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For employment gains, USA Inc. should minimize tax and regulatory uncertainties and encourage businesses to add workers. While hiring and R&D-related tax credits may add to near-term deficits, over time, they should drive job and GDP growth. Immigration reform could also help: A Federal Reserve study in 2010 shows that immigration does not take jobs from U.S.-born workers but boosts productivity and income per worker.

Changing tax policies.

Using another simple mechanical illustration, covering the 2010 budget deficit (excluding one-time charges) by taxes alone would mean doubling individual income tax rates across the board, to roughly 26-30% of gross income, we estimate. Such major tax increases would ultimately be self-defeating if they reduce private income and consumption. However, reducing tax expenditures and subsidies such as mortgage interest deductions would broaden the tax base and net up to $1.7 trillion in additional revenue over the next decade, per CBO. A tax based on consumption - like a value added tax (VAT) - could also redirect the economy toward savings and investment, though there would be drawbacks.

These issues are undoubtedly complex, and difficult decisions must be made. But inaction may be the greatest risk of all. The time to act is now, and our first responsibility as investors in USA Inc. is to understand the task at hand.

Our review finds serious challenges in USA Inc.’s financials. The ‘management team’ has created incentives to spend on healthcare, housing, and current consumption. At the margin, investing in productive capital, education, and technology – the very tools needed to compete in the global marketplace – has stagnated.

America’s Resources Allocated to Housing + Healthcare Nearly Doubled as a Percent of GDP Since 1965, While Household and Government Savings Fell Dramatically

Healthcare + Housing Spending vs. Net Household + Government Savings as % of GDP, 1965-2009

[Chart Data]
25%
20% - Housing + Healthcare Spending as % of GDP
15%
10% - Net Household + Government Savings as % of GDP
5%
0%
-5%
-10%

Labels: 11%, 7%, 20%, -9%
Axis: 1965, 1970, 1975, 1980, 1985, 1990, 1995, 2000, 2005

Note: Housing includes purchase, rent and home improvement. Government savings occur when government runs a surplus.
Source: BEA, CMS via Haver Analytics.
KP CB www.kpcb.com USA Inc. | Summary

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