Prediction for Congress

The end of the shutdown came with resumption of ‘normal order’ on budgeting.  A large group from both the House and Senate are to ‘resolve’ issues such as the budget for 2014, tax reform and entitlement reform.

Sounds very similar to the ‘super committee’ and many of the key players are the same.

We all know the bottom line position of both sides.  Democrats insist on increasing revenue through either tax increases or elimination of tax ‘loopholes’.  Republicans insist on no new taxes.

Given that base position there can be no long term resolution.  With even more intransigence on the sequester (Democrats want it eliminated, Republicans want it maintained) there is even less opportunity for progress.

While the Democrats generally refuse to even acknowledge the unsustainable nature of entitlements there is virtually no opportunity for reform.

So, what can we expect?

I think the Republicans will see themselves as the underdog in these negotiations and will not press for any substantial changes.  They won’t want to be blamed, once again, for a shutdown and this immediately puts them on the defensive.

Democrats have the upper hand, whether deserved or not, and will argue strongly to increase taxes and spending.  It is likely that they will win the argument.

My prediction:

FICA taxes will be expanded beyond the current $112,000 dollar income limit.  I doubt that there will be any means testing or increase in retirement age.  (This simply pushes back the date for failure and does nothing to reduce the long term obligations and eventual collapse of the system.)

Tax ‘loopholes’ on corporate earnings will be eliminated.  (This will make our products even more costly and that cost will be passed on to the consumer.  Net effect – more job losses in the U.S.)

Some minor tinkering with the personal income tax that permits lowering the tax rate on earnings below $250,000.  Don’t expect more than a 1-5% decrease.

Defense spending will escape the sequester lowering the overall impact of the sequester and reducing future savings.

I doubt that anything more than these minor adjustments will occur and the impact will be to increase taxes and continued deficit spending with no end in sight.  The economy will be even more crippled and we will slowly lose our position of leadership in the world.

What should happen:

Entitlement spending is the key to our long term debt and must be addressed.

At a minimum we should have means testing (limit entitlements to wealthy individuals.  They are supposed to be a ‘safety net’ after all and should not be given out to everyone), increase the retirement age and expand contributions above the $112,000 earnings limit.

An even better plan would be to allow 1/3 of the contributions to be placed in a ‘personal savings account’ reducing the government’s obligation and guarantee while increasing the potential value of the program.

Taxes are key to economic growth and the primary source of revenue for the functioning of government.  Everyone agrees that they are too complex and a major contributor to ‘cronyism’.  It is also well documented that our corporate taxes are the highest in the world.

Adopting the Fair Tax in place of the existing income tax would dramatically improve our economy.

  1. Eliminate the dreaded IRS.
  2. Eliminate taxes on earnings or income and effectively improves our competitive position in the world.  Business would be drawn to the U.S. rather than pushed out of the country.
  3. Puts the consumer in control of their tax burden.  If they spend more they will pay more taxes.  Spend less and pay fewer taxes.
  4. Encourages savings.  What you don’t spend is not taxed and those savings are available to sustain economic growth through investment in business.
  5. FICA is eliminated and entitlement spending is funded from the general tax fund.  Eliminates the argument that S.S and Medicare is funded from a separate revenue stream and clarifies the true cost of these programs.

No other action has the stimulus effect that adopting the Fair Tax would have on the economy.  Once adopted we could concentrate of removing unnecessary regulation and non-essential government bureaucracy.

The emphasis should be on entitlement reform (long term debt) and taxes (current fiscal policy).



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