meeting recently. These chitchats will continue on a regular basis until
December when their thoughts will be made public. Former Sen. Alan
Simpson, R-Wyo., the panel’s co-chair, summed up the difficulty the
commission faces:
“It's going to be
like giving dry birth to a porcupine.”
While Senator Simpson has provided a colorful description of what lies
ahead I think he (and most others in D.C.) are doing us a disservice. As
it turns out a significant portion of the revenue problems can be fixed.
All that Congress and the President have to do to right the revenue
ship is: Do Nothing.
Consider this first graph of the CBO projected budget deficits through
2020. The graph measures the size of the annual deficits. These very
big deficits assume that various tax credit/deductions are eliminated
and taxes on income are increased.
This second graph shows what would happen if Congress and the President
were to extend existing tax breaks. The three big areas of tax increases
come to $3 trillion over the ten-year period.
Our tax code is littered with provisions and temporary “fixes” that have
the affect of reducing tax revenues. Each of these provisions has a
drop-dead date attached to it. If Congress were to just say “no” to
extending any of this we would generate $5.3 trillion over the next
decade. That much money would go a long way toward addressing our fiscal
imbalances.
The CBO has a list (Expiring
Tax Credits) of the nasty tax breaks that could fall prey to
the setting sun. The list is three pages long. Many are important
incentives for alternate energy. There are some that smell like pork.
For example the Depreciation Classification for Certain Race
Horses could be eliminated. That would save us $500 million. But
these categories don’t amount to much. We need to go after the big
bucks. We need trillions, not billions.
Our politicians will be faced with two difficult choices. Either they
can go to their constituents and corporate contributors and say with
glee:
“I voted to raise taxes on every damn think we could think of!”
Or they could do it the easy way and say:
“I did not vote for any tax increases. My record is clear. I did
the responsible thing. I did nothing”.
Given how things work in D.C. and that a fair swath of the population
hates everyone (red or blue) at the moment it would seem reasonable that
our leaders will do what is necessary (and expedient) and do nothing at
all. With that in mind it is worth taking a look at the CBO list to see
what big-ticket tax increases are in store between now and 2020.
-EGGTDDC (AKA- The Bush Tax Cuts) Letting this roll off into the sunset
on 12/31/2010 will result in a $1.6 Trillion tax increase. Big money and
it would result in an immediate increase in revenue. This increase will
come from those making over $200k. On average this will mean about 2%
off the bottom line of 5-10mm households. A substantial hit.
-Raise long term capital gain to 28%. This comes to $350b over the
ten-year horizon. It is not a big category but a politically important
one. This is going to happen.
-Estate and Gift taxes will add $570b. I think this one is a layup.
Sorry trust funders.
-Expensing of Investment Property will save $300b. Your incentive to own
any real property will be diminished.
-Eliminating the deferral on AMT will generate $530b. This is an ugly
tax. I have been subject to it for years. I think of it as a 28% flat
tax. But it really is a bastard of a flat tax because certain deductions
are still permitted, while others are not. Here is how the IRS
describes the AMT:
The AMT is a separately figured tax that
eliminates many deductions and credits, thus increasing tax
liability for an individual who would otherwise pay less tax.
What are those deductions/credits that you might lose? (1) Child-care,
(2) State taxes, (3) local property taxes, (4) medical expense and (4)
charitable contributions. Basically if you live in NY or California (or
state with high income tax), own a home where property taxes are high
and have three kids and support your church; bend over. This tax is
going to hit between 10 and 20mm people. If your individual of combined
income is ~$125,000 look out.
Something along these lines is coming. We have survived high tax burdens
in the past and will likely do so this time. The most critical factor
in the CBO analysis of the future deficit is not expenses or taxes. It
is the growth in the GDP of our economy.
In a utopian world we would have tax receipts of 15% and expenditures of
18%. We are far from utopia. In 2010 we are looking at tax receipts of
10% and expenses of 25%.
Consider this graph of the CBO’s projected growth of GDP. They assume an
average growth rate of 4.38%. I think it is going to be closer to 2%.
