Monday, January 14, 2013 - Debt Ceiling Conditions
Debt Limit: The president says that we should just extend the debt limit, or cede the authority to him to expand it as he wishes. I'm sure he probably doesn't think we even need such a discipline at all. He says he will not negotiate on this issue. He says that Congress has already approved all the spending that led to these deficits.
Like on most things, the president is completely wrong.
If credit cards had no limit on them, a whole lot of people would spend without end. The debt limit is like that. It is a discipline that reminds us – “Oh yeah…we've just borrowed $16.4 TRILLION. That's kind of a lot. Maybe we shouldn't spend so much.” We’ve borrowed 35% ($5.805 trillion) of that since Obama took office. Maybe we ought to think about it before we try to borrow $7 trillion more, which is an approximation of how much more this president wants to borrow in his second term. And, as I understand him, the president won't negotiate on this. In fact, he has yet to negotiate on anything. No change here. And, as far as Congress already approving the spending....that's not correct either, Mr. President. Sixty percent of all federal spending occurs as a result of entitlements, which do not require any action by Congress on any periodical renewal. They continue without end unless Congress acts to change them. In my nearly 8 years in Congress, I have voted to reform and reduce said entitlements every chance I have gotten. But, never once have said bills passed the Senate.
I did not vote for this spending, Mr. President, and I don't support it. Nice try.
This member of Congress will vote to increase the debt limit. But, only if there is significant, substantial and meaningful reform to several entitlement programs that starts to reduce the curve on our deficits by a noticeable amount immediately. Only a third of Medicare costs are covered by the taxes. The rest is borrowed. That cannot continue. Medicare will fail. Social Security is better off, but still under water. The food stamp program has increased by 270% since 2002. Medicaid is rampant with inefficiencies and abuse. Student loans are burying kids in debt they will never be able to repay. And, there are about 400 other entitlement programs out there. Reforming entitlements is a target-rich environment. I'm flexible as to what said reforms should be. There are lots of options.
But, I am not flexible on this: I will not vote to raise the debt limit without said cost-saving and deficit-reducing reforms. Period. I understand that if we go past the ability of the federal government to borrow money, federal spending will be limited to how much is received. (Shocking thought!) I understand that this could cause major disruption in the financial markets. Foreign markets may lose faith in Treasury securities. A lot of federal programs will be shut down or reduced. A whole lot of people, including yours truly, won't get paid. None of this is good.
But, if we don't get these deficits under control, we will soon have a debt crisis which will be much worse than what I just described - and we will have no way to get out of it without tremendous pain. This is not conjecture. The only 3 countries on earth with a worse debt to GDP ratio than the U.S. are Greece, Spain and Japan. All 3 have had different outcomes from their respective debt crises, but all of them are bad. This president has shown no interest in or capacity for dealing with these deficits. I don't know if he subscribes to the now disproven theory that deficits don't matter or if he is just oblivious. But clearly, if the House does not act here, we will have a crisis at some point very soon. I don't want to have to go past the debt limit with the consequences thereof. But, better to have such consequences of our own making at a time of our own choosing, when we have the ability to fix them, than to have much worse and uncontrollable consequences for which we are unprepared.
Why am I so firm about this? I have been a spending and deficit hawk since I was first elected to the California State Assembly in 2000. I was a spending hawk in my business for 25 years before that. Maybe it is my Scottish heritage. Maybe it’s because that's the way CPAs like me are. I'm not sure.
But, for me now, this is beyond just a political position. It is beyond a fiscal position. It is a moral imperative.
Stay tuned for the next laptop on this subject. Once again: Same bat time. Same bat channel. (Actually…why did I like that show? It was so campy.)
Monday, January 7, 2013 - Why I Voted Against the Fiscal Cliff "Deal"
Fiscal Cliff: You may be wondering why you did not hear from me during the last few weeks of the "fiscal cliff" machinations in Washington. For one thing, I figured that many of you were enjoying the holidays with your families and friends and did not want me to interrupt that with depressing news. Additionally, however, things were moving so fast that anything I wrote you would have been obsolete by the time you read it. I had about a dozen “laptops” in my head each day, but, by the time I sat down to write them, the circumstances had already changed.
Well, unless you were abducted by aliens or have just gotten back from your Mayan end-of-the-world worship ceremony in South America, you know about the deal that was passed by the Senate and the House on New Year's Day. To say I didn't like the "deal" would be to understate the case. I hated it.
