spending

Budgeting 201: An Immediate Debt Crisis

/ L. M. Walker / 1 Comment

USA vs. Cyprus: Gross Government Debt to GDP

– By: Larry Walker, II –

According to Speaker of the House John Boehner, “We do not have an immediate debt crisis.” No, then what would you call it? Seems to me it was immediate in 1995, and again in 2008, so what is it now? Are we just screwed? And according to Barack Obama, “We don’t have an immediate crisis in terms of debt. In fact, for the next 10 years, it’s gonna be in a sustainable place.” Yeah, what place is that, Wonderland? Have you people lost your minds?

The chart above is from data published by the International Monetary Fund in its World Economic Outlook Database, October 2012. Based on what’s happening in Cyprus, for some reason I don’t believe either of them. We had an immediate debt crisis in 1995 when our debt-to-GDP ratio reached 71%, insomuch that the government was shut down. And another in 2008 when it reached 76%, just before all hell broke loose. And now suddenly, as gross U.S. debt has surged beyond 100% of GDP, the problem is no longer immediate. If the debt isn’t an immediate problem, when will it become one? Let me answer that for you.

The debt will become an immediate crisis when our economy inevitably dips into recession, a phenomenon which has occurred historically about once every 5 years since World War II. In fact, recession is exactly what’s happening in Cyprus right now. But surely recession will never reoccur in the U.S., because government fixed that problem once and for all, right? I mean it cost us around $6.7 trillion over the last four years, but the problem is solved, right? With GDP surging at a robust growth rate of 0.4% (revised) in the 4th Quarter of 2012, how can our government possibly be wrong? Oh give me a break!

I believe part of what exacerbated the crisis of 2008 was an excessive amount of government debt. So what do you think is going to happen with our debt hovering above 100% of GDP, as the next crisis hits? Is the U.S. government prepared for another recession? Is there anything left in the tank? It sure doesn’t look like it. Well, we’re not going to sit around and let the government continue to tax us to death, and we’re definitely not going for the unlawful seizure of our money and property, so I suggest you government guys get your act together and get serious about your spending problem, and that means now.

Instead of loosening standards and letting everyone who wants to – go on disability, welfare and food stamps; granting any illegal alien who desires – a free pass; and subsidizing any and everyone’s health insurance bill, while the other half of us and our grandchildren get stuck with the bill, now is the time to tighten standards and cut the slack. The sequester is right! Reducing the size of government is right!

Government needs to learn how to say, “No”. It should be, ‘Sorry, you’re going to have to go back to work, and you’re going to have to go back to your own country, and you’re going to have to chip in on taxes, because we can’t have 50% of the populace taking care of everyone else.’ If our government doesn’t learn how to say no, it’s going to destroy this nation and along with it our freedom. Yes, the debt is an immediate crisis, and it is an imminent threat to the survival of the Republic.

The chart above is from the Federal Reserve Bank of St. Louis. I’ll ask again. Does this look like it might be an immediate crisis, or just a tiny little problem years and years from now? It sure looks immediate to me, but maybe I’m just a bit more focused on surviving the unknowns, than sitting around fooling myself into thinking everything is going to be rosy ten years from now, if I just fold my hands, play a little more golf, and trust that someone else will handle it for me. Yeah, just like Cyprus, right? It’s time to stop playing politics and face reality.

References:

My Data – USA vs. Cyprus: Debt to GDP

IMF: World Economic Outlook Database, October 2012

Related:

Budgeting 101: A Balanced Approach

What Does Sequestration Mean To You?

From AAA to AA- in Four Years

Uncorrelated: GDP and National Debt

#Debt

Budgeting 101: A Balanced Approach

/ L. M. Walker / 1 Comment

I do believe that at some point government has borrowed enough. Although tax revenue is directly tied to economic growth, government spending is not.

– By: Larry Walker, II –

How does one balance a budget? Let me count the ways. Spend less than you take in annually, and you’ll live within your means. But how can governments comply? Why that’s easy. Simply calculate the rate of revenue growth in the previous year, then adjust the prior year’s spending level by this multiple for the current year. If a deficit ensues, trim spending back into balance. If a surplus results, pass it back to taxpayers in the form of tax rate reductions. Most of us would call this a balanced approach.

Of course proponents of big-government will retort, “It doesn’t work like that. We must spend around 50% or more than we take in, to stimulate revenue; so that we can spend around 50% more than we take in, to stimulate even more revenue; so that we can spend around 50% more than we take in, stimulating ever more revenue, ad infinitum…” Yet, it’s rather obvious that the modern day extreme left-wing’s touted correlation between government borrowing and economic growth is nonexistent, as we proved in – Uncorrelated: GDP and National Debt.

