The Road Less Traveled:

An Independent Path to Balance the Budget

Senator Marshall Wagner

March 2011

Sen. Marshall Wagner | March 2011

1. The President's Proposal

In 2009, our national debt was $9.3 trillion. Now, in 2011, we are looking at a possible
national debt of $12.4 trillion – a 33% increase in only two years under President
Campbell. The FY2010 budget deficit of $874 billion set a record for largest deficit in
U.S. History. Sadly enough, though, the FY2011 budget proposal more than doubles this
deficit. A $2 trillion deficit is practically unfathomable – the first trillion-dollar deficit in
US history, equal to more than 13% of GDP. To put this in perspective, this is about
twice the highest mark since World War II.

The path to trillion-dollar deficits is five-fold:

1. In the previous session of Congress, President Campbell and Congress passed a

massive $750 billion bailout of the financial industry - the largest corporate handout in
history.

2. President Campbell and Congress also supported a $470 billion raid of the Social
Security and Medicare trust funds – never minding the fact that Medicare was already
going to start running deficits by 2017 anyway.

3. The President and Congress have continued massive debt-funded defense budgets -
$718 billion for the Department of Defense in FY2010 alone, and $672 billion for
Defense and Homeland Security combined in FY2011. These two departments now
account for over 60% of discretionary spending in Campbell's FY2011 proposal, and
totals almost as much defense spending as the rest of the world combined.

4. No major attempts have been made to reduce spending or increase revenue to offset
these three initiatives.

5. While President Campbell and Congress have undertaken these initiatives, the recent
economic downturn has ensured an appreciable drop in federal revenue.

These are the four factors to blame for the sudden explosion in deficits under President
Campbell. Clearly, this path is not sustainable; too many more trillion-dollar deficits, and
we risk bankrupting our seniors, our country, and our children.

The purpose of this document is to reverse course, to declare that the era of borrow-
and-spend is over. We seek not to balance the budget at some point in the future - five
years, ten years, etc. - but now. By tackling the tax code, health care reform, pork,
corporate welfare, and other wasteful government spending, we can turn this deficit into a
surplus.

Sen. Marshall Wagner | March 2011

2. Overhauling the IRS Tax Code

Our tax code is a mess. Over seven million words long, it's twice as long as the Bible,
and most of that text consists of loopholes – exclusions, deductions, write-offs, credits
and tax expenditures. The result is that a small sliver enjoys massive tax benefits, while
working families suffer. As an illustration, here is a chart showing the average tax break
per person enjoyed by each tax bracket as of 2007:

For perspective, bear in mind that the federal poverty threshold for a family of four is
$20,000, less than the average tax break for the 33% bracket. Even more startling,
however, is the tax break for the 35% bracket - $111,671 a year, more than the annual
income for 85% of all households.

Granted, marginal rates have risen on higher brackets in recent years. However, this has
done nothing to curb the massive tax breaks enjoyed by the top two brackets. As we can
see, we need to overhaul our tax code so that we can enjoy lower rates for all, and
special preferences for none.

Recommended Reforms:

1. Tax adjusted gross income. This will allow us to eliminate the federal income tax for
individuals making less than $50,000 a year and for couples making less than $100,000 a
year – effectively eliminating the two bottom brackets. We can also lower the remaining
marginal rates down to 10%, 20%, 33%, and 36%.

2. Create a Family Tax Credit of $5,000 per household, plus $2,000 per person. Doing
this will cut the poverty rate down to less than 6%, the lowest rate in American history.

3. Simplify the business tax code. As with personal income, this step will eliminate
special loopholes and tax breaks, allowing us to lower the top marginal rate down to
30%; we will also be able to cut the top marginal rate on small businesses from 38%
down to 20%.

4. Replace FICA with a 0.17% transaction tax, to be levied on both the sender and the
recipient. This will replace the regressive 7.65% payroll tax on employer and employee,
and will actually make up for most of the Social Security and Medicare shortfalls.

Sen. Marshall Wagner | March 2011

These four steps combined will increase the median, four-person household's after-tax
income from $41,300 up to $60,600, an increase of 47%. On top of that, overall revenue
will total over $3.8 trillion, cutting the FY2011 deficit down to about $600 billion – still
too high, but significantly better than $2 trillion.

Sen. Marshall Wagner | March 2011

3. Health Care Reform

Our country faces two health care crises: out-of-control health care costs, and lack of
access to basic coverage.

Critics of health care reform often argue that it would be prohibitively expensive to
provide coverage for the 50 million uninsured and the millions more dissatisfied with
their current coverage. This criticism overlooks the fact that through a combination of
Big Pharma handouts in Medicare and the tax exclusion for employer-based health care,
we are already paying enough money to provide universal health insurance - we're just
not getting it.

