Balance the Budget AND Eliminate the Debt!

The other day the comment below on another blog prompted an idea.

“My thoughts exactly. Regardless of the size of the budget deficit we are still going further into debt. The US. does not have unlimited credit. With a steady de-valuation of the American dollar we are already having trouble finding buyers for our debt. The “growth” of our economy means nothing if it is supported by foreign nations buying our debt. Eliminating the debt is the only sure fire way to stop the house of cards from collapsing.” Joe

Absolutely true.

The problem of course is that neither side will agree to end entitlements for their pet programs, much less earmarks.

But, I do have a proposal that might eventually change all that and I’d welcome feedback on it.

As crazy as this will sound, I believe it’s possible to, over a very long time, end the debt, greatly reduce taxes and have plenty of money to spend on needed programs.

No, I am not proposing that we can have our ‘cake and eat it too’.

Everything I am about to propose is based in mathematically and fiscally sound principles.

It will take sacrifice and most importantly, fiscal discipline. And I know how improbable and even oxymoronic the words Congress, the American people and fiscal discipline are in the same sentence…

Nevertheless, here goes:
We all are familiar with the notion that there are individuals who have been ‘blessed’ with the inheritance of a trust fund. I propose that we create a ‘public trust fund’ for the American people.

‘Running the numbers and doing the math’ is something that any actuarial accountant worth his salt can do to arrive at the specific amounts and details. Being a ‘big picture’ guy and ‘idea’ man, I’ll leave the details to the accountants and only elaborate the basic principles.

So, please do not hold my feet to the fire over amounts used by me to illustrate the idea, ok?

I also realize that while the idea is simple, successful implementation of this idea would be complex. If complexity really puts you off, you may want to pass on this post right now.

So, after due consideration and running the numbers and getting economists to agree that the idea is viable, we institute a new investment tax!

Hey, liberals like it already but conservatives are running for the door!

Now stay with me fiscal conservatives, I promise this is a tax you CAN live with and tolerate.

It’s an investment in ourselves tax…Matter of fact, it’s not accurate to think of it as a tax, so view it for what it in fact is, an investment in our children’s future and a gift from those alive today, to those yet to come.

One that will fundamentally alter the economic circumstances for ALL future generations.

A big, bold claim I know, so let each reader judge the worth of the idea for themselves, fair enough?

It is the idea of compounded interest and capitalism taken to the max…

For purposes of discussion, say the new tax is 1% of any taxpayers gross income. Basing the tax upon gross income would eliminate the possibility of evasion, as everybody would pay into it and Congress couldn’t play fast and lose with how much was being collected.

All monies collected would go into a version of Al Gores ‘lock box’ (groan, groan, ok the man had one good idea in his life, come on). The lock box would HAVE to really be a lock box because the only way to make this work is to create a fiscal sanctuary that Congress AND The American people simply COULDN”T get into.

AND as you’ll soon see, as time passed, the temptation to ‘raid’ the lock box would become irresistible.

To make this work a Constitutional amendment would be needed, making this a constitutionally created program, it would have to be literally woven into the Constitution.

Congress would have to cooperate and the only way they’d actually do that is if the public and media embraced this idea and demanded that Congress actually implement it.

Full transparency would be critical and a special, ‘unanimous vote condition’ would be written into the legislation creating the public trust fund and its eventual distribution.

This means that in order to change anything, Congress would have to get a special, unanimous approval from BOTH the House and the Senate AND then, it would have to submit the proposed change through the state amendment process, which requires 3/4 th’s of the states legislature’s approval.

Just the unanimous voting requirement alone would keep Congress from raiding the fund because as we all know, you can’t get 100% of the people to agree to anything… There’s always at least one cantankerous cuss who’s NOT going along with the group, either out of principle or just plain spite.

Once the needed protection was set up for the fund and a real lock box created, we would then start the new tax. Eventually, the amount of money collected would build to an astronomical amount. That means it would need to have built-in safeguards, ‘fail-safes’ to ensure that it keeps growing untouched, until the time was right.

Again the actuaries can run the numbers but the day would come in say, 50yrs. when the first payout phase could begin. I envision a four step approach with accordingly 4 phases of payout, with the money going to fund specific and mandatory purposes.

Payout would be set up so that the amount taken out of the fund on a yearly basis could never be as much as what is being put into the fund, on a yearly basis. This would ensure that the fund would continue to grow.

The payout in Phase 1 would initially go to eliminating the debt. It would again be written into the constitution that once debt elimination began, Congress could NOT add to the debt.

Boy, they’re not going to like that requirement.

Once the debt was eliminated, Phase 2 would begin and payout would go to reducing personal income taxes.

For every dollar paid out from the fund, income taxes would have to be reduced by one dollar. In time, with the fund increasing on a yearly basis, taxes would be greatly reduced. Yet revenues would grow because the economy would experience less ‘tax-drag’ upon it and consumers would have more disposable income available.

To eliminate Congress simply raising or creating new taxes to end-run around the requirement, an overall cap would be placed upon Congress as to how much it could raise taxes. Say 10% of whatever amount the fund was paying out. Probably a yearly cap as well as an overall cap would be best.

