by | ARTICLES, ECONOMY, OBAMA, POLITICS, TAXES
Here’s a true story to ponder.
A gentleman, one of my clients, recently sold his entire business that he founded. Having worked at it and worked hard for it his entire life (he is in his late 70’s), the company sold for around $600 million dollars. This is a classic example of the American Dream.
From the sale of the company, his cut was around $65 million (pre-taxes). The sale took place recently. I advised my client that he should arrange the close of his business before the end of 2012 because of the likelihood of the change of tax rates. If he was able to close by the end of December, his share of taxes was calculated to be around $18 million, or just under 28%. This would mean his net earnings were $47 million total.
But Obama is saying that amount is not enough, to a man whose company has created thousands of jobs for this country. Jobs for people who have paid income taxes to the government for all those years.
The gentleman found out that, due to the numerous amounts of paperwork and regulations regarding the sale of his company, he will not be able to close on his company until April 2013. And Obama’s tax proposals say that successful taxpayers have to pay more, which means that my client would now be expected to pay 36% in taxes. Therefore, out of the $65 million from the sale, the gentleman’s net is now $41 million, while the government will get $24 million. Why that extra $6 million to them? For what?
Some people will say that $41 million is enough. Is it? Who decides? Is it really fair that the government should have that 36% instead of 27.7% for someone else’s life work because of an arbitrary date? Regulations? Massive deficits? And is it “fair” to the gentleman that the government can’t control its spending, or that he can’t close in 2012?
Why does the government get to arbitrarily decide what is someone else’s “fair share” for work that they did? How do you quantify the fair share of something — in this case, a successful company — that someone nurtured for their own entire life? As I have argued before, those who are prosperous should be given the same liberty to manage their success as any other citizen, not additional tax penalties based on whimsy and “need”. How can we honestly and morally take extra money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who manage to continuously and egregiously squander income?
by | ECONOMY, TAXES
Taxpayers have a right to be nervous about the impeding “fiscal cliff”. There are a lot of “end of the year” uncertainties because taxpayer don’t necessarily know what to do with their money right now.
For instance: take charitable giving. This year, is it prudent for a taxpayer to make a donation in December or January? One the one hand, if the tax rates are going up, it’s more prudent to wait until January because then you’ll have a deduction next year to offset higher tax margins.
.On the other hand, there is a real possibility that there will be a deductions cap next year, or else possibly the elimination of deductions for charitable giving if the tax code gets overhauled. In that case, it would be better to take the deduction this year in December and not risk losing out on a deduction entirely next year if there are major changes.
Let’s hope we’ll get some decisions by the end of the week. How outrageous is it that people don’t know? It is this very type of uncertainty that we’ve been experiencing for years now, with this administration that has put people, businesses, the market, and the economy on hold.
by | CONSTITUTION, ECONOMY, SOCIAL SECURITY, TAXES
In order to understand the magnitude of government spending, debt and fiscal cliff “solutions”, it is helpful to scale down the numbers to more manageable ones that we are more accustomed to. Most citizens cannot properly comprehend the magnitude of the government finances because the amounts with which we are dealing were — at one time — unimaginable.
First, some basic facts:
1. Government annual revenue FY2012 = $2.5T ($2,500,000,000,000)
2. Government annual spending FY2012 = $3.8T ($3,800,000,000,000)
3. Government annual deficit FY2012 = $1.3T ($1,300,000,000)
4. Current total government debt = $16.37T ($16,372,000,000,000)
5. Population of the United States = 314M people (314,000,000)
6. Current total Medicare liabilities (per the Annual Trustees Report) = $42.8T ($42,800,000,000,000)
7. Current total Social Security liabilities (per the Annual Trustees Report) = $20.5T ($20,500,000,000,000)
The best way to visualize the numbers is to reduce each figure by $10 million ($10,000,000 – or 8 zeros). So for instance, $2.5 trillion becomes $25,000 and so forth. Then, we can apply those numbers for a typical family in three parts: 1) Annual Deficit; 2) Current Debt (“Shadow Debt”); and 3) Entitlement (“Future”) Debt. The following scenario will be based on a family of three. And finally, we can see the proposed fiscal cliff solutions and their impact with these scaled down numbers.
1) Annual Revenue & Debt (all numbers below are equivalents reduced by $10 million)
Revenue = $25,000
Spending = $38,000
Annual Deficit: $13,000
2) Current Government Debt (“Shadow Debt”) — think of this as your mortgage, credit cards, etc)
Each citizen share of debt = $163,700/3.14 = $52,000
Citizen share x 3 people (family of three) = $156,000.
