Big news this week: The incoming Republican majority and voter anger have persuaded President Obama to block tax increases scheduled for January 1.
It’s possible this welcome-but-insufficient development may indeed coax stock markets higher in over the short term. But let’s look at fundamentals.
Sadly, the spectacle of the “Obama Tax Cuts” and other developments since the GOP won the House only reconfirm our belief that nothing has (or is going to) cause a deviation in the government’s path toward fiscal and monetary disaster.
We all want to believe that politics can undo decades of structural damage – a private sector with crippling debt, massive mal-investment, and zealous send-the-jobs-overseas monetary policy and over regulation. I do not enjoy being a naysayer, but the facts do not support the notion that we are returning to government getting off the backs of productive people on whom prosperity depends. Far from it.
Dose of Reality Number One: Our Politicized Economy Still Crashed Despite the Bush Tax Cuts
To be clear, I’ve never seen a real tax cut I didn’t like! But the “tax cut” package hammered out by President Obama and presumptive House Speaker John Boehner is way overblown. The extension of Bush-era tax rates are not new tax cuts, but a temporary, 2-year stay of a higher tax-rate structure.
If modestly lower taxes were the elixir to America’s woes, the economy would not have veered off the rails three years ago during the Bush administration!
So why are GOP pundits out there implying that an extension of the Bush tax rates is some kind of economic cure-all?
The Bush legacy of horrific new government spending and regulation should have taught us all that tax cuts alone can’t create prosperity. President Ronald Reagan himself said that tax cuts only work if accompanied by fiscal restraint, regulatory relief, and a sound monetary policy. Absent these other pillars of Reaganomics, a simple temporary continuation of tax cuts doesn’t cut the mustard. Not even close.
The tax deal once again puts a temporary hold on a dramatic increase in the Alternative Minimum tax. Plus there is a temporary 2% reduction in the Social Security payroll tax, but only pertaining to the employees’ compensation (providing no benefit or incentive to employers to hire anew). In fact, the bill also pays people to stay unemployed for another 13 months!
Dose of Reality Number Two: Speaker-Elect Boehner Has Promised to Fund Obama Using More Debt
But here’s the real enchilada most are missing: Incoming Speaker Boehner has preemptively agreed to support another increase in the national debt limit, which means that Obamacare and the parade of new spending enacted over the last two years remains firmly locked in place. We can expect another 40 cents in debt accumulation for every single $1.00 spent by the federal government.
If you are serious about stopping your teen’s reckless credit spending, you cut the card in half, not bump up the limit! Kids judge you by your actions – and, much to the chagrin of many other House members, Boehner has already shown he is not serious about controlling spending – much less reduce it.
Dose of Reality Number 3: Markets Aren’t Going to Be Fooled By the Boehner-Obama Tax Deal
Look, don’t just take my word for it. The markets are already signaling that they are not fooled by the Boehner-Obama tax deal. On Monday, two top rating services, Moody’s and Fitch Ratings, warned that if Congress passes the Boehner-Obama tax package, the United States government faces a significant reduction in its credit-worthy status. (Spending remains out of control.)
“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody analyst Steven Hess said in a report.
In a Reuter’s news story about the possibility of the U.S. losing its must-have AAA credit rating, they noted that “In a market obsessed with the euro sovereign debt crisis, the Moody’s note reminded foreign exchange investors about their worries of growing debt and was a factor pressuring the dollar…“
Dose of Reality Number 4: The Boehner-Obama Tax Deal Introduces More Uncertainty for Businesses
One big argument Republican backers of the Boehner-Obama deal make is that it creates more “certainty” in business tax planning. Nonsense! As a December 14 Wall Street Journal notes, as recently as the 1990s there were fewer than a dozen tax provisions that had to be renewed every year or two.
Now there are 141 major tax laws that have to be renewed on a regular basis, which wrecks havoc on estate planners, investors, dividend-paying companies, small businesspeople, and on and on.
Having so many major tax provisions come up for renewal on a regular basis is mostly a boon for Congressional fundraising! Constituencies depending on a continuation of existing tax rates have to “pony up” to incumbents with donations and entirely too much ass-kissing.
Once all the political lip service about restraining government fails to turn into reality, good old-fashioned market forces will eventually impose desperately needed reform. But it’s not going to be pretty.