The key points of the 537 Accountability PACT

Our elected leadership-537 men and women-is dysfunctional. We are lurching from manufactured crisis to manufactured crisis, with less time between each preventable looming disaster. Unless our elected leaders change their ways, one day a manufactured crisis will blow up into a real one, and the consequences will be uncontrollable. The 537 Accountability PACT is designed to resolve these manufactured crises sooner, or prevent them from happening in the first place.

The 537 elected leaders of our country form a permanent political class. As such, their actions are not directed toward the greater health and wealth of the nation, but rather to ensuring that they maintain or grow their political power. They are largely exempt from the law. By April 15th of every year, for example, citizens are supposed to have paid their taxes, and each Chamber of Congress is supposed to have passed a budget resolution for the following year. Citizens face fines for not filing taxes. Congress members face...nothing for not passing a budget.

The 537 Accountability PACT is designed to have our 537 elected leaders bear the burden of the policies that they implement, and be rewarded for the positive outcomes their policy choices yield. The PACT contains both carrots and sticks. Some examples of the sticks are below:

• Every elected member pays a base tax rate equal to the rate of Federal spending (including unfunded mandates) as a percent of GDP. No deductions, exemptions, etc. This base rate is paid on all income, including spousal, tax exempt, etc. The reason for this is simple: Under our progressive system of taxation, the 537 should already be paying at least this amount if the budget is going to balance. Consider President Obama: in 2011, the government spent about 24% of GDP, while President Obama paid less than 20% of his gross income in taxes. Simply put, not even the President paid his fair of taxes. By setting a base tax rate equal to the amount the government spends, our leaders will be motivated to ensure that every dollar is spent wisely.
• Every elected member pays a marginal rate that is equal to the maximum rate that any citizen faces through a combination of federal tax and benefit phaseouts. This would be at east equal to the combined highest income tax and Medicare rate, but may be much higher. This should lead to tax code simplification and a comprehensive approach to our benefits system.
• Elected members face a surtax if the budget process, tax rates, and any required debt ceiling increases are not passed in a timely manner. Members may also face a surtax for missing other legally mandated deadlines that are not budget related but are important to a well functioning government. Deadlines are not changed; rather, an enforcement mechanism is added to existing deadlines.
• Elected members face a surtax for an out of balance budget. If they voted for an out of balance budget or for a debt ceiling increase then they pay a higher surtax. A portion of this latter surtax carries into the future. We will be paying interest on the debt forever; those who vote to burden us with this debt should pay for it over time as well.

As mentioned earlier, the PACT also offers carrots. Bonuses are awarded for on-time budgets and surpluses, and these bonuses compound. Furthermore, increased pensions will be granted if the budget is in surplus over a Members' term of service.

The bonus system is integral to the 537 Accountability PACT. Once a bonus has has been awarded for a few years, the compounded bonus will be a significant percentage of base pay, and failing to get the bonus will result in a large cut in pay. Thus, the 537 will be very motivated to continue the good practices that have earned them the bonus over the previous years.

Our elected leadership is dysfunctional, and the result is high unemployment, large deficits, low growth, and the financial health of the company in jeopardy. Implementing the 537 Accountability PACT will reduce the turmoil and get the 537 focused on fulfilling their legally mandated duties on time. The result will be a more stable, better governed, and more prosperous America.

For more detailed explanations of the 537 Accountability PACT, please read the other posts. They include more more in-depth information than the brief overview above.

The 537 PACT applied to Calender Year 2012

The 537 were incredibly dysfunctional in 2012. The House passed a budget; the Senate did not. There was the debt ceiling crisis, no budget enacted, the debt ceiling crisis, bond downgrade, and fiscal cliff. Let's see how the 537 PACT would have affected the various Members, had it been in place. 

To examine how the 537 Accountability PACT would affect Members, let’s look at a Member’s 2012 tax rate, assuming that the PACT had been in effect.  None of the key events-budget enactment, tax rates set, or debt ceiling increase passed-were enacted before the end of the CY 2012-an example of our government’s dysfunction and incompetence. Based on FY 2012 actuals and the FY 2013 budget process, Member base tax rates for 2012 would range from 35.4% to 46.8%, with their effective rates being higher, depending on the maximum marginal rate any citizen is subject to.

