For those of you who have asked, I have produced an outline of my recent talk on the Fiscal Cliff: How We Got Here & Where Do We Go? This is a handy cheat sheet that outlines the problems that contributed to our current situation and what we can do to make long-lasting, systemic changes.
A. How Did We Get Here?
1. Spending
a) Spending up estimated 27% since 2008 (cite: Forbes)
b) Trillion dollar deficits each year since 2009 (cite: OMB)
c) Debt-GDP ratio up from just over half of GDP in 2009 to nearly three-fourths in 2012. (cite: Heritage)
2. Taxes
a) Bush “tax cuts”
b) Uncertainty with tax rates
c) New taxes slated for 2013
3. Entitlements
a) Social Security
b) Medicare/Medicaid
c) Food Stamps
d) Disability
4. Healthcare
a) Cost of Obamacare – $1.93 Trillion in first decade (cite: Weekly Standard)
b) Taxes associated with Obamacare
1. Health Insurers Tax
2. Surtax on Investment Income: (3.8%)
3. Health care deduction AGI haircut (from 7.5% – to 10%)
4. Hike in Medicare Payroll Tax: (.9%)
5. Medical Excise Tax
5. Regulations
a) Code of Federal Regulations has increased by 11,327 pages — a 7.4% increase since 2009
b) Examples
1. EPA
2. FDA
3. NRLB
4. IRS
B. Where Do We Go?
1. Cut Spending
a) First, go back to FY2008 spending levels
b) Cut Federal Workforce by at least 10%, which should be commensurate with spending cuts
c) Enact Spending Caps to 19%-20%
2. Tax Reform
a) Make “Bush Tax Cuts” Permanent
b) Lower corporate rate and all tax margins
c) Simplify the tax code
d) Eliminate AMT
3. Entitlement Reform
a) Social Security
1) Raise the retirement age
2) Privatization options
3) Change from current to straight inflation increase
b) Food Stamps/Disability Overhaul
1) Fraud and abuse
2) Stricter guidelines
4. Healthcare Reform
a) Repeal Obamacare
b) Tort Reform
c) Create system more like HSA
5. Regulation Reform
a) Repeal strangling regulations – is this possible?
Recently I gave a talk on the Fiscal Cliff — how we got here and where we are going. Since several people have asked, I posted the videos from the talk. For whatever reason, the last 2 minutes ended up a second separate video, but you can view them one after the other. Enjoy!
Consider this: if we go over the fiscal cliff, about $600 Billion will be taken out of the economy in a combination of tax increases and lower spending. This is certain to put a stranglehold on an already weak economy. Obama has had trillion dollar deficits each year of his presidency — the highest deficits of all the presidents in history. Even by reducing the deficit to about $500 Billion by the automatic fiscal cliff triggers, Obama would still be responsible for a deficit that is larger than all of his predecessors. Clearly, spending is at the heart of the problem.
The Democrats have continuously claimed that they are looking out for America’s middle class by keeping the tax rates the same for them while seeking to raise rates on the top 2% who need to “pay their fair share”. The spotlight has been on this point of contention in the fiscal cliff negotiations, thereby serving to deflect attention away from the one policy that 1) is already the mechanism for ensuring that the wealthiest pay more and 2) will raise rates on the middle class for certain if the fiscal cliff has not been resolved. What is it? The AMT.
The Alternative Minimum Tax (AMT) currently serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. The AMT was instituted in its present form when the prior “add on” Minimum Tax was transformed into the AMT in the early 1980’s. Its stated purpose was to require that all taxpayers paid at least a “fair share of tax”. Yet it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax – and 28 million additional taxpayers will now be impacted if the method by which it is calculated is not fixed by the end of the year.
The AMT was developed to identify“loophole” type deductions, also known as “preferences”. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. Whichever of the taxes is higher is the one the taxpayer must pay.
However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law abusers), the law that was passed included items that were not loopholes at all. A convoluted formula is used to calculate and compare the differences between income and deductions in order to determine who falls under the guidelines. Interestingly, a very substantial majority of all current AMT paid by taxpayers results from the following factors: 1) treating state and local taxes as a preference; 2) treating miscellaneous deductions as a preference; 3) allowing lower exemptions than the regular tax.
These factors have flaws. For instance, state and local taxes are hardly a loophole because taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Likewise, “Miscellaneous Deductions” is the category of deductions that consists primarily of expenses incurred to earn income. It often includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction necessary to have a truly fair income tax system and should not be considered a loophole. Furthermore, the exemption available under the AMT is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation; it is also phased out entirely over certain income levels.
