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Posts Tagged ‘mid-term election’

Fiscal Austerity: Easier Said than Done

Although there is still a lot of political posturing and wrangling to be done, it appears that a deal has been made regarding the extension of the Bush tax cuts.  Like most Washington deals, it’s a compromise where all sides get to claim victory. 

Here is a quick summary of the major points of the plan:

  • 2-year extension of all current tax rates
  • Reinstatement of the Estate Tax for estates in excess of $5 million
  • Extension of unemployment  benefits for an additional 13 months
  • Reduction in the employee’s portion of Social Security taxes of 2% for one year
  • Extension of several expiring tax provisions

The price-tag of this bill: $800 billion – all of which will be funded by additional U.S. debt.

There are arguments to be made for the economic and social benefits of each of the provisions.  However, while the machinations may be different, there is still an overriding principle to consider… Congress continues to spend money it doesn’t have.  While many people oppose various elements of the agreed framework, all of the politicians and economists I have heard comment on this matter support deficit-spending of some sort. 

The sluggish economy, the rapid expansion of government spending and national debt were hot issues during the recent 2010 elections. Candidates made promises of fiscal restraint and austerity.  There was a lot of drum-beating and chest-thumping over the debt and deficit and many promises to reign in government spending. 

It’s interesting how quickly Washington returns to business as usual, or remains oblivious to the wishes of the voters.  Granted, many of the new elected officials have yet to take office, but the recent tax legislation is a clear example of the challenge that lies ahead.  However, the stark reality is that fiscal austerity measures are easier said than done.  As this article in The Economist points out, President Obama and Congress have punted on fiscal austerity once again. 

The progress of the lame-duck session of Congress is a good indication that we should not expect to see a dramatic shift in the way Washington works or spends money.  Political posturing continues to take precedence over what’s best for the country. Furthermore, when faced with the choice between making tough financial decisions and pandering to certain constituencies, fiscal responsibility loses every time.

Whether anyone wants to admit it or not, hard decisions will eventually be required.  You only need to look to the recent events in Greece, Ireland, Spain and Portugal to realize that sooner or later a nation must put its fiscal house in order.  As these countries and their citizens have discovered, it won’t be pleasant, but you can’t continue to spend more than you take in forever.

Fiscal Austerity is easier said than done.  It’s also easier if it’s tackled sooner than later.  At this point, I’m not sure we can count on either.

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Lame Duck Session and Bad Tax Policy

The 111th Congress resumes session today.  With the recent mid-term elections over and a significant shift of power coming in January, this session has been dubbed a lame duck session.  A lame duck isn’t supposed to accomplish much, yet Congress has a lot of unfinished business and little time.

Two of the biggest issues Congress needs to tackle are the 2011 budget and taxes.

The U.S. Government started a new fiscal year on October 1, 2010, yet none of the 13 appropriation bills that govern federal spending have passed both houses of Congress.  To keep the government from shutting down, Congress passed a continuing resolution that allows federal agencies to continue spending based on the 2010 budget.

The other major issue that has dominated the political discourse for months is the scheduled elimination of lower tax rates, otherwise referred to as the “Bush tax cuts.”  The biggest point of contention is whether or not the lower tax rates should be extended to high income taxpayers (i.e., individuals earning over $200,000 and couples earning over $250,000). 

I will explore the arguments of maintaining the Bush tax cuts in subsequent articles.  Today’s topic is the political process and poor tax policy that is likely to result.

When the current tax rates were enacted in 2001 and 2003, they were scheduled to sunset at the end of 2010.  Thus, if Congress does nothing, tax rates and brackets will revert back to the rules that were in place at the end of 2000. It will literally take an act of Congress to extend the current rates beyond December 31, 2010. 

You may have your opinion of whether or not this is good for the country or the economy.  Irrespective of that issue, it’s bad tax policy to wait until the last minute to make a decision.

Congress has known for at least 7 years that the current rules would expire, but they have not acted.  In my mind, it’s a travesty that we are 46 days away from a new year and no one knows what the rules will be.   That may not seem like a big deal, but it is very challenging for business owners, managers and entrepreneurs, who are planning months or years in advance.  Many of my clients have been asking me for months what tax rules will change in 2011.  All I could tell them was that no one knows, and with six weeks to go, we still don’t know. 

