Without tax code reform, it’s budget cuts and tax hikes

ANGOLA, Indiana -- Let's see, I'm going to buy a new Mercedes-Benz. And I think I'll buy a new Ford F-150 4x4. I'll sign up for a premium health care plan with a tiny deductible and an array of prescription drug benefits. The scripts will cost me about $4 out of pocket. And I'll take a 10 percent pay cut. If I run out of money in the third week of the month, I'll just put it on one of my credit cards.

If I were to really do that, I would end up in a financial hole. Probably bankruptcy.

Of course, I won't do that. I'll live within my means. I'll have long-term mortgage and car payments, but most everything else I'll try to pay as a I go. For the credit card debt I do have, I'll gradually pay it down.

Our federal government hasn't been so responsible and now the time for reckoning is here. Treasury Secretary Timothy Geithner has set an Aug. 2 deadline to solve the debt ceiling "crisis." If the debt ceiling on $14.2 trillion is not extended, the United States of America faces a situation where it won't be able to pay all of its bills. It could default on some of those payments and obligations. Many economists fear that such a scenario could push the U.S. into the feared double-dip recession and shock global financial markets.

How did we get here?

With a budget deficit of $1.5 trillion, over the past decade we have paid $1 trillion for wars in Afghanistan, Iraq and now Libya. In past wars, American taxpayers had to ante up. But in this period, we instead got the Bush tax cuts. So the wars went on the national credit cards. Prior to Bush's 2004 reelection where it was determined he needed the votes of senior citizens, Congress passed and the President signed the Medicare Prescription Drug Plan. It was the biggest entitlement expansion since the Great Society.

That wasn't paid for either.

So it is with much fascination that we watch Congressional Republicans try and take the tax hikes off the table.

Common sense suggests that the solution to this debt and budget crisis is a combination of budget cuts and tax hikes.

The election of a Republican House in 2010 has set up the dynamic where budget cuts will happen. This past week President Obama went beyond the $2 trillion in tax cuts over the next decade and is now seeking a plan that would cleave $4 trillion and as the Washington Post described, "stabilize borrowing, and defuse the biggest budgetary time bombs that are set to explode as the cost of health care rises and the nation’s population ages. It would also put Obama and GOP leaders at odds with major factions of their own parties. While Democrats would be asked to cut social-safety-net programs, Republicans would be asked to raise taxes.”

Republicans began talking this past week about a short-term deal, but Obama was having none of that. "I don’t think the American people sent us here to avoid tough problems. That’s, in fact, what drives them nuts about Washington, when both parties simply take the path of least resistance. And I don’t want to do that here."

"I believe that right now we’ve got a unique opportunity to do something big — to tackle our deficit in a way that forces our government to live within its means, that puts our economy on a stronger footing for the future, and still allows us to invest in that future," Obama said. "To get there, I believe we need a balanced approach. We need to take on spending in domestic programs, in defense programs, in entitlement programs, and we need to take on spending in the tax code — spending on certain tax breaks and deductions for the wealthiest of Americans. This will require both parties to get out of our comfort zones, and both parties to agree on real compromise."

Obama missed a golden opportunity during his State of the Union Address last January to seek a dramatic tax code reform. U.S. Sen. Dick Lugar has reintroduced the Fair Tax concept and it's unfortunate that the time limits today won't allow for a thorough examination of a long-term solution.

What would a Fair Tax do?

According to Lugar, because the income taxes embedded in the final cost of goods and services are roughly equivalent to the Fair Tax, the prices of goods and services won't change significantly. Low-income families will not have an increase in taxes. The bill includes a tax "pre-bate" to insure fairness to American citizens, covering costs of essential purchases. Tax compliance will be higher. Currently a majority of Americans don't pay federal taxes. Illegal immigrants, tax evaders and foreign tourists will pay taxes when they buy goods and use services. Under the Fair Tax, mortgage rates will fall by about 25 percent. Foreign investment and employers will flood to the United States to take advantage of the favorable tax structure. Job creating economic growth will increase substantially. Wage earners will no longer pay regressive withholding taxes for Social Security and Medicare.

Common sense has its limits, of course, roughly coming in that little rectangle known as the District of Columbia.

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