Opinion: Both parties must face their third rails to solve the 'fiscal cliff'
With the U.S. election over, we went on national TV together recently to discuss the fiscal crisis, and to our great surprise, we found that we are largely in agreement on most big issues. If we can agree, then our political leaders should be able to as well.
The United States is running enormous and unsustainable budget deficits -- exceeding $1 trillion in each of the last four years -- and our national debt exceeds $16 trillion. There is no way to address this crisis without a comprehensive budget deal that both reins in spending and increases revenue, meaning that both parties will have to deal with their third rails: entitlements for Democrats and higher taxes for Republicans.
Such a grand bargain would have three major elements: higher taxes on wealthy folks like us; a reduction in loopholes and deductions, again primarily affecting the wealthy; and slowing the growth of entitlements, mainly Social Security and health care, which will affect a far broader swath of Americans.
Although there has been much discussion since the election about the general outlines of a deal, we have seen few concrete proposals -- everyone is in favor of shared sacrifice until it's his or her turn -- so allow us to make some.
Let's start with having the wealthy pay more taxes. We don't like the idea of our taxes going up, of course, but for a deal to happen, somebody has to say, "I'm willing to do my fair share -- in fact, more than my fair share." Who better than people like us, who are doing very well, to be the first to step forward?
We don't favor raising tax rates, but believe that Social Security taxes, which are levied on income only up to $110,100, making them highly regressive, should also be paid on all income (including unearned income) above $1 million, starting in 2013. The limit would go down by $100,000 each year such that there would be no cap whatsoever after 10 years. In addition, we believe the tax rate for capital gains and dividends, now 15 percent, should be raised to 20 to 25 percent. Finally, carried interest should be taxed as the regular income that it is.
Some argue that even if these tax increases are carried out, they won't eliminate the budget deficit. True, but think of the math this way: For every $1 billion not raised from the wealthy, that's equal to having 1 million average American families each pay an extra $1,000 in taxes. That would be real hardship families struggling to make ends meet.
As for deductions, rather than trying to tackle sacred cows such as the mortgage-interest deduction one by one, we endorse the proposal by Gov. Mitt Romney to put a hard cap on income-tax deductions at, say, $35,000.
Finally, we need to address entitlements, especially Social Security and health care, which consume more than half of the federal budget. We need to gradually raise the age of Social Security eligibility to 70 years old; after all, people who reach age 65 today live, on average, five years longer than they did when Social Security was created in 1935. Also, Social Security has to be means-tested. Everyone who paid into the system should get something back, but the amount should be based on need. The government can no longer afford a safety net for people who don't need it.
An even tougher problem is the explosive growth of health care costs. Medicare and Medicaid are already means-tested, so it makes little sense to raise the age of qualification because everyone is now covered under Obama's health care law anyway. And payroll taxes for health care are already uncapped, so the solution here rests on reining in the total growth of health care costs -- a tremendously difficult and complex task. Of course, we need to combat frivolous lawsuits and the large amounts of fraud, waste and unnecessary care, but we also need to have tough conversations about how much we can spend in certain areas, without silly talk of "death panels."
We are probably going to anger just about everyone with our ideas, but, to use a quotation from John F. Kennedy: "The hottest places in hell are reserved for those who, in times of great moral crisis, maintain their neutrality." We hope America's political leaders think similarly.
Whitney Tilson is the managing partner of T2 Partners LLC, the hedge fund, and is a member of Patriotic Millionaires. Anthony Scaramucci is a managing partner of SkyBridge Capital LLC and was one of the national finance chairmen for Mitt Romney's presidential campaign. This was written for Bloomberg View.¥