The Amateur Financier

I was reading Financial Samurai’s post on The Ultimate Solution For A Fair Income Tax Policy in America quite a while ago, but I still wanted to say something about it.  (Sometimes, these response posts end up disappearing in my archive for a while.)  If you haven’t had a chance to read it, or if it’s been a while and you want to refresh your memory, it’s pretty interesting (as Sam’s posts tend to be).  The Cliff Notes version is that he recommends only allowing those people who pay income taxes to vote.  If you don’t have any of your own money at stake when government starts divvying up the spoils, you’re not going to have any qualms giving out the money (and taking some yourself), or so the thinking goes.

Well, I and some other commentators had some qualms with that approach.  (Sometimes I think that Sam writes these kind of articles just to get us all riled up; not a bad strategy, if that’s what he’s doing).  The complaints included the fact that income taxes are not the only taxes being paid (there’s everything from sales taxes to Social Security taxes that lower income people pay; should they only be able to vote on issues that their taxes go to fund?  If that’s the case, expect to see lots of votes to up Social Security benefits to low or moderate income people (that is, incomes at or below that of the voter) and increasing the threshold for paying Social Security benefits.)  There are also plenty of ethical issues with disenfranchising a number of people (which is the sort of thing that’s led to protests, even wars in the past).  Short version, not something I think would be possible.

But, in the course of answering Sam’s argument, I came up with my own variation on the idea, which has some possibilities for not only keeping government spending under control, but also potentially increasing the number of people who willingly pay their taxes.

My (Brilliant) Plan

The basic idea is allow individual tax payers to direct their income taxes toward specific government programs. It won’t change the total amount owed, but at the end of the 1040 form, we add on a list of government programs, allowing the taxpayer to choose what programs he wants to support with his or her tax dollars.  (Sorry, no ‘I can spend my money smarter than the government, give me back my tax money now’ option; again, no changes in your tax bill, just in how the money is divided.)

"White House Lawn Maintenance" might be an Option, though

How would this help?  Well, I imagine that you, like me, know plenty of people who like some of what the government does, but not everything.  Heck, it’s difficult to find someone who likes everything the government does, all the time.  From people who think that the government should only defend the borders to those who want more social programs and fewer defense projects, just about everyone wants the government to spend their money differently.

That’s where being able to direct where your money goes could have a nice benefit.  Want to support the troops, and government social programs?  Direct your taxes to the military.  Want social programs to grow, but think there’s too much military spending?  Put your money toward poverty aid or other social programs.  We can even make it possible to direct your money more narrowly; the military, for one example, spends money in lots of ways, from paying soldiers to developing new weaponry.  If you want to give soldiers a nice boost in their income or want to develop ways to keep them safer in the field, you can find the appropriate government programs to do so.

The end result is a closer connection between your tax money and the government programs that it helps to fund.  If you can say to yourself, “I helped to pay those soldiers” or “My tax money helped to rebuild those roads”, it’ll help forge a better connection between your taxes and the services provided.  It could also help to get those who don’t pay taxes in protest of some government program or another to pay, if they could be ensured that their money would only go to the programs they thought were worthwhile.  (The program could also serve as a backdoor means of balancing the federal budget; if you can only put money towards government programs when the taxpayers ‘opt in’, it would make it more difficult to spend money beyond what is taken in taxes.)

Disclaimers and Notes

Before you go out and start to demand this type of tax program from the federal government (or to take to the comments and deride my utter misunderstanding of how the federal government and the tax system really works), bear in mind that this is just me, thinking out loud about government spending and taxes.  I make no claims about the efficiency of this hypothetical system, or if it would be possible to implement such a system.  I just had a thought about government spending and taxes, and wanted to share some thoughts.

Now, though, I’d like your thoughts.  What do you think of my plan?  Do you think it could work, or is it destined for failure?  Has it been tried before anywhere (again, I’m thinking out loud, and wasn’t able to find anything about this type of plan before), and how did it work out?

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Have you ever had something you were writing get overtaken by events?  You know, you’re writing about how tensions between the United States and the Soviet Union are only going to get worse, when you turn on the TV and see that, hunh, the Berlin Wall is coming down, making everything you just wrote seem completely deluded.  Sound pretty familiar?