Current Government Debt for Family = $156K
3) Promised/Future Debt to Pay to Others (Entitlements)
Medicare: $428,000/3.14 = $136,000 per person
Citizen share x 3 = $408,000 for Medicare per family
Social Security: $205,000/3.14 = $65,000 per person
Citizen share x 3 = $195,000 for Medicare per family
Total “Promised” Debt for Family of Three = $408,000 + $195,000 = $603,000
How do the Fiscal Cliff plans impact this debt?
Current Obama Plan:
Cut $850B over 10 years, plus add $1.3T in revenue
$850B = $85 Billion a year ($85,000,000,000), or $850 a year (scaled down)
Citizen share of cuts = $850/3.14 = $270 per person; x 3 = $812 a year
$1.3T = $130 Billion a year ($130,000,000,000) or $1300 a year (scaled down)
Citizen share of revenue = 1300/3.14 = $414 a year; x 3 = $1242 in revenue/year
Current Boehner Plan:
Cut $1 Trillion over 10 years, plus add $1 Trillion in Revenue
$1T = $100 Billion a year ($100,000,000,000) or $ 1,000 a year (scaled down)
Citizen share of cuts = $1,000/3.14 = $318 per person; x 3 = $955 a year
$1T = $100 Billion a year ($100,000,000,000) or $ 1,000 a year (scaled down)
Citizen share of revenue = $1,000/3.14 = $318 per person; x 3 = $955 a year
Total Current Financial Picture for a Family of Three
Annual Income: $25,000
Annual Spending: $38,000
Annual Expenses/Deficit per year: $13,000
Current Government “Shadow” Debt: $156,000 (ie. like mortgage & credit cards)
Promised Future Entitlement (SS and Medicare) Debt: $603,000
Therefore, total debt on a mere $25,000 Income is $759,000 PLUS $13,000 in annual added deficits Ask yourself is that even remotely affordable or sustainable? Now multiply that by 10 Million (10,000,000), and you’ll have the real debt numbers for the government.
And those debt “Fiscal Cliff” Solutions for the Family Scenario?
—Obama’s Plan: cuts a mere $812 a year for 10 years and adds $1242 in revenue
— Boehner’s Plan: cuts a mere $955 a year for 10 years and adds $955 in revenue.
Those are not real solutions!
These numbers, brought down to equivalent figures, are a scary and sober reminder about just how deep in debt our country is. And both “solutions” barely make a dent in solving our fiscal crisis. So, what do we do? Where do we go from here? What reforms are needed — both short and long-term?
Cross-posted at redstate.com/alanjoelny
by | ECONOMY, FREEDOM
President Obama, please stop lying. There are no “tax cuts for the wealthy” on the table. The Bush tax rates are what the taxpayers pay and have been paying for 10 years. Keeping the rates the same does not equate to a tax cut. And changing the rates to the Clinton-era rates is, in fact, a tax increase.
These current tax margins have been built into the economic market for a decade. Our economy – for better or for worse – has operated on that particular set of data. Increasing of the rates would have the effect on the marketplace and in the business world of immediately reducing the value (by reducing the after-tax cash flow) of all existing investments, and, by reducing the expected return of prospective investments, will eliminate many of them (and the jobs that would have gone with them).
To talk about “restoring the old Clinton-era rates” is ludicrous for several reasons: 1) the Clinton-era economy was stronger than our current one; 2) the Clinton rates did not have the burdens of taxation introduced by legislation since then; 3) state and local tax rates are significantly higher (and states have much higher debt levels which portend even greater increases); 4) the enormously increased burden of Obama (and some Bush) era regulations exists, which have the same effect of still further tax increases, and 5) we now have to contend with Obamacare and all the staggering taxes associated with it.
Additionally, spending during the Clinton-era was much lower than now. Currently, Obama is spending 24% of the GDP, compared to 18% with Clinton. It was Clinton who specifically declared “the era of big government is over”; he aimed to reduce the spending in order to substantially reduce the size of government. Not so with Obama. Really, how in the world does Obama have the chutzpah to compare himself to Clinton when talking taxes?
Referring to a continuation of the same law is not a “tax cut”. Just because the liberals have not accepted it doesn’t mean it’s not the law. Increasing tax rates on any segment of taxpayers, especially the segment responsible for nearly all job creation, is irresponsible.
by | ARTICLES, FREEDOM, SOCIAL SECURITY
It is a national tragedy that people may be willing to put aside the issue of Social Security reform because Congressional Leaders on the Democrat side – such as Dick Durbin and Harry Reid – have been standing behind the position that Social Security is not a problem. While discussing the impending “fiscal cliff” negotiations last week, Harry Reid proclaimed (yet again), that
“Social Security is not part of the problem, That’s one of the myths the Republicans have tried to create,” he said. “Social Security is sound for the next many years.
Reid justifies this outrageous and distorted view by asserting that Social Security is not adding to the current deficit since the the cash in and out is roughly the same. While that may technically true, it is technically true only in the sense that it is analogous to an individual who is running up millions in credit every day — and then that person says that since he doesn’t have to pay it back right away till next year or the year after, it doesn’t affect his immediate budget.
