Obama’s New Tax Increase

Obama has tried numerous strategies to try to gain favor and/or bad mouth Mitt Romney in the past months.  It is has been mildly impressive that they have a new attack every week that is completely random, usually not true, but very distracting.  However, last week President Obama got back on what appears to be one of his key messages, that the rich people need to pay their “fair share” and actually presented a policy stance: raising taxes on the “wealthy.”

President Obama said that the Bush tax cuts need to expire for those making more than $250,000 for couples and $200,000 for individuals.  His proposal is a one year extension, just enough to get him through the election.  One of his main arguments was that he wants to return to the same tax rates as the Clinton era.

However, in 2001 (Clinton’s last year as President), the federal budget was $1.9 trillion.  In 2011, President Obama’s federal spending was $3.6 trillion.  In ten years, our government has nearly doubled in size and the President’s tax plan does not get us close to a balanced budget.  Further, I feel his tax plan of increasing taxes on small businesses will be a job killer.  A small tax increase can take away the revenue needed to pay someone’s salary.

The Republicans and Mitt Romney argue that tax cuts are the key to recovery, based on what Reagan did.  The reason it worked for Reagan is that he brought tax rates down by over 40 percentage points, which is a big change that did spur economic growth.  However, all of the Republican proposals I have seen have been less than 5% points, which will not be significant enough to catapult our economy.  As much as I believe in tax cuts, we need to get our spending house in order before we get too aggressive with cuts.  If we cut taxes too much before reducing spending, it could hurt our deficit so much, that it will slow economic growth instead of spur it.

As I have always said, this blog is about solutions.  There are a lot of things I would do such as repeal Obamacare and cut spending drastically.  However, I would go after two things first that are a little less political and could have the biggest initial impact for our economy.  The first thing we need to do is gain some stability, so I would try to get permanent income tax rates versus continually extending Bush tax cuts one year at a time.  Permanency gives stability to small businesses, thus allowing them to plan and hire.  Because this would not be easy, here’s my compromise: make the Bush tax rates permanent, but close loop holes.  The rates keep taxes low, but closing loop holes increases revenues, making both parties happy.  While Republicans may argue that closing loop holes are a net tax increase, I have a different opinion altogether.  Loop holes are, in my mind, unintended tax breaks that lawyers took advantage of, which is not congruent with the original intent of Congress when the code was created.

The second thing I would do is permanently cut the corporate tax rate in half.  Right now, the United States has the highest corporate tax in the world.  Our corporate tax revenue is only 8% of the U.S. total revenues (approx. $180 billion), so it’s impact financially for the government would be small, but the impact for the businesses would be large.  Cutting the rate in half does three key things:

• It reduces the cost of doing business in the United States, helping jobs come back home from overseas.
• It increases the ability to hire people and reduce unemployment.  Further, when the money goes to individuals’ income vs. corporate income, it will still be taxed, thus roughly breaking even on net revenue.
• Last, this concentrated radical change would be just big enough to spur change in our economy.  The tax cut would essentially increase the profitability of every corporation in the United States and help the stock market as well.

The key to problem solving is to start with high impact, low effort solutions (i.e. my two ideas).  Afterwards, you look for high impact, high effort solutions (i.e. solving social security and healthcare).  The two simple ideas I proposed would be easy to understand, quickly implemented, and highly effective in spurring economic growth.

Are We Really Free?

I will be getting into a series on basic economic principles soon.  I have done all my research working within the confines of a democratic, free society.  The more I thought about it, I started questioning our true freedom.  I want to share a few concerns:

Freedom of Property:

Democracy started with the idea that people were willing to pay a body for protection of their property.  Although people were willing to give up money for protection, they were not willing to give up their property rights; people maintained that you have the right to do what you want on your land, true freedom.

The world is a different place now.  Eminent domain is when the government obtains private property without the consent of the citizen (for a fair market value).  The only threshold is that it needs to be used for “public good.”  In Lakewood, Ohio, the government forced a family out of their home to build more expensive condominiums.  In the City of Meza, AZ, the government forced a man who inherited a brake repair shop from his father out of his shop to sell the land to make way for an Ace Hardware.  In New York City, the government forced a man out of his property that his family had owned for over 100 years to make a new headquarters for the New York Times.

There are thousands of gross examples of eminent domain and the threshold seems to be dwindling, along with our property rights.

On a more simple level, my friend tried to build a deck on the back of his house in the suburbs of Minneapolis and the city did not approve the plans.  Another friend wanted to take down his one car garage and put in a two car garage and had to go get approval from his city.  It was approved, but the fact that they have that power to determine what I do to my house is scary to me.

