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“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy

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Dec 10 2012

“The Age of the Unserious”

C.M. Phippen

Our president claims that he is making an honest effort to negotiate with Republicans to avoid the fiscal cliff. He wants us to believe that they are the ones who simply won’t budge on their positions and won’t allow him to fix the horrific fiscal issues we face.

This is the president whom Tim Geithner claims is willing to go off the fiscal cliff if the Republicans don’t agree to his plan to raise taxes on the richest 2% because, in Geithner’s words, “remember, it’s only the top two percent.” Doesn’t unequal treatment under the law become a civil rights issue at some point!? Anyway . . .

This is the same president who has had his past two budgets shot down in Senate votes of 99-0 and 97-0, one of which looked an awful lot like Obama’s current proposal from which he is negotiating. He apparently expects Republicans to support the plan that his Democrat allies in the Senate refused to support?

In addition to major entitlement spending cuts, the greatest priority our government should have is that of allowing/encouraging/stimulating economic growth, which will in and of itself lead to the President’s desired revenue increases.

In fact, Bill Whittle recently made the point that “if you destroyed the entire government, burned every [public] building, fired every government worker, sank every aircraft carrier, even with no government to pay for – none – we’d still pay the same taxes that we’re paying today and still have to borrow or print money just to pay for entitlements.”

I would argue that if we do indeed have a shortage of money for schools, teachers, police and other government services, it is entitlement spending that is draining those resources, not tax cuts or wars.

Even Austin Goolsbee, former president of Obama’s Council on Economic Advisers, recently stated that any solution to America’s economic ills “cuts on discretionary and entitlement spending.”

In addition, Peter Orszag, former OMB director, recently came out urging his fellow Democrats to support reforming entitlements and putting “crucial programs on a sounder footing.”

I must assume that our president is well aware of the fact that nothing in his rejected budget plans or spending priorities will stimulate growth. And he has made it very clear that, despite his repeated declarations to the contrary, he is never going to cut any real spending.

Thus, his only plan to decrease the rate of growth of our historically unprecedented federal deficit seems to be an increase in revenue coming from the already over-burdened taxpayer. Unfortunately, the proposal on which he is willing to risk our entire economy, that of increased taxes on the top 2%, leads to enough revenue to cover expenses for about eight days! Brilliant!

Even the Obama-touted Buffet Rule, if implemented, would pay for about 28 hours of government spending. If you want to close the deficit through increased taxes on the two highest tax brackets – 33% ($178,650 – $388,350) and 35% (over $388,350) – it would be necessary to hike those rates to 159% and 166% respectively. I’m assuming most liberals would tell us that such rates would have absolutely no impact on economic growth or the willingness of those individuals to work!

AEI economists recently looked at the effect of tax increases v. entitlement reforms on fiscal crises management over the nearly three-decade period of 1970-2007. They found that countries that were able to successfully reform did so mainly with spending cuts; in fact, on average 85% of their budget gaps were closed this way. On the other hand, those with failed reforms were the countries that, on average, relied at least 50% on tax increases.

Just ask Jim Sinegal, co-founder of Costco, if those tax increases will most likely lead to greater or reduced revenue next year. He’s a supporter of Obama who preached the moral imperative of Obama’s tax plan, and of businesses large and small all “following the same set of rules . . .” while risking Costco’s credit rating to take on an additional $3.5 billion in debt in order to pay out dividends this year before Obama’s tax hikes kick in. Oh, and he is apparently the biggest beneficiary of this move.

Or ask Great Britain how a plan of tax increases worked for them last year when they raised rates on those making over £1 million (about $1.6 million) to 50%. The result was that they saw a £7 billion treasury loss as nearly two-thirds of the high earners were suddenly missing from the country or finding ways to shelter income.

Funny though, that even after the manifestation of the result of such policies, political supporters of the increased tax are now calling any reduction a “tax cut for millionaires,” as though resentment toward the wealthy is more important than the amount of money the government actually has for programs which benefit the less well-off.

Yes, Mr. Whittle, I think you’re right; this truly is “The Age of the Unserious.”


