Welcome to the Party

I'm sure every single member of American society feels overwhelmed with news of the debt ceiling.  We have the Democrats on the left side stirring the pot about how if we don't raise the debt ceiling that we will default and there will be ominous consequences.  Barack Obama has even said in no uncertain terms that he isn't sure the federal government will be able to send out all those Social Security checks that the good citizens rely on after August 2 if the debt ceiling isn't raised substantially.  There's been so much pandering to the AARP sect of voters that I'm starting to wonder if another block of voters even exists.  One of the big scare tactics from the left is that if the USA defaults then our creditworthiness (Is that really a word? It just feels weird.) will be damaged irreparably which will then cause our already fragile economy to tumble into a double dip recession or even a depression.  We have the Republicans on the right (but probably not correct) side of the aisle that seem to be somewhat divided.  Apparently some on the right including Senate Minority leader Mitch McConnell are willing to hand over free reign of raising the debt ceiling to Barack Obama and his cronies.  We have another more ardent faction including most of the freshman House Republicans and most notably Rand Paul in the Senate that have been preaching big time cuts and a balanced budget amendment primarily but also seem willing to raise the debt ceiling if that will be enough to coerce the Democrats into agreeing to the Cap, Cut and Balance plan they have forwarded.

Lost in the shuffle among all this banter were what I found to be two of the most important pieces of information that could help point us in the direction of making the correct (not right) decision.  Standard and Poor's [1] recently warned that the good ol' USA is in real jeopardy of being downgraded from AAA to a lowly AA rating on their system.  Basically, they seem to imply that this is inevitable by warning that raising the debt ceiling will damage the rating and not cutting back on spending will also damage the rating.  Since NOT raising the debt ceiling AND cutting back on spending isn't even being seriously considered in ANY of the discussions it would seem that a credit downgrade is not only possible but absolutely inevitable.

Following up the S&P news was a release from Moody's [2] that they too are strongly considering a downgrade of US creditworthiness.  (Sorry, but the full Moody's report is available [3] for pay and in these difficult economic times I can't afford it and am forced to rely on second hand information)  They seem more confident that the debt ceiling will be raised but seem to imply they have little faith that the politicians will make sizable enough cuts to impact the real problem which is out of control spending.

I hate to say "I told you so" (actually I love it) but Libertarians and more recently Tea Party members have been preaching this mantra of balancing the budget and maintaining some semblance of fiscal responsibility for quite some time.  I know the Tea Party gets a bad rap in the news frequently and I think in a lot of cases that that bad rap isn't exactly without cause due to the fact that the Tea Party has unfortunately attracted a small number of fringe personalities that damage and marginalize the real beliefs and mission of the group.  However, I do admire the Libertarian fundamentals that the group espouses.  Unfortunately, I believe that both the Democrats and Republicans are a little late to the Party and won't be able to make any meaningful impact on the political machine in DC.  It may indeed be too late to avoid a downgrade of the US credit rating but it is not too late to replace the lousy politicians we currently have with some new ones that will be willing to stand up and do the right thing which is reel in the out of control spending and restore fiscal sanity in our federal government.  I believe this has already started with the 2010 elections and I also strongly believe that Americans have finally awakened to this reality and will continue to replace the business as usual politicians including Barack Obama in 2012.  We may not be able to avoid a double dip recession or even a depression but we are definitely not too late to save this great republic.

[1]  http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245315237257

[2]  http://thehill.com/blogs/on-the-money/801-economy/174447-moodys-neither-plan-protects-the-nations-aaa-rating

[3]  http://www.moodys.com/

A few words on taxation and fairness

We've all been absolutely inundated with end of the world/the sky is falling talk about the debt ceiling and how to balance the budget lately.  I just wanted to throw out a couple of quick observations on some of the things we've been hearing from our politicians lately.

The big thing that caught my attention and I wanted to address was this talk of tax "fairness".  Barack Obama and his Democrat cronies have been making a big push for raising taxes on both individuals and businesses as part of an overall plan to balance the budget and this is the one issue that seems to be the biggest sticking point between the two parties.  I would like to address both the individual and corporate taxes separately.

