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Old 12-24-2011, 10:51 AM   #21
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I don't know if the current payroll tax cut controversy is exactly the same as DW's situation, but I suspect that it is.

DW is self-employed. We live in the region affected by Hurricane Katrina in 2005.
When I prepared our income taxes for 2005 using Turbotax, I was presented with the option of either paying self-emplyoment taxes for DW or not paying the tax since this was a special provision for self-employed people in the Hurricane Katrina region.

At the time it seemed like a no-brainer. The choice was to pay a few thousand in self-emplyment tax or to pay nothing. We chose to pay nothing.

Every thing was fine until DW received her annual SS statement in 2006. The statement showed her total earnings for 2005 as "0". Actually, 2005 was a good year for her business. The "0" went into her lifetime SS earnings record and possibly reduced her SS payout.
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Old 12-24-2011, 11:05 AM   #22
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Originally Posted by JakeBrake View Post
I don't know if the current payroll tax cut controversy is exactly the same as DW's situation, but I suspect that it is.

DW is self-employed. We live in the region affected by Hurricane Katrina in 2005.
When I prepared our income taxes for 2005 using Turbotax, I was presented with the option of either paying self-emplyoment taxes for DW or not paying the tax since this was a special provision for self-employed people in the Hurricane Katrina region.

At the time it seemed like a no-brainer. The choice was to pay a few thousand in self-emplyment tax or to pay nothing. We chose to pay nothing.

Every thing was fine until DW received her annual SS statement in 2006. The statement showed her total earnings for 2005 as "0". Actually, 2005 was a good year for her business. The "0" went into her lifetime SS earnings record and possibly reduced her SS payout.
It is not the same situation. If you look at your SS earnings for the years that the payroll tax reduction is in effect you will find that those earnings are not reduced at all as a result of the 2% cut, and the calculation on SS benefits is based on earnings, not how many actual $ a person has paid in.
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Old 12-24-2011, 11:06 AM   #23
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+1 the mystery to me is why they haven't just made the change. I don't think that anyone earning $106,800 to $150,000 would be upset, particularly if they know that their SS will be more secure as a result.
As someone in that range, no I wouldn't object.

But this whole business of the cut affecting SS is silly. We've had a unified federal budget for over 20 years. There is no separation of SS or any other payments/collections. They could just as easily eliminate SS collections from paychecks and increase the income tax. It's all a game.
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Old 12-24-2011, 11:12 AM   #24
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Originally Posted by donheff View Post
We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.
While I basically agree with your post, what I highlighted in bold is not true.

The bonds in the SSTF are not like those held outside the US Government, such as those held by other countries, borkerage houses, and individual investors. They are nothing more than a bookkeeping entry which states how much one part of the USG owes another part. Their net economic value is zero because the asset value they are by the holder (SS) is equal to the liability value they are to the issuer (US Treasury). These special trust fund bonds cannot be resold on the open market.

