The Republicans are proposing substantial tax cuts in the discretionary spending portion of the budget. Meanwhile, the Democrats demagogue the spending cuts as dangerously cutting programs for the sick, elderly, and the poor.
From FY2008 – FY2010, federal spending on projects increased roughly 25%. Such a dramatic enlargement of the budget deficit is bordering on criminal. There was no actual money to do so, and now the Republicans are being vilified for trying to go back to the point at which the Democrats, ignoring all financial reality, substantially overspent taxpayer money.
How can we be blaming those people who are, for the first time, showing us all of the worldly irresponsible actions and promises that have been created over the last two years? The reality is that during that time, the Democrats have made outrageous promises to the sick, elderly, and poor that they had no hope of being able to carry out.
The point is clear. The blame needs to squarely rest upon the tax-and-spend liberals, not the people who are trying to actualize fiscal responsibility by cutting back to previous and more reasonable spending levels. The politicians who enacted reckless legislation with money that was not theirs should be held accountable to the fullest extent.
One of my favorite elected officials, House Majority Leader Eric Cantor, wrote an Op-Ed for his local newspaper in Virginia. Cantor addresses the fundamental and necessary economic premise that cutting spending will grow the economy.
America is at a tipping point, and Republicans have begun to take action.
Last week, the House passed unprecedented legislation reducing discretionary spending this fiscal year by more than $100 billion. In addition, we made clear that our long-term budget, to be unveiled in the spring, will address the entitlement crisis that threatens to bankrupt our country — a long overdue move that politicians for too long have kicked down the road. This show of fiscal restraint represents not merely a clean break with Congress’ free-spending past, but a rededication to economic growth and a laser-like focus on job creation.
It’s important to recognize the link between cutting spending and growing the economy. Like the gardenerpruning the tree, we do not cut for the sake of cutting, but out of necessity. It’s the only way to restore economic health and free up the private capital necessary for new growth. Put simply, less government spending equals more private sector jobs.
Economic growth is generated when businesses weigh their risks against their potential reward (returns after taxes) and make a decision that an investment is worthwhile. That investment can take the form of a capital investment or an investment in additional labor (jobs). Especially in this increasingly interconnected world, businesses will logically move their investments to wherever they can achieve the greatest returns without assuming too much additional risk.
For many years, America offered unparalleled opportunity for businesses to grow and succeed. Investors could find in the United States comparatively low taxes, a consistent regulatory environment and a stable currency. Tens of millions of jobs were created as America served as the global driver of growth and prosperity.
Yet today many doubt whether America can still power the world economy forward. Uncertainty over our deteriorating fiscal situation and increasingly burdensome regulatory structure has made job creators and investors think twice about deploying their capital in the United States.
As the federal government continues to borrow nearly 40 cents for every dollar it spends, America’s $14 trillion debt hangs over the economy like a dark cloud waiting to unleash a violent storm of higher taxes, inflation and higher borrowing costs. The very businesses and investors we need to grow our economy are waiting to see if this cloud will pass.
The more local and national business owners I meet with, the more obvious it becomes that our businesses are innovative and poised to grow; government just has to stop making it harder for them to compete.
As part of our larger effort, Republicans are reviewing and cutting job-impeding regulations that stifle job growth. Next week, we will repeal the onerous 1099 reporting requirement to provide small businesses with much-needed relief. Additionally, we are focused on other ways to grow the economy, including tax reform and implementing job-creating trade agreements.
Will the administration and the Senate join us in getting our fiscal house in order? Or will they continue to add entitlements and borrow and spend at unsustainable levels? If only they would unite with us, confidence can be restored in America and capital investment can return.
But if they don’t walk us back from the precipice, businesses will see only weaker prospects for profit and growth on our shores — and turn instead to other countries they deem safer. What does this mean for America? It means we would be a lot more like Europe. Our graduates and work force would have less opportunity to find work. Our prospective entrepreneurs would have less incentive to pursue their ideas. Unemployment would be permanently higher and growth would be permanently weaker.
During his recent speech to the Chamber of Commerce, President Barack Obama insisted that in response to his policies, businesses have a “responsibility” to hire more workers and support the U.S. economy. But that’s not how it works in market-based economies. There is no magic hiring wand.