The calculation is outlined below:

The base tax rate applies to all Members and is equal to FY 2012 federal spending (direct and mandated but not funded) as a percent of GDP. This base rate would be 22.7% plus unfunded mandates (amount unknown).

A marginal rate equal to the highest marginal rate any citizen faced in 2012 applies to 20% of all Members’ income. This rate has not been determined. The calculations below assume that this highest marginal tax rate is 80%.

The deficit surcharge, equal to half of the deficit as a percent of GDP, applies to all members as well. This deficit surcharge equals 3.5%.

For those Members voting for an out of balance budget or a deficit ceiling increase or an out of balance budget would also be 3.4%. This would be the majority of the Members.

The next step is to add the FME penalties to the base rates. These FME penalties are based largely on the FY 2013 budget process, which is outlined below:

The President submitted his Budget Request on February 13^th (one week late)

The House passed a Budget Resolution on March 29 (on time-note that the House woudl get a small bonus in pay for this.)

The Senate did not pass a Budget Resolution

None of the three required elements for FY 2013-budget enacted, tax rates set, or debt ceiling increase for FY2013- were enacted by the end of the calendar year.

The amount of the tax penalty depends on whether one is the Minority or Majority party and where one serves. Thus there are five cases, as outlined below:

Case	FME tax penalty prior to Oct 1, 2012	FME tax penalty after Oct 1, 2012	Total FME tax penalty
Executive Members	4.25%	9.2%	13.45%
Majority Member of House	0	9.2%	9.2%
Minority Member of House	0	9.2%	9.2%
Majority Member of Senate	8%	9.2%	17.2%
Minority Member of Senate	5.9%	9.2%	15.1%

When all of these items are combined, there are a total of nine cases. The tax rate for the President and Vice President are shown in the table below:

Case	Tax Rate	Deficit Surtax	FME Surtax	Total tax rate
Base Tax Rate (80% of income)	22.7%	6.9%	13.45%	43.05%
Marginal Tax Rate (20% of income)	80%	6.9%	13.45%	100.35%
Combined effective rate				54.51%

A similar calculation can be made for each of the Congressional Members based on their Party, Chamber and if they voted for a debt ceiling increase (DCI) or an out of balance budget (OOBB):

Case	Base Rate with Penalties	Marginal Rate with Penalties	Combined, effective rate
Majority Member of House-voted for OOBB or DCI	38.8%	96.1%	50.3%
Minority Member of House-voted for OOBB or DCI	38.8%	96.1%	50.3%
Majority Member of Senate-voted for OOBB or DCI	46.8%	104.1%	58.3%
Minority Member of Senate-voted for OOBB or DCI	44.7%	102%	56.2%
Majority Member of House-did not vote for OOBB or DCI	35.4%	122.7%	46.9%
Minority Member of House- did not vote for OOBB or DCI	35.4%	122.7%	46.9%
Majority Member of Senate- did not vote for OOBB or DCI	45.4%	130.7%	56.5%
Minority Member of Senate- did not vote for OOBB or DCI	41.3%	128.6%	52.8%

These tables demonstrate the effectiveness of the 537 Accountability PACT. The House passed a budget on time, as required by law, and had the lowest tax rate. The Senate never did pass a budget, and its majority members have the highest effective tax rate-over 58%. The President and Vice President are in between the two groups.

Other items to note:

• The debt ceiling limit for FY2013 has not been raised, so a daily surtax would continue.
• The above calculations do not include any surtaxes rolled over for previous deficits.
• The tax rates for the President and Vice President would be higher, since they failed to meet the legally mandated deadline for the Regulatory Agenda (and maybe other items, as well.).

Simply put, America cannot afford incompetence in the 537. The 537 Accountability PACT ensures that the 537 cannot afford their own incompetence either.

The Implementation of the 537 Accountability PACT

Sample Implementation of the Five Thirty Seven Accountability PACT:

The need for the 537 Accountability PACT has been explained; the goals and general principles have been outlined. Below is a specific proposal for the implementation of the Five Thirty Seven PACT. This implementation assumes that, in addition to the elected Five Thirty Seven, some Senior Executive Branch employees are also subject to the PACT. Note that penalties add to the base and marginal tax rates, and the resulting rates can exceed 100%.