The difference between the CBO estimate and the more realistic 2% comes
to a whopping $22.5T over the ten years. Apply a 15% tax rate to that
missing growth and you end up with $3.3trillion of less revenue. That
is equal to all the tax income that will be created by the big rate
increases that are coming. In other words, nothing will have been
accomplished.
If we fail to grow, we die. The deficits will overwhelm us. It is very
difficult for me to imagine how we can grow if we implement these (or
similar) tax increases. We will bump back and forth from good years to
bad and the average growth will be closer to 1% versus the 4% we need.
That said, I still think we will do “Nothing”.
Whatever.
Here's another line of reasoning ... suspend baseline budgeting, i.e. no automatic increases to the budget (which BTW are usually in excess of inflation) for several years. If you simply held the current budget to the current numbers, and let the economy simply drag along, that would be enough to close the deficit in several years. But in Democrat parlance, that would be a budget cut, and the persons who proposed this would be accused of wanting to starve the children, which is why this is never proposed.
"tax receipts of 10% and expenses of 25%. the difference of 10%...". why not a difference of 15%? (there is much on zerohedge that is miles above my head).
I think FOFOA'S latest piece sums it up pretty well
http://fofoa.blogspot.com/2010/05/hair-of-dog.html
Has anyone ever seen a federal agency eliminated? It never happens, and the hundreds of billions in extra spending are now baked in the cake. Doing "nothing" will only result in a collapse a few years earlier than if they jacked taxes in an attempt to balance the books. These idiots have already seen the trailer for the movie coming soon to a big screen near you. Greece showed the world how it works -- but I'm sure the U.S. Congress, lead by The One, can do much better.
I agree with do nothing...just monetize to fund Fed govt and stop federal income tax...money for nothing will create jobs, better than money for nothing to create bank reserves...
Right now, a lot of low to middle income families pay litte Fed income tax (besides FICA) due to earned income credit...so mid to upper midd pay the most income taxes and deductions help people in higher income/higher cost areas (bigger mortgage/local tax deductions) and for higher income professions that spend a lot on eduction to make a lot...if you take AMT exemptions away from these folks resulting them in losing their deductions but still have high wages and high costs, they will make Tea Party look like sheeple...and they are mostly in blue states... Dems have always worried more about AMT than Repubs because red states have lower wages, lower local taxes, lower cost of living so deductions AMT would wipe out not as big of a deal..
Oh, I don't know. Sure is a lot of talk about money without the folks in charge not knowing what money even is. How about some remedial courses for our elected officials on basic economics... not of the Keynesian variety.
The Federal Income tax is illegal. If we stopped paying the interest on the debt to the Fed they would go broke and auditing them would be moot. It will be in the history books that they gave monie to the banks through bailouts and that monie was used for bank$ter bonu$e$ and also to short silver and gold. Be your own bank, buy silver.
Our survival depends on the health of our currency, and its continuation as the world reserve currency.
Fiscal and monetary policy should be forged to protect the health of our currency, and promote sound money.
To put this another way. Our main avenue of survival, at this point in time with our fiat system, is to find buyers for US debt while there is still confidence in the USD.
What happens to the US treasury debt market when a US city or state declares bankruptcy. Well perhaps nothing, what if two or more? The US sovereign debt credit rating is tied to the health of the states. If California was to default, what would happen to the US ability to sell debt?
This is the risk, because the treat of insolvency has non-linear effects on issuance when the world is de-leveraging. That is why I think that the Treasury market outside of the FED and primaries buying of our debt, is extremely fragile.
----------
I would also like to point out that the effects on revenue per a specific tax strategy are not as simple as they seem. In the world of tax, what matters is the revenue you generate once the policy plan is enacted.
How ever you add it up, there is a finite ability to pay tax, and when this is exceeded, revenues will not go up even though we are being taxed more.
Another turning point is when IRS incremental collection costs exceed the returns. In other words, the IRS is ultra sensitive to any corrodinated tax "revolt", I would say much more so than Greece. The problem is the IRS has no realistic way in addressing massive tax evasion. When there is money to be made in creating avoidance schemes on a mainstream scale because of unreachable burdens, the IRS will only see diminishing returns.
Another danger is to tax into negative growth. This is even worse that tax breaks in the short term.
Obviously, the answer does not lie with increasing taxation. If the politicians are smart they will not test these types of measures.