I submit the following proposal to reduce waste, increase efficiency, improve the quality
of care and expand health care coverage to all:

1. Expand competition within Medicare Advantage and the Part D drug benefit, reduce
unintended overpayments, introduce malpractice reform, and increase focus on
preventative care and chronic care. Even after closing the Part D donut hole and
improving physician pay rates, this will still save us $85 billion in FY2011 on Medicare
expenses.

2. Cap the tax exclusion on employer-based health insurance at the 75th percentile of
income, and index for inflation. This will save $11 billion in FY2011, and should grow
to more than $100 billion per year by 2018.

3. Expand Medicare eligibility to all Americans. This will cost about $230 billion in
FY2011 if 100 million Americans enroll in Medicare; however, this will be offset by
$210 billion in savings on the subsidy for employer-based health insurance, $22 billion in
savings on the Medicare "safety net," and $51 billion in savings from the hidden costs
associated with treating the uninsured in the ER.

These three steps combined will produce a net savings of $152 billion in FY2011 alone,
and will place us on the road to long-term solvency by restraining the growth of health
care costs. In tandem with tax reform, this proposal will reduce our Y2011 budget deficit
to around $450 billion.

Sen. Marshall Wagner | March 2011

4. Corporate Welfare

While one can easily spot certain corporate handouts, it is difficult to figure out just how
much all these handouts total when combined. First of all, nobody knows for sure all the
handouts that exist; second off, it is nearly impossible to produce a universal definition of
"corporate handout." For present purposes, I will try to tackle only the most egregious
giveaways.

Many corporate handouts, such as the oft-cited $6 billion to oil companies, tend to be tax-
based. The previous tax code overhaul proposal already eliminates all of these
provisions. However, many handouts still remain as spending items in the federal
budget. The $750 billion financial bailout and subsidies to the biggest 10% of
agricultural corporations are the among most glaring examples of such spending items.

While it is difficult to compile an exhaustive list, the following should serve as a decent
starting-off point to end corporate welfare as we know it.

1. Eliminate subsidies for the biggest 10% of agricultural corporations, and double
subsidies for the remaining 90%. This will save about $50 billion in FY2011.

2. Scour the budget for more unnecessary subsidies: eliminate subsidies for the Airport
Improvement Program ($3.4 billion); cut funding for the Export-Import Bank ($2.7
billion); and reduce NASA subsidies of private sector aviation ($1 billion).

3. Reform the Financial Stabilization Act. As it stands now, the bill authorizes a $750
billion giveaway to Wall Street.

We can do better. Let's use that money to provide loans so homeowners can stave off
foreclosure, a la the Home Owner Loan Corporation of the 1930s. Such a program would
cost around $200 billion, but would come at no additional cost - the money has already
been appropriated.

For another $150 billion, we could provide start-up capital to establish state-wide stock
exchanges and community banks, providing a local alternative to Wall Street. This will
get capital and investments flowing through the economy again, only at a local level that
people can actually trust.

After that, we'll eliminate the remaining $400 billion worth of bailout money. There is
no reason why we should hand over a single cent to Wall Street.

If we enact these provisions, we can eliminate $800 billion in corporate handouts and cut
the deficit to zero.

Sen. Marshall Wagner | March 2011

5. Defense Budget

As noted earlier, proposed FY2011 spending on national defense would continue the
recent trend of the United States accounting for almost half of worldwide defense
spending.

There are several reasons for this proliferation of spending. The political implications of
cutting defense spending ensure that many pork projects go untouched, and we continue
to pay for many Cold War-era weapons programs that do nothing to protect as against
21st century non-state terrorist threats.

1. Modernize the military. While the military is well-equipped overall, specific sectors
are stretched too thin for non-conventional combat. The Navy needs to expand
amphibious forces, many expensive projects have crowded out the purchase of proven
machines, and the military needs about 20 more cargo carriers. These recommendations
will ensure that the military i well-equipped for modern, non-conventional warfare (and
at a net cost of only $7.9 billion).

• Renew the KC-X program and place on a 5-year course ($7 billion cost)
• Add 20 more CV-17 cargo carriers ($6.3 billion cost)
• Create a new Maritime Prepositioning Force (MPF) with two new LHA-6 class
ships, one Wasp-class LHD, six new supply and cargo ships (T-AKEs and T-
AKRs), three new mobile landing platforms, and two MPF supply ships ($3
billion cost)
• Replace ARH with MQ-1c ($1.1 billion cost)
• Replace DDG-1000 with DDG-51 ($700 million savings)

Sen. Marshall Wagner | March 2011

 • Focus missile defense tech development on near-term systems ($1.6 billion
savings)
• Replace the MV-22 Osprey with the CV-22, AW101, and H-92 ($1.8 billion
savings)
• Replace F-35 with F-16s and F/A-18s ($5.4 billion savings)

