According to Sen Harry Reid we are going over the “cliff” because the Republicans are not cooperating. By that I assume they are not doing what the Democrats want. Republicans are no better of course.
All these fiscal problems can be solved and quite easily. They need to be broken down into short-term and long-term issues. Some portion of the deficit will be taken care of with time when the economy improves and federal revenue automatically increases.
The Social Security tax holiday needs to be terminated because it is adding to the deficit on a daily basis. This can be done gradually to minimize the impact, perhaps a quarter percent every three months.
Likewise the tax on capital gains can gradually be increased over two to three years until it reaches regular income tax levels. Dividends on the other hand represent income to millions of Americans who are not wealthy and should remain at 15%.
While I continue to believe increasing income taxes is a losing proposition if you are looking to lower the deficit, if for no other reason than perception, taxes will go up. Given that, raise tax rates on household income above $500,000 a year. However, keep in mind that Congress will simply spend the additional revenue so all we have accomplished is more wealth transfer.
Some deductions make sense others do not. Starting at some future date say 2018 there should be a gradual reduction in the amount of mortgage interest that can be deducted. Likewise over time we should reach a cap on the amount of tax-free income from employer contributions toward health Insurance. At the same time the ability for workers to pay their share of premiums on a pre-tax basis should be phased out.
The key to all this is the gradual future phase in of the changes. This will give people time to adjust and time for the economy to recover.
Both Medicare and Social Security need to be modified in the future to allow them to not add to the deficit. Yes, this means in the future Americans will get a little less and pay a little more which should all be indexed.
The Social Security COLA must change. We must switch to chained inflation, increase the actuarial reduction for benefits that begin before normal retirement age and gradually and modestly raise the payroll tax over several years. In addition, the COLA should be eliminated in the future for those collecting the maximum Social Security benefit. No COLA should apply to anyone during the first five years of collecting a benefit.
Medicare cannot continue simply by cutting payments to providers. The benefit structure needs to be overhauled including more realistic deductibles and more realistic premiums for all beneficiaries. A renewed attack on fraud and abuse is all well and good, but better utilization management is equally important. There needs to be more oversight of the services provided, greater application of medical necessity and utilization review. Medicare payroll taxes must increase gradually if Americans want what they perceive Medicare to be because the fundamental problem for the federal government is not the cost of health care for each beneficiary, but the growing number of beneficiaries.
Having said all the above, the real key is reduced spending. We can do all we want on the revenue side and accomplish nothing if current and future spending is not managed to revenue levels and what Americans are willing to pay in taxes.
Every new spending proposal can be rationalized by some group, every new program helps someone and that’s the problem; spending can always be justified even when it is not affordable. As long as Americans demand more and ignore how it will be paid for these fiscal problems will continue in one form or another.