The indexing brings us back around to the problem at hand. Each year, Congress has to approve an annual “patch” which raises the threshold for inflation in order to raise the exemption limits of the tax — so that less wealthy taxpayers won’t be subject to the AMT. During AMT discussions, Congress likes to posture and point to the patch as some major revenue loss (had the AMT been applied to those families) as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”. It’s all song-and-dance really. Congress always approves the patch; the yearly patching process itself, however, is poor government. We are learning this lesson the hard way as a quiet showdown is unfolding during negotiations.
The AMT presents a dire situation with the fiscal cliff right now. If the patch isn’t approved by the end of December 31, the AMT will reset and taxes will go up for millions. If we go off the fiscal cliff, the Democrats will be directly complicit in a massive tax increase on millions of middle-income taxpayers’ families – the opposite of what they have been claiming in their bid to raise taxes on the most wealthy.
How could this occur – unless the Democrats really do prefer to let the patch lapse…and hope they can pin the discussion failures on the Republicans. After all, if more citizens pay the AMT, more revenue is raised for the rapacious government. Is it all part of a grander scheme, perhaps? What we do know for certain is this: the Democrats have shown that their narrative of protecting the middle class is a lie and empty rhetoric. They would risk sacrificing the tax rates of 28 million taxpayers for the sake of ideology and the job creators (the top 2%).
Alan Reynolds over at CATO published a nice piece at National Review Online (NRO). He adeptly points out the fallacy of Obama’s claim that raising taxes on the top 2% will raise a princely sum of revenue to put toward our skyrocketing deficit.
The Treasury Department calculated that
raising the top two personal-income-tax rates — to 36 from 33 percent and to 39.6 from 35 percent on incomes above $250,000 and $377,000, respectively — would raise just $23.1 billion in 2013, barely enough to finance federal spending for two days.
How is this supposed to be a solution? It’s not, but it’s the stuff of which good rhetoric and sound bytes are made. Making the rich “pay their fair share” puts the onus on the wealthy — someone other than the average taxpayer — as a red herring to the hide the fact that our deficit problem is so large, a tax increase isn’t going to make a dent. But the Democrats can’t admit that their tax-and-spend mentality is falling apart.
Yet the real interesting part of the article starts halfway in. Reynolds goes on to make the case for cutting the corporate tax rate, an important point raised in the Simpson-Bowles package that has been all but forgotten. We are reminded that both Obama and Romney have suggested lowering the rates in the past, which are among the highest in first-world countries at 35%. Cutting the rates would be stimulative, as more money becomes readily available to businesses which have been struggling in this economy. It would also serve to entice businesses to relocate here, instead of our businesses continuously seeking lower tax rates outside the US (as they are now). We desperately need the economy to grow — to grow our way out of this slump, instead of trying to tax our way out of it (and putting ourselves back into a recession). Reynolds notes,
the positive impact on business investment, and on multinational decisions to locate new businesses in the U.S. rather than abroad, would be swift and powerful. There is nothing to lose from cutting the corporate tax rate, not even revenue, and the economic gains are likely to be quite astonishing.
Let’s hope for some real tax relief out of the fiscal cliff negotiations. Besides allowing the current tax rates to stay in place — perhaps permanently — so that we can stop being in a state of economic uncertainty, cutting corporate taxes should be a key item on the table.
Time for another milestone. I noted it when it was 1,000 days past, but today we are now 1331 days without a budget. Nevermind all the doomsday talk for tomorrow — our fiscal situation is dire now.
April 29, 2009 is the last time Congress passed a budget. Obama’s two budgets proposals failed 0-97 in the Senate, and 0-414 in the House. No Democrats would vote for, or even sponsor, his proposals.
Right now we are about: $16,370,000,000,000 in debt. But that is not the whole picture. It doesn’t include entitlement debt, which makes the situation more egregious.
And what about the fiscal cliff? Harry Reid has decided to send Congress home for Christmas and reconvene on December 27th, and rules out a vote on Boehner’s “Plan B”. On the contrary, Eric Cantor has said the House has the votes for “Plan B”. “Plan B” raises taxes for taxpayers above $1 million, while the Senate version is a much lower, $250,000 threshold. More discussions, but no answers. We continue on in a state of uncertainty.
Yesterday, I wrote out a primer which showed all government debt, spending, and fiscal cliff solutions scaled down to manageable numbers. If you were to reduce equally everything by $10 million, you can understand the figures in amounts we are use to.