2. Reduce or cancel programs that are either out of date, or have fallen so far behind that
continuation would actually deny the troops the supplies they need. Such a list would
include the following programs, totaling about $27 billion for FY2011:

• Unproven Missile Defense Agency programs ($7 billion)

• Cancel Future Combat Systems Program ($4.1 billion)
• Cancel CVN-78 ($3.2 billion)
• Cancel F22A ($3 billion)
• Cancel Expeditionary Fighting Vehicle ($2.8 billion)
• Cancel Virginia Class submarine ($2.8 billion)
• Cancel production of the V-22 aircraft ($1.5 billion)
• Postpone purchase of new airborne refueling tankers ($1.4 billion)
• Cancel the Space-Based Radar Program ($1.2 billion)
• Cancel the LPD-26 ($800 million)

3. End the wars in Afghanistan and Iraq. We only have residual forces left in Iraq, and
the war in Afghanistan has gotten increasingly bloody. Moreover, taking out Al Qaeda is
far from the focus of either mission. This is not to say that cutting back involvement in
these countries would be easy. Indeed, in normal times, U.S. involvement might be
desirable. This, however, is no normal time. We have a $2 trillion deficit, and no way to
pay for these ongoing conflicts. Especially given that our security is not at stake in either
country, we cannot afford to mount more war debt on our children.

If we stage a gradual pull-out over 18 months, we can save about $90 in FY2011 and
$130 in FY2012.

4. Increase military efficiency. If we implement the Air Force restructuring plan ($2.4
billion), replace military personnel in some support positions with civilian employees of
DOD ($700 million), reverse organizational changes that have increased the Army's
support tail without increasing its combat tooth ($500 million), and ease restrictions on
contracting for depot maintenance ($100 million), we can save a total of $3.7 billion in
FY2011.

Combined, these changes will save $110 billion in FY2011, creating a $110 billion
surplus. In addition, if we run a surplus in FY2011, this will save us another $115 billion
in interest payments in FY2012.

Sen. Marshall Wagner | March 2011

6. Pork and Government Waste

The Republican Congress in the previous session deserves a lot of credit for abolishing
the earmark process, which at one point cost taxpayers over $13 billion annually.
However, we still need to account for earmarks that have already been made in the past,
and continue to cost billions of taxpayer dollars. Also, we need to undo the growth in the
federal bureaucracy which proliferated under the Bush administration.

At the same time, there are several worthwhile projects that, unfortunately, the federal
government can no longer afford to pay for. I have selected only the programs that I
would consider the most painless - not necessarily wasteful, but necessary to cut to
balance the budget.

1. Government reform. Reduce the number of federal contractors by 1,000,000, freeze

overhead expenses for five years, and prohibit the use of outside consultants; meanwhile,
cut overhead costs, prohibit no-bid contracts, and reduce equipment purchases. Such an
agenda will save $56 billion in FY2011 and help restore the federal bureaucracy back to
2001 levels.

2. Repeal the highway earmarks in TEA-LU, saving $5 billion per year.

3. Cut or restructure programs that we can do without:

• Privatize the Corps of Engineers ($7.2 billion)

• Convert the the air traffic control component of the Federal Aviation Administration
(FAA) into an independent government corporation ($10.4 billion)
• Eliminate the Agency for International Development ($3.8 billion)
• Sell part of the government's direct loan portfolio to the private section ($7 billion)
• Sell most of the government's 602,000 non-tactical, non-postal vehicles ($2.7 billion)

These cuts will save a total of $31 billion dollars; this gives us a grand total of $92 billion
in FY2011, expanding the surplus to $200 billion.

Sen. Marshall Wagner | March 2011

 Conclusion: A Commitment to the American People

President Campbell's FY2011 budget proposal is not just a stray misstep; it reflects the
culmination of a decade's worth of borrow-and-spend economics. This mistaken theory
has already weakened our dollar, and threatens to leave our children with a debt they
cannot possibly pay off.

Now is the time for us to adopt a new path – one that makes the necessary investments in
tax relief, health care, and national defense without putting the bill off for another day.

Moreover, this alternative budget proposal reflects my own personal commitment to the
my constituents in Vermont and to the American people. When I was elected, I promised
my constituents that my work as their senator would never add to our national debt. I
intend to keep that promise.

I will push for every single recommendation in this alternative budget proposal.
Obviously, since the proposal would create a large surplus, there is some wiggle room
and not every measure needs to get passed. However, I cannot and will not vote for any
budget that fails to reduce our deficit from FY2010 levels; to do so is to tread the well-
worn path of high deficits, more debt, high interest rates and a weak dollar.

We can do better; we deserve better. My hope is to lead us towards that better future.

Sen. Marshall Wagner | March 2011