If something doesn't happen with the budget, the federal government will shut down after this Friday. I do not expect that to happen. Except for some Tea Party Republicans, no one wants to see that happen. I expect a deal to be struck soon and for business to continue.
That said, there are some major changes that are needed to try to bring some fiscal sanity to the federal budget. People who want to be serious will have to recognize that this will include tax increases, budget cuts, and changes to both the tax codes and government programs. The structural issues that plague our national budget cannot be solved with just minor changes - it requires a major overhaul. Some tax increases or a couple of program cuts won't do it.
So the question we have to ask ourselves as a nation is what are our priorities? My own view is that we need to maintain the safety nets of Social Security and Medicare, and that we need strong regulation to prevent the runaway excesses of capitalism to again destroy our economy like it did at the end of 2008. Having a more simplified tax code that eliminates most of the tax shelters, credits, and breaks that many special interests receive is critical, as is keeping it progressive (higher brackets for higher earners). I view it as appropriate and healthy and overall it results in better fiscal health for the nation.
The national debt stands at over $14 trillion and the deficit for this year will come in around $1.5 trillion. As I have said in the past, these are unsustainable. The goal for the next fiscal year should be to drop the deficit down to $1 trillion. This can easily be achieved by several simple steps.
1. Eliminate the Bush tax cuts for those making over $250,000/year. Increasing the marginal rate by 3-4% for these folks won't have a severe effect on them. For someone making a million dollars they will have to pay an additional $40,000 in tax - very doable. This will generate about $250-$300 billion.
2. Do not extend the 2% cut on Social Security tax (it never should have been put in place anyway), and eliminate the cap on income taxed for Social Security. Right now, Americans pay 4.2% of their salary into the Social Security program. It was 6.2% before President Obama pushed and received the 2% tax cut for this year. The strange thing about it is that income above $106,800 is exempt from the tax. So someone making $50,000 pays 6.2% of their salary, but someone making $1 million only pays 6.2% on the first $106,800 - the rest is not taxed. This results in an effective tax rate of .662%. Just eliminating the cap would ensure solvency for the Program for decades and grow the Social Security surplus by at least $150 billion.
3. End the wars in Afghanistan, Iraq, and now Libya. This would easily save $100 billion/year - even with technical advisors and some non-combat troops.
4. Cut another $100 billion from the defense budget. There is waste, fraud, and abuse within military contracting and it could be rooted out without any risk to the nation.
These four changes, along with the continued growth of the economy, would allow us to cut the budget by at least $500 billion.