PAYING OFF THE NATIONAL DEBT
Given that the federal government is still borrowing thirty-five cents of every dollar it spends, paying
off the National Debt seems like a pipe dream. However, last week I wrote about balancing the budget
through spending cuts, and if that is done, additional revenue could be spent paying down the National
Debt.

Where would the additional revenue come from? First it would come from the restoration of jobs. This
solution has the merit of not only increasing the tax base, but also reducing the need for government
assistance. I wrote about restoration of jobs a few weeks ago, No. 142, "Creating And Preserving Jobs."
The first half of that article was devoted to showing that China was in a war with us, despite
protestations of trade partnership. "All war is based on deception," Sun Tzu.

The remainder of the article dealt with job creation, basically guarding the in-country market for
American technological inventions against the kind of Chinese tactics that have destroyed the American
solar panel industry. (For details, see No. 142, "Creating And Preserving Jobs.") My suggestions  
required American withdrawal from the World Trade Organization (WTO), primarily because China
ignores their restrictions. The WTO can't control China and allowing the WTO bureaucrats to control
American trade will allow China to continue destroying our high tech industries, the main source of new
manufacturing jobs. (My suggestions concentrated on jobs in  manufacturing, because every new
factory spurs growth in related areas, for example parts supply, tool and die manufacturing, design,
marketing, etc.)

I suggested identifying promising inventions in the patent office, providing special help for inventors
from the time that they file the preliminary documents that establish the date of the invention, and fast
tracking development and production of promising inventions. In addition, I proposed that all new
inventions in America be protected by restrictive trade barriers or bans on import of similar products
for the first ten years. Here is more from the article.

""There are further suggestions for getting America back to work in No. 134, "Suggestions, Solutions
And Wild Ideas." To summarize: I suggested giving Big Oil a free hand to develop American oil fields,
perhaps five years with minimal regulations and red tape. Also I suggested a lottery of the homes among
the 240,000 properties once owned by Freddie Mac and Fannie Mae, which are now owned by the
American people because the government took over the failing mortgage giants. I thought 5000 homes
a month would be a big enough number to stir interest. For full details, read the article."

"For manufacturing overall, because it creates wealth (cars, computers, and other objects those sales
value substantially exceeds the cost of production, as opposed to the service and government sectors
of the economy that move wealth from one person to another), I would propose the maximum possible
deregulation consistent with safety, deregulation of manufacturing in all non-critical areas, the
exceptions should be worker safety and disposal of hazardous wastes." (See No. 142, "Creating And
Preserving Jobs.")

A lottery of the Freddie Mac and Fannie Mae properties would generate $24 billion if the average
property had a $100,000 sale price (about the foreclosure price of the homes). If the lottery was
successful, even more capital would be generated, perhaps $6 billion a year.

On the other hand, the National Debt is $15,000 billion. $24 billion is not much compared to $15,000
billion. We need much more revenue to pay down the debt. It must come from taxes or from printing
money. These two approaches are not dissimilar. Increasing the amount of American currency is
inflationary, so it represents a tax on everyone as money becomes worth less.

To get some idea of the effect of increased taxes, I decided to look at the past history of American
taxes. There were a lot of footnotes on the table I used, but I generally ignored them, so take my figures
as a tool to show trends rather than the total picture.

From 1950 to 1963, taxes on income over 400,000 were 91% or 92%. In 1964, the top tax rate was 77% of
income over $200,000. From 1965 to 1978, the top rate varied from 70% to 77% of income over $200,000.
In 1979 and 1980, the top tax rate was 70% of income over $212,000. In 1981, the top tax rate was 69% of
income over 212,000.

At this point there seems to have been a shift in policy, reducing the top tax rate and applying it to lower
amounts, a change that greatly benefits the super-rich. From 1982 to 1986, the top tax rate was 50%, this
rate was applied to amounts over $106,000 initially. By the end of the period, it was only applied to
amounts over $171,000.

At this point there was another reduction in taxes for the super-rich. In 1987 the top tax rate was 38.5%
on amounts over $90,000. From 1988 to 1990, the top tax rate was 28% on amounts over $29,750 initially,
rising to $32,450. In 1991 and 1992, the top tax rate was 31% on amounts over $82,150, then $86,500.

