From Payback Time, New York Times, Sunday night, 11/22/09:
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed. ... the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
We can't protect our children from the full brunt of this catastrophe. But we can protect our grand children. Continue over the fold for a plan to do that without increasing taxes on any living soul.
The misguided economic theories that took hold in this country after the inauguration of Reagan in 1981 were the main culprits: with their Laffer Curve, their theory called Supply Side Economics, (aka “Build It And They Will Come”, “Trickle Down,” etc.,) their demands of the CBO for Dynamic scoring of all those tax cuts, necessitated because there were no plans to pay for them with spending cuts. (Dynamic scoring assumes that increased tax revenues, due to the resultant economic growth down the road, would pay back more than was borrowed, and thus heal the national debt before things got out of hand.) ...Yeah! ... Right!
The total National Debt was just one trillion dollars in 1980. At the end of 2008 the debt was about eleven and a half trillion. Clinton added less than a half trillion dollars to the debt. So almost 90% of our current debt was accumulated with Republicans controlling the Executive Branch during the last thirty years. That's just a little over one generation's time on Earth.
We were sold a bill of goods, -- some of us were, anyway! They promised tax cuts without spending cuts. Snake oil salesmen, they were!
Those were not a tax cuts at all. They were tax deferrals to be paid back with interest! Even worse, that monkey business of tax rate adjustments was designed so that the vast middle classes had to share their meager portion, only 40% of the tax deferral amount, about one trillion dollars. A much smaller group of people in the top brackets shared the larger portion among their own small group. They got 60% of the total tax deferral dollars, about one and a half trillion dollars.
Today, if the Bush tax cuts were made permanent as planned, the middle classes would end up responsible for paying back 60% of those borrowings plus interest, not just the 40% of their taxes which were deferred. Those in the top brackets would pay back only about 40%, not the entire 60% of total taxes which they were deferred.
Perhaps we lucked out, however. Obama was elected instead of McCain so there is a good chance that the tax brackets will be adjusted back to the way they were before. Perhaps everyone will suffer merely in proportion to how much of their taxes were actually deferred, and no upward redistribution of income will actually occur.
But we should really solve this problem now, before it affects more than one additional generation.
THE PLAN
Here's a plan. It involves just a few calculations, to be done at everyone's death, as part of the normal probate process. First we gather some data:
What was the National Debt at your year of birth? Call it "A".
What is the National Debt at your year of death? Call it "B".
Subtract A from B. This number is proportional to the net amount of taxes that were deferred over your lifetime. Call it "D".
OK, now we have a measure of how much you were under-taxed over your lifetime. It is proportional to how much of your estate should be used to replenish that debt before the remainder of the estate on to your heirs. The word "should" was used above because estates that have relatively small value will be exempted from this form of payback, in order that the payback be progressive rather than regressive.
Purely as an example, suppose we exempt the first half million dollars of each person's estate from this debt recuperation formula and consider a flat percentage as a payback percentage for the rest of each estate.
We now need to compute a suitable value for that percentage. In order to do this we need to decide over how many years the debt is to be fully paid back. Let's use 25 years as the target for that length of time. That approximates the average time for one generation of Americans to proceed through life. Remember, we are trying to save the grand-children, not the first generation of children. It's too late for them and they did benefit, growing up, with extra cash in their households.
So the IRS will calculate tables for most of the following:
The IRS compiles a running average of the total values of all estates, (less one half million per applicable estate, of course,) which had been available to pass on to heirs over the preceding five years. This gives a prediction of how much total wealth is typically available to pay down the total national debt from inheritance transfer valuations each year. Call that amount "W", for "wealth" available.
Divide the present total national debt by 25. This gives the average amount of debt which must be paid off each year in order to pay off the total National Debt in 25 years. Call that amount G, for it represents our "goal" for each year.
Compute the quantity P, (for payback "percentage"), to be G divided by W and express it as a percent. To be reasonable, prohibit P from surpassing 30%. So P will be 100*G/W percent or 30%, whichever is less. (If P is pinned back to 30% we are effectively increasing the payback period of time, (assuming congress does not continue to overspend.) It will become somewhat longer than 25 years.
But P is correct only for those who were born during a year at which the National Debt, A, was zero. P must be adjusted by the quantity D/B, which is (B-A)/B. So compute for each individual the quantity Pa, meaning "P adjusted." It will be equal to P multiplied by D/B, generally a smaller percentage than P.
Now each probate filing a separate check will be sent to the IRS for the amount Pa times the portion of each estate that exceeds one half million dollars. If that amount is not available as cash, installments can be agreed to with the IRS or a lien against unsold estate property can be tendered.
This method of paying down the debt is simple and fair.
It places the least amount of burden upon the economy at large.
It is progressive in nature due to the exemption of a half million dollars.
It is paid from money that is not actively cycling through the economy.
It is paid from capital that normally sits around for a year or two as the estate is being settled.
Without giving details, it should be noted that some loopholes will also need to be closed.
A parallel computation needs to be defined for gift giving when there are gifts over a certain amount. Otherwise the entire estate could be transfered to the heirs before death, circumventing the payback normally rendered as part of the probate process.
Another computation must be established for people who elect to leave the United States for another jurisdiction before death approaches, taking most of their possessions with them.
There will need to be a subtle correction to the first formula, the computation D. For after a few years of this plan the quantity B, the current National Debt, will become unjustly low for people who are just now arriving at their deathbeds. The money that was paid back over the preceding years of this plan makes B smaller than it should be. So paybacks from previous years should be added back into the value of B to compensate for this effect. A similar adjustment will be needed to compute the value of A, after about twenty years into the plan.
This plan has the further benefit of educating the public against falling for such tax cut scams in the future. They will see clearly that there is no such thing as a tax cut without a spending cut to go along with it. It will be recognized as a tax deferral instead and people will know that all those deferrals will eventually have to be reconciled.
And our congress-critters will have to think harder about the budgets they pass. They will know that the people know what previously only the congress-critters used to know.