Here at The-Party-of-Common-Sense.org Institute, we regularly have a number of "common sense" recommendations that are submitted for consideration. However logical these may seem on the surface, a more thorough analysis usually shows why they haven't been enacted. Today, we'll look at three such suggestions: (1) A requirement to have a built in retirement, or sunset, date for all laws; (2) the idea to much simplify the tax code with a flat tax; (3) the idea of balancing the budget through across the board cuts.

The first "common sense" recommendation that we hear a lot is one to have the government "sunset" or include a retirement date in all laws. By retiring each law after a number of years, the idea is to force lawmakers re-evaluate each and every law to determine its relevance. Everyone has heard the stories of the bizarre and outdated laws, ones that usually pop up on an especially slow news day. These include stories of places where it is illegal to play Scrabble while waiting for a politician to speak (Atwoodville, Connecticut) or where you may not have an ice cream cone in your back pocket at any time (Alabama)¹.

Politicians from both parties have suggested that red tape and regulations often get in the way of doing business and free markets, and I've heard many politicians and taxpayers complain about the complexity of the tax code. The knee jerk reaction is to force politicians to periodically re-examine these laws for relevance. Although, at first blush this may make sense, we'd suggest that this may not be the case.

How about legislation which were painful to pass, but necessary to the functioning of this country? Do we really want to revisit some of these highly contentious laws every few years? For example, for better or worse we've figured out how to choose which military bases close or which schools should be shuttered. Do we really want to revisit those decisions every few years?

I haven't been a politician, but I have worked in business. I understand that most problems start as solutions, and that inefficiencies creep into every system. I worked for a one Fortune-500 company, where there was a database group. They worked in a single room and if you needed an update to the database you filled out a form and placed it in an "in-box". Between other duties, they'd usually fulfill the request and give you a call that day or the next when the job was completed. Occasionally, if you had an urgent request, you'd poke your head in the room, and more often than not they'd do the work on the spot. Then there was a manager who was in need of position, and someone higher up had the bright idea that they should create a new position: Manager of the Database Group. This person was given a pager and cell phone, and would tell everyone he could be contacted day or night if there was an urgent data base request. He'd take the forms, ensure they were complete, prioritize them, assign the database administrator to the task, and follow-up when complete. My guess is that the Manager of the Database Group position exists to this day - and no one has ever questioned the need for it, although there was little value created by adding that role (it may have actually been detrimental since it added another layer of bureaucracy). Sometimes these inefficiencies are accidental and other times not. Railroad engines used to have the position of fireman, whose job it was to shove coal into the engine. Over time, as steam engines were replaced by diesel engines, there was no longer the need for the fireman. However, the railroad unions were afraid of losing employees, and continued to insist on every engine being fully staffed - steam or diesel.

Recognizing how these inefficiencies can creep into system, a management concept called "zero based budgeting" was developed. In many companies, budgets are based on the prior year's budget and staffing levels and adjusted slightly. So if your department had a $5m budget, you might get 10% more, and have a $5.5m budget. Zero based budgeting meant each department started with a blank sheet of paper and had to defend each and every cost decision. The purpose was to force managers to take a hard look at each and every process and position would eliminate any inefficiency that might have crept into the system with the goal of ultimately saving the company money and make it more nimble. However, there were two problems that should have been obvious: (1) managers had to think outside the box and be imaginative in coming up with new workflows; (2) this was very time consuming and expensive to do in real life. A third problem emerged only after a number of organizations completed this process: the cost savings weren't there.

To best understand this, imagine yourself a manager of a department. Now image the department as being the dishwasher in your kitchen. It has a very specific purpose, it (most likely) does what it's supposed to do, but there are clearly some inefficiency, some rattles, and the like. Now imagine having to take that dishwasher apart and rebuild it every year. There would be a period of time that the dishwasher doesn't function. There are inputs and outputs that other system require remain constant - the drain needs to stay where it is, the voltage in can't vary, the water in has to plug into the old pipe, and so on. So you take it apart, challenge the necessity of each part, and reassemble it. You have a preconceived notion of what works (the prior version) so it's difficult to get people to challenge the original design assumptions. And when you do, you may find out why the original design worked better than your new design. In addition, you may question, why do we need this gasket, or that screw - only to find when you reassemble it that they were critical components. Finally, the dishwasher has a fundamental purpose that doesn't change. You need a large cavity to put dishes where they would be sprayed with water. No matter what you do, any additional designs have those requirements and therefore limit your design ideas. Ultimately, people found that they ended up with a very similar dishwasher, at great expense, and with little benefit.