I have a collection of quotes about the SSTF. Here are a few of my favorites:
  • "Trust Fund balances are available to finance future benefits...but only in a bookkeeping sense...they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes or borrowing." President Bill Clinton in his Analytical Perspectives section of the 2000 budget.
  • "We have no positive assets in the Social Security Trust Fund." Secretary of the Treasury, and one of the trustees, Paul O'Neill, June 19, 2001, at a luncheon speech to the Coalition for American Financial Security in the Sky Room of the World Trade Center and later to Sam Donaldson on This Week, Sunday, June 25, 2001.
  • "It holds no real assets. Consequently, it does not generate funds to pay future benefits. These so-called trust fund 'assets' simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations." June O'Neill, former Director of the Congressional Budget Office (CBO) at the CATO Institute's Conference for Women and Social Security.
  • "Government trust funds do not correspond in any meaningful way to those in the private sector. Government trust funds are simply a form of earmarking, accounting mechanisms that record tax receipts, user fees, and other credits and associated expenditures," Barry Anderson of the Congressional Budget Office in testimony before the House Budget Committee, September, 2002.
  • "We are going to get no help from the so-called Social Security Trust Fund. The Fund is a collection of non-negotiable government bonds in a filing cabinet in West Virginia. Investing in Treasury certificates is a good idea unless you are the Treasury. The idea that somehow this represents anything other than records kept on money collected by Social Security taxes that had been spent on other programs in the last 20 years is a complete fraud. When the president talks about using the Trust Fund to extend the life of the Social Security program for 24 years, he is wrong. We are misleading people into thinking that this Trust Fund has any relevance whatsoever. From an economic and a legal point of view, there is no Trust Fund." Former Senator Phil Gramm at the Economic Club of New York.
  • "It is in this role as a savings account that the Trust Fund could fail. It cannot work because it holds no independent assets. Though the Trust Fund is backed by government securities, these have a different meaning than they would for you or me. If I hold a government bond, I have an asset that the government will give me money for or that I can sell at any time. If the government holds a bond, however, its obligation to give itself money is meaningless. The government cannot make these bonds good, as needed in 2014, except by borrowing, reducing other expenditures or taxing citizens." House Budget Committee Chairman Nick Smith 6-8-99
  • "In fact, the money the government has supposedly been putting aside from the Baby Boomers' Social Security taxes is not there. The government has been borrowing the money to pay for the budget deficit. The Social Security Trust Fund is simply IOUs from the U.S. Treasury.... [Social Security] would be fine if the government would stop borrowing the money." Newt Gingrich 4-7-95
  • "The truth is that the Social Security Trust Fund has already been stripped bare. There is no trust and no fund. It is a lot like the S&Ls. The savings and loans had a lot of real estate on the books, a lot of property, a lot of shopping centers, a lot of deposits, and everything else, until you looked inside and found out there was nothing there. The assets were mostly on paper.... Meanwhile, the Social Security cupboard is bare." Senator Ernest “Fritz” Hollings (D-SC) Congressional Record 4-24-91
  • "When the money going out exceeds the money coming in, you are in trouble and that happens in 2016. Those who try to push the fatal date off to 2038 are counting the money that Social Security has in its so-called trust fund. However, the so-called trust fund exists only as a legal technicality, not as an economic reality...you cannot spend and save the same money." Thomas Sowell, The Washington Times, July 29, 2001.
  • "It means that ordinary working Americans, like teachers, police officers and firefighters, who believe their payroll taxes are going toward their Social Security retirement are in for a surprise...Instead of going to the Social Security trust fund, their payroll contributions are being funneled directly into tax breaks for individuals and corporations" Robert Matsui (D-CA), Chairman House Ways & Means Subcommittee on Social Security, Associated Press, March 30, 2002.
  • "Every dollar collected in (FICA) payroll taxes is spent the very minute, the very hour, the very day it comes in the door ... any funds left over, they are spent on other programs or used to pay off the national debt. But nothing is saved. No money is stashed away in bank vaults; no investments made in real assets." John C. Goodman, President of the National Center for Policy Analysis in an article published by the Washington Times, April 12, 2002.
  • "Any government leader who discusses the Social Security trust fund as if it comprises real financial assets with marketable value isn't worthy of being taken seriously." Jerry Heaster, The Kansas City Star, May 11, 2002. "The trust fund is a mirage of promissory notes." July 25, 2001.
  • Senator Peter Fitzgerald (R-Illinois) on the Senate floor during lock-box debates, 1999: "A few years back Congress passed laws making it illegal for State and local governments to plunder the pension funds of their employees. But during all this time, where Congress has put these laws on the books and made it illegal in the private sector and at the State and local government level to plunder pension funds, we have gone on and on in Washington taking all the money that goes into the Social Security trust fund, taking every dime of it out, and spending it on some other program. As a result, as I speak now on the Senate floor, there is no money in the Social Security trust fund. All of it has been taken out and spent on other programs. They have put meaningless, nonmarketable, nonnegotiable securities in the Social Security trust fund, securities that have no economic value because they cannot be sold to raise cash. Right now our Government is building up, theoretically, surpluses in the Social Security trust fund, but they are taking all that money out and spending it. So when we actually need it to pay benefits, beginning in the year 2014, there will be no money there. No matter what the balance of those bogus IOUs is in the Social Security trust fund, in the year 2014--whether that balance is $1 trillion or $5 trillion--they are of no assistance in paying benefits to those who depend on Social Security. The country will either have to raise taxes or cut benefits to make up for the shortfall that is anticipated after the year 2014. This legislation is basic, decent common sense. We should not allow Congress to continue frittering away the Social Security trust fund. I urge all my colleagues to support it and end this outrageous practice of plundering the Social Security trust fund, to the detriment of our Nation's seniors and those who will be desiring to live on Social Security benefits in the next century." (Note: Cash never goes into the trust fund, never, not even for an instant. It is always kept in the Treasury general fund until spent.)
