Hensarling's Law
House Republican Study Committee Chairman Jeb Hensarling (R-Tex.) has an extraordinary idea: “The correction of tax mistakes should never be offset with tax increases.”
Hensarling's Law, which might also be called the Mulligan Act of 2007, came in response to a huge tax restructuring proposed on Oct. 25 by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.). The core of that plan would repeal the Alternative Minimum Tax and make up nearly $1 trillion in lost revenue over 10 years with an income tax surcharge and other tax hikes.
Since Hensarling deems the AMT to be an error, he argues that repealing the law ought to be free.
Except, of course, it isn't. If AMT repeal is not going to be financed with offsetting tax increases, there are only two other possibilities: We will have to find $1 trillion in spending cuts or the national debt will rise by over $1 trillion in the next decade. Expecting any other outcome is akin to Congress trying to make objects fall up by repealing of the law of gravity
While I await Hensarling's trillion dollar spending cut plan, I can't help but muse about how we might borrow to make up this lost revenue. One possibility might be Bad Idea Bonds or BIBs.
Congress would first certify by majority vote that a past tax hike was officially a Bad Idea. The Treasury would then be authorized to pool all BIBs. Tranches could be sold to hedge funds which, in turn, would peddle the paper to investors who could hold them through off-balance sheet subsidiaries located on a small but sunny Caribbean island. This would, of course, make the debt disappear. It all sounds so simple.
Or, we could call it the China Wealth Sovereign Fund Accumulation Law, because, under the 'borrow, don't tax' regime, we can accelerate borrowing from China and inflate its accumulation of huge stacks of dollars. Many of those dollars end up in these new Sovereign Funds – immense private equity funds owned by central governments. Currently, those funds are estimated to have about US$2 trillion in them, an amount projected to grow to about US$17 trillion by 2010 – a legacy of U.S. debt. That would be enough to buy every publicly-listed company in America…and still leave excess change to purchase arms for the Taliban or oil equipment for the government in the Sudan.
It is no surprise that the U.S. dollar is on a record downwards spiral. While families, cities, and states understand that income must offset expenditures, this appears to be an increasingly novel or Henslarian concept in Washington. Why raise taxes or offset tax cuts if the friendly loan window at the Central Bank of China has a drive-up window?
At some point, an increasing number of Emirates, foreign treasuries, and others will have to try to trade or dump their dollars for something that might appreciate and be backed. The Piper willl have to be paid.
What we can understand is that the ominous flow of borrowed dollars to nations which have divergent strategic interests is mortgaging risk.
Essentially, Chairman Rangel wants to reduce the drain and raise the offsetting revenues so that this country can determine how to spend those dollars–recognizing that China's interests, long-term, will be profoundly different than ours.
Even the Bible warns that “The borrower is slave to the lender.” Imagine a federal tax policy that accelerates such a prophecy.