Thus stands the tax code, or laws. Although laws, such as one in Chico, CA where detonating a nuclear device within the city limits will result in a $500 fine, make the news², there are many fewer of these than one might first assume. Take the traffic laws. Are there some inefficient, dated, or completely irrelevant laws on the books? I'm sure if you looked hard enough there are laws that might date back to the time of horse and carriage, or which might have been enacted for some long forgotten specific reason, but these are few and far between. Although they may fill time on a slow news day, most of these can be identified and repealed without the need for a sunset clause. Forcing every politician to review and reenact every law would be incredibly time consuming and disruptive, while providing little benefit.

The second "common sense" recommendation is to simplify the tax code with a flat tax. As previously mentioned, most problems start as solutions. When we hear that about 47 percent will pay no federal income taxes³, or that the GAO releases a report showing that two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005⁴, we begin to get the call for a flat tax. And certainly it does have its appeal.

There are those that believe that our current tax code should be scrapped and replaced with a flat tax on consumption where everyone and every corporation pay an equal percentage of their income. There is a certain egalitarian appeal to this idea. Flat tax advocates claim that tax breaks were created by "special interests" and there is an appeal to stop the seemingly endless number of tax "loopholes". This solution is especially popular with the pure free market types - who believe that any government intervention distorts free markets and either intentionally or inadvertently picks market winners or losers (we'll leave the role of government for another blog and another day).

By getting rid of all the complexity of the existing tax code and going with a very much simplified tax, tax returns would be simple and could "fit on a postcard" (as proponents of a flat tax like to say). An entire industry of tax collectors, tax accountants, and tax lawyers would be eliminated. But there are a number of problems.

First this would create the equivalent of a Value Added Tax (VAT). Suppose part A is sold to manufacture B who assembles a unit and sells it to distributor C, who then sells it to the consumer. Under our current system, expenses are deducted from income and only profit is taxed. Under a flat tax, in this case, companies A, B, and C are all receiving income each time they sell their goods to the next company (or consumer) and would have to pay taxes on the full amount of the income - causing them to pass the "tax" in the form of higher prices onto the next company in the supply chain. You can image how much higher prices would be, especially for complex products. Secondly, the tax code is being used, along with regulations, to provide the carrot or stick to modify American's behaviors. Tax breaks for investment in R&D, for example, make us a more competitive as a nation, while higher tax rates for short term gains tends to reduce "flipping" and speculation of securities or properties. Another issue would be the effect on non-profit organizations. Without tax deductions for donors and with any income being taxed, non-profits and their do-good causes would be a costly causality. Furthermore, one must ask if companies or individuals would make investments and engage in costly transactions. Buying and selling a home, for example, would cause the selling event to be fully taxed, while providing no relief for the buying side of the transaction. Finally, either an attraction, or a detriment depending on your point of view, is that a flat tax would be regressive. That is, it would affect (measured as a differential from our current system) the poor much harder than it would the rich. Especially, when taking into account the effect of abolishing standard deductions, the abolishment of the inheritance (aka death) tax, and higher prices for essential goods and services. The American Dream requires social and economic mobility and already we are seeing the divide between the rich and the poor drift farther and farther apart. What effect would this have on this and is this desirable? There are those who would regard the widening gap merely financial Darwinism, and the natural result of a fully functional free market system. Others, including those of us at The-Party-of-Common-Sense.org, would argue that the real value in free markets is not having a winner, rather having competition, and therefore free market require certain rules and boundaries. Besides, one has to question, who are these people advocating a flat tax as being a more fair way of paying taxes? Could they be special interests who would lower their own taxes at the expense of others? Or are they purely altruistic individuals?

