A Simple Government Part 2

National Debt Of course, these annual national deficits add to our combined national debt, which is about $13 trillion now and growing at the rate of about $4 billion every single day! That's even more than hedge fund managers make!

Our friends at the Congressional Budget Office have another grim estimate: The cost of interest on the debt will more than triple in just the next decade. In fact, President Obama is on track to add more to our national debt in his first two years than President George W. Bush did in his entire eight.

An accepted yardstick for a nation's economic health is the ratio of national debt to GDP. Economists studying national debt levels over the past two hundred years have concluded that economic growth is sharply restricted when debt is 90 percent of GDP. President Obama's projected budget will raise our debt level to 103 percent of GDP by 2015, which will be extremely threatening to our national prosperity. By comparison, both Reagan and Bush 43 left office with that ratio at 40 percent.

There are many related consequences, none of them good. For example, Moody's rating agency warns that our Treasury bonds risk losing their triple-A rating. Other countries, watching us make irresponsible economic decisions, talk about abandoning the U.S. dollar as the world's reserve currency.

As for interest rates, they are artificially low right now because of the downturn. They are predicted to go up soon, meaning that carrying our national debt is going to cost us more. And as the debt increases, the cost of interest will rise right along with it. The result: a lower GDP because of less investment.

Meanwhile, we are rightfully terrified that we now owe so much to the Chinese, but we're just as terrified that they may stop lending to us. This is a security issue as much as an economic one: How hard can President Obama push them for sanctions on renegade Iran or fairness in international trade when our huge debt to them gives them so much leverage over us? I'm thinking about ordering the Rosetta Stone course in Mandarin Chinese so I'll be prepared to talk with the bankers who will own all our currency!

Social Security Here's a dirty little secret: Social Security was never intended to finance retirements lasting decades. When the legislation was pa.s.sed in 1935, and the retirement age was set at sixty-five, life expectancy was in the late fifties for men, early sixties for women. See that? It was a.s.sumed that most people would be dead before they could qualify! No one imagined those legions of healthy, lithe retirees you see in TV ads playing golf, boating, running marathons. Today, life expectancy for average Americans has reached the late seventies, and many of us will live at least a decade or two longer. This is a blessing, especially if you're healthy, but you can no longer expect the government to support you for twenty or thirty years. The original financial calculations didn't allow for that eventuality. It's that simple.

What can be done? Well, for those already retired or close to retirement age, it's too late to change benefits. That door is closed. But it is fair to ask people in their twenties, thirties, and forties-in light of radically changed life expectancy-to plan for a different kind of future, including the responsibility to provide more for their eventual retirement. For one thing, the retirement age has to be raised. For another, the benefits will have to be adjusted downward.

There's another dirty little secret in all this (actually, most people know it but pretend otherwise). Your Social Security benefits are not funded by what you actually contributed to the system over your working years. That dissipates very quickly. No, your monthly checks come from the payroll taxes paid by younger folks still in the workforce. Back in 1950, when there were sixteen workers for every retiree, the cost was spread widely. Today, there are three workers for every retiree. There will be only two in 2025.

Even as these changes were becoming crystal clear to everyone involved, it was predicted that the Social Security system would not begin paying out more than it took in until 2016. Wrong. This happened in 2010. The unantic.i.p.ated shortfall was caused by the downturn: It caused some people to choose to take early retirement, and payroll taxes fell because of widespread job losses.

As things are going now, Social Security is expected to run out run out of money by 2037. Let us pause. . . . That is only twenty-six years from now. Most of you are probably old enough to know from experience how quickly that time will pa.s.s. Where will you or your children or your grandchildren be when that happens? Let's also note that Social Security, right now, has unfounded of money by 2037. Let us pause. . . . That is only twenty-six years from now. Most of you are probably old enough to know from experience how quickly that time will pa.s.s. Where will you or your children or your grandchildren be when that happens? Let's also note that Social Security, right now, has unfounded liabilities liabilities of about $70 trillion. That's right. of about $70 trillion. That's right. Trillion Trillion. (You haven't yet forgotten that ill.u.s.tration, have you?) What all of this means is that we must do everything we can to delay making payments to those who are too old to have their benefits reduced. Tax incentives could encourage such people to keep working beyond retirement age, letting them keep more of what they earn. (I don't know about you and your friends, but I find that most people get bored after a few months of the "golden years" and want to work at something in order to feel useful. Rocking Chairs "R" Not Us.) Also, benefits could be made higher the longer the recipient waits past age seventy to retire; currently, they stop rising at that age. Finally, some people don't need Social Security at all. Let's offer them the option of a tax-free, lump-sum benefit payable at their death to their chosen beneficiary. This provision could delay some payments for decades.

Medicare The picture is hardly brighter with Medicare, which is expected to become insolvent by 2017 and currently carries unfunded liabilities of about $38 trillion.

