To Solve the Twin Deficits

That problem is how to simultaneously reduce the trade deficit and to reduce the US Federal budget deficit. Those problems are connected by the flow of funds to and from overseas: the dollars sent overseas to buy goods (or services) flow back to invest in US $ denominated debt. Some call them "imbalances". Maintaining stability when both flows are large is a problem, as small changes in big numbers are ... big, and cause serious disturbances.

What is Do ?

First, recognize some causes. IF the US economy had full employment, the Federal budget deficit would shrink hugely. Second, US tax policy both taxes employment heavily AND subsidises imports, so we get less employment and more imports than otherwise would be equilibrium.

How is this done ? Social security, Medicare and various unemployment taxes are a very, very high cost to labor, over 15% of gross wages. Add to that the cost of health care benefits. The gross cost probably is over 25%. Under ObamaCare, this cost for using people will grow. Obviously, less US source employment is used for production and US firms place production overseas where possible.

All that labor tax money flows to provide benefits to US workers/people, and is added to the cost of US source goods. So Americans buying US source goods pay a huge added cost, while buying foreign source goods lets them pay NONE. What do we get ? People can buy imports and not pay for those benefits to the people. So the nation's tax policy effectively subsidizes imports, at the expense of US-based production, AND even taxes exports, too, via US source labor taxes.

All these create a huge dis-equilibrium in favor of less jobs, more imports, and less exports. This poor US tax policy supports the twin deficits.

How to Solve the Problem ?

Replace ALL labor taxes - Social Security, Medicare, unemployment and any health care mandates with a single National Sales Tax ("NST"), or call it a value added tax ("VAT") if you wish, on all goods. Employers will see their labor bill reduced hugely, and can hire more. Firms using foreign source labor will have to pay the NST/VST on sales in the US, so will lose that prior advantage (of not paying for US social benefits). US firms will see better profit margins on exports, as they will not have to pay that tax on exports.

American consumers will pay the tax equally on US source goods and imports, but that total amount will go to US benefits to its people. The opposite is true now, as no benefit to the American people flows from use of imports.

This fair tax policy will hugely reduce unemployment and the trade deficit - helping hugely to solve the twin deficits.

By the way, one has to replace ALL labor taxes at once with the NST/VAT, or no one will believe that the change is real and permanent, and that the public will not end up with both taxes. Also, the tax is on goods only: services are labor. The income tax picks those up directly or in the NST/VAT on price of the goods they help produce.

Additional Benefits

The municipal bond freeloaders and cash income persons will have to pay that NST/VAT, too when they spend their money. This improves fairness.

Word of the Day

"Controvert" - verb, transitive [$10]
Controvert means 1. to dispute, deny; 2. argue about, discuss.
Sentence: To controvert that US labor taxes seriously hurt US employment levels is a pretty difficult position to argue.