At this point, taxes went back up. From 1993 to 2000, the top tax rate was 39.6%. Initially this was applied
to amounts over $250,000, but the amount seems to have been adjusted for inflation. By 2000, the top
rate was applied to amounts over $288,350.

After 2000, the top tax rate went down. In 2001, the top tax rate was 39.1%, in 2002 it was 38.6%, then from
2003 to 2011, it settled at 35%. The top tax rate initially applied to amounts over $297,350 (2001) and
increased each year, apparently for inflation. The top tax rate now applies to amounts over $379,150
(2011). (See http://ntu.org/tax-basics/history-of-federal-individual-1.html.)

The Republican Party has historically promoted the idea that lower taxes are good for the economy. This
has not been true since 2000, the question is, was there ever a connection between lower taxes and
economic recovery or were there so many other factors that they overshadow any connection. For the
answer I will have to look at the economy over the last six decades.

"The period from the end of World War II to the early 1970s was a golden era of American capitalism...
The middle class swelled, as did GDP and productivity. The U.S. underwent a kind of golden age of
economic growth. This growth was distributed fairly evenly across the economic classes..." ("Economic
history of the United States," Wikipedia).

For the first 14 years of this period, the top tax rate was over 90%. For the rest of this period the top tax
rate was at least 70%. No correlation between low taxes and economic growth found here.

This boom ended in 1973. Among the causes Wikipedia lists are: "the growing influx of imported
manufacturing goods, such as automobiles and electronics (and) the 1973 oil crisis." (Ibid). "The United
States grew increasingly dependent on oil importation from OPEC after peaking production in 1970,
resulting in oil supply shocks in 1973 and 1979. Stagflation gripped the nation... Inflation continued to
climb skyward. Productivity growth was small, when not negative. Interest rates remained high, with the
prime reaching 20% in January 1981." (Ibid). From 1971 to 1980, the top tax rate was 70%. Again I see little
cause and effect relationship between economic growth and the top tax rate.

The 1980s were the decade of Ronald Reagan. "In 1981, Ronald Reagan introduced Reaganomics...
cutting marginal federal income tax rates by 25%... Real GDP began to grow after contracting in 1980 and
1982. The unemployment rate continued to rise to a peak of 10.8% by late 1982, but dropped well under
6% unemployment at the end of Reagan's presidency in January 1989. The gap between those in the
upper socioeconomic levels and those in the lower socioeconomic levels increased during Reagan's
presidency, and the federal debt spawned by his policies tripled... In addition to the fiscal deficits, the
U.S. started to have large trade deficits." (Ibid).

Reagan's first tax cut dropped the top tax rate to 50%, but it also cut everyone's taxes, so everyone had
more money to spend. Also, Reagan deregulated various sectors of the economy, so it's impossible to
isolate the exact influence of cutting taxes for the super-rich. Substantial controversy exists.

In his second term, Reagan raised taxes on the lowest income bracket and lowered taxes on the highest
income bracket, the only time this combination has occurred in American taxation. ("Tax Reform Act of
1986," Wikipedia).

In the early 1990s, Bush increased taxes in a compromise with Congressional Democrats. He also
negotiated the North American Free Trade Agreement. ("Economic history of the United States,"
Wikipedia). In 1992, Clinton was elected.

During the 1990s, the national debt increased by 75%, (and) GDP rose by 69%... From 1994 to 2000 real
output increased, inflation was manageable and unemployment dropped to below 5%... (Ibid). These
Clinton administration figures are suspect.

"As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in
its public polling that if the government inflated economic reporting, enough people would believe it to
swing a close election. Accordingly, whatever integrity had survived in the economic reporting system
disappeared during the Clinton years.
Unemployment was redefined to eliminate five million
discouraged workers and to lower the unemployment rate
; methodologies were changed to reduce
poverty reporting, to reduce reported CPI inflation, to
inflate reported GDP growth, among others."
(Walter J. "John" Williams, "GOVERNMENT ECONOMIC REPORTS: THINGS YOU'VE SUSPECTED BUT WERE
AFRAID TO ASK!" 2004, www.shadowstats.com).

From 1993 to 2000, the top tax rate was 39.6%. If you isolated the two decades from 1980 to 2000, you
could make a good argument for decreasing taxes on the rich in order to stimulate the economy. But the
three decades before and the decade after can't be included without destroying the picture. Here is
what happened after 2000.