The only exception to this would be in times of war or national emergency and then it would take a 3/4’s vote of Congress, with mandatory yearly renewal of any increase in taxes over the spending ‘cap’.

One basic aspect of my proposal is using Congressional access to a national ‘trust’ fund to impose spending and taxing limits upon Congress.

I’m also proposing to gradually shift government income from the personal income tax to the trust fund’s payouts. As the country would still need revenue for public projects, and necessary and worthy programs.

Why would liberals go along with limiting Congress’s ability to tax and spend?

Ah, because of the ‘carrots’ we offer 🙂

Once personal income taxes fall to a predetermined level, say 10%, the payout enters phase three…which has a very nice carrot!

But before I describe the third phase of the payout from the ‘lock box fund’ lets reiterate where we are; the debt is paid off, so the country is debt free. Over time, taxes have been reduced to an easily sustainable level, say 10% of income.

Ok, phase three payout.

The fund now starts paying out to eliminate the remaining personal taxes. Starting from the bottom up…So those most in need are benefited first.

But over time, everyone benefits with the greatest amounts going to those paying the most into the system. While they wait longer to receive those benefits, they are compensated with a commensurately greater reward.

Eventually the ‘trust fund’ grows to the point of essentially eliminating personal income taxes.

Incidentally, though it might be last, there’s no reason why we couldn’t eliminate business taxes too.

Eventually we will have almost completely eliminated taxes from income and in say a hundred years(?), the trust fund has grown to the point where the fourth and final phase can begin. And boy, is this carrot a whopper, the biggest of all! Remember, the trust fund has continued to grow…

Now the trust fund starts creating individual trust funds that start at birth…for everyone.

Because no child has an inherent right to more than another, (we’re all created equal…) the amount placed into every child’s trust fund is the same. With the yearly amount growing as the fund continues to grow.

This would continue until the child reached its majority. Then the outside funding of the individual trust fund would stop, though the funds principal would continue to accrue interest and the fund would be available for access by the new adult.

How much, and in what manner the individual trust fund could be accessed would have to be worked out. Common sense would seem to indicate that a mandatory amount of the principal should be required to remain so the fund can continue to grow for retirement, etc. Actuarial tables could be used to calculate the amount that could be withdrawn on a weekly, monthly or yearly basis.

Depending upon the use envisioned, the individual might be required to withdraw funds according to a formula. Obviously there would have to be exceptions built in for things like medical emergencies.

Details like the unfortunate death of a child could be easily worked out, with whatever amount going to remaining siblings, or if no siblings existed, then perhaps it would be returned to the public trust fund for redistribution to all.

It’s important to consider the range of individual responses to this program. Basically one of three categories of response is possible. People either work less, the same or harder. That’s their choice but in any case, everyone would receive access to an individual trust fund which would eliminate poverty at virtually no cost to the public.

Essentially I’m suggesting a public savings account, withheld until it can grow to an amount sufficient to become a viable substitute for income taxes. And then, as compound interest grows the trust fund further, using that increase to fund public trust funds for individuals, which we all, at majority, have access too.

Well, there you have it.

It may seem idealistic but as I pointed out before, it appears to be based in sound fiscal principles. It already is working for individuals lucky enough to inherit. Think of Paris Hilton…or not. But, if you come this far, I’m sure you get the idea.

The only thing I see as a real obstacle to implementation of the idea is simple human cussedness. People can mess up just about anything but we got it right once, a little over two hundred years ago. I don’t see why we can’t get lucky one more time.

One thing seems likely, with the emergence of virtually certain future realities: artificial intelligence, robotic manufacturing, the eventual discovery of fusion based power (the suns’ source of atomic energy, environmentally clean) resulting in such low energy costs as to be essentially ‘free’ energy. The incredible mineral resources out in the asteroid belts waiting for future exploitation…then using the moon (no environmental degradation) for heavy manufacturing with products shipped down to Earth as we now do with China, wealth and productivity will rise to the point of what would now seem absurd. And then, we will HAVE to find a new operating paradigm in economics.

To reiterate, the main idea is to create a public trust fund that in time can be used to good purpose. The specifics of how we administer it are details that would need to be worked out. That’s a case where many heads are better than one.

So, let the criticism begin and hopefully there’s enough worth to the idea that those more knowledgeable, can figure out what needs improvement and actually make it work.

And until someone convincingly explains why a public trust fund won’t, in principle, work as well as a private trust fund…I’m going to adopt the ‘Lone voice crying in the wilderness’ pose.

Hey, it worked for the Prophets! Then again, there’s also that bit about a prophet never being honored in his own land…or was it time?

Anyway, I’ve done my part and led you to the well, you have to decide whether you’re gonna drink or just complain about being thirsty.

Geoffrey Britain

Note: this is a slightly revised version of a post I first published in July of 2006. I suggest rereading Joe’s comment in light of the recession we are now in… and then, reflecting upon an eternal truth; times change but principles do not. And that truism is why this can work because the same financial principles that apply to individuals, apply to nations.

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