----------
Also, a lot of theories are put forth, myself included, which tend to not appreciate that the economic health in the US is a co-dependent system. Much analysis is done under assumptions that are impossible from a systemic stand point. The CBO is famous for their projections based on existing norms, when they themselves will use words like unsustainable. You come to the realization that a lot of the scenarios are not plausible. The magnitude of failure can wipe savings. Yet we hear the word unsustainable.
The CBO mission is clear, not to be shot as the messanger. Their motto; a call to misaction.
So our fiscal house will burn down while the CBO and congressman watch while holding fire hoses and doing NOTHING. Except looking at each other and wondering what fire hoses are used for.
We have entered the era of a new political face, it is called the CRISIS face, and it is always one of great surprise. The result of an unforeseen event, no matter what the warnings.
Mark Beck
"do nothing" ... default. good. failure is the only
reliable teacher. either you have mastery or you have
failure, pretending is no substitute. the existing money
system is just functioning as it was designed to function
and insurmountable debt / interest payments are the fruit
of this system. that is it, period. it has been accomplished.
the bailouts are just terminal redistribution from every
frugal player to the terrorist lords of usury. the last huraahhhahaha.
the last call at the predators ball. no one can stop it or wants to
stop it because it is all we know. debt. empty debt and more slavery.
it is not like the system is good but is being soiled by bad actors and
corruption, though that is true too. the system is fundamentally corrupt and has succeeded in
destroying itself by its own cancerous growth genetic structure. face it, kaput!
.
but life goes on even though our money system doesn't. we have to
create a new one. what we need to do is make sure the new one is not
ponzi based, is a utility that serves as a means of exchange for goods
and services and is not casino based, thereby diverting its utility for
production of goods and services. when you have no means of exchange
for goods and services, diverted, you have no incentive to produce or work. we have seen
this. gambling for our personal profit and pleasure, with taxpayer money,
is not work, even if it does take all day and result in either massive profit
or destruction of entire economies and people.
.
it seems we have created, allowed the creation of, an instrument or instruments
whereby the truly psychopathic among us can in brief moments of time
destroy centuries of artistic endeavor and then chalk it up to some natural
evolved outcome of the free expression of the free will of modern man, and
then move on as if we will learn from our mistakes. and then blame the victims.
demonize them. or consider it creative
destruction, driving us further along the evolutionary path. to what?
no idea! everyone is completely consumed squirming their way out of debt,
or into debt, or leveraging someone else's debt to avoid personal debt or
creating corporate debt to siphon some to pay prior personal debt, with
an eye toward future debt. all anxious to default.?
.
the solutions are obvious and simple. the problem is that certain
players in the current system are making so much easy, trillions, in
this system that they will never let it go, no matter that it is not
working for 90% of the people. this is the design. the recipe.
we are in the phase where the only priority is quantity of digital
liquidity and political solvency. surreal deflation. surrounded by
material wealth and energy in a psychological ghetto. debt at interest
based money, last leg, global. fiat hell. just a thought...
have a cupcake.
ps. the growth option is u n s u s t a i n a b l e. again...debt at interest.
where will one find these slaves?
[ Our politicians will be faced with two difficult choices...“I voted to raise taxes on every damn think we could think of!”
Or they could do it the easy way and say:“I did not vote for any tax increases. My record is clear. I did the responsible thing. I did nothing”. ]
Well in theroy they could also say: "I voted to eviscerate every useless government department, agency and program until we get to a point where tax revenue equals tax spending!"
But of course The Commission's final report has already been written and we all know what it's going to say anyway. They just won't release it until a week or so after the November elections (December).
What is unknown however is whether Obama will then deliver an I-Have-A-Dream style speech or a We-Choose-To-Go-To-The-Moon style speech in an effort to whip up enthusiasm for taxing the living crap out of everything. Vanity Fair is probably covering the lead-up to that breathless historical moment right now.
There will be no charts in that article.
4 ways to balance the budget:
- Grow
- Tax
- Conquer
- Print
I suggest ending the Forever Wars and conquering Venezuela. That would be the most cost-effective solution to several problems.
That's like the intro of a strategy game :)
Three things they should do:
- Eliminate capital gains tax.
