Independent Fiscal Authority Board Can Solve Debt Crisis

NEW YORK ( TheStreet Ratings) - America's debt crisis does not have to turn into a Shakespearean tragedy. The full faith and credit of the United States can be preserved by removing the politics from the decision to raise taxes.

Just as the Federal Reserve Board remains independent and sheltered from the harsh political winds by not needing Congressional or Presidential ratification of their monetary policy adjustments to money supply and interest rates, American would be well served by having an independent body setting fiscal policy on tax revenue collections.

One hundred years ago, the United States Congress, after seeing the damage caused to businesses by the panic of 1907, as well as the many other panics and crashes experienced in the 1800's, passed the Federal Reserve Act of 1913. They believed that an independent board authorized to set interest rates and control the supply of money would aid in business growth.

We need another independent body of government to set fiscal policy consistent with the U.S. Constitutional goal of preserving our union and supporting the general welfare by paying down and eventually eliminating our national debt. I, hereby name this body the Fiscal Authority Board, or FAB, because it is such a fabulous idea.

Why is FAB needed? There is little hope that the current structure of our federal government can balance a budget let alone pay off the U.S debt. An independent body with no social agenda setting fiscal policy may be required to balance our books.

Politicians, cowered by the thought of voter backlash, never want to raise taxes. They rationally fear that fulfilling their required duty to do what is in the best interest of the continued prosperity of our country will cost them their job in the next election.

President Obama made a campaign promise to cut the deficit. He would like both spending cuts and increases in tax revenue consistent with his other promises to protect Americans making less than $250 thousand a year and to collect more from tax sheltered, affluent Americans and corporations not paying their fair share. The President's grand compromise to raise the debt ceiling is reviled by both ends of the political spectrum. Plus, Mr. Obama had an opportunity to let the Bush tax cuts expire but made the political decision to continue the tax breaks.

Tea Party Caucus Republicans holding sway over the U.S. House of Representatives have pushed our government finances to the brink of optimal leverage to further their goal of dismantling the social safety nets of Medicare, Medicaid, and Social Security. The so-called "Cut, Cap, and Balance" plan virtually guarantees the end of these popular programs and makes future attempts to raise government revenue much more difficult by requiring super-majorities. An amendment that leads to only spending and never taxing guarantees the bankrupt destruction of our American experiment.

With the "Cut, Cap, and Balance" constitutional amendment plan, the House Republicans are clearly signaling their desire to abdicate the responsibility to ever raise tax revenue. That is a good idea. The responsibility for adjusting tax rates must be removed from Congress and the Presidency.

The creation of the Federal Reserve System did not require a constitutional amendment and neither would FAB.

No amount of spending cuts will be enough to pay back $14 trillion in public debt. No increased rate of economic growth will be enough to generate tax revenue if profitable corporations are subsidized while paying no taxes. Taxes collected as a share of the economy are at or near record low levels. Raising taxes on the poor is a dry well. If companies want customers, increasing the tax burden on the middle class would be counterproductive. Higher taxes on profitable companies and affluent Americans are the only way to pay off the debt.

The debt ceiling not being raised by Aug. 2nd triggers the nightmare scenario where investors in government debt start to demand higher and higher interest rates. This translates into hundreds of billions of dollars in extra interest paid to carry our country's debt load. Borrowing more money to pay that interest compounds the problem. Plus, automatic rate adjustments in all the debt instruments and other contracts tied to U.S. Treasury rates will send shock waves through the public.

The government paying more to borrow means American infrastructure will suffer as roads go unpaved, more bridges collapse, and levees burst from lack of maintenance. Budget cuts resulting in the firing of government workers such as teachers, police, and firefighters will hurt our children's future earning power while putting them are increased risk of crime and wild fires. In advance of this scenario, I recommend everyone read Sean Brodrick's book, The Ultimate Suburban Survivalist Guide.

Armageddon does not have to happen. There are solutions to be had as long as we accept the premise that there is a cost to living and doing business in the greatest country on earth. Great countries keep faith with their people by not defaulting on debt, social security, or other promised payments.

Our country is the greatest because any person with a dream and determination can start with nothing and build fabulous wealth. The grand bargain here is that a portion of that wealth is owed back to the state that made it possible to create the wealth. Companies that do profitable businesses in the U.S. also owe America a share of their prosperity.

Only taking in money and never giving back is economically immoral theft. High income individuals in illegal tax shelters and profitable companies that pull political strings to change laws to avoid paying taxes are willing to bankrupt America as long as their bottom line gets fatter. Independent Senator Bernie Sanders of Vermont recently disclosed a list of large U.S. companies collecting refunds from the IRS including Exxon Mobil ( XOM), Bank of America ( BAC), General Electric ( GE), Chevron ( CVX), Boeing ( BA), and Valero Energy ( VLO).

If elected politicians refuse to raise taxes on wealthy donors & large corporations, then we should move that responsibility to an independent group free to do the right thing for America.

The global debt markets still believe that the United States Treasury securities are among the highest quality in the world and therefore are charged low interest rates to borrow money. A leading-edge sign of big trouble would be investors demanding higher interest rates on U.S. government debt. Downgrades of U.S. debt by the other rating agencies could trigger higher rate demands.

How would FAB work? The Fiscal Authority Board would not decide what projects to fund. That would still be decided by the U.S. Congress and the President. FAB would tell the Executive and Legislative branches, "You have this much money to spend based on the current level of tax receipts. Should you decide to spend more, FAB will automatically raise taxes necessary to balance the spending." The principle here is very simple. Any project worth spending money on is worth taxing for. Congress can still declare "war" and spend whatever is necessary to defend our country. But, Congress will do so knowing that sending our troops into harm's way costs money and that FAB will immediately begin collecting that money from our companies and citizens though higher withholding amounts in anticipation of higher marginal rates.

Instead of collecting taxes, our Congress loves to give away money though the tax-code in the form of credits. This has got to stop. With the introduction of FAB, all spending through the tax code will need to be repealed and any tax provision that causes an outflow of money from the government must be banned. Previously benefiting organizations should have to justify why a direct spending bill should be written to give them money during this fiscal crisis.

All Internal Revenue Service responsibilities will be absorbed by FAB. So, proponents of abolishing the IRS may be pleased.

During times of robust economic expansion, when the growth in gross domestic product exceeds productivity growth, the FAB would set tax rates high enough to slowly begin paying down the debt. Conversely, the FAB would lower rates allowing deficits to add to the national debt during periods of economic contraction.

My independent Fiscal Authority Board framework idea is a good solution for which I have no delusion of imminent spontaneous existence. However, if an infinite number of monkeys type potential fiscal solutions then maybe we will end up better off than Hamlet.

-- Reported by Kevin Baker in Jupiter, Fla.

For additional Investment Research check out our Ratings Research Center.

Kevin Baker became the senior financial analyst for TheStreet Ratings upon the August 2006 acquisition of Weiss Ratings by, covering equity and mutual fund ratings. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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