For instance:
Total Current Financial Picture for a Family of Three, on a $25,000 income
Annual Revenue: $25,000
Annual Spending: $38,000
Annual Expenses/Deficit per year: $13,000
Current Government “Shadow” Debt: $156,000 (ie. think – like your mortgage & credit cards)
Promised Future Entitlement Debt (SS and Medicare): $603,000
Total Family Debt on a $25,000 Income = $759,000 + $13,000 in annual added deficits
Debt “Fiscal Cliff” Solutions:
Obama’s Plan: cuts a mere $812 a year for 10 years and adds $1242 in revenue
Boehner’s Plan: cuts a mere $955 a year for 10 years and adds $955 in revenue.
With 11 days out before the fiscal cliff deadline and no solution in sight, you can be sure the “no-budget clock” will also continue ticking. 1331 days…and counting.
A gentleman, one of my clients, recently sold his entire business that he founded. Having worked at it and worked hard for it his entire life (he is in his late 70’s), the company sold for around $600 million dollars. This is a classic example of the American Dream.
From the sale of the company, his cut was around $65 million (pre-taxes). The sale took place recently. I advised my client that he should arrange the close of his business before the end of 2012 because of the likelihood of the change of tax rates. If he was able to close by the end of December, his share of taxes was calculated to be around $18 million, or just under 28%. This would mean his net earnings were $47 million total.
But Obama is saying that amount is not enough, to a man whose company has created thousands of jobs for this country. Jobs for people who have paid income taxes to the government for all those years.
The gentleman found out that, due to the numerous amounts of paperwork and regulations regarding the sale of his company, he will not be able to close on his company until April 2013. And Obama’s tax proposals say that successful taxpayers have to pay more, which means that my client would now be expected to pay 36% in taxes. Therefore, out of the $65 million from the sale, the gentleman’s net is now $41 million, while the government will get $24 million. Why that extra $6 million to them? For what?
Some people will say that $41 million is enough. Is it? Who decides? Is it really fair that the government should have that 36% instead of 27.7% for someone else’s life work because of an arbitrary date? Regulations? Massive deficits? And is it “fair” to the gentleman that the government can’t control its spending, or that he can’t close in 2012?
Why does the government get to arbitrarily decide what is someone else’s “fair share” for work that they did? How do you quantify the fair share of something — in this case, a successful company — that someone nurtured for their own entire life? As I have argued before, those who are prosperous should be given the same liberty to manage their success as any other citizen, not additional tax penalties based on whimsy and “need”. How can we honestly and morally take extra money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who manage to continuously and egregiously squander income?
Taxpayers have a right to be nervous about the impeding “fiscal cliff”. There are a lot of “end of the year” uncertainties because taxpayer don’t necessarily know what to do with their money right now.
For instance: take charitable giving. This year, is it prudent for a taxpayer to make a donation in December or January? One the one hand, if the tax rates are going up, it’s more prudent to wait until January because then you’ll have a deduction next year to offset higher tax margins.
.On the other hand, there is a real possibility that there will be a deductions cap next year, or else possibly the elimination of deductions for charitable giving if the tax code gets overhauled. In that case, it would be better to take the deduction this year in December and not risk losing out on a deduction entirely next year if there are major changes.
Let’s hope we’ll get some decisions by the end of the week. How outrageous is it that people don’t know? It is this very type of uncertainty that we’ve been experiencing for years now, with this administration that has put people, businesses, the market, and the economy on hold.
In order to understand the magnitude of government spending, debt and fiscal cliff “solutions”, it is helpful to scale down the numbers to more manageable ones that we are more accustomed to. Most citizens cannot properly comprehend the magnitude of the government finances because the amounts with which we are dealing were — at one time — unimaginable.
First, some basic facts:
1. Government annual revenue FY2012 = $2.5T ($2,500,000,000,000)
2. Government annual spending FY2012 = $3.8T ($3,800,000,000,000)
3. Government annual deficit FY2012 = $1.3T ($1,300,000,000)
4. Current total government debt = $16.37T ($16,372,000,000,000)
5. Population of the United States = 314M people (314,000,000)
6. Current total Medicare liabilities (per the Annual Trustees Report) = $42.8T ($42,800,000,000,000)
7. Current total Social Security liabilities (per the Annual Trustees Report) = $20.5T ($20,500,000,000,000)
The best way to visualize the numbers is to reduce each figure by $10 million ($10,000,000 – or 8 zeros). So for instance, $2.5 trillion becomes $25,000 and so forth. Then, we can apply those numbers for a typical family in three parts: 1) Annual Deficit; 2) Current Debt (“Shadow Debt”); and 3) Entitlement (“Future”) Debt. The following scenario will be based on a family of three. And finally, we can see the proposed fiscal cliff solutions and their impact with these scaled down numbers.
