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Today's Commentary: 11.28.05
The Death of Pay-Go

The House of Representatives and the Senate recessed for a gluttonous holiday with the two legislative bodies still quite some distance from finding a tax bill that will work for both the rich and the Presidentıs flawed economic agenda. Focused on continued tax cuts when deficits are running at record levels and there is no plan for paying for them, seems as foolish as spending money you donıt have for Christmas presents you canıt afford.

Determined to get something memorable for his two terms in office, Mr. Bush is insisting on certain provisions in a tax bill. Although his last effort will carry him through his last days in office, his zeal for permanency at a time when so much ambient noise is suggesting that 'something wicked this way comes' has pushed Congress to shoot for the best and hope for the Presidentıs approval.

One of the (apparently) must needed elements and present in some degree in both bills is further stimulation of the economy from the top down. While the current strength in the economy is not a result of any previous tax cuts, the belief that they were a positive catalyst for growth remains at the core of their legislative nearsightedness.

Businesses did not take advantage of the tax cuts to grow their businesses. They learned how to streamline them in such a way that increased productivity without any real expansion. Tax relief was used for share buybacks and dividend payouts, which only further enhance ownership, a class of folks with far too few members to consider the previous tax cuts a success.

Here's what Congress came up with before the adjourned for a two week holiday.

The House bill, as expected, would further line the wallets of the top wage earners in this country. That much-maligned top one percent would get 51% of the billıs largess. In fact, the House bill would give those making in excess of a million dollars a year, a 5.3% reduction in the federal rate. You do the math on that one.

Further proof of detachment from the voting populace is the Houseıs refusal to acknowledge the looming threat of the Alternative Minimum Tax. Enacted in 1969 as a way to force high wage earners to pay their fair share by eliminating certain deductions, Mr. Bushıs tax cuts have created a vacuum for unsuspecting middle class tax payers. Estimates of the number of folks who would find themselves eligible in 2006 vary, depending on whom you talk to. The White House suggests that an estimated 18 million filers would be affected by the AMT this year. This is up from 3 million surprised taxpayers in 2005.

The Senate bill does offer some relief for impending AMT but at the refusal to extend the current tax cuts. Wanting both is typical of Mr. Bush as the Senate grapples with a way to comply with the problem.

The party however, is nearly over. The spending cuts for the programs designed to help the neediest will do little to please voters when they realize that, should either of these versions pass, the deficit will not be reduced as promised. Not even close. In fact, these tax cuts are even more misguided than past efforts.

Believing that the economy is doing well and will continue to do so ignores some of the obvious signs that globalization is beginning to reveal. Worldwide investment in the United States and our far-as-the-eye-can-see deficits may come to a grinding halt once the central banking system in Europe begins to raise rates. I realize that the banking system in Europe is mostly laughable, but should it gain some degree of respectability, raising rates will give investors another chance at assuming risk.

The Bank of Japan could begin to do the same next year. These kinds of possibilities will offer investors, who have had no other choice but to buy United States Treasuries, an alternative place to park their cash.

Without so much as a nod towards fiscal responsibility, Capitol Hill is risking the fate of the whole economy. As long as the dollar is strong, it is widely believed by Congress that this could be interpreted as a global vote that the US economy is strong enough to run deficits and survive without bringing its populace to their collective knees.

The telltale signs are beginning to surface. Consumer spending in the third quarter outpaced income. Businesses know all to well that this will not last indefinitely. As interest rates inch higher, inflation worms its way into the everyday cost of goods, and federal deficits grow without any chance of closing the gap, consumers will stop and think. It is that pause to reflect that will force the crack wide open.

At this point, America needs to make the effort to find a better way. Our elected officials need to do what they were elected to do without reducing spending on programs that count to a vast majority of the voters while giving huge tax cuts to those who have proven to be the least likely to spend the windfall.

Congress is missing a golden opportunity to help the very voters who put them in office. Remember the out-going Federal Reserve Chief Alan Greenspan suggesting that tax cuts (wink, wink) were okay if you found a way to pay as you cut. So much for Pay-Go.

Suffice to say, if you are rich in the United States, Œtis the season.

BlueMoney Report

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