The Design of the 537 Accountability PACT

The previous post introduced the concept of the 537 Accountability PACT. We elect 537 people to govern our nation, but these 537 have not managed the nation's financial health well, and the majority of the country has suffered for it. The 537 Accountability PACT is designed to penalize the 537 for fiscal mismanagement and reward them for properly managing our nation's financial health by modifying the Pensions, Annual Compensation, and Taxation of the 537.

The 537 PACT is neutral with regard to tax rates and spending policy. It does not speak as to whether the Federal government should be large or small, nor does it require a balanced budget over any period of time. It does not change any budget deadlines from those already mandated. What the 537 PACT does is reward our political leadership for passing fiscally responsible budgets, tax rate changes, and debt ceiling increases in a timely manner, and penalize them for late or out of balance budgets, sudden changes in the tax code, and events like debt ceiling crises and fiscal cliffs. These penalties increase throughout a fiscal year, so the longer a problem is avoided the more expensive it is for the 537. Finally, the Five Thirty Seven PACT attempts to inject rationality into the tax/benefit system by taxing some of the 537’s income to the highest tax rate that any citizen is subject to under the Federal taxation and benefit scheme.

The PACT is designed to hold the 537 accountable on several different levels: it rewards and/or penalizes the 537 as a whole, by Party, as an individual, , by Chamber, and by seniority.

As a Whole: The 537, as a group today and for an extended period of time, are a failure. And yet, after the 2012 election, nothing has changed-the House will still be led by Boehner, the Senate by Reid, and the Executive by Obama. The same people will be doing the same things that got us to where we are today. It is ridiculous to expect anything other than the same dismal results. Failure has been rewarded, and we are back to Democrat vs. Republican trench warfare. Applying some of the provisions of the PACT to every single one of the Five Thirty Seven should motivate them to work together instead of trying to outmaneuver and blame the other party.

The largest bonuses are awarded to the 537 as a whole-for enacting budgets in a timely manner, and for having a surplus.

By Party: The majority party in each chamber controls the timing and expenditures of budgets passed by that chamber before going to reconciliation. Members of the minority party have input, but do not have control over the budget process, timing, or contents. It logically follows that majority party members should be more heavily penalized for late budgets than minority party members.

As an Individual: A Member who votes for deficits and debt ceiling increases should be penalized more than one who votes for fiscal prudence. The more frequent and larger these votes in favor of overspending are, the larger the penalty should be.

By Chamber-a chamber that completes its tasks on time earns a compounding bonus; a chamber that does not is penalized.

By Seniority: Senior members are most likely to wield power and influence within their chamber. Because some penalties accrue over time, these senior members may be taxed at a higher rate than junior members. Thus, the senior members, out of self interest, should be more inclined to avoid penalties than junior members, and will use their influence to minimize the penalties that apply to them.  This means that the more senior Member’s interests are aligned with passing a balanced budget on time.

The current situation is simply Republicans vs. Democrats, but both against fiscal responsibility. It truly is a Tragedy of the Commons situation, with the American Treasury being the Commons that is being overused. The 537 PACT will align each member of the Five Thirty Seven’s self interest with fiscal prudence, while creating different coalitions within the Five Thirty Seven that may work across party lines to reduce the dysfunction in the nation’s capitol.

The Five Thirty Seven Accountability PACT is designed to be relatively simple to explain, justify, and implement. It is closes obvious loopholes and end-arounds that the Five Thirty Seven may try to take advantage of to avoid the PACT. While it is expected that the Five Thirty Seven will eventually find a means to circumvent it, it is hoped that implementation of the 537 Accountability PACT will result in the nation avoiding the looming fiscal disaster and put the nation onto fiscally sound footing for the bulk of the 21^st Century.

Brief Explanation of who is subject to the PACT:

The Five Thirty Seven PACT applies to our nation’s elected leaders during and after the time that they served. It may also apply to some appointees within the Executive branch, such as Cabinet Secretaries.

People subject at any time to the 537 PACT are called “Members.” Members can be Active (currently subject to the PACT) or Inactive (previously subject to the PACT). A person becoming subject to the PACT may be a New Member (who is subject to the PACT for the first time) or a Returning Member, who is transitioning from Inactive status to Active. Each of these four types of Members may be treated differently, as explained below.

Generally, the Annual Compensation and Taxation portions of the PACT apply to Active Members, while Inactive Members are subject to the Pension and some Taxation portions of the PACT.

New Members always have a clean slate-they do not suffer any penalties for actions of their predecessors. Any penalties that accrue over time will apply to Returning Members under the same formula as if they had served continuously.

Three key metrics determine how the PACT is applied:

1)    Federal Budgetary Deficits/Surpluses. Members are rewarded for surpluses and penalized for deficits. In some cases, unfunded mandates are counted as expenses for purposes of the PACT.