Furthermore, in order to help pay for ObamaCare, Medicare is scheduled to be cut by $500 billion over the next decade. If that kind of cut is actually made (a huge if if), shouldn't the savings be used to extend the life of Medicare rather than to pay for this new (and widely unwanted) new ent.i.tlement?

There are potential answers readily available. For instance, we could switch to vouchers for Medicare; that way, recipients would be able to buy private insurance in the marketplace. Also, we should recognize that, just like Social Security, the Medicare program has not kept pace with the increases in life expectancy. We should raise the age of eligibility. I know that's not politically smart to say, but I promised you I would do my best to talk sense in this book! This society likes to boast that age sixty is the "new forty," because people live better and longer. Fine, so if we feel as good as we did at forty when we turn sixty, shouldn't we be able to stay active and productive by continuing to work for a few more years? That would make it even more likely that the benefits will be there waiting when we reach the age or condition when we really do need them.

We Need Jobs Our economy has tanked precipitously, but there is a very simple way to bring it roaring back. The key is jobs. When the economy slows and unemployment rises, not only do tax revenues drop, but government spending increases because of the increased demand for safetynet items like unemployment insurance and food stamps. This means that the government is forced to spend more even as it takes in less.

But while the deficit can expand very quickly, as we've experienced, it can also contract very quickly. When people both have jobs and feel confident they will either keep them or have no trouble finding new ones, they (1) spend more (remember, 70 percent of our economy is driven by consumer spending), (2) pay more to the government, and (3) take less from from the government. the government.

Even if Ben Bernanke is right that we can't entirely grow our way out of the current economic mess, we must wring every last drop out of growth that we can. That means creating as many jobs as we can, and job creation requires funds for new businesses to start up and existing businesses to expand. Even though small businesses create about 70 percent of our new jobs, they have more trouble getting credit than medium-sized and big businesses. They are therefore affected more seriously by our growing deficits and debt, which soak up available capital and drive up interest rates.

According to the Kauffman Index of Entrepreneurial Activity, all of the approximately forty million net new jobs net new jobs between 1980 and 2005 were created by firms that had been in business for only five years or less. They also found that if we take firings and layoffs into account, older companies added almost no net new jobs during the same period. Yet it's harder for small start-up businesses to get financing than it is for established companies; moreover, because of the greater risk of failure, they have to pay higher interest rates just to get off the ground. As long as the government continues nutty policies that hinder or hurt small businesses, the existing factors do not bode well for job creation. between 1980 and 2005 were created by firms that had been in business for only five years or less. They also found that if we take firings and layoffs into account, older companies added almost no net new jobs during the same period. Yet it's harder for small start-up businesses to get financing than it is for established companies; moreover, because of the greater risk of failure, they have to pay higher interest rates just to get off the ground. As long as the government continues nutty policies that hinder or hurt small businesses, the existing factors do not bode well for job creation.

It doesn't take Nostradamus to predict the future we're facing. As the interest on our national debt pushes interest rates for the private sector ever higher, many businesses will never get started, and others will be unable to grow to their full capacity. In other words, there is really an inverse correlation between our national deficit and our future economic growth. Unfortunately, it couldn't be simpler to understand: As interest rates rise in order to finance growing government debt, fewer and fewer new jobs can be created, and that situation in turn depresses revenues and adds to the debt, which in turn pushes interest rates up even higher.

What's the Solution?

Why not just "tax the rich"? After all, we certainly hear that a lot from the White House and from a certain side of the aisle in Congress. But we have to consider one simple fact: The top 1 percent of American taxpayers now pay more than all of those in the lowest 95 percent combined. What more can they be expected to contribute? Meanwhile, about half of us pay no taxes at all-a very unhealthy situation. Almost everyone should be contributing at least something to the pot; those who don't contribute have little reason to care about what is done with everyone else's investment.

I'd say that representation without taxation is as threatening to our national character as taxation without representation. Those who don't pay taxes-that is, who are not pulling their weight in the community-have no real reason not to vote for more and more government services. And that will lead to more and more dependency, making the country more and more like a European welfare state. At times, a safety net is essential, but it must not be used as a hammock that can lull us into lethargy. This country was built by personal responsibility, work, and risk taking.

Maybe you personally don't have a philosophical objection to raising taxes. But practically speaking, there is no way we can tax our way out of the current situation. As taxes are raised, growth of the GDP is cut, basically killing the geese that lay our golden eggs.

So what's the solution?

When you come down to it, the answer is very simple (as the t.i.tle of this chapter hints): Do not spend money that you do not have. Of course, even the simplest idea can be extremely difficult to execute. After all, temptation has been a human problem since Eve ate the apple in the Garden of Eden. It was certainly enticing a few years ago, if you were living in a modest tract home, to be a.s.sured that you could easily afford a fancier house in a more upscale neighborhood, even if, in your heart, you suspected that you really couldn't. Too many of us, of course, gave in to that temptation. Now that some of us have lost the big house and have had to retreat to a tiny apartment, that tract house looks pretty good.