If the president genuinely wants to create jobs, he should take a cue from Virginia. Gov. Bob McDonnell has turned a $1.8 billion deficit into a $403 million surplus, cut $4.2 billion out of the 2011 and 2012 budgets — and he has done so without raising taxes.
America needs to show the world that we are serious about slashing our debt. By cutting $100 billion off the president’s proposed budget and taking the lead in reforming entitlements, House Republicans have demonstrated that we are more than ready to help make the tough choices necessary to move us in the right direction. Moving forward, we will use every tool at our disposal to remove barriers to economic growth so that people can get back to work and we can start to get our fiscal house in order.
Continuing on the housing theme, I wanted to share with you an article written on February 7 by Robbie Whelan of the WSJ. Mr. Whelan has a good run-down on the current housing and lending situation as well as the accurate status of HAMP (Home Affordable Modification Program).
As the federal government’s flagship mortgage-modification program comes under scrutiny for failing to meet its goal of helping three to four million troubled homeowners, state-level efforts to boost modifications appear to be picking up momentum.
The Treasury reported Monday that the government’s Home Affordable Modification Program, or HAMP, had provided permanent help to 521,630 homeowners since the program began in spring 2009.
By comparison, over the same period, banks negotiating directly with borrowers have made about two million permanent loan modifications outside the government’s program. These modifications continued to rise in recent months even as the number of HAMP modifications trailed off.
Critics of HAMP say the program has made little impact on the housing market and should be ended. Last week, House Republicans introduced a bill to end the effort, calling it a “colossal failure.” The administration defends the program.
“I think we’ve got to remember that HAMP has achieved over a half-million modifications. These are people that make $50,000 a year, so to sort of write it off and say, ‘Well, it’s a failure,’ I think is not really appropriate,” said Tim Massad, an acting assistant Treasury secretary, in a hearing on Capitol Hill last week.
Banks say they are doing more of their own modifications—and fewer HAMP mods—because eligibility requirements for HAMP are more stringent. Once a borrower is deemed ineligible for the government program, a modification worked out directly with the bank sometimes is the best option.
But also having a big impact are state mandates requiring banks and loan-servicing companies to hold mediation sessions with borrowers prior to foreclosing, said lawyers for delinquent borrowers and judges handling foreclosure cases.
About 20 states encourage some type of foreclosure mediation program to allow borrowers and lenders to hammer out a settlement, according to the Center for American Progress, a liberal Washington think tank. Three of those states—New York, Florida and Connecticut—and a handful of cities make mediation mandatory.
In Florida, Fannie Mae has begun testing a foreclosure-prevention program to get banks to meet with troubled borrowers to negotiate mortgage modifications and other alternatives before filing foreclosure documents in court.
“If they’re looking at mounting legal costs and risks to foreclose, then the workout process might seem like the best option,” said Alan M. White, a professor of law at Valparaiso University in Indiana, who has written extensively on the mortgage crisis. “Banks have got states preventing you from foreclosing…dismissing cases and ordering mediation, those are just two tools that state judges have.”
Others say banks are more willing to modify loan terms—which generally means reducing interest rates, forgoing late fees and extending the terms of loans—because it’s starting to be cheaper than completing a foreclosure. In some cases, in some states, that process can take years and thousands of dollars in legal fees to complete.
Among the banks to ramp up modifications isWells Fargo & Co., which plans to hold 20 large-scale mediation sessions across the country this year. More than 150,000 borrowers who have missed payments, or have been in modification negotiations, have or will be invited to come to hotels and convention centers for rapid-fire meetings the bank hopes will result in loan modifications.
That’s what happened to Patricia Yador, 53, of West Orange, N.J. at a “home preservation workshop” held at the Marriott hotel in downtown Brooklyn last Tuesday. Wells Fargo, her mortgage servicer, agreed after a mediation conference to knock more than 2 percentage points off the interest rate on her $300,000 mortgage.
That cut her monthly payments from $3,257 to $2,833.
“These are tears of joy because [before] they always turned me down,” said Ms. Yador, who has owned her home for 17 years and lives on $2,100 in disability and pension payments since she stopped working as a hospital accounts manager about three years ago.
Ms. Yador was one of 30,000 borrowers that Wells Fargo invited to participate in the modification fair in the New York-New Jersey area. Borrowers like Ms. Yador, who end up in a non-HAMP modification, are far more common than those who go through the government program. Of the roughly 600,000 loan modifications made by Wells Fargo since January, 2009, 86% have been done outside of HAMP, and 14% through HAMP.
