Mike Kueber's Blog

January 8, 2013

The Fiscal Cliff compromise includes a fix to the estate tax

Filed under: Fitness,Issues,Politics — Mike Kueber @ 2:29 am
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Today’s local paper included an article on America’s estate tax, as revised by the Fiscal Cliff compromise.  The article’s writer tried to humanize the issue by describing a 91-year-old farmer who has been concerned with how the tax would affect the 5,000-acre farm that he has been building since WWII.  Unfortunately, however, she failed to say how the new law, which increased the exemption from $1 million to $5 million while increasing the rate from 35% to 40%, will affect the farm. 

If I guessed that the land was worth $5,000 an acre, the farm would be worth $25,000,000.  And that doesn’t include buildings and equipment, which I’ll guess at $5,000,000.  Based on my calculations, the estate would have paid $10.15 million under the old law and will pay $10 million under the new law.  Now that’s change you can believe in.

The farmer’s daughter probably didn’t create a lot of sympathy in the article by saying, “You don’t really inherit the farm, you inherit a bunch of taxes. … The heirs lose the farm to pay the taxes. And that’s one more family farm that goes out of business.”

In fact, the estate will first pay the taxes and then transfer to her whatever is left.  The farm will still be worth many millions of dollars, even though it will be diminished by the estate tax.  That is a problem millions of heirs would love to have.

No taxes are painless, but they are a necessary evil.  And I can’t imagine a tax that is less painful than that assessed against a rich person’s estate before passing the remainder onto the heirs.

January 2, 2013

FiveThirtyEight weighs-in on the Fiscal Cliff compromise

Filed under: Issues,Media,People,Politics — Mike Kueber @ 9:30 pm
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FiveThirtyEight by Nate Silver is one of the most popular political blogs in America.  (Its name is taken from the number of presidential electors.)  San Antonio’s Mayor Julian Castro has declared it to be his favorite, and I agree.  It is not only interesting, but also credible, as proven by its detailed predictions about last year’s presidential election. 

Today’s posting of FiveThirtyEight in the NY Times provides an excellent framework for evaluating the Fiscal Cliff compromise.  According to Silver, the compromise can be evaluated from three perspectives:

  1. How much does it redistribute income?  Although Silver is a liberal, he is not running for office, and this allows him the freedom to admit that part of the liberal agenda is to redistribute income from the rich to the poor.  Clearly, from this perspective the compromise was a great success because most of the new taxes were imposed on America’s high earners and only a bit of it (expiration of temporary FICA cuts) was imposed on low earners.
  2. What is the ratio of tax increases to spending cuts?  Republican presidential candidates were ridiculed in the media for arguing that they would reject $9 in spending cuts if the cost was $1 in tax increases.  I wonder if the media will now ridicule the balance in this compromise with $40 of tax increases for every $1 of spending cuts.
  3. How much stimulus spending is included?  From this perspective, the compromise is more balanced.  The extension of unemployment benefits and a few business tax credits will provide some stimulus, but those will likely be outweighed by taxes on the rich and the FICA tax on almost everyone.

Prior to the compromise, several pundits (mostly conservative) warned that President Obama might drive too hard of a bargain and that this will come back to haunt him.  I am “modestly optimistic” (to use one of Obama’s malaprops) that those pundits were correct and that Americans will now rise up and insist on significant spending cuts as part of the Debt Ceiling compromise.

January 1, 2013

Thoughts on avoiding the fiscal cliff

Filed under: Issues,Politics — Mike Kueber @ 2:55 pm
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The so-called fiscal cliff was considered to be extremely dangerous to the fragile American economy because it sharply increased taxes and modestly decreased spending.  For a nation that was ostensibly concerned about its burgeoning debt, you might think that increased taxes and decreased spending were things that both parties could agree on.  But that would be wrong.  Just like what happened last year, the only acceptable political compromise results in a smoke & mirrors solution that simply kicks the can down the road.

