Friday, August 20, 2010

Washington Could Learn From Richmond

When Bob McDonnell took office as Governor of Virginia in January, he inherited a large dollar state budget deficit. Now, a mere seven months later, the state closed out the 2010 fiscal year with a $220 million surplus! It only took the new Governor a mere seven months to fix Virginia’s budget deficit.

How did he do it? Well, he forced the state legislature to get serious about cutting spending. He made it clear that he would veto any budget bill that contained a tax increase. With the economy being what it is and many Virginians struggling financially, McDonnell felt that this is not the time to be increasing people’s taxes. With that option off the table, the legislature had to make hard choices about reducing spending to achieve a balanced budget as required by Virginia’s constitution. The legislature acted responsibly, and state dollar outgo was equated to dollar income without our tax burden being increased.

Meanwhile, in Washington, the White House raised its forecast for the 2011 budget deficit to $1.4 trillion. That’s just for one year; the total U.S. debt ceiling has been raised to $13 trillion. This is all borrowed money, mind you, which will have to be paid back some day.

The U.S. Constitution has no balanced budget provision, so Congress is free to spend more than it has, which it often does. Since Obama took office, deficit spending by the Federal government has gone on steroids.

We have seen a trillion dollar “stimulus”, auto company bailouts, TARP, bank bailouts, cash for clunkers, money being thrown at “green energy”, a remake of student lending that costs more, trillions to be spent on Obama-care, more money for unemployment payments, etc. And there are no signs that the spending in Washington is slowing; the latest episode is a $26 billion bailout to the teachers’ union and others.

You and I have to balance our monthly budget, or else eventually face some serious financial consequences. If our income goes down due to a job loss, pay cut, the poor economy, or any other reason, we have to cut expenses. Sure, we can live off of credit cards for awhile, but if you listen to Dave Ramsey, you know where that leads.

Congress doesn’t have to exhibit the same kind of financial discipline that ordinary Americans do. Congress can just spend, spend, spend with money it lends itself, and let future generations deal with the mess. Congress never goes bankrupt or finds itself talking to collection agencies. Congress just raises the debt ceiling. It’s as if you had a credit card that, whenever you hit the limit, you could just take a pencil, erase that number and write in a new, bigger number, and keep doing this until someday you hand the whole thing over to your children and grand-children.

And now, the very same Congressmen who have been spending money like drunken sailors for the last eighteen months, thereby running up the huge federal deficit, are now saying it’s time to balance the federal budget.

Now it’s time? Not when any of those spending bills were being passed; no, that was not the time to show budgetary restraint by voting against the spending. Now that huge deficits have been run up in Washington, now is the time to balance the budget.

This is like the Captain of the Titanic saying, as the ship goes down, that now we need to go slow and watch carefully for icebergs.

Here is why you are now hearing from the same people who ran up the federal debt to unprecedented levels that something has to be done about it. You will notice that none of these complicit Congressman are saying we have to cut federal spending to any significant degree, even though this out-of –control spending is what caused the deficit. They’re just saying that something has to be done about the deficit. And what might that something be? There are two keys to figuring it out.

The first key fact is that the so-called Bush tax cuts will expire at the end of this year, unless Congress acts to extend them. These were tax cuts passed during Bush’s first term that reduced tax rates for everyone plus reducing the tax on dividend income and capital gains. For political reasons, these tax cuts were put in place with an expiration date, which is Dec. 31of this year. Thus, Congress must act, or taxes on everyone will go up January 1. Some taxes, such as dividend income, will almost triple, regardless of income level.

The second key fact is that Congress has appointed a Deficit Reduction Commission to study the deficit problem and make recommendations on what to do about it. I predict that this commission will not recommend taking a meat cleaver to budget-busting federal spending programs or any such approach, although it may recommend token spending cuts here and there. This is because the commission’s membership is stacked such that it will, no doubt, recommend raising federal taxes significantly.

Some people are even speculating that a recommendation will be made for a federal Value Added Tax (VAT), European style, in addition to the federal income tax. A VAT is a tax imposed throughout the production cycle. For example, consider a wheat farmer. When he buys seed, he will pay a value-added tax on it. After he harvests and sells his crop to the bakery, a VAT will be paid on the grain. When the bakery sells the loaves of bread to the supermarket, a VAT will be paid. And when you buy a loaf of bread, you will pay a VAT.

Note that in both of these cases, the increased taxes will be on everyone, not just the “rich”.

And now for the final piece of the puzzle. Congress talks incessantly about making the “rich” and the “wealthy” pay their fair share, or about raising taxes only on the “wealthiest” people. Beware when you hear this talk. It’s what duplicitous politicians say when they want to lull you into a false sense of security. The dirty little secret of taxes is that the “wealthy” already pay most of the income tax. Data from the IRS shows the following:

Share of Income Tax Burden (2004)
Top 1% in income ------------- 35.6% of total federal income tax
Top 10% ------------- 67.6%
Top 50% ------------ 96.6%
Bottom 50% ------- 3.4%

Taxes on high income people can’t be raised enough to pay for the ballooning government budget deficits. You could take 100% of the income of the “wealthy” and it wouldn’t be enough. So taxes on the middle class are going to have to go up, unless there is a major change of course in Washington.

Anyone who doesn’t think big federal tax increases on the middle class are currently heading our way need only look at recent budget machinations in California.

In case you haven’t been following it (I do because I used to live there), California has been wrestling with a $40 billion deficit. They have gotten that down to $19.1 billion. The California Governor recently proposed cutting spending on welfare, child care, in-home care, and schools to finish balancing the budget. The California state legislature rejected that and came up with a complex tax scheme that includes a state income tax increase for all but the highest income tax bracket. You read that right; the California state legislature is considering a state income tax increase on everyone EXCEPT the wealthy. The reason given is that the state’s current tax structure excessively taxes the top bracket, adding to the volatility of revenue.

Keep in mind that California is truly the land of fruits and nuts, and its state legislature for the most part believes in socialist tax and spend state welfare policies to the extreme. Again, I know this because I lived there for years. If in California they have come to the realization that they can’t tax the rich enough to balance the state budget, and that they must instead increase taxes on the middle class, you know reality has set in.

Washington is coming to the same conclusion, they just don’t want to tell you. Congressmen still prattle on about taxing the wealthy, but reality is setting in. Hold on to your wallet; America’s spending chickens are coming home to roost.

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