Freedom of Convene:

A couple was fined $300 in San Juan Capistrano, CA, for having a Bible study.  The city said they were fined because they did not have a special permit to transform a residential area into a place where people regularly assemble.  In a democracy, people must have the right and freedom to convene.

Freedom to Contract:

Two people should have the right to contract with each other.  Even if there are risks involved, parties can negotiate around those risks.

The FDA has shut down local grown farms that sell to neighbors for various reasons.  In one instance, the FDA seized a family farm that made cheese because they thought the cheese might have Listeria, despite no proof.  The FDA has even shut down lemonade stands.  The FDA is one example of a governmental body that is taking away our ability to contract freely with other people.  The government does not think we can make our decisions or negotiate, but that we need the government to tell us with whom we can do business.

Freedom to Work:

Did you know that one of three Americans need a license to do their job?  In other words, 33% of Americans need permission from the government to do their jobs!

I could go on and on…

The more you think about it, little by little, we are losing bits and pieces of freedom, especially by city ordinances.  Every time the government increases, our freedoms decrease.  Freedom is an extremely important economic subject because in a “free” economy, resources flow to the most efficient medium.  When the government spends money, it is not typically an efficient use of resources.  For example, in Los Angeles, $111 million in stimulus dollars translated into just 55 jobs (roughly $2 million per job).

Debt Ceiling Increased – the Wins and Opportunities of the Bill

The House and Senate have voted to increase the debt ceiling.  The bill that passed was definitely a compromise. Before I get into the wins and opportunities of the bill, let me just take a second to clarify what is worst about the outcome of this bill and what the democrats stood for in this debate.

The saddest thing about this deal is that we could have saved trillions of dollars against the baseline by simply freezing our budget. Instead, they assume about a 7.5% annual budget increase and their “cuts” are against the 7.5 increase baseline.  As my father said once, “you can never ‘save’ money when you are spending it.”  If you buy a $100 sweater for $75, you did not save $25, you spent $75.  You may have paid $25 less than the proposed value, but you still spent $75.  The United States may have ‘saved’ a few trillion dollars in this debt deal, but they are still spending many more trillions!

The democrats did not support balancing the budget, they wanted to increase the debt limit with no restrictions. People may think I am mean because I am a republican who wants big budget cuts, but I’d rather be mean than reckless.  Democrats ASSUME that we will always be able to borrow money, but would you borrow to someone that owed over $14 trillion and was borrowing roughly $100 billion more every month?  Do you really feel like someone in that much debt is going to pay off their debt?

The reason our credit rating is potentially going down is because we are not a great investment and it does not appear that we are going to pay our debts back.  Our economy grew 0.4% last quarter.  That is not the kind of return you are looking for as an investor.  Russia’s leader called the United States a parasite on the world economy today.  If countries stop borrowing to us, we’ll either have to stop paying for medicare and social security, because we will not be able to afford it, or we’ll have to print money and have massive inflation.  I feel the RESPONSIBLE thing to do is to make the tough decisions now, to avoid a crisis tomorrow.  Wouldn’t you rather see someone get 90% of medicare for the rest of their life than 100% for two years and then 0% afterwards?  I am not mean, I care about those people that are relying on a promise that may not be kept.

Hopefully this debt deal is a really small step in the right direction.  Below are some of the wins and opportunities of the bill.

Major Wins:

• America did not default on paying the bills.
• There were no tax increases.
• President Obama did not get a blank check.
• There are some measures in place to look for more cuts.
• There will be a vote for a balanced budget amendment (which was previously tabled by Senate democrats).

Major Opportunities:

• The cuts weren’t large enough – from what I read, there will only be $7 billion in cuts in 2012 and $3 billion in cuts in 2013 (less than 0.1% of the budget).  I could cut that in the blink of an eye and no one would even notice!
• The debt ceiling increase was one of the largest, if not, the largest in United States history.
• President Obama will not have to talk about it again before the next election because of the large increase to the ceiling.
• Spending is still increasing, as was explained earlier.
• There was no transformation on the way Washington works or views taxation and spending.
• We are still the laughing stock of the world (seriously think about watching this from the outside – we are a smart nation who has elected leaders that do not believe in having a balanced budget, despite massive debt!).  They are looking at us like I look at Greece!

The Tea Party did some great things to make this an issue.  The Republicans were in a tough spot and because of their commitment to their beliefs, the democrats knew they had to give in if they were ever going to pass a bill.  So, it was the convictions and principals of  the tea party candidates that made this a better deal, not their politics.  The deal is not even close to perfect, but I hope all of the attention on the debt ceiling puts pressure on candidates in the fall of 2012 to pledge that they will balance the budget.