It might be helpful for far left-wingers to remember the words of the Original Democrat, Andrew Jackson, who once said, “I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country.” For more, see my post entitled, From AAA to AA- in Four Years.

You see, “For Jackson politics was very personal,” says H.W. Brands, an Andrew Jackson biographer at the University of Texas. “He hated not just the federal debt. He hated debt at all.” Before he was president, Jackson was a land speculator in Tennessee. He learned to hate debt when a land deal went bad and left him with massive debt and some worthless paper notes. Thus, unlike POTUS #44, Jackson brought practical business experience to the White House.

When he ran for president, Jackson knew his enemy: banks and the national debt. He called it “the national curse”. In Jackson’s mind, debt was “a moral failing”, says Brands. “The idea you could somehow acquire stuff through debt almost seemed like black magic.” But now days, if you listen closely to the Democratic Party, its enemy is no longer the national debt, but rather the average, anti-debt, fiscally responsible, Tea Party patriot.

The Balanced Approach

What would the federal government’s surpluses and deficits look like had it followed a balanced approach since 1929? Per the chart below, having begun with a surplus of $1 billion in 1929, the federal government would have realized a surplus of $835 billion in the 3rd quarter of 2012, compared to an actual deficit of around $1.1 trillion. Of course, all surpluses along the way could have been returned to taxpayers through periodic tax rate reductions, making income tax compliance at least somewhat worthy of the effort.

Under the balanced approach, when all spending is totaled from 1929 through 2012, the federal government would have spent a total of $39.4 trillion, versus the $66.9 trillion actually spent, for savings of $27.5 trillion. That means instead of a national debt fast approaching $17 trillion, we could be sitting on a national surplus of around $10.5 trillion.

The Unbalanced Approach

In contrast, what has the federal government’s unbalanced approach yielded? Per the second chart (below), having begun with a surplus of $1 billion in 1929, the federal government wound up running a budget deficit of approximately $1.1 trillion in the 3rd quarter of 2012. As you can see, the main imbalance has occurred since the year 2008, which is when the federal government adopted its current philosophy, where expenditures are completely decoupled from revenue growth – as if spending is suddenly a function of an imaginary 22nd Century economic boom. Meanwhile, approximately $6.7 trillion has been added to the debt since 2008, and the economy grew at a paltry annual rate of 0.4% (revised) in the 4th Quarter of 2012.

Conclusion

Although federal tax revenue is a function of economic growth, government spending is not. In other words, as the economy grows, tax revenue increases; and as it shrinks, tax revenue declines. Anyone who doesn’t understand this should return to the 6th grade for a refresher in basic math. On the other hand, government spending is a function of revenue. That is to say, as tax revenue rises and falls, so follows the amount available for government expenditures. Surpluses and deficits are directly linked to the level of government spending. When government spends less than it takes in, there is a surplus; when it spends more than it takes in, a deficit. It’s really that simple.

If the federal government is to ever regain control over spending, it must start with the rate of revenue increase (or decrease) in the previous year, since this is the only reasonable way of projecting the amount available for the current year, and then adjust its current year spending level accordingly (up or down). As soon as a deficit appears, the role of government is to trim spending back into balance. When a surplus results, government’s role is to pass the savings back to taxpayers, in the form of tax rate reductions. This we call, “the balanced approach” – and there is none other. Don’t patronize me. There is really only one question, Will the Democratic Party ever recover its bygone common sense?

Reference:

My Worksheet on Google Drive

BEA: Table 3.2. Federal Government Current Receipts and Expenditures

Related:

From AAA to AA- in Four Years

Uncorrelated: GDP and National Debt

#Debt

Obama’s Economic Reduction Plan

/ L. M. Walker / Leave a comment

Private Equity vs. Government Redistribution

– By: Larry Walker, Jr. –

“A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants. Still other seed fell on good soil, where it produced a crop—a hundred, sixty or thirty times what was sown. He who has ears, let him hear.” ~ Matthew 13:3-9

For many, the American Dream consists of the hope of freeloading off of the good fortune of others for their entire lives. Yet for some, the dream is comprised of one day saving enough capital to invest in a business of their own. And for a few, the dream is to one day save enough to invest through a private equity group. For those aspiring towards business ownership, sometimes a little help is needed, and that help, in many instances comes though private equity firms.

