How the Government Will Save $4 Trillion in 10 Years

Cut. Slash. Reform.

The co-chairs of the president's deficit-reduction commission issued a report yesterday with more than 50 proposals designed to cut nearly $4 trillion from the federal deficit over the next decade.

Here are a few of its major selling points. 

1. Taxes
A big misconception about the recent deficits is that they've been entirely caused by runaway spending. They haven't. Lost tax revenue -- a function of tax cuts from the stimulus package and income lost to the recession -- accounts for the majority of the hole.

The commission addresses this reality in a pragmatic way. It proposes raising tax revenue -- almost $1 trillion over the next decade -- by dramatically lowering tax rates, while reducing or eliminating tax deductions. Here are a few different scenarios:

Scenario

Bottom Tax Bracket

Middle Tax Bracket

Top Tax Bracket

Corporate Tax Rate

Current 2010 tax rates

10%-15%

25%-28%

33%-35%

35%

Scheduled 2011 tax rates if Bush tax cuts allowed to expire

15%

28%-31%

36%-39.6%

35%

Proposed tax rates if all deductions eliminated

8%

14%

23%

26%

Tax rates if child tax credit and earned income tax credit kept

9%

15%

24%

26%

Tax rates with child, earned income, reformed deduction for mortgage interest and health insurance, 80% of current deduction on retirement contributions, and tax corporations only on domestically earned income

12%

20%

27%

27%

Tax rates if child, earned income, mortgage, health, retirement deductions kept, and tax corporations only on domestically earned income

13%

21%

28%

28%

Source: President's Budget Commission.

If you pay mortgage interest, get employer-provided health care, and make 401(k) contributions, that's fine and great, but you wouldn't be able to deduct them from your taxes under the most extreme proposal. To make up for it, some marginal tax rates would be cut in half.

This is, I think, the most sensible way to engage in much-needed tax reform: Broaden the tax base by axing loopholes and deductions, but lower the tax rate in the process. It's a flatter, fairer tax, and it raises a ton more revenue. People would put up with that.

2. Defense spending
Earlier this year, the Pentagon proposed cutting $100 billion in wasteful spending from its budget over the next five years, but plowing that money back into other defense projects (a fascinating form of "savings" calculus).

The president's commission says no -- just cut $100 billion and be done with it.

A few areas it reckons can be slashed (with annual savings by 2015):

  1. Freeze noncombat military pay at 2011 levels for 3 years ($9.2 billion).
  2. Reduce procurement by 15% ($20 billion).
  3. Reduce overseas bases by one-third ($8.5 billion).
  4. Double proposed cuts to contractors ($5.4 billion).

This would be a rare jab to companies like Lockheed Martin (NYSE: LMT  ) , Raytheon (NYSE: RTN  ) , and Boeing (NYSE: BA  ) , but that's reality. Defense makes up nearly 20% of federal spending. It's hard to have a serious discussion about deficit reduction without bringing it into the mix.

3. Social Security & Medicare
The commission proposes reducing Social Security benefits for wealthier workers, and raising the maximum level of wages subject to Social Security taxes, both phased in incrementally until 2050. It would also reconfigure how cost-of-living adjustments are calculated, and increase the retirement age to 68 by 2050 and 69 by 2075, while allowing earlier retirement for those with physically demanding jobs.

These might not seem like draconian cuts. And they're not. But Social Security doesn't need to be shaken upside-down to become fiscally solvent. A few fairly mild tweaks initiated over several decades, and the program becomes permanently viable.

Medicare is by far the bigger problem. The commission's proposal for overhauling health care is meaty, but it boils down to a few broad ideas:

  1. Pay doctors and providers less.
  2. Overhaul the fee-for-service system.
  3. Figure out tort reform -- reduce the cost of defensive medicine.
  4. Increase cost-sharing by broadening premiums, making patients more cost-conscious.
  5. Require pharmaceutical companies to provide rebates on name-brand drugs as part of Medicare Part D.

These proposals will be shocks for both doctors and companies like Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) . But they address the heart of Medicare's flaw -- that it pays for too much care requested by patients and providers who couldn't care less about cost.

4. Miscellaneous fat
In the long term, the budget deficit is about rising health-care costs and nothing else. Blogger Kevin Drum correctly writes: "Any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on health care."

But there are folds of fat to cut over the medium run. The commission found several areas of non-defense discretionary spending that can be deep-sixed, including (with annual savings by 2015):

  • Reduce unnecessary printing costs ($400 million).
  • Reduce Congressional and White House budgets by 15% ($800 million).
  • Reduce 250,000 nondefense contractors ($18.4 billion).
  • Eliminate funding for commercial spaceflight ($1.2 billion).
  • Sell excess federal property ($1 billion).

(While you're busy picking your chin up off the floor from waste in printing costs, here's another fun fact: The Washington State Employment Security Department just announced that it'll save $115,000 a year by changing the color of its mailing envelopes from gold to white.)

Just get it done
"The problem is real -- the solution is painful -- there's no easy way out -- everything must be on the table -- and Washington must lead," says the commission.

That last part, leadership, is the biggest impediment to getting any of this done. The commission's proposals can bring long-term deficits back to sustainable levels. The question is, are they politically feasible for politicians whose definition of long-term is the time between now and the next election?

You tell me.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Fool owns shares of Legg. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 12, 2010, at 11:56 AM, TheDumbMoney wrote:

    ''The question is, are they politically feasible for politicians whose definition of long-term is the time between now and the next election?"

    No. Their hatred of this proposal might be the only thing Boehner and Pelosi could ever hold a joint press conference on. Nobody in Washington right now is interested in a real solution, with the possible exception of the President. Boehner has tea partiers advocating just getting rid of the IRS. Pelosi has a base that says the fed should just keep making money to pay for things (I'm not kidding, that was in a The New Republic Op-Ed a few days ago).

    Also, just a note: suddenly the Mortgage Interest Rate deduction has come into bipartisan cross-hairs. I'm biased, since I have a mortgage. But I just think it's important to note: that deduction, as far as I'm aware, is the only major tax benefit or tax that is cost-of-living indexed. (Because people in expensive areas pay more for houses, they get a bigger benefit.) In a world in which $100,000 in income is taxed the same in New York City in which it is taxed in Cleveland, there is something to be said for this.

