P.J. O’Rourke: The ugly truth about tax reform

From P.J. O’Rourke in Stansberry Digest:

We really need tax reform… We really want tax cuts… And we have a once-in-a-political-lifetime chance to get both.

In all three branches of the federal government, Republicans hold a majority… more or less. (Hey, Freedom Caucus members, where are you going?! Get back over here!)

The people who pay taxes are, for a change, in charge of what taxes should be paid.

What I mean is that the nonpartisan Pew Research Center has examined tax information from 2014 – the most recent year for which statistics have been released by the IRS – and found that people with adjusted gross incomes of more than $250,000 filed 2.7% of individual income tax returns but paid 51.6% of all income tax.

Meanwhile, people with adjusted gross incomes of less than $50,000 filed 62.3% of returns, yet they paid only 5.7% of income tax.

Those who make more than $250,000 a year tend to vote for fiscally conservative candidates – or should have their heads examined if they don’t. Republicans are fiscal conservatives. (So they say.)

We can pass tax reform. Q.E.D. (For those of you who, like me, flunked high school Latin, that stands for quod erat demonstrandum, which loosely translated means, “I just proved it, sucker!”)

However, we’re all suckers if we believe that proving we can pass tax reform means proving we will pass tax reform.

Taxes are too damn high. But any tax reform that lowers taxes is going to be messy. Tax reformers immediately find themselves plunged into “a mud bath of math.”

One number is particularly dirty and sticky – $3.8 trillion.

That’s what the federal government spent in 2015, the most recent year for which we have complete figures from the U.S. Treasury Department. Lowering that number is going to be hell. I’ll describe this journey through Hades in a moment…

But first, let’s pause and consider two things I’ve just said: “2014 – the most recent year for which statistics have been released by the IRS” and “2015, the most recent year for which we have complete figures from the U.S. Treasury.”

Those phrases in quotation marks say all that needs to be said about fiscal conservatives’ dearly cherished concept of running the federal government like a business. How much confidence would you have in a business that was two or three years late issuing its annual report?

The federal government cannot be run like a business any more than monkey business can.

Now to get back to the monkey business at hand – the $3.8 trillion. Except now – according to Congressional Budget Office estimates – it’s $3.9 trillion for 2016. That’s a ridiculous number. That’s 21% of U.S. gross domestic product (GDP). That’s about $12,000 per person living in the United States.

Cutting that number would seem to be as easy as cutting government lard with a hot, sharp knife of public indignation. Except the knife goes cold and gets as dull and breakable as a chopstick when we face the facts.

The worst facts are the debt and the deficit. The 2016 deficit projection is $544 billion, resulting in a gross national debt of $19 trillion, which is 104% of our GDP, the highest percentage since 1950.

There’s a simple explanation for these facts. While government expenditure was $3.9 trillion, government revenue was less than $3.4 trillion.

This kind of reckless government overspending has been going on all our lives. We’ve had only five balanced budgets in the past 60 years and no significant reduction in the national debt since Ike’s second term. (When the national debt was only $1.7 trillion.)

If you and I behaved with our personal finances the way the government does, we’d be… well, since government fiscal behavior shapes individual fiscal behavior – we’d be in the same circumstances that caused voters in 2016 to hand over all three branches of the federal government to fiscal conservatives and arm them with a hot, sharp knife of public indignation.

Yet the truth is, if we’re going to avoid the economic catastrophe that growing deficits and debts will inevitably cause, we must increase government revenue.

“No, no!” I hear you cry with horrified voices. “We must cut government spending!”

Good luck with that.

Of the $3.9 trillion the government spends, $2.4 trillion is mandatory entitlement spending. Neither President Trump nor moderate Republicans nor any Democrats at all are willing to grab the aforementioned budget-slashing cutlery and press it against this political third rail.

That leaves us with $1.5 trillion in spending. But we have to pay about a quarter trillion in interest on the debt we’ve accumulated. And we’d better continue to do that or repo men from China will be jacking up the Capitol building and dragging it away with a tow truck.

So now we’re down to $1.25 trillion of spending that can be cut. Except 54% of this is military spending, which Republicans have promised to raise. Even if they don’t keep their promise, it’s hard to see how we can spend less on our armed forces unless ISIS, the Taliban, and Syria all go jump in the lake. And in that part of the world, they don’t have much in the way of lakes to jump into.

The actual amount that the government has in hand for all other discretionary spending is something in the order of $675 billion.

It sounds like a lot, but it isn’t. For example, the American Society of Civil Engineers gives U.S. infrastructure a D+ and estimates that we’ll have to spend $3.6 trillion by 2020 just to bring our national infrastructure back up to adequate.

This is $900 billion a year. Subtract $900 billion from $675 billion and you get… a big hole, just like those we have in I-95.

Plus, more bad news: We really should be allocating a substantial portion of our federal budget – $100 billion a year, at the very least – to paying down our national debt.

Thus, although we really need tax reform, we also really need $4 trillion in government revenue as opposed to the $3.4 trillion the government currently collects.

How can we possibly square the tax-cutting tax reform we want with the $600 billion in increased revenue we require?

I think it can be done. And I’ll tell you how tomorrow

In the meantime, I want to leave you with a little hope. There is a fundamental governmental budgetary principle that will bring government outlay closer to government income. I’ve just invented it. I call it “The O’Rourke’s Circumcision Precept.”

You can take 10% off the top of ANYTHING.

So now all we need to do is find $3.6 trillion for the government to spend.

Regards,

P.J. O’Rourke

Crux note: P.J. will be joining many other high-profile speakers, such as Shark Tank’s Kevin O’Leary, The ‘Dean of High-Yield Bonds’ Marty Fridson, Dr. Steve Sjuggerud, Porter Stansberry, Dr. David Eifrig and many more at the Stansberry Las Vegas conference in September. For a chance to meet some of your favorite analysts and hear their latest and greatest ideas (including some they don’t share in public) click here.

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