So why would anyone dream of investing in a private equity firm? Well one big reason is that under current law, around 58% of the profits realized by private equity firms are taxed as long-term capital gains rather than as ordinary income. Long-term capital gains are currently taxed at the maximum rate of 15%, while ordinary income is taxed as high as 35%. The lower tax rate on long-term capital gains helps to compensate for the opportunity cost of investing for the long haul, and also enables a greater portion of the profits to be reinvested into the next venture, which can ultimately lead to the accumulation of a great deal of wealth.

Another reason many dream of investing in private equity groups is because they feel a calling to help fellow Americans reach their dreams. Unlike bloated, deficit-financed, short-sighted, big government wealth redistribution schemes, private equity is good for America. However, if the carried interest (the long-term capital gains earned through investing in private equity) were to suddenly be taxed at the same rates as ordinary income, then there would no longer be an incentive to invest in long-term private business endeavors.

Private equity firms fund and co-manage thousands of private businesses in the United States, employing millions of American workers, and these businesses are dependent upon stable long-term investments. If big government takes away the incentive to save and invest in long-term endeavors, then there will be no long-term investment. It simply won’t be worth the risk. And without long-term private equity investment, thousands of businesses, millions of jobs and the American Dream will be choked out of existence.

Carried Interest vs. Ordinary Income

Ordinary income is mostly comprised of net business income, fixed compensation, interest, dividends, rents, royalties, and short-term (less than a year) capital gains. Unlike ordinary income, there is greater risk involved with long-term (more than a year) capital investments. Private equity firms typically make investments over a 3 to 7 year term. The risk of tying up capital savings for many years is that the investment might be lost entirely, or may not return any profit at all. So is carried interest the same as ordinary income? Centuries of sound and settled tax policies say no. But Barack Obama, a novice, with no business experience, and a track record of failed economic policies; and Warren Buffett, a retiring billionaire, who has profited from lower taxes on carried interest during his lifetime, say yes. So who’s right, centuries of proven economic science, or 32 months of butt kissing and B.S.?

The Obama-Buffett Rule presumes that carried interest is the same as ordinary income and should be taxed at ordinary income tax rates of up to 35%, instead of at capital gains rates of up to 15%. The contention that the profits earned through long-term capital investment, which involves placing previously taxed income at risk through investing in risky business ventures, which employ hundreds of thousands of American workers, and which help drive the American economy, should be taxed at the same rate as fixed compensation, such as wages earned from labor, is quite a leap. The problem with Obama’s latest Socialist twist is that unlike fixed compensation, which is properly taxed as ordinary income, carried interest, garnered through private equity investments, only rewards general partners if, at the end of the term, the fund actually results in a net gain.

To break this down further, you have on the one hand wage earners, who work 40 hours per week, get paid weekly (or semi-monthly), consume most of their pay, and have taxes withheld from each paycheck. And on the other hand, you have private equity partners who work on a project for 3 to 7 years, expending capital and sweat equity, aiding in the employment of thousands of tax paying workers, helping make tax paying businesses profitable, and ultimately hoping to, at the end of the term, regain their investment along with a handsome profit. So is carried interest the same as ordinary income? Is all income created equal? Is Capitalism the same as Socialism? Do words still have meaning?

Private Equity in Action

Within the State of Georgia there are approximately 30 private equity firms, which have invested an estimated $26 billion in Georgia-based companies, which back approximately 340 private companies, which employ more than 175,000 U.S. workers. If more capital is diverted away from private equity investments, through errant tax policies, and instead invested in tax-free securities or some other jurisdiction, then where will the capital to fund these Georgia businesses come from? It’s not likely to come from banks, which are currently paying investors taxable interest of between .01% and 1.0% on savings. And it’s not likely to come from the federal government which is currently $14.7 trillion in debt. Thus, when private equity capital is finally taxed out of existence, there will be no capital, and most of these 340 companies will cease to exist, along with 175,000 jobs.

In the State of Illinois there are approximately 137 private equity firms, which have invested an estimated $72.9 billion in Illinois companies, which back approximately 450 private companies, which employ more than 350,000 workers in the U.S. The State Employees’ Retirement System of Illinois had nearly $525 million invested in private equity as of June 30, 2008, about 5 percent of the System’s total pension fund portfolio of more than $11.4 billion. And as of June 30, 2009, the Illinois’ Teachers Retirement System had $2.34 billion invested in private equity, about 8.2 percent of TRS’ total portfolio of nearly $29 billion. Are the billions of dollars that Illinois pension funds invest in private equity firms any more or less important than any other American citizen’s savings? I think not. If the government takes away the incentive of private equity partners, then where will this capital go? If you say, “To the Banks”, again you err. If you say, “Directly into businesses”, then who will oversee and manage these investments, the government? Yeah, right, just like Solyndra.

