CBO Solution to Budget Crisis - Everyone Bend Over!

February 7, 2025 By 13 Comments
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I look at the political landscape and conclude that we’ve got more of the same in front of us. I think Obama will win, and the Republicans will control the legislative side. For the sake of this discussion, assume that is how it works out.

As of today, there is an economic firestorm that is programmed to hit on January 1, 2013. It’s the kitchen sink - the Bush tax cuts (all of them), the payroll tax cuts, the AMT patch, the ending of extended unemployment benefits, the Sequestered Amounts (11’ budget deal), the debt ceiling, the need to pass a continuing resolution to fund the government and a bunch of other landmines. Many of the things that have been kicked down the road during the past few year come due on New Year’s Eve.

If there is a hostile mood in D.C. (there will be) this list of “must fix” issue will be impossible to tackle following the election.

It’s difficult to see around the corner on this. One possibility is that nothing happens in the six weeks post-election. If nothing is accomplished, it would bring about an immediate and significant recession.

I say that doesn’t happen. For once, both the Republicans and the Democrats will pay a big price if there is no deal. For the Republicans, the mandatory cuts in the Military, and for the Democrats, the mandated cuts in the rest of the budget, means there has to be a deal.

But what deal could there be? The problem is enormous. The budget “hole” will be at least a trillion in 2012. It will get bigger every year. The Republicans have said “no more taxes.” The Democrats have said, “We need to spend more”. These seem like irreconcilable differences.

Fortunately, the Congressional Budget Office has come up with a solution. It’s a neat one at that. Neither overt new taxes nor cutbacks in spending would be required. This magic would be accomplished with a very big stealth tax. The CBO looked at eliminating all tax deductions. That would generate a ton of additional revenue. The CBO put the extra annual loot for the Feds at $800 billion plus, exactly what is needed.

Of course the idea of cutting/eliminating tax deductions is an old one. The CBO does a super job of summing it up on one (crowded) page. The critical issue is:

Who pays?

The answer is:

Almost everyone over 21.

Ah… that would come to about 250 million people. Damn near everyone chips in. The highlights:

*Forget the mortgage deduction. That would be gone. This would be a significant change in the Rent VS Buy calculation. Bye-bye housing.

*Are you working and have benefits? You will be taxed on the value of those benefits. Same thing for employer contributions to 401Ks. You will have the same income, but your taxes will be higher.

Do not be confused; this is not a tax increase. Both Parties will tell you so.

*A geezer on Social Security? Your benefits are going to get taxed (much more).

*Don’t bother having kids, the child deduction is gone.

*Live in a State with an income tax? You’re about to be hosed big time. NY and Cali will end up paying an ever-higher percentage of total federal taxes.

*Feel good about giving some money to a worthy charity? You won’t any more. That deduction will be gone too.

*Trying to save a buck? Dividends and Cap Gains will no longer have preferential treatment. Under this plan, short-term gains will be taxed the same as long-term gains. The “Casino” will move to the short-time horizon. The Wall Street crowd will welcome the new (and needed) players.

It’s easy to say that this could never happen. It never has before. Every special interest group would be whacked. But before you dismiss it, consider what will be happening in the weeks between November 10 and December 31. America will be on the edge of a cliff. The option described by the CBO is the only thing that is both politically feasible and large enough to fill a very big bucket.

The CBO one pager follows. Where are you on this list? Where do you expect to be on this list in five-years?

 

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Bruce Krasting

I’ve been writing for the professional press for the last five years and have been on the Fox Business channel several times as a guest describing my written work. In January 2009, I started writing my blog Bruce Krasting (http://brucekrasting.blogspot.com). From 1990-1995 I ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. We expressed our views in global bonds, currencies, stocks, commodities and derivatives. I closed the fund and retired in 1995. I’ve also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp. I hold a bachelor’s degree in economics from Ithaca College and currently live in Westchester, NY.

Latest posts by Bruce Krasting (see all)

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Filed Under: All-Star Originals, Economy, Finance, Markets
About Bruce Krasting

I’ve been writing for the professional press for the last five years and have been on the Fox Business channel several times as a guest describing my written work. In January 2009, I started writing my blog Bruce Krasting (http://brucekrasting.blogspot.com). From 1990-1995 I ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. We expressed our views in global bonds, currencies, stocks, commodities and derivatives. I closed the fund and retired in 1995. I’ve also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp. I hold a bachelor’s degree in economics from Ithaca College and currently live in Westchester, NY.

  • bduncan

    With all due respect, Only the minority % that pay taxes would be affected. That’s how the deficit ot this large.

  • Nyjerr98

    Why not cap deductions or means test them? That way everyone get the same benefit regardless of how much they make. Instead of 800 Billion you could take in 500 billion and keep money in the hands of those who spend it, the working poor.

