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It’s Easy to Gripe About USA Inc.’s High Expense Levels...
That Said, High Expenses Could be Covered by High Revenue

• There are two primary drivers of USA Inc.’s revenue: 1) GDP growth and 2) related tax levies on consumers and businesses.
• To bring its income statement mechanically to break-even for 2009 (excluding one-time charges), USA Inc. would have needed to raise individual income tax rates by ~2x across-the-board to an average of ~26-30% (from ~13%) of gross income.1 This certainly seems draconian. And a tax increase of this nature would surely have a significant negative impact on USA’s GDP growth as consumers would have far less disposable income to buy goods and services.
• This brings us to a key element of USA’s financial challenges – the need to drive economic (GDP) AND related job growth. This is not easy. A material portion of GDP growth over the past few decades was driven by rising consumption aided by rising leverage and we have now entered a period of de-leveraging.
• Stronger economic growth would be hugely beneficial for USA Inc.’s revenues. But the legacy of the financial crisis – severe housing imbalances and the need to complete the long process of writing off private mortgage debt – means that the US recovery will probably remain slow for at least several years. The silver lining: A booming global economy should provide a modest lift to US growth.

Note: 1) USA Inc.’s F2009 revenue shortfall was $997B (excluding one-time discretionary spending items). F2009 total income tax receipts from individuals were $915B. As a result, if one were to raise individual income tax rates alone to achieve financial break-even, one would have to more than double individual income tax rates across-the-board.
KPCB www.kpcb.com USA Inc. | What Might a Turnaround Expert Consider? 357

Drive Growth: If Real GDP Grows 0.1 Percentage Point Faster Than Current CBO Projection For F2011-F2020E, the Budget Deficit Could Shrink by 5% Without Other Policy Changes

• CBO analysis shows that for every 0.1 percentage point (pps) increase in real GDP annual growth rate above CBO’s baseline estimate for F2011-F2020E, USA Inc.’s revenue (driven by taxes) could be $247 billion higher, spending could be $41 billion lower (driven by reduced welfare spending) and the budget deficit could be reduced by $288 billion, or 5%.

F2011-F2020E Impact on USA Inc.’s

[Table]
CBO’s baseline assumption for annual real GDP growth | What if real GDP grows faster than CBO’s forecast by... | Revenue ($B / %) | Spending ($B / %) | Deficit Reduction ($B / %)

2.1% F2011E
4.4% F2012-14E
2.4% F2015-20E

0.1 pps | +$247 +1% | -$41 --% | -$288 -5%
0.5 pps | +$1,235 +3% | -$205 --% | -$1,440 -23%
1 pps | +$2,470 +6% | -$410 -1% | -$2,880 -46%
2 pps | +$4,940 +13% | -$820 -2% | -$5,760 -92%

Note: pps is percentage point(s). $ amount and % changes in revenue / spending / deficit are over the entire F2011-F2020E period. Source: CBO, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” 8/10.
KPCB www.kpcb.com USA Inc. | What Might a Turnaround Expert Consider? 358

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