Comprehensive Long-Term American Deficit Solution

Comprehensive Long-Term American Deficit Solution

Author:

Del Lienemann, Jr. C.P.A., Partner in D&D Investments

The Comprehensive Long-Term American Deficit Solution consists of 4 main components.  They are a Long-Term Deficit Reduction Plan Component, an Annual Budget Deficit Reduction Plan Component, a Tax Reform Plan Component and a Social Security and Medicare Plan Component.

In order to be effective this plan would have to enacted as one package by congress.  The long-term and annual budget deficit components must be enacted together in order for them to be effective.  The tax reform component and the Social Security and Medicare component must be part of the package in order for the Comprehensive Long-Term American Deficit Solution to be a balanced solution to the problems we face as a nation.  This plan is also a solution to the fiscal tax cliff which will occur at the end of the year with the expiration of the Bush tax cuts.

Long-Term Deficit Reduction Plan Component:

1.  Create a National Sales Tax to capture revenue from the underground economy to help reduce the long-term deficit.  The National Sales Tax  would be implemented as follows:

Years 1 through 4 the sales tax rate would be 3%.

Years 5 through 9 the sales tax rate would be 4%.

Years 10 and beyond the sales tax rate would be 5%.

2.  All proceeds from The National Sales Tax would be used to reduce the long-term deficit.  None of the National Sales Tax could be used to reduce the annual budget deficits.

3.  The National Sales Tax would be linked to a plan to reduce the annual budget deficits over 10 Years.

4.  The National Sales Tax would be piggybacked on top of the sales tax rates of the individual States.  The National Sales Tax would be collected by the States and remitted to the Federal Government less a collection fee of .25%, which would be retained by the States.

The National Sales Tax would follow the sales tax laws in each State as to whether or not the National Sales Tax would apply to a particular business.  Congress should work with the States to draft a model sales tax law that would contain uniform provisions for all States to follow.

5.  The exclusion for internet sales not being subject to sales tax would be repealed.  However, internet sellers would only be required to collect the State and National Sales Taxes and not the local sales taxes, unless they voluntarily elect to do so.

 

Annual Budget Deficit Reduction Plan Component:

1.  The Annual Budget Deficit Reduction Plan would be linked to the  National Sales Tax, which would reduce the long-term deficit.

2.  The Annual Budget Deficit Reduction Plan would reduce the annual budget deficits by 10% each year until after 10 years the budget would be in balance.

3.  The Annual Budget Deficit for the fiscal year preceding the passage of the law would become the base amount for the 10% reduction calculation.  For example: If the previous year’s budget deficit was 1 trillion dollars, the annual target for budget reduction would be 100 billion per year for the 10 year period.

4.  Congress would have to agree to balance the budget over 10 years in order for The National Sales Tax to come into existence.

5.  The Annual Budget Deficit Reduction of 10% would work as follows:

a.  Congress would pass a year 1 budget with a projected deficit reduction of 10%.

b.  At the end of the government’s fiscal year 1, the annual deficit would have to be the target of 1 trillion dollars less 100 billion or 900 billion dollars.

c.  If the actual year 1 annual budget deficit exceeded 900 billion dollars, the excess would be allocated in across the board percentage reductions of the year 2 budget amounts, which would have already been reduced by 100 billion from year 1 and 100 billion for year 2.

For example:

Congress passes a 900 billion dollar budget for year 1.  The actual annual budget deficit comes in at 930 billion dollars.  The year 2 budget is 1 trillion less the year 1 and year 2 reductions of 100 billion dollars each or 800 billion dollars.  The 30 billion dollar budget shortfall from year 1 would be applied to the year 2  budget in across the board percentage budget cuts to reduce the year 2 budget to 770 billion dollars.

6.  The only variance from the annual budget decreases would be a Presidential declared emergency, such as a war or natural disaster, and if the President requested a variance, the President would have to request a specific amount of the variance being be requesting.

 

Tax Reform Plan Component:

The main component of the tax reform plan will be the equalization of the individual and corporate tax rates at 10%, 15% and 25%.

Individual Income Tax Provisions:

1.  Dividends and capital gains would be taxed no higher than 15%.

2.  The tax brackets for single and married filing jointly would be as follows:

          Single Tax Rates                   Married Filing Jointly Tax Rates

$0  to  $40,000              10%       $ 0  to  $ 80,000              10%

$40,000  To  $80,000    15%      $ 80,000  to  $160,000    15%

$80,000  and up              25%      $160,000  and up            25%

The tax brackets would be adjusted for inflation annually.