Fine. You learn from mistakes; you move on and do better. You take a second job; you go to night cla.s.ses. Instead of remaining chained to a credit card and its minimum monthly payments, you set a new goal of putting aside a year's salary in savings. You strive, by becoming the most conscientious and productive person in your office or plant, to be the very last person who would be fired. As you continue honing your job skills, you add new ones to make yourself more marketable. Working hard and working smart won't just create real prosperity for you and your family-as opposed to the illusion of prosperity a bubble creates; they will help create real prosperity for the whole country.

Americans don't have ranks and t.i.tles, and most of us like that. Still, some of us try to distinguish ourselves from the herd by showing off our "stuff," our houses, our cars. In the run-up to this crisis, many of us probably looked at our neighbors and wondered how they could support their lavish lifestyles: How could they afford that top-of-the-line remodel, not to mention those luxury cars, private-school tuition, and trips to Hawaii and Europe? Then, as we watched their house go into foreclosure and saw them slink away, we realized the truth: They really had never been able to pay for all of those nice, s.h.i.+ny things. They were overleveraged big time. By using what they thought was equity in their house to buy toys, they were actually using their Visa to pay their MasterCard bill. Instead of thinking, What's wrong with us?, What's wrong with us?, since we couldn't seem to make two plus two equal eight, as they did, many of us who did not get overextended now feel pretty darned smart. We learned that not only is material wealth less important than we thought, but it is also a trap. From the errors of the high rollers, many of us have gained new priorities; we've learned to distinguish between real needs and frivolous wants. Let's join together and promise not to forget those lessons anytime soon. since we couldn't seem to make two plus two equal eight, as they did, many of us who did not get overextended now feel pretty darned smart. We learned that not only is material wealth less important than we thought, but it is also a trap. From the errors of the high rollers, many of us have gained new priorities; we've learned to distinguish between real needs and frivolous wants. Let's join together and promise not to forget those lessons anytime soon.

Because friends, the party really is over. We have to sober up and pay for our excesses. We are entering-as we need to-a new era of reality and responsibility for our families and our country. Already American families have shown they understand this by adjusting budgets and lifestyles. So far, not surprisingly, government doesn't get it: Our leaders are still cowering behind smoke and mirrors.

Most politicians already know everything I've shared in this chapter. The problem is not ignorance but their refusal to make choices that will be painful and politically unpopular. Everyone is aware of the coming crisis of unsustainable spending, deficits, and debt. But given the way our government functions, it's likely that nothing significant will be done until that disaster is fully upon us. Once again, just as with the bank bailouts, policy will be made in the panic mode, rather than calmly and deliberately. In other words, when our finances finally crash into the iceberg, the outcome is unlikely to reflect wisdom or fairness. Instead, it will be a matter of who can get into the lifeboats first. You know who that will be: those who have the most clout and political power, who can spare themselves pain and inflict it upon someone else.

One risk we might run is that a frightened government will just print money in order to pay off its enormous debt with cheaper dollars. That will inevitably lead to inflation, or even hyperinflation. In the 1920s, a similar decision caused people in Germany to have to buy bread with wheelbarrows full of money. If you thought that was something that only happens on the History Channel, think again. And if you've ever heard or read anything about the 1930s, you know that things did not end well. What would be a windfall-a quick and dirty way out-for the government would be an unmitigated disaster for the American people. It would also upend our whole system: The government is supposed to work for us, not the other way around.

Do we want to imitate Europe, where the government takes care of you in exchange for very high taxes and reduced individual opportunity? Do we want to be coddled like that, or do we instead want to remain the people of responsibility who made this country strong and free? The social spending of European countries is not hindered by a military budget like ours, which accounts for almost half the world's defense spending. Would we prefer to surrender our superpower status rather than repair Medicare and Social Security?

We built America by relying on ourselves, our families, and our neighbors-not on the federal government. To change our economic system to a European-style welfare state, we'd also have to change our culture. We'd have to abandon a heritage and a set of values that has worked well for over two hundred years, much more effectively than any other in the history of the world.

That's why resolving this crisis is not just about money, about cutting this or taxing that. Rather, it is essentially about who we are. It's about who we want our children and grandchildren to be.

CHAPTER FOUR.