I don't want to raise taxes. That feeling is not driven by a pledge, as many liberals would like to argue in order to portray we conservatives as the mindless lemmings that some of said liberals are. I think that having the federal government take roughly 20% of all the production of the people of the United States is more than enough to accomplish what the federal government has to do. I also think that having all levels of government take 1/3 of all the value of goods and services produced by all of us is equally sufficient. Those numbers are roughly where we are now.
During the 12 years during which I have served in 3 legislative bodies, I have observed a couple things about the operation of the loyal opposition. (1) There is no end to the number of programs that Democrats will fund with taxpayer money as long as they can get their hands on that money. (2) They will passionately describe why this need and that need must be fulfilled, which in the aggregate will require taxes on everyone to double, triple or even quadruple (if you actually wanted to do it all without deficits). So, in order to stop this madness, we must starve the beast. We must limit the tax revenue so that real choices have to be made between what it is truly worth confiscating the people's earnings for and the things which do not rise to such a level.
Furthermore, I believe that we are at a tipping point in taxation at which additional taxes will cause people to change their behavior in such a way as to result in less revenue. This will become supremely evident soon in my home state of California, where the recent tax increases have already passed that tipping point. People, businesses and money are and will be rushing out of California to other states where success and accomplishment are welcomed rather than despised and punished. This exodus is in part fueled by the fear that the tax and regulation behemoth that is now the formerly free state of California is not finished taxing and regulating. That fear is well placed.
So, the last thing in the world I wanted to do was raise taxes. But, I understand that the people made an exceptionally bad choice in reelecting Barack Obama as president in spite of his complete lack of accomplishment or agenda for prosperity, national security, reducing the deficit or anything else. Raising taxes for the purpose of "revenge" (his word, not mine) was the singular thing he demanded as though that would somehow cure all the nation's ills. So, Speaker Boehner, on November 7th, offered to give the president tax increases in exchange for spending reductions. By doing this, at least in theory, we would reduce our deficit.
The final "cliff deal" definitely included tax increases. And, in spite of the advertised threshold of $450,000, taxes were actually increased starting at $250,000 because of the limitation on deductions that was included. And of course, with the expiration of the payroll tax holiday, everyone will now see a tax increase unless you earn under $250,000 and 100% of that income is from dividends, interest and other investment income. The dozens of Obamacare taxes also went into effect January 1st, which will directly tax many and will indirectly tax everyone on "medical devices" as ubiquitous as band aids.
But, the tax increases were not accompanied by any spending cuts in this deal. If that had been the case, I might have even been able swallow that deal. But, what I absolutely could not abide was that these tax increases were coupled to $600 billion in spending increases!
That fact made my "no" vote on this package one I cast with vigor. Late New Year's evening before the vote, I argued vociferously with the Republican leadership to return the bill to the Senate with the tax provisions included but amended with all or most of the spending increases removed. Many others joined me in this appeal. But, that request was rejected.
What were these spending increases? Well, from my perspective they were pretty bad. To start, an extension of the up to 99 weeks of unemployment payments, in spite of all the evidence that long unemployment payments perpetuate unemployment rather than reduce it. And, an extension of a greater "earned income tax credit". This is the refundable tax credit where people who pay no taxes can get a check from the government. This is universally recognized as the single most abused program of any sort in the federal government. The IRS, who administers the program, has said that this is effectively a welfare program and they are not built to administer welfare programs. So, they have no way to know if the checks they are sending are to legitimate recipients, and estimates of abuse of this program run upwards of 30% of all the money sent. But......we just expanded it.
And then, of course, there is the spending that occurs through the tax code. We just extended for up to 10 years, a whole bunch of special interest tax credits that can be described by no other word but “pork”. For example, tax breaks for Disney and Hollywood film production companies, subsidies for mine companies to train their employees on safety, subsidies for rum production in Puerto Rico and the U.S. Virgin Islands, special tax provisions benefiting New York City, subsidies for "2 or 3 wheeled plug-in electric vehicles", subsidies for growing algae for “cellulosic biofuel research”, a wind energy production tax credit, and tax credits for private railroad companies to maintain their own tracks. The list goes on and on.
No, this was not a close vote for me. But, it passed. So, we need to move on.