With so much to do in a matter of a few days, I question the veracity of the decisions Congress will be making.  Will they be casting votes for what’s best for the country and the economy, or will their votes be primarily based upon politics and the desire to get out of town quickly?  Granted, these issues are always part of the process, but deferring these major issues to the lame duck session has created more pressure than was necessary.

Tax policy and the 2011 budget affect every person in the nation.  To postpone these major decisions and deal with them in a lame duck session is an indictment of political leaders from all political parties and persuasions. 

Over the past year there has been a lot of frustration with the political process.  Politicians will argue the process is not important, but that’s not true.  The Founding Fathers created a process that was designed to generate good legislation for the nation.  A poor process results in poor legislation.  Additionally, the process is a reflection of the culture of Washington.  Passing major legislation that affects every American in a lame duck session, is an indication that the legislative process is not functioning well, which will result in poor financial decisions and bad tax policy.

2010 Elections: Follow Up and Accountability

The U.S. 2010 mid-term elections are officially over.  Whether you are happy, sad or indifferent about the election results, we can all be glad that the campaign ads and robo-calls have ended… at least for a little while.

Before the votes were even counted, some journalists and pundits asked questions or made comments about the 2012 election.  While elections may be good for the news industry, the length of campaigns often creates a fatigue factor.  Most of us want a reprieve from campaigns, elections and politics.

In some respects, this is the way the system is designed.  We have a republic form of democracy where our elected leaders make decisions on our behalf.  There are supposed to study the issues, pay attention to the details, and make decisions, so we don’t have to.

Unfortunately, too many politicians have taken advantage of voters’ lack of attention. Our passivity allows them to legislate in a manner that is different from the platform they campaigned upon.  It’s also how they have developed a reputation as being some of the least trusted people in society.    

In some respects, we are at fault.  Our inattention gives them the freedom to say one thing and do another.  Continuous accountability is much more likely to cause them to stay true to their promises.  Although elections are the ultimate form of accountability, a lot of decisions are made between election cycles, and campaigns and very adept at covering and distorting the truth.

There is no fiscal responsibility without accountability.  Think about what happens if you send your teenager to the store with $20 to buy bread and milk?  Chances are they will pocket the change unless you ask for it, or they may have added candy and a soft drink to your shopping list.  Asking for the change is a mechanism of accountability for how the money was spent.  As another example, assume that you gave an investment advisor $1 million to invest on your behalf.   Would you wait for 2 years before you asked for an account statement or performance report?  Probably not.    

Same goes with elected leaders.  Essentially, Congress has unlimited access to the U.S. checkbook.  Billions and trillions of dollars can be spent on your behalf without your consent.  You can vote them out in the next election, but the money has already been spent.

The 2010 mid-term elections are a good illustration of this.  Voters expressed concern with the size of the deficits and the national debt, and voted out many incumbents.  I’m glad people are taking this seriously, but if we had paid closer attention sooner, we might not be $14 trillion in the hole. 

This is not a partisan issue.  No matter who is the elected official or what political party they are affiliated with, they all need to be held accountable, especially when it comes to money.  Many candidates promised to exercise fiscal restraint and reduce the annual deficits and total debt.  Without you and I holding them accountable, they are hollow promises. 

If we keep them accountable, we should see some measurable progress in the next couple of years.  The election may be over, but our job is still not done.

2010 Elections: Electing Fiscally Responsible Leaders

The U.S. 2010 mid-term elections are tomorrow.  You may be tired, confused and/or angry by all of the political ads and campaigning.  While you may not like all of the candidates, or feel like you’re choosing the lesser of evils, I highly encourage you to vote. 

Each election, people will often comment on how this may be the most important election of your lifetime.  In my opinion, it’s the most important election, because it’s the one you can vote in right now. 

Fiscal policy is an important issue in this election cycle.  Federal, state and local governments are facing huge budget deficits resulting from increased expenditures and declining revenues.  I don’t know that the future of the country will be determined by this election alone, but I do know that the current path is not sustainable. 

The U.S. government can’t continue to rack up trillion-dollar deficits each year without consequence.  There are no easy solutions, but the longer we wait, the more difficult and painful it will be.  The same principles apply to state and local governments.