2)    Timely passage of budgets, debt ceiling increase, and tax rates. Failure to perform these tasks within the time limits defined results in a Fiscal Mismanagement Event (FME) and a penalty on Active Members. A single task (like passing a signed budget) will have multiple deadlines in a single year, and thus multiple FMEs may occur. Further, FME penalties will increase in frequency and size as final deadlines approach.

3)    Maximum marginal tax rate any citizen pays through taxes and phase-out of benefits. Some portion of Members’ pay is taxed at this rate, to ensure that a rational tax and benefit system is in put place for all citizens.

 The Five Thirty Seven PACT’s General Principles for Active Members:

1)    Members receive a Base Annual Compensation that is a multiple of per capita GDP.

2)    Members are eligible for three Annual Bonuses:

a.    A surplus bonus that is awarded every year that the budget is in surplus. Consecutive surpluses result in a compounding bonus; a deficit in any year results in no bonus, thus resetting the compounding process.

b.    An FME avoidance bonus that is awarded every year that there is are no FMEs. Again, consecutive bonuses compound, and a single FME in any year results in no bonus, thus resetting the compounding process. This FME avoidance bonus applies to each chamber separately.
c.   A bonus for enacting the budget, corresponding debt ceiling increase, and setting tax rates in a timely manner.

3)    Members pay a Base Income Tax Rate that is equal to the percentage of GDP spent or mandated by the Federal Government. This base tax rate applies to both active (wage) and passive (investment) income and applies to a fixed percentage of income.

4)    Members pay a higher tax rate on the balance of their joint spousal income. The tax rate paid may be as high as the highest marginal tax rate any citizen may theoretically be subject to under the tax and benefit policies enacted by the Federal Government. Thus, the marginal rate at which the Five Forty are taxed on this income may exceed 100%. 

5)    A surtax is paid for each FME.

a.    The budget for a given fiscal year (FY) is considered passed on the last day that any portion of that budget is enacted.

b.    The debt ceiling for any given fiscal year is considered passed when all borrowing for that fiscal year has been legally authorized.

c.    A Member is considered as having voted for a debt ceiling increase for a given fiscal year if a Member voted for any portion of a debt ceiling increase used to fund that fiscal year’s debt ceiling.

d.    Note that an item (such as budget passage) will have multiple deadlines. The magnitude of the penalty will increase the longer the process takes. Majority members are subject to a higher surtax than Minority members.

e.    Each Chamber faces its own set of FME penalties until the new FY begins, at which point all 537 elected leaders are penalized until the budget is enacted.

6)    A surtax is paid for each budget that is in deficit. Unfunded mandates are counted as spending for purposes of this surtax. The amount of surtax each member faces depends on how that member votes on debt ceiling increases and out of balance budgets. To reduce strategic voting, any vote for any budget item is counted as a vote for all budget items for purposes of the PACT.

7)    A surtax is paid for each previous budget deficit or debt ceiling increase that a Member voted for. This surtax may decay over time, but does not have to.

The Five Thirty Seven PACT’s General Principles for Inactive Members:

Inactive members have their pension and tax rates adjusted based on how well the nation’s fiscal health was managed during their tenure.

If a Member serves a minimum defined period, and the Federal debt has not increased over the Member’s term subject to the PACT, then the Member’s pension equals 100% of current Active Member’s base pay, and he pays taxes as an ordinary citizen.

If the above conditions are not met, then the Member’s pension is prorated based on number of FMEs and the aggregate Federal deficit amount during his tenure.

This design of the 537 Accountability PACT  has several features:

1) Setting Member's base tax rate at the same rate as they spend will tend to reduce spending. Every billion dollars Congress spends would cost an Active Member about $10 in taxes-more, if they have outside income. Members will be literally voting to spend their own money.

2) Setting Member's marginal tax rate equal to the maximum marginal tax rate any one faces should bring simplification and rationality to the tax and benefit code.

3) Penalizing Members for running a deficit will push the 537 to try to balance the budget over time, whether through tax hikes or spending cuts. By making the penalties for voting for a debt ceiling increase or out of balance budget accumulate over years, the PACT ensures that large deficit spenders are effectively taxed out of Congress.

4) Since the budget process and surplus bonuses compound over the years, the 537 will be highly motivated to keep these bonuses in place once they are in effect for a few years. For example, if there is a 5% bonus for each properly managed budget process and 15% for each surplus, the bonus after 3 years would be almost 68% of base pay. A budget process failure and deficit in year four would cut member's pay by about 40% (and the tax rate the 537 pay would go up.)

 5) The 537 PACT maintains financial flexibility. If the country is facing a crisis and needs to run a deficit, it can. Members will still be penalized, but sacrifice is one aspect of our national leadership that is sorely lacking.

The 537 Accountability PACT is designed to control spending, simplify the tax code, and potentially break up the Republican vs. Democrat approach that currently rules in Washington. Enactment of the 537 Accountability PACT should reduce the petty, partisan warfare in Washington and force the 537 to focus on governing in a responsible manner.