"The economy worsened in 2001 with output increasing only 0.3% and unemployment and business
failures rising substantially, and triggering a recession... Through 2001 to 2007, the red-hot housing
market across the United States fueled a false sense of security regarding the strength of the U.S.
economy... In 2008 a perfect storm of economic disasters hit the country and indeed the entire world."
("Economic history of the United States," Wikipedia).

After two years of small reductions, in 2003 the top tax rate settled at 35%, where it remains. With good
reason, critics of this low tax policy have complained that the decreased revenues have contributed to
the National Debt.

My conclusion is this, there is no correlation between low taxes for the rich and economic growth in the
last six decades if they are taken as a whole. We need not be afraid to raise taxes on the rich. This is
also the conclusion of specialist in public finance, Thomas L. Hungerford of the Congressional Research
Service.

Among Hungerford's findings, small business accounts for just over half of new jobs, and 74% of small
businessmen have income under $100,000 and would not be affected by tax increases on the wealthy.
(Thomas L. Hungerford, "An Analysis of the Buffett Rule," Congressional Research Service, 2011, p. 7).

Hungerford also suggests that returning taxes to the levels of the 1990s by allowing the Bush tax cuts
of 2001 and 2003 to expire and raising tax rates on capital gains and dividends and taxing carried
interest as regular income would be "unlikely to affect many small businesses or to deter savings and
investment." (Ibid, p. 9).

(Carried interest allows investment fund managers to take their fees in shares of the fund, avoiding
immediate taxation and paying at the capital gains rate when they cash the shares out. That would save
them 20% if tax policies don't change. Congressional efforts to change carried interest tax policy have
traditionally been fended off by big checks.)

Since the nation needs the revenue, I would start raising taxes by taxing all income equally. It seems
morally bankrupt to me that wages, which require work, should be taxed at a higher rate than
investment and dividend incomes, which don't require work. I think income from any source should be
taxed as if it were wages.

I'm going to assume that one-third of the income in America is now subject to the lower capital gains tax
rate, and that mostly those with higher income have the investment and dividend income. Therefore, I
would guesstimate a tax increase of 18% on this income (the tax increase for investment income in the
top three brackets would be 13% for the lowest, 18% for the next and 20% for the highest). An 18%
revenue increase on one-third of income is equivalent to a 6% increase in revenue on overall income.  
According to the US Treasury Department, in 2010, individual income taxes were $900 billion dollars, so
6% this should produce $54 billion more revenue. (My estimates are quite conservative, it could be
substantially more.)

I would also let the Bush Tax cuts expire. These tax cuts dropped the top tax rate from 39.6% to 35%, so
that would restore a top tax rate of 39.6%. The Congressional Budget Office and the Pew Charitable
Trusts estimate the ten year cost of extending the Bush tax cuts of 2001 and 2003 at $3.3 trillion. The
Congressional Research Service has estimated the ten year cost of continuing these tax cuts at $3.5
trillion. ("Bush tax cuts," Wikipedia).

Based on the numbers from the Congressional Budget Office, eliminating the Bush Tax cuts would
provide $330 billion more in revenue per year. Adding in $6 billion from the Fannie Freddie lottery and
$54 billion from taxing all income at the same rate as wages, and the result is an increase in revenue of
$390 billion dollars, an estimate that is likely to be low.

I have found estimates of the cost of extending the Bush tax cuts for the top 1% that range from $70
billion per year to $100 billion per year. Adding an extra top bracket raising the tax rate on the
super-rich to perhaps 44% would probably increase revenue by $70 billion. I would recommend that
change, this would bring my estimate of increased revenue to $460 billion.  

An alternative to this is to go with a flat tax plan, BUT my calculations indicate that the 18% to 25% rates
proposed are INSANELY low and so are the exemptions. Before any such plan is contemplated, the IRS
should create a tax information data base and that data base should be used to verify that there is not a
huge tax break for the rich and a tax increase for the middle class hidden in the plan. The country simply
can't afford it. The rich don't need more income and the spending of the middle class is essential to the
economy and should not be compromised unduly.