If You Drain the Lake, All the Fish Will Die We Need a Simple and Fair Taxation System

It's one of the great ironies of history that a beverage so thoroughly a.s.sociated with polite culture-tea-would become a flash point in America's struggle for independence. Wars have been fought over love, treasure, territory . . . but tea? Of course, what Americans have revered as the Boston Tea Party was in truth anything but, and what you may not realize is that it wasn't actually a revolt against high high taxes. In fact, the price of tea was actually reduced by Britain's Tea Act of 1773 in an effort to prop up the floundering East India Company, which had a monopoly on tea sales to the American colonies. London knew of Americans' pa.s.sion for tea (sort of the eighteenth-century version of the near-tyrannical grip Starbucks has on us today!), so, in what you might call a corporate bailout King George style, the Tea Act reduced the taxes on the East India Company's business in an attempt to support the long-standing trade giant. But as has been our own experience with corporate bailouts, the outcome fell short of expectations. taxes. In fact, the price of tea was actually reduced by Britain's Tea Act of 1773 in an effort to prop up the floundering East India Company, which had a monopoly on tea sales to the American colonies. London knew of Americans' pa.s.sion for tea (sort of the eighteenth-century version of the near-tyrannical grip Starbucks has on us today!), so, in what you might call a corporate bailout King George style, the Tea Act reduced the taxes on the East India Company's business in an attempt to support the long-standing trade giant. But as has been our own experience with corporate bailouts, the outcome fell short of expectations.

While reducing the overall price of tea for American colonists so East India could undersell illicit tea smugglers and regain its dominance of the market, prime minister Lord North left in place the Townshend duty-a tax of three pence per pound of tea-for the sole purpose of putting a stick in the eye of colonists, who were growing increasingly hostile toward taxation without representation in Parliament. Even some members of Parliament implored the prime minister to stop poking the bear in this way, but he would have none of it. He wanted to send a message. (An important footnote here is that Lord North also knew where the revenues of the Townshend duty went-to pay the salaries of Britain's bureaucrats and administrators in the colonies. Without a paycheck, he feared they'd soon "go native.") So the tax stayed in place, and with it the British essentially told Americans, "We'll tax you as we see fit." So on the night of December 16, 1773, colonists who'd had enough of taxation without representation boarded three East India s.h.i.+ps docked in Boston Harbor and sent 342 chests of tea to sleep with the fishes. That was both the first time Americans showed righteous indignation and the last time anyone even thought about drinking water out of Boston Harbor!

The Bostonians didn't launch a very risky blow against the most powerful government in the world just because of high taxes. They did so because they were outraged by the idea that an out-of-touch government, worried more about supporting a bureaucracy than about supporting liberty or even fair trade, could force a trifling little tax down their throats without any say on their part. The Boston Tea Party was a protest of the notion that a government could use taxes as a means to control and manipulate, rather than a means to actually govern or administer the affairs of the state. Lord North sent his message, all right, but I suspect in hindsight that was three pence per pound he wished he'd just written off the books.

Even Taxation with Representation Ain't So Grand Even today, fights about tax rates are proxy fights. As with the Boston Tea Party, we're not really arguing about the burden of taxes but about the burden of government. Oppressive taxes and oppressive government go hand in hand. When we talk about raising or lowering taxes, that's just code for expanding or contracting the welfare state, for increasing or decreasing dependency on the federal government. The more of our money we give to the government, the more control we cede to it and the more power it has over us.

The income tax has become the most burdensome example of this notion. The nine states without an income tax-Alaska, Florida, Nevada, New Hamps.h.i.+re, South Dakota, Tennessee, Texas, Was.h.i.+ngton, and Wyoming-expand much more quickly, in terms of both population and economic growth, than the states with the highest income-tax rates. But the burden isn't just in the paying of the income tax; it's in the paperwork behind the paying of the tax. According to a survey by the National a.s.sociation for the Self-Employed, small businesses will have a 1,250 percent increase in paperwork for their taxes by 2012 because of expanded Form 1099 reporting requirements. The more time businesses have to spend on these forms, the less time they will have to produce or sell anything, which threatens our economic growth and job creation. Not only is the government demanding more of our money starting in 2011, when the Bush tax cuts are set to expire, but it's demanding even more of our time and energy.

And the tax code actually affects how we act-in business and in life. Veronique de Rugy of the Cato Inst.i.tute elaborates: Changes in marginal income tax rates cause individuals and businesses to change their behavior. As tax rates rise, taxpayers reduce taxable income by working less, retiring earlier, scaling back plans to start or expand businesses, moving activities to the underground economy, restructuring companies, and spending more time and money on accountants to minimize taxes. Tax rate cuts reduce such distortions and cause the tax base to expand as tax avoidance falls and the economy grows.

So not only are we taking home less money in our paychecks, but our economy is suffering under the time, cost, and energy burden placed on us by our complicated tax system. There has to be a better-a simpler-way.

Show Me the Money!

Art Laffer, an economic adviser to President Reagan and the father of supply-side economics, believes that the business profits we're seeing for 2010 are artificially inflated because of tax incentives. He says that because taxes are set to go up in 2011, companies are trying to show as much income and profit in 2010 as they possibly can. He expects profits to "tumble" in 2011 because of this s.h.i.+ft. That's just what an economic recovery doesn't need.