And, move on we will. By the end of February, the Treasury says that they will run out of cash due to reaching the debt limit. Also, at the end of February, the delayed "sequester" spending cuts will go into effect. And, at the end of March, the authority of the federal government will run out.
Tune in to the next laptop report for my thoughts on the "debt limit cliff". Same bat time. Same bat channel. (Yes, I realize I’m showing my age here!)
Friday, December 21, 2012: Update from the "Cliff"
Update from the "Cliff": Given Thursday evening’s events in the House, it looks more and more like we may be going over the “fiscal cliff”. Therefore, I wanted to give you an update on what that could potentially mean for you. I also wanted to clarify the total impact of the income tax rate changes that we will face should we go over. These figures, which appeared in my previous “Laptop Report”, have been updated.
The total impact of all the income tax rate changes is estimated to raise revenue of roughly $4.5 trillion over 10 years. The total effect of all of this would be to reduce the deficit by approximately $7.7 trillion over the next ten years according to the Congressional Budget Office (CBO). That means CBO projects an "average" annual deficit of roughly $230 billion if we are over the "cliff" vs. a deficit of about $1 trillion a year if everything is extended.
Again, these projections are based on “static modeling”. That means they do not take into account the economic impacts and the behavioral changes that will occur as a result of what I’ve outlined above. When these tax hikes take place, people will most certainly take actions to legally reduce their tax bills. Additionally, many economists predict a recession will occur, which would further reduce revenue. Also, as I pointed out last time, the medical provider payment reductions will likely result in a number of doctors and hospitals refusing Medicare patients. This will all have its own economic ripple effect. Put that all together and the deficit is unlikely to drop that far.
With all that, as best you can, have a Merry Christmas and a Happy New Year!
Thursday, December 13, 2012 - Just the Facts, Ma'am: Fiscal Cliff Edition
Just the Facts, Ma’am - Fiscal Cliff Edition: This was the famous, at least to those of us who were alive then, admonition offered by the fictional LA detective, Sergeant Joe Friday, to witnesses who would engage in too much speculation about a crime. Well, I generally give you a lot of my opinion. Every once in a while, though, I give you just the unvarnished facts so that you can draw your own conclusions.
You have probably heard the term "Fiscal Cliff" enough times to make you sick. But, do you really know everything it entails? Below, you will find a comprehensive list of every law that will expire at the end of this year, as well as the result of our returning to whatever the law was before. The accumulation of all of these things has been dubbed collectively by the media as the "Fiscal Cliff":
• Unemployment compensation will revert from a 73 week maximum to a 26 week maximum. This takes it back to the duration that existed in 2008 and prior. This will reduce spending by approximately $30 billion over 10 years.
• For the past 2 years, there has been a "payroll tax holiday". For this year, every paycheck in the U.S. at or below $110,100 per year saw Social Security taxes reduced by 2% of that paycheck. By the way, that limit is scheduled to be $113,700 next year. But, Social Security benefits have not been correspondingly reduced, meaning that the money to pay Social Security benefits has been borrowed. Social Security taxes will revert to where they were in 2010 and prior, which is 6.2% of each paycheck. This is projected to raise between $100-$120 billion over 10 years.
• For the last 2 years, estates have been exempt from death taxes if they were below $5 million, while higher amounts have been subject to a 35% tax. These death taxes would revert to 55% on any estate over $1 million, not indexed for inflation in the future. This is the rate that existed in 2000 and prior. However, the rate has been lower and the exemption higher every year since. This is projected to raise $300 billion over 10 years.
• The "Sequestration" is complicated. But in short, it requires about $500 billion in defense spending cuts over the next 10 years. About $320 billion will be cut across the board from other non-entitlement (discretionary) federal spending that is not defense-related. And, there is about a $180 billion cut to Medicare payments to doctors and hospitals that provide Medicare services. This is about a 9% cut in the "discretionary" spending and about a 2% cut in Medicare. Total savings, including interest on the debt not borrowed, is $1.2 trillion over 10 years.
• The changes in the tax rate tables are also complicated. But, here is a table of the old and new tax rates on ordinary income. This table displays the results of reverting to the rates that existed prior to 2001:
*Source: House Committee on Ways and Means
• In addition to the ordinary rates, capital gains taxes will increase from 15% to 20%. Dividend income will be taxed as ordinary income and will no longer have a special preference. The "phase out" of itemized deductions and exemptions will start at lower incomes than today, so the “value” of deductions and exemptions will be reduced. Standard deductions will also be reduced. The child tax credit will drop from $1000 to $500, and it will no longer be refundable.
