The financial news this week contains a curious mix of stories, that all have a common theme. America may be heading toward some very difficult times ahead. And, the primary reason is that our Government, at all levels, has spent us into ruin. The most frustrating part of this story is that nobody in office seems to get it. It’s almost like a horror movie, where you can hear the scary music playing in the background. But, the oblivious politicians are too busy partying to notice the guy with the chainsaw, wearing a hockey mask.
Entitlements Gone Wild
According to the Wall Street Journal, nearly half of all Americans live in a household in which someone receives government benefits. At the same time, American households not paying federal income taxes has also grown to an estimated 45% in 2010, from 39% five years ago. There are an estimated 10% of tax payers who get refunds, even though they don’t pay any taxes. And, the percentage of the federal budget spent for entitlements is currently 64%, the highest in history.
Message from Voters
The latest high-profile TEA Party victory in Delaware has rankled the Republican leadership. They were hoping to use the anti-Obama backlash to retake control of the Senate in November. Now, they fear they may lose this seat and remain the minority party. This doesn’t surprise me because the Republicans haven’t shown any kind of fiscal restraint or leadership. And, they remain oblivious to the message from voters, which is to reduce the size and scope of the government.
Tax Cuts Expiring
The Bush-era tax cuts are set to expire at the end of the year. And, the trillion dollar question is whether or not to extend these cuts or to let them expire.
- President Obama wants to allow the tax cuts to expire for the rich, who make more than $250,000 per year.
- Republicans want to extend the tax cuts indefinitely, warning that raising taxes on employers will plunge us back into a recession.
- Democrats initially supported letting the tax cuts expire. But, as the election approaches, they are starting to cave in to avoid a backlash.
My solution is simple, a good old-fashioned compromise. Keeping the cuts in place, but raising the long-term capital gains rate from 15% to 20% should allow the recovery to continue, without piling onto the deficit.
Greenspan Changes his Mind
This week, Alan Greenspan surprised everyone by advocating that we let the Bush-era tax cuts expire. When Alan Greenspan used to run the Federal Reserve, he was all for tax cuts and he strongly supported the current cuts that are set to expire. But, in typical Greenspan double-speak, he advocates new tax cuts at the same time he warns about the deficit.
“We should not have tax cuts with borrowed money, but we should have tax cuts, and the more as far as I’m concerned the better, but only in the context of bringing the deficit down. Unless we do that, I think we have very grave problems ahead.”
Unfortunately, he doesn’t give any explanation of how tax cuts would bring down the deficit. And, he ignores the most obvious solution, which is to cut government spending to reduce the deficit, while keeping taxes lower to stimulate the economy. How did we listen to this guy for 20 years?
The Bottom Line
The bottom Line is that it’s not going to be easy to rein in spending. No matter what part of the budget gets cut, someone is going to be unhappy about it. But, we have to put a stop to the free-lunch mentality, before we all go hungry.
“Three groups spend other people’s money: children, thieves, politicians. All three need supervision.”
Dick Armey – House Majority Leader (1995-2003)
This post was featured on the Carnival of Personal Finance over at Well Heeled Blog. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the premiere carnival for Finance Blogs.