Laffer believes that individuals also will s.h.i.+ft as much income as they can to 2010. He antic.i.p.ates that the rise in taxes from the expiration of the Bush tax cuts (with income, dividend, capital gains, and estate taxes all going up) will cause a "crash in tax receipts" from both individuals and businesses, causing even higher deficits and unemployment.

Scott Davis, the CEO of UPS, thinks we should encourage long-term investments (investments of five years or longer) by taxing them at a lower capital-gains rate. He understands that the rise in the capital-gains rate from 15 percent to 20 percent on January 1, 2011, and to almost 24 percent in 2013 will stunt the growth of our GDP and jobs and divert long-term investment from this country. We need to do away with the capital-gains tax, but as long as we tax capital gains, I strongly agree with Mr. Davis that we should have tiered tax rates that go down the longer you hold the investment. He points out that giving investors an incentive to keep their investments longer will create capital to grow our private sector.

Tax Cuts Are Like Fertilizer (in a Good Way!) Presidents Coolidge, Kennedy, and Reagan didn't have a lot in common other than having "Hail to the Chief" played when they entered a room. But all three presidents understood the value of putting more money-or should I say leaving leaving more money-in the pockets of working Americans. That money isn't a "gift" from the government, remember. You had to work and earn it. The example each of these leaders gave us was that tax cuts increase investment, jobs, and income and generate more revenues. more money-in the pockets of working Americans. That money isn't a "gift" from the government, remember. You had to work and earn it. The example each of these leaders gave us was that tax cuts increase investment, jobs, and income and generate more revenues.

When President Coolidge cut the top rate from 70 percent to 25 percent, revenues went from $719 million in 1921 to $1.164 billion in 1927. Hey, in those days, a billion dollars was a lot of money! He also lowered the national debt by 33 percent and ran a surplus every year he was in office. "Silent Cal," as they called him, may not have said much, but in this case, actions spoke louder than words anyway.

When President Kennedy cut the top rate from 90 percent to 70 percent, revenues went from $94 billion in 1961 to $153 billion in 1968. His tax cuts led to a three-billion-dollar surplus. President Kennedy was neither a conservative nor a Republican, yet he recognized that "the soundest way to raise revenues in the long run is to cut the [income tax] rates now."

When President Reagan cut the top rate from 70 percent to 28 percent, revenues went from $517 billion in 1980 to over a trillion in 1990. When the Reagan tax cuts took effect in 1983, real growth (not just inflationary growth) jumped 7.5 percent in 1983 and 5.5 percent in 1984, after no growth in 1981 and 1982. Our GDP grew by a third during Reagan's two terms.

And the Reagan cuts didn't just benefit the rich, as some would have you believe. Americans at all income levels prospered during his presidency. From 1981 to 1989, the number of Americans making less than ten thousand dollars fell by almost 3.5 million. By 1989, 2.5 million more Americans earned upwards of $75,000 than had in 1981, and almost six million more Americans earned more than fifty thousand dollars. African Americans saw their incomes rise 11 percent under Reagan, compared to 9.8 percent for whites.

Given these examples, there's no question that it's wrong to let the Bush tax cuts expire in 2011 for high earners while we are trying to get our economy expanding again. Those earners are responsible for a great deal of the consumer spending that accounts for 70 percent of our economy-spending we need to emerge on a strong and sustainable footing from the Great Recession. Further, higher tax rates mean less money available for investment and job creation, since half of all business profits, particularly those earned by small businesses, are taxed at personal rates rather than the corporate rate.

Nicole Gelinas of the Manhattan Inst.i.tute notes that newly enacted tax increases (the top tax rate going from 35 percent to 39.6 percent in 2011 and the new 3.8 percent tax on investment income of upper-income people starting in 2013 to help pay for ObamaCare) will, perversely, s.h.i.+ft money away from the private sector, where we need it to go, while encouraging state and local governments to keep spending instead of getting their houses in order. That's because the tax increases will cause upper-income Americans to put more money in tax-exempt local and state bonds, so those ent.i.ties will just keep growing. But as she points out, eventually the rich will be so squeezed that taxes will be raised for everybody.

Corporations Are Not the Enemy Most Americans I know understand that corporations shouldn't be tax mules for the government. Corporations are like the canary in the coal mine of the US. economy-when they do well, it's a sign that workers will do well, and the economy thrives. However, the opposite is often just as true. Michael Boskin, who is now an economics professor at Stanford and a senior fellow at the Hoover Inst.i.tution and was chairman of the Council of Economic Advisers under Bush 41, explains: "Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth, in both the short and long run, increase America's global compet.i.tiveness, and raise future wages."