It’s Math!

And then there’s this hogwash about wealthy people paying lower tax rates than middle income earners. Does anyone really believe this? All you have to do is glance over at one of our “progressive” tax rate schedules, to know that’s not the case. Since our tax rate structure is “progressive”, the rates increase along with income. One’s combined tax rate is never the same as their bracket rate. In other words, you may be in a 25% bracket, but that doesn’t mean you’ll fork over 25% of your taxable income. As you can see below, married couples with ‘ordinary taxable income’ of $25,000 pay a tax of 11.6%, those with $50,000 pay 13.3%, and those with $100,000 pay 17.2%; while married couples with ‘ordinary taxable income’ of $250,000 pay a tax of 24.0%, those with $1,000,000 pay 32.0%, and those with $10,000,000 pay 34.7%.

In terms of dollar amounts, on the low-end, 11.6% of $25,000 translates into $2,900, while on the high-end, 34.7% of $10 million works out to around $3.5 million. So is paying $2,900 in taxes greater than or equal to paying $3.5 million? It’s math! One must also consider that five times out of ten, that $2,900 liability gets magically turned into a tax refund of up to $8,000, as nearly half of all American workers are either not liable for any income tax whatsoever, or fall into the negative category. So perhaps the words “fair share” could be more appropriately expressed as “unfair and not-shared”.

From Taxing the Rich
From Taxing the Rich

Although it may seem fair for Obama and Buffett to compare a private equity partner with $10,000,000 of carried interest, to a married couple with taxable wages of $100,000, it’s really not. It’s like comparing oranges to apples. Although the wage earning couple will pay federal taxes of 17.2% versus the carried interest earners 15.0%, in the end, the couple will have paid a total of $17,250 in taxes, versus $1,500,000 for the private equity partner. So is $17,250 greater than $1,500,000? “It’s math!”

The real difference is that a private equity partner may then turn around and reinvest most or all of the remaining $8,500,000 into the same company that the married couple works for, thus enabling them to continue their very employment. In terms of economics, the multiplier effect on private equity investment generates many times the tax revenue paid by the partner himself. Just add up the taxes collected on all the additional wages, salaries and business profits he helps to generate. But if that capital be muzzled, the result will be less free-enterprise and even higher levels of unemployment. Thus, while earning a salary is productive, it’s nowhere near as productive as carried interest. Perhaps there’s a reason why some of our tax policies are the way they are! “It’s math!”

If Obama and Buffett really wanted to compare apples to apples, then they would be comparing a married couple with carried interest income of $10,000,000, to a couple with long-term capital gains income of $10,000,000. Each will pay $1,500,000 in taxes. So is fairness still an issue? The truth is that no American is prevented from saving his or her own money and investing in activities generating similar capital gains. Anyone can do it, and will reap an equal reward — a maximum 15% long-term capital gains tax. But if the government ever takes away this incentive, or begins to discriminate against certain forms of long-term gains, then you can kiss the American Dream goodbye.

Government Subsidies vs. Private Equity

If the government steps in and confiscates a larger chunk of the profits earned by private equity firms, then there will be that much less capital to reinvest in new acquisitions. And what will the government do to make up the shortfall? Will the government invest in and manage new enterprises? Perhaps, the federal government will subsidize more companies like Solyndra, but then who gets the ‘return on subsidy’ (ROS), if and when the government is successful? Will every taxpayer get an equal slice of the pie? That’s highly doubtful. More than likely, the money will simply be absorbed into the federal government’s irresponsible $1.3 trillion per year budget deficits, or into its $14.7 trillion national debt, or used to pay unemployment compensation, or to dole out more food stamps, neither of which will create new jobs. In other words, the money will be pilfered and consumed rather than invested in viable job creating enterprises. And we all know that America needs more jobs, not more debt, unemployment compensation and food stamps.

Private equity investors fund American businesses which employ millions of American workers. By investing in non-public companies they typically hold their investments with the intent of realizing a return within 3 to 7 years. Shouldn’t there be some reward for committing previously taxed income for 3 to 7 years, in order to help businesses grow, and to enable employment for millions of workers, with no guarantee of a profit let alone return of the original investment? I say, yes. Obama and Buffett say, no. Where they err in their quest for “fairness” is in that 42% of the profits earned by private equity investors are already taxed at ordinary tax rates, while just 58% represents carried interest. They also fail to realize that such profits are typically reinvested back into the cash account to fund the next acquisition. You would think that at least Buffett would understand this concept, since most of his earnings have been likewise reinvested.