According to an article in the NY Times, the following comprise the fiscal-cliff solution:

  • Taxes. The income capital-gains tax rate will increase for those making $400k/$450k, deductions/exemptions will phase out for those making $200k/$250k, and the estate tax rate will increase from 35% to 40% for estates over $5M/$10M.  This is the only part of the solution that makes sense because it is a reasonable compromise between Democrats who want to make the tax more progressive and Republicans who believe America is taxed enough already.  Too bad the pols didn’t call it a day and go home after reaching this compromise.
  • Spending.  Extended unemployment benefits were extended, while Medicare cuts, sequestration, and the debt ceiling were deferred.  Without this unemployment-benefit extension, which costs over $30 billion a year, the 26-week limit to benefits would have replaced the current limit that goes up to 99 weeks.  Although this spending has been described as a great stimulus, the time for stimulus spending has passed and the people who have been collecting for more than 26 weeks need to stop holding out for a job that no longer exists.  The Medicare cuts and sequestration are examples of future spending cuts that are included in earlier bills, but when the time comes for implementing the cuts, the gutless congressmen refuse to take their medicine.  And finally, although President Obama attempted to get the debt ceiling increased during these negotiations, that matter will need to be addressed in late February or early March. 

Several Republicans bragged that there was actually a coherent strategy behind their actions – i.e., by getting taxes off the table now, they will have more leverage to insist on spending cuts during the debt-ceiling negotiations in a couple of months.  Too bad that President Obama has not agreed to those operating principles.  In fact, he recently declared that any future spending cuts must be matched by an equivalent amount of tax increases.

Déjà vu, anyone?  

I still remember all of those Republican presidential candidates boast that if Congress gave them $9 of spending cuts in return for $1 of tax increases, they would just say “no.”  At least, now the Dems have shown their colors – they want higher taxes and bigger government – and that is a losing argument in this country.

December 4, 2012

Sunday Book Review #91 – The Price of Politics by Bob Woodward

Filed under: Book reviews — Mike Kueber @ 3:05 pm
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Talk about déjà vu.  While reading The Price of Politics, I couldn’t help but think about the Fiscal Cliff negotiations currently going on in Washington.  Today’s headline in the NY Times reads, “Boehner Counters Obama’s Proposal on Deficit Reduction,” and at the heart of The Price of Politics are similar interminable negotiations between Boehner and Obama in the summer of 2011 over the Debt Ceiling.  

As I started reading The Price of Politics, I felt exhilarated by the behind-the-scenes reports which figuratively allowed me to be a fly on the wall.  But as the process dragged on, I began to share what the participants called “negotiations fatigue.”  Even worse, I became severely frustrated by the refusal of either party to compromise (Republicans – no new taxes; Democrats – no reform of entitlements).  By the time I was two-thirds through the book, I wanted to be put out of my misery.

Ironically, one of the critical items to resolve the 2011 negotiations is the $1.2 trillion sequestration that would be assessed against both parties’ sacred cows (Republicans – defense; Democrats – Medicare) if a to-be-named Super Committee was unable to agree on cuts before January 1, 2013.  Not surprisingly, the Super Committee failed to agree on cuts and now a major part of the Fiscal Cliff is the triggering of sequestration in a few weeks.  Thus, it is fair to say that the Super Committee and sequestration were actually just another act of kicking the can down the road.

As a fiscal conservative, I support the Republican position that the entitlement programs – Social Security, Medicare, and Medicaid – need to be fundamentally reformed now.  The Democrats argue that this reform is unfair (a) because the beneficiaries of these programs are least able to absorb financial shocks, and (b) because the fiscal nightmare could be ameliorated if the rich were required to contribute more. 

Now that the Republicans have finally agreed to tax the rich more, the Democrats are left with only a single defense – i.e., the defenseless elderly and poor need to be protected.  My response to that argument is that if Americans want the safety net to remain at current levels, then taxes need to be raised to pay for it.  That is the glory of a Balanced Budget amendment – we get the level of government we are willing to pay for. 

I believe the Democrats know that voters are not willing to pay for the benefits that they insist on retaining.  Let’s put it to a vote.

November 30, 2012

The fiscal cliff or a game of chicken

Filed under: Issues,Politics — Mike Kueber @ 5:47 am
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Yesterday I blogged about how the progressives were planning to reduce the deficit – i.e., do nothing but raise taxes.  As crazy as that sounds, the White House has confirmed that that, indeed, is their plan. 

As reported today in the New York Times, Treasury Secretary Tim Geithner formally described the Obama administration’s plan to avoid the year-end fiscal cliff – $1.6 trillion in tax increases, $50 billion in additional stimulus spending, abolition of the debt ceiling, and a promise (“with no guarantees”) to look for social-spending savings of $400 billion sometime next year. 

