The Ticking Time Bomb

Incomprehensible, Yet Growing, and a Genuine Threat…

Leading Republicans in Congress, with the active support of President Trump, have committed to pushing comprehensive tax reform to passage before the end of the year.

This is good.

If the GOP focuses on substance and not posturing, a framework tax bill will trade a myriad of special interest deductions for lower overall tax rates, simplifying the system and easing the overall financial burden and complexity on Americans.

Lowering the corporate tax rate, currently 39.1 percent (only the UAE and Chad have higher rates), not only makes companies more competitive internationally, it also provides incentive for multinationals to bring back some of the trillions stashed overseas, specifically to avoid the confiscatory US rate. Progressive indignation at even the suggestion of a corporate tax cut is more hollow when one realizes that even at today’s high rate, corporate taxes constitute only $298 billion of the $3.3 trillion that the USG took in during fiscal 2017; about nine percent.

Most importantly, comprehensive tax reform will create the predictability and certainty, missing over the last eight years, which will catalyze private sector investment in organic, jobs-creating, economic growth.

However, while tax reform is a critical priority, true fiscal health depends on seriously addressing other consequential issues that no one wants to talk about.

The FY 2017 federal budget deficit numbers came in over the weekend.

From October 1, 2016 through September 30, 2017, the federal government ran $666 billion in the red. Although federal tax receipts increased by $47 billion between FY ’16 and FY ’17, the deficit increased by nearly twice as much, to $82 billion, in the same period. The national debt now stands at more than $20 trillion, which represents over 100 percent US GDP. In a more personal representation, that debt is equal to $168,000 per taxpayer.

Think about carrying that on your credit card.

Republican tax reform will not solve this problem by tax cuts alone. If the GOP does its job correctly, there will be an increase in the deficit in 2018 and part of 2019, as businesses adjust corporate strategies, before the full effects are felt, and increased growth generates increased federal revenue. But as history demonstrates, that’s only part of the problem.

After the Great Recession cratered tax receipts, federal revenues reached their 2008 level in 2012. By 2016, the feds took in $818 billion more in taxes than in 2012, and still the deficit was $150 billion greater than George W. Bush’s last year in office.

Unless you address spending, no amount of growth will balance the budget.

But where to cut spending?

Federal spending can be broadly grouped into three categories; 1) mandatory spending (Social Security, Medicare, Medicaid et.al.), 2) discretionary spending (funding the federal government for day-to-day activities, including military spending) and 3) interest on the national debt.

Failure to pay interest on the national debt, a whopping $240 billion in 2016, is a default event and therefore non-negotiable in national spending priorities. No one has the stomach to touch the entitlements in mandatory spending, so everyone’s favorite target is discretionary spending, with Democrats focused on military spending, and Republicans focused on non-defense spending.

During the epic budget battles of the Obama years, discretionary spending was eviscerated. Between 2009 and 2016, non-defense discretionary spending declined by seven percent in real terms. Defense spending declined by an even greater 11 percent. Want to know why you can’t get anyone on the phone at the IRS? Why there are longer lines at Social Security and fewer Park Rangers? Why the US Navy is at its lowest ship count since WWI?  This is why.

But yet the deficit doesn’t decline?  That’s because non-defense discretionary spending – the meat of what the feds do each day, now only represents a mere 13.8 percent of all federal spending. Defense? 15 percent.

For the sake of argument, if Congress were to  simply abolish all non-defense discretionary spending, the USG would still have run a deficit of $132 billion. For Progressives, if we just got rid of DoD and put our faith in the UN, there’d still be an $82 billion deficit.

You cannot balance the budget by addressing only 29 percent of spending.

Which brings us to entitlements.

A broad cross-section of both Republicans and Democrats believe that even discussing entitlements is suicide or heresy, depending on your philosophy. But the need to discuss this has never been more important.

While Congress was busy slashing discretionary spending to the bone, Entitlements were skyrocketing. Between 2008 and 2016, they grew 52 percent. The anticipated trajectory of these programs for 2018 and beyond only goes up, consuming an ever larger piece of the federal pie.

The chief reason to tackle this unsustainable growth is insolvency.

While the life expectancy of the average American has increased by 20 years during the 82 years the Social Security program has been in operation, the official retirement age has remained the same, meaning more people draw more generous benefits for a longer period of time.

Second, to be blunt, Social Security is premised on a lie.

The taxes we pay each year are not set aside in an interest earning account to be disbursed when we retire. Those monies are directly transferred to fun benefits of current retirees. It has always been that way.

The Social Security Administration claims to have ample assets to fund retirees, but this too is a ruse. Social Security tax revenue has regularly been “borrowed” by the Treasury to fund current account priorities. In return, Social Security gets an IOU. Right now, the balance sheet looks abundant with Social Security funds earning interest in US bonds. But those bonds aren’t in a separate account, like a trust fund. They are little more than a promise from the federal government to redeem the IOUs when called upon.

Who pays when the bonds are redeemed? Either the government raises taxes, or borrows from foreign investors. With Baby Boomer retirement in progress, Social Security has actually begun redeeming bonds – $73 billion last year – and growing.

Unless something is done to reform the program – even the modest proposal to raise the retirement age with life expectancy would help – Social Security, as part of the entitlement system, threatens to take the US down a sink hole.

Worse, right now we are at an inflection point.

While interest payments on the national debt have actually declined between 2008 and 2016 (from $253 billion to $240 billion), despite the addition of nearly $10 trillion in debt in the same period, this is solely due to the near zero interest rate policies that have followed the Great Recession.

During the Obama years, debt was virtually free. The cost of that debt today, artificial for nearly the last decade, is likely to skyrocket as even modest changes to national interest rate policy dramatically increase the minimum payments due.  That will occur as the US continues to run $400-700 billion deficits through the end of President Trump’s term in 2020, compounding the problem, and likely making the national debt the second biggest item in the budget, surpassing defense.

And remember, this is “dead” money. It doesn’t build roads or airports, fund education or defense. It just pays back creditors. It doesn’t add or sustain our national wealth, it drains it.  Anyone who has ever had credit card debt understands this.

This is the existential problem that America faces today, and it impacts everything from the quality of our government services to our quality of life. It is a bigger threat than terrorism and climate change, and unlike Al Gore, who worries about threats in a century, this is a real and present danger.

Perhaps with a measure of irony, the citizens who will bear the greatest burden here are Millennials – the Bernie backers who dream about government-run healthcare and government-financed college.  They are tied to an unfunded financial anchor so large, that if you taxed the top one percent at 100 percent, you would still barely put a dent in the debt.

So as the nation tackles tax reform as a prerequisite for organic economic growth, let’s remember that there is more work – very tough work – to be done. Work that will require the commitment of every American if we are to be successful.

This is not the easy jingoism of #MAGA; the Lazy Boy patriotism that requires a primal yell, but blinks in horror at any hint of personal sacrifice. It’s not about compassion, as it could never be compassionate to bankrupt our children to pay for the prolificacy of their parents.

This is about serious leaders and serious citizens.

Both, unfortunately, are in short supply.