Presidential candidates Buddy Roemer is suggesting a substantial cut in the corporate tax rate, cutting
all of the tax rates for taxable income down to 15%, which is the rate for the first $50,000 of taxable
income. Theoretically, this would save a major corporation with millions in profits up to 20%, however,
there are so many tax loopholes that in fact very little corporate income tax is paid in America, about 1%
or 2% of GDP. As part of his plan, Buddy wants to close all the loopholes.

According to a 2010 report by the Tax Foundation the cost of the loopholes will be $628.6 billion over
the next five years. That's about $126 billion a year. The IRS reports that $ 225 billion in corporate taxes
was collected in 2010, so this plan won't cost the country. Lowering the rate will stimulate the economy
and closing the loopholes would increase corporate tax revenue.

There is one loophole we should keep. This loophole enables a tax deduction for manufacturing
activities conducted by American companies within the United States. At a cost of about $10 billion a
year, its beneficial effects on the economy probably outweigh its cost.

And so we arrive at the most controversial recommendation for increasing tax revenue, legalizing and
taxing the herbal (natural and unrefined) version of most drugs.

Marijuana is sold in its natural state as a dried herb. It is used in medicine for relaxation and pain
control and is legal in some states for medicinal purposes.

Opium is the dried latex obtained from the opium poppy. It contains up to 12% morphine and also
codeine, both narcotics. It is generally sold in refined form. Its medicinal uses are for pain relief and
relaxation.

Cocaine is obtained from the leaves of the coca plant. It is a powerful nervous system stimulant.
Cocaine increases alertness, feelings of happiness, sexuality, energy and endurance. It is generally
sold refined. (I suspect that a tea brewed from dried coca leaves would provide substantial relief from
depression.)

Peyote is a small, spineless, dried cactus, whose principal active ingredient is the hallucinogen
mescaline. Peyote is sold in its natural state.  It has been used to obtain visions. Medically it is used to
enhance meditation and to unblock barriers to psychological analysis.

Magic mushrooms are hallucinogenic. The effects of magic mushrooms come from psilocybin and
psilocin. They are used dried. Historically, they were used in pagan religious services. Some benefits
have been claimed in the treatment of chronic cluster headaches, and obsessive-compulsive disorders.

In Britain, the Independent Scientific Committee on Drugs investigated the drug issue without any
political interference. Here are their conclusions expressed as overall harm scores, including both
harm to the individual and to society.

Alcohol had a score of over 70.
Heroin (refined morphine from the opium poppy) had a score of about 55.
Crack cocaine had a score of about 54.
Methylamphetamine (meth) had a score of about 33.
Cocaine had a score of about 28.
Tobacco had a score of about 26.
Cannabis (marijuana) had a score of about 20.
Mushrooms had a score of about 6.
(Peyote was not rated.)

(Source: The Lancet (British Medical Journal) as quoted from "Alcohol 'more harmful than heroin' says
Prof David Nutt," BBC News UK, November 1, 2010).

Based on this data, and keeping in mind that the unrefined versions of drugs are generally substantially
less dangerous than the refined versions (see the marijuana and mushroom scores above), I would
recommend that opium poppy pods, marijuana, coca leaves (the source of cocaine), peyote and magic
mushrooms all be sold in their raw and natural forms, subject to appropriate control and taxation. This
would provide a less dangerous and better regulated legal access to these drugs and should provide
substantial revenue.

There are obviously many other ways to increase revenue, but except for the ending of the Bush tax
cuts, my recommendations would not effect the buying power of the middle class. Adding the revenue
from taxing legalized drugs to all the other tax increases I have suggested would cause the amount of
additional income to approach $500 billion.

Using the additional $500 billion to pay down the National Debt would be a slow process. Even with
freezing of interest on the National Debt at the date of default, the process would take thirty years.
However, I have not included any extra revenue for jobs coming back to America. A strong economic
recovery would both cut the cost of social services like food stamps and bring in increased taxes.

Without a strong economic recovery, creating new money to aid payment of the debt would probably be
required, and as this tactic is inflationary, it could have a substantial impact on the buying power of the
middle class. That would likely continue the current stagflation and slow economic recovery. This is why
any attempt to recover from default should include a two year pause in debt payments.

What exactly happens if we just don't pay the National Debt off? Are we morally obligated to pay it?
These are questions for next week.

Amo Paul Bishop Roden