The U.S. statutory corporate tax rate is 40 percent. The effective effective corporate tax rate (when you add state corporate taxes and deduct federal tax breaks) is about 35 percent-higher than in any of the other thirty-three countries in the Organization for Economic Cooperation and Development (OECD). It's significantly higher than the corporate tax rate (when you add state corporate taxes and deduct federal tax breaks) is about 35 percent-higher than in any of the other thirty-three countries in the Organization for Economic Cooperation and Development (OECD). It's significantly higher than the average average OECD effective rate of 19.5 percent or the average G7 effective rate of 29 percent. OECD effective rate of 19.5 percent or the average G7 effective rate of 29 percent.

In the last ten years, twenty-seven of the thirty-three other countries in the OECD have reduced their corporate tax rates by an average rate of about 7 percent. This makes that "level playing field" you always hear about when people discuss international trade a little less level. It makes us less able to compete. And as capital becomes ever more mobile, this inability to compete will just become more p.r.o.nounced unless we do something about our tax rates.

To create more investments, we would be much better off reducing the corporate tax rate than making the targeted and temporary tax cuts (such as bonus depreciation) that Congress typically does. Companies and their investors need to be able to rely on tax rates, rather than hoping for special, occasional breaks at Congress's whim.

If we cut corporate taxes, companies would have less incentive to move their investments and profits overseas, foreign companies would have more incentive to invest here, and we would increase jobs, wages, and tax revenues in the process.

Raising Taxes Is Not the Answer Data from the past sixty years have shown the close relations.h.i.+p between federal tax revenues and GDP. The government can raise tax rates, but it can't make revenues rise to more than about 19 percent of GDP. Kurt Hauser of the Hoover Inst.i.tution first pointed out this ratio about twenty years ago, and it has remained just as true ever since. When the government predicts that it will get more revenue through higher rates, it is always wrong because it doesn't account for the ways people change their behavior and manipulate the tax code in reaction to the higher rates. When we look at the CBO's projections for the next decade, we can safely a.s.sume that its a.s.sumption of increased tax revenues from the higher rates starting in 2011 is wrong, which of course means its projections about deficits are wrong.

As of this writing, Congress is in the process of raising the tax rate on "carried interest" from the capital-gains rate (which itself is going from 15 percent to 20 percent) to as high as 38.5 percent. This is going to discourage long-term capital investment just when we should be encouraging it.

When we want to discourage a behavior, like smoking, we tax it more. Why on earth would we want to penalize long-term investment in one of America's largest industries, whether automotive or steel, now, as we are trying to get companies going and growing and Americans back to work? If you were trying to come up with a counterproductive tax increase to slow growth and kill job creation, this would be it.

This reduction in after-tax returns means money will be diverted from the partners.h.i.+ps that are our main source of long-term investments. Venture capital will dry up. Nothing ventured by investors, nothing gained by American workers. This change is a dangerous abandonment of our long-standing tradition of taxing long-term investments at a lower rate than short-term investments, to reward those who are willing to invest in America and wait patiently for results rather than just pursue the quick buck. It makes you wonder whose side Congress is on. Do they really prefer money going out for unemployment benefits, food stamps, and Medicaid, rather than money flowing in from more working Americans?

Why "Fair Tax" Isn't an Oxymoron A 2008 study from the OECD found that the taxes "most harmful for growth" are corporate taxes, followed by personal income taxes. Consumption taxes are least harmful. n.o.bel laureate Robert Lucas believes that eliminating corporate and personal income taxes in favor of a consumption tax is "the largest genuinely true free lunch I have seen."

As many of you may know, I am a longtime supporter of the FairTax. Why? The answer is in the name-it's fair fair! Imagine a world where you could chose how you spend your money-where you could choose how much tax you pay based on what you buy instead of the government deciding how much you owe based on what you earn. That's the FairTax. In a nutsh.e.l.l, the FairTax would levy a nationwide national sales tax while doing away with the federal income and payroll taxes, as well as estate, gift, capital-gains, self-employment, Social Security/ Medicare, and corporate taxes. Beyond that, it would repeal the Sixteenth Amendment, allow Americans to take home 100 percent of their paychecks (unless they live in a state with its own income tax), and end compliance costs built in to the goods and services we buy. Not to mention, the IRS would be dismantled, as the national sales tax would largely be handled by existing state sales tax infrastructures.

Another feature of the FairTax that makes it unique is the "prebate." In order to make sure no one is taxed on the essentials of life, every registered American household would receive a monthly rebate check (prebate) to cover the sales tax on essentials up to the poverty level. This basically "un-taxes" the poor, lowers the general tax burden on most Americans, and makes the tax system progressive based on spending choices. No longer would those who are successful be penalized for their success by being stuck in a high tax bracket. They'd pay taxes commensurate with their spending choices. That's certainly not the tax code we've come to know and "love," is it? Why, it's almost fair, not to mention rather simple.