  • Report this Comment On November 12, 2010, at 12:17 PM, TangoSukka wrote:

    Washington seems more concerned with struggling for and gaining power than solving problems. They seem to spend their time blaming the other side of the aisle with ambiguous claims/attacks and equally ambiguous solutions that only their side can provide. If they don’t have the guts to fix Medicare and Social Security now, they will have the ability to do it when a true budget crisis arrives.

  • Report this Comment On November 12, 2010, at 12:29 PM, FutureMonkey wrote:

    Thanks Morgan. I was waiting to read your take on the Commissions proposal.

    Seems balanced, rational, and factually based, and therefore totally unacceptable to either political party.

    Special interest groups are already lining up to protect their...uh...special interests.

    AARP -- "oppose"

    AFL-CIO -- "Drop dead"

    Mortgage Banker Association -- "Now is not the time"

    Aerospace Industries Association -- "Grave concerns...abandon security of future generations"

    I'd happily give up my mortage interest deduction and every other itemized deduction in exchange for the proposed income tax rate. I'd also prefer single page filing for every person and get rid of this married, filing jointly nonsense. Think of the savings in productivity from time spent filing out returns!

    I can imagine the howls from Tax Preparers Association.

  • Report this Comment On November 12, 2010, at 12:29 PM, simplicius wrote:

    I would urge the President to condemn this proposal immediately, disband the Commission, and re-form a Commission that does not lean to the Far Right as this one obviously does. My solution? Repeal the 1981 Reagan Tax Cuts, repeal Nafta, re-institute Tariffs to protect US Industry, Nationalize the Oil Companies, repeal Glass-Steagal. This would benefit about 98% of Americans, and the other 2% can relocate to Dubai for all I care.

  • Report this Comment On November 12, 2010, at 12:47 PM, LearnerINC wrote:

    I wonder how much we could save if our government in Washington was forced to operate under the same healthcare and pay scales as the rest of us, and/or had to save for retirement with 401K's, or the like, as the rest of us do instead of automatically being taken care of at or above your exit salary for the rest of your life. Things may be different if constituents decided how much of a salary raise they accrued over time instead of voting themselves phenominal increases on a regular basis. Include yourselves in the deal while your telling me I could take a few percentage points off my taxes, I have very few deductions left anyway....

  • Report this Comment On November 12, 2010, at 12:52 PM, PhulishMortal wrote:

    I don't think I could put it any better than FutureMonkey did (except I'd just as soon keep the "married, filing jointly nonsense"). There are precious few career politicians who are interested in rational and balanced policies.

  • Report this Comment On November 12, 2010, at 1:23 PM, stan8331 wrote:

    Excellent analysis of our predicament, although it would have been more accurate for the title to read "How the Government COULD Save $4 Trillion in 10 Years, But Won't".

    Dumberthanafool is right, Boehner and Pelosi will be united in their opposition to any plan that balances pain equally across the political spectrum. And the author is correct in pointing out that any proposed solution that fails to provide a path to dramatic reduction of health care costs is not to be taken seriously.

    It's hard to blame the politicians, because we do tend to fire anyone who attempts to tell us the truth. The thing that drives me nuts is that by delaying action, chasing after phony culprits like illegal aliens, we are greatly increasing the level of trauma that our society will eventually suffer when baby boomer Medicare really kicks in.

  • Report this Comment On November 12, 2010, at 1:25 PM, MONEYonBLACK wrote:

    LearnerINC,

    I understand your anger at Washington. As a federal government employee (I work nights so please don't claim I am wasting time at work) no one sees the waste more than I do. I think my area of the budget could take a 15-20% cut easily. That said, you should be aware that federal healthcare (while nice) isn't as lavish as you would think (we couldn't even purchase dental and vision until a few years ago!).

    Also while we still have pensions (and I am very grateful for that ) they will not pay out anywhere near your final salary or greater. 1% per year of high three salary averaged (no overtime or bonuses included in that). If you started at 25 and retired at 65 you would receive 44% of your final salary (escalates to 1.1% per year after 30 years of service).

    The debt commission is asking to freeze my salary for 3 years - I am ok with that. That said, the government should actually seek to move half of the current government jobs out of DC to lower cost of living areas. I would be fine with a 20% pay cut if my agency were located in a place where a 3 BR home goes for 600K +.

  • Report this Comment On November 12, 2010, at 1:43 PM, PeyDaFool wrote:

    "A big misconception about the recent deficits is that they've been entirely caused by runaway spending. They haven't. Lost tax revenue...accounts for the majority of the hole."

    Morgan,

    I'm so glad you've been hammering this point through recently. It's a very important distinction and I believe one that your readers may incorrectly believe is not true.

  • Report this Comment On November 12, 2010, at 2:08 PM, CrimsonXFool wrote:

    Fantastic article. I particularly liked the emphasis that we are not bringing in enough money, and the Byzantine tax code needs to change.

    Cynically, I wait for the Republicans to criticize this plan. Optimistically, I hope they sign on to, you know, help our government onto a sustainable path.

  • Report this Comment On November 12, 2010, at 2:12 PM, lution wrote:

    MONEYonBLACK,

    LearnerINC's post was aimed at the people in congress since they are the ones that get to vote on their own pay increases, benefits, etc.

    Basically telling them that they should have to live by the same rules they make you live under.

    -Lution

  • Report this Comment On November 12, 2010, at 2:36 PM, ellipsoid wrote:

    Nearly 2/3 of americans take the standard deduction instead of itemization to include mortgage interest deduction. Since the backlash from losing this deduction is reported to be high, it seems to me that many people don't even understand that they are in fact not getting and advantage from the deduction.

    For those that take the mortgage interest deduction, the benefit is probably much less than they think it is. To caluclate the benefit, most people forget to subract the standard deduction from the amount of interest that they are paying o the home. Ex. If you have an above median home of $250,000 and pay $15,000 in interest per year based on 6% interest. The benefit of the mortgage interest tax deduction is $15,000 - standard deduction (married) $11,400 = $3600 x marginal tax rate (28%) = $1008. + the ability to itemize other deductions such as charitible giving.

    $1K is definately nothing to sneeze at. However, most people assume that this is a HUGE deduction. It really is not that HUGE and really only benefits the upper income brackets that can afford homes that require interest payments in excess of the standard deduction....

