Don’t make the usual Social Security fixes. The last time we “fixed” Social Security was 1983, when we followed the Greenspan Commission’s recommendations and raised Social Security taxes and cut back benefit growth. Social Security’s number crunchers declared the system solvent, but the problem wasn’t fixed. That’s because although the plan created temporary Social Security surpluses, they’ve gone to subsidize about $2 trillion of other government spending rather than being saved to pay future benefits. The problem is that the Social Security trust fund owns only Treasury securities. So when the system starts running a cash shortfall in a decade or so, it will ask the Treasury to redeem some of the securities in the trust fund. The Treasury will have to borrow the money to do that–which amounts to the Treasury borrowing to pay the benefits. Hence, the trust fund is useless.
Clearly, we’ll fix Social Security by again increasing payroll taxes and trimming the benefit formula. But this time, let’s actually save the Social Security surplus by investing it in mortgages or other debt securities that are paid by individuals or businesses rather than by the federal government. And let’s let people open individual accounts to supplement (rather than replace) Social Security’s basic benefit.
Don’t keep betting on China. One reason we’ve got low interest rates here, despite enormous budget and trade deficits, is that China’s lending us money cheap. Think of it as “vendor financing”–customers paying for purchases with IOUs rather than cash. China sells us more than it buys, we send dollars there, and China uses the dollars to buy Treasury securities. At the end of the day, we have goods; China has our IOUs.
So far, it’s worked great for the United States–with the very serious exception of people and businesses who’ve been devastated by Chinese competition. The game has worked well for China, too. Selling to the United States has helped spur employment growth in China, and sending dollars back to the United States instead of letting them circulate in China reduces the inflationary pressures on China’s economy.
However, this can’t possibly last. Even if China doesn’t decide to call in its IOUs, there’s the whole dictatorship question. And there’s the fact that all we really know about the Chinese financial system is that it’s big and growing and filled with ugly stuff like tons of bad loans in government-owned banks and heavy government ownership of the economy.
Some day relatively soon, I suspect, the Chinese masses may begin to resent seeing their standard of living depressed by their government’s giving the United States cheap financing rather than investing more in building up China. Or something will roil China’s financial system. Maybe both.
Don’t eliminate the AMT. The alternative minimum tax was established in the 1960s to make sure that high-income people had to pay at least some income taxes to support the society that’s given them the chance to be rich. But the AMT has morphed into a nightmare that afflicts the middle and upper-middle classes, while generally sparing families with incomes of $600,000 and up.
The conventional wisdom is to kill the AMT and replace the lost revenue with higher tax rates. Instead, let’s change the AMT so that it once again applies to only a handful of tax-dodging richies. It’s still a good idea not to let such folk escape all taxes on income, we just need a better AMT.
Ditto for the estate tax. Like the AMT, the estate tax once applied to only a handful of the ultrawealthy, but crept down to affect the upper middle class. (And, no, I won’t call it the “death tax”–the heirs of some 98 percent of the people who die don’t have to worry about it.) I like the way the Bush tax cuts increased the amount exempt from estate tax–but I don’t like the total elimination scheduled for 2010 or the fall to $2 million per couple in 2011. So instead of eliminating the tax, which would be morally unjust and financially insane, let’s leave the 2009 rules (which exempt $7 million for a married couple) in effect. That way, only 0.3 percent of estates would pay tax. And let’s index everything for inflation.
OK. You may consider some or all of these resolutions total turkeys. But please at least consider them. Resolving to fix our problems now will make the new year so much better.
