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.

How Republicans Win 2012 – Options

For my 100th blog post,  I decided to let you in on how the Republicans can create a strategy that will improve our system and economy, resonate with voters, and defend against Democrats.  It all comes down to one thing, giving citizens options.

I love having options, it is essentially a form of freedom.  I believe Republicans need to develop programs where people can choose between the current system and a new system.  Giving citizens the option between old and new eliminates the fear of the new.  Further, Democrat’s entire election campaign is around generating a fear of the Republicans.  For example, they have commercials of a Paul Ryan looking figure pushing granny off the cliff.  Just this past weekend, David Axelrod labeled Republicans a “reign of terror.”

I want to give a you few examples of options:

• Social Security –> the Chilean model essentially privatizes gains and socializes loses.  Basically, people would be given the option to stay with the current system or invest a portion of their social security dollars (instead of paying the full tax) to a private investment.  If the private investment does not meet the payout they would have received with the government social security check, they are paid the difference by the government.  It benefits the citizen because people typically get paid more privately than with social security, less money is paid out to citizens because their investments worked, preventing the system from going bankrupt, and there are still people paying in for those who want to stay on today’s version of social security.
• Medicare –> Did you know it is cheaper for us to pay citizens about $15,000/yr. for them to get their own private insurance than it is for them to be on medicare?  If we give people the option to do the private version, we would save money, even if only 10% did it.  Further, insurance is all about risk for the insurance companies.  If they have a larger pool of people paying in, it reduces the risk for them, increasing their ability to make insurance more affordable..
• Tax Code –> What if we had the ability to choose between the current tax code and paying a straight 20% of earned income without any deductions? If I had the option of paying a straight 20% instead of going through the confusion of our current model, I’d probably choose the easy path.

Obviously, the examples I gave are extremely complicated.  However, I wanted to illustrate some ways that we could create platforms that provide options.

I believe Republicans are trying to convince the American people that we need massive changes.  However, people do not like change, especially big change.  The public opinion of an entire nation cannot turn like a speed boat, it is more like a massive air craft carrier that takes miles to slowly turn around.  By offering options, it allows people time to get comfortable with big ideas.  The great thing about the private options presented is they will naturally become popular because they will typically put more money in people’s pockets.

Romney and Republicans need to market options more than the big ideas.  They need to tell Democrats, “If you like the current system, keep it.  Meanwhile, us 50% of Americans (the Republicans) will take the private options, make more money, and help cut the national budget.  You’re welcome Democrats…you’re welcome!”

Capital Gains Tax Rate – Just Leave It Alone

There has been a lot of talk about the tax rates of Warren Buffet, Mitt Romney, and President Obama.  Most people don’t remember this, but when then Senator Obama ran for office, he said was going to pay for all his campaign promises by ending both wars (Iraq & Afghanistan), increasing taxes on the rich (by letting the Bush tax cuts expire), and increasing the capital gains tax rate.

Income made on investments get taxed at a 15% rate vs. income from a job, which reach as high as 35%.  However, when Obama got into office, there was a recession going on, which crushed our stock market.  Essentially, there were little capital gains to tax, they wanted to encourage people to invest in companies, and a tax hike on capital gains in his first year during a recession would have been toxic politically.

Now that the dust has settled and we are seeing a small recovery, President Obama wants to increase taxes on capital gains and on the rich as he goes back into campaign mode.  Adversely, some Republicans and conservative blogs say that we should get rid of capital gains to increase the incentive to invest in the marketplace.  I believe the government does play a role in producing an environment that promotes economic growth, but they also need to be careful about putting too big of incentives on either side so as not to disrupt the balance of reasonableness and the power of the free market.

I do not believe we should increase the capital gains tax rate because for the majority of Americans, it is double taxation.  We get taxed when we earn income from our jobs, and then that money gets taxed again if we make any money with it on an investment (note: that same money gets taxed a third time when you die).  Further,  I think it is good to have an incentive (lower taxes) for people to invest in companies.  Financial investments in corporations lead to hiring, innovation, and profits.