HAMP offers servicers financial incentives to reduce loans to 31% or less of a borrower’s income, but it also has stringent requirements for eligibility. Borrowers who have lost their jobs or who have expensive medical conditions or other debts often are rejected by HAMP.
A Wells Fargo spokesman said the modification fairs are driven by the bank’s desire to do right by its customers. But others say the stepped up efforts are in response to ratcheted-up pressure from the states.
For the last two years in Philadelphia, where foreclosures are handled by judge, courts have moved to a system where they automatically schedule a “conciliation conference” within 30 to 45 days of each foreclosure filing.
Servicers are required to send a representative in person or by telephone to these conferences. If they fail to do so, the case can be postponed. The courts also keep mediators and pro bono housing lawyers on hand to serve borrowers.
“Yes, we are asserting pressure, but it’s almost as if they want the pressure,” said Annette Rizzo, a judge with the Court of Common Pleas in Philadelphia. “The banks always say that reaching out to homeowners, it’s a black hole. It’s so hard to connect with them. That’s what we offer, to connect with them.”
About 75% of eligible, struggling homeowners show up for and participate in mediation sessions in Philadelphia court rooms, and they have produced about a 35% success rate for about 14,000 loans according to an evaluation of the program to be released next month. Programs in Staten Island, NY and Bloomington, Indiana, have produced similarly high participation rates.
To be sure, not every mediation or modification results in significant savings for homeowners and it’s not clear how these modification will perform over time.
In the third quarter, modifications done in the HAMP program reduced monthly payments by an average of $585, almost double the $332 reduction in payments for modifications done outside the HAMP program. Those loans with modifications that reduced payments by 10% or more were almost twice as likely to be current than those loans with modifications that reduced payments by less than 10%.
The Financial Crisis Inquiry Commission was impaneled to describe to Congress, the president and the American people what caused the financial crisis. What it produced was a story about the financial crisis, but not what caused the financial crisis.
Both the majority report by six Democratic appointees, and the dissent by three of the Republican members, acknowledged that the U.S. and world financial system were badly hurt by the collapse of a huge U.S housing bubble. The bubble’s collapse was destructive, everyone agrees, because banks and other financial institutions in the U.S. and elsewhere held large numbers of U.S mortgages — or securities backed by these mortgages — which lost most of their value when the bubble’s collapse drove down housing prices.
Left out of both the Democratic and Republican accounts was the vital fact that although many other countries also had housing bubbles, the number of mortgage defaults in the U.S. was many times higher than in any other country. This would suggest that the underlying cause of the financial crisis was the particular weakness of the mortgages in the U.S. financial system — the likelihood that they would default when the U.S. bubble deflated.
In my dissent, I point out that before the financial crisis began in 2008, half of all mortgages in the U.S. financial system — 27 million loans — were subprime or otherwise high risk. This was an unprecedented number and a far larger percentage than in any bubble in the past.
Why were so many U.S. mortgages so weak? Both the Democratic and Republican reports ignored this central question. The answer is that it was Housing and Urban Development’s policy, from 1992 to 2007, to reduce mortgage underwriting standards so that more people could buy homes. Home ownership rates rose. But in 2007 it all came apart.
Then the finger-pointing began — and continued in the two commission reports. But the government cannot escape the numbers. Just before the financial crisis, government agencies, or institutions under its control, held or had guaranteed more than two-thirds of the risky loans that brought the financial system down. If we don’t change these government policies, we won’t escape the next crisis.
Peter J. Wallison is a senior fellow at AEI and a member of the Financial Crisis Inquiry Commission.
#1) ON TAX BREAKS FOR THE WEALTHY: “And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break. It’s not a matter of punishing their success. It’s about promoting America’s success”.
FACT: The highest-income earners are the greatest investors. Investment is much more stimulative than consumptive spending; raising the tax margin punishes the earners and the economy – while theat extra revenue will go straight to the government. These top 2% earners also provide nearly 50% of small business income in this country; by targeting them, Obama is also hurting businesses.
