Restoring the " Watershed " : Fixing the Economy in Six Weeks...

Prof H. at fluxlife

...Guaranteed!
Does that sound bold?

Not if you deal with the economic crisis at its heart - where the economy springs forth: from consumers themselves.

The Federal government has already doled out an $800 billion rescue package for the finance industry. Consequently, those financiers didn't have to give up their plans to buy $50 million private jets. It was only later that public outcry delayed (for now), the notorious $50 million purchase.

Obama has asked Congress to pass another $820 billion dollar stimulus rescue package for the economy. It will likely bring relief to average Americans within a few years. The Obama package also has the added benefit of directly creating jobs. It also addresses the critical importance of investing in the national infrastructure (that has now been long neglected). But, jobs rescue the economy primarily by increasing consumer funds leading to consumer spending.

Both packages have flaws, and neither really helps the majority of average residents soon enough. They both seek to fix today's problems, but not until some time later on down the economic brick road.

So why not fix today's economic woes today?

Step 1: Up to $50,000 cash for most Americans, NOW. The U.S. Treasury has the ability to issue cash to every adult resident citizen of three or more years receiving income under $150,000, no strings attached. Not a petty amount up to $600 like the early Bush stimulus package, but a significant amount up to $50,000. Any individual normally receiving less than $50,000 in annual income gets $50,000 stimulus cash, tax exempt, from the Treasury. Individuals earning more, up to $150,000, receive decreasing amounts, $1 less stimulus cash for each $2 above $50,000 that they normally receive.

That's more than 75% of all resident citizens receiving substantial stimulus payments. Does this include you?

Now, who normally making less than $50,000 a year, suddenly receiving a $50,000 lump sum, isn't going to spend money? How many on the verge of foreclosure will be able to prevent that foreclosure? How many new cars will suddenly replace old, polluting clunkers? How many popular consumer products will fly off of the shelves, saving retailers, wholesalers and manufacturers across the economy?

Within six weeks of those stimulus payments reaching most Americans, the economic downturn would be an upturn that will carry the economy at least into early 2010, and upon which sustained growth and stability could be built. And all for price on par with the finance industry rescue and the Obama stimulus package.

Step 2: Tax exemption for most individuals. When the income tax was first implemented, it taxed only wealthy income levels, not people struggling to eat properly and maintain a rudimentary level of shelter and security. In fact, only something like 10% of the population earned enough to become subject to direct income taxation. So, exempt 85% to 95% of the population, the middle class and everyone not receiving exorbitant incomes, from all direct taxation. Roughly, everyone making less than thrice the highest income level receiving stimulus payments under Step 1, above.

Importantly, for the current crisis, that elevated individual exemption needs to be applied to the 2008 tax year, so that taxpayers making less than $450,000 in 2008 receive their 2008 withholdings back this coming April - a second influx of cash stimulus to the consumer economy. More importantly still, that $450,000 2008 exemption level needs to increase automatically every year to keep pace with inflation and growth across time.

Although this step involves setting a 40% flat tax rate, because the first $450,000 of everyone is exempt, a person has to make $900,000 income to reach an effective 20% tax rate. Consequently, even individuals receiving income in the low seven figure range will see an effective reduction in tax rate, although the elimination of deductions may begin to quickly offset that savings for many in that income range. In short, only those receiving extraordinarily high incomes begin paying higher income taxes, mostly since it is a flat tax rate and there are no deductions to calculate or be taken.

Apparently, Congressional Republicans have cried out for tax cuts, and this step should send them dancing into the streets, representing the largest tax cut in the history of direct taxation of individuals in the U.S.

Clearly, alternative revenue sources will be necessary. In a consumer based, free-market economy, however, non-critical consumer product taxation methods, such as value added taxes and wealth and luxury taxes, are more appropriate than income taxes as primary revenue sources.

Step 3: Finance relief for individuals on par with the $800 billion financial industry bailout. That means that any individual receiving a stimulus payment under Step 1, above, also gets debt relief. Any financial industry creditor receiving Federal intervention during 2008 or later must forgive any unsecured consumer debts (including student loans) that it holds against individuals eligible for stimulus payments. Those forgiven accounts then must also be reported to credit bureaus as accounts paid in full, rather than write-offs. The revolving credit debt of the average consumer is something near $15,000, and the economy requires that the stimulus payments go toward consumer spending rather than to the financial industry already getting direct Federal assistance.

Step 4: Direct mortgage lending at a fixed 1% interest rate to individuals exempted from direct taxation in Step 1, above, no strings attached and no closing costs, up to 120% of real economic valuation (not "comp" valuation, see Fluxlife post dated 01-07-2009). This protects consumers and the finance industry throughout the future from the risks and costs of subprime loans without barring vulnerable individuals from access to home ownership. Moreover, those in or on the verge of foreclosure would be immediately refinanced into this direct lending program at real economic valuations.

Steps 5 and beyond continue to solidify and stabilize the economy in the longer term, focusing on the economically critical breadth of the consumer base. Indeed, the above steps alone will strongly resurrect our mortally wounded economy immediately, but additional and fundamental changes are needed to sustain that resurrection. Still, unlike every other plan, this Six Week Plan will realize significant results within six weeks beginning with consumers, and will address the gap forecast between now and the time when any significant results reach average Americans under the other plans.

So get out there and start lobbying your new President and Congressional members for your own tax relief and stimulus funding! And don't stop there. Lobby your governor, your mayor, your state and local representatives to get them to, in turn, lobby your U.S. Congress and President Obama. Be heard and help save America! ... and buy yourself something nice along the way.

Prof.H
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3 comments:

itcanbe said...

Hey Prof H., I would love to get a check for $50,000! I've paid way more than that in Federal Income taxes over the years! Great idea. How do we get The Treasury Department to issue these checks?

Steve Morozumi said...

thanks again for your post on fluxlife! that was almost a novel, but well worth the read. with the new administration, we've got a better chance at making things like this a reality. who knows? let's give it a shot! :D

Prof.H said...

Your username says it all, itcanbe. Pester the new prez (an online webmail form is found at http://www.whitehouse.gov) and every last one of your elected officials.

I do like to boil things down to the shortest, easy-to-understand post possible, but it is a huge topic, and I still only began the dive into the topic. Perhaps a multi-part discussion, spread across several days, might be a future format for such things.

The shocking reality of it all, however, is that the Six Week Plan will provide instant stimulation, will carry the economy for many months, and for an expenditure similar to the other two packages. More importantly, it reaches those who need it most immediately.

I am a firm believer in acting with the long-term view in mind, and of thinking on the scale of centuries, and the impact of actions in the present upon the next 8 (at least) generations. Right now, however, the economy is that much of a mess, and the next several generations, worldwide, will likely struggle far more if our economy collapses as deeply as it could and might yet.

Prof.H