On raising individual taxes, Obama repeatedly pushes the notion that raising taxes means everyone would be "paying their fair share".  However, he isn't pushing for a new taxation policy that would be anything close to fair.  What Obama wants is to increase taxes primarily on those individuals making more than $250,000.  In America, the number of households that makes more than $250,000 is around 2% or 1 in 50.  (1)  Interestingly, the top 1% of income earners already pay an extremely large proportion of all tax revenue at roughly 38%.  (2) In addition, in 2009 less than half (49%) of all Americans paid any taxes and about 30% not only didn't pay taxes but actually had a net negative effect by getting money back via the EIC and other tax credits.  (3)  So, what we have is a small minority of Americans already footing the bill for the majority (51%) who pay no taxes.  It is beyond comprehension how further increases in taxation to the minority already footing the bill could be seen as "everyone paying their fair share".  Wouldn't it be much more fair if the majority who pay no taxes started picking up at least a small portion of the bill by paying at least some taxes?  That's to say nothing of those actually taking money out of the coffers via the EIC and other tax credits.  I'd say further increases in taxation on those making over $250,00 is the polar opposite of making "everyone pay their fair share".  But that's just my opinion, I guess.  To further increase taxes on the roughly 2% of Americans that already provide the lion's share of tax revenue amounts to nothing more than "classism" akin to sexism or racism.

On corporate taxation, I fear that Obama will drive our economy further into the ground by increasing corporate taxes.  Actually, Obama has been pitching this idea as "closing corporate tax loopholes" but that's just a nicer way of saying "let's extract more money from corporations via a higher effective tax rate".  Does it matter if it is a "closed loophole" or a higher rate when the net effect is that businesses pay more taxes?  I think not.  So, it's important to examine where we stand currently.  As of right now, the US has one of the highest corporate tax rates in the world.  (4)  In fact, a substantial percentage of economists are pushing for decreasing the US corporate tax rate to stimulate the economy.  (5)  So, we have Democrats saying we should increase corporate taxes to balance the budget while Republicans are saying leave it alone or even cut the corporate tax rate to stimulate growth.  Which side is right?  And where can we look for answers?  Let's look at Delaware to see if we can find some answers.  Delaware has long had the reputation for being very tax friendly towards corporations and businesses in general.  In fact, for companies incorporated in Delaware who don't do business in Delaware there is no corporate tax rate above the federal tax rate.  (6)   In addition, Delaware is well known to be extraordinarily business friendly in other ways including legally and regarding asset protection.  What is the end result of such policies?  Delaware is host to more than 50% of ALL the Fortune 500 companies.  (7)  I would say that there is no better place to look for guidance on how to grow a business friendly economy than Delaware.  They have shown us the best way for about 100 years with staggering success.  With their business friendly environment, they have managed to minimize unemployment which is currently at 8% for their state as compared to 9.2% for the US  (8)  Additionally, Delaware has used these successful business policies to limit the tax burden on individuals by eliminating sales tax and personal property taxes.  (9) Ultimately, I fear that increasing the effective tax rate on corporations by "closing loopholes" will end up damaging our already fragile economy further.  For these reasons, I think that the right thing to do is cut corporate taxes instead of raising them.

I'd be interested in hearing other opinions in the comments section below.

Links below for stats from above:

(1) http://www.factcheck.org/2008/04/americans-making-more-than-250000/
(2) http://www.davemanuel.com/2010/11/04/what-percentage-of-federal-income-taxes-do-rich-people-really-pay/
(3) http://uselectionnews.org/politifact-51-of-american-households-pay-no-income-tax/854468/
(4) http://www.politifact.com/virginia/statements/2011/jun/18/george-allen/george-allen-says-us-corporate-tax-rate-second-hig/
(5) http://seekingalpha.com/article/257977-high-u-s-corporate-tax-rate-a-barrier-to-economic-growth
(6) http://revenue.delaware.gov/services/Business_Tax/FilingCIT.shtml
(7) http://corp.delaware.gov/whycorporations_web.pdf
(8) http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=state:ST100000&dl=en&hl=en&q=delaware+unemployment+rate#ctype=l&strail=false&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=state&idim=state:ST100000&tdim=true&hl=en&dl=en
(9) http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_Dela.asp