#2) ON FIXING THE TAX CODE: “Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world”
FACT: This is purely populist rhetoric. Accountants and lawyers do not eliminate tax liabilities. And it is not so much lobbyists as it is legislators pandering for votes who put in provisions intended to help their own individual special interests. This happened in the 1986 Tax Act under Ronald Reagan, when tax rates from 50% to 28% in exchange for a large number of deductions and writeoffs. However, the ink was barely dry when Congress used that as an opportunity to jack the rates up from 28% to 39.6% — which lasted until the Bush tax cuts pushed them back a little bit.
#3) ON A FEDERAL FREEZE FOR FIVE YEARS: “I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president”.
FACT: Obama’s federal freeze comes after he has increased our spending 25% in two
years. We need to go back to FY2008 and start from there.
#4) ON JOB CREATION: “We’ll invest in biomedical research, information technology, and especially clean energy technology – an investment that will strengthen our security, protect our planet, and create countless new jobs for our people”
FACT: “Invest” is just code for increased government spending. Here’s an example of the government picking industry winners and losers, something they have no business – or qualifications – doing. This policy will result in a net job losses – taking away from market directed companies in order to subsidize activities that cannot justify investment by the free market. A better and more impacting idea would be to give businesses research credits that companies could use and develop on their own.
#5) ON CLEAN TECHNOLOGY: “Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: by 2035, 80% of America’s electricity will come from clean energy sources. Some folks want wind and solar. Others want nuclear, clean coal, and natural gas”.
FACT: There is no clear consensus on the best type of clean energy. This only means continued uncertainty in the business markets, which will hamper the rate of recovery.
In ruling against President Obama‘s health care law, federal Judge Roger Vinson used Mr. Obama‘s own position from the 2008 campaign against him, arguing that there are other ways to tackle health care short of requiring every American to purchase insurance.
“I note that in 2008, then-Senator Obama supported a health care reform proposal that did not include an individual mandate because he was at that time strongly opposed to the idea, stating that ‘if a mandate was the solution, we can try that to solve homelessness by mandating everybody to buy a house,’” Judge Vinson wrote in a footnote toward the end of the 78-page ruling Monday.
U.S. District Judge Henry Hudson in Virginia has ruled the individual mandate portion of the Health Care bill is unconstitutional. Virginia’s Attorney General, Ken Cuccinelli, filed the lawsuit last year shortly after Obamacare was passed. Cuccinelli argued that the federal government did not have the constitutional authority to impose the requirement to purchase insurance or pay a fine.
“Neither the Supreme Court nor any federal court of appeals has extended Commerce Clause powers to compel an individual to involuntarily enter a stream of commerce by purchasing a commodity in the private market. In doing so, enactment of the Minimum Essential Coverage Provision exceeds the Commerce Clause powers vested in Congress under Article I.”
Hudson is the first judge to rule against Obamacare.
Ed Barnes at Fox News is one of the very few people talking about the AMT these days, but if the AMT doesn’t get its annual patch, the economic repercussions could be catastrophic. This leaves me to wonder if this is a political tactic from the Left, who will fancy themselves as the “hero for the middle-class” by passing the necessary patch adjustments at the 11th hour. Or perhaps they plan to use it as a bargaining chip with regard to the Bush tax cuts, a loathsome prospect. Worse still, the administration could be eyeing the AMT reversion as a cash windfall for our government on the backs of millions of taxpayers. In any event, the fate of the AMT needs to be watched carefully over the next two months. Below is Barnes’s article in its entirety–it’s a good overview of the AMT intricacies.
Taxpayers Anxiously Await Annual ‘Patch’ to Alternative Minimum Tax
Of all the tax issues facing Congress when it returns for a lame duck session after the Nov. 2 midterm elections, the annual rite of patching the Alternative Minimum Tax will be the most urgent.
Unlike the debate over the Bush tax cuts, which will affect taxpayers’ income in 2011, the AMT applies to 2010. And the delay in patching it is already causing problems and raising alarms for large numbers of middle-income taxpayers — as many as 25 million Americans, according to one expert — who could face a huge increase in their tax payments if Congress doesn’t act.
Enacted in 1969, the Alternative Minimum Tax was originally aimed at 155 extremely wealthy taxpayers who had avoided paying federal taxes completely. It was an add-on tax designed to ensure that everyone paid some income tax every year. Since then it has evolved into the primary tax mechanism for taxing high income taxpayers.
