Tax Cuts and Spending Reform

It seems that our “greatest economic minds,” along with the incoming President, are content to aimlessly wander through a vast economic wasteland. Corporations, investors, and consumers are all left wondering what the future holds and all the government can come up with is spend your way out of it. Many factors have been overlooked and history has been ignored, to the average American’s dismay.

Where we sit now, as far as solutions, is a plan that includes $300 billion in tax cuts, $700 billion to recapitalize banks and get credit flowing, and an additional $500 billion of government spending to create jobs. However, nothing from the government on how to deal with the looming effects of such a massive spending program.

From the Economist,

On January 7th the Congressional Budget Office (CBO), a non-partisan outfit, released projections that show the financial crash and the resulting recession are already wreaking havoc with America’s finances. It reckons that the budget deficit will soar from $455 billion in fiscal 2008 (which ended last September 30th) to an astonishing $1.2 trillion in the current year. At 8.3% that would be the most as a share of gross domestic product since the second world war. The CBO does, however, see it dropping to 1.1% of GDP by 2019.)

In 2008, America’s publicly held debt was at 48% of the GDP, this will rise to 54% in 2010. If current fiscal policy continues, it will grow to 400% by mid-century. This is sparking fears among investors that the dollar will devalue and interest rates will rise dramatically as America will attempt to inflate its way out of debt.

Staunch Keynesians cringe like they are hearing nails across a chalk board at the mere mention of “tax cuts.” Keynes, a British economist, held to the concept that massive deficit spending, lowering interest rates, and government infrastructure projects were the only way out of an economic downturn. However, his theories are antiquated, never really worked, and definitely do not apply to the consumer driven market we have now.

As major holes appear in the balance sheets of corporations and banks, another one has developed for consumers. According to Investor’s Business Daily, Retail sales plummeted 2.7% in the month of December and a 9.8% drop for the year when compared to 2007.

An effort to recapitalize consumers, to Obama’s credit, has at least been considered. He is proposing $300 billion in tax cuts for businesses, individuals, and tax credits for those who pay little to no taxes. This would amount to a modest $500 per worker and $1,000 per household, according to the Economist.

Tax cuts are not the end-all-be-all solution to the problem however they do address the needs of the American people. And most economists are starting to agree it is essential for them to start saving so that they are in the black, as far as debt is concerned, when the recession ends.

From Business Week,

From this perspective, the main purpose of the tax cuts and tax credits is to help repair consumer balance sheets, just like the TARP is helping repair bank balance sheets. I don’t want consumers to spend the tax cuts—I want them to save the money, as much as possible, and get their debt back to reasonable levels. That’s the only to ensure that consumers will be on solid ground when the recession is finally over.

Of course, there is the 800 lb. gorilla in the room that goes by the name of the spending ape that needs to be dealt with. Tax cuts mean reduced government revenue and in this spending rich environment this leaves the government one choice to pay down the debt. Print more money. This will inevitably lead to massive inflation which will devalue the dollar even further. So, what do you do?

As a self admitted fiscal-hawk, I see massive reduction in government spending and increases in tax cuts directed towards businesses and individual taxpayers as the path towards long-term solvency and solution. Government and economic contraction could serve as a purging effect, although, painful, the long term benefits would be considerable. That, however, is not the reality of the situation. The $1 trillion stimulus package is going to be a fact of life as of January 20th, and its implementation needs to be dealt with.

Fiscal responsibility, in Washington, is as extinct as the dinosaurs, however, the “One” has a grandiose opportunity to bring it back with a vengeance. Entitlements have been one of the major factors which have contributed to the rise in deficit spending and will only get worse as time goes on.

Via the Economist,

In coming decades spending on entitlements—the three main ones being Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor)—will drive deficits and so debt up sharply. Publicly held debt will climb from 41% of GDP last year to 54% next year, the CBO predicts, then decline (on the assumption that the recession will start to come to an end.)

Mandatory spending for for the US federal budget encompassed over 50% of national expenditures. $608 billion was allocated for Social Security and $595 billion for Medicare and Medicaid. As opposed to the discretionary spending for defense at $481.4 billion and $145.2 billion for the global war on terror.

These issues need to be dealt with by presenting a solid plan to change the thought processes of Washington when it comes to wasting tax payer money. By not dealing with the huge amount of deficit spending we are about to engage in we will be dooming this country to the very pain that all of this was seeking to alleviate. Someone has to have the fortitude to stand up for this and unfortunately Mr Obama is the only one who has a prayer. With that in mind, we are screwed.