Hell No!

With Obama’s brand of math, one would surmise that if the government could just confiscate the $1.4 trillion in annual private savings, and use it to pay the $1.4 trillion of annual government deficits this would somehow bring about “balance”. But all it would really bring about is a permanent state of depression, mass government dependency, and even greater deficits once the government runs out of other people’s money. And considering that the best the federal government could possibly do, by confiscating additional tax revenue, is to immediately absorb it into its irresponsibly amassed $14.7 trillion in accumulated deficits, over $4 trillion of which was squandered by Obama himself, the answer to the request for more revenue is still, “Hell No”. Cut spending, stop squandering the tax dollars we’re already paying, and stop regurgitating the same old lies over and over again.

Although the federal government does employ a couple of million workers, about 59% of the money used to pay them is already confiscated from taxpayers, while the other 41% is merely borrowed from the Federal Reserve Bank and from countries like China. Every dime taken away from private investors and spent by the government is a dime taken away from private businesses and private sector workers. Once the point of no return was breached, back in 2010, there was no longer enough personal income to cover the amount of federal debt, on a per capita basis, and if this is not corrected soon, it will lead to the death of the American Dream. If there is already not enough income to pay the government’s debt, then why is Obama begging for higher taxes? When there is nothing left but government, then what? Will the government pay everyone a subsidy of say $50,000, and then proceed to levy a 100% tax on everyone in order to fund itself into infinity? Isn’t this exactly where Obama’s plan leads?

The failure of Obamanomics can be summed up in a few short phrases: If it produces jobs, tax it. If it keeps producing jobs, regulate it. And when it stops producing jobs, subsidize it. Thus Obama’s plan for deficit reduction, like his Jobs Act, is just another gimmick leading to economic reduction, job destruction, government dependence, poverty and the end of the American Dream. Obama gave it his best, but his best just wasn’t good enough for America. Hey Obama, “Hell no, and good riddance.”

*** BTW – Raising the tax rate on carried interest from 15% to 35% would result in a 133.33% tax hike, or to 39.6% would equal a 164.0% hike, just in case anyone is still considering this madness. ***

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~Calvin Coolidge (Address to the General Court beginning the 2nd year as Governor of Massachusetts January 8, 1920)

References:

Private Equity Info

Private Equity Growth Capital Council

Related:

The Problems with Raising Taxes on Carried Interest, Part II

Fiscal Commission: Tax Reform I

/ L. M. Walker / 2 Comments

Review of Tax Reform Proposals –

By: Larry Walker, Jr. –

I am in agreement with the Fiscal Commission’s goals on tax reform. Although the details are a little vague, it’s clear to me that Option 1 is probably out of the question, Option 2 is promising, and Option 3 is pretty much a joke. I think that those who have discounted this initial ‘draft’ report at face value are doing the commission a disservice. And as far as the Trash Talker In Chief, who has already started spouting off without even reading it, I have nothing but contempt for the comments I heard today out of South Korea.

I personally had a falling out with President Bush, when he put together a special commission on the War, and then proceeded to ignore everything they said. So I hope that someone in Washington takes this commission seriously and implements some of their more excellent ideas (the right ones). If not, there will probably be another major falling out.

Of course, the following tax reform proposals go along with proposed cuts in spending. I am just looking at the tax aspects today, but as long as spending is cut as proposed, there is hope of some kind of compromise on taxes. I think we do need to simplify our tax code and lower tax rates however, our main problem right now is spending. Thus, spending reform should occur prior to any type of tax reform, and of course the repeal of Obamacare is number one on that list. At the top of the tax reform list today is passing another patch for the AMT, and extending the 2010 tax rates for another couple of years. There’s no time to waste on partisan trash talk.

My likes and dislikes are below in blue type, and a link to the original report is at the bottom.

Comprehensive Tax Reform

Goals:

  • Lower Rates
  • Simplify the Code
  • Broaden the Base
  • Cut Spending in the Tax Code (Tax Expenditures)
  • Improve Compliance (Tax Gap)
  • Make America the Best Place in the World to Start and Grow a Business
  • Reduce the Deficit

I have no problem at all with the commissions outline of goals for comprehensive tax reform. I think they are in agreement with what every fiscal conservative has been chiming for decades.

Option 1: The Zero Plan

  • Consolidate the tax code into three individual rates and one corporate rate
  • Eliminate the AMT, Pease, and PEP
  • Eliminate all $1.1 trillion of tax expenditures
  • Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
  • Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero-expenditure low

Option 1: The Zero Plan

*Note: All options set aside $80 billion for deficit reduction and treat capital gains and dividends as ordinary income. Rates based on very rough static estimates. No behavioral effects are assumed. Magnitude of tax expenditures estimated broadly.