Avoiding Another Housing Bubble Under the FairTax, people wouldn't be pushed into buying a house to get tax breaks when they'd rather rent. If there's one thing we've learned in the last two years, it's that sometimes it actually makes sense to rent. The FairTax would give Americans more freedom to live how they wish, rather than encourage them to buy houses they can't afford, as did Fannie Mae and Freddie Mac and the subprime scheme. It's also better for the government because, according to the Congressional Budget Office, all the tax breaks and subsidies for home owners.h.i.+p cost $230 billion in 2009. It's fairer for renters because they're not put at an unfair tax disadvantage. It's also better for those who choose to own but don't want to see their investment destroyed in a bubble.

Richard Florida, an economist from the University of Toronto, has determined that the areas that suffered the least from the housing crisis were those with the highest number of renters. The FairTax would end the distortion of the housing market, which has brutally distorted our overall economy.

Declare Those Pennies on Your Eyes Benjamin Franklin told us the only two certainties in life are death and taxes. But there's something particularly distasteful about a "death tax."

Did you know that due to a quirk in the law, 2010 was the only time since 1916 that heirs didn't have to pay a federal inheritance tax? The reason this came about was nearly as complicated as the tax code itself. The 2001 tax-relief package pa.s.sed by Congress gradually phased out the inheritance tax over ten years. But because the tax-relief bill was pa.s.sed under "budget reconciliation rules," the policy couldn't extend beyond a ten-year budget window. So in 2011, the death tax-known in more polite circles as the "estate tax"-gets resuscitated, and at full 2001-level strength. Kind of like the end of a Friday the 13th Friday the 13th movie-just when you think Jason's dead and the credits are about to roll, he jumps out of the lake to pull an unsuspecting victim down with him. movie-just when you think Jason's dead and the credits are about to roll, he jumps out of the lake to pull an unsuspecting victim down with him.

In 2010, we lost baseball icon George Steinbrenner, owner of the New York Yankees and (just as important to me) a recurring character on Seinfeld Seinfeld. Steinbrenner was larger than life and an astute businessman. It's estimated that his estate at the time of his death was somewhere in the ballpark (excuse the pun) of $1.1 billion. If Steinbrenner had died in 2009, his heirs would have been hit with a tax bill of about $500 million. As it is, they'll still have to pay capital-gains taxes on a.s.sets should they be sold, but what will no doubt be avoided is a repeat of what happened to the Wrigley family in Chicago in the 1970s.

When Chicago Cubs owner P. K. Wrigley died in 1977, the inheritance tax devastated his family and forced them to sell the team to the Tribune Company in order to meet the huge tax burden on the estate. Who knows what would have happened had George Steinbrenner's family been in a similar position?

Now, admittedly, this is a huge problem of the wealthy. But it's also a problem for the rest of us because the death tax undermines job creation. A 2003 study by economist William W. Beach found that eliminating the estate tax would create between 170,000 and 250,000 jobs. And a study conducted by Douglas Holtz-Eakin and Cameron Smith in 2009 found that full repeal of the tax would create 1.5 million jobs.

The Heritage Foundation estimates that repealing the death tax would increase small-business capital by $1.6 trillion, increase the probability of hiring by 8.6 percent, increase payrolls by 2.6 percent, and expand investment by 3 percent.

Compare the benefits of repealing the estate tax to the benefits of the $862 billion stimulus funding intended to invigorate the economy, and I think you'll agree-it's time to bury the death tax.

Something Smell Fishy to You?

In July 2010, the inflatable dam on Tempe Town Lake in Tempe, Arizona, burst, releasing almost a billion gallons of water down the usually dry Salt River bed in just a few short hours. Luckily, no one was injured in the episode . . . well, almost no one-fish casualties were high.

What was left was a stinking, muddy lake bed and shallow pools of flopping, dying fish. Crews had to stay on top of the fish problem because carrion birds see pools of flopping fish as an all-you-can-eat buffet, and the nearby Phoenix Sky Harbor International Airport couldn't have dive-bombing birds occupying its flight path. So something had to be done. Who wins in a situation like this? Well, in this case, local alligators from the Phoenix Herpetological Society, that get to feast on the stranded fish, making the circle of life complete.

This is not unlike what high taxes are doing to the American economy. Like a dam straining against the pressure of too much water, our economy is straining against the pressure of too many taxes. In 1913, when the Sixteenth Amendment was pa.s.sed, less than 1 percent of Americans paid income tax and the top rate was 7 percent. In the 1950s and early 1960s, the top tax bracket was a whopping 91 percent. Even during the Clinton years, it topped out at nearly 40 percent.

If we continue to strain our economy like this, the dam will eventually burst, and all of the people who relied on that capital will be left flopping around like dead fish-at the mercy of the big bad alligator called government.

CHAPTER FIVE.

