It’s Not a Zero Sum Game

By Kevin Meyer

Here we are again, tax day.  I'm always amazed by the people excited to receive a refund not realizing they've really just given the government an interest free loan.  They'll shop around for low rates on car loans and such, then gladly give the feds on average three grand of their money with no return.  Not that I'm exactly happy about cutting a fat check tomorrow either.

The budget debates have been pretty mind-numbing over the past several weeks, and the worst is still yet to come as the debt ceiling limit approaches.  Obviously something has to be done to halt our spiral into banana republic status – debt is debt.  What makes me raise an eyebrow is how the left is ok with more debt when the interest on that debt will so squeeze the budget in a few years as to crowd out all opportunity for new entitlement programs they so love.  But I won't let the right off the hook – just slashing isn't the solution either.

Different ends of the political spectrum are focusing on the different ends of the equation, and forgetting about the middle. 

It's not just government.  That's exactly what many, if not most, companies and other organizations do as well.  Look at the inputs and outputs, but not the process that converts inputs into outputs.

The left wants to raise taxes, especially on "the rich."  A larger and larger percentage of people don't pay any income tax – pretty much at the tipping point of 50% right now – concentrating the burden on the top few percent. But they are also correct that the effective tax rate on those top wealthy folks has gone down.  What often isn't realized is that thanks to the explosion of LLC type companies a larger and larger percentage of small business income actually flows through directly to individual tax returns – making more people appear "wealthy" when they happen to be business owners that employ lots of people and take much lower personal spending money – in fact they hire far more than the supposedly evil large corporations.

Last week The Wall Street Journal had a great analysis of the potential impact of sucking more tax revenue from the rich, based on states like California where that is already a predominant tax revenue policy thanks to initiatives like Prop 13 that limited property taxes.  It may seem like great social policy, but the reality is that the incomes of the rich are far more volatile than those of the rest of the population.  Hence in good times the revenue is great, in bad times it is much worse and the revenue drops off a cliff – often right when it's needed.  Strong tax revenue policy needs to reduce volatility, not increase it.

Over the past couple decades wealth and income, as well as knowledge, have become less and less hindered by geographical barriers as the ancillary advantages of being located in the U.S. decrease compared to the rest of the world.  Some believe we can be an oasis of increasing taxes while most of the rest of the world is decreasing tax rates and therefore we should go back to the tax rates of the Clinton years and before.  Good luck with that mindset.  Similar to how the wealthy are fleeing California and New York and taking their taxable income with them, think Halliburton as an example of the numbers of companies and individuals already relocating abroad.  And we continue to be about the only country that tries to tax foreign income.  If I had a dime for every new medical device company I work with that is setting up shop in Switzerland or Eastern Europe instead of the U.S. – sad to see us lose those startups.

But slashing and burning isn't the answer either, nor is leaving certain programs and departments and activities, like defense and wars, completely untouched.  I applaud Paul Ryan for finally being a politician with enough guts to go after programs that voters love, but much of his method of simply demolishing programs isn't the solution either.  You can't ignore the costs of foreign adventures and apparently sacrosanct departments.

The answer is in the middle.  The process that converts taxes into government services.  Financial solutions are not a zero sum game – you don't have to either raise taxes or slash programs.  There is another way.

First off is the ubercomplexity of the tax code itself.  72,000 pages of confusing rules and regulations disguising a lot of social engineering.  Upset at GE not paying taxes?  Get upset at the tax code that allowed it to do so.  They just had enough green eyeshade types that could interpret it in their favor.  Simplify simplify simplify and billions would be saved and billions would be reaped.

Second is the amount of internal waste – especially in duplicate or ineffective programs.  The General Accounting Office came out with a report listing hundreds of billions of dollars worth of duplicate programs in every agency and department of government.  Examples?

• The US Department of Education maintains more than two dozen different study abroad grant sources or programs.
• The Government Accountability Office (GAO) found 69 overlapping early child education programs scattered at 10 different agencies.
• There are over 200 distinct federal programs to assist or encourage students to enter science and math career fields, maintained at 13 different federal agencies. These programs spend about $3 billion annually.
• There are at least 21 federal programs that support efforts to combat childhood obesity located at various federal agencies, including the Centers for Disease Control, the Department of Agriculture, and the Department of Education.
• There are 44 job training programs at nine federal agencies, operating at a cost of $30 billion.
• The Health Resources and Services Administration (HRSA), a federal agency, operates half a dozen duplicative programs to address the nation’s nursing workforce shortage.
• The Department of the Interior has at least four overlapping climate change wildlife adaptation programs, including the US Geological Survey, which is now launching Regional Climate Change Response Centers around the country. This does not include new climate change programs at the Environmental Protection Agency, the National Oceanic and Atmospheric Administration, or the US Department of Agriculture.
• Seven agencies within the Department of the Interior operate overlapping invasive species programs, with the US Fish and Wildlife Service accounting for eight programs with an invasive species component. Outside of Interior, six other federal agencies administer their own invasive species programs. Finally, the federal government has created four separate councils to better coordinate various federal invasive species programs. In total, the federal government is spending a minimum of $1.4 billion annually on these overlapping programs.
• The federal government has a minimum of 16 programs at three federal agencies aimed at addressing homelessness.
• There are 23 federal programs with a senior housing component.

Seriously?  And some folks want to raise my taxes to pay for more of that duplication?  Are they naive or just stupid?

Finally, thirdly, is a situation that isn't often reported.  Many government appropriations are authorized for a set period of time or a set use.  Yet many of those appropriations never end.  In fact the GAO has found another couple hundred billion of expenditures that shouldn't be happening because they simply are no longer authorized.

Raise taxes?  Nope.  Slash some valuable programs?  Nope.  Instead focus on the the obscene duplication and unauthorized activities and expenditures. 

And as you look around your own companies and organizations I'm betting you could find examples of the exact same situation.  Instead of chasing low cost labor to unstable countries or trying to force price increases on your customers when there hasn't been an increase in value, take a look at your internal conversion processes.  What's going on there?  I'm guessing some duplication and waste.

Inputs do not control outputs.  There's a process in the middle that can be optimized.