What Does the Government Shutdown Mean? That We're Not Focusing On Real Tax Issue

Don’t you just love this time of year? The leaves are changing colors, the air is crisp, and Washington is fighting another fiscal battle. Unfortunately, the annual signs of autumn are now accompanied with the Democratic vs. Republican budget showdown. Republicans voted to defund Obamacare, the president has refused to negotiate on raising the debt limit, and our government shut down Tuesday.  How can anyone doubt that the ever-elusive “grand bargain” will never happen?

What gets lost in all this political posturing is the fact that the United States is in desperate need of deficit and tax reform. The last time Congress enacted a comprehensive tax reform, Top Gunwas still in theaters. For those of us too young to remember, the year was 1986, and the president was Ronald Reagan. Democrats and Republicans in Congress worked together with President Reagan to pass the Tax Reform Act of 1986. In today’s Congress that sort of compromise and bipartisanship is unheard of. The Tax Reform Act of 1986 helped propel the American economy forward, paving the way for the boom of the 1990s. Our nation needs a tax code for a 21st century economy.

My goal is to borrow ideas from both sides of the political spectrum in order to find common areas where compromise can be made, and the Tax Reform Act of 1986 will be my main reference for policy ideas.  

President Reagan and Congress raised the maximum long-term capital gains rate from 20% to 28% and lowered the maximum ordinary income tax rate from 50% to 28%. They did this based on the principle that equal incomes should pay equal taxes. This principle should play a major role in any current discussion of tax reform. Is it fair that Warren Buffet pays a lower effective tax rate than his secretary?  A majority of Americans do not think so. Recall the uproar during the 2012 election over the revelation that Mitt Romney paid an effective tax rate of 14%. Since the wealthy receive most of their income from capital gains, and not ordinary income, it is only sensible they pay a similar rate. 

Today, the top capital gains rate (20%) is about 20% lower than the top income tax rate (39.6%). Many economists may argue that this is necessary to encourage investment by the wealthy. This may be true, but there is definitely room for Congress to raise capital gains taxes while still creating incentives for investment. One way to promote investing is to revive a 1985 proposal to index capital gains to inflation, which would provide a tax break to investors. For example, if inflation is 10% during the time one owned an asset, then the first 10% of capital gains would be tax-exempt.  This is just one of the numerous strategies that Congress could use to promote investment while closing the gap between capital gains and income taxes.

Increasing the capital gains tax serves as a positive step towards bringing more equality into our tax code. For those deterred by rhetoric about the battle of the 99% versus the 1%,  a higher capital gains tax is a more sensible, moderate way to reduce some of the tensions created by this perceived income inequality. Currently, the long-term capital gains rate is the same 20%, whether you make $1,000 or $1,000,000 in gains. A progressive capital gains rate (maybe one that mirrors the income tax brackets) may be another innovative policy Congress should consider.

Immigration Reform 2013: Reform Will Not Solve All Problems, But It Is a Start

“Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!”

For generations the Statute of Liberty greeted millions of immigrants on their journey to the land of opportunity. Whether it was for life, liberty, or the pursuit of happiness, individuals throughout the world traveled to our nation in search of the American Dream. It was and is a simple dream: the promise that you will be judged on the basis of your character, and not on the basis of your race, religion, class, or creed. It is the promise that through hard work and determination you can achieve a better life for you and your family. This promise is what motivates immigrants, legal and illegal, to come to the United States. Today, it seems as though the American Dream is slipping away, but we as a nation can fight to reclaim it, and the first step is to pass immigration reform.

For those who do not believe economic inequality is increasing (and surprisingly, 58% of Americans do not), here are a few key statistics to help illustrate the gravity of our nation’s problem. Income inequality, as measured by the Gini index, has been on the rise since the start of the new millennium. Relatively stable during the 1990s boom years, the United States' Gini index has risen significantly since the Great Recession (1.6% in 2011 alone, compared to 5.2% in the prior 17 years combined). 

