I would also suggest a look at the Fair Tax. It shifts the entire tax burden from Production to Consumption, and essentially makes America the next global mecca for business & manufacturing outsourcing. Our economy desperately needs to return to a basis of real wealth creation (taking raw materials, innovation, labor, and capital and turning them into products worth more than the sum of their inputs) instead of paper wealth creation or transfer, and the Fair Tax is the best way of doing that I've yet seen. If you haven't read their latest book, please do so. There are lots of misconceptions and misunderstandings about it, and even the Fair Tax creators made some inaccurate assertions initially that they have now corrected in the latest book, Fair Tax: The Truth: Answering the Critics.

All else equal I'm in favor of cutting taxes too. However, things are not equal. The insane runup in the Federal debt the past 8 years threatens a bond market dislocation that could jack up interest rates across the board not only in the US, but the world. Such an event would certainly lead to a US and probably global depression.

A bond market dislocation is when bond market decides that the US govt debt is reaching levels that threaten its credit rating or even a partial default, and demands higher interest rates to compensate for the higher risk. This happens by way of a (probably panicked) sell off of US Treasuries en masse, crashing their prices and jacking up their yields.

More specifically, when bonds are dumped on the market en masse, their supply rises relative to their demand, and their prices fall. Since [bond yield = (fixed bond interest rate / price)] (roughly), as price falls, yield rises. Yield is the current return of any debt instrument, so when the government issues, say new 10yr Treasury Notes, it must offer them at a rate competitive to the yield of currently trading 10yrs or other comparable bonds. If the yield on currently traded bonds is rising, so must the rates on newly issued bonds.

Further, since US Treasuries are considered the global risk-free rate of return (backed by the as-yet-unmatched tax base and political stability of the US), all US interest rates and many global rates are indexed off of them (and LIBOR). So if Treasury rates rise, so must all other interest rates. If Treasury rates skyrocket due to a bond market dislocation, then rates on everything around the world will do similar - all adjustable rate debt like credit cards and ARM mortgages, and all newly-originated fixed-rate debt like corporate bonds and standard mortgages. Individuals in debt b/c more distressed, corporations curtail borrowing for hiring, investment in new production or R&D;, housing market slows, and economic activity in general contracts. The degree of that contraction depends on the degree of the bond market dislocation.

Unfortunately this scenario is becoming more likely with each additional bailout. Currently, interest on the Federal Debt is one of the top 3 expenditures in the Federal Budget, after Military and Entitlements. At the current rate, it will soon reach 25% of tax revenue, and as the US economy tanks, our decreased demand for Chinese products and MidEast oil may reduce the ability of those regions to continue financing our national debt (China, Japan, Mideast, and Britain are the largest purchases of US Govt debt.).

You can see how the outcome of such an event is not pretty, and worth doing everything possible to avoid, even raising taxes and drastically cutting government spending. The latter is clearly unavoidable, the former is hopefully avoidable, but may not be.

What will fix the economy is to solve the root of the problem, not throw money at the symptoms as Congress, Paulson, and Bernanke have been doing. This crisis is imminently solvable, not the opaque, insurmountable problem they make it out to be.

The roots of the problem are:

1. No trust in the markets. All banks and financial institutions suspect each other of hiding insolvency, and are afraid to loan in the overnight lending market or longer term b/c who wants to lend money to an institution that could within a few days spiral into failure, as Bear Stearns and Lehman did?

2. Many banks and investment banks are insolvent, they're just hiding it off-balance sheet on Level 3 or in SIVs, or some other obsfucation. They've leveraged up, or borrowed money, using these hidden, now-distressed or nonperforming 'assets' as collateral. Now that collateral is going bad, they are trying to hide it using off-balance and/or mark-to-model accounting.

3. Excessive leverage ratios of 20:1, 30:1, 40:1, even 60:1 in the case of Fannie Mae. Leverage amplifies your returns in good times, but amplifies your losses when your trades and investments go against you.

4. Housing prices are reverting to their historical mean of no more than 3.5x to 4x salary levels, bringing down mortgage securities based on them that were created with the assumption that housing prices, even those in a historically unprecedented bubble, never fall.

Several sound, informed solutions have been proposed: The Genesis Plan, Plan B by Luigi Zingales of Chicago GSB, Tavakoli Structured Finance's alterntive plan, Juan Enriquez's plan of Harvard GSB, and Nouriel Roubini's plan. In a nutshell, they all include variations on the following:

1. Require 100% balance sheet transparency on all publicly traded companies. Off-balance-sheet shenanigans like Level 3 and SIVs were supposed to have been eliminated after Enron, instead they infected the entire financial system. Without full, perfect transparency trust can never completely return to the financial markets.

2. #1 will expose many companies as distressed or insolvent, some of which are necessary for a working financial system and some of which are not. The solution to this is forced restructuring that puts first losses on stock and bondholders, as is supposed to happen in capitalism, not a taxpayer bailout that shifts the risks and losses to the Federal balance sheet and currency. A capital structure cramdown that wipes out current equity and converts bonds to new equity is usual way of accomplishing this. Stockholders lose 100%, and bondholders take a partial loss but are left with equity in a still-functioning, productive company with a clean, debt-free balance sheet, able to return to making money unimpaired. If further capital infusion is still needed after the restructuring, the Fed and Treasury can triage at much less cost and risk. This step is covered in detail by all three plans, and by dr. Enriquez's plan as well.

3. Require all derivatives to be traded on a margin-requirement-enforcing exchange. No more OTC contracts that can stealthily balloon into a $66T tangle of 'weapons of financial mass destruction'.

4. Reinstate the historically safe 12:1 leverage cap requirement (that incidentally Hank Paulson, lobbying in 2004, got repealed).

5. Restructure and workout bad mortgages so as to allow an orderly housing price regression to the historical mean of no more than 3.5x to 4x salary levels, while mitigating as much as possible the damage to currently outstanding securitized mortgage instruments. Zingales covers this in detail.

Links to the plans:

http://www.denninger.net/letters/genesis.pdf

http://faculty.chicagogsb.edu/luigi.zingales/research/PSpapers/plan_b.pdf

http://www.tavakolistructuredfinance.com/TSF8.html

http://www.tavakolistructuredfinance.com/BNN5.html

http://poptech.wiki.zoho.com/

http://www.rgemonitor.com/707