  • Report this Comment On November 12, 2010, at 3:00 PM, jimhull4 wrote:

    On reading this proposal yesterday I immediately wrote to Boles and said that this was a balanced approach to get this off the ground and these two gents appear to be the only 2 in the congress that are grown ups! I also said I doubted if there were any more grownups in congress to work at the solution. I see by this mornings paper i wasa right. Just 2 guys!!@!!!f

    This is extremely sad as this body should be smart and resourcefull to propose alternates but with must be balanced ones or nothing is going to be any different from the only one answer and that is mine group thought.

    Grow up people......I don't see any responsible response so far.....just more of the same republician or democratic single mindness!!!!!

  • Report this Comment On November 12, 2010, at 3:41 PM, dfrizzle03 wrote:

    i think the tax proposition would work effectively. not only would it force all Americans to pay tax, but it would make the tax code simpler. you make this much income, you pay this much tax, period.

    what better way to pull a demographically torn country back together. this change to the tax code would not only produce more income, but it would help unify our country. obviously this has nothing to do with the theme of the motley fool, investing, but this tax proposition could also cool feelings of hatred in this country. what better way to collectively fuse our citizens to the same cause of rebuilding America on multiple fronts than to make sure all Americans contribute to the effort??? wealthy Americans are frustrated that close to 50% of their fellow Americans don't pay tax. well, how do you think wealthy Americans will feel if they get a flat 25% tax notice when they also know that every other american out there is paying tax alongside them...

    and now for the point that goes with the motley fool theme of investing. one thing that i think should accompany any tax changes for the American people is the idea that anyone making under $50,000 should be able to capture capital gains and dividends from investments with no tax liability!! all Americans, no matter how much income they make should invest their money but lower income individuals are hindered, not only by less investment sophistication but also the taxes that are associated with investing. this change could encourage all Americans, no matter what their income, to invest more of their money and ultimately become a more financially responsible and investment savvy citizen. having a strong sense of financial responsibility and becoming a more financially suave individual is something that every American should strive to be. a little nudge from the government could help to reform the American people from the inside out.

  • Report this Comment On November 12, 2010, at 3:44 PM, tobernator1000 wrote:

    Democrats want to raise taxes, but don't want to cut spending. Republicans want to cut spending, but don't want to raise taxes. The correct compromise is to do a little of both (because we need both to fix this thing). The more likely compromise is to do neither, because the first compromise will get them voted out of office.

    Maybe we can start a movement of people writing to their representatives and explaining to them that, just this year, it's ok for Democrats to cut spending and for Republicans to raise taxes and we won't vote them out of office for it. After we've fixed this we can go back to partisan bickering as usual.

  • Report this Comment On November 12, 2010, at 5:07 PM, eldetorre wrote:

    The mortgage deduction "...is the only major tax benefit or tax that is cost-of-living indexed."

    The mortgage deduction has always been unfair as it benefits people more in upper tax brackets purchasing more expensive homes. We have a mortgage too. We are of modest means and purchased a modest home with a fairly good sized down payment.

    Since we must itemize, and lose the standard deduction, to get the mortgage deduction we found that we are worse off than taking the standard deduction.

  • Report this Comment On November 12, 2010, at 5:12 PM, eldetorre wrote:

    44% of your final salary for a pension?! That is way too much considering you'll be getting social security too!

  • Report this Comment On November 12, 2010, at 5:16 PM, PeterVanKan wrote:

    Isn't it amazing, and very very sad, that the simplest, best and most rewarding way of reducing the deficit is not even mentioned ?

    Reduce trillions by LIVING HEALTHILY.

    Eat organic, a lot of raw, practise yoga or something like that, move, meditate, be happy and be unafraid to die when your time comes.

    The medical system is sick because everyone involved makes money when people are sick instead of healthy.

  • Report this Comment On November 12, 2010, at 6:58 PM, ironyworks wrote:

    Simplifying the tax code is imperative;

    But a flat tax is absurd.

    An aggressive progressive income tax rate ( restoration)

    would have the least impact on quality of life, while dropping deductions entirely.

    Between the IRS savings and the proposals in the article,

    that ought to wrap it up nicely.

    Opposed to this is the present fact that money buys legislative votes...something repugnant to a democracy.

  • Report this Comment On November 12, 2010, at 8:23 PM, rsinj wrote:

    There is a common misconception that doctors are overpaid. The fact of the matter is that HMOs, along with the insurance companies and lawyers have f*cked the system up. Most doctors today are not overpaid for the work they do, the amount of work they do or the amount of work/education/experience/cost that's it's taken to get to their current position. Being married to a doctor, and seeing first hand how the system works, I know this for a fact.

    If the government seeks to blindly reduce doctor pay, then the situation which we've all dealt with in even getting to see a doctor is going to get much worse.

    If you lower doctor pay, then you will automatically lose a certain percentage because they are just going to leave the profession. It's gotten to that point. In the current environment, the incentive for a student to make the education/time/cost commitment to get in to the profession is not going to be justified if the monetary payback is not going to provide a good living and enable them to payback the loans needed to get the necessary training and credentials.

    There's also a problem in society today, where people think they have the ability to tell others what is a "fair" salary and anyone who makes more than them, or above what they believe is too much, is evil and must have their pay lowered. Unfortunately, the human body is not like a car, which comes with a service manual where any high school graduate can fix it. Things will get to a point where doctors will begin to refuse service because an insurance provider won't provide sufficient compensation for work, and patients are not going to want to pay more.

    Government should be very careful what they do in this area, because it can backfire in a major way, and costs may increase because they get an unintended effect. But, then, considering the way that government "saves" money, this wouldn't be any surprise to see costs increase as a result of what their intent is.

  • Report this Comment On November 12, 2010, at 8:57 PM, PsycheDaddy wrote:

    Why not sell off about $15 Trillion worth of state and federal land to pay off the national debt?

  • Report this Comment On November 12, 2010, at 9:02 PM, kbeck02 wrote:

    simplicius wrote: …repeal Glass-Steagal [sic].

    The Glass–Steagall Act of 1933 was repealed and replaced with something called The Gramm-Leach-Bliley Act in 1999. Signed into law by Bill Clinton on 12 NOV. What we need to do is repeal G-L-B and replace that with the original 1933 version.