Debt Ceiling Debate – Finally There is an Acceptable Plan!

In my last posting, I said there were three keys to a ‘successful’ debt debate: deal by August 2nd, major, but gradual cuts, and address entitlement programs.  Boehner and Reid’s plans being proposed probably won’t be agreed upon by August 2nd, they’re not major, and neither address entitlement programs.

Here’s what you need to know:

• What they do not tell you is that every year, there is an assumed 7.5% increase in spending on autopilot.  So, when they say they are going to save $2 trillion in 10 years, they may be adding around $9 trillion, and then cutting $2 trillion, equaling a net gain of $7 trillion in additional debt. They’d save more if they just froze spending.
• Despite the Tea Party being mocked, if it wasn’t for them, America would not care about this debt ceiling debate.  The debt ceiling has been raised over 70 times and this is pretty much the first time America cares.
• There is only one plan being proposed that is worth looking at right now, the Connie Mack “Penny Plan.”  The plan isn’t perfect, but it makes sense.

Before I explain the plan, I should admit that I have not yet seen the actual verbiage of the bill, I have just heard the writers talk about it’s features:

• The “Penny Plan” is the only plan that has real cuts.  Essentially, the plan freezes spending this year and then cuts federal spending by 1% (vs. raising it 7.5%) every year for the next six years.  By doing this, we would have a balanced budget in 5-8 years.
• The plan would then cap federal spending at 18% of GDP going forward (which is where federal spending has traditionally been).  A balanced budget amendment would be much more feasible at that point.
• The plan allows Congress to decide how to make the cuts, but if they cannot decide, it mandates a 1%  across the board cuts.

Although the plan does not address entitlements immediately, the plan is simple and makes real cuts.  The plan has a path to a balanced budget, which could keep our triple A credit rating and put markets at ease about the future of the United States.  Last, at 1% annual spending reductions, the cuts are gradual and humane.  If Congress cannot find 1% in cuts in fraud and waste alone, then they aren’t qualified to be leading our country!

Debt Debate – Who Will Win?

Amidst all of the debate about the debt ceiling, my big question is, who will win?  I think this question is particularly interesting because most Americans do not know what side they are on.

First of all, Americans are desperately looking for a solution in Washington and are not finding it from either party.  In 2008, the electorate ran from President Bush and the Republican party to heavily endorse the Democrats.  Two years later, Republicans recorded the biggest turnaround in our history.  Yet, despite the pendulum swinging back and forth, the Congressional approval rating is currently sitting at 18%, according to Gallup polls.

If you look at the debt crisis, 69% of Americans say Congress should not raise the debt ceiling, according to a recent CBS poll.  The debt ceiling has been raised 74 times, but this time it would seem to be different.  Further, 73% say spending too much is to blame for the debt crisis (vs. not taxing enough), according to a Gallup poll.

It would seem that Americans support reducing the deficit by reducing spending.  However, when people are polled about whether they still support cutting spending when the spending cuts affect them personally, the tide changes quickly.  More specifically, people get really nervous when cuts to entitlements (Social Security, Medicaid, Medicare), which make up over 50% of the budget, are discussed.  According to Gallup, 66% are worried about cuts to Medicare, and 65% are worried about cuts to Social Security.

Gallup polls also show that Americans are looking for their leaders to make compromises and work together.  I have to give credit to President Obama for announcing today that he is open to increasing the age for Medicare eligibility from 65 to 67, which goes against his party lines.  John Boehner also seems to be willing to negotiate on a lot of issues as well.

Even if Boehner and Obama develop a compromised plan, it is not a guarantee that Congress will vote for it.  When it comes to voting, the politicians that toe the party lines are often the ones that get re-elected.  Michelle Bachmann has become quite popular for voting against compromises, despite her one vote never being a deciding vote.

So who wins in this battle?  I think the only potential victor is the American people if three things happen:

• An agreement is reached by August 2nd so we do not default on our debts and hurt our credit rating.
• We need major, but gradual cuts to the long-term budget.  Our annual deficit is conservatively $1.5 trillion, which is $15 trillion of additional debt over the next 10 years or roughly $29 trillion in total debt.  Congress and President Obama have discussed reducing the deficit (not the debt) by $4 trillion over 10 years, which would still make our debt be around $25 trillion in 10 years.  We need major cuts.
• Entitlement programs have to be changed in a humane, but impactful way.  The entitlement programs are the ticking time bomb, growing at uncontrollable, exponential rates.  If these programs are not changed, then we do not have much hope for a legit solution to our budget issues.

