My Plan to Solve the Debt Crisis (or: What We Need is a CLEAN SLAT)

March 8th, 2011

This is a follow-up to my earlier piece about how to eliminate the deficit, inspired by On national debt, interest is the monster, Bipartisan ‘Gang of Six’ in Senate developing framework for deficit reduction (Washington Post 2/17/11), Boehner: We have a ‘moral responsibility’ to deal with debt, ‘start praying (WashingtonPost.com 2/28/11), and Prescribing bitter medicine, senators take case to the public (Washington Post 3/08/11).

 

“It is immoral to bind our children to as leeching and destructive a force as debt. It is immoral to rob our children’s future and make them beholden to China. No society is worthy that treats its children so shabbily.” – Speaker of the House John Boehner
 
“You can’t change the past, cause it’s gone
And you just gotta move on,
Because it’s all lessons learned.” – Carrie Underwood

 

This time, I agree with the Speaker–

Our future’s bleak, but if we don’t act, it’ll get bleaker.

 

Unfortunately, I’m sad to say,

We can’t just pray the debt away.

 

Here’s a way to make the medicine less bitter,

And hopefully keep the country from ending up in the…

Crapper.

***

Our national debt and the interest on it are a serious problem. Interest on the national debt is sucking up an increasing share of the federal budget. This increasing crowding out has created many popular misconceptions and false choices. By itself, government spending is not the insurmountable problem it sometimes seems: without interest payments, President Obama’s proposed budget would be balanced in 2017. No, government spending isn’t the problem, the debt is the problem, and we can’t avoid repaying and paying interest on that debt.

 Well we could, in theory, but that would be one of those times when the “solution” would be a bigger disaster than the problem itself. Defaulting on our national debt would cripple the U.S. and the world economy, making both the Great Depression of 1928 and the Great Recession of 2008 look like walks in the park.

We could also, in theory, execute a “soft default” by inflating ourselves out of debt, and there’s a distinct possibility that this will happen anyway. But if we adopt that approach, consciously or not, it would also have serious consequences for our economy. Remember the good old days of stagflation and stratospheric interest rates? Well, you won’t have to, because if we adopt the inflationary approach, they’ll be back.

So those two options aside, if we are going to keep up the interest payments on our national debt and gradually pay it down to more sustainable levels, we need a better way to do it. I’ve come up with one. It’s called the National Debt Repayment Program (NDRP).

Under the NDRP, a new tax would be created and paid into a separate trust fund (let’s call it the Comprehensive Lockbox to Ensure Achievement of National Sustainable Liability Amortization Trust, or CLEAN SLAT), like Social Security and Medicare are meant to be (see further discussion on that below). If collected on the basis of income, the tax would be administered and treated like the Social Security Tax: it would be a flat x% of income deducted from one’s paycheck, possibly with an income ceiling, but preferably without one, since that would allow the tax rate to be significantly lower. Aside from Schedule C filers, it would not appear in annual federal income tax filings or payments (except as referenced in W2s).

Alternatively, the NDRP could be financed in full or in part with a new value-added tax (like the one I propose in Dangerous Curves), and/or a real estate tax. Both of these approaches would make good economic sense, since consumption taxes are a priori less economically damaging than income taxes in the long run, and taxes on real estate are the least economic damaging of all (they do not affect the owner’s incentive to seek the best and highest use for that real estate). The real estate tax makes particular sense if the NDRP is approached as a combined federal-state program (see further discussion of that below). All three revenue sources could conceivably be combined, which would have the advantage of providing diverse revenue streams. That diversity would make the trust fund less subject to short-term fluctuations, and more sustainable in the long run.

Whatever the source or combination of sources, creation of the NDRP tax would allow for federal income tax rates to be significantly reduced, which should appeal to Republicans. While total revenues from the NDRP tax would (at least at first) equal or exceed the reduction in federal income taxes (that and reduced spending are after all the only ways to reduce the deficit), its makeup as a flat rate tax without deductions would mean that the NDRP tax rate itself would be lower than the reduction in federal income tax rates, so overall tax rates would drop.

The NDRP trust fund (“CLEAN SLAT”) would be established as an off-budget independent trust fund: any annual cash flow deficits would not count in the federal deficit, and any annual surpluses would not be available to fund general government spending, a dual requirement that would appeal to both Dems and Republicans respectively. CLEAN SLAT would be legally required to become and remain solvent over a legislatively-set time horizon. The flat tax rate could then be gradually increased or decreased as necessary from year to year as interest rates rose or fell, with the goal being to reduce the tax over time, while avoiding disruptive short-term increases in the NDRP tax rate.

The NDRP tax could also be combined with my “Where’s My Bail-Out” consumer debt program and “You Can Bank on It” infrastructure bank, reducing or eliminating the actual cash flow impact on most taxpayers.The program could also be combined with a program to similarly (with a combination of federal and state funding and guarantees) capitalize state debts (including unfunded pension liabilities) which will otherwise risk taking many states into bankruptcy. The historical precedent:  assumption by the federal government of state obligations after the Revolutionary War.

The argument is that federal assumption of state debt would reward previously profligate states by allowing their residents to shed debt is countered by the fact that those residents already can do that by simply moving to another state. The combined federal-state program also has the benefit of being future-oriented, wiping the slate clean and forgetting about trying to assess blame for the multi-party policies that have over decades contributed to states’ current liabilities. Plus, the “moral hazard” argument is also mitigated by the quid pro quo for state participation.