- Rewrite the SA33, SEA34, IA40, and IC40, to restore value investing and long-term capital growth of businesses. End the casino-style trading such as HFT, CDS, and a number of other gambling options.
- Eliminate the tax code and go to a 15 percent across-the-board tax rate for anyone earning a combined family income of more than $50,000.
This is just the beginning.
I don't think it will work even if they do it over 10 years, because the amount of expenditures along with inflation and REAL inflation along with interest will be more than what we save over 10 years. At the federal level, the state level the local level and the personal level, there is just to much debt that is on everyones books. For the person everything from credit card debt to undischargeable debt like school loans and such. Local and state are losing revenue from taxes and can't keep the good times rolling anymore, so they for now are cutting welfare and libraries and whatever they need to cut as long as (for now) they don't cut police and fire. Then there is the state pensions which aren't funded well enough and have lost alot. They have been promising better and better pension payouts to state workers every year but the pay in has been going down. Eventually it is starting to happen where counties are not able to pay pensions, which in turn makes it a state problem. What can't be controlled without hardship is the fate of our immense liquidity that is out in the world via the greenback and treasuries. Sooner rather than later we will have a meltdown on our currency and then what.
http://www.modbee.com/2010/04/11/1123208/stanislaus-trails-piper-it-cant.html
http://www.delcotimes.com/articles/2010/04/30/opinion/doc4bdaa2929a6d7325596315.txt
"We have survived high tax burdens in the past and will likely do so this time. "
Effective tax rates will have never been this high. Sure there were high marginal rates in the past, but there were also boatloads of loopholes in those days. "Doing nothing" will raise effectivce tax rates to unprecedented levels. As such the growth needed to yield the CBO's very optimistic numbers will not happen..short of some technological breakthroughs we don't yet know about coming to save us. As we know, raising taxes reduces government revenues beyond some ideal sweet spot, and we're past that sweet spot already. BTW, I wonder if off-books debt like Fannie and Freddie and Sallie are built into this. Almost certainly not.
How about all of the rest of the unfunded liabilities? They were talking about freeing up 5.3 trillion over the next 10 years? Spit in a bucket.
If you counted all the tribute you pay, 2.5% every time you use a debit or credit card, being front run on every trade, forced to use ethanol in your gas and so on as "taxes" then you might have a clue. The politicians do not have to raise taxes to raise taxes. They just let the system extract more tribute and then tax a portion, their cut, from the people collecting the tribute. Inefficient but it keeps the anti-tax idiots happy. See wer're taxing the rich they will say. Meanewhile the printing pressess keep rolling and rolling and rolling turning out all that nice money until we either have a failed auction or you don't make enough to shelter and feed yourself on the inflated prices with the later coming before the former.
yup. hiding their cleverness in taxes and regulations three layers away from the customer. but the customer still pays, and the customer cannot deduct those taxes...
wheeee.
I say we make Ben and Timmy print every dollar by hand...talk about debt slaves.
+1 trillion. Grinning ear to ear, imagining the possibilities. Best idea in the history of ideas...except for beer.
Any bill that is less than perfect must be thrown out, and redrawn. Too harsh?
They're already out of power. These charts are a little meaningless.
I suspect that we'll see a UK-like madness of dolts rush into office, followed by a semi-orderly breakup.
It's very familiar to those of us who've studied the post-Soviet collapse.
If you guys like Taibbi and Mark Ames, you may enjoy reading the back-issues of the eXile. I read all of them years ago. It's also an excellent primer on how to do business in a failed state. They're ideologically confused, but by far the best (and funniest) journalists in the world.
"We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."
Winston Churchill
Yeah! What happened to the option of cutting spending?
Yep. I agree. So, why not merely state the obvious?
Feedback loop. Default. Game over. There is no scenario forward.
We can now discuss the terms of the default ...
and how hideous is the irony that no less than eighty years after economics made plain the stimulative/restrictive implications of federal fiscal policy versus the credit cycle, we have had highly stimulative fiscal policy for the disinflationary expansion (1982 to 2007) only to have, increasingly, its world-wide reverse in the deflationary depression. great stuff the intercourse between politics and financial markets.
+1