CONGRESSIONAL MEMBERS

Base Taxation of Members: Congressional members will be subject to a simplified tax code. They will pay 80% of all household income at a base rate equal to Federal spending and unfunded mandates as a percent of GDP. The rest of their income will be taxed based on the highest marginal tax rate any citizen is subject to. This marginal tax rate is based on Federal programs only, and the calculation of this maximum rate includes income based phaseout of housing, food, child support, and other federal benefits. Newer members pay a percentage of this highest marginal rate, while more senior members pay the full amount. Note that this rate may be in excess of 100% of income. Table 1 below details this foundational tax scheme. 

Table 1-Base Taxation Provisions for Congressional Members

	Applies to:	Rate
Base Rate	80% of all income (passive and active) earned by Member and spouse	(Federal Spending + Unfunded mandates)/GDP
Marginal Rate for first year members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -80% of the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.
Marginal Rate for second year members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -90% of the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.
Marginal Rate for third year and longer serving members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.

Tax surcharges for Members: Congressional members may be subject to tax surcharges, depending on when budgets, deficit ceilings, and tax increase are passed, and how much the budget is in deficit. Surcharges for missed timelines increase in magnitude and frequency as deadlines near. Votes for deficit spending (either debt ceiling increase or budgets in deficit) will result in tax surcharges applying as long as an individual is an active Member.

Table 2 outlines the tax surcharges for Members.

Table 2-Tax Surcharge Provisions for Congressional Members

Reason for Penalty	Amount of Penalty	Comments
Fiscal Mismanagement Event (FME)	Majority Members: up to 8% for each chamber if budget not passed by Oct 1, and daily penalties thereafter. Minority members: up to 5.9% for each chamber if budget not passed by October 1, and daily penalties thereafter.	See Table 5 below for details. Note that penalties can continue into following calendar year.
Current Budget Deficit	Equals (deficit + unfunded mandates)/(2*GDP)	Note that a surplus reduces taxes owed.
Vote for current Budget Deficit or Debt Ceiling increase	Equals (deficit + unfunded mandates)/(2*GDP)	Applies to Member who votes for deficit spending in Fiscal Year under consideration or for debt ceiling increase that funds deficit spending in Fiscal Year under consideration.
Voting for Previous Budget Deficit or Debt ceiling increases	Equals sum of previous penalties for voting for budgets in deficit or for debt ceiling increases

Table 3-Annual Compensation Provisions for Congressional Members

Compensation	Rate	Comments
Base Compensation	Multiplier of per capita GDP	Rank & File: 5X per capita GDP Senate and House Leadership: 6X per capita GDP Speaker: 7X per capita GDP
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *15%	Bonuses compound as long as there is a surplus
Chamber Process bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *3%	Bonuses compound as long as Chamber completes its process in a timely manner (passing budget, debt ceiling increase and tax rates changes in a timely manner). Chambers earn this bonus independently of each other.
FME Avoidance Bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *5%	Awarded if budget, debt ceiling increase, and tax rates for following year enacted by Sep. 30. (so either Senate, House, and Executive earn this bonus, or no one does.)  Compounds.
Chamber Process bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *3%	1. Bonuses compound as long as Chamber completes its process in a timely manner (passing budget, debt ceiling increase and tax rates changes) 2. If a first year President or VP had a Chamber Process bonus from last term of Congressional service, bonus will continue to accrue.

Table 4-Pension Provisions for Congressional Members

Congressmembers start with a base pension that they have earned and/or contributed to. This base pension is adjusted as follows:

Provision	Effect
If Member has served twelve or more years and deficit has not increased during Member’s entire term of service, then effect to left applies. Otherwise, Pension Reduction and Tax Surcharges below apply	Member’s pension is equal to the base pay rate for the position from which the Member retired
Pension Reduction	2% reduction for each year the budget was in deficit during a Member’s service
Tax Surcharge	Members tax surcharge = total increase in deficit during term of service * 2 * weighted average of Fed Funds rate for previous year divided by current GDP.