States wishing to participate in the program would voluntarily enter into an agreement with the federal government to federalize state debt, in return for which the federal government would receive a set share (which could vary from state to state) of property tax revenues. In addition to restoring solvency in states currently on the edge of bankruptcy, this approach would give the federal government an incentive to maximize local property values (it currently has a perverse incentive to do the reverse, since real estate tax payments are deducted from federal income taxes).

 Initial trust fund liabilities could be further reduced by transferring some federal assets, income streams, and the corresponding debt to an infrastructure bank, which would then sustainably support itself with gas taxes, mileage taxes, and other such user fees. The infrastructure bank would then receive further off-budget funding for both new investment in national infrastructure and restoration and maintenance of existing infrastructure (read You Can Bank on It for more on that). 

The NDRP approach has the political and psychological advantage of clearly delineating past and present. Don’t like paying taxes to support a bloated government? You won’t be. What you’ll be paying is your fair share of the interest on the national debt racked up over time by your forefathers and predecessors. Think some of that accumulated national debt was a mistake or a waste? It doesn’t matter, since that’s in the past and can’t be changed. Consider it the cost of admission to living in this great and bountiful country of ours.

Politically, the NDRP tax would allow Congress to focus on real budget issues instead of meaningless and counter-productive atmospherics. It would appeal to Dems because it would eliminate the pressure to balance the budget entirely on the backs of discretionary spending, which anyone speaking truthfully will admit is itself an impossible task. For Republicans who truly want to reduce spending, it would give them more manageable and realistic goals, instead of subjecting them to critics like me who point out that even their most draconian cuts are still just an insignificant drop in the bucket compared to the overall deficit and debt: taking interest payments out of the picture would make those cuts much more mathematically significant. As another benefit to Republicans, revenue from the NDRP would be legally prohibited from use to finance anything but interest and principal payments on the national debt, and would therefore not subject Republicans to criticism for being tax-and-spenders.

In the context of making this reform, Medicare and Social Security should also be taken completely off budget, making the theoretical “lockbox” that politicians on both sides of the aisle have trumpeted over the years a reality. There would be a separate effort to make both Medicare and Social Security whole and sustainable, but it would be totally off-budget, such that Social Security and/or Medicare net cash outflows would not count as part of the federal deficit, nor would net cash inflows be permitted to mask and support other deficit spending. Other trust funds (e.g., the highway trust fund) would also be taken completely off-budget and made self-sufficient and sustainable, in order to both allow for and finance infrastructure maintenance and improvement (read You Can Bank on It for more on that) and remove the perverse incentive that politicians have to use trust fund surpluses to fund general deficit spending. 

Here’s another related debt reduction idea: In the context of comprehensive immigration reform, allow new and illegal immigrants to obtain legal immigrant status through a combination of one-time cash payments and ongoing payment of the NDRP  tax. The initial cash payment (call it the Fund for American Immigration Reform & Sharing Helps America Rebuild our Economy, or FAIR-SHARE) would be in recognition of the debt service contributions that people already legally living, working, and paying taxes in America have made over the years. Most illegal immigrants already make such a one-time cash payment, but they make it to the coyote that smuggles them across the border.

Instead of letting the coyotes get that cash, FAIR-SHARE would mean that the federal government would, and that it would automatically be used to pay down the national debt instead of to fund government spending. For cash-poor immigrants, FAIR-SHARE could “lend” them the money, repayment of which would be through payroll deductions, default on which would result in expulsion, thus turning INS’s enforcement mechanisms into a profit center instead of budget drain. The FAIR-SHARE approach would thus have the triple benefit of helping pay down the national debt, reducing the NDRP tax burden for everyone else, and eliminating the generally untrue but nonetheless common criticism that immigrants are economic freeloaders. With this approach, they clearly would not be.

And, as a further incentive to Republicans, creation of the NDRP could potentially be combined with reduction or elimination of estate and corporate taxes (they’re not economically efficient taxes and don’t raise that much revenue anyway) and a three-year balanced budget legislative requirement and/or Constitutional amendment (the former could be established legislatively, pending approval of the latter). I say three-year instead of single year, since the latter does not allow for the effects of short-term recessions during which a balanced budget is economically counter-productive. Alternatively to a three-year balanced budget requirement, a rainy-day fund could be created, which could be drawn on by federal, state, and local governments during recessions, but which would then have to be replenished during periods of sustained growth.

Whether or not the above bells and whistles would ultimately be included, NDRP would first and foremost be (and should be promoted as) a way to pay down our national debt and reduce the taxes necessary to feed it. NDRP would financially and politically separate those non-discretionary payments from discretionary government services, which can then either be continued or eliminated or their own merits, and, if continued, paid for with a true balanced budget.

***

Here’s Hardball’s 3/04/11 panel discussion on the deficit and Social Security.

 

Visit msnbc.com for breaking news, world news, and news about the economy

Here’s your theme music, Lessons Learned by Carrie Underwood.

Don’t like the name Comprehensive Lockbox to Ensure Achievement of National Sustainable Liability Amortization Trust (CLEAN SLAT)? How about the Comprehensive Unified Tax & Trust Helps Enhance our Balance Sheet (CUT-THE-BS), or the Restore Economic Strength Trust Obligation Repayment (RESTOR) America Fund? If you prefer one of those or have a better idea, please suggest it in a comment!

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