The soap opera playing out over raising the US debt ceiling is more politics than reality. Neither political party wants to go into the 2012 elections with responsibility for more red ink on their shoes. The United States is not going to default in our payments of principal and interest on our debt and everyone knows this. That is why the markets have watched this debate with relative calm and baked into the numbers a presumption that some last minute face-saving deal will be done once enough mud had been slung on the face of the opposing party.
But while this may be politics as usual there are instructive lessons about new realities resulting:
- Our Negative view of our Elected Leaders is confirmed. As voters we have tolerated the slovenly behavior of our elected officials and the way they spend our money. The debt ceiling has been raised scores of times in the past without much debate. This time it has become a big deal because while Democrats and Republicans are using it to score points, the rest of us are using it to measure the people we elected by their approval ratings in the polls. Congress scores worse than the President, but his ratings are racing to the bottom to match them.
- It’s the Debt, Stupid. The debate in Washington may be about raising the debt ceiling. The debate on Main Street is about the enormous size of the accumulated debt and the reckless willingness to keep spending. We’ve lost confidence in our leaders because we see them weakening our country, undermining our values, and stealing from our children to play politics.
- President Obama is a Disappointment. We elected Barack Obama because he inspired us to live into our aspirations as a great nation. We demonstrated once again de Toquiville’s 200 year old observation that America has the capacity to reinvent ourselves for the challenges we face. We hoped that the change the President spoke of would lead us there. But he baited and switched us reverting to the most corrosive form of class warfare, entitlement expansion and free-spending liberal instead of the centrist we thought we were choosing. We needed the president to help fix our broken economy but his policies have made it worse. So “Yes We Can” is turning into “Oh, No We Won’t” as the president misread his mandate and no longer seems a good fit for our needs, as the voters might say as we hand him his pink slip.
- Democrats and Republicans are both the same, but the TEA Party member have scruples. This is the ‘pox on both your houses’ lesson we seem to keep relearning. The partisan differences are real and debating them is good but we’re losing confidence in both parties because we have come to believe their debates have more to do with scoring points than principles. While the President and Democrats have trashed the TEA party candidates and tried to discredit those who were elected a funny thing has emerged. The TEA party members are the only group that has remained true to the principles they told us about as candidates. TEA party members in the House have given speaker Boehner fits with their unwillingness to cave into demands for compromise over spending cuts. While their resistance has delayed a settlement of the debt ceiling issue, it fundamentally frames the 2012 election debate around the core issue of spending, overspending and more spending that got us into the debt overhang we face. Thank you!!!!!
- Whose Country is this Anyway! This debate has been a constant reminder of our core values and the choices we face as a nation. We’ve been slackers as citizens coasting along letting our elected representatives get away with bloat, blather, and balderdash on our behalf and with our checkbook. It is like groundhog day only we are watching the movie Network and the line keeps being repeated over and over again:
“We’re mad as hell, and we’re not going to take this anymore.”
The 2012 election is a referendum not only on President Obama and our overspending ways. It is also a referendum on incumbents and most will be found wanting. It won’t be a good year for candidates, we’ve been tricked before with uplifting speeches. We’re looking for real people who share our values and will do what they promise once elected.
- Trey Ellis: Debt Ceiling Is Health Care All Over Again (huffingtonpost.com)
- Mitchell Bard: Lesson From the Debt Ceiling Negotiations: The GOP Is Now Run by Far Right Ideologues (huffingtonpost.com)
- Boehner’s two-step plan: Risky politics (capitolhillblue.com)
- The Future Of America, Or Politics As Usual? (trueconservatism115.wordpress.com)
- Armageddon clock ticks down on debt deal (fullcomment.nationalpost.com)
- Boehner delays vote on his debt-ceiling measure (seattlepi.com)
- Death To The Debt Ceiling Negotiations! (huffingtonpost.com)
- Analysis: The politics behind Boehner’s two-step debt hike – Reuters (news.google.com)
- US debt ceiling crisis: Why Republicans won’t compromise | James Antle (guardian.co.uk)
- Tea party to Boehner: Stand firm (capitolhillblue.com)
“Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”
As Democrats and Republicans posture about what to do about the US debt ceiling cap expected to be reached August 2, 2011, a new “theory” floated in the media is provoking more debate that the issue on the table. That theory is that we really don’t need Congressional action to increase the debt ceiling since the 14th Amendment says the public debt “shall not be questioned” therefore the President acting alone can order the Treasury to keep on spending.