Although I like the idea of lowering the tax brackets and consolidating them down to the three, and having one lower rate for corporations, the elimination of all tax expenditures is problematic. Having survived through a household with four young children, I have empathy for parents of young children. Between day care, food, medical, and the extra running around that parents deal with, it would be right to extend the child tax credit. Although it wasn’t there in my day, it would have given us some badly needed relief.

I am however not a fan of the EITC (earned income tax credit). I think the EITC discourages people from being all that they can be, and instead keeps them locked within a certain range of income. So the EITC can be dumped.

I agree with repealing the AMT (alternative minimum tax), in fact, we ought to just go ahead and do that right now. And I agree with repealing the limitations on itemized deductions (Pease), and personal exemptions (PEP).

I disagree with taxing dividends and capital gains at ordinary rates. I think we should encourage investment by extending more favorable tax rates to investment income.

I would like to see the continuation of deductions for mortgage interest, property taxes, state and local income taxes, and charitable contributions.

I am in favor of keeping deductions for retirement contributions such as IRAs and SEPs which are not addressed in this summary.

Thus, Option 1 falls short of the mark because by the time one adds back all the desirable tax expenditures, we’re right back where we started. However, Option 2 is more appealing.

Option 2: Wyden-Gregg Style Reform

Individual Tax Reform

  • Repeal AMT, PEP, and Pease
  • Establish 3 rates –15%, 25% and 35%
  • Triple standard deduction to $30,000 ($15,000 for individuals)
  • Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
  • Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
  • Limit charitable deduction with floor at 2% of AGI
  • Cap income tax exclusion for employer-provided health care at the amount of the actuarial value of FEHBP standard option
  • Modify and repeal several other tax expenditures
  • Dedicate portion of savings to deficit reduction

Again, the repeal of the AMT, PEP, and Pease are most desirable, fundamental to both options and should be done now, today.

I like the idea of having just the three tax brackets.

The tripling of the standard deduction is very appealing. It would take the place of the mortgage interest deduction for many, allow non homeowners a higher deduction, and not impair those with larger mortgages (under $500K). I think limiting the mortgage deduction on 2nd homes and mortgages over $500K is prudent. Why are we subsidizing 2nd homes anyway?

I’m OK with the limitations on charitable contributions, and the employer health care exclusion.

I don’t know what is meant by ‘repealing several other tax expenditures.’ The commission needs to be more specific.

Corporate tax reform

  • Reduce corporate tax rate to 26%
  • Permanently extend the research credit
  • Eliminate and modify several business tax expenditures, including:
    • Domestic production deduction
    • LIFO method of accounting
    • Energy tax preferences for the oil and gas industry
    • Depreciation rules
  • International tax reform including a territorial system

The corporate tax reform ideas seem reasonable, but of course more detail is required.

Option 3: Tax Reform Trigger

  • Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
  • Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
  • Haircut would limit proportion of deductions and exclusions individuals could take to around 85%* in 2015. Similarly, corporations would only take some proportion of their general business credits
  • Set haircut to increase over time until tax reform is enacted

*This is a very rough estimate of the haircut necessary to reduce the deficit by $80 billion in 2015

Option 3 is absolutely out of the question. Throwing tax reform back into the hands of politicians virtually assures that nothing will be accomplished for another 40 years. The use of the word ‘trigger’ pretty much sums it up. Who’s going to pull it?

Source: http://www.fiscalcommission.gov/news/cochairs-proposal

[D]issing America: The Looming [R]esurgence

/ L. M. Walker / 1 Comment

D is for Dissing America

The Case for Further Tax Cuts

Ranted By: Larry Walker, Jr.

Obama’s progressive form of economic change is destroying America. Not only does he threaten to hoard the keys, but to thrust the car over a cliff. Specifically, the effect of his policies on productivity, government subsidies, tax credits, class warfare, income taxes, and government spending is doing more harm to America than the Great Recession ever could.

Taking Away the Incentive

In the private sector, when you want to motivate a workforce you offer them things like more time off, bonuses, or stock ownership. In other words you offer them something in exchange for something. The Obama administration offers nothing for those who work hard. With Obama, if you work hard, you receive the reward of paying higher taxes, fees and fines to support those who don’t work as hard, or at all. If I told my employees that next year, the lowest paid would be getting a 50% decrease in pay, and the more highly paid would receive a 10% pay cut, would they work harder? No. In the real world they would quit immediately, hang around while looking for another job, or simply decrease their performance in line with the coming downgrade. Isn’t this what Obama is doing by proffering a tax hike for those who are working hard, paying their bills on time, and in essence supporting everyone else?

