I look at the political landscape and conclude that we’ve got more of the same in front of us. I think Obama will win, and the Republicans will control the legislative side. For the sake of this discussion, assume that is how it works out.
As of today, there is an economic firestorm that is programmed to hit on January 1, 2013. It’s the kitchen sink - the Bush tax cuts (all of them), the payroll tax cuts, the AMT patch, the ending of extended unemployment benefits, the Sequestered Amounts (11’ budget deal), the debt ceiling, the need to pass a continuing resolution to fund the government and a bunch of other landmines. Many of the things that have been kicked down the road during the past few year come due on New Year's Eve.
If there is a hostile mood in D.C. (there will be) this list of “must fix” issue will be impossible to tackle following the election.
I say that doesn’t happen. For once, both the Republicans and the Democrats will pay a big price if there is no deal. For the Republicans, the mandatory cuts in the Military, and for the Democrats, the mandated cuts in the rest of the budget, means there has to be a deal.
But what deal could there be? The problem is enormous. The budget “hole” will be at least a trillion in 2012. It will get bigger every year. The Republicans have said “no more taxes.” The Democrats have said, “We need to spend more”. These seem like irreconcilable differences.
Fortunately, the Congressional Budget Office has come up with a solution. It’s a neat one at that. Neither overt new taxes nor cutbacks in spending would be required. This magic would be accomplished with a very big stealth tax. The CBO looked at eliminating all tax deductions. That would generate a ton of additional revenue. The CBO put the extra annual loot for the Feds at $800 billion plus, exactly what is needed.
Of course the idea of cutting/eliminating tax deductions is an old one. The CBO does a super job of summing it up on one (crowded) page. The critical issue is:
Who pays?
The answer is:
Almost everyone over 21.
Ah… that would come to about 250 million people. Damn near everyone chips in. The highlights:
*Forget the mortgage deduction. That would be gone. This would be a significant change in the Rent VS Buy calculation. Bye-bye housing.
*Are you working and have benefits? You will be taxed on the value of those benefits. Same thing for employer contributions to 401Ks. You will have the same income, but your taxes will be higher.
Do not be confused; this is not a tax increase. Both Parties will tell you so.
*A geezer on Social Security? Your benefits are going to get taxed (much more).
*Don’t bother having kids, the child deduction is gone.
*Live in a State with an income tax? You’re about to be hosed big time. NY and Cali will end up paying an ever-higher percentage of total federal taxes.
*Feel good about giving some money to a worthy charity? You won’t any more. That deduction will be gone too.
*Trying to save a buck? Dividends and Cap Gains will no longer have preferential treatment. Under this plan, short-term gains will be taxed the same as long-term gains. The “Casino” will move to the short-time horizon. The Wall Street crowd will welcome the new (and needed) players.
It’s easy to say that this could never happen. It never has before. Every special interest group would be whacked. But before you dismiss it, consider what will be happening in the weeks between November 10 and December 31. America will be on the edge of a cliff. The option described by the CBO is the only thing that is both politically feasible and large enough to fill a very big bucket.
The CBO one pager follows. Where are you on this list? Where do you expect to be on this list in five-years?
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The child tax credit will never get chopped off.
ReplyDeleteThe child tax credit is essentially a government subsidy for low wage employers. It is precisely the reason why so many min wage or near min wage (in more expensive COL areas) unskilled workers are able to survive at all.
Eliminate the child tax credit and these low wage employers would need to increase wages almost immediately.
You will have entire industries suffering massive profit contraction.
Some of the tax deductions can be eliminated with few drawbacks but some would have huge implications that neither the R's or the D's would touch.
How about corporate taxes? Why not abolish all the loopholes, subsidies, etc. that let the corporations get away with paying un-equitable taxes? That surely ought to be a non-partisan issue. It would be a true sign that we are not a corporatocracy.
ReplyDeleteI can dream, can't I?
How about corporate taxes? Why not abolish all the loopholes, subsidies, etc. that let the corporations get away with paying un-equitable taxes? That surely ought to be a non-partisan issue. It would be a true sign that we are not a corporatocracy.
ReplyDeleteI can dream, can't I?
Tax gasoline @ ten dollars per gallon. Tax auto registrations at the Fed level (like commercial vehicles). Institute a national driving license with mandatory college-level classroom, mandatory skill lessons and testing along with draconian penalties for texting, cell phone, alcohol/drug use, etc. while driving. When is the country going to get serious about the waste that is built into our economy.
ReplyDeleteCars, suburbia, freeways, sprawl, malls, office towers, all of these are toys and status symbols. Grow up, people!
Auto fatalities cost the country $33 bln as per last year. almost as much as the year's new cars sold for. Add the injuries and cars are underwater to the tune of billion$: add war costs, currency drain, effects of pegged (oil/dollar) currency and the US is bankrupt, unsurprisingly.
Tax the waste. If it doesn't pay for itself tax it out of business. Get rid of the 'subsidy' (welfare) mentality.
Good grief!
Bruce; Off topic(sorry), I know you did a few years in FX a while back, i was wondering could you clear something up for me (it will have to be one part wild guess, the other, straight foward)?
ReplyDeleteThe straight foward question; We just got FX trading volumes from all major central banks yesterday, the BOE said volumes were up on the year to ~$2 trln daily...the question is, is that an American trillion or an English trillion?
Secondly, markets were probably less liquid when you were working in them, but, considering the volumes these days, do you think its a plausable assumtion that a medium sized market maker could move a busy market (EUR/USD)... to even a small extent? (i.e 10-50 pips?)
Cheers.
