Posted: May 24, 2005 By: Clint Lovell

Subject: Current/Projected Tax Policy Failures

Comment: We are facing a fiscal reality that our current income tax revenue model of government funding is not equipped to handle. It is mathematically impossible for the current system to successfully deal with the impacts of the federal deficits, impact of entitlement program spending, impact of inflation, and impact of changing interest rates.

Historically, when total federal income taxes exceed 19 percent of GDP, the result has always been a recession (in the last 50 years, rates have exceeded 19% in 1969, 1981, and the 1998-2001 periods). Accordingly, this points to the patent inefficiency of the income tax revenue generation model as a way to sustain long-term government funding.

As a bankruptcy consultant, my job is to utilize structure finance solutions to resolve complicated insolvency problems that are not really that much different from the insolvency crisis facing our federal budgetary process. One of the things that I learned from working in structured finance is that when something no longer produces the desired result, then it is time to replace it with something that does/can/may produce the desired result.

In the case of our federal government funding system approach, we are attempting to layer a quasi-command economic system (that being the economy of the units of government) over the existing free-market economy of the private-sector that supports the government's economic structure and the inefficiencies become greatly magnified.

Since it is generally agreed that it is politically impossible to produce the deep budget cuts that would be required to sustain the current system, then you are left with only one (1) choice in fixing the system.

The units of government must abandon the role of an entity that arbitrarily taxes the output of the underlying economy that supports and assume the same role as the rest of the participants in the economy - that of a co-investor.

There is a way to create a high-yielding investment program approach for the benefit of all citizens and the units of government that is not inherently risky - even compared to the risk associated with government debt. The outcome of this approach would be to relieve the government of the pressure created by federal entitlement program spending and replace it with a model that fully funds these entitlement programs. Eventually, this approach would result in the government being able to replace the income tax model of government funding with the investment income model that would not be inherently inflationary. In point of fact, inflation would work for the government under this model (instead of against the government as is the present case).

To accomplish this task you only have to be intellectually honest enough to realize that the laws of mathematics and business economics are immutable, and therefore; the outcome of the current approach is one of certainty of failure. Once you realize the way you've beendoing things won't work you can begin to seriously consider those things that in fact may work.

To that end, I am attaching a file on an omnibus federal funding program known as "The Fix" for consideration in resolving the crisis we face. This is but a summary of the complete programmatic conceptual structure and analysis, but illustrates the economics and underlying requirements in fairly plain language.