Our economic “recovery” exceedingly seems to benefit the richest Americans, while the poor and middle class are left behind. The top 1% received 93% of the income gains in the first year of the recovery. Poor and middle-class wage stagnation is a major reason for this. Deregulation, privatization, globalization, erosion of the social safety net, and the destruction of unions have all contributed to an economy that values corporate profits over rising middle-class wages. Corporate profits are 22% above their pre-recession levels, while employee compensation is 3% lower. The result of these trends is the dreadful fact that 80% of American adults will face joblessness or reliance on some sort of government welfare program. 

So you may be asking, what does all of this have to do with immigration reform?  Organizations from across the political spectrum, from conservatives to progressives, claim that immigration reform will benefit the American economy, and low-wage Americans in particular. Illegal immigrants and low-wage workers are in perpetual competition for jobs.  When an illegal immigrant can work for less than the federal minimum wage, this puts poor Americans at a distinct disadvantage. According to the Cato Institute, legalization of low-skilled immigrant workers would increase the U.S. GDP by 1.27%, or $180 billion, largely because immigrants are more likely to start businesses than non-immigrants. A Small Business Administration studyfound that immigrant-owned businesses tend to have higher sales and are more likely to export good and services than non-immigrant-owned businesses. 

The United States of America is a nation of immigrants that was built upon the millions of individuals who traveled here in search of a better life.  We need to change our immigration system to one that can fulfill the requirements of a 21st century economy. Reform will not solve all of our nation’s problems, but it is a start. It will renew a promise: the promise that together we all prosper, the promise of a thriving middle class, and the promise that America will always be home to the hardworking, the tired, and the poor, yearning for an opportunity to succeed.  

Investing in Growth

            The word on everyone’s mind is sequester.  Turn on the news, the radio, or pick up a magazine and you will see it.  The sequester is a series of indiscriminate spending cuts to lower our nations budget deficit.  It will cut government programs across the board; excluding entitlement spending (the true cause of our debt crisis).  Entitlement spending requires more and more of our nations budget each year and yet our leaders in Washington refuse to discuss actual reform.  President Obama has proposed to base future entitlement payments on chained-CPI, which will save a substantial amount of money.  However, this does not address the fundamental problems with Medicare and Social Security (high medical costs combined with an aging population). 

            Even better, the sequester is a manufactured crisis; a result of Washington’s inability to compromise and lead our nation out of a weak recovery.  The purpose of the sequester was to force Democrats and Republicans to work together for real reform.  Who in their right mind would allow these indiscriminate budget cuts?  Our leaders in Washington would HAVE to make a deal before the sequester comes into effect.  Once again the American people have been let down. 

            With all this talk of spending cuts, one key aspect of our recovery is lost in the noise.  Where is the discussion of growth?  How will Washington help the American economy prosper in the 21^st century?  We might be able to cut our way to lower deficits, but we cannot cut our way to more economic growth.  The best way to increase revenues and decrease our deficit is to increase the taxable base.  What better way to increase revenues, then through growth inspired policies?  The faster the economy prospers, the quicker a solution to our debt will emerge. 

            Today’s low interest rate environment puts us in a unique position to invest in our future.  With interest rates at record lows we can borrow and invest to help our nation prosper.  But we must act now!  If the FED’s minutes this week showed anything, it was the fact that interest rates will not be low forever.  Washington’s fiscal policy needs to compliment the FED’s monetary policy. 

            Now some people may argue that the government has tried and failed to steer the economy in the right direction.  They will point to the trillion dollar deficits of the past four years and failed investments in companies like Solyndra and A123.  However, I beg to differ.  Imagine what our economy would look like today if the government spent trillions on research and development, education, and infrastructure rather than bailing out big banks.  What we need today is a smarter government that invests its limited funds efficiently; not a smaller government that you can  “drown in a bathtub”. 