  • "Mr. President, the thrust of President Clinton's State of the Union address was "save Social Security first." The quickest way to save Social Security is to stop looting Social Security. Over the years, we have looted the Social Security trust fund with wild abandon; we owe it to the tune of some $631 billion right this minute. It should be a $631 billion surplus. But actually, since Congress has expended it on foreign aid, defense, food stamps, and other programs in order to appear fiscally responsible, there is a deficit in Social Security." Senator "Fritz" Hollings in a letter of January 29, 1998 to the Senate.
  • "The Social Security trust fund does not provide the resources to close this financial gap. The non-negotiable bonds in the trust fund are essentially i.o.u.'s from the government to itself and must ultimately be repaid by taxpayers...Another targeted misrepresentation is that the Social Security Trust Fund can maintain the system from 2016 to 2038, pushing the need to do something well beyond most people's time horizons. The reason is that the trust fund consists of nothing but U.S. Treasury securities, i.e, federal government IOUs. But how will the Treasury redeem those IOUs when they come due? A 2000 Congressional Budget Office report said, 'To repay what [The Treasury] has borrowed from the trust fund, the federal government must raise the cash by boosting taxes, reducing other spending, borrowing more from the public, or retiring less debt,' making the trust funds essentially just a commitment to massive future tax increases." Thomas R. Saving, one of the Social Security trustees and professor of economics at Texas A&M University serving on President Bush's Social Security reform commission in a New York times article titled "A Social Security Solution" August 12, 2001.
  • "The key point is that the Trust Funds themselves do not hold financial resources to pay benefits -- rather, they provide authority for the Treasury Department to use whatever money it has on hand (taxes or borrowed) to pay them." David Stuart Koltz, Congressional Research Service, April 29, 1998.
  • "On January 3, 1983, Robert J. Dole, Senate Majority Leader, published an article on the op-ed page of The New York Times, entitled "Reagan's Faithful Allies." It seemed that many people thought Congressional Republicans weren't giving the President the support he needed and deserved. Not so, Senator Dole said, we are with the President and there are great things still to be done. Then this: 'Social Security is a case in point. With 116 million workers supporting it and 35 million beneficiaries relying on it, Social Security overwhelms every other domestic priority' ....That day I was being sworn in for a second term in the Senate. I had read the article and went up to Senator Dole on the Senate Floor and asked if he really thought that, why not try one last time? (They had just spent a year on the Greenspan Commission that went nowhere) And he did think it. A year of listening to Myers had altered a lifetime of Republican dogma. We met the next day. The day after that Barber Conable was brought in, a Republican who both understood and believed in Social Security. On January 15th, 13 days from our first exchange, agreement was reached at Blair House and the crisis passed...Social Security was secure for the time being. Indeed, the payroll tax generated a considerable surplus which we have lived off ever since, and will continue to enjoy for yet a few years. Moynihan at a speech delivered on Social Security Reform to the John F. Kennedy School of Government at Harvard University, March 16, 1998. Back in '83, and once Dole and Moynihan had decided on the amount of tax increase, it was within a month that Congress passed and the President signed a bill raising payroll taxes to their present 15.3 percent level over the next seven years.
  • "The Social Security trust fund is what I call a fiscal oxymoron. It shouldn't be trusted and it's not funded. And whether you have one or not, you still have to go out and do the same three things. You either have to try to borrow the money or you're going to increase taxes or you are going to cut the benefits. We’ve spent the money in the trust fund. We may have told the American people that we were setting it aside in a quote 'trust fund.' We spent it on other subjects. Shock of all shocks." Pete Peterson, head of the Concord Coalition and former Commerce Secretary. January 13, 2005.
  • "You see that Social Security is now taking in more cash than it spends. Ok, let's fast-forward to 2018, when Social Security is projected to take in $23 billion less cash than it spends. By then, the trust fund would have more than $5 trillion of Treasury IOUs in it. So it would be a piece of cake to cover a crummy $23 billion, right? Wrong. The fund's irrelevant, folks. It's an accounting entry, not real money." Allan Sloan, Newsweek Magazine, February 14, 2005.
http://www.uncle-scam.com/Confessions/statements.html
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Old 12-24-2011, 11:15 AM   #25
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It is not the same situation. If you look at your SS earnings for the years that the payroll tax reduction is in effect you will find that those earnings are not reduced at all as a result of the 2% cut, and the calculation on SS benefits is based on earnings, not how many actual $ a person has paid in.
Alan, thanks for clarifying that. The payroll tax cut won't affect me since I have no earned income.

