The Economist had a fascinating article on potential methods of addressing the US federal & state budget gaps (canyons, actually).

The upshot – what the Economist says, plus my 2 cents:

• It will take at least a decade to get the federal annual budget deficit down to 3%. And that will rely on nothing bad happening that hits us from left field (Iran? Another central-Asian country named Stan?) It will probably take 15+ years before we are able to see a budget surplus.

• States are in a terrible position because they can’t print money or devalue their currency to bail themselves out.

• The US is the only OECD member country that does not have a national Value Added Tax (VAT). OECD = Organization for Economic Cooperation and Development. The largest democratic economies on the planet. (no Russia or China)

• A VAT has the obvious benefit: a new revenue stream (tax) for the government, and thus an opportunity to close the budget gap. I like VATs because they do not tax people for being successful, and they don’t tax employers. The US levies a high employer tax (relative to OECD countries).

o VATs have been un popular in this country because they tax consumption and are omnipresent.

o On my soap box… I recently have made these observations from a trip to the mall, and to the barber:

 Far too many low-wage earners have $300 gore-tex jackets, $200 cell phones (that also cost $100/month in fees), and $1000 big screen TVs. Just watch people at Best Buy next time you’re there. It seems clear from several observations that many can barely afford to get by, but they have all the best personal luxury trinkets available. Having seen the statistics on savings, I know most of the bottom third of this society (from an income perspective) pay nothing in tax, but continue to consume far beyond their means and save nothing. Why is that?

 A national VAT would help address this issue in that it would incent savings and investment, and self responsibility. Any public policy that does that and reduces incentives for debt/leverage is a good thing.

o I’m not confident that we’ll see a VAT anytime soon because we’re allergic to taxes and have repeatedly elected officials to pander rather than deliver harsh but required medicine. Cash for clunkers is the opposite to policy we need.

• With apologies to those in the real estate business… We need to gradually do away with the tax deduction for interest on a mortgage. All this does is incent people to have larger homes than they need, and to never pay debt off. It should be painfully obvious that debt & leverage are what got our society into the current situation.

• A 50 cent per gallon national tax on gasoline would also be a step in the right direction. The funds could be used to rebuild the ageing highway system. Higher gas prices would incent R&D in fuel efficiency. It would also reduce greenhouse gas emissions because less fuel would be burned with higher prices seen. Given our achilles heel reliance on foreign energy, why not mitigate the risk by incenting consumers to move away from oil? (natural gas makes a lot of sense here)

• The spend side of the equation needs to be wrestled as well (obviously).

o State and federal government workers have a pretty sweet deal when the total pay + pension + healthcare package is put together.

o Medicare and Medicaid programs need trimming, and 30-35% of the cost of the current healthcare system needs to be trimmed as well.

o Social Security needs to be less generous to those receiving it now, plus cut future benefits and raise the age at which it may be collected.

o Military spending needs to be cut as well. Given our likely involvement in countries named Stan for the foreseeable future, I’m not sure how this will happen.

To be sure, implementing any of the above is a recipe to not be re-elected. We can cut our deficits and have an obligation to do so. We just need the collective & political will.