I will not be so bold as to tell you whom you should vote for.  It’s your decision to make, but when it comes to fiscal matters, let me give you a couple of thoughts to consider before casting your ballot.

  • Look beyond soundbites and rhetoric.  Campaign ads and political speeches are intentionally vague and intended to mollify a wide range of people.  It will take some investigation, but it’s worth the effort to educate yourself about the candidates.
  • Examine voting records.  Although some candidates have never held public office, most of them have held some elective office.  See how they have voted on fiscal policy matters in the past.  Politicians are also notorious for saying whatever it takes to get elected and voting differently once elected.  A prior voting record is probably the best indicator of future behavior.
  • Ask questions.  You may not be able to ask the candidate directly, but you can call the campaign office, e-mail or check their website.  Here is a list of 10 questions you can ask a candidate to help determine if they are fiscally responsible.
  • Be specific.  Politicians talk in generalities.  It’s easy to say you’re in favor of fiscal restraint or a balanced budget, but exactly what measures do they support to achieve it? Speaking in general terms is easy, but setting priorities and making specific choices is difficult.
  • Character counts. It’s impossible for a candidate to address or even know every potential situation they will face while in office.  A person’s character dictates how they will respond when faced with difficult decisions. You may not personally know the candidates, but the way a person conducts themselves during a campaign provides insight into their character.
  • Use wisdom.  There are no perfect candidates, and it may be challenging to sort through all of the campaign rhetoric. If you lack clarity, pray and ask for wisdom. 

I support candidates who advocate fiscal responsibility and restraint, and I hope and pray this election will result in a significant increase in elected officials who are serious about tackling the deficits and fiscal challenges of our nation, even if it’s not popular.  I want people who are more interested in doing what’s best for the nation than what’s best for their personal ambitions.  I hope you do too.

The Size of the Current U.S. Deficit

Although the terms are often used interchangeably, the deficit is different from the total debt.  The deficit is the amount of money the government spends in excess of the taxes and fees it collects in one year.  The debt is the cumulative amount of money borrowed by the government.

The White House released its revised estimate of the deficit for the fiscal year ending September 30, 2010; it’s $1.47 trillion.  The good news is that the deficit is projected to be $84 billion less than the amount estimated in February.  The bad news is that government receipts are expected to be down by $33 billion.  Irrespective of the final amounts, this is a gargantuan amount.

I admit that have difficulty fully grasping the difference of the illions (i.e., billions and trillions).  A $1.47 trillion deficit is almost unfathomable.

Let me try to make a few points to illustrate the magnitude of this problem.

  1. The 2010 census is still underway, but it’s estimated that the current U.S. population is 310 million.  Divided up equally amongst every person in the U.S., the government will borrow $4,742 for every single person this year.  Looked at another way, they are overspending $13 for each person every day.
  2. Total federal spending is about $3.6 trillion.  Over one-third of it is deficit spending.   Therefore, the government is borrowing $1 of every $3 it spends.
  3. The total taxes collected by the government in fiscal year 2009 was $2.1 trillion. Across the board, taxes would have to increase by 70% to break even.
  4. The current US debt is $13.25 trillion and will be ready to crest $14 trillion by the end of 2010. It total receipts are $2.1 trillion, it would take over 7 years to pay off the debt (including interest) if the government shut down and spent no more money.

I understand the significance of the deficit is difficult to fully comprehend, but we can no longer afford to ignore it.   My purpose with these articles is to raise awareness and hope people will step back and say enough is enough… something has to change.  Change has to start with you and I.

Don’t count on politicians to voluntarily tackle this problem; they created it.  Politicians always care the most about one thing… reelection, and the current system helps secure that goal. Cutting benefits, eliminating programs and raising taxes alienates constituents.  The survival nature of politicians means they will defer or avoid decisions that may cost them votes.  They will only make the tough choices and changes when voters are more upset with their inaction than with their actions. For years, politicians preached fiscal restraint, yet continued to support deficit spending.  It’s time for deeds to match words.

Keep in mind there are no simple solutions.  If it was easy, it would already be done.  We can’t cut our spending enough to balance the budget without significantly disrupting the programs and services we continue to expect and enjoy.  Alternatively, raising taxes or expecting to grow our way out of this deficit is not realistic either.

While I don’t have the answer, I believe the solution will be innovative, transformative and maybe even divine.