             Like it or not the government plays an instrumental role in steering the economy.  It is time to move beyond the ideology of how we would like our government to be and accept the reality of what government is.  Washington has played an important role in the economy for generations.  President Eisenhower, a republican, invested in America’s infrastructure and help build the interstate highway system, which revolutionized commerce in our nation.  The Apollo program provided advances in technologies ranging from kidney dialysis, to semi-conductors, to athletic shoes.  And we should never forget that the United States Military played an instrumental role in developing ARPAnet, the precursor to the Internet. 

            The American economy is revved up and ready to go; we just need Washington to clear us a path.  Will they decide for a short-term Band-Aid or real investment in our future?  Will they maintain entitlements for the older generations or provide a future for the younger generation?  It is time for millennials to make our voice heard in Washington.  Our government needs incentives to focus on long-term solutions.  It is time for us to stand up and demand a prosperous future!

The Fiscal Cliff

           Ahh the fiscal cliff, the result of last summer's debt-ceiling debacle.  Rather than try to work together and solve our nation’s debt problem, our fearless leaders in Congress kicked the can down the road once again.  Democrats and Republicans in Congress decided our debt crisis could not be solved until after the election.  Unfortunately for the American people, the Tea Party needed to be sure we “solved” this issue before they allowed the US Government to raise the debt ceiling and pay off the bills we already incurred (which has no affect on future spending). 

            The solution Congress came up with was automatic tax hikes and spending cuts that take effect on January 1^st, 2013.  To make matters worse, these sequestrations happen across the board without rhyme or reason.  The general consensus among economists is that if the fiscal cliff is not lifted the US will head into another recession.  If you paid attention to the presidential campaigns, watched the debates, or followed the numerous Congressional elections you might not have any idea about the fiscal cliff or how to solve it.  As I stated before, we had 3 presidential debates and not once was there a serious discussion about the fiscal cliff. 

            We are concerned about the anemic growth in the post-financial crisis economy.  Many Republicans point to the slow growth in 2012 as why Obama should not be re-elected.  It is important to understand the detrimental effects the fiscal cliff has on our economy.  This summer, for the first time ever, Standard & Poor’s downgraded the credit rating of the United States.  Other agencies plan on doing the same if we do not solve the fiscal cliff or our debt issues.  With the national debt at $16 trillion, another downgrade could lead to higher interest rates, which would equate to billions of dollars a year in payments.  Unfortunately for us, there is another, more complicated, effect of the fiscal cliff.

            The stock market is up, the housing marketing is rebounding, and consumer confidence is rising.  So where are the jobs?  Uncertainty is a huge obstacle to corporations large and small.  Uncertainty prevents many CEOs from making decisions about the future.  The failure to deal with the fiscal cliff has sown the seeds of uncertainty in CEOs throughout our nation and the world.  I’ve read reports from SPDR funds, Envestnet, and numerous big banks and investment firms urging Congress to do something, anything that will provide them with some direction.  The financial sector just needs some direction from the government so they know where to invest their money. 

            And it is not just the financial industry.  American corporations hold about $1.7 trillion on the books and my guess is that they are dying to spend some of that cash.  Defense contractors, such as, Lockheed Martin, Northtrop Grunman, and General Dynamic are sitting with cash on their books to brace themselves for cuts in defense spending.  The CFO of Siemens, the German industrial giant, has admitted that they are delaying new investments and expenditures until the fiscal cliff is resolved.  The CEO of Legrand, a global manufacturer, has stated that they are holding off on hiring until we are in a more stable environment. 

            It is time for Congress to stop holding back our recovery.  Consumer confidence and spending is bouncing back, and Congress needs to provide businesses with a clear direction so they can begin to benefit from this.  Some may argue that Obama’s policies have slowed down our recovery, but I believe the real culprit is the uncertainty created by our horrible Congress.  Whoever wins the election will need to tackle the fiscal cliff in order for America to truly recover and transition into economy of the future.  So as I finish this post I will leave you with this.  The CEO of JP Morgan, Jamie Dimon, said last week that many on Wall Street would be fine with a rise in taxes as long as it was part of a concrete plan to deal with the fiscal cliff and our debt issues.