Since the Republicans see the debt ceiling as the Washington DC version of crossing the Rubicon over deficit spending and the nation’s credit rating, this theory is causing outrage. The Democrats are lobbing smoke bombs at Republicans threatening a Constitutional crisis if they don’t get their way. Only this is not just Congressional Democrats doing the talking it is President Obama tweeting for the media and letting his Administration leak stories about this 14th Amendment end-run.
Meanwhile, both sides are, publicly at least, diverted from solving the problem while they score points to weaken the other side. We hope, of course, that behind the scenes real discussion is going on about a compromise that serves the national interest. But we have been tricked before by partisan bickering.
But there is something constitutionally scarier than maxing out our national credit card and facing the dreaded rate penalty consequences. What is more scary is that our elected officials including our President are so cavalier in twisting and abusing the plain language of the US Constitution to play gotcha in a political brinksmanship ahead of the election. This is something we expect— from President Hugo Chavez or the Russian Duma.
Let’s hope that all this posturing is the lead-up to a compromise that protects the national credit rating, allows paying the national bills on time at reasonable interest rates, and reins in spending enough to change the slope of the deficit curve. That would be progress.
Beyond that a deal that includes closing tax code loopholes and reducing both the gaming and cost of a tax system so larded with special interest favors that it results in more than 40% of Americans at the lower end of the income scale and many of our largest corporations at the upper end paying nothing while the rest of us get hit with the alternative minimum tax (AMT) GOTCHA to make up the difference.
But let’s face it, the reason our tax code is in such a mess is that ‘messing with the tax code’ is the best way Congress has of accumulating campaign contributions from those seeking advantage or those seeking to avoid tax pain. And the louder the controversy the more money is pouring into Congressional and political party coffers on both sides of the aisle.
The class warfare language and soak the rich evasion are gimmicks used by both sides to keep their base energized, but for the rest of America it just does not cut it anymore. While we do NOT believe raising taxes is this weak economy makes any sense at all, we recognize the tax codes offers a target rich opportunity to close loopholes and simplify the tax process, enabling companies to bring profits home and spend them here without having much of it confiscated by a corporate tax system that is no longer serving our strategic interests.
For the Democrats this 14th Amendment charade risks turning a lot more Americans into TEA party movement members. For Republicans, there is a fine line between sticking to your principles about not raising taxes and recognizing that a broken tax system offers opportunities to raise revenue while simultaneously simplifying the tax code, broadening the base of actual taxpayers, and encouraging repatriation of capital and profits to be spent at home thus raising tax revenues—don’t let the perfect be the enemy of the good.
The American public sees what is happening and we do not like it. We have reached our ‘Network moment’—you remember the line:
“We’re mad as hell and we’re not going to take it anymore!”
- Raising the debt ceiling (stillliberalat84.com)
- More Economic Propaganda from Geithner (stoshwolfen.wordpress.com)
- The debt ceiling and the Fourteenth Amendment (maureenholland.wordpress.com)
- 14th Amendment, Section 4: Obama Should Simply Raise The Debt Limit (underpaidgenius.com)
- U.S. Treasury secretly weighs options to avert default (theglobeandmail.com)
- How the Debt Debate Might Lead to an Impeachment Frenzy (swampland.time.com)
- Questioning the Debt (themoderatevoice.com)
- Democrats Raise Constitutional Argument In Favor Of Raising Debt Limit (jonathanturley.org)
- Is the Debt Ceiling Legal? (bigthink.com)
- Martial Law Cometh ……. (2012patriot.wordpress.com)
- Bring On the Constitutional Crisis (thedailybeast.com)
- What Debt Limit? Plan B Is the 14th Amendment (delong.typepad.com)
- US Hoyer: Urging House Dems Not To Support Debt Hike ‘Charade’ (forexlive.com)
No Budget, No Payday!