    Someone needs to get control over Freddie Mac and Fannie Mae. No one is doing anything about the real reason for all of these foreclosures, which, BTW are still going on full steam ahead even though you never see this in the media. Rumors say the banks are still operating exactly the way they did before the crash. Loans are still being sold to MERS. Buyers beware. You can't get taxes from people who are unemployed, or living on the street, or in their car.

    Not to mention that the big banks are sucking the treasury dry with the fees they are charging to “service” the FM and FM loans/foreclosures. The US tax payers own the houses being foreclosed on. You need to talk to some of the people who are losing their houses, and real estate agents, about how all of this is being mishandled by the banks. Mishandled so the banks can keep raking in fees. Is anyone even keeping track of the cost to the treasure of this? It has to be huge.

    I totally agree with LearnerINC. It is way past time to make Congress operate under their own laws. You know, the laws we all have to live under. They are paid way too much money, and they get way too many perks (never mind the insider trading…remember Martha Stewart… She should have gone to work with a MOC, she would have been home free!). Make them pay for their own retirements, make them go on Social Security and Medicare. Life might be different for all of us if that would happen.

    There are already MDs who refuse to take Medicare patients, and MDs who opt out of Insurance Co. "preferred provider" agreements.

    "...close to 50% of their fellow Americans don't pay tax"... dfrizzle03 do you have a reference for this number?

  • Report this Comment On November 12, 2010, at 10:20 PM, devoish wrote:

    i can get on board all of this, although i don't believe tort reform is worth much to anyone but the insurers. They can lower their costs, but are under no obligation to pass those savings on to Doctors. If everything must be on the table, How about a flat tax on corporate income, and no business expense deductions. I'd like to see what a corporate lunch, corporate jet and corporate owned skybox at the new Yankee stadium is worth without taxpayer backing. Everything could also include ending the subsidies the gas and oil industry have enjoyed for decades.

  • Report this Comment On November 12, 2010, at 11:08 PM, MartinSamuelson wrote:

    The mortgage interest deduction needs to be eliminated for numerous reasons, but that will be politically difficult. To make it politically feasible, why not eliminate the deduction only for mortgages originated after, say, 2012? This will allow for some recovery of the market and will keep the tax break for existing homeowners.

  • Report this Comment On November 12, 2010, at 11:18 PM, starbucks4ever wrote:

    "To make it politically feasible, why not eliminate the deduction only for mortgages originated after, say, 2012? "

    Because members of Congress took their mortgages prior to 2012.

  • Report this Comment On November 12, 2010, at 11:36 PM, modeltim wrote:

    A study of international health care spending levels published in the health policy journal Health Affairs in the year 2000 found that the U.S. spends substantially more on health care than any other country in the Organization for Economic Co-operation and Development (OECD), and that the use of health care services in the U.S. is below the OECD median by most measures. The authors of the study conclude that the prices paid for health care services are much higher in the U.S.

    I find it rather peculiar that there is no mention of these facts in this article. The reason hc services are so much more expensive here than in other modern industrialized countries is because they provide universal healthcare coverage to all of their citizens and these systems on average are much more efficient and equitable in the "land of the free". In effect, there is no healthcare system in the United States, it is a combined "system" of disease management and cost containment for the benefit of the executives of the giant insurers and Big Pharma who run a non-competitive oligarcy resulting in unconscionable inequities and gross waste and inefficiencies. The CEO of UNH (United Health Group) made $1.7 billion in executive compensation in 2007 while it was reported this week (11/9/10) by the U.S. Centers for Disease Control that more than 59 million Americans had no health insurance for at least part of 2010, an increase of 4 million from the previous year.

    Of all the forms of inequality, injustice in health care is the most shocking and inhumane.

    -Martin Luther King

    Aside from the moral issues, this glaringly poor performance of U.S. health care is one of the major reasons why our manufacturers and other large domestic producers of goods and services have so much trouble competing in the global marketplace. Sometimes, I'd say most of the time, doing the right thing is also the smart thing from a purely business perspective.

  • Report this Comment On November 13, 2010, at 7:52 AM, ellinroc wrote:

    This proposal is right on!

    Let's get it done.

    Contact congress!!

  • Report this Comment On November 13, 2010, at 8:55 AM, TigerPack1 wrote:

    This gives the greatest and ONLY cover to both Democrats and Republicans to actually vote YES on deficit reduction. They will let this opportunity pass them by, no doubt about it.

    VOTE YES, and let's get back to business and growing our economy!!!!!!!!

    I suspect Treasury debt credit downgrades, double-dip recession and HYPERINFLATION are what we have to look forward to in 2011-12, as our elected clueless politicians follow BEN into the abyss of easy, cheap, dishonest dealings. We are out of time to fix things, it appears to me, through any type of honest manner, like proposed by this deficit cutting commission appointed by Obama. To bad for U.S.!!!!

    I hope American democracy can survive until the next 'scheduled' election in 2012! It may not.

    -Tiger's Two Cents

  • Report this Comment On November 13, 2010, at 8:59 AM, TigerPack1 wrote:

    PsycheDaddy above is correct... The U.S. owns a tremendous amount of valuable building, equipment and land on its asset side of the balance sheet.

    We will have to look into a serious restructuring of our government's finances the next few years, including asset sales to raise capital and pay down debt. Selling Alaska to China is high on TickRTapeKing's list!

    -TigerPack

  • Report this Comment On November 13, 2010, at 9:02 AM, TigerPack1 wrote:

    The real blueprint on how to actually fix things was put out December 2009 by TickRTapeKing on his CAPS blog: http://caps.fool.com/Blogs/how-to-fix-america/302070

  • Report this Comment On November 13, 2010, at 11:20 AM, xetn wrote:
  • Report this Comment On November 13, 2010, at 12:33 PM, aleax wrote:

    Mortgage interest deduction was at least as important in Great Britain as it is in the US -- yet in 1988 Chancellor Lawson (under Prime Minister Margaret Thatcher, Conservative) started slashing it, his successors continued slashing, and by 1999 Chancellor Brown (under Prime Minister Tony Blair, Labour) finished the job altogether.

    How the Brits collectively managed this huge political feat, I'm not sure -- it may matter that it took Chancellors and Prime Ministers from both major parties, and that it was a 12-years process rather than a single "big bang".

