A Budget Fix Worth Rioting For

12/02/2010 3:02 pm EST

Focus: MARKETS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Timothy Lutts, chief investment strategist of Cabot Wealth Advisory, deems the preliminary proposals from leaders of the presidential budget panel a good starting point for essential reforms.

First the Greeks rioted after their government imposed austerity measures designed to help the country climb out of its deep financial hole.

Then the French rioted over President Sarkozy's plan to raise the retirement age from 60 to 62. (He succeeded last month.)

Then the English rioted over their government's plan to triple college tuitions as part of a multi-faceted effort to stop the country's financial hemorrhaging.

But here in the US we haven't had any serious unrest yet, and the reason is not because Americans are better behaved. It's because our government hasn't really done anything to get out of the deep hole we're in!

Republicans want to cut spending. Democrats want to raise taxes. And neither side wants to compromise for fear of being perceived as soft, losing out on lobbyists' backing and losing the next election.

In the meantime, our national debt grows.

The collapse of the housing industry under a mountain of bad debt was just a preview of what will happen if this trend continues. If this mountain collapses—say the Chinese stop buying our bonds—millions of Americans are going to be sorry.

It’s a Place to Start

And so we have the National Commission on Fiscal Responsibility and Reform, a bipartisan group tasked by President Obama in February with finding a sensible path out of our economic mess.

Of the 18 members in the group, six are members of the US Senate, six are members of the US House of Representatives, and six were appointed by the president. Ten are Democrats and eight are Republicans.

To be fair, what the group's leaders, Alan Simpson and Erskine Bowles, released last week is not a final plan [which was released by the commission on Dec. 2—Editor]—it's a "discussion draft.” And the good news is there's a lot to like in this draft, as well as plenty for party stalwarts on both sides of the aisle to criticize. Among the items the draft proposes:

First, reduce discretionary spending by $200 billion by reducing defense spending by 15%, closing one third of overseas bases, eliminating earmarks, and cutting the federal work force by 10%. Sounds good to me.

Second, generate $100 billion in increased tax revenues by increasing the federal gasoline tax by 15 cents a gallon, increasing the capital gains tax to 28%, restoring the inheritance tax to 45%, eliminating the mortgage-interest deduction for second homes, home-equity loans and mortgages over $500,000 and eliminating the deduction for employer-provided healthcare benefits. I think the last two have been instrumental in driving up the costs of housing and healthcare, and as for the gas tax, I'd raise it even more, while eliminating the EPA, which foolishly tries to determine what kinds of cars we should all drive.

Third, maintain the Medicare cost controls associated with the recent health care reform legislation, while offering doctors new protection against malpractice lawsuits and strengthening the ability of the Independent Payment Advisory Board to squeeze costs. No comment; I'm waiting to see what they can do.

Fourth, reduce entitlements, including farm subsidies, civilian and military federal pensions, and student loan subsidies. Absolutely.

Fifth, reform Social Security by increasing the amount of income subject to the payroll tax from $106,800 this year to $190,000 in 2020, and increasing the retirement age from 67 to 69 gradually. Yes, yes, yes.

The co-chairs also recommended reducing the corporate tax rate from 35% to a more internationally competitive 26%.

Again, this is a draft, not a proposal.  The final proposal needs to be favored by 14 of the commission's 18 members to trigger a vote in Congress [The commission was expected to vote on the final proposal on Dec. 3—Editor.]

But it's a start.

And I think that if anything remotely resembling this is actually enacted, it will provide a huge boost to the US economy, as people will once again have more money to spend where they want to spend it, and not where their government foolishly spends it.

Of course, if the talk gets serious, no doubt there will be massive protests, and rioting, too. But if that's the price of progress, I look forward to it.

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