To paraphrase from the 1040 tax form:

Contributing to the political slush fund will not increase your taxes or decrease your refund.
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Old 12-24-2011, 11:30 AM   #26
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We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.
There are a lot of misconceptions on Social Security so I'm surprised there isn't a sticky/FAQ (unless I missed it) on this topic at an ER forum, though probably no one wants to be responsible for the content...
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Old 12-24-2011, 11:31 AM   #27
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Sure Scrabbler, you are correct in a technical sense. But the SS Trust Fund is and was a good faith promise from the US Government (yeah, I know, another oxymoron) to the wage earners who paid into it that the funds they contributed would be held "in trust" for their retirements. I don't believe that means no changes should be made in payout rates, inflation factors, etc -- the fund is insufficient to pay the benefits as currently structured so changes need to be made. But I strongly believe that the taxpayers who paid into it have a fair expectation that the money "booked" for SS will be made available for retirement purposes. If not, we will have enabled a massive retro-active regressive income tax. That is the travesty that those who counsel treating the Trust Fund as a fiction would impose on us.
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Old 12-24-2011, 11:44 AM   #28
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Originally Posted by misanman

I'm not anxious to pay taxes in general but this is one tax I think I should be paying. I think SS should remain vital for the long term. Also, when they reduce FICA and replace the funding out of general revenues it makes it seem more like a welfare program.

I'm also amazed at the replacement funding - heard on the news that an affected mortgage holder would pay an additional $4,000 on a 25-year $250K mortgage - maybe someone can do the math to confirm. Doesn't seem to be a bargain to me when what we're getting is two months of FICA tax relief.
It does seem a very odd way to pay for it. As far as the tax cut in and of itself. At least it is a surgical strike that helps workers especially the lower, working, and middle class. As far as an additional year really helping, that will probably be more doubtful. In a year when it reverts back, it will be called a " tax increase" instead of ending a temporary cut that was the original purpose. Then the political football games will begin on who is blamed for increasing taxes.
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Old 12-24-2011, 11:57 AM   #29
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Originally Posted by donheff View Post
We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.
In essence, same pair of pants, different pockets, and the SSTF pocket is stuffed full of worthless IOUs.
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Old 12-24-2011, 12:14 PM   #30
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I'm not anxious to pay taxes in general but this is one tax I think I should be paying. I think SS should remain vital for the long term. Also, when they reduce FICA and replace the funding out of general revenues it makes it seem more like a welfare program.
Maybe, maybe not -- but levying a tax for 10 years to pay for a tax cut lasting 2 months?
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Old 12-24-2011, 01:53 PM   #31
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All the cashless SSTF represents is a claim on future general tax revenues (or funds borrowed from outside the government). When the SSA runs a cash shortfall (payouts exceed FICA tax revenues), it redeems some of those IOUs to the US Treasury so they can pay out all the benefits due.

When the so-called bonds in the SSTF are exhausted in 25 or 30 years from now, the FICA taxes collected will be able to meet about 75% of promised benefits. At that time, everyone will see a 25% across-the-board cut in benefits. Or, Congress and the president at that time will be faced with the exact same set of choices they would have if the SSTF still held its so-called bonds. That is, raise FICA taxes, raise non-FICA taxes, cut benefits, cut other government spending, or borrow the money from outside the government (i.e. public debt).
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Old 12-24-2011, 02:31 PM   #32
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Even though the tax cut approved Friday extends for only two months, a small fee on loan amounts will be levied for a decade on all mortgages sold to housing finance giants Fannie Mae and Freddie Mac, which control about 60 percent of the nation’s mortgage market.
That's DC logic for you: 2 months of benefits to one set of constituents in exchange for 10 years of charges to a different set of constituents. What a bunch of dweebs. Perhaps the constituents are the idiots they apparently think we are.
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Old 12-24-2011, 02:31 PM   #33
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You don't give that bunch in DC enough credit. They are much more creative than a mere 12 months:
Mortgage fees paying for tax cut - Spokesman Mobile - Dec. 24, 2011

A mere decade for two months of lower payroll taxes seems like a bargain.
I guess we can look forward to 60 years of higher Fannie/Freddie fee for the entire year worth of taxes cuts.