It is not good policy in my mind, to promote too much risk by having a 0% tax rate on capital gains.  Too many people would try to make all of their money on investments so they do not have to pay taxes, which could be dangerous at the macro level.  Investing in the stock market is no guarantee and can be extremely risky.  If you don’t believe me, ask the thousands that had to come out of retirement because their portfolio shrunk to nearly nothing when the recession hit.

The current 15% capital gains tax is fine in my mind — not too high, not too low.  I definitely think we can talk about capital gains tax rates if we are talking about restructuring the entire tax code, but it is a low priority topic right now in my mind.

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.

How’d We Get into this Budget Mess?

Making a budget is kind of like trying to lose weight.  If you have ever tried to lose weight, you will find there are a million ways to do so.  You can try this work out or that, this diet or that, or this tool (such as a lap band) or that.  Because all these different options make different people money, the options become more complex.  However, the equation is pretty easy: if you burn more calories than you eat, you’ll lose weight.

Just as money confuses losing weight, politics/power ruin efficient and effective government in Washington.  Government budgets are easy – spend less than you receive.  There are a lot of ways to do that, but we’re still not there.  Instead, games have been played by the Democrats to force Republicans to make the cuts so the Democrats can brand them as the bad guys and try to keep the power through irresponsible governing, inaction, and deceit.

Luckily, there are conservative blogs like this one that tell you the real story about the budget!

Let me walk you through how we got into this budget mess:

• Federal Gov’t’s fiscal year is October-September.  Last year, the Democrats (who owned the House, Senate, and Presidency) did not pass a budget before the year started.
• After Democrats lost the election, they passed a budget during the lame duck session (time between election and when election winners take office in January), but the budget was only to last until March 8.
• When Republicans took over the House, they passed their own budget for the rest of the year that had $61 billion in cuts to discretionary spending (which had seen an 83% increase under Obama).
• The Senate is supposed to either pass it or pass their version of it and send it back to the House (to begin the negotiating process).  After about 1.5 months, the Senate didn’t pass anything.
• Approaching a deadline, Republicans in the House extended the budget for another two weeks to give Democrats time to either pass their budget or create their own budget.
• The Republicans made an offer, but Democrats didn’t like it.
• President Obama sends VP Biden to met with the House leadership – Biden has one meeting and then leaves the country for two weeks.
• Approaching another deadline, the Republicans extend the budget another 3 weeks.
• This Friday, we are now facing yet another deadline and the Democrats still haven’t proposed anything.  There is even Democrat leaders on record saying they are hoping for a shut down to make Republicans look bad.
• On Tuesday, President Obama had one meeting to discuss the budget and then he left town.
• Today (Wednesday), most likely bothered by the bad press, President Obama decided to come back and now had another meeting tonight.  Earliest reports indicate they didn’t reach a decision and are talking about another extension to give them more time to figure out the budget.

A few facts to think about:

• Republicans’ $61 billion in cuts proposal in a $3.5 trillion budget is about 1.7% of the budget.
• The $3.5 trillion budget has a $1.65 trillion deficit – $61 billion is about 3.7% of just the annual deficit.
• It took 3 deadlines before President Obama decided to step in.

Democrats have had every opportunity to make a budget and they have not.  If there is a shut down, it is the Democrats fault.  It is amazing that the Democrats still own the Senate and the White House and we don’t know their plan.  Even more amazing is that instead of the Senate passing their own version and starting the debate publicly, 3 people (Obama, Boehner, and Reid) have to sit in private to negotiate a $3.5 trillion budget.  Where are the elected officials from other states?

On the bright side, although the Democrats did not pass a budget on time last year, Republican Paul Ryan has already proposed a budget for next year that actually tries to curb spending.  I am still waiting to hear a real Democrat plan…if they have one.

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.

Spending Cuts in Washington – It Has to Hurt

Really…are we still talking about the spending in Washington?  I know it is more complex than this, but essentially we are spending more than we are earning.  There is fear of a government shut down in early March because we are running out of money because Democrats aren’t willing to make tough cuts to the budget.