The Failure Subsidy

Now let’s take a person who has been unemployed for a year and is about to lose their home. They haven’t really looked for work because they’re on 99 weeks of unemployment, courtesy of Obama, and they expect the government to step in and make up the back payments on their home. Why should this person work when they can live off of less and still get by? Their plan is to start looking for work again when all the free government benefits run out. This person has in effect been given a government subsidy not to work, at the expense of those who are working. When my teenagers can go out and find jobs in this economy, I find it hard to believe that there are no jobs. One of them gets up at 5:00 AM and goes off to bake bread, while moochers stay home to collect free checks. Why do my kids work? Because their mother told them they must either work, or get out of the house. That’s the kind of incentive that will either make you or break you. Implying that we somehow need illegal immigrants to perform undesirable work, because Americans won’t is a sad, sad excuse.

Breaking the Free-Market

At a time when home prices had fallen between 30 to 50% in some Georgia communities, in stepped the federal government with an $8,000 refundable tax credit for first time homebuyers. Initially the credit was only $7,500 and had to be repaid over a 15 year period. People were already buying houses at the time, and were turning down the initial credit because it had to be repaid, so the government, in its wisdom, made it a giveaway. Did potential buyers really need an additional incentive beyond the existing 30-50% discount? What about the hardworking folks down the street who were left paying for their largest, and now most devalued, asset? Prices may have eventually recovered on their own had fewer houses been sold in the trough, but through government intervention, now all of our houses have been hopelessly devalued. Those who received the tax credit also received the bonus of equity in their homes, while those who hung on through tough times got screwed.

The Victims

The Obama administration talks a lot about the “haves” and “have-nots”. It seems there are a lot more have-nots today, than there were in January of 2009 (roughly 6.4 million more). Those who still have a job, a business, or some savings (things that they worked hard to achieve) are the new haves. The have-nots are those who are victims of an economy, hindered by the federal government. In many cases, the have-nots are the direct victims of the federal government. Instead of motivating people to get off of unemployment, welfare, subsidized housing and food stamps, the government is increasing these programs and fostering the entitlement mentality. What incentive is there for one of these, government-made, have-nots to ever claw their way out? If working means giving half of ones labor to the government, then why even try?

Legalized Robbery

I was looking over a client’s job situation recently. The conclusion was that if she accepts the proposed contract, she and her husband will be in a position where every additional dollar she earns, for the rest of the year, will be subject to 50% in federal, self-employment, and State taxes. Is it even worth the effort? If you were offered a contract that would pay you $68,000 in five months, but you had to pay $20,000 in travel expenses to earn it, and then another $24,000 in taxes, leaving you with just $24,000 would you do it? It might be better to just stick closer to home and find a W-2 job paying $30,000. Where is the incentive when the government stands to gain 50% of ones labor? Yet the Obama administration wants to raise taxes. Hell, taxes are already too high. We need additional tax cuts, not an increase. Top tax rates should be cut back down to 28% like they were under Reagan (and even that’s too high). No one in their right mind is going to put forth maximum effort for half. It’s just not going to happen. Many have-nots ponder this same dilemma everyday.

The Spending Bonanza

If the Bush tax cuts caused such huge deficits, then how did Obama’s July 2010 budget deficit end up exceeding Bush’s 2007 annual budget deficit, by $5.0 Billion?

Per the website, Liberty Works, “the one-month deficit for July was $165,043,000,000 or $5 Billion more than the “irresponsible Bush deficit” for the entire year of 2007.”

Graph via: http://blog.heritage.org/2010/02/05/past-deficits-vs-obamas-deficits-in-pictures/

Will the government ever be able to raise enough tax revenue to cover Obama’s massive spending gap? Let me answer that for you. No. Never in a 1,000 years. The only thing certain about our exploding national debt is that more revenue will eventually be required to cover it. The question is how to increase revenue without further damaging the economy.

A Conservative [R]esurgence

What’s the solution? We need a conservative resurgence in America. Give us the incentive to produce, take away the subsidy for failure, stop tampering with the free market, and free us that we may lift the have-nots. Reduce income tax rates, and stop spending more than we have. Our present course is destined for failure.

The bottom line: Drastically cut the size of government, and don’t just freeze tax rates, cut them. You can’t just cut taxes without a corresponding reduction in spending. It doesn’t work like that. Yet, until taxes are cut, the government will be trapped in providing greater failure subsidies (bailouts), and further destructive interference with the free market. That’s how it works.

