The One Solution For Fixing the Budget Crisis

The problem with the $1.5 trillion budget deficit for the current fiscal year is that it is incomprehensibly large. Perhaps Bill Gates can relate to this number – the deficit is about 30 times his net worth – but for the rest of us, billions and trillions don’t mean very much.

One way to humanize our budget problem is to divide it equally among the US population of 307 million people. We will use Obama’s original budget proposal for our calculations, because none of the modifications under discussion make much of a difference.

Obama’s budget translates to $12,147 of spending per person. Some of the larger contributions are spending on security (Homeland Security, CIA, wars, etc.) at $2879, and spending on Social Security, Medicare and Medicaid at $4935 per person. Roads, schools, and other government services add another $1485. Interest payments are $788 per person.

A $60B Cut

The Republican budget cut of about $60 billion would reduce per capita spending by $195, while the Democratic proposal of about $6 billion would cut $20. Clearly neither proposal will make an appreciable difference, but they make for good political theater.

Projected government revenues from income taxes, duties and other sources are $7081 per person. This leaves a deficit of $5065 for every man, woman, and child in the US. That is a pretty big hole. Democrats favor raising taxes to closed the gap, while Republicans want to cut spending. We will discuss a few examples to show how feasible these ideas are.

Are Spending Cuts Feasible?

Cutting spending is certainly a good idea, but to balance the budget we would have to cut all spending on the entitlement programs (Social Security, Medicare, Medicaid). Alternatively we would have to cut all spending on security (wars, FBI, military, etc.) and all discretionary spending (roads, bridges, ports, schools, museums, etc.).

Obviously neither of these proposals is feasible. They simply illustrate that it is impossible to fix our budget problems by cutting spending alone.

Can We Raise Taxes?

So how about raising taxes? According to the IRS, in 2008 people making $100,000 or more paid 75% of all income taxes. According to the Democrats, these are the people who should be taxed more heavily to close the budget hole. In 2008, 18 million returns fell into this income bracket. To balance the budget, each of these filer would have to pay an extra $83,000 in taxes every year, which is clearly not feasible.

The numbers don’t look any better if we raise the income cut. Taxing only filers making over $1,000,000 to close the budget gap would require each one to pay an extra $4.8 million in taxes.

The Only Way

These examples show that the only way out of the budget crisis is to cut spending and raise taxes. It is absurd to think that one or the other alone could do the trick. Washington needs to address the difficult problem of how to reform the entitlement programs, cut other spending, and raise taxes without stifling the economy.

It is time for both parties to slaughter their holy cows: ‘No Benefit Cuts’ and ‘No Tax Increases.’ It is time for them to stop fighting over tiny budget cuts that may dupe a few voters into thinking that something is being done but that don’t address the problem. It is time for them to get to work!

Posted by Martin Gremm (Pivot Point Advisors)

About the author

Marc Schindler, CFP®

One Comment

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  • You say $83,000 is not feasible. Consider this: Someone who has an income of 2 million per year, this is roughly 2 1/2 weeks pay (2 million breaks down to $38,461 per WEEK).

    There was a time in this country when greed was frowned upon. The rich and ultra rich were taxed at anywhere from 90 -94% (IRS Table 23) for all of the years 1930-1960. Americans said “This is the amount that is acceptable to make (roughly $400,000)–anything more and you’re just being a greedy little pig, so you can just give that back to society.”

    Call it de-incentivizing greed. After you’re done with that, take a look at our GINI index, and what countries SHARE our same GINI index. We are starting to look more and more like a 3rd world country, and something needs to be done soon, if it’s not already too late.

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