  • Endocine

    its time to get rid of these tax deductions. Why should everyone else pay for other people’s children, and their mortgages? Encouraging these behaviors, to have kids, to have mortgages, etc, it hasn’t resulted in a balanced budget or a stable economy. Follow this up with a reduction in expenditures by reducing entitlements and all other spending proportionally, and instituting a flat tax so people not in the tax system, which is probably the majority of people in this country, can start paying *their* fair share.

    • ThinkPeople

      You will desperately want “other people’s children” when you want your SS and Medicare to be paid by those “other people’s children”! Once again, look at Europe!
      The poor children and what YOU have saddled them with….all we can hope is to tie the “tubes” and “snip” welfare folks AND get the educated and employed to crank out babies… give them BIGGER deductions just to save YOUR SS and Medicare! If you are lucky. POSITIVE DARWINISM for a change.

    • Rmdupe

      A child is a future taxpayer, especially if it comes from a current taxpaying family (which there are less of today). You want to discourage this?

      Remember, those that would take advantage of the child tax credit are actually paying taxes. They are more likely now to be grooming their children, through example, to also pay taxes. Our country needs tax payers. Don’t discourage their production.

      • Jonnybuoy

        Removing the deduction wont discourage sex/reproduction anyway. Also, many kids born today are born to people that pay no income taxes whatsoever, and in fact get free money back fromn Uncle Sam thru the EITC because of their “churn”.

        • Baynyc

          Exactly

  • http://profiles.yahoo.com/u/53AURFVJ4DXTX5SGL22ZCZHRZI kevin

    Black swans are by definition unpredictable. This on the other hand, is not only predictable, but was engineered through decades of legislative action on both sides. We even know when.

  • charlskins

    Disturbing, great article Mr Krasting… love the way the congressional budget office logo looks familiar to the OCP logo from the film Robocop…… lol :0)

  • Algalli

    I am all in favor of eliminating all deductions as long as the tax rates are lowered. Thus you would have a one page tax form. How much income do you have? Here is what you owe. Of course this means the 25% bracket is lowered to around 10-11%. It would be a progressive tax, not the absurd flat tax. Why would this be fair? Because we are a nation of laws and those with the most money are best able to take advantage of the law. eg. OJ Simpson.

    • http://pulse.yahoo.com/_KE6J6QSW5ZMVP5RBKXEDFO4LZE ettucat

      What is there to take advantage of, if your total income is reported, and no deductions are allowed? Why would anyone strive to create, innovate, expand, hire, etc., if when the tax man cometh, everything you worked hard to obtain was mostly handed over to the gov’t, leaving you with barely more than what you started with?

  • http://profile.yahoo.com/YJPA3RJUE5OXU3HQY7IAI76YAA robert

    Atlas Shrugged and then he laughed at the stupid people who think there is a “fix”. Fact is living standards are set to COLLAPSE globally and there is simply no way to avoid it.

  • DRB

    What a bunch of blather. Anyone who has kids knows that the $1400 child tax credit does not cover what the annual expense of raising a child really is. Parents are essentially investing in the future growth of the economy, with very little ROI (unless you you include love and other such intangibles in the equation)

    Another thought: The biggest single variable in the equation for economic growth is population growth. Why, because more people mean more consumption of goods and services. This blog is populated by a crowd of dilettantes posing as real thinkers. There never has been a time in human history where distribution and redistribution of goods and services (through taxes or charity) has not been an “issue”. The only question is whether you believe the goverment (who sanctions the fiat currency) or private persons (including corporations) are better at doing that. The jury is far from out on that question. But the point is that it must take place in order to grow the economy. Having government in bed with banking and industry has never really boded well for a large healthy middle class economy — indeed it has typically led to massive indebtedness and relative economic decline. Historically indebtedness on the part of individuals typically led to to imprisonment or slavery (of the owner or his family). Goverments and large institutions were excluded from those “remedies.”

    I am always amazed at how quick people are to pin our economic problems on the poor and disenfranchised, who have little or no control over assets or the government, and yet somehow we are in this mess because of them. And yet most of the time these complaints come from middle class folks who are just a wrung above them on the economic ladder. Some facts: Your average 401k balance is under $30,000. A majority of retirees sole income will come from Social Security, and their healthcare from Medicare. Real average wages have been in decline for more than 30 years (just in case you thought is was a “savings” problem). Total debt has skyrocketed from the first year of Ronald Reagan’s presidency. There was no economic miracle in the last 30 years, growth and asset values were largely fueled by debt. Our living standard, whether you like it or not, is being arbitraged by very powerful and very large interests, and no whining is going to change that.

    The only thing you can do is change your own relationship to consumption and production. Sadly, the historical record indicates that most economic policies fail, and the solution devolves into violent upheaval. Perhaps that is why Thomas Jefferson said there should be a revolution every few generations — to renew the social contract between the people and those who rule.