• The AMT (Alternative Minimum Tax) patch expires retroactive to 2012. The current patch has been in place since 2001. Again, this is a complicated thing, but suffice it to say that its expiration will further raise taxes on about 20 million taxpayers, primarily in states with high state income tax rates. The result of the AMT expiration will be $864 billion over 10 years.
• The "farm bill" will expire. The farm bill details how farm payments, price supports and food stamps are administered. Its expiration means that the law reverts back to the 1949 code. This has a number of consequences that will likely increase spending. An example is that milk price supports will be triggered, requiring the government to buy enough milk and cheese to raise the price of both by about 70%.
• The "doc fix" will expire. In 2013, the “doc fix” would prevent a 25.6% cut to Medicare doctors who treat Medicare patients. If this expires in combination with the Sequester, reimbursements to medical providers will drop significantly, causing many of them to refuse to treat Medicare patients. And, under current law, the patient is prohibited from making up the difference. This is projected to save approximately $245 billion over 10 years.
The total impact of all the income tax rate changes is estimated to raise revenue of $4.5 trillion over 10 years. The total effect of all of this would be to reduce the deficit by approximately $7.7 trillion over the next 10 years. If that were to occur, that equates to about 35% of the projected deficit over that period. But, these projections are done in what is known as "static modeling". That means that no adjustments are made for the economic impacts or behavior changes resulting from any of these changes. When tax rates go up, people do not sit still. They take actions to legally reduce their tax bills. Without a doubt, that will happen here and the revenue increases will not occur as projected. Furthermore, if the economy falls into recession, as many predict, incomes and revenues will drop further.
Boy, it’s hard for me not to add any opinion. But, there you go. Just the facts.
Tuesday, December 4, 2012: The President's "Offer"
The President's ""Offer"": That is not a typo. I intended to have two sets of quotation marks around the word "offer". That's because it is unspeakably absurd to call what the president proposed on the fiscal cliff an offer. It was more like a liberal wish list. There was literally nothing in this proposal for Republicans to like and a liberal (pun intended) sprinkling of elements that most Republicans absolutely hate. For example, the proposal (I will no longer flatter this monstrosity with the label "offer") raises taxes on families making over $250,000 ($200k for individuals) by more than would result from going over the "fiscal cliff". On top of that, Obama threw in some stimulus spending, an extension of the 99 weeks of unemployment benefits, and an extension of the payroll tax "holiday" - which means more and more Social Security benefits are borrowed. This package actually both increases taxes and increases the deficit because there is so much additional spending. As a false gesture towards something reasonable, the president says they will make some unspecified changes to Medicare that would save some money......starting no more than 10 and more likely 20 years from now. So, the tax increases are specific and go into effect in less than 30 days, but the spending reductions are unspecific and don't start for at least 10 years!! Seriously?
Speaker Boehner called this proposal "not serious". I call it absurd and counter-productive. You all know that I was a car dealer in my private sector life. How would you react if you walked into my dealership and my first proposal to you was to buy the car for double the window sticker price, but we also get your trade-in for free and you have to finance the car with us at 30% interest? You would storm out of the place and go buy a car somewhere else, or not buy one at all. The president's proposal is the equivalent of this scenario. It was not just a worthless offer. It actually moved both sides farther apart.
So, why would the president do this? I obviously don't know but I will postulate a few ideas:
• Arrogance: He is used to getting his way on everything, and doesn't see how others view this proposal.
• Intention: He really wants to go over the "cliff" and wants to act like he tried before there is no agreement.
• Inexperience: He has little experience in negotiating and doesn't really know how to do it.
• Perspective: He doesn't understand the concept of a win-win negotiation and only understands I win/you lose.
Maybe it’s a little of all four of those things. This is very similar to the style and posture of the newly elected President Obama in 2009 when he famously rejected all of Eric Cantor's (R-VA) suggestions with the simple comment: "Eric, I won". But, there is a difference. Then, Democrats controlled the House and the Senate. This time, we won, too.
I am pretty pessimistic right now that anything reasonable can be worked out with this president. As I often say, I hope I am wrong, but I fear that I am right.
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