It is going to be difficult to find a solution for this one.  Ultimately, all of the solutions above involve self-sacrifice and personal responsibility by all Americans.  We can either be a nation that fights through a tough problem or we can be a nation that pushes the problem down the road.  Either way, we’re going to have to face these issues eventually.

Oil Prices…Ugh!

About a week ago, I discussed how Obama’s release of our strategic petroleum reserves was idiotic and would have no long term benefit.  Well, in just a week, the price of oil is already going up again (is now a good time to say, “I told you so?”).  Consider this another Obama “stimulus” that did not stimulate anything but more debt.

The price of gas is up $0.80 per gallon from the same week last year.  When Obama took office in 2009, the price per gallon was at $1.84.  The average price per gallon is now at $3.55, a 92.9% increase in gas prices.

The White House has given two responses to the high gas prices:

1. Excuses – President Obama blamed the wars in the Middle East and Japan earthquake.
2. Aspirations – President Obama said green energy is the solution, but that infrastructure will not be set up in a long time.

The only thing the White House has not offered…a solution.

President Obama uses Strategic Petroleum Reserve (Doh!)

President Obama recently announced that they will be using 30 million barrels from our Strategic Petroleum Reserve (SPR) to try to lower gas prices.  The Strategic Petroleum Reserve is meant for our military in case of a sudden war or for some tragic event happens, that is why it is called ‘strategic,’ and ‘reserve.’

Secretary of Energy Steven Chu said the release was “intended to complement the production increases recently announced by a number of major oil producing countries.”  In short, they wanted to show OPEC and other oil producing countries that we don’t need their oil because we have our own.  This is hopes to spur production, increasing supply, and lowering the cost.

I don’t think this threat scared OPEC.  First, they know that we are not giving out permits quickly to drill for our own oil because the President believes drilling is bad for the environment.  Instead, we are paying billions to Brazil to drill their oil and I believe the President’s energy policy is to rely on Brazilian oil.  I am still not sure why it is okay for them to drill but not us.

Second, with the amount of petroleum that we use in the United States, 30 million barrels will only last our country 1.5 days.  So, while you may get excited to see prices going down a little bit, this release is definitely a short term solution.  President Obama wants to show the American people that he is doing something about the oil prices.

Like jobs, he doesn’t have a plan for long-term success.  In jobs, he just threw a bunch of money at it to stimulate the economy.  The economy never really got stimulated.  For oil, it looks like he is doing the same thing – throwing money at it to stimulate other countries to produce oil.  Look for oil prices to stay around where they are at right now.  Do not be fooled by short term gains at the expense of our strategic reserve!

The Nanny State is Hurting America

I am opposed to Nanny State policies (policies that are uninvited state intervention) it for three main reasons: it takes away personal freedoms by getting involved in areas unnecessarily, because arrogant politicians think that they can run my life better than I can and mainly, it produces no consequences.

Government Gets Involved in Areas it Does NOT Need to be:

This past week, it was announced that cigarette packs are going to have graphic pictures to deter people from smoking. Do people not know that smoking is bad for you?  What percent of smokers are going to see the picture and be shocked by the possibility of poor health caused by cigarettes?  This example shows that the government assumes that we are all 10 year olds that could be influenced by a picture.  Here are more examples of the government intervening on daily decisions:

In New York, they have talked about removing trans fats and/or salt at restaurants.  There has been talk of a “fat tax” in some places around the country, which would be a higher sales tax rate on foods that are high in fat.  Medicare recently decided to cover obesity, which mean American tax payers could be paying for obese people’s stomach stapling surgeries, diet plans, and nutritional counseling.

In San Francisco, they are looking to ban people from getting circumcised and ban gold fish ownership within city boundaries, being that it is mean to put gold fish in a bowl.

Every state but one requires you to wear a seat belt.  Every state but three requires a helmet for some or all people on a motorcycle.  In 2000, the Consumer Product Safety Commission banned a certain car seat not because it wasn’t safe, but because it was too safe and they argued it could lull parents into a false sense of security.

Many cities around the country have banned smoking in restaurants.

We have federalized airport security with TSA agents (who will be voting to unionize soon, so don’t expect that line to be moving any faster anytime soon).

We are forced to pay social security taxes, but have no say on how the money is invested (mainly because it is not invested).

Arrogant Politicians:

Why do our politicians think they know how to live our lives better than we do? Why do they think their job is to tell us what to eat or what kind of car to drive?  When I see politicians like Anthony Wiener, I wonder what makes him think he can run my life if he cannot run his own!