Nov 16 2012

Obama and the “Balanced Approach”

C.M. Phippen

Within days of his razor thin re-election, President Obama chose to inform us that he now has a mandate for his deficit reduction policies that include a “balanced approach.” In this case, balanced means he wants the wealthy to pay for the overspending of politicians in Washington; if the rich will just pay more, then the politicians will find the discipline to reduce their overspending by a tiny fraction.

Never mind that it wasn’t a “balanced approach” of irresponsibility that got us here – it was fully a result of Washington not living within its means. The increase in revenue from those taxpayers would amount to $82.3 billion annually, the equivalent of about eight days of spending.

According to a recent study by Ernst & Young, just allowing tax rates to go up on those making over $250,000 a year could cause a loss over the long-term of 700,000 jobs.

Are we really willing to exchange eight days of spending for 700,000 jobs in an economy that is barely making it? Does this make sense to anyone who’s not a community organizer?

Our economy needs to grow at about a 3 percent annual rate in order to just keep up with new workers entering the work force; under Obama we’ve experienced a GDP growth rate average of about 2 percent.

Even Thinkprogress.org, while denying that these increased tax rates will have any real effect on economic prosperity, has admitted that the US economy would take a .25 percent hit in growth if these taxes increase. Even if that is the worst of the economic consequences from such a policy of anything but “equal protection under the law,” are we really willing to take a 1/4 percent hit year after year just to cover eight days of expenses during each of those years, especially when the record under this president has been growth below what is necessary just to keep the currently high rates of unemployment stable?

Interestingly enough, when looking at the exit polling done on election day, only 33 percent of voters said they think taxes should be raised to deal with the deficit. A full 63 percent of voters responded “No” to the question of whether or not taxes ought to be raised to help cut the budget deficit.

Of course, no surprise that many of the people who probably voted for Obama were completely unaware of his plans. That would be because he didn’t run on his plans. He ran on demonizing Mitt Romney for being successful and rich, as evidenced by his 85.5 percent of negative ads in this campaign; ads that were mainly aimed at Romney personally rather than being aimed at his actions and principles, by the way. Translation – nearly all of his sizeable war chest was spent demonizing the most successful guy in the room.

There’s no better time in America to be a loser – we love the guy whose every promised outcome was a flop and who, at every turn, had an excuse handy as to why he just couldn’t accomplish what he wanted and why it was everyone’s fault but his own. The reason the stimulus didn’t work, according to the Obama administration, was that the recession was much worse than they’d realized; turns out it wasn’t as bad as we thought – 4.7 percent decline rather than 5.7 percent.

He truly is the president of the participation trophy generation. I guess though, that if the successful aren’t responsible for building their own success, it follows that the losers aren’t responsible for their own failures.


Apr 19 2011

Signs of Destruction

C.M. Phippen

As I’ve tried to better understand the events leading up to the financial crisis of 2007-2008, I’m haunted by a comment made by Charles Gasparino in The Sellout. He stated that as corporate bond prices lost value in the rapidly declining market of June 2007, there was a dramatic “flight to quality of investors selling corporate bonds and snapping up supersafe Treasuries” (Gasparino, p 265), the bonds considered the safest available.

At about the same time, in June of 2007, the rating agencies (Standard and Poor’s, Moody’s) began downgrading mortgage-backed securities, despite the fact that they had been showing signs of deterioration for a year or two prior while still maintaining consistent AAA ratings.

One-and-a-half years earlier, in late 2005, AIG made the decision to no longer insure CDOs underwritten by US financial institutions because of the lax standards in US subprime lending (Gasparino, p 226). At about the same time, Bill Gross of PIMCO was warning about falling housing prices and defaults.

Now let’s jump to 2011. Over the past two years, the Fed has pumped nearly $3 trillion into the economy by purchasing US treasuries (QE1, QE2, and reinvestment of maturing treasuries). This in addition to all those purchased by private investors fleeing toxic CDOs.

In February, Bill Gross of PIMCO, “one of the largest investors in the Treasury market,” announced that he would be selling Treasuries and just one month later, with no holdings of US government debt, began shorting them.

In a major shift, China has begun pouring money into hard assets and away from US government debt.

A former advisor to China’s central bank, Yu Yongding, recently “likened the U.S. Treasury market to a ‘giant Ponzi scheme,’ arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy.”

