"The Moment of Truth" or the Simpson-Bowles Report by the National Commission on Fiscal Responsibility and Reform, Circa 2010
Enacting the Plan
Enact the Plan: Speech on 2/24/2012
Brentwood, TN Rotary Club
I got a text message from Marcy Shelton on January 25th asking me if I would like to speak to you today. She suggested that I could talk about mountain climbing or the current economic conditions. I have climbed Africa's Mount Kilimanjaro five times and dedicated my entire life to the process of building family wealth.
Talking about those two subjects would have been easy. And as you will see later in the speech... a whole lot cheaper. But, I have chosen to talk about something far more difficult.
My talk today is going to be about why the President and Congress have continued to ignore our nation's budget problems. But I want you to relax. This isn't a political speech. It is a bi-partisan, politically agnostic look at the problem. I am a businessman. Not a politician. And I prefer to stay the former. It is bad enough when people find out I am also an attorney.
President Obama established the National Commission on Fiscal Responsibility and Reform in April of 2010. The 18 member bi-partisan group, co-chaired by retired Senator Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles, was given the responsibility of developing concrete solutions to our nation's fiscal problems.
The Simpson-Bowles findings were alarming. Our total debt is over 102% of GDP- defined as the value of all goods and services we produce in the economy. The highest debt to GDP ratio we ever had was after WW2 when it reached 120%. Greece just agreed to cut their debt to 120% of GDP over 10 years. Simpson-Bowles documented that we have both a taxing and a spending problem.
At the conclusion of their work, the Simpson-Bowles Commission voted by an 11-7 margin to recommend the changes and strategies in a report the titled, "The Moment of Truth." An apt title which they further explained in their preamble: "Our challenge is clear and inescapable: America cannot be great if we go broke. After all the talk about debt and deficits, it is long past time for America's leaders to put up or shut up. The era of debt denial is over, and there can be no turning back."
The report has been sitting on the President's desk since December of 2010.
Since that time, we have seen our credit rating cut and have experienced some of the worst partisan bickering since the Civil War. Not to mention the trillions in new debt being placed on our shoulders of our children and grandchildren. And 2012 is starting out like a version of the movie, Groundhog Day. We are getting to replay 2011 all over again.
The Plan makes recommendations in 6 key areas:
- Discretionary Spending Cuts
- Health Care cost reduction
- Mandatory Spending Cuts
- Social Security Reform
- Budget Process Reform
We are going to touch briefly on most of the six and focus on two: Tax Reform & Budget Process Reform.
Today, tax receipts are 15% of GDP. That is the lowest level since 1950. That is bad because we have been spending over 24% of GDP.. The Simpson-Bowles plan creates a budget process that stabilizes revenue and spending to a sustainable 21% of GDP by 2035; a much more manageable number..
If revenue exceeds those targets because of tax reform, all surplus is applied to the deficit.
The Plan also calls for budgeting everything from natural disasters (an average of $11 billion annually) to putting strict caps on all forms of discretionary spending. Even with the discipline imposed by creating structural changes in the budget process, we won't see a fully balanced budget until 2035. We don't pay down the national debt. We just make it a smaller percentage of GDP with targets set at 40% during the 20-year time frame. Remember, we're at 102% now. We aren't eliminating anything, we are just taking it down to a sustainable percentage.
By creating national spending and revenue goals, we will give the American people an opportunity to understand our nation's finances. This will occur gradually. Budgetary process reform is critical to changing the national dialogue on spending and giving the American people realistic goals about what government can provide.
The biggest area of reform recommended by the commission is the tax code. No organization can sustain itself unless it is properly funded. The United States is no exception.
We collect 15% of GDP and spend a whole lot more. One of the objectives of the commission was to increase the global competitiveness of the United States. The President is wrong when he asserts that this is just a question of changing tax rates and making the upper 1% in this country pay more. That's not my opinion. It is the conclusion of the very commission he created to study these problems.
The nation's tax system has been corrupted with tax preference items that cause the system to be fundamentally unfair to all tax-payers. During my business career the tax code grew from 2000 to over 10,000 pages long. The commission identified tax preferences --- loopholes, if you will --- that amount to $1.1 trillion of spending per year. If we cut loopholes, we can lower tax rates, expand the base of tax payers, and create a system that is more equitable and globally competitive.
Let me illustrate the unfairness of the system by looking at Governor Mitt Romney's tax return first.
Now let's compare it to Gingrich and Santorum.
Right now, all three candidates seem more worried about who is going to pay for birth control pills than the fundamental inequity in our system. Even millionaires are treated unfairly in the current system. The budget crisis should be the primary discussion of this campaign.
The Simpson-Bowles plan completely changes the dialogue on the tax code. The emphasis is on getting tax rates to the lowest possible level to support the funding needs of the government, and to make us more competitive on a global basis. This is accomplished by re-booting the tax code and re-creating preferences in the following areas only:
These Preferences Only:
- Mortgage interest - single home $500,000
- Charitable giving
- Employer provided health insurance
- Retirement savings and pensions
- Tax credits and incentives for the disadvantaged.
That's it. As the plan states, this kind of discipline will result in tax rates of 12%, 22%, and 28%. And it maintains the progressive nature of the tax system. Everyone pays some tax unless they have income below the federal poverty line. Corporate tax rates would drop to 28%. The key component of the plan is a more reasoned approach to making our U.S.-based multi-national corporations more competitive. The commission recommends adopting a territorial tax system like most of the countries of Europe. Instead of having to pay tax on repatriated money to the U.S., corporations will pay tax to the country in which the services are provided. Companies are then free to allocate capital where it is advantageous for their business structure. With lower corporate tax rates in the U.S. our manufacturing base will grow again.