That was the stunning decision yesterday by California State Controller John Chiang. Under California law the State Legislature must adopt a balanced budget (Proposition 58) and they must do so by June 15th by a simple majority vote instead of the previously required 2/3 vote (proposition 25).
Yesterday the other shoe dropped when State Controller John Chiang, also a Democrat, said the Legislature failed to meet the tests under both Proposition 58 to pass a balanced budget and Proposition 25 to do so on time. Therefore, he was just following the law (Proposition 25) and ordered that the Legislators would forfeit about $260 per day in salary and $142 in tax-free travel and living expenses. Under Prop 25 that money is forfeited meaning it cannot be later paid back once the budget is adopted.
Since the Legislature is a full-employment act for politicians with members making $95,291 getting cut off cold-turkey is the voters’ equivalent of a furlough, and legislators are not accustomed to being disciplined especially by other Democrat elected officials.
The Democrat Legislative Leaders were furious believing Governor Brown stabbed them in the back. The Republicans were largely quiet observing the age old political proverb—‘when your opponent is committing suicide, let him’.
Brown told the Legislative leaders to go back to the budget negotiating table and try to talk the Republicans into a short-term extension of the current sales and income tax increases and to allow voters to decide whether to extend them further. Otherwise he told the Legislature to send him a budget with cuts deep enough to close the $9.6 billion gap.
The Controller’s action was refreshingly gutsy and the blogosphere was alive with calls of “Chiang for Governor.” In the short-term Chiang’s action strengthens the hand of Governor Jerry Brown in getting the Legislature to act responsibly enough to allow State Treasurer Bill Lockyer to sell the bonds needed to keep the state in cash.
Republican have resisted calls for a tax extension arguing that past use of that strategy has resulted in the Legislature spending all the money and then some. The problem Republicans have is voters surveyed have repeatedly said they want the opportunity to vote up or down on taxes. So if Republicans continue to hold out they risk irritating voters on a core issue. But voters also passed Prop 25 reducing the vote needed in the Legislature to approve the budget to a simple majority thus depriving the minority party—almost always Republicans in California—the ability to hold the budget hostage. So Democrats have the votes but not the will to adopt a balanced budget making deep cuts, but they don’t have the votes to call a special election on the tax questions.
Checkmate as usual—but this time no paycheck as usual.
- California State Controller Sticks Lawmakers’ Face In It (cehwiedel.com)
- California Controller to Pols: No Pay for You! (reason.com)
- Chiang Cuts Off Legislators Pay As California Budget Saga Continues (economy4abc.blogspot.com)
- California Budget Rapture is Near (civicchoices.wordpress.com)
- California Voter Revenge Hits Politicians Hard! (civicchoices.wordpress.com)
- Jerry Brown vetoes budget – Democrats ‘dismayed’ (sfgate.com)
A fist fight between opposing views on the State budget broke out at the California Legislature just before the Democrat-sponsored State Budget was approved anyway and sent to Democrat Governor Jerry Brown. But Brown vetoed the budget sent him by fellow democrats saying it was full of gimmicks and did not solve the problem.
He told them to talk the Republicans into allowing voters to decide whether to extend the current temporary sales and income tax increases as a bridge and to find more cuts in budget categories or else.
This is Jerry Brown at his finest!
He knows every legislative and political trick in the books and he obviously surprised the Democrats by not rolling over for their latest attempt to kick the can down the road.
Why were they doing it?
Voters approved a ballot Initiative last election that stops legislative paychecks if they fail to approve a balanced budget on time. So the Legislature approved a budget they called balanced in time—the first time in decades—to meet that paycheck deadline betting that fellow Democrat Jerry Brown would let them get away with this smoke and mirrors trick.
