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.

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.

Death Tax – The Straw On the Camel’s Back…

Lets look at two fictional characters, Paul and David.  Let’s say, for simple math’s sake, that each earn $1,000,000 over a 20 year period.  Paul buys a nice house and a nice car, and after 20 years, he has $340,000 (saves about $1500/month after taxes).  David lives a little bit more conservatively to save money to hand down to his kids and ends up with $600,000 (saves about $2500/month after taxes).  In short, David has $260K more than Paul.  After twenty years of working, the are both killed in an accident.

The government has a Death Tax (an estate tax) that typically ranges from 41-47%.  Yes, you are penalized by the government for dying.  If we assume a 41% tax, Paul’s estate would have to pay $139,400, while David’s estate would have to pay $246,000.  Despite earning the same amount of money during their career, David’s estate has to pay roughly 76% more in taxes than Paul.

The Death Tax is the most ridiculous tax there is in my mind.  In addition to taxing earnings that have already been subject to being taxed, the rate at which they are taxed is higher than they were the first time they were taxed.

With small business being key to our economic success, this tax is the last straw on the camel’s back for our economy.  From a economic viewpoint, there is a disincentive for a business owner to grow his or her business which hurts job growth.  Further, often businesses need to be liquidated to pay the heavy taxes, which causes people to lose their jobs.

The Death Tax only accounts for 2% of the government’s revenue and causes the government to pay pretty much everything they gain just to enforce the tax.  The net impact of this tax is a loss of jobs (or at least a prevention of growth), a very small revenue stream for the government, and a very big headache for grieving families.

The good news is that in 2010, the death tax rate is 0%, so there is an incentive to die this year because next year it will shoot up to 55% for anything over $1 million.

It is time to get rid of this STUPID tax!

Looking Out For #1

On August 23rd, I wrote an article entitled, “Different Cultures Indeed.”  The article discussed the release of terrorist Abdel Baset al-Megrahi by Scotland on ‘compassion’ grounds.

Many in the international community, especially the United States, were quite upset by the release of a convicted terrorist.  When the UK, a very close ally to the United States, was challenged, they said they allowed Scotland to make the call and completely evaded any responsibility.

New reports are showing that Abdel was potentially used as a bargaining chip for the UK to secretly gain access to Libyan oil reserves at a discounted price.  While many are shouting ‘foul,’ I wish to look at it from a different perspective: this is a story about a State leader that is looking out for his constituents when times are tough.

The UK’s unemployment rate is now at 7.8% (2.43 million people – roughly double what it was last year), the only spending that is increasing in their economy is the governments, and gas prices have reached as high as $9/gallon.

Due to the international recession, many countries are struggling to get their economies going, manage their debt, etc.  Politicians have always proven to care about job security more than their country’s best interest; however, politicians are being held accountable by electorates more aggressively in these tough times.  For a shining moment, politicians’ job security and the States’ best interest collide.

Universal Healthcare and Cap and Trade are both programs that I’ve heard the argument, “Well, they do it in Europe.”  While having good relations with other countries is important, I think it is MORE important that we look after ourselves first and quit spending in the name of ‘good global reputation.’

Universal Healthcare and Cap and Trade have been disasters in Europe.  We should be looking at those programs and deciding on whether to have them based on the data, not the feeling others may get if we do it.  While I hate that the UK let go of a single terrorist, if it reduces their oil rate to put more money in people’s hands to invest in their economy and reduces business expenses so they can invest in hiring more people, then the net benefit for the country may outweigh the threat of a dying prisoner being released.

Are our leaders going above and beyond to protect our interests or are they focusing on global reputation?

Energy Restrictions Do Not Apply Abroad

The ‘Green Movement’ in the United States have killed any prospects to release our dependency on foreign oil.  Democrats have blocked:

• Drilling in ANWR (Alaska)
• Drilling off the Alaskan coast
• Drilling off the coast of Florida
• Drilling off the east coast
• Drilling off the west coast
• Building oil refineries
• Nuclear energy production
• Clean coal production

All of this blocking is rooted in environmentalism.  However, the Wall Street Journal reports that the U.S. is going to be lending $billions to Brazil to finance oil exploration off their coast.  In May, Obama approved a nuclear energy program for UAE (United Arab Emirates).

Why is okay for them but not okay for us?  It is very disappointing that we could revolutionize our energy system through domestic exploration, but we refuse to do so because of old laws that were an emotional response to oil spills.

Our economy needs the boost of local energy sources.  Our government does not need to invest any money, there are plenty of private companies willing to extract our natural resources.  Instead, our government spends money that it does not have to help another government explore their natural resources.

Cash for ‘Perfectly Good Cars’

Politicians are calling “Cash for Clunkers” a wild success!  Are surprised that when you give people money, they may spend it?  It is funny how Congress defines “success” for a program.  The program had a $1 billion budget that was supposed to last until Nov. 1st; instead, the $1 billion lasted  1.5 weeks.  Currently, the program that spends money the fastest is considered “successful.”

When looking at the program a little closer, there is a story not being told.  A dealer in Minnesota was doing the Cash for Clunkers program and only 65/200 cars that should have been accepted were accepted.  In short, the dealership had to eat roughly $3500-4500 per car.  When the dealership went to call the one telephone hot line to challenge the other 135 cars, there was a 2-3 hour wait.

Some say that this program is helping our economy, but there is no overall GDP gain.  Because it is coming from tax money, there is no added benefit to the economy.

The car industry is temporarily being propped up by our government.  With hundreds of different industries struggling right now, why cars?  Could it be because our government now has a vested interest in the car industry?  What is even more worrisome is that there are reports that Detroit is ramping up production.  Increase in supply will lower the demand for the car industry, hurting them in the long run.

We are seeing that our politicians can rationalize anything for the sake of good intentions.  We can back up ethanol, the banks, cars, …, what’s next?

What’s next is another $2 billion for this horrible program!  Ugh!