Well, something similar happened to me this weekend; I had a post in mind about what will happen if (actually, when, at that point) an agreement to raise the US debt ceiling was NOT reached.  Low and behold, as I was putting some of the finishing touches on the article, I saw in my Alexa toolbar something about ‘Agreement on Debt Ceiling Reached’.  I put my article, which would have gone up today, off to the side, and low and behold, in just a few short days, the politicians in Washington managed to do what they hadn’t in months of squabbling up to that point.  Since my original post is all but worthless now, let me try to sum up some of the feelings of my fellow Americans in the following rant (Warning: politics ahead; you may want to escape while you still can):

Well, well, well.  After months of squabbling, bickering, accusations, and general carrying on, the United States Debt Limit has been raised.  Yes, rather than screeching to a halt (or at least, finding themselves forced to make the sort of decisions about what programs should be funded and which should not, the sort of decisions that far too many families and other organizations WITHOUT the power to raise how much they can borrow at will have had to do), the government will keep right on rolling, doing…far too many things for me to cover in a single blog post.

I think now is as good a time as any for fireworks, don't you?

I could, I suppose, discuss more about just what a debt limit increase means, both for the economy (US and global) at large and for the government itself, but I’ve already covered most of the pertinent facts when I first discussed us hitting the debt ceiling, back in May (Yes, yes, it was ONLY back in May; I know it feels like they’ve been arguing this for well over a year, but it’s only been about two and a half months since we hit the ceiling and the REAL fun began.)  With all of that said already, I have only one thing to say on the subject:

What the heck, Republicans?

You managed to get spending cuts with no tax increases (or for that matter, decreases in the number of available tax credits (that whole ‘spending in the tax code’) that Obama talked about), thus managing to tackle the rising national debt WITHOUT having to increase taxes, AND put Obama in a position to shoulder nearly all the blame for even more debt limit increases next year.  That’s a political Hat Trick if ever I’ve seen one.  Yet, YET, to judge from some of your reactions (compiled below in helpful Daily Show format), you seem to think this isn’t enough, in spite of the fact that you’ve gotten just about everything you could have hoped for (and given that you control only one house of Congress and the President is a Democrat, you shouldn’t have hoped for nearly as much as you did in the first place), you STILL seem upset:

Look, I’m a Democrat (albeit a Libertarian leaning one), so we’re probably not going to see eye to eye on most subjects, but here’s the thing: if you really want that pesky national debt gone, or at least cut down to a more manageable size, taxes SHOULD at least be on the table.  Trying to balance the national budget (and generate a surplus) on spending cuts alone will require making some serious, deep cuts to many beloved programs.  Trying to get our national budget in order on spending cuts alone is similar to a household trying to get its budget back in order only by cutting down spending, with no thoughts to earning more money: possible, but potentially harder than it needs to be.

Now, perhaps you want to do this; heck, perhaps I’m greatly misguided and most of America WANTS you to cut down federal spending to almost nothing, but my gut feeling is that there are some things on the table that, while they might be trimmed, are unlikely to be completely cut anytime soon.  (Medicare and Medicaid, for example, strike me as things you don’t want to mess with too much; the controversy surrounding Paul Ryan’s proposed budget seems to prove that.  As a side note, since I’m talking to politicians right now anyway, I should tell you that anytime I see a proposal like Ryan’s that changes a major government program ONLY for people under the age of 55 (or any age selected from the 45-65 age block), I automatically assume that (a) it’s a horrible change, (b) if it affected current seniors from the start, none of them would approve of it, and thus, (c ) leaving the current seniors out of the proposal is a shameless ploy to keep their votes, and given how seniors are frequently the voters who vote the most, win the election even as you alienate every young person.  Just something to consider, from one twenty-eight year old voter.)  If that’s the case, please bear in mind that you will need SOME tax income to fund them, and perhaps finding ways to increase that tax income would be a good thing, after all.  (I’d recommend trying to make a flatter, still somewhat progressive income tax system, with a much lower amount of deductions, preferably one where everyone making more than poverty wages paid at least SOMETHING in federal taxes.)

There, my ranting and raving is done (for now).  To all my regular readers, I promise tomorrow I’ll be back to personal finance writing, and I’ll leave the politics to the political writers.  (It’s harder than it looks, anyhow.)