The Governor knew he would have to live with a flawed budget and thus would get all the blame for making draconian cuts needed to make up for the gimmicks the Legislature approved. So in vetoing the budget he told them to try again.
So angry was Senate President Pro Tem Darrell Steinberg that he announced he was halting Senate consideration of Governor Brown’s appointments and there would be no further confirmations for an indefinite period of time.
Pressure on the Legislature to approve a realistic state budget is compounded by bad economic news. California employers shed 29,200 jobs from payrolls in May after several months of job growth had boosted California’s estimated revenue for the year. California’s unemployment rate still fell to 11.7% from 11.8% in April, according to Bureau of Labor Statistics.
California was not alone in this bad economic news as only 54,000 jobs were added in May and the national unemployment rate grew to 9.1%. First quarter job growth averaged 220,000 jobs a month. Add falling home prices and lower retail sales and consumer confidence numbers and you see why Governor Brown was tired of waiting for the Legislature to do its job.
A POX ON BOTH YOUR HOUSES
Jim Boren, an editorial writer for the Fresno Bee, summed up the nasty mood pervading the State with this editorial:
“Here’s more evidence that we need a part-time Legislature in California: It took lawmakers almost six months to come up with a phony budget, which Gov. Jerry Brown vetoed within hours of its passage. Part-timers couldn’t have done any worse, and likely would have solved the problem.
The Sacramento political establishment scoffs at the thought of a part-time Legislature for many reasons. If lawmakers are part time, their staffs would be part time. The public relations professionals and lobbyists, who operate full time, would have less work.
A full-time but dysfunctional California Legislature works for everyone except the taxpayer. We have a system in Sacramento that has morphed into a moneytree for the political class.”
And so it goes.
- Calif. Gov. Jerry Brown vetoes state budget (marketwatch.com)
- Uncertainty reigns as Jerry Brown vetoes ‘questionable’ California budget (csmonitor.com)
- Gov. Jerry Brown vetoes Democratic budget bill (abclocal.go.com)
- Jerry Brown Vetoes California Budget, Cavanaugh on 10 O’Clock News Again Tonight (reason.com)
House Budget Committee Chairman Paul Ryan unveiled the House leadership proposal for the 2012 budget calling for reduction in Federal spending and entitlements of $6.2 trillion over ten years. Compare that to the Obama Administration’s proposal to cut spending $1.1 trillion over the same period and you begin to see the stark contrast of views that will not only frame the debate ahead but the 2012 election as well.
Democrats are already lining up with every special interest sacred cow to call these cuts in spending draconian and accusing Republicans of sending grandma to the poor house so millionaires can keep tax breaks.
Congressman Ryan seems to understand what many others are still in denial about. The US Government faces a red ink problem that is profound and staggering. The excuse of the recession to continue spending at unsustainable rates is wearing thin. And the American people chose a mid-course correction in the last election to restore a sense of balance and proportion to our budget and our national policies.
Ryan and the house leadership had no choice but to propose a budget and lay out policy options that give the people what they want, even if they must give it to them hard. The question is whether this proposal will be seen as a serious program of reform and recovery or political grandstanding to create an issue for the next election.
We will know the answer to that question soon enough. But we do know this—Paul Ryan has done more to help restore America’s financial strength in this one action that anyone else in the last five years across both administrations.
By forcing America to look into the mirror and speak truth about our fiscal and policy realities we unleash the best in America—common sense, air play, and optimism about the future that has made us the greatest nation on earth.
There is one more truth we all know—-no serious budget or reform proposal can evade a serious discussion of the unsustainable realities of health care costs including Medicare. An entitlement is worthless if the nation is bankrupt. Piling on more unsustainable costs will not solve the problem only competition among service providers across state lines, choices among benefit levels rather than government mandates, an end to automatic increases regardless of cost, and restoring the basic soundness of our economy so that more revenue flows into the government treasury will turn things around.