3.  The Individual Alternative Minimum Tax would be repealed.

4.  Carried Interest would be taxed as ordinary income.

5.  In order to broaden the tax base, changes would be made to the itemized deductions of individuals as follows:

a.  The medical percentage limit of AGI would be increased from 7.5% to 10%.

b.  The general sales tax deduction would be eliminated, however, taxpayers would be allowed to deduct sales taxes paid on capital expenditures, such as, motor vehicles, TV’s, washers & dryers, ect. up to a maximum of $2,500.  This provision will help the manufacturing sector of the economy.

c.  The mortgage interest deduction for second homes would be eliminated.

d.  The investment interest deduction would be eliminated.  This provision would encourage reduced debt levels in the economy. Stock margin accounts should be reduced significantly and lead to a less volatile stock market.

e.  The maximum AGI percentage for charitable contributions would be reduced from 50% to 30%.

f.  Total non-cash charitable contributions of up to $500 would be allowed based on a receipt from the charitable organization and a taxpayer compiled list of items and values.  For total non-cash charitable contributions in excess of $500 an appraisal of the items donated will be required in order to claim the deduction on form 8283.

g.  The 2% AGI limit on miscellaneous deductions would be eliminated.

h.  The deduction for gambling losses would be eliminated.  Gambling winnings would not be taxed, unless the amount won was in excess of $2,500.

6.  An overall limit on itemized deductions as a percentage of total income would be imposed on taxpayers.  The limit would be 25% of total income.  The amount of itemized deductions in excess of 25% of total income could be carried over to future tax years.

Corporate Income Tax Provisions:

1.  Repatriated foreign corporate earnings would be taxed no higher than 15%.

2.  The corporate tax brackets would be as follows:

Corporate Tax Rates

$ 0  to  $ 50,000                10%

$ 50,000  to  $150,000    15%

$150,000  and up             25%

The tax brackets would be adjusted for inflation annually.

3.  In order to reduce long-term budget deficits, bonus depreciation would be eliminated.  However, in order to help small businesses, the expense election under section 179 would be made permanent at  $250,000.

4.  The Corporate Alternative Minimum Tax would be repealed.

5.  In order to broaden the tax base, changes would be made to all special corporate deductions not available to all taxpayers (i.e. specific industry tax breaks).  These specific industry tax breaks would be phased out as total corporate income rises. The phase outs are as follows:

Total Income             Phase Out Percentage

$   0  to  $  250,000                          No Phase Out

$  250,000  to  $  500,000                25%

$  500,000  to  $  750,000                50%

$  750,000  to  $1,000,000                75%

$ 1,000,000  and up                          100%

 

Social Security and Medicare Plan Component:

1.  The retirement age would be increased to age 70 from age 67 over the next 10 years to account for increasing life expectancies.

2.  The taxation of social security benefits would be reduced from a  maximum of 85% to 50%.  The amount of modified AGI needed before social security benefits would taxed would be increased to $40,000 for single taxpayers and $80,000 for married filing jointly.  These amounts would be adjusted for inflation annually.  Income in excess of the threshold amounts would trigger an equal amount of social security  benefits to be taxed up to 50% of the benefits received.

3.  In order to stabilize the long-term viability of social security and  additional 2.9% withholding tax would apply to all social security  wages in excess of the annual base amount, which is currently $110,100.  The additional 2.9% withholding tax would only apply to employees and not employers.  Similar changes would be made in the self employment tax rate for self employed individuals.

4.  In order to reduce the long-term budget deficit, both Social Security  and Medicare benefits will become subject to means testing.  Both  Social Security and Medicare benefits will be phased out as follows:

Adjusted Gross Income          Phase Out Percentage

$  0  to  $  250,000                             No Phase Out

$  250,000  to  $  500,000                 25%

$  500,000  to  $  750,000                 50%

$  750,000  to  $1,000,000                75%

$1,000,000  and up                           100%

The phase outs for both Social Security and Medicare benefits would be based on the taxpayers prior year Federal Income Tax Return.  For example, the 2012 phase out would be based on the taxpayers 2010  Federal Income Tax Return that was filed in 2011.

5.  Medicare supplemental insurance would be changed to cover the phase  out of Medicare benefits to higher income taxpayers.  The  corresponding premiums for Medicare supplemental insurance would be  adjusted to account for the phase out.  All taxpayers in the Medicare system would have their medical bills first go to Medicare, as is currently the case, and then on to the supplemental insurance carrier after Medicare has determined the amount that they should pay of the medical bill.

 

Conclusion:

If the Comprehensive Long-Term American Deficit Solution is passed by Congress as a package prior to December 31, 2012, the following provisions would be repealed: (1) the 1.2 trillion in across the board cuts contained in the Budget Control Act of 2011 and (2) the .9% Medicare tax increase and the 3.8% Medicare tax on investment income contained in the Patient Protection and Affordable Care Act.