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It’s official; as of Monday, the United States has hit its debt ceiling, the self-imposed limit to the level of debt that the Treasury can take on in order to fund the function of the federal government.  Yes, we have hit the current debt limit of $14.3 Trillion (an amount so large that I honestly have no ready comparisons to help put it into context), and without a law passed by Congress allowing the Treasury to borrow even more, there’s a risk of serious trouble with national finances.

To help try to sort through this (potentially) monumental event (and help to get my own thoughts in order), I thought I would go through some of the most common questions about this deficit problem, and try to answer them for my readers (and for myself).

Q: Just What Is The Debt Ceiling?

The debt ceiling is, as mentioned, the limit on the amount of debt that the Treasury Department can take on in order to fund all the spending obligations approved by Congress and the President.  As the Government Accountability Office (GAO) notes, it doesn’t stop Congress from passing legislation that increases the level of spending (or cuts the amount of tax income), nor does it keep the President from signing such legislation into law.  All it really does is determines what the Treasury is able to do in order to fund the laws that Congress enacts.

There’s no perfect parallel to your household finances (unlike the federal government, you lack the power to tax or the ability to sell IOUs to the international market at low rates).  The closest comparison I can make is maxing out your credit cards; the credit card company will no longer let you borrow money at that point, so you’re forced to find alternatives to pay what you owe.

Q: So, Does This Mean The Government Will Stop Functioning?

Short answer, No.  Longer answer: This does mean that the options that the Treasury has to finance government services is more limited, but don’t expect that the Army will bring everyone home, nor will the FBI will close up shop, Social Security checks won’t stop coming, etc.  Much as hitting your credit limit doesn’t eliminate all your money management options, there are a few possibilities that the Treasury Department has to keep the government’s doors open, including the following:

Source: The Wall Street Journal

So, good news: regardless of whether Congress and the President can come to an agreeement on the debt ceiling immediately, there is a little leeway before we run into serious trouble.  The bad news is that there’s already a date when we are expected to run into serious trouble: August 2nd, when the Treasury runs out of options for alternative sources of funds.

Q: How Do We Deal With The Debt Ceiling?

A: The easiest way is simply to raise the debt ceiling and enable more borrowing.  Similar to getting an increase in your line of credit (but potentially even easier, as Congress can simply agree to give themselves more borrowing authority), increasing the debt ceiling would enable more borrowing in order to fund the programs that Congress has already authorized.  There are arguments, particularly by Republicans, that such increases should only be granted if accompanied by significant spending cuts.  Without getting too much into the politics of the whole situation (which I might do later if and when the lines drawn in the sand become clearer), there’s a good chance this will not occur without significant political battles.

Q: What Happens If We Don’t Raise The Debt Ceiling?

Short answer: nothing good.  As we’re never gone over the debt ceiling before, it’s hard to know exactly what would happen.  A report on CNNMoney, while acknowledging that fact, mentions two (in their words, awful) possibilities for measures that might be undertaken if we can’t raise our debt limit.  The first is cutting spending and/or raising taxes by several hundred billion dollars to make up the difference between our current spending levels and our income levels (and even that level of budgetary balancing will only get us to the end of this fiscal year, in September; expect trillions in cuts or new taxes if we still haven’t raised the debt limit).  Think of the austerity measures imposed on the European Union nations that have gotten bailouts, or the type of belt-tightening you’d need to do if you no longer could rely on credit cards.

The second option is even worse: the U.S. could default on some of its debts.  It’s almost hard to articulate just how bad things would be.  It would certainly torpedo the reputation of the U.S. as a risk-free investment, causing us to spend more to borrow in the future.  It would likely cause a frenzy of selling, as investors here and abroad tried to unload their Treasuries.  Expect the stock market and the value of the U.S. dollar to be devastated.  In a word, horrible.

Q: Golly, That Sounds Bad.  What Do You Think Will Really Happen?

A: Well, as neither possibility in the event of not raising the debt ceiling sounds like the sort of thing the typical politician wants to deal with (particularly in our perpetually campaigning political culture), I feel fairly confident that an agreeement will be reached some time before it comes to that.  There will likely be some spending cuts to appease deficit-cutting Republicans, although not as many as they might like.  There might also be some decreases in tax deductions (or to use President Obama’s bizarre phrasing, ‘spending in the tax code’), or even tax increases, if the Democrats put up a fight.  Ultimately, expect a few months of infighting before a deal is reached, hopefully before the eleventh hour when the world markets start to flee in terror.