So thank you, Paul Ryan, for framing the debate and the decisions ahead in terms that are practical, realistic to our needs, and honest.
- The 2012 Budget War (civicchoices.wordpress.com)
- Must Read of the Day: Paul Ryan: The GOP Path to Prosperity (bigcitizen.wordpress.com)
- GOP Budget Plan to Cut $6 Trillion (foxnews.com)
- GOP’s Ryan Prepares Medicare ‘Premium Assistance,’ Medicaid Block Grants In Budget Proposal (kaiserhealthnews.org)
- Democrats Warn That Paul Ryan’s Medicare Plan Would Reduce Federal Health Care Spending (reason.com)
- David Brooks Is Excited: Paul Ryans Kicks the Elderly While Protecting the Wealthy (businessinsider.com)
- GOP to Unveil Budget Plan Cutting More Than $6T Over Next Decade – Fox News (news.google.com)
- Now THAT is cutting the budget! (thedaleygator.wordpress.com)
- Paul Ryan budget hard-headed or inhumane? (politico.com)
New inaugurated California Governor Jerry Brown wasted no time putting on the Legislative table a proposed state budget he said would require sacrifice from every part of the state. Now we know how he was able to get this budget prepared so fast—there are no good options left for California so it’s pretty much the same deep spending cuts former Governor Schwarzenegger proposed last year that the Legislative leaders declared dead on arrival plus the same extension of temporary tax increases the voters rejected in 2009 together.
The only thing different is Jerry Brown is a democrat and the voters chose him over Meg Whitman. So the Democrats in the Legislature are in a political as well as a fiscal bind. Jerry is on their team so DOA is not going to cut it as a response this time around and every vote will count to get the 2/3 needed to put the tax measures back on the ballot. So trying to make nice with Republicans is necessary.
The Republicans can just say no to putting the tax measures on the ballot and risk legislative gymnastics to configure the measure to require only a simple majority. Or the Republicans can agree to let the public decide on the tax questions assuming the same “NO” the public said last time and demand even deeper cuts as the price for doing so.
Either way it’s going to be a food fight.
In my email this morning was this message from Charles Schwab about their take on what Congress might do with tax rates:
2011 Taxes Remain in Limbo
Michael T. Townsend
Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc.
September 29, 2010
- Unless Congress takes action, most Americans will see their taxes rise next year.
- We handicap the likely outcomes of the tax debate.
- Helpful information for all investors and taxpayers.
Congress returned to Washington in mid-September with relatively few “must do” items on its list. But the one topping that list is a biggie: dealing with impending tax increases that could affect virtually every American.
The Bush-era tax cuts enacted in 2001 and 2003 are set to expire at the end of 2010. If Congress does not act, most Americans will see a tax increase in 2011 as income-tax rates rise, taxes on capital gains and dividends increase, and the estate tax—currently at zero—returns in a big way.
The deadline isn’t a surprise to lawmakers—it’s been looming for years. However, as the calendar turned from summer to fall, there was little indication that a solution was coming anytime soon. Congress will wait until it convenes after November’s mid-term elections in a “lame duck” session to resolve the tax conundrum.
Here’s our analysis of the likely outcomes of the tax debate, and the political hurdles that must be overcome to reach agreement.
First possibility: Congress does nothing
Under current law, all of the tax cuts are set to expire December 31, 2010, with rates reverting (in most cases) to their pre-2001 levels. The 10% bracket would disappear completely, and the other tax brackets would rise (see chart below). In addition, the per-child tax credit would fall from $1,000 to $500, and the “marriage penalty”—married couples filing jointly getting a smaller deduction than if they filed separately—would return.
Capital gains taxes would increase from 15% to 20% for all taxpayers, and dividends would be taxed as ordinary income. The estate tax, which was eliminated at the beginning of 2010, would return at a rate of up to 55% on estates valued at more than $1 million.