    But it's not as if the British system is any more prone to "bipartisanship" than the US -- rivalry between the two main parties is always fierce and furious. (As a citizen of Italy, with its own dysfunctional politics, and a permanent resident of the US now, of other European countries in the past, I look at these things as a "somewhat-outside observer", I guess... even though I *do* pay taxes in the US!-).

    Hypothesis: maybe it matters that there are just about NO checks and balances in the British political system (the very opposite of the many c&b designed into the American Constitution, and the many more piled on by procedural tradition even though nowhere to be found in the Constitution, such as the Senate's 60-vote "cloture" threshold rather than simple majority) -- the c&b's-caused inertia may make the US system more stable, for good or for ill, and the UK one more dynamic, ditto.

    Be that as it may, I think removing mortgage tax deduction was one of the best accomplishments of the Conservative AND Labour governments in question. I also have a mortgage, and live in one of the costliest-housing regions (Silicon Valley), but my own self-interest in the matter does NOT blind me to the absurdity of the government subsidizing my decision to live here (while somebody choosing to live in way-cheaper-housing places, such as Detroit, all other things being equal will get much less). If any government subsidy is ever warranted (a philosophically moot point, I know), surely it should be one that encourages STABILIZING (broadly speaking "counter-cyclical") behavior, not the reverse (i.e., if any housing subsidy at all is affordable and warranted, which may not be the case, surely it should go to help save America's heartland by making it a bit MORE desirable to live in, say, Detroit, rather than prop up prices in, say, Silicon Valley, or the nice parts of DC and its suburbs).

    So I'm all in favor of the commission's proposal to remove tax-expense subsidies for costly mortgages (and most of their other proposed expense reductions, too). Worrisome parts to me are the ideas of removing the EITC (which I consider the best bipartisan tax accomplishment in recent US history, much like removing MIRAS was in the UK) and favored tax treatment of long-term capital gains and qualified dividends (which, by favoring longer-term investors over day-traders, now helps inject SOME modest but desperately-needed measure of stability in the frothily-churning markets). I'm not thinking of impacts to my own pocketbook (I'd be personally unaffected by the removal of EITC, modestly affected by having long-term gains taxed as ordinary income), but of what the incentives from such removals portend for the economy as a whole.

    Ah well, as many have commented, the fury of left AND right (and many special interest groups such as charities, mortgage lenders, trial lawyers, doctors, &c) make it essentially impossible for these proposals to pass (and therefore for the deficit to be substantially cut in any way, no matter how much voters insist it's their priority... it never really IS, when it hits their pocketbook one way or another!-).

  • Report this Comment On November 13, 2010, at 12:57 PM, JeanDavid wrote:

    Paying doctors less does not seem feasible to me. I am already retired. Whenever my doctor refers me to a specialist he usually gives me two or three recommendations. Usually none of these will accept my insurance (essentially medicare). And it is not just specialists. My present doctor I just selected last year as my former doctor (actually an entire medical group) refused my insurance with all their clients. That medical group said I should get different insurance that would have cost me $340/month more than what I already have. They gotta be kidding, but i suppose they are not.

    And all this is before any cuts in Medicare payments.

  • Report this Comment On November 13, 2010, at 1:29 PM, TheDumbMoney wrote:

    aleax:

    Your post is self-contradictory though. The Brits ended the mortgage interest deduction, you say. The mortgage interest rate deduction is a subsidy to richer areas, and "props up" prices there, you say. How do you explain the fact that since the Brits ended the mortgage interest rate deduction, prices in the most desirable areas of Britain, and London in particular, have soard? The fact is the prices in these areas soar for a host of reasons: monetary policy, desirability of the area, influx of foreign investment, regulations that limit housing-stock growth, lack of available land, proximity to amenities, etc. I completely reject your simplistic premise. The growth of these areas in America, such as Silicon Valley, Los Angeles, New York City, has come despite the fact that they have a very high cost of living, and despite the fact that uniform national taxes (whether 39%, or 33% or 15%) based on income treat all income equally, whether earned there or in Detroit. The mortgage interest rate deduction, in my view, does a lot of good helping poorer families in these high-cost areas, at the bottom of the market. That is the real reason why people want to get rid of it; people have concluded it was in part responsible for the bubble, particularly at the bottom of the market. I don't want to write more of a screed than I already am writing, but suffice it to say I think this is unsupported.

    The fact is, at my family's income level, because of the income tax reduction I would see, I would be better off under the debt commission's plan, if the deduction were eliminated and my income taxes were reduced. So while I'm biased, I'm not that biased. I just have never liked the fact that all of our income taxes take no account of cost-of-living (which affects poorer people in these high-cost areas, too). I like the fact that this deduction partially corrects for that.

    I also find others' comments "you should just move" to be indicative of an American dismissiveness of familial ties that I understand (given both our country's immigrant history, and our corporate culture), but do not really support. My family has, for generations, lived in my high-cost area. Sure, there is a certain point at which I might move, but I find flippant suggestions that this is the solution to be unproductive, and indicative this lack of value on family cohesiveness that I think is culturally vapid, emotionally disengaged, and ultimately destructive.

  • Report this Comment On November 13, 2010, at 1:35 PM, jpvmd wrote:

    How much do you think doctors make an hour? How many hours per week do you think they work?

  • Report this Comment On November 13, 2010, at 4:40 PM, bgss wrote:

    Identifying medicare as the main future concern for government spending is right on. Any one who's watched (not simply ignored) pay-outs to manage a hospital-based death process for an elderly person knows how ridiculously we overpay doctors and hospitals. Medicine in the US is essentially a government-sanctioned monopoly without significant competition that would be found in a free enterprise system.

  • Report this Comment On November 13, 2010, at 5:41 PM, wtatm wrote:

    Morgan,

    Although you do an excellent job (as you always do!) in laying out the facts, I believe this analysis is based on a faulty premise. That premise is... that the amount of government spending is "correct". It is true that most of the budget deficit is due to decreased revenues (i.e. recession), rather than increased spending. However, the govt spending for the fiscal year just completed was about $3.5 trillion. Divide that by approximately 310 million Americans... and the govt spent over $11,000 for every man, woman and child in this country in fiscal 2010. Given that about 1/2 of our population (155 million) are employed... or would like to be employed... the tab for govt spending was $22,000 per worker. Does anyone think that kind of spending level is reasonable?