The fallacy of this logic is that although the Social Security cash in may be equal to the cash out, the cash in includes everything we are getting, while the cash out doesn’t include the responsibilities due to come. The cash out formula they are referring to excludes the trillions that are being promised to existing workers in the future while their Social Security tax is being collected today. As the years go by we are continuing to incur the deep cost of future payment obligations that the Democrats are conveniently not accounting for – and it’s going to get impossible to pay those bills when they come due. Yet, those obligations are every bit as real as charges on a credit card.
Equally disturbing is the fact that the media is complicit in promoting this fable. Each year that that passes without fixing the system creates trillions of additional deficit to be paid by our children and grandchildren. Our media is feeding the Democrats’ incompetence by promoting their sham and failing to report the truth about the insolvency of Social Security.
(crossposted at redstate.com/alanjoelny)
by | ECONOMY, GOVERNMENT, OBAMA, TAXES
Tomorrow is the first Friday of the month, when unemployment numbers get released. This morning, Gallup released the results of its survey. It announced that,
U.S. unemployment, as measured by Gallup without seasonal adjustment, was 7.8% for the month of November, up significantly from 7.0% for October. Gallup’s seasonally adjusted unemployment rate is 8.3%, nearly a one-point increase over October’s rate.
.
The article went on wonder how the unemployment rate could have possibly risen again in November, after dropping right before the November Election. It speculated “superstorm Sandy” or “lackluster holiday hiring is to blame”.
Of course, it certainly couldn’t be related to the re-election of President Obama or the fiscal cliff now, could it?
Update: Unemployment drops to 7.7% — specifically, and only, because more than 500,000 workers dropped out of the workforce entirely.
by | ECONOMY, FREEDOM, POLITICS, SOCIAL SECURITY, TAXES
There have been renewed talk about reviving the bipartisan Simpson-Bowles recommendations as a Republican bargaining strategy. Though the package isn’t perfect – Republicans cringe at the tax increases while Democrats despise the spending cuts – in many ways, it seems better and more reasonable than some of the other offers currently on the table.
Simpson-Bowles could work under two circumstances: 1) Congress must first repeal the $1 trillion/year spending binge we’ve seen during the first Obama administration and start at FY2008 budget levels; and 2) the deal must include the healthcare revisions that were contained (and subsequently removed by Obama before the final draft) in the original Simpson-Bowles negotiations.
The virtues of Simpson-Bowles right now are that it includes entitlement reform, reigns in spending better than other current proposals, simplifies the tax code, and most importantly, is a bipartisan commission that originated from President Obama. Simpson-Bowles isn’t perfect, but it could be doable. And because Simpson-Bowles originally had more Democrat support than Republican support, it would put the Democrats in a tough spot if they rejected it now during the fiscal cliff talks.
Coming off the fresh wounds of the staggering Romney loss, the Simpson-Bowles package may be just what the Republicans need as a rallying point in order to emerge as the winners of this current standoff crisis.
Crossposted at redstate.com
by | ARTICLES, ECONOMY, FREEDOM
I just read Stephen Moore’s new book “Who’s the Fairest of Them All? The Truth About Opportunity, Taxes, and Wealth in America“. Thomas Sowell gave it a nod last week when he wryly observed,
If everyone in America had read Stephen Moore’s new book, “Who’s The Fairest of Them All?”, Barack Obama would have lost the election in a landslide. The point here is not to say, “Where was Stephen Moore when we needed him?” A more apt question might be, “Where was the whole economics profession when we needed them?” Where were the media? For that matter, where were the Republicans?
Indeed. This book does a great job in a little over 100 pages of expelling the myth that “the rich need to pay their fair share” by showing with quantitative data that cutting taxes spurs economic growth, and that tax cuts increase tax revenue collection. These are some of the very topics I’ve written about before on this site.
We need to let the “Bush tax cuts” continue. Except that they really aren’t the Bush tax cuts anymore — they’ve been the law for 10 years. Let’s stop pretending they are “very temporary” and either extend them again long term or else make them permanent.
We also need to overhaul the tax code. With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money.
We need comprehensive tax reform, but not the type that Obama is pushing. His policies of more “tax credits” (which is government spending run through the tax code) and marginal rate increases hampers our recovery. If the federal tax rates are going to rise again – and they will, unfortunately, if Obama has his way – in addition to state and local tax hikes, the tax burden in this country will be staggering. People will do one of two things: 1) start finding ways not to pay it like they did when the rates were outrageous or 2) stop working and investing so much because it’s just going to get taken away from them. When that happens, the economy worsens — and it is already suffering enough. We need to simplify the tax code.
Back to the book — I would heartily recommend it, and also check out Sowell’s overview of it.