Talk about chutzpah!  It was just a few months ago when Republicans were being ridiculed by the media for refusing to accept a hypothetical budgetary compromise of $10 in cuts for every $1 in tax increase.  Now the Republicans are being told that, to avoid the fiscal cliff, they must accept astronomical tax increases plus increased spending. 

If Americans wanted that, why didn’t they elect a Democratic House of Representatives?

Let’s hope that this is mere posturing.

November 15, 2012

Driving off the fiscal cliff with Thelma & Louise

Filed under: Economics,Issues,Politics — Mike Kueber @ 1:42 pm
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President Obama held his first post-election news conference today.  Although I missed catching the event on TV, I was able to read an on-line transcript.  Three subjects dominated the questioning – Benghazi, David Petraeus and the so-called fiscal cliff. 

This post is about the third subject – the fiscal cliff.  According to Yahoo.com news, it consists of the following severe economic developments that are scheduled to occur at the end of the year unless government takes action:

  • The Bush tax cuts will expire.  President Obama wants to retain the tax cuts only for those who make less than $250k, which effectively increases the marginal tax rate for the rich from 35% to 39%.  The Republicans want to retain the tax cuts for everyone.  If the Bush tax cuts are allowed to expire for everyone, the federal government will obtain an additional $330 billion a year in revenue.
  • Sequestration.  As part of the debt-ceiling deal last year, the parties agreed to reduce both defense and domestic spending by $55 billion each.
  • Long-term unemployment benefits.  Last year, in return for the Republicans agreeing to allow these benefits for up to 99 weeks, the Democrats agreed to retain the Bush tax cuts for everyone, including the rich.  Now the Democrats want to keep the long-term unemployment benefits, but they want to repeal the Bush tax cuts for the rich.
  • Cuts to Medicare reimbursements.  Medicare reimbursements for doctors participating in Medicare will be severely cut by $11 billion.
  • Restoration of the full Social Security tax.  Last year, to stimulate the economy, Congress temporarily reduced the Social Security tax by 2%.  By resuming collection of this 2%, the federal government takes in an additional $95 billion a year.
  • Tax extenders.  A variety of smaller taxes cuts for both businesses and individuals collectively known as tax “extenders” cost the government $65 billion a year.  They include a tax credit for research and development and a deduction for sales taxes in states that don’t have an income tax.
  • The debt ceiling.  The $16.4 trillion debt ceiling will be reached in late December or early January.      

Both parties seem to agree that driving off the fiscal cliff – i.e., not doing anything to prevent these things from happening – would throw the American economy back into a recession.  That was exactly the position that most politicians adopted in agreeing to Obama’s $1 trillion stimulus in 2009.  But if this turns into a game of chicken like the debt-ceiling deal, some pundits think the Democrats are more willing than the Republicans to go over the cliff.

Back in 2009, the incipient TEA Party provided the vocal opposition to the stimulus and again later with the debt-ceiling deal, but they are surprisingly muted here, primarily because three significant components of the fiscal cliff are various tax increases, which are anathema to the TEA Party.

As a fiscal conservative and a debt hawk, I see a lot of positive things that would come from taking a Thelma & Louise plunge off the cliff:

  1. Everyone, not just the rich, would be asked to pay more.  Shared pain; fewer free riders.
  2. There would be painful cuts to defense and domestic spending.  Again, shared pain.
  3. Individuals would not be allowed to linger on unemployment benefits.  Discouraged dependency.
  4. The full revenue stream to Social Security would be resumed.
  5. Medicare spending would be trimmed.

The major negative result of going off the cliff is that it would over-emphasize short-term pain and ignore long-term reform of the entitlements – Social Security, Medicare, and Medicaid.  Too much short-term pain is what could cause a recession.  By contrast, long-term entitlement reform will save more money with less pain.

I agree with an article in the Washington Post that suggests the fiscal cliff could be a blessing in disguise because it might prompt the parties to reconsider something as big and comprehensive as the Simpson-Bowles solution. 

That is why Republicans should reject President Obama’s press-conference proposal to first raise taxes on the rich and then later consider tax and entitlement reform.  Instead, the increased taxes need to be the incentive to force the Democrats into agreeing to entitlement reform.

If this turns into a game of chicken, however, some pundits think Obama and the Democrats are now more willing to go over the cliff because they could blame any subsequent recession on the Republicans.  (Am I mixing metaphors?)   

This is getting interesting.  Either way, I see significant progress toward balancing America’s budget.