    I fully agree that our tax code needs a massive overhaul and simplification. But so does our govt. The recession has merely brought to the surface something that many Americans have known for far too long. Govt spending... on both sides of the aisle... is out of control. Personally, I don't want to see any increases in taxes... anywhere... until the govt makes SERIOUS cuts in all areas.

    Thanks for a great article.

    Jim

  • Report this Comment On November 13, 2010, at 6:26 PM, xetn wrote:

    I think the following video, although British, applies equally to any country. It is well worth the few minutes it takes:

    http://www.youtube.com/watch?v=Yi2l0NilEBE

    and then the real nub of the issue:

    http://www.youtube.com/watch?v=vlYECD55vEM

    The U.S. has a very serious debt problem (we are the greatest debtor nation in history) that no amount of tax reform will solve. We first have to first get a real handle of spending.

    It has been said, that if we completely eliminated all of the ABC bureaucracies, we would still be unable to pay for the unfunded liabilities (Social Security, Medicare, Fannie, Freddie, etc). As a matter of fact, Fannie and Freddie are not even on the budget.

    But the most important thing that needs to be "fixed" is that idea that government can spend its way to wealth. Spending does not create wealth, it destroys wealth. Only saving and investment, the basis for capital formation, can create wealth.

  • Report this Comment On November 13, 2010, at 7:38 PM, Timetested wrote:

    Focus is not on who is spning, but what is spent. Taxes, like social security has been deviated to pay for other tax caried suporting program. Yet, the payin bck of those funds landed on future contributions, which failed to meet the pay back.

    Policially, the old, aging and dieing are being lost as lost income, no payback or lost income. The continuing work suported are being called upon to pay back the deficits. Politcal rights are not responsacl to pay back, but raise their own salaries. Admitting that othe tax incentive is not the worries of the politics, but those being taxed.

  • Report this Comment On November 13, 2010, at 7:39 PM, Timetested wrote:

    No one is listening really, very polically correct, very!!

  • Report this Comment On November 14, 2010, at 1:23 AM, PoundMutt wrote:

    Special Interest Groups:

    Single

    Married

    Single, No children

    Single, Children

    Married, No Children

    Married, Children

    Single Mother

    Single Father

    College Student

    Working

    Doctors

    Lawyers

    Nurses

    Professional Sports Players

    Retired

    Wealthy

    Poor

    Middle Class

    Straight

    Homosexual

    Combinations of the Above

    Need I Go On?

    EVERYONE is in a SIG!

  • Report this Comment On November 14, 2010, at 10:55 AM, bkeiller wrote:

    What a wonderful American dream: a self regulating, fiscally responsible government with some commonsense approaches to Management.

  • Report this Comment On November 14, 2010, at 12:02 PM, mikenrobin wrote:

    If we could just set term limits on our elected officials we would eliminate the concern of being reelected. If the decisions they make had no effect on their employment they would make different decisions and possibly do the "right" thing. I propose a term limit of 5 years with the proviso that they can never hold elected office again and that they cannot accept a position with any employer who may have been affected by decisions they made. They just accept there nomination, serve their time and go back to their life. They would not be beholden to special interests because they would not need money for reelection. Their decisions would be for the good of the country not their own good only. They could make politically unpopular decisions because their job would not be on the line.

    There are many other benefits to term limits but the obvious is unbiased decision making.

  • Report this Comment On November 14, 2010, at 12:48 PM, rmarks1 wrote:

    I think raising the Social Security age is good and should be done sooner that 2050. I think most healthy people between 65 and 70 want to work. Problem is that these people are at the top of there salary and they have declining skills (I'm 70 by the way). We MUST have a way so older people can have reduced salary and responsibilities at current employers with no loss of social stigma. Call it "Age Position Reduction". This is especially important for older men in highly physical jobs.

    And pensions and benefits based on "last XX years of work" would have to be modified to not count years on APR.

    In my case I was earning almost $200K as a principle engineer at a big Aerospace company. And at 67 I was slowing down. I was offered a salary reduction to about $120K and more important to my ego, a demotion in level. So I retired. But if there was a formal program accepted by society, then perhaps my ego could stand it and I would have opted for the APR reduction and would have kept contributing for a few more years.

  • Report this Comment On November 14, 2010, at 6:09 PM, jsmiley007 wrote:

    If heatlh care costs are 98% of the problem, how about a thorough, unbiased study of health care costs and a similar panel to come up with a plan to cut and control health care costs?

  • Report this Comment On November 14, 2010, at 11:13 PM, badnicolez wrote:

    My immediate reaction to the debt commission's proposals was to shudder and wince.

    However, after further review and careful thought, I find that the proposals sound eminently reasonable, if not downright smart. Combine this plan with a balanced budget amendment that has real teeth, and I think we have a winner!

  • Report this Comment On November 15, 2010, at 11:52 AM, nickolassc wrote:

    I've been saying something similar to this has been needed for a long time. The current tax code allows those with money to increase their lead over those who don't have money due to their not being enough top tier marginal rates, the cut-off for SS tax, the investment tax structure, and the home mortgage deduction that helps those most who can most afford an expensive home. The middle class's wealth as a percentage of the nation's wealth peaked in 1968, right about the time that the number of marginal tax rate brackets was lowered.

    I have one change to the proposed 8% lowest tax rate: Drop the standard deduction of $5,500 or whatever it is completely (as well as the itemized deductions) and have the first $15,000 of anyone's income subject to no federal income taxes at all.

    Only in my wildest dreams would such a plan actually be implemented. There are two things that will keep it from happening: 1. The current environment of corruption in DC will never allow for this plan, and 2. The bloviating idiots on the radio think a flat tax, fair tax, or higher top tier marginal tax rate on the "rich" is going to somehow ruin our country, the sad thing is the listener's are the people who are hurt the most: The middle and lower classes that actually believe what they here.

  • Report this Comment On November 15, 2010, at 11:55 AM, nickolassc wrote:

    @rmarks1

    Society doesn't need another useless program because of your ego. It's your own fault you didn't accept what you were offered and you alone have to live with your retirement and your ego.

  • Report this Comment On November 15, 2010, at 12:44 PM, Melaschasm wrote:

    They did not cut nearly enough spending. Even if all of these proposals were passed, we would still be facing deficits greater than $1 trillion per year.