Once Humpty Dumpty Falls, It's Hard to Put Him Back Together We Need a Responsible Approach to Health and Health Care

I know all too well about the dangers and struggles of obesity. It's chased me throughout my adult life. In 2003, I lost 110 pounds and beat back early symptoms of type 2 diabetes. Since then, I have been able to live without any symptoms. As my doctor told me after I aggressively fought back with nutrition and exercise, it's as if I was never diagnosed. That's good news and I'm not taking it for granted. After a year of nonstop travel and gaining about thirty of those pounds back, I went back to a more focused lifestyle to again fight the "demon" of food addiction. It is a lifelong battle that many other Americans can relate to. know all too well about the dangers and struggles of obesity. It's chased me throughout my adult life. In 2003, I lost 110 pounds and beat back early symptoms of type 2 diabetes. Since then, I have been able to live without any symptoms. As my doctor told me after I aggressively fought back with nutrition and exercise, it's as if I was never diagnosed. That's good news and I'm not taking it for granted. After a year of nonstop travel and gaining about thirty of those pounds back, I went back to a more focused lifestyle to again fight the "demon" of food addiction. It is a lifelong battle that many other Americans can relate to.

When I decided to get the thirty pounds off and get back to my marathon-running fitness, I went back and read my own book on the subject, Quit Digging Your Grave with a Knife and Fork Quit Digging Your Grave with a Knife and Fork. I meet people almost every day who tell me that book caused them to change their lifestyle and lose anywhere from twenty-five to two hundred pounds.

Of course, as much as I could probably flatter myself into taking credit for these people's success, I know they could never have lost the weight without taking some personal responsibility for their own health. I'm sure plenty of doctors and specialists told them, as they did me, that they would face serious health risks if they didn't take better care of themselves. But in the end, no amount of advice or warnings can make up for a lack of effort on the part of the patient.

And as much as I love hearing weight-loss success stories like these, I know that for every person who has made the commitment to eat right, exercise, and lead a healthier lifestyle, there's at least one more who still opts for the Twinkies and TV over carrots and cardio. And sooner or later, these folks end up at the doctor's office or worse, the emergency room, undergoing expensive procedures and treatments that could have been avoided with a few more good decisions.

What does this have to do with health care? It's simple, really. No matter what kind of health-care system we have, the only way to really manage costs and reduce wasteful procedures and medicines is to take some responsibility for our own health. After all, at the most fundamental level, we don't really face a health-care crisis; we face a health crisis.

If We Can't Take Care of Ourselves, No One Can About 75 percent of our health-care costs are from four chronic conditions: heart disease, cancer, diabetes, and obesity. Besides being the most expensive diseases, they are also the most preventable. These four chronic conditions are linked to four behaviors-tobacco use, alcohol use, lack of exercise, and poor diet.

In 1996, the President's Council on Physical Fitness and Sports found that almost 30 percent of our health-care costs come from lack of exercise and excess weight.

These four chronic conditions are interrelated. For example, being overweight is a cause of diabetes. Diabetes, in turn, increases your risk of heart disease (as well as your risk of kidney disease, stroke, blindness, and leg and foot amputations). But if a diabetic avoids saturated and trans fats, he can lower that increased risk of heart disease. Unless we change our ways, a shocking one-third of Americans born in 2000 will become diabetics.

Being overweight or obese increases your risk of cancer and is considered a factor in about 20 percent of cancer deaths.

Some businesses are trying to hold down health-care costs by rewarding healthy behavior through discounts on health-insurance premiums. In 2005, Safeway began its Healthy Measures plan for nonunion workers. Between 2005 and 2009, when most businesses saw their health-care costs rise almost 40 percent, Safeway's costs, amazingly, stayed the same. Safeway tests workers' tobacco use, weight, blood pressure, and cholesterol and gives employees a premium reduction for each test they pa.s.s. Steven Burd, Safeway's CEO, wrote in 2009: "By our calculation, if the nation had adopted our approach in 2005, the nation's direct health-care bill would be $550 billion less than it is today." That's a heck of a better record than anything anything Congress has pa.s.sed or even proposed! Why didn't they listen to Burd? He and I both testified at a Senate hearing in 2009. I didn't expect them to listen to me in Was.h.i.+ngton, but it's a pity they didn't grasp his very compelling facts. But facts and Was.h.i.+ngton politics are like oil and water. Congress has pa.s.sed or even proposed! Why didn't they listen to Burd? He and I both testified at a Senate hearing in 2009. I didn't expect them to listen to me in Was.h.i.+ngton, but it's a pity they didn't grasp his very compelling facts. But facts and Was.h.i.+ngton politics are like oil and water.

Besides emphasizing prevention, companies are also cutting costs through better management of chronic conditions. Boeing has reduced its health-care costs by 20 percent for employees with illnesses like diabetes and heart disease by having their doctors ride herd on them to take their medications and modify their unhealthy behaviors. Besides keeping costs down, Boeing is helping these employees enjoy the best possible quality of life despite their diseases.