Table 5-Congressional Budget Timeline and Penalties

If event occurs after:	Event	Majority Member Penalty	Minority Member Penalty
15-Apr	Budget Resolutions due from each Chamber (Requirement A)	2.00%	2.00%
13-May	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
10-Jun	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
8-Jul	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
22-Jul	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
5-Aug	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
19-Aug	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
2-Sep	FME penalty trigger (for each failure to meet requirement A)	0.25%	.05%
9-Sep	FME penalty trigger (for each failure to meet requirement A)	0.25%	.05%
16-Sep	FME penalty trigger (for each failure to meet requirement A)	0.50%	.25%
23-Sep	FME penalty trigger (for each failure to meet requirement A)	0.50%	.25%
30-Sep	Enacted budget appropriations and corresponding debt ceiling increase due; tax rates for following calendar year set (Requirement B)	3.00%	3.00%
1-Oct	Daily Penalty: For failing to enact any of the items of Requirement B (budget appropriations, corresponding debt ceiling increase, tax rates for following year)-applies to all Members	0.10%	0.05%

Notes:

1.    The maximum penalty a Majority Member can face for failing to enact a budget by September 30th is 8%. A Minority Member may face a penalty of up to 5.9% for the same time period. 2.    The penalties for prior to Oct 1 apply to each Chamber separately. For FY 2013, the House passed the Ryan budget on March 29th, and so would have not have had any FME penalties apply prior to October 1st . Conversely, the Senate did not pass a budget, and so Senate Members would have faced the full penalties. 3.     If the three required elements (budget, tax rates set, and debt ceiling limit adjusted) are not enacted by December 31st, the daily penalties will continue into the next year. Members will be responsible to pay these penalties on income from the same calendar year as the fiscal year. 4.    If the a new term begins, and the budget has not passed, then Members who did not serve in the previous term have a thirty day grace period from being seated before FME penalties begin to apply.

EXECUTIVE MEMBERS

In this implementation, there are two classes of Executive Members subject to the PACT.

The first class consists the President and Vice President (the Elected Executive Members). These two members are subject to the same range of penalties as the Legislative Branch Members.

The second class consists of the most Senior political appointees, such as Cabinet Secretaries, “Czars,” etc. These appointees have their penalties from previous any Membership in Congress applied to them.

Table 6-Base Taxation Provisions for Executive Members

Description	Elected Members	Appointed Members	Rate
Base Rate	80% of all income (passive and active) earned by Member and spouse	All Income earned by Member and Spouse	(Federal Spending + Unfunded mandates)/GDP
Marginal	20% of all income (passive and active) earned by Member and spouse	N/A	The higher of: -the Member’s Base tax rate or The highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.

Table 7-Tax Surcharge Provisions for Executive Members (applies to Elected Members only except where noted.)

Reason for Penalty	Amount of Penalty	Comments
Fiscal Mismanagement Event (FME)	Up to 10%	See Table 10 below for details. Note that penalties can continue into following calendar year.
Current Budget Deficit	Equals (deficit + unfunded mandates)/(GDP)	Note that a surplus reduces taxes owed.
Voting for Previous Budget Deficit or Debt ceiling increases	Equals sum of previous penalties for voting for budgets in deficit	From any time served in Congress Note: this penalty applies to Cabinet level Appointed Members as well.
Scheduled, mandated reports (such as Unified Agenda of Regulatory and Deregulatory Actions)	Equals 0.10% on first day late and 0.1% for every week thereafter	Applies to both Elected members (President and Vice President) plus the Appointed Member whose department is responsible for submitting the  report

Note: Other than penalties for votes as a previous Member, Appointed Members do not face FME penalties.

Table 8A-Annual Compensation Provisions for Elected Executive Members

Compensation	Rate	Comments
Base Compensation	Multiplier of per capita GDP	President: 10X per capita GDP Vice President: 7X per capita GDP
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *15%	1. Bonuses compound as long as there is a surplus 2. If a first year President or VP had a surplus bonus from last term of Congressional service, bonus will continue to accrue.
Executive Process bonus	Equal to (Base compensation plus previous year’s Executive Process Bonus bonus) *10%	1. Bonuses compound as long as Executive completes its legally mandated duties in a timely manner (submitting budget, complying with other mandated dates) 2. This bonus can accrue from one President to the next.