    The proposed cuts are about $400 billion per year, while we are running $1,400 deficit this year.

  • Report this Comment On November 15, 2010, at 9:32 PM, PoundMutt wrote:

    On November 14, 2010, at 6:09 PM, jsmiley007 wrote: If heatlh care costs are 98% of the problem, how about a thorough, unbiased study of health care costs and a similar panel to come up with a plan to cut and control health care costs?

    Many common treatments and drugs have:

    1. No scientific basis for their use

    OR

    2. Flawed studies supporting their use

    OR

    3. ONE OR FEW Studies supporting but SUPPRESSED studies that show little or NO BENEFITS justifying their use

  • Report this Comment On November 15, 2010, at 10:12 PM, whomonkyoulus wrote:

    I would not support any proposal for lowering the tax that far on the rich unless we had an 80% tax on estate transfers over 2 million. Simple. Anything less threatens our democracy and reduces opportunity/efficiency.

  • Report this Comment On November 17, 2010, at 1:45 PM, Robin1938 wrote:

    If the President comes out in strong opposition, the Republicans would then support it and maybe it could sneak through.

  • Report this Comment On November 17, 2010, at 4:45 PM, ajstudebaker wrote:

    If Congress doesn't have the political will to eliminate the mortgage interest deduction, I hope it will at least limit the deduction to interest on one mortgage.

    I agree that defense spending must see some cuts.

  • Report this Comment On November 17, 2010, at 5:40 PM, drbpconn wrote:

    On December 1, 2010, physicians will experience a 25% cut in medicare reimbursement due to the SGR formula. In essence, the number of patients in medicare has grown faster than the economy because of the shift in population demographics. In January 2012, the cut will increase to 33%.

    For practices with 50% overhead (typical), a $70 office visit leaves $35 in payment for the physician. The overhead of $35 will not change, but as of December 1, the physician will take home $17.50 (50% cut in pay) after expense and before taxes. In January 2012, that will be further reduced to $11.20 (66% cut in pay).

    To trim medicare waste or reimbursement is one thing. To ram through a devastating cut will force many if not most primary physicians and many specialists out of the medicare system entirely. If these figures seem unrealistic, please refer to the www.ama-assn.org website.

    Be careful what you are wishing for.

    A concerned physician

  • Report this Comment On November 18, 2010, at 5:41 AM, dbjella wrote:

    drbpconn:

    What are physicians going to do after these cuts and leave the system?

    The unemployment rate is over 10%. "All" these doctors chasing non medicare patients maybe good for me. But just a warning, I don't have deep pockets like uncle sam :)

  • Report this Comment On November 18, 2010, at 11:06 AM, GigMaster wrote:

    Cut everything by 10%. Next year, do it again.

    It's that simple. No exceptions.

  • Report this Comment On November 18, 2010, at 11:24 AM, JeanDavid wrote:

    Uncle Sam's deep Medicare pockets.

    I had 4 days in a hospital. In return for that, I have a pile, almost an inch thick, of Explanation of Benefits forms. Medicare seems to pay $0.00 for most of the charges incurred. They also pay around 10% of the billed amounts.

    The paperwork is so tough for the hospitals and doctors, that they billed Medicare directly for payment that they should have billed my (primary) insurance company. Since Medicare would not pay at all, I got a bill for several thousand dollars (that I did not pay). I spent the morning on hold trying to get them to bill my insurance company. Another hospital (I was sent from one to another) billed my former insurance company (where they got that insurance company from, I am not clear), who pointed out that that policy was canceled two years ago. Another morning on hold straightening that out. Then one hospital did bill the right insurance company (the one on my insurance card), but the insurance company refused to pay because the hospital did not send my discharge report among the other paperwork. Well, I was not discharged from that hospital; I was sent to the second one. But the first hospital billed me $4000. Another morning on hold getting that straightened out. At least, I hope these are straightened out.

    The first hospital also charged me for 3 days in the ICU. But I was never in the ICU. I went back a week later, and the same thing happened: 3 more days billed for the ICU when I was not in it. The hospitals and doctors need armies of clerks to try to understand all the different billing requirements of the various insurance companies, and the insurance companies have different plans each with their own requirements.

    I was in there for a little stroke. But the problems dealing with the insurance companies are so stressful that I wonder if I will have another.

    They talk about all the uninsured. A problem, to be sure. But I AM INSURED and that is a problem too.

  • Report this Comment On November 19, 2010, at 2:53 PM, interdependent wrote:

    Bankrupt:

    JeanDavid you are right, insured patients face more craziness ahead if we keep making cuts to Medicare without dealing with the rest of the industry.

    "My present doctor I just selected last year... refused my insurance with all their clients. That medical group said I should get different insurance that would have cost me $340/month more than what I already have. They gotta be kidding, but i suppose they are not."

    Medicare cost-containment will fail without cost-containment across the health care industry. And paying doctors less is not the answer. Providers can't break even at those lower rates, which is why they are fleeing Medicare and insurance. They can't afford to take those patients.

    Cost containment means eliminating waste. Follow the money.

    Insurance companies add layers of unnecessary, expensive administrative costs in two places:

    1) the operating costs of entire insurance company itself, which only exists as a middleman to intercept payment for services, in the form of 'premiums' and prevent payment for services where possible, denying 'claims', and

    2) the costs of medical billing staff in every provider's office across the country.

    What if everybody could go see a doctor and the doctor could get paid a flat fee by submitting a simple bill, no extra staff required? Yes, universal health insurance, less expensive, more equitable, less excessive waste and no exorbitant profits, zero.

    But we just finished our health care reform debate and the insurance companies spent gazillions to make sure they came out more profitable with more customers forced to buy their products now post-reform. So today those same companies are making good for stockholders by "re-earning" the gazillions (premiums) they spent in Washington to make sure we didn't get real health care reform, by raising premiums and lowering coverage, while limiting pay-outs for everything not specifically listed in the reform legislation.

    The business model is simple: collect money (monthly premiums), don't pay money (deny claims, raise co-pays and deductibles, limit visits, procedures, require more paperwork and reporting from providers), call it "insurance" so people believe they have to have it, or else!

    All you Fools out there think twice about health insurance stocks, a fantastic business model, but can you sleep well at night knowing that those companies' profits are quite literally bankrupting the US economy?

