Another Simple Fix for a Massive Washington Problem.
Is too much Common Sense such a dangerous thing?

by Jody Tallal - 2006

There is no question in anyone's mind that the United States is heading towards financial disaster if we continue adding massive annual deficits to the overall federal debt. The annual deficit for 2005 was projected at $317 billion and the total debt for the nation is over $7.3 trillion.

The only two options being considered to rectify this problem are to either reduce federal spending or to raise taxes. Neither are very saleable to the American people, and due to the political process itself, neither are likely to be implemented to the degree necessary to truly fix the problem.

There is a third alternative which no one appears to be exploring that could have a significant impact on helping solve the problem. A little exploration of a few realities is first require to fully appreciate the viability of this alternative.

Estimates indicate that for every dollar the government pays to directly solve a social problem it actually has to collect ten dollars in taxes. In other words, the bureaucracy is now so dense that nine out of every ten dollars collected in taxes goes to pay the cost of collecting and then processing that money just to distribute the one. If you can grasp the magnitude of this problem you can easily see that the government choosing to independently solve any problem, as opposed to letting it be solved by the private sector, is an automatic prescription for disaster.

The second piece of the puzzle that must be explored is the dissatisfaction the average American has with the current income tax system. Each year the frustration level grows as we see ballooning deficits and a continual, increasing percentage of our personal savings go to pay our income tax bill. Evidence for this was apparent as Congress felt forced to eliminate all forms of tax sheltered investments in the 1986 Tax Reform Act. By 1986, so much investment capital was seeking tax shelters that it actually distorted entire industries, real estate being the easiest to explain.

For decades real estate has produced tax benefits through depreciation and interest deductions usable against earned income. The economics of that industry were controlled by supply and demand. However, the frustration of the tax payer grew throughout the 1970's and mid 80's. This frustration was due to the Tax Reform Acts of 1969, 1974, 1976, 1978, 1981, 1982 and 1984, combined with the spiralling federal deficit. From 1980 to 1986 so much money was chasing real estate for tax shelter reasons that all economic principles dictated by the law of supply and demand were ignored, and commercial real estate became grossly over built. As a result, from 1986 - 1995, we were in a national real estate recession.

The alternative solution this author proposes to the budget problem is to selectively create tax incentives in most areas of the economy that the government is currently funding. Such tax incentives would include investment tax credits, depreciation, and interest deductions. These incentives should be analyzed on a year-by-year basis and discontinued when the need subsides. The taxpayer's frustration with the tax system has already demonstrated how much capital can be diverted into an industry. Properly targeting this capital into problem areas could dramatically reduce the overall cost of obtaining the solution.

Let's look at a couple of examples to illustrate how this process would work. First, take the past Savings & Loan crisis in the early 1990's (for which we are still paying for today) and the incredible inventory of real estate the government amassed as it closed down institution after institution. The government's solution to the management and liquidation of this realty was to create The Resolution Trust Corporation (The RTC). The RTC created layer upon layer of government bureaucracy and, due to its inability to function in the business world, ended up being forced to dump tens of billions of dollars of realty for pennies on the dollar. The result was absolute auctions where Class A office buildings, 90% leased, sold for 38% cash on cash annual yields, and fully usable commercial property that is across the street from property that the government itself paid $150,000 per acre for a few years ago for $6,000 per acre. We as taxpayers and our children will pay for the RTC incompetence for many more years to come.

Consider what the result could have been had Congress, in the beginning, created a special 15% Investment Tax Credit given to anyone willing to buy RTC property at current appraised value plus allowing them a deduction of normal real estate depreciation against their incomes. Billions of dollars would have been raised by the Wall Street investment firms for this specialized tax sheltered investment. The result could have been that most of the deficits created by the RTC's inept management and liquidation process would not have existed. Conversely, we as taxpayers would now not be responsible to pay $10 in taxes for every $1 they wasted.

The total cost of this alternative would have cost a total of only 15 cents in taxes (the 15% ITC) not collected for every dollar of market value paid for the properties plus the cost of allowing normal depreciation deductions. The result would be pennies on the dollar in true cost, instead of only receiving pennies on the dollar from these original properties' values with we as taxpayers became responsible for the losses.

Another example of how this tax incentive process could be applied would be in helping the lower income families in the country that can no longer afford quality healthcare. Both major political parties are promising some form of national health insurance in the future to alleviate this problem. Once again the government will enter private business and the resulting mess will be a fiscal nightmare which our children will pay for decades.

An alternative would be to create a special tax incentive for doctors who donate their time serving lower income families. The complete framework to implement this process is already in place throughout the existing Medicare system.

Currently all doctors have a complete profile within the Medicare system which tells them what they will receive for services rendered to patients on Medicare. The doctor sends in his or her bill and later receives some portion of that billed amount as their fee. The cost to you and I: $10 in taxes for every $1 paid to the physician.

What would happen if doctors could voluntarily choose to see a special-needs patient and, instead of receiving a check from Medicare for their services they receive a Tax Credit Certificate, redeemable dollar for dollar, off of their income tax bill? This would give doctors the option to work extra time for free instead of paying income taxes. The result would be an incalculable quantity of free medical service available to those in need with no tax dollars collected from you or me to pay for the services. Granted, there would be a loss of dollars from taxes paid by the doctors, but that would be a fraction of what it is currently costing to collect the money from us to pay them, only to try to recollect a part of it back again from them in income taxes.

You could carry this same concept into the hospitals and allow them to provide free services to be credited against their tax bills. In fact, there are a number of opportunities to use this concept with businesses who receive government subsidies. It could also be used to raise money to solve a number of social problems, from providing assistance to the homeless to contributing to AIDs research. If given the right incentives to work with, the financial services industry will automatically create the vehicles needed to raise money from those who would rather choose how their tax dollars are spent and have some chance for economic reward from their investments.

Think about an abundance of controlled, targeted money designed to solve our most critical, social problems so that the government won't have to waste our money feebly attempting to accomplish the same thing. If this concept seems a little too radical and could never work, consider the following: prior to The 1986 Tax Reforms, tax incentives had been used for decades by Congress to funnel money into areas of the economy that needed economic stimulus, such as energy, cattle, farming and real estate. Additionally, prior to the government deciding that it should be responsible for solving all of our problems, most of our problems had been solved for the preceding 200 years through a combination of family, neighbors, concerned citizens, businesses and churches. Let's begin creating a system which reawakens all of these entities and stimulate them back into action.