2) Current Government Debt (“Shadow Debt”) — think of this as your mortgage, credit cards, etc)
Each citizen share of debt = $163,700/3.14 = $52,000
Citizen share x 3 people (family of three) = $156,000. Current Government Debt for Family = $156K
3) Promised/Future Debt to Pay to Others (Entitlements)
Medicare: $428,000/3.14 = $136,000 per person
Citizen share x 3 = $408,000 for Medicare per family
Social Security: $205,000/3.14 = $65,000 per person
Citizen share x 3 = $195,000 for Medicare per family Total “Promised” Debt for Family of Three = $408,000 + $195,000 = $603,000
How do the Fiscal Cliff plans impact this debt?
Current Obama Plan:
Cut $850B over 10 years, plus add $1.3T in revenue
$850B = $85 Billion a year ($85,000,000,000), or $850 a year (scaled down)
Citizen share of cuts = $850/3.14 = $270 per person; x 3 = $812 a year
$1.3T = $130 Billion a year ($130,000,000,000) or $1300 a year (scaled down)
Citizen share of revenue = 1300/3.14 = $414 a year; x 3 = $1242 in revenue/year
Current Boehner Plan:
Cut $1 Trillion over 10 years, plus add $1 Trillion in Revenue
$1T = $100 Billion a year ($100,000,000,000) or $ 1,000 a year (scaled down)
Citizen share of cuts = $1,000/3.14 = $318 per person; x 3 = $955 a year
$1T = $100 Billion a year ($100,000,000,000) or $ 1,000 a year (scaled down)
Citizen share of revenue = $1,000/3.14 = $318 per person; x 3 = $955 a year
Total Current Financial Picture for a Family of Three
Annual Income: $25,000
Annual Spending: $38,000
Annual Expenses/Deficit per year: $13,000
Current Government “Shadow” Debt: $156,000 (ie. like mortgage & credit cards)
Promised Future Entitlement (SS and Medicare) Debt: $603,000
Therefore, total debt on a mere $25,000 Income is $759,000 PLUS $13,000 in annual added deficits Ask yourself is that even remotely affordable or sustainable? Now multiply that by 10 Million (10,000,000), and you’ll have the real debt numbers for the government.
And those debt “Fiscal Cliff” Solutions for the Family Scenario?
—Obama’s Plan: cuts a mere $812 a year for 10 years and adds $1242 in revenue
— Boehner’s Plan: cuts a mere $955 a year for 10 years and adds $955 in revenue.
Those are not real solutions!
These numbers, brought down to equivalent figures, are a scary and sober reminder about just how deep in debt our country is. And both “solutions” barely make a dent in solving our fiscal crisis. So, what do we do? Where do we go from here? What reforms are needed — both short and long-term?
President Obama, please stop lying. There are no “tax cuts for the wealthy” on the table. The Bush tax rates are what the taxpayers pay and have been paying for 10 years. Keeping the rates the same does not equate to a tax cut. And changing the rates to the Clinton-era rates is, in fact, a tax increase.
These current tax margins have been built into the economic market for a decade. Our economy – for better or for worse – has operated on that particular set of data. Increasing of the rates would have the effect on the marketplace and in the business world of immediately reducing the value (by reducing the after-tax cash flow) of all existing investments, and, by reducing the expected return of prospective investments, will eliminate many of them (and the jobs that would have gone with them).
To talk about “restoring the old Clinton-era rates” is ludicrous for several reasons: 1) the Clinton-era economy was stronger than our current one; 2) the Clinton rates did not have the burdens of taxation introduced by legislation since then; 3) state and local tax rates are significantly higher (and states have much higher debt levels which portend even greater increases); 4) the enormously increased burden of Obama (and some Bush) era regulations exists, which have the same effect of still further tax increases, and 5) we now have to contend with Obamacare and all the staggering taxes associated with it.
Additionally, spending during the Clinton-era was much lower than now. Currently, Obama is spending 24% of the GDP, compared to 18% with Clinton. It was Clinton who specifically declared “the era of big government is over”; he aimed to reduce the spending in order to substantially reduce the size of government. Not so with Obama. Really, how in the world does Obama have the chutzpah to compare himself to Clinton when talking taxes?
Referring to a continuation of the same law is not a “tax cut”. Just because the liberals have not accepted it doesn’t mean it’s not the law. Increasing tax rates on any segment of taxpayers, especially the segment responsible for nearly all job creation, is irresponsible.