  • Report this Comment On November 19, 2010, at 3:00 PM, STORMSTOCKER wrote:

    Our Government or ANY government cannot save a plug nickle. Government = Taxes from the private sector. The only ones that will ever be able to save is the taxpayers themselves. Cutting All Taxes, puts immediate cash into the hands of ALL the people. They will Save their own money. Government (TAX) only takes away their savings and livlihoods.Cut Income Tax, Sales Tax, Cut Gas Taxes, Fees, Charges,etc.etc.etc.

  • Report this Comment On November 19, 2010, at 3:54 PM, jonesericr wrote:

    I see the cut in deductions but which deductions get cut? Can I no longer invest in my 401k and have those dollars being taken out prior to payment not get counted in my annual tax payment? If they do tax those do they get taxed once again when I pull out the 401k dollars to use it? I would think not, tax me at one end or the other but not both.

    As for contractors I can see the government saving more than just money by reducing the number of contractors. Many of the companies are unscrupulous (did I spell that right?) in their dealings. I should qualify that as some of the employees of those companies are. I was a contractor for 6 years and glad to be out; however, the flip side is if contractors aren't doing it then Civil Service, me again, will be and I have heard of proposals to cut the number of civil service employees to help reduce the deficit. This could potentially put more people on the unemployment rolls as the private sector won't be able to absorb a large influx of people. Unless we open up some manufacturing in the US and start creating goods rather than rely on providing services won't we have long term employment problem?

    The government and it's rules need an overhaul. When it comes to hiring in overseas positions an employee may not get all the benefits that a state side hire would. You can be denied pay benefits which make a difference depending where you are overseas. A recent case of several people transitioning from contractor to civil service resulted in many leaving after getting in the system because of this denial. Now the government must advertise for those positions again and possibly hire from the states. The people let go would have earned an extra $40K (ball park figure) annually. Now they must spend that plus another $10K or more to move a family from the US to here. They have lost productivity and historical knowledge and will have that person for 2 to 3 years before they are due to rotate somewhere else. If I could save $10K by paying $40K that I'm going to pay anyway, keep a knowledgable employee on hand and lose no down time to retraining I think that would be a good thing.

    ej

  • Report this Comment On November 19, 2010, at 4:28 PM, RobertC314 wrote:

    Did anyone else catch this one:

    "The CEO of UNH (United Health Group) made $1.7 billion in executive compensation in 2007 "

    Just to be clear, the CEO of UNH in 2007 (Stephen J. Hemsley) made $15,549,028 according to company filings ($1 million in salary, $11 million in stock options/awards, $3 million in non-equity incentives, and some change). A lot to be sure, but certainly not $1.7 billion. Not sure where that number came from.

  • Report this Comment On November 19, 2010, at 6:28 PM, drborst wrote:

    Morgan,

    Finally, and anaylsis of this proposal that includes numbers. Thanks, but there's one thing that concerns me quite a bit, and I haven't been able to find anything on the topic. What happens to the AMT? These dropping tax rates mean nothing to a number of people who pay it.

  • Report this Comment On November 19, 2010, at 7:23 PM, TMFHousel wrote:

    drborst,

    As I recall, AMT would be axed in the co-chair's proposal.

  • Report this Comment On November 19, 2010, at 7:43 PM, HIGHNLOW wrote:

    Morgan, Just a general thought on "raising/lowering" of taxes, if the Federal tax rates are lowered all things being equal (which they never are) will it really lessen the tax burden with the assumption that people will either save (Increased revenue on Interest taxed as income) or spent on stuff like clothing/retail about 7% where I live; another gallon of gas taxed Fed/State average about 14% (Avg tax of $.41 on $3/gallon) or on travel/rental/airport car fees which I calculated once to be around 17% just for the rental car. Is this just re-arranging taxes or encouraging the creation of new "fees" instead of calling them taxes....If jobs keep leaving, why do people keep "illegally" try to come here?....Is it possible do you think that in my lifetime (I'm in my early 40's), jobs will actually eventually start filtering back to our country once we've exhausted (doubtful) less expensive labor opportunites abroad as their Cost of Living escalates (ie China, Indonesia, India) and labor/shipping costs start to outweigh creating "stuff" right here in the USA??? And how might the eventual passing of the Boomer Generation affect Health Care with an obvious glut of persons utilizing those resources moves through the system so-to-speak??? Sorry just a few tangents....I guess its all about people working and generating revenue/housing appreciate again/taxes.

  • Report this Comment On November 21, 2010, at 12:05 PM, IBJAMMIN wrote:

    Just tax foods based on their sugar content, fat content, or excessive salt content. Use the proceeds to help pay for Medicare. People probably would choose healthier foods if they were 20% cheaper. If they ate better, people would be healthier and be sick less (less heart disease, strokes, and diebetes). That's 3 of the top 4 killers of Americans. Less illness = lower Medicare dollar outflow.

    Also, refuse Medicare coverage to smokers for smoking related illnesses. Ditto for heavy drinkers, drug addicts, drug abuse overdoses, & gang members shot in gang shootings. It's just saying "be responsible for yourself or accept the consequences for your choices. Don't expect the rest of society to cover the bill for your excesses and irresponsibility."

    It sounds harsh I know but fair is fair. It would also threaten the interests of about a dozen well funded special interest groups groups from sugar, corn, beef, and tobacco farmers to the obvious junk food, fast food, tobacco and alcohol companies. With 2 Senators per farm state, something to help the 98% of the population that doesn't farm, still has little chance of passing Congress.

  • Report this Comment On November 21, 2010, at 1:30 PM, crawlfish wrote:

    The deficit-reduction commission lays out the truth. Some pain will be required to get our deficit spending and national debt under control. As a fiscal conservative I am angry at the Republican Party of being the borrow and spend party. Well now it is time to walk the talk. Lets see how serious they really were. Taxes have to rise to get this problem under control and medical cost must be contain. If they do neither then we know that they are just opportunist politicians with out any backbone.

  • Report this Comment On November 22, 2010, at 1:36 PM, Auburn102 wrote:

    I think the doctors are greedy. My daughter who is a NP works for one -- he is building a Taj Mahal but he does not want to pay her and he works her to death. If they want to leave the profession, then bring doctors from other countries and they will be willing to work for less. If only we all can work for less, then all the jobs would not be sent overseas and we will not have to bring workers from overseas.

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