Well the estimate was given in Dollars, not Sterling so dollars is the right answer.
DeleteBut to add the confusion, I don't think $2T is the right answer. I think it is much higher than this. My number would be $5T on average.
Can the markets be moved by one of the big players?? Yes, under certain circumstances that can happen. I think it happens on a regular basis (2-3 times per week)
Big even the biggest players can't move these markets for long. They are that big and deep.
Ok, so its short scale and not long scale trillions.
DeleteEven if it is $5 trln daily, and im assuming that number is including all the leveraging that occurs, i suppose thats still only a few million per second in a 24 hr eur/usd market (taking eur/usd being ~60% of the volume).
So im thinking, since even i could trade a few million on my account with crazy leverage, that if there are some stops on a market makers book that are in range by a few pips, they would have no trouble at all clearing them out even with today’s volumes?
I have always been interested in the dynamics of how these guys actually function,and their true modus operandi; for example would they throw leveraged millions at a market just to hunt a few stops worth a few thousand on they‘re books? I find that hard to understand from a risk perspective, as anyone could be wating to pounce on them(do they clear it with other market makers before they make a move?)...are they moving the spot market and offsetting their risk somewhere else, hence managing to keep they're account relatively netural(somwhow!)?
The recipe sounds plausible. What bothers me is that the incentive in many cases is to earn less.
ReplyDeleteThe tax and spending side are out of control. It would be a great start if we broadened out the tax base and made taxes less prone to reduction via a good accountant or gaming. This is best done by lowering rates, and eliminating as many deductions as possible on both the corporate and personal side. The mortgage interest deduction helps mis-allocate capital towards buying homes and penalizes renters and for the very rich is nothing but an arbitrage vs tax free munis. And on the spend side while not the biggest numbers we have the post office ( whose function can now be performed by the private market) and gov't subsidies toward ethanol, solar, wind , oil & gas.
ReplyDeleteWe need to rationalize the function of gov't to make sure it's providing needed services and not growing for the sole purpose of growing.
You know something's wrong big time when the government you pay taxes to support is sitting around scheming up new ways to steal money from you.
ReplyDeleteBut there is no shortage of people who seem to think that if only people paid a "fair" amount of tax, or paid all their taxes, the budget could be balaanced, the crisis averted and life could go on a la 1985 again...
ReplyDeleteIf I understand the CBO chart correctly, muni interest is untouched (there may be a Fed vs. state legal issue that the CBO wishes to avoid introducing). Ironically, it works well since a number of states will desperately need buyers of their debt....
ReplyDeleteState tax deductions would be the big hold up, in my opinion, along with the home interest deduction. Democrats will never support the elimination of the state income/local tax deductions since their states are much more dependent on them. In addition, I simply can't see things like the child deduction being eliminated. Once such a broad deal starts to fall apart (i.e. exeptions get made), then it falls apart quickly as does the revenue generated.
ReplyDeleteI think it far more likely that the Bush tax cuts finally expire along with the payroll tax cuts (but the AMT continues to get a fix). I see this as a simpler and more likely compromise between the parties.
While it will be painful, there is no solution beyond reforming the tax code and eliminating deductions. The government needs to stop with the notion of changing behavior via the tax code. Once put in place, it is next to impossible to eliminate a deduction that once might have had value.
ReplyDeleteThe government also needs to stop buying votes via the tax code. Lock it down and only adjust the marginal rates. No deductions again ever.
Feel free to send as much of your money to the government as you want.
DeleteAs for me I'll pass on that.
art-eclectic.....no doubt there are way too many deductions available. And politicians do buy votes while swinging them around.
DeleteBut, slow down. As usual, extremes are not the way to go.
As a small business owner 7 years in, things are going fine. But, the FIRST 2 - 3 years as a start-up are a Mother Fu*ker. Categorically, it would not have been worth the risk without the tax breaks provided to small business.
Fascinating that the CBO, a bunch of government bureaucrats, concludes that the only solution is to tax the life out of the country outside the Washington DC beltway.
ReplyDeleteNo mention of cutting government spending, which has grown 1.8x as fast as GDP for five decades.
No mention of requiring bureaucrats to achieve minimum levels of productivity -- if they want the same pay as the private sector (never mind 175% of the private sector that they get now), they must match private sector productivity.
"Shared sacrifice" is fraud. The people do all the sharing and sacrificing, while LAZY OVERPAID bureaucrats piss our hard earned money away.
I say the public employee unions should be sued under RICO for the regular cost overruns they pull every single day of every single year. Its way over three violations.
Seize the public union pension funds (especially the losers at the CBO!). If the lazy public servants don't like this plan, they are free to quit and get a lower paying job (with half the benefits) anytime they want
FUCK THE PUBLIC SECTOR!!!!
Since Congress doesn't have to follow the rules of insider trading, I suggest we initiate this action - WE WILL PAY OUR TAXES WHEN CONGRESS STOPS STEALING WITH THEIR INSIDER INFORMATION AND IPO STOCK DEALS. Also, I suggest we each call our representatives offices and ask for their latest stop tip.
DeleteWith health benefits being the biggest chunk of change, taxing this non-cash benefit will cost employees several hundreds of dollars per month in additional taxes. This will have them all screaming for Obamacare, which of course won't be taxed.
ReplyDeleteDid these jerks plan this all out years in advance?
I read the title wrong, I thought you said the “end” and “over.” The budget crisis is not over. When the money went out on TARP as a loan, Washington whether in the legislature or treasury thought when the money came back in, it meant to spend it. Such is the looting of the money of the people which is unconstitutional!
ReplyDelete