Try your hand at solving the problem. There are no solutions without pain

Solutions to the fiscal crisis require compromise and some pain for all.
Reduced benefits and increased taxes are essential.
What are the lessons of the German experience?.

Pres. Obama had appointed a Bipartisan National Commission on Fiscal Responsibility and Reform in February to study ways to reduce the chronic deficit and issue a report by December 1. On November 10 the co-chairmen, Erskine Bowles and Alan Simpson, released a list of recommendations to be a basis for the final report and for congressional discussions. The full text is at http://assets.nationaljournal.com/pdf/fiscal_commission_draft_11.10.2010.pdf.

    In summary it proposes nearly $4 trillion in deficit reduction through 2020:
  • Reduces the deficit to 2.2% of GDP by 2015,
  • Reduces tax rates, abolishes the Alternative Minimum Tax, and cuts numerous subsidies hidden in the tax code,
  • Caps revenue at or below 21% of GDP and gets spending down to 22% of GDP, balancing the budget in 2037,
  • Stabilizes national debt by 2014 and reduces debt to 60% of GDP by 2024 and 40% by 2037,
  • Ensures Social Security solvency, prevents projected 22% cuts in 2037, reduces elderly poverty, and distributes burden fairly.
  • Stabilizes TOTAL Federal health care costs after 2012 to grow no more than GDP+1%.
Both Democrats and Republicans in Congress immediately released a blizzard of criticisms. Our elected representatives still haven't understood that the deficit is approaching a crisis and solutions will be painful for all. Hopefully the American people, whose children will face financial catastrophe if nothing is done, will realize that the days of continual over-spending both by themselves, as well as the government, are reaching an end. Unfortunately in the latest elections, most of the elected representatives are even more polarized than ever, either extremely right or left with little desire to reach essential compromises.

      The New York Times, has placed on its web site a very informative interactive page which allows anybody to play around with each of the proposals of the Commission to fix the deficit, both short range in 2015 and long range in 2030. The projections are all based on numbers developed by the Congressional Budget Office. As you play with selections it soon becomes obvious that neither government cost reductions, nor tax increases will solve the problem by themselves. Some combination of both is essential. Some proposals save more money in the near term than others. However some changes to Medicare and Social Security have much greater long-term savings, but raise concern among all older Americans.
The interactive puzzle is easy and allows results of any choice to be immediately visible. For those who prefer to play around with pencil and paper, you may download this form.

Note that the Bipartisan National Commission on Fiscal Responsibility and Reform, in addition to the two Co-chairmen (one Democrat, one Republican), includes 16 other members - 6 senators and 6 congressmen (evenly divided between Republicans and Democrats), 2 CEO's of corporations, a union president and a member of the Brookings Institute. 14 of the 18 members have to agree on the final report to be issued by December 1. The preliminary recommendations include numerous proposals for simplifying the convoluted income tax code with substantially reduced rates, and on reducing costs of Medicare.

     However, in my opinion, too much of the burden is placed on the middle class. In the proposed revised rates, the middle class would pay almost as much tax (income tax and mandatory premiums for social services, etc) as the richest, as a percentage of earned income. Nothing in the proposals addresses the enormous disparity between earnings of the 1% at the top and those in the middle.
In 2007 the top 1% of the population earned on average $1,319,700, an increase of 281% since 1979. However the average earning of those in the middle fifth in 2007 was $55,300. an increase of 25%. In the last three years, it is reported that the top 1% continued to increase their earnings, while the earnings of those in the mid fifth actually decreased. See this review .
Income inequality in the United States is growing and is presently similar to that in notorious Latin American countries (Ecuador, Venezuela, Argentina), in which ironically inequality is reported to be declining now. It is much greater than in western Europe.

     I also caution against cutting back government expenditure, or at least loans to promote research, education and to help new industries get started. Writing this I am watching an ABC News program from China, showing the huge investments being made by China in wind turbines, solar panels and high speed trains. Let's not forget that many of the American industries of today are the result of inventions, such as transistors and penicillin, that were developed, at least partly, because of reseach at government institutions such as Argonne Laboratories, N.I.H. and others, and as a result of government grants to universities and young industries.

      Republicans, I have a question for you. Your mantra is that increasing taxes reduces business, investment, and increases unemployment. Please explain the success of Germany!
The German economy is thriving and has recovered quickly from the financial disaster of 2008. Unemployment has just dropped below 6.7%. Germany enjoys a positive trade balance, exporting 30% more than they import. The German government budget deficit for the first six months of the year rose to €42.8 billion ($56 billion), or 3.5% of gross domestic product as a result of bailing out the banks and the auto industry. In the U.S. taxes have been cut back drastically in recent years, and the present annual deficit is over 6% of G.D.P. and growing.
      All of this in spite of taxes much higher than in the U.S.A!

In Germany the present tax code sets the top tax rate at 45% for taxable income in excess of €250,731 (approx $326,000); the next rate is 42% for incomes in excess of €52,882 ($68,750), the lowest is 14% for taxable incomes from €8,000 ($10,400) to €52,882. In addition wage earners pay a 14% tax for health, social security and unemployment insurance (their employers pay an equal amount). The top corporate profit tax rate is 33%. Tax on capital gains on investments held less than 12 years ranges from 15% to 25%. Everyone pays a 19% Value Added Tax on most purchased goods. However all Germans receive free medical care (only nominal copays) and every worker enjoys 4 week vacations. Fast, sleek high speed trains interconnect all major cities almost hourly. Every city has fast, convenient rapid transit. Germany is one of the world's leaders in developing alternate sources of energy and reducing carbon emmissions.

     Citizens, like you and me, also play an important role. Part of the German manufacturing success is due to native patriotism. Whenever possible they buy German, or at least European, products. They prefer Philips or Telefunken TV sets to Sony or Sanyo, even if they pay a little more. If you see a KIA or Honda car it is being driven by an immigrant, not a German. Compare that with Americans, both individuals and businesses, who buy foreign products, particularly Chinese, even to save a few cents. Walmarts alone imports more from China than all west European countries put together!

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