If you’re not part of the solution, you’re part of the problem.

National Debt Crisis – 2010

/ L. M. Walker / 3 Comments

Obama’s Debt Crisis

How much is the National Debt costing America?

It’s interesting to note that the total interest paid on the National Debt since 1988 has been $7,393 billion (that’s $7.4 trillion). That’s a lot of money being wasted by politicians in Washington, D.C. and there are not enough people talking about it. There is an even more deafening silence regarding what the cost will be over the next 10 years. The United States will pay almost as much interest as it did over the last 20 years in just the next 10. And no one in Washington is addressing the Debt Crisis. I would to God that somebody would wake them up before it’s too late.

click to enlarge

Source: Treasury Direct

Plan A – Pay the Debt Now

The National Debt is currently $12,087 billion (that’s $12 trillion). If principal and interest payments were made over the next 30 years at 4.0% interest, the total remaining interest cost would be $8,883 billion (that’s $8.9 trillion). The total annual P&I payment would be $699 billion or roughly 31% of current government revenues (click on the chart below). But since it’s not likely that this plan will ever see the light of day, what is Plan B?

PLAN A - click to enlarge

Plan B – Ignore the Debt until 2019

The National Debt is projected to grow to $19,224 billion (that’s $19 trillion) by the year 2019. This is calculated by adding the CBO’s projected budget deficit of $7,137 billion to our current debt. If the debt is not addressed until 2019, the cost of interest over the next 10 years would be $6,271 billion, since no principal payments will have been made (see chart below). Then, assuming that a plan is put in place to pay the debt off over the ensuing 30 year period, ending in fiscal year 2050, the total cost of interest over the next 40 years will be $20,397 billion (that’s $20.4 trillion). If the government starts making payments after 2019, the annual P&I payment would be around $1.1 trillion or 49% of current government revenues.

PLAN B - click to enlarge

Obama’s Debt Crisis

If we address the National Debt now it will cost roughly $8.9 trillion in interest. If we wait until 2019 it will cost closer to $20.4 trillion in interest. If we never address our debt and continue to treat it as an interest only loan, then this number will “skyrocket”. In fact we may already be at the point of no return.

This is Barack Obama’s failure. Obama talks the talk but he doesn’t walk the walk. Obama will cost America $6.3 trillion in interest over the next 10 years by his failure to address the national debt. Add that to his $7.1 trillion (and rising) budget deficit and Obama will have cost America at least $13.4 trillion. So any success that Obama touts short of $13.4 trillion in savings, revenue or benefits is a joke.

The Consequences

What consequences could American’s face if the debt is not dealt with? Well, for one interest rates are currently at an all time low, and there is only one direction they can go, up. When interest rates begin to rise, so will the cost of the debt. As shown here, if interest rates rise to 5.0% and the debt is not brought down by fiscal year 2050, then the total interest cost jumps from $20.4 trillion to $36.8 trillion. That’s about the equivalent of three times annual GDP wasted on interest payments.

Also, the United States could lose its AAA-credit rating. Once AAA status is gone it will be tougher for the nation to borrow money and lenders will charge higher interest rates. Lenders may also begin to impose stringent standards on our nation’s fiscal policies. Don’t forget that a lot of this borrowed money comes from foreign countries. In other words, if we don’t deal with the debt now it will only cost more in the future and we could potentially lose some of our freedom in the process.

Is Congress Brain Dead?

When Congress talks about saving the country a couple of hundred billion over 30 years, by passing a health care entitlement bill, I can’t help but wonder if anyone is awake at the helm. Congress is on the path of costing the country roughly $6.3 trillion in interest over the next 10 years, plus another $14.1 trillion over following 30 years, and these are probably low-ball figures, and what are they up to? Telling us how they will save a few pennies by adding a few trillion more to the National Debt. Yet, if Congress fails to address the Debt by 2019, the interest costs will soar well beyond the $20 trillion mark.

Those who truly love this country could care less about the Congress saving $200 billion on a new entitlement program. I could especially care less since I know that it will cost 5 times as much to implement and more down the road. Don’t talk to me about Health Care reform while your back is turned on the more pressing $20 trillion problem. Will somebody please wake up the Congress, the Media, and the Borrower in Chief? Wake them up before it’s too late.

Note: This posting is based on the following assumptions: (1) that interest rates are fixed at 4.0%, and (2) that the debt is repaid over a 30 year term.

References/Related:

GAO Financial Audit of Public Debt 2007-2008

CBO Budget Projections through 2019

U.S. Treasury Direct