Under the original system, taxpayers who earned more than $200,000 — a very high income 30 years ago — were required to calculate their taxes differently, resulting in a larger tax payment for the wealthy.
But unlike most other income tax rates, the AMT was never indexed to inflation, and since 1982 the AMT has become a parallel tax system and a critical element in funding the government. It covered more than 4 million high-income taxpayers in 2009, according to the Congressional Budget Office.
But the $200,000 ceiling is no longer a small fortune, nor is it the sole criteria for triggering the AMT tax. Today a complex formula that looks at the differences between income and deductions determines who will pay. And each year Congress has to act to raise the exemption limits of the tax to prevent it from targeting increasing numbers of less affluent people.
If Congress is unable or unwilling to act on the patch, then “as many as 25 million taxpayers may see their tax liability rise by anywhere from $3,000 to $5,000,” according to Leigh Mutert, of H&R Block, “The primary victims will be middle-class taxpayers.”
In 2008 Congress set the exemption for the AMT at $70,950 for married couples filing jointly, the largest group impacted by the AMT. If it fails to enact a post-election patch, that exemption will revert to $45,000, the original exemption amount, ensnaring millions of taxpayers in a tax hike that would total $70 billion, according to Bill Ahern of the Tax Foundation.
Under the system, high-income taxpayers are required to calculate their tax returns twice. If tax returns completed under the normal procedures meet certain income and deduction criteria, the taxpayer is then required to complete the process again using AMT rules. Whichever tax is higher is the one the taxpayer must pay.
For example, according to the Congressional Budget Office, a married couple with four children and earned income of $160,000 who paid $10,000 in mortgage interest and $25,000 in state and local taxes using normal filing procedures would pay $18,150 in taxes this year.But when they recalculate their taxes under AMT procedures, they would be required to use the single $70,950 deduction but lose their deductions for the four children and local taxes. Their tax liability would then jump to $20,553.
While Congress has been embroiled over the expiration of the Bush tax cuts, there has been little debate about the AMT — other than promises that it will be taken care of before next year’s tax season begins. Usually a bipartisan and uncontroversial procedure where the inflation rate is added to last year’s exemption, no one is certain what will happen this year.
“It is getting alarmingly late in the year, and with Congress recessing for the election followed by a brief lame duck session before year end, it is not certain that Congress will get this done,” Mutert worried.
“I told everyone that Congress would never let the estate tax lapse. I was wrong. We just don’t know what will happen this year,” Ahern added.
Press secretaries for several Senate Finance Committee members from both the Democratic and Republican parties said that the patch is expected to be handled in the lame duck session, but no one is “sure” if it will be. “There are a lot of pressing tax matters this Congress hasn’t dealt with,” one said.
Even if Congress does act, tax preparers are sweating bullets that the delay will throw next year’s income tax season into disarray, because no matter what Congress agrees on, putting new rates into effect will take time. Aside from the debate over the size of the patch, tax preparers say the Internal Revenue Service will need at least six weeks to upgrade its software and issue schedules reflecting the changes to the AMT.
When Congress delayed fixing the patch until December in 2007 the IRS wasn’t able to accept tax forms from a significant number of AMT filers until Feb. 11, 2008. If Congress acts on Nov. 15, there shouldn’t be any delays this year. But if Congress gridlocks over the Bush tax cuts, or declines to act for other reasons, then the impact would be almost immediate.
Robert Higgs published a thoughtful essay a few days ago in the Sacramento Bee. Higgs reminds us of a basic economic lesson that Obama has yet to learn: consumptive spending is not nearly as stimulative as investment spending. Higgs rightly cites a sharp decline in private investment as the reason for the economic downturn. Obama is compounding this cycle by perpetuating a feeling of uneasiness and uncertainty with his plans to raise taxes and regulations on business owners. And with Congress promoting only band-aid stimulus projects as the cure for the economy, we will unfortunately continue to have a long road ahead. Higgs writes,
If politicians truly wish to promote genuine, sustainable recovery and long-term economic growth, they should focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, gross private domestic investment was still running at an annual rate more than 20 percent below its previous peak. Net private investment was fully two-thirds below the previous peak.
To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors’ returns or create uncertainty that paralyzes the undertaking of new long-term projects.
Well said. The article in its entirety is a great read.