On February 5, 2010, I wrote an article with a catchy name, “House Raises Debt Limit” that discussed how Congress raised their debt limit to $14.3 trillion (only a year later, Democrats want to increase it again).  When Congress voted for it last year, every Republican in the House and Senate voted not to increase the debt limit in addition to the 30 Democrats in the House that didn’t want to raise the debt limit.

The Democrats had an entire year to figure out a budget that would not cause a shut down, but they refused to do so.  Instead, they decided to make Republicans offer budget cuts and then attack them for being mean or unfair.

In 2001, our debt was $5.1 trillion – in just 10 years, our government has essentially tripled our debt.  President Obama’s response – a spending freeze.  When he first got into office, he ran a massive deficit and now he wants to freeze the spending at a level that adds $trillions to our debt every year.

Looking at our budget, 63% of our budget is Medicare, Social Security, and Defense.  Even if our government cut all discretionary spending, with the increases in Medicare and Social Security alone, by 2020 we’d still have a $600 billion annual budget shortfall.

The government has to attack all areas, but no one wants to make cuts.  Agriculture wants to keep up their subsidies, Education always says they need more money, Social Security doesn’t want to stop paying people, and the list goes on.  Spending cuts are not going to be easy – you know we are going down the right path when the spending cuts hurt because to get down to where we need to be, it is going to have to hurt!

The Problem with Social Security

There is going to be a lot of debate about Social Security because it costs us a lot of money.  For this posting though, I just want to focus on the incentive of Social Security.  As I look at how our government spends money, I often look at what incentives they are giving citizens through their policies.  For example, Welfare gives an incentive to be unemployed (if you do not work, you get money – that is an incentive), tax deductions for charitable giving gives an incentive to give money to non-profits.  What incentive does Social Security give?

I believe the Social Security system gives people an incentive not to think about money for retirement.  The “feeling” of Social Security (which is more important than its actuality) is that you will have this nest egg waiting for you when you retire at age 65 years old.  Wealth Builder magazines’ poll showed that 80% of Americans think their standard of living will go up at retirement.

The first thing that most people don’t know is that we have a retirement crisis in America.  A study done by Bankrate.com showed that more than 70% of Americans do not believe they’ll retire with dignity.

According to a USA Today study on people 65 years old, 97% can’t write a check for $600, 54% are still working, and just 3% are financially secure.  Further, bankruptcies for those 65 years and older went up 244% in a ten year period.

If we did not have Social Security, people would have an incentive to figure out a plan themselves in the private world.  They would most likely realize that they don’t know how to buy a stock, bond, mutual fund, or invest in an IRA without some professional help.  That would give them an incentive to sit down with a professional, who would need to understand what their goals are for retirement.  Once they found out their goals, they’d understand what it takes to make those goals and have about a much better chance of retiring with dignity.

What are people’s current retirement plans?  There was a study done by the Consumer Federation of America asking people earning less than $35,000/year how’d they save $500,000 for retirement and 40% said the lottery.  The lottery is another government program that gives people incentive not to save and to throw away their money.

I get passionate about this subject because I care about people and our government is hurting people and filling them with false hopes.  Let me say that again, our government is hurting people by giving them incentives to make poor life decisions.  I am not saying that tomorrow we should write a bill to end Social Security because too many people are relying on Social Security’s promise.  I do believe we should immediately write a bill that phases it out over the next several years so that people have an incentive to come up with their own plan.

I also believe that all State governments should get rid of the lottery, even though it earns revenue pretty easily.  The benefits do not outweigh the negatives because even the winners always seem to go bankrupt.

It is funny how so many people complain about the government overspending and then they look at their own finances and they have a mortgage, car loans, student loans, and credit card debt.  To make a difference, you have to be different.  Start by getting on top of your debt.  The statistics for this posting were found in the book, “The Total Money Makeover” (pg. 153-154) by Dave Ramsey.  If you have debt and are looking for a good financial plan, I would recommend his book.