Thursday, February 16, 2012

My View

Random ruminations from your resident curmudgeon...

With the economy mired in a seemingly intractable funk and unable to create new jobs, there is much debate about what to do to change this situation. Many proposals are being discussed, but one thing that cannot be ignored is the effect of taxes on job creation. Congress has just sent to President Obama a bill that would extend the payroll tax cut for the remainder of 2012. Good news for every worker, but according to a massive and major study by the Tax Foundation, there is no correlation between payroll taxes and job creation. In other words, the payroll tax level does not have a significant impact on a company's hiring decisions. What does? Being the intelligent readers that I know you are, I knew you would ask. What the Tax Foundation discovered is that corporate income tax rates have a highly significant effect on long term economic and job growth. In fact, corporate tax rates are the single largest determinant of economic growth in a country. Closely behind corporate tax rates, according to the Tax Foundation study, are personal income tax rates. Where does the United States rank globally for corporate tax rates? The second highest nominal corporate tax rate in the developed world, behind only Japan. Consider the President's tax proposals outlined in his State of the Union address: extend the payroll tax cut (no significant effect on economic and job growth); reformation of the corporate tax code to close loopholes and have corporations pay more tax (very detrimental to economic and job growth); and allow the personal income tax rates to rise significantly with the expiration of the Bush tax cuts (an economy killer). So often, the rhetoric from Washington says that personal taxes must go up and corporations must pay more, all in the interest of "fairness". That populist theme sounds good, but the reality is that our economy will not grow if it is excessively burdened  with high taxes.

You know you're getting old when your friends compliment you on your alligator shoes and you're barefoot.

I want to give you some facts. These are just facts presented without my usual snarky commentary because I think it is important for all of us to understand the magnitude of the financial problems we face in this country. Here we go... Our national debt now exceeds $15 trillion. In and of itself, that is not necessarily bad. What is problematic is that our debt is growing at a geometric pace; this year's $3.6 trillion dollar budget is 20% larger than the 2008 budget. And while our government has been growing exponentially, our economy has been flat. And here is another stark truth: the $15 trillion we owe today does not take into account the $15 trillion we need to make Social Security solvent; the $20 trillion we need to fund the prescription drug benefit; nor the $115 trillion unfunded Medicare liability. Here is what you should know about those numbers. Our elected leaders and we as the voters have ignored these unfunded obligations, but we are already having to pay them. Total payroll taxes collected to pay these benefits last year were $800 billion; total spending on Social Security and Medicare last year was $1.5 trillion.This shortfall is adding to our annual deficit. So let's look at the big picture. Right now, we are spending $2.4 trillion per year on transfer payments (payments on all social programs) and interest on our debt. Right now, we are collecting $2.3 trillion in income, payroll, and corporate taxes. Understand this: Even if we cut every other government program, including the military, revenue collected by the federal government will not be enough to cover the costs of our transfer payments and the interest on our debt. I will let that sink in for a moment. And after it sinks in, I know that each of you are intelligent enough to realize that by all reasonable measures, our nation is bankrupt.

Impotence is nature's way of saying "No hard feelings".

After reading the two paragraphs above, you can see the financial dilemma we face. There are no easy solutions to these problems. You will not see the federal government make meaningful cuts to benefits, not when 50% of the populace pays no taxes and more than 40 million people (and that number is growing) are receiving food stamps. And just raising taxes on "the rich" will not work. Most marginal tax rates are now 50%, and higher tax rates actually reduce revenue as income earners adjust their behavior to minimize taxes. Understand this: capital (money) will ALWAYS go to its highest and best use, and staying in a high tax country with wasteful government spending is not the best use of capital. This is why so many U.S. companies have chosen to invest in other countries that have a more favorable tax and spending structure. How are we as a nation going to pay our bills? Here is how: since 2008, the Federal Reserve has expanded our monetary base (read: printed money) from $800 billion to $3 trillion. TRILLION. Think the next time the bills come due, our country will exact the painful fiscal discipline necessary to begin to correct these problems? Neither do I. More dollars will be printed, and for all of us, we had better hope that our creditors continue to believe that our country is a sound financial bet.

I try not to let my mind wander. It is too small to be out by itself.

And that, my friends, is my view.

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