What do you think about the debt ceiling fight?  What’s the best method to resolve the current problem?  For any foreign readers, does our government look as silly to you as it feels to us U.S. citizens when it has arguments like this?

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As of the last time I checked the news (7:37:08 Friday morning), there still hasn’t been a budget agreement reached that will prevent the United States federal government from shutting down today.  While I’m certain the possibility exists for a stunning, eleventh hour agreement to be reached that keeps the government open  (if only for the next seven days, as the latest proposal from the House of Representatives would), I think it’s worth considering what will happen in cause an agreement can’t be reached.  What’s that, you say I’m cynical, thinking that the mature and reasonable elected officials in Washington D.C. will not be able to come to a reasonable conclusion, even with the eyes of the nation focused on them?  Well, perhaps, but let’s run with the concept anyway.

There’s a lot of discussion out there about how a shutdown would effect the typical Joe or Jane Citizen, detailing the government programs and agencies that would not longer be functioning (try not to smile too gleefully about the IRS being unable to conduct audits) and the problems it will cause the average person.  I’m going to take a different tact, and look at those ‘nonessential’ government workers who will be unable to work during a shutdown (or collect their paychecks during that time).

Yes, this article goes out to people like my mother, who in the event of a widespread government furlough, will find herself not working until Washington D.C. gets its act together.  It’s far from a complete guide to your furlough time, but hopefully it will help you keep your head together while you are unable to work:

1) Don’t Panic: Good advice to consider during almost any troubling situation, there’s nothing that panicking will do that will benefit you.  Yes, it’s far from fun being labeled as ‘nonessential’, particularly if you regularly have to deal with people who gladly accept your services (and frequently, the government money you dispense) but then immediately complain about the lack of service they get and size of your paycheck.  But bear in mind that there is a fair to good chance that you will end up being compensated for the missed time anyway (as government workers have in past shutdowns), and in the mean time, you can watch as the politicians try to deal with all complaints about delayed checks and lack of service that would otherwise be directed at you.

2) Try Not to Empty Your Emergency Fund: Even allowing that you will likely be compensated for your lost work time eventually, you are going to need money to live on in the meantime.  Hopefully, you’ve established a nice emergency fund and will have no problem surviving (and even thriving) while you wait to go back to work.  Even if you do have enough money to survive weeks, or perhaps months (this is Congress we’re talking about), without an agreement being struck, though, you want to keep from emptying your emergency fund.  While I’ve noted above that you will likely receive any back pay for time that you were furloughed, that depends on the generosity of Congress, and as you’ve probably guessed, you probably shouldn’t stake your survival on them.  Plus, there are already rumblings that the 2012 budget will cause as much, if not more, ‘discussion’ and consternation among lawmakers, so you should try to be prepared for that.  On the subject of being prepared…

3) Consider Using Your Downtime to Start a Side Project: Assuming this government shutdown (and thus, your furlough) stretches on for a while (that is, Congress doesn’t spend every waking minute trying to knock out some sort of plan and ends up wrapping things up by Monday), you might start to wonder how to spend this unplanned (and unpaid, at least for now) time off.  Well, why not start a side project of some sort?  From creating a blog to doing repair work on your relatives’ cars, there’s any number of things you could consider to bring in a bit more money while you have some down time.  Who knows, you might just find something you enjoy doing more than government work.

4) Don’t Be Offended: Possibly most importantly of all, don’t be offended that you are considered ‘nonessential’.  There is likely to be a far amount of dung being slung around (metaphorically, anyway) (at least, I hope it will stay metaphorical) about government workers as various politicians and commentators try to jockey and shift public perception.  I’ve known more than a few government workers in my life (including, as noted, my mother) and there’s nothing I’ve seen that makes you any less hard-working, diligent, or otherwise less deserving of respect than private workers.  Here’s hoping everyone involved in this debate keep that in mind while they try to determine an appropriate budget.

There you have it, my advice to (potentially) furloughed government employees.  Here’s hoping an agreement is reached by the close of business today, but if not… Well, perhaps we’ll see what happens when 800,000 people start side businesses all at once.  That would definitely be a sight to see.

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