Overall Logic

The overall logic of the proposals and draft legislation found below is to change the laws of the United States so that our nation can survive indefinitely, at least from a financial perspective. Now, it cannot do so.

Using algebra, the tax system proposal is designed to gradually produce balanced budgets for all non-recession (or worse) years, thereby causing the debt to stop growing (at least as a percentage of GDP). It is simpler and less evasive than the current system. Some retired persons will have to pay more tax under it than the current system. But the huge debt came into existence on the baby boomers’ working watch. (The debt-to-GDP ratio was .3 in 1980; it’s now close to 1.3.) Discretionary spending is reduced by letting agencies’ employees share in 20% of any cost savings.

The Social Security and Medicare changes are designed so all receive benefits over a constant percentage of life expectancy. The normal retirement age/Medicare eligibility age adjusts over time to so do. However, people now receiving Social Security benefits will not experience a benefit cut. The proposed changes are also designed to eliminate some of the unfair attributes of these systems, as explained in the summary of the Financial Sanity Act of 2027. Social Security is gradually changed from a pure defined benefit system to a combined defined benefit/defined contribution system. Some younger people will come out ahead; others won’t. But the strain on the system should become manageable, as Social Security and Medicare become tax system expenses.

For day-to-day entitlements such as SNAP (food stamps) and refundable credits, single parenthood is no longer encouraged, and having more kids while remaining single is financially discouraged. Disincentive to make more money is largely eliminated.

The Tax System

As an attorney/CPA for approximately 40 years, I’ve worked mainly in the areas of tax, employee benefits, estate planning and related corporate and litigation matters. In the process, I’ve prepared many tax returns and dealt with many tax controversies. I know the complexities of our tax system, the areas of evasion and abuse, and the areas where the IRS abuses taxpayers and return preparers. In 2017, Tax Notes published the below article, summarizing my thoughts on possible alternative systems (our system has changed little since the 1930s), and recommending a replacement system. The replacement system would eliminate annual return filings for most Americans while producing an overall reasonably progressive result. Specifically, all would pay a value added tax (VAT) while only the upper half of middle class and above would pay an income tax, instead of our current system with two income taxes—the income tax and the FICA/SECA tax. (The FICA/SECA tax is the Social Security/Medicare tax.) The current income tax is eliminated, and the proposed income tax expands the current FICA/SECA tax to pick up passive income, while making all business entities “pass-throughs” that pass their income onto their owners, who pick up their shares as SECA income. Affiliated businesses are aggregated, with the U.S. portion of their combined net income (based on sales percentage) taxable to worldwide owners, while disallowing deductions for payroll and salaries to the extent the foreign payroll percentage exceeds the foreign sales percentage. Five limited deductions exist (poverty level and limited home mortgage interest, charitable, retirement and health care). The VAT and FICA rates are “X” and the SECA rate is 2X. X balances the budget. This system (and balanced budgets) would be phased in over 4-6 years.

The below article notes what some large companies recently paid the U.S. under the current corporate income tax system. Eli Lilly’s material is marked. It shows roughly twice as much tax paid to Ireland even though 2/3rds of sales are in the U.S. Under my proposal, 2/3rds of the net income of Eli Lilly would be taxable by the U.S., with the remaining 1/3rd taxed elsewhere. (And under my system, labor costs would not be deductible to the extent the foreign labor percent exceeds the foreign sales percent.)

Spending

If the tax system ties rates to spending to produce balanced budgets, the less spending the less taxes. For the federal government, there is mandatory spending and discretionary spending. Mandatory spending covers entitlements, and amounts spent are required by law. (Laws can be changed.) Currently, 60-70 percent of spending is mandatory in nature. Proposals to change them (including Social Security and Medicare) follow. Concerning discretionary spending, agency heads should be given 20 percent of whatever savings they produce, to be divided among the agencies’ employees. Given it hasn’t been productive, the federal Department of Education should be eliminated.

Social Security, Medicare and Healthcare

Social Security generally supplies retirement benefits to seniors. When the system was created in the 1930s, the average life expectancy of a 65 year-old was 6 years. It’s now roughly 20 years. In 1945, the ratio of workers to retirees was 42 to 1. It’s now under 3 to 1. Tax rates gradually increased from 1 percent on employer and employee to 6.2 percent on employer and employee. The normal retirement age has not kept pace with increasing life expectancy. Many people experience a great return from Social Security, while others (mainly single people) greatly lose. For example, a man who marries a much younger woman who then has children can take advantage of very significant (generally $1,500/month/child) child benefits by taking Social Security at age 62. In contrast, a single person without children who dies at age 61 receives nothing. The Financial Sanity Act of 2027 (FSA) is designed to change Social Security to make it ”elastic” and to reduce the defined benefit nature of the system and increase the defined contribution nature, thus reducing the inequities. Certain inequities, noted in the 2-page explanation of the summary of the FSA, are eliminated by the bill. The normal retirement age is gradually moved from 67 to 70, and then adjusted starting in 2050 based on changing life expectancy, so all receive benefits over constant percent of life expectancy. The eligibility age for Medicare is similarly gradually moved to age 70 (from age 65). In this regard, between employer plans, Medicaid, Tricare and Obamacare, sufficient means exist for coverage to retained prior to age 70. For both Medicare and employer plan coverage, FSA creates competition and incentive to control costs, by causing reasonable out-of-pocket costs to be paid by patients under Medicare or any plan, while not breaking anyone in the process.

Below are a summary of the Financial Sanity Act of 2027, the actual bill, and a 2009 article I wrote on Social Security potential fixes at that time.

Other Entitlements and Refundable Tax Credits

The current system encourages single parenthood, discourages marriage, encourages single parents to have more children while remaining single, and discourages most lower income persons and households from making more money (lest their entitlements and refundable tax credits will be reduced). The Child Advancement and Ditch Elimination Act of 2027 is designed to counter these results by encouraging marriage where children are present and causing people to come out financially ahead by making more money. A 2023 book by Melissa A. Kearney titled “The Two-Parent Privilege” pulls together a lot of analysis done over the years by many different persons. In the preface of her book, Ms. Kearney states:

Based on the overwhelming evidence at hand, I can say with the utmost confidence that the decline in marriage and the corresponding rise in the share of children being raised in one-parent homes has contributed to the economic insecurity of American families, has widened the gap in opportunities and outcomes for children from different backgrounds, and today poses economic and social challenges that we cannot afford to ignore—but may not be able to reverse.

The laws should be changed to, from a financial perspective, encourage reversal and a return of traditional families.

The Federal Reserve

For decades, the Fed’s objectives  have been 3-fold: maximum employment, stable prices and moderate long-term interest rates. Most articles discuss the Fed’s “dual mandate,” relating only to maximum employment and stable prices. While it’s easier to achieve two goals than it is to achieve three, the Fed has largely failed at its dual mandate. Given that, historically, the first move of financially declining empires and countries has been to attempt to inflate away the problem, and the Fed was quantitative easing at the rate the Treasury was borrowing in 2020 (at one point, $75 billion per day), the Fed’s sole objective should be to produce stable prices. The Financial Sanity Act of 2027 (subsection (tt) – on the last page) changes 12 U.S.C. §225a to so do.