Considering the money Fannie/Freddie are hemorrhaging wouldn't have made more sense to use the fee to reduce the $10 billion worth of losses they suffered last quarter. Or would that be too sensible for Congress.
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Old 12-24-2011, 02:33 PM   #34
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Maybe, maybe not -- but levying a tax for 10 years to pay for a tax cut lasting 2 months?
It is intended to provide a current economic stimulus without killing the economy in the near future with higher taxes. So a short tax break with a long payback period fits the bill. What was kind of strange was proposing to pay for it immediately with a tax-the-rich scheme. No stimulus in that that I could see. The whole idea of stimulus is to provide extra cash now without paying for it now.
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Old 12-24-2011, 02:34 PM   #35
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That's DC logic for you: 2 months of benefits to one set of constituents in exchange for 10 years of charges to a different set of constituents. What a bunch of dweebs. Perhaps the constituents are the idiots they apparently think we are.
Yep, this is another example of robbing Peter to pay Paul, because they lack the courage to tell everyone they have to pay for what they want. Everyone wants their own goodies preserved -- and they want everyone else to pay for it. And we wonder why Washington is broken...
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Old 12-24-2011, 02:43 PM   #36
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Here is the official summary report on Social Security income, trust fund status and projections: Trustees Report Summary .

This includes a discussion of revenues and expenditures and how the trust funds are treated.
This indicates, from a government accounting standpoint, that the "ious" in the trust fund are actually treated as interest generating items and that the "interest", paid from general revenues is now supplementing payroll tax revenues and will until 2022, as projected. After 2022, the "ious" themselves will be redeemed until they are exhausted in 2038.

Regardless, the payroll tax revenue is less than current payouts.
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Old 12-24-2011, 03:15 PM   #37
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It is intended to provide a current economic stimulus without killing the economy in the near future with higher taxes.
If we want to stimulate business, hiring, and the economy, the way to do it is with tax rates and policies that are relatively constant and predictable. A lot of the cash sitting on the sidelines now is there due to the recent flood of "good ideas" and changes that make the future costs of hiring employees, borrowing capital, and investing in new plant/equipment much more variable than just a short time ago. Extensions of stimulii for 60 days at a time just shows the buffoonery of the present gaggle of folks in DC.
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Old 12-24-2011, 03:24 PM   #38
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If we want to stimulate business, hiring, and the economy, the way to do it is with tax rates and policies that are relatively constant and predictable. A lot of the cash sitting on the sidelines now is there due to the recent flood of "good ideas" and changes that make the future costs of hiring employees, borrowing capital, and investing in new plant/equipment much more variable than just a short time ago. Extensions of stimulii for 60 days at a time just shows the buffoonery of the present gaggle of folks in DC.
I tend to agree. Nothing hurts the markets and the economy like uncertainty. And doing nothing but passing laws, having the opposition immediately seek to repeal them, and kicking the can down the road instead of making tough, lasting decisions adds immensely to insecurity.

When you don't know if an investment that makes sense today will be good in a year from now because of a high potential for changes to tax and regulatory policy, you're more likely to not invest it. And the economy and the markets suffer for it.

I've long said that the level of tax rates (within reason) are less important to economic growth than the constant yo-yoing, the constant tug of war, between warring factions constantly trying to change them. Whether lower or higher, I think we'd be well served to lock in tax policies for a long time, stop kicking the can down the road with "emergency stopgap" extensions and stop tweaking them every year.
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Old 12-25-2011, 07:42 AM   #39
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Spot on ziggy. Our elected public servants overwhelming interest in getting reelected rather than making our country better is depressing. Perhaps a revolution is in order.
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Old 12-25-2011, 08:02 AM   #40
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Originally Posted by ziggy29 View Post
Yep, this is another example of robbing Peter to pay Paul, because they lack the courage to tell everyone they have to pay for what they want. Everyone wants their own goodies preserved -- and they want everyone else to pay for it. And we wonder why Washington is broken...
Agreed, but how's this reconcile?

You've already acknowledged this here and in other posts, but if any of them did have the "courage" to tell us what we need to be told, they couldn't get elected - something they well know. Aside from the gamesmanship, the electorate is just as much to blame as the politicians. Add in campaign finance and the influence that buys, and it's no wonder we are stuck.

I've read several moderate thinkers who say we're going to need some sort of crash or upheaval to change course, I am starting to think they may be right. It's hard to believe we'll come to our senses without some sort of shock to the system - that's sad. And the irony is many people (one recent poll reported 75%) seem to recognize what needs to be done (higher taxes for all, tax code reform to simplify and reduce loopholes for indiv & Corps, lower government spending for all major expenses, campaign finance reform to name a few), but there's no one effectively pushing for any middle ground. The only "revolutions" so far seem to be well right or well left of the mainstream, adding to polarization or protecting respective turf...
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