No Consequences:

In short, people should have the right to be stupid and the right to fail, so long as they have to face the consequences of their actions.  Right now, 49% of Americans do not pay federal income tax, many because they are “poor.” So what are the consequences of being poor right now in America, according to government reports on people classified as “poor” by the Census Bureau:

Looking above, over 50% have two or more tv’s and over 50% have cable!  I am pretty sure having cable television isn’t a right protected in the Constitution.  In a typical poor family, the family works 16 hours per week.  If they were able to move it up to 40 hours a week (or 2 parents at 20 hours each), 75% of poor children would officially move out of poverty.  Nanny State policies, although many well intentioned, have unintended negative consequences.  When an item is free that others have to pay for, more and more people will gravitate towards the free item.  Why work 40 hours when you can work 16 hours and get the rest of the money from the government?

The Real Bad Guys – Colleges & Universities

Whenever things go bad, people start pointing fingers.  You have seen fingers pointed at Wall Street, big oil companies, and Washington.  The truth is that we have all played a small part in this recession.  However, I want to talk about the detriment that our universities are having on our economy and society.

At a macro level, economics is the study of production, distribution, and consumption of goods and services.  To have a strong economy, you need people capable of producing and purchasing goods.  Are our universities creating producers and purchasers of goods?

The first item I want to talk about is the increased cost of tuition over time:

College tuition is increasing at an exponential rate.  This is causing an increase in college debt.  The average student debt went from $12,750 in 1996 to $23,200 in 2008, nearly doubling.  In just four years (2004 to 2008), there was a 24% increase in debt.  In 2008, 67% of students graduating from four year colleges and universities had student loans.

It used to be that if you got a college degree, you were guaranteed a job.  The cost was little for school and the benefit great.  The cost is no longer little and the guarantee for a job is gone.  Unemployment is high right now, despite numerous job openings.  The big problem is that we have few people with the skill set needed for the jobs that are available (mainly technical skills).

There is a new lower class and middle class developing.  The new lower class contains people who spent a lot of money on a degree they cannot do anything with or that is for a low paying job.  Many social workers now have masters degrees and while that helps them make a difference, financially, it puts them in a tough spot.  Even if they file for bankruptcy, that does not relieve them of their college debt typically.

The new middle class are being called by some as HENRY’s (High Earning Not Rich Yet).  HENRY’s are people with nice paying jobs, but loads of student debt; student debt has even surpassed credit card debt.  Because they are high earners, they are paying high taxes.  With the combination of high taxes and high school loan payments, the new middle class has decreased purchasing power.  Many can take up to 20 years to pay off all of their school debt.

I do believe there is a need for a great education at a low cost that has to be filled.  Public universities, like the federal government, have a spending problem.  Their simple solution to making their budget is to pass their cost onto their students, who really have no power.  Before, I mentioned that there was a 24% increase in tuition costs in a four year span.  Do you think a freshmen student in 2004 saw a 24% increase in value in his degree by the time he was a senior?  Public universities need to stop spending money on items that do not add value and provide a basic education that prepares students for the real world.

I do not see long-term growth in our country without tackling the costs of universities.  Our young adults are starting life behind financially with degrees that are offering declining value.

Spending Cuts in Washington – It Has to Hurt – Part 2

My last article talked about why we need to make cuts that hurt.  This article takes another look closer at where the revenue comes from and how our government spends their money.  When you want to solve a problem, the first step is to figure out the “as-is.”  In short, understand the situation and the problem before you make decisions based on feelings rather than factual information.

I want to show you where we get our money from and how we spend it:

What you need to know:

• In 2010, our government spent $3.456 trillion and had $2.162 trillion in revenue, creating a $1.294 trillion deficit.
• To break even, we would’ve had to reduce our spending by 37% or increase our revenue (taxes) by 60%!
• Social Security/Social Insurance revenue is $865 billion and spending on Social Security/Medicare/Medicaid is $1.494 trillion, creating a $629 billion shortfall in those few programs alone.
• Medicare/Medicaid spending in 2007 was $599 billion and in 2010, it was $793 billion, a $194 billion (32%) increase in just 3 years.
• When Social Security started, there were roughly 30 employees for every retiree, and now there is approximately 2 employees for every retiree, creating budget shortfalls.

Now that you understand the problem a little bit more, do you believe President Obama’s spending freeze is going balance our budget?  Even if we froze our discretionary spending, the increases in Medicare/Medicaid alone are going to bankrupt us.

As you look for 2012 Presidential and Congressional candidates, look for those people that are saying outrageous things because they are probably the ones that really get it.