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DEBT CEILING CRISIS ILLUSTRATES NEED FOR TAX ADVISOR WITH BOTH STRONG CREDENTIALS AND SOUND JUDGMENT

Posted on 07/06/2011

DEBT CEILING NEGOTIATIONS: CONGRESS AT WAR - BATTLE OF THE BULGE

By Robert S. Steinberg, Attorney, CPA, CVA

July 6, 2011  

Scientists have recently confirmed that dark energy is driving the universe apart at accelerating speeds.  Perhaps dark energy is also at work in congress and our political differences are an astrophysical phenomenon.   

Whether physical or psychiatric, the debt ceiling impasse is ongoing.  At Blair House Vice President Joe Biden is trying to bring together Republicans and Democrats themselves internally divided, to forge a compromise bill that would avoid a technical default by the US Government on outstanding sovereign debt.  The combatants, apart from ideological differences about the appropriate role and size of government, have much at stake with a Presidential election looming in 2012 and many campaign promises having been made to either retain or reform certain entitlement programs.  The Treasury since July has been shuffling its spending to avoid exceeding the $1.43 Trillion existing debt ceiling.  On August 2, the Treasury states it will run out of maneuvering room and some interest payments or other mandatory entitlement checks will be postponed.  Everyone will eventually be paid but amidst a catatonic sovereign debt environment, debt rating agencies have warned of a possible reduction from the current top rating of U.S. debt. Psychologically, breaking that barrier could be chaotic to world financial markets and increase the cost of U.S. borrowing putting more pressure on already difficult budgetary problems.

I suspect the participants in these tense talks may feel under siege as was the light brigade in Tennyson’s historic poem: “Cannon to the right of them, Cannon to the left of them, Cannon in front of them…Boldly they rode and well… into the mouth of hell.”  No one is going to be completely happy with what emerges from these debt ceiling discussions and political careers may rise of fall with the outcome. Whether an agreement can be reached will depend on how much each side is willing to alienate its political base.  Such political calculus I doubt will prove mathematician-philosopher Gottfried Leibniz’s theory that a logical notation (formula) with a quantifier, if found, would end all disputes and confusion in the world.

Congressional experts predicting the outcome might read Dan Garner’s book “Future Babble: Why Expert Predictions are Next to Worthless and You Can Do Better” in which his study of 27,451 expert predictions revealed that dart throwing was just as reliable.  What can be said, however, the result of this skirmish will mark another armistice in an ideological war between the parties and factions within each party; The Vice President may find a formula for a temporary truce but there will be no peace treaty.  The battlefield will simply move to the presidential election and its aftermath.  David Mamet, in his conservative anthem “The Secret Knowledge” writes: There are no perfect solutions to inequity, only trade offs.”  He questions, are we better off fully subjected to the risks and rewards of freedom and capitalism or with a paternal government softening the blows of life’s harsh exigencies?  I suppose the answer depends on one’s station in life; specifically, not everyone can absorb the same degree of risk.  The depth of our resources vary, hence our risk capacity varies, regardless of our willingness to take on risk. Government provides a safety net for those most vulnerable.  How wide to cast that net and who will pay for social compassion is what is at issue.  We do not want the Triangle Shirtwaist Factory capitalism; nor do we want government stifling initiative.  Can we find the proper balance?  

 WHAT IS AT STAKE?

First we might take small comfort in knowing we are not alone.  A recent Peterson Institute for International Economics report, “The Global Outlook for Government Debt over the Next 25 Years,” states, “It is unique in peacetime for so many countries to have so much debt.”  Clearly, spending levels cannot continue to exceed revenues because inevitably higher interest rates and rising health costs will strangle the budget. As a larger and larger portion of revenues goes to pay interest and health care less and less will be available for other spending programs. Implementing measures to reduce the deficit would calm jittery stock markets and reassure credit markets that Congress and the President can work through political paralysis.

 WHAT IS BEING CONSIDERED?

To reign in spending is no simple matter, however, and involves dealing with the largest budget line items:  Social Security, Medicare and Medicaid and defense.  Powerful lobbies staunchly defend each (Non Sequitur “The Big Picture” in Miami Herald 4/25/11 depicts board room with members around table.  The chair states “The meek may inherit the earth gentlemen but we’ll still own congress”).