S&P just lowered the outlook on US debt from stable to negative, signaling the potential eventual loss of the AAA credit rating and “a sign that the ratings agency has doubts about prospects for taking effective action to curb deficits and debt.”

To argue that deficits and debt can be reduced by raising taxes as opposed to cutting spending would be to ignore the realities of history. Regardless of marginal federal tax rates, revenue raised has always remained fairly consistent, at about 18% of GDP. In fact, raising capital gains rates could likely have the opposite effect, as more people have historically sold more assets during lower-rate periods than higher-rate, when taxes collected on gains have historically plummeted. Interestingly, lowering capital gains tax rates in a high-growth business environment has been one of the only ways shown to actually create outliers in this equation – increased percentages of revenue above the 18% norm.

All the while, President Obama’s budget would add $9.5 trillion to the debt from 2011-2021, a near doubling in just 10 years! Just as many of the major players on Wall Street spent the years leading up to their firms’ meltdowns playing golf and entertaining, we seem to have a president equally oblivious to the eventual destruction being sown all around him. While it looks like many of the American people have learned from the mistakes of the past decade and are willing to accept the changes that entails, the lack of foresight and leadership emanating from the capitol is the very essence of Nero fiddling while Rome burns.


Sep 20 2010

Tax Cuts for the Rich?

I received this email from Paul Day and felt like it was worth publishing:

Remember how we have heard from the Democrats for the last 8 years that the ‘Bush’ tax cuts were tax cuts for the ‘rich’? Now we have our (Democratic) president proposing to extend the ‘Bush’ tax cuts for people earning less that $250,000. But I thought they were for the ‘rich’. It turns out that extending the tax cuts for those earning over $250,000 will ‘cost’ $700 billion over 10 years while extending them for those earning less than $250,000 will cost $2.3 TRILLION. In other words, more than three quarters of what the Democrats all this time have been calling the ‘Bush tax cuts for the rich’ didn’t go to the rich at all. Oh, and the reason given for not extending the cuts for the upper income earners is that they are concerned about the loss of $700 billion – but apparently not concerned about the loss of the $2.3 trillion! Do you think the Democrats knew the truth all this time?


Jul 27 2010

Jobs and Tax Cuts

C.M. Phippen

As earnings reports come out, several companies are beating expectations, not only in bottom-line profits but also in sales. While corporations have had to cut back and trim down in order to pull back on expenditures, many are finally starting to experience some real growth.

Why, then, are they still not hiring? Last week I wrote about the fact that the political environment seems to be less than reassuring for business expansion and hiring. A comment was made by a reader that corporate tax rates are lower now than they were under Ronald Reagan, and I can only assume he was alluding to his belief that the current rates ought to then be good enough to do the trick.

The solution, though, seems to be all about the trajectory, and confidence in the political class going forward. Sir Martin Sowell, Chief Executive Officer of WPP, when asked by Larry Kudlow yesterday how the US can become a “re-emerging” market (in other words, attractive to investors as are the BRIC nations currently), his response was that the US must deal with our upcoming tax increases set for 2011 and our deficit, looking not at increasing taxes, but rather “looking at government spending.”

In a paper written by Christina and David Romer in 2008, they come to the conclusion that “a tax increase of 1% of GDP reduces output over the next three years by nearly 3%.” Christina Romer is the chief economic advisor to President Obama.

Why then, would this Congress allow the Bush tax cuts to expire at the end of this year, and why would the administration not support across-the-board tax cuts? According to Larry Kudlow, when Bill Clinton decreased the capital gains tax rate from 28% to 20%, revenue increased by $80 billion, and when George W. Bush reduced the rate even further, to 15%, revenues went up $85 billion. Couple that with the fact that Obama’s own chief economic advisor recently came to the conclusion that “tax increases have a large negative effect on investment.”

Timothy Geithner has recently stated that the White House would like to see tax rates for the top 2-3% of Americans increase in order to demonstrate to the world our commitment to dealing with our trillion dollar deficit. Heaven forbid we actually cut spending and allow private business expansion through reductions in taxes not only for corporations, but also for top earners. This encourages investors to invest, which thus encourages businesses to expand and ultimately hire more workers.

Is that really so difficult?