The face of multinational companies has changed. For example, Gardner Denver headquartered in Philadelphia makes industrial pumps for a variety of industries. They went from a $300 million company to a $2.5 billion company in seven years. They are a global organization. They have two manufacturing facilities in China where they produce pumps designed specifically for that country's consumption. They should be allowed to use the profit from Chinese operations to flow freely to the U.S. without fear of our tax system. All companies should be on an equal playing field.
Our tax base will increase and the top one tenth of one percent will pay more tax. Governor Romney's tax will go up substantially by eliminating a tax loophole called "carried interest." It won't make any difference under a simplified tax code.
Incidentally, while I may have poked a little fun at the Republican candidates for President, I would like to say something that no one in the press, to my knowledge, has commented on. Governor Romney contributed over 44% of his taxable income to charities and taxes at the federal and state level. He should be commended for his generosity to his church and other causes. It takes a lot of ordinary people to pay over 4 million dollars in federal, state and local taxes. We need all the help we can get.
Earlier in the week, the President outlined a plan that would lower corporate tax rates but keep the tax code corrupted with billions of dollars of preference spending. His plan is not comprehensive, nor does it address raising revenue except through increasing tax rates on individuals and small business. The President's plan rejects the territorial tax system recommended by Simpson-Bowles. Like so many White House initiatives, the plan lacks details.
The chief economic advisors to the President, Christine Romer and Lawrence Summer, have returned to Stanford and Harvard. President Obama has become increasingly isolated. He has ignored the commission that he charged with creating solutions to our problems.
Simpson-Bowles makes other detailed comprehensive recommendations --– one of the most notable being an overhaul of Social Security --– not to reduce the deficit, but to restore confidence in a system that is vital to many Americans. Raising the retirement age to 67-68-69 by 2050, changing the cost of living increase calculation to reflect how consumers actually spend, and protecting the most disadvantaged Americans are just a few examples of what can be done now to avoid the types of Draconian cuts that are being implemented in Greece.
Once this reform is passed, an individual working at minimum wage for 25 years would retire with a package of benefits that would provide income at 125% of the national poverty level. There are many reasons to pass all of the plans recommendations. I don't have enough time to cover them all.
The comedian Woody Allen once commented that we were "at a turning point of opportunity- one road leads to frustration and despair --- the other road leads to chaos and hopelessness. I pray God will give me the wisdom to choose the right one." I want to leave you with a better perspective than just the negative view of our financial problems.
The proportional nature of our problems is real. Our Debt-to-GDP is at staggering, unsustainable levels. But the opportunity is great. And we are proportionately better off than the rest of the world in our ability to deal with these problems.
If Tennessee was a country, it would have the 24th largest economy in the World and be slightly larger than Greece. By the same measurement, California would be the sixth largest economy in the world. The United States economy is as large as all of the economies in the European Union combined. Our economy is 40% larger than China. And measured by the output on a per capita basis, we are actually 6-8 times the size of China. China has the second largest economy in the world, yet it ranks at 100th in the standard of living for its people.
I have spoken a lot about the problems with our debt. Yet there are two sides to every balance sheet. We have tremendous tangible assets- hospitals, schools, universities, interstate highways, electricity, fire, and police protection. We have a court system, clean water, and a consistent push toward creating a cleaner, healthier environment.
We have many intangible assets as well. We have a system of regulation, management and organizational expertise, as well as zoning and planning. We have companies that know more about product safety than most of the countries in the world. This is evident as we see the rest of the world stuggle with basic consumer problems like producing safe milk for infants. I would not trade places today with countries like China, Brazil, and India as they begin the process of dealing with problems we faced nearly 100 years ago.
Everyone is dealing with these problems in their own way. In Egypt, Syria, and Libya there has been bloodshed and revolt. In Greece they have resorted to violence and denial as a means of coping with problems that should have been dealt with years ago.
In this country you can join the Occupy Wall-Street movement, let your hair grow, stop bathing, grab a sleeping bag, hang out at a legislative plaza, and demand that your problems are solved by someone other than yourself. But where is the real solution in these actions?
The country has a solution to its fiscal problems. It is the Simpson-Bowles Plan.
In my world, 'Hope' has never been a strategy. And, change is always accompanied by hard work. So, I leave you today with an opportunity to better educate yourselves and participate in the national debate on solving the nation's fiscal problems.
That's why today I'm announcing the launch of the "Enact the Plan" movement. I have created a website that focuses the debate on the country's fiscal problems and on the solutions contained in Simpson-Bowles. The website will accompany a series of public service announcements you will see in the Tennessean over the next month. I will talk to anybody that is willing to listen as to why I believe Simpson-Bowles is the fast track opportunity to put our fiscal house in order.
Join me in asking the President and members of Congress why they have failed to act… why they asked questions and then walked away from the answers. The answers are contained in the plan that has been sitting on the President's desk since December of 2010.
I have a limited number of copies of the Simpson-Bowles plan in the back, or you can pull a copy off the website. Read it, talk to your friends, and help me spread the message.
I want to thank the team at J&A Integrated Thinking for helping me articulate the message today. I will leave you with a quote from Winston Churchill.
He once said, "You can always count on Americans to do the right thing…after they have tried everything else."
Let's get behind Simpson-Bowles, stop the bickering, and start having some fun again. Thanks, I'd like to open the floor now for any questions you might have.