If Congress can’t agree on an alternative proposal, the old tax provisions would be restored on January 1, 2011. In the pre-election atmosphere, this worst-case scenario will be a popular talking point on the campaign trail, as candidates from both parties point the finger of blame at each other for possible tax increases in 2011.
Realistically, however, once the election is over, it seems highly unlikely that lawmakers will let taxes go up for nearly everyone, particularly given the economy’s continuing struggles. Serious negotiations on a compromise solution will take place shortly after the election.
And even in the unlikely event that the current Congress does nothing, expect the new Congress to act in early 2011 to implement some sort of fix that’s retroactive to the beginning of the year.
Second possibility: Congress approves President Obama’s proposal
President Barack Obama has stuck with his long-standing position of allowing taxes to go up only on individuals earning more than $200,000 and couples earning more than $250,000. Under his plan, only the top two tax brackets would increase: The 33% bracket would return to 36%, and the 35% bracket would go back to 39.6%.
In addition, the president has called for taxes on dividends and capital gains to increase from 15% to 20% for filers in those top two tax brackets only. Most filers would see the rate remain at 15%, while the lowest tax bracket would continue to have 0% tax rate on capital gains and dividends.
Finally, President Obama recommends that the estate tax be made permanent at a 45% rate on estates valued at more than $3.5 million ($7 million for couples).
Senate Democratic leaders put forward legislation that mirrors the president’s proposal in late September. However, several key Democrats have publicly expressed concern about raising taxes on anyone given current economic conditions. It doesn’t appear right now that the necessary super-majority of 60 votes in the Senate (where Democrats currently hold a 59-41 majority) is attainable. That could change after the election.
Third possibility: Congress extends all the tax cuts for one or two years
The outcome that appears most likely—though far from certain—is that Congress simply extends all of the tax cuts for one or two years. Republicans would unanimously support such a proposal, and several Democrats have signaled their support for the idea. If faced with a choice between letting the tax cuts expire and extending all of them for a year or two, most observers think Congress would choose the latter.
The big stumbling blocks are the budget deficit and an obscure rule governing budgetary items. Extending all of the tax cuts, even for just a year or two, would increase the budget deficit, which is already approaching $1.5 trillion. Many lawmakers are deeply concerned that the massive debt the United States is compiling is creating a hole that may be almost impossible to escape.
Further, under rules known as “pay as you go,” any tax cut must be offset with either spending cuts or tax increases. There are a number of exceptions, including one for income-tax rates for taxpayers with income up to $250,000 ($200,000 for single individuals).
Also, keeping the capital gains and dividends tax rate at 15% would technically require Congress to find approximately $100 billion in offsets, which seems unlikely in the current environment. Congress could just ignore the “pay-go” requirement, but some Democrats are reluctant to do so, since it was they who pushed for this new statutory requirement at the beginning of 2009.
Potential income tax rates for 2011
If Congress extends current law Obama proposal If Congress does not act 10% 10% 15% 15% 15% 15% 25% 25% 28% 28% 28% 31% 33% 36% 36% 35% 39.6% 39.6%
Fourth possibility: Some other compromise emerges
None of the three options described above yet enjoys broad support. That may change in the weeks ahead, but it also leaves the door open for another proposal to be put forward to resolve the issue.
Some lawmakers have proposed letting the estate tax return to where it was in 2001, while preserving the other tax cuts. Others have proposed dealing just with income tax rates, while allowing the capital gains rate to return to 20% for everyone and dividends to be treated as ordinary income. Other proposals could emerge. At this point, though, the three scenarios outlined above are the main players.
The final complicating factor is the election itself. Republicans are widely expected to make significant gains in both the House of Representatives and the Senate, narrowing the current large margins and possibly even taking control of one or both chambers.
While newly elected members will not take office until January, the lame-duck session looming in November and December is likely to include a number of lawmakers who have lost their seats. Freed from political repercussions, these members could vote in unpredictable ways.
There are numerous moving parts to the tax endgame, and it remains very difficult to predict the outcome. We’ll continue to provide updates as developments warrant.