Thus the idea of scraping the tax code is not a good one. When people suggest this, we ask about the popular exemptions: things like tax breaks for medical benefits provided by companies, or tax allowances for children, and education expenses. As we are seeing today, people want a balanced budget and to reduce the debt, but when suggestions are made to slash big entitlement programs, a necessity if we are to balance the budget, people are overwhelmingly not in favor. The flat tax has a certain appeal until one realizes that we lose it as a tool to help shape public policy and when one realizes that it will hurt the masses more than the rich.

The last "common sense" proposal that we get often is one to cut US government budgets equally across the board. The appeal is that it would prevent "sacred cows" - programs that are arduously defended by special interests (such as certain defense programs) and others that have wide popular support (such as defense or Medicare). It, too, may appear to be an appealing proposal but consider if you needed to cut your own budget 10% and adopted this policy. How would you cut 10% off your mortgage or car payment? Renegotiating your car payments may require you to trade in your car and to cut 10% from your house mortgage would likely require going to the trouble of remortgaging your house. Does this make good financial sense? There are high transaction costs, and if you’re going to the trouble would it not make more sense to cut deeper? Or take your phone bill. You might be paying for a land line and several cell phones. Perhaps you pay $100/month on phone service, with $30 going to the land line and the rest to cell phones. Do you really need the land line? Cutting out the land line alone saves a whopping 30% of your phone budget. Identifying these low hanging fruit is much more effective than trying to cut a flat percentage across the board.

In the US budget, we can't stop paying interest on the outstanding debt, without the US going into default. So how would we cut 10% from servicing the debt? On the other hand, we may find entire programs or budgets that could cut completely. There are two main problems: one man's trash is another man's treasure. Cutting agricultural subsidies may make sense to the urban resident, but would be blaspheme to the independent farmer. Government funding of the arts, no matter how small, may seem to be not within the charter of the government's core responsibilities and an obvious choice to be cut. However, to others arts funding represents an insignificant portion of the budget but creates a huge return in quality of life. Does it make sense to cut IRS collections agents by 10%, when they actually increase tax revenues? The second problem is that politicians have for too long fostered the belief that simply eliminating waste, fraud, and abuse will solve the budget problem. Hyped by politicians for their own political purposes, news stories of thinks like the Alaska bridge to nowhere and a billion dollar design for a second engine on the F-35 leave people with the impression that this is the norm, not the exception.

The unfortunate truth of the matter is that this no simple answer to the budget and debt crisis. The problem is complex and will require a scalpel and not a saw. Each program must be looked at individually, sacrifice shared, and cuts made intelligently.

Today we examined three common sense solutions: automatic repeal of laws, a flat tax, and across the board budget cuts. To each we think have explored the cause and effect that these changes would bring and have rejected each as being impractical. We did this not in the spirit of debunking myths, but rather to be illustrative of the critical thinking process that we wish more voters would apply.

By no means are these the only "common sense" solution s that we hear. At The-Party-of-Common-Sense.org we regularly get these "common sense" solutions, many which at first blush sound like winners. However, once thought through we find many of these are most likely obvious and have been examined and rejected for any number of reasons. In no way do we wish to discourage people from sharing the ideas and these plans, however, the next you hear something that seems to make implicit sense we ask you to be critical. Test it in your mind. Why would or wouldn't this work? After all, there seems to be way to Americans that accept propaganda as "political fact" and fail to apply these critical thinking skills. A quick trip to Google can unearth opposite views or provide more depth to issues. It is our belief that we as nation would be much stronger and intelligent about the choices we made as a country and as a society if (as a whole) we were to be more thoughtful and critical of what we hear and read.

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Sources

¹ http://crazytopics.blogspot.com/2007/01/craziest-laws-in-america.html
² http://www.la.cityzine.com/2008/01/28/the-crazy-laws-of-california/
³ http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1 Note that articles like this usually state that these individuals are "paying no tax", everyone still pays payroll tax, sales tax and other taxes.
⁴ http://www.cbsnews.com/stories/2008/08/12/national/main4342535.shtml