Table 8B-Annual Compensation Provisions for Appointed Executive Members

Compensation	Rate	Comments
Base Compensation	As defined by formula
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *5%	1. Bonuses compound as long as there is a surplus 2. If a first year Appointed Member had a surplus bonus from last term of Congressional service, bonus will continue to accrue.

Table 9-Pension Provisions for Executive Members

Executive Members start with a base pension that they have earned and/or contributed to. This base pension is adjusted as follows:

Provision	Effect
If Member has served twelve or more years and deficit has not increased during Member’s entire term of service. Otherwise, Pension Reduction and Tax Surcharges Below apply	Member’s pension is equal to the base pay rate for the position from which the Member retired.
Pension Reduction	2% reduction for each year the budget was in deficit during a Member’s service
Tax Surcharge	Members tax surcharge = total increase in deficit during term of service * 2 * weighted average of Fed Funds rate for previous year divided by current GDP.

Table 10-Executive Budget Timeline and Penalties (for Elected Members only)

If event occurs after:	Event	Penalty
First  Monday in February	President Submits Budget Request	1.00%
Every Monday  thereafter until  30-Sep	FME penalty trigger event	0.25%
30-Sep	Enacted budget appropriations and corresponding debt ceiling increase due; tax rates for following calendar year set	3.00%
1-Oct	Daily Penalty: For failing to enact a budget, debt ceiling increase, and tax rates for following year	0.10%

Note: under this scenario, the maximum penalty for not having an enacted budget by Sep 30^th is 12.50%, including 34 weekly penalties.

 ADDITIONAL DETAILS

Below are more details to clarify the implementation of the Five Thirty Seven Accountability PACT:

-The PACT only affects Members during the time that they are in a position that is subject to the PACT. A New Member does not pay any surcharges for previous deficits, for example, nor does she receive any of the surplus or FME bonuses for year prior to her service. Similarly, a returning Member does not pay any surcharges for actions taken while he was not serving.

-Timing of Penalties: Members’  taxes are base on calendar year income, and the Federal Government’s Fiscal Year runs from October 1^st to September 30^th. A member’s PACT calculations for year “N” are based on:

Annual Compensation-Per capita GDP for Calendar Year N-2

Base tax rate and deficit penalty-spending, Federal revenue, and GDP for Fiscal Year N

FME Penalties: budget process for FY N+1

Marginal Tax Rate: Taxation and benefit policies for FY N+1

-If a penalty of the PACT applies to individual Members and is triggered, but it cannot be determined which Members the penalty should apply to, the penalty shall apply to all Members. For example, imagine that a debt ceiling increase is passed by a voice vote, so it cannot be determined who specifically voted for it. Thus, every member, present or not, is taxed as if she voted for it.

-Unfunded mandates, in general, count as spending for Active Members. For inactive members, unfunded mandates are not included when calculating whether a budget was in deficit or surplus when calculating 537 PACT pension adjustments.

-Penalties add to the base and incremental tax rates.

-Marginal or overall tax rates can exceed 100%, and the Member is expected to pay all taxes due by the initial tax filing deadline (April 15^th). Failure to pay all taxes due by this date will result in automatic expulsion from their seat, and forfeiture of all unearned pensions (Member contributions are returned as a lump sum and must be rolled into a retirement vehicle or taxed with penalties as any other premature withdrawal of retirement funds.)

-Federal loans by the government to any entity, public or private, are counted as expenditures when incurred, and revenue when repaid.

-If Independents caucus with a Party, then they face the same penalties as Members of the Party in that Chamber. If they do not caucus with a Party, then they receive no party related penalties.

-Departure of Members: if a member vacates his seat mid-term, he is penalized for any actions that he took prior to his departure.

-In case there is a question of whether the 537 PACT applies in a given instance, the presumption should be that it does. The burden would be on the Membership of the Five Thirty Seven to prove that their actions do not violate the letter or spirit of the 537 PACT.

SUMMARY

This implementation of the 537 Accountability PACT gives a lot of motivation for our elected 537 leaders to govern better. The compounding of the rewards helps to ensure that once a culture of competence starts to take root, it can be maintained. The system of penalties will ultimately drive free spenders out-simply put, they cannot afford to serve very long before the tax rates they face become onerous. The following post will show how this implementation would have applied to the FY2012 budget and FY 2013 budget process.