The other part of the budget equation is tax revenue.  President Obama wants to raise tax rates for higher income taxpayers; Republicans want the Bush tax cuts extended in an earlier compromise through 2012 made permanent.  One potential bridging compromise proposes to lower tax rates but eliminate some deductions making the tax code broader based and more efficient. A center-right coalition has emerged favoring this approach.  The three biggest tax revenue loss items are the exclusions for 401(k) plan employer contributions and employer paid health insurance and the home mortgage interest deduction.  The problem with all of the above is that politically everyone wants to tinker with someone else’s favorite tax benefit or entitlement.  Into to the stew pot is also thrown the possibility of combining some tax increases with spending caps wanted by Republican’s who feel that any tax increase will be spent instead of going towards deficit reduction. 

 ROADBLOCK: THE ECONOMY

The continuing economic sludge, a mix of high unemployment, deflating home prices, eroding consumer wealth and confidence, and lender wariness, create another dilemma:  Some say we need to spend more now and/or lower taxes to create jobs; others say we need to raise taxes now and cut spending to lower the deficit’ and, yet others say we need to cut taxes now and cap spending. All may be correct and all may be wrong at the same time.

 THE TAX CODE

In David Foster Wallace’s unfinished novel, “The Pale King,” set in the innards of the IRS, he writes, “The tax code, once you get to know it, embodies all the essence of (human) life; greed, politics power, goodness, charity.”  Everyone agrees that the tax code has become incomprehensible. Even IRS has difficulty administering ever more complex tax provisions.  Efforts as simplification starting with The Tax Reform Act of 1969 instead wrought more complexity.  The essential problem lies in the tax code’s split personality:  The code is meant to raise revenue to run to government; it has also become a tool for social engineering, encouraging specific favored actions over alternatives. Thus, the home mortgage interest deduction encourages home ownership over renting for which no deduction is allowed. 

HEALTH CARE

As if tax reform is not complicated enough by itself, tackling Medicare and Medicaid reform at the same time adds yet more complexity to the negotiations, and will complicate later efforts to draft a comprehensive and workable bill.  There has been talk of more means testing for Medicare since we already have means testing in determining premium payments. Senator Ryan’s proposal to privatize Medicare with a tax credit has been largely shunned.  Medicaid is controversial because bulk grant proposals would shift the financial burden to states and, at least according the Kaiser Foundation, increase in those getting by without insurance.   Arguments persist, legal and philosophical, about President Obama’s healthcare law virtually jammed down the throats of Republicans.  Some have proposed replacing the mandate with a tax credit to purchase private health insurance. Someone would have to pay for the revenue loss due to the credit, however. Gregory Mankiw, professor of Economics at Harvard, in a NYT Op Ed on 6/19/11 opines that the uninsured would not benefit from the tax credit and thus would ultimately bear the burden.  The effect would, like the mandate, impose a penalty, but on the poor who could not use the tax credit.  Whatever the path, many economists believe that health expenditures will continue to rise driven in large part by medical advances that prolong life at a high cost. 

SOCIAL SECURITY

Social Security is not in dire straits as many seem to think.  But, reform is needed to insure its future solvency.  The idea to privatize Social Security is still around but grounded by the power of AARP.  AARP has, however, softened its opposition to other cost saving measures for both Social Security and Medicare; and, proposals now center about extending the retirement date, eliminating COLAs, and raising the income amount subject to the tax.

 RAKSHASI HORNPIPE

Aldus Huxley’s novel “Island” is about a utopian society on an island called Pala.  Will Faranaby journeys there “suffering from a disease called civilization.”  Touring the Island he witnesses children dancing.  He is told the dancing is both fun and education. “…Stamp it out the children were chanting in unison.  And they stamped their small sandaled feel with all their might.”

Farnaby is told the dancing is called Rakshasi Hornpipe because a Rakshasi is a species of demon, “all the ugliest passions personified.” The dance “is a device for letting of those dangerous heads of steam raised by anger and frustration.”  So, I say to congress and President Obama: get together and “Stamp it out!”

CONCLUSION

In these uncertain, frenetic times, one especially needs sound financial and tax advice from advisors who have not only credentials, but depth of experience from which good judgment is born.

Copyright 2011 By Robert S. Steinberg

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