Right now Wall Street and talking heads are speculating about the possibility of a "double-dip recession." This is semantics. The U.S. economy has been in recession for years now and has never truly recovered. A double-dip, therefore, is an impossibility.
To plug the gap in GDP caused by the "financial crisis" of 2008 the US government has gone on an unprecedented spending spree that has done nothing to correct the market’s problems but instead has pushed us closer to Europe. And as we all know, several European countries are on the brink of bankruptcy – and it’s reckless government spending that put them in that position.
That can happen to us, too!
Right now, the US has a $15 trillion economy and $15 trillion in national debt – that’s 100% leverage. Failing European countries like Greece have 120% national debt to GDP ratios. Not only are we heading in their direction – we’re in their neighborhood!
The income statement for the U.S. government for fiscal year 2011 looks like this:
U.S. Tax Receipts (Revenues) $2.1
Government Spending (Expenses) -$3.8
Just like your personal situation, the only way to pay off debt is to spend less than you take in. That said, the US government must cut $2.0 trillion of spending this year in order to reduce its debt load. This must be done soon or we will run the same course as Greece, Spain, Portugal, Italy, and France – to name a few.
For instance, if the annual US government deficit is removed (hence a balanced budget) from GDP our national debt would be 115% of GDP. In other words, we’re roaming around a bad neighborhood and nightfall will soon be upon us!
Such a drastic reduction in government spending would also return the US economy to recession, which would cause the stock market to correct and selloff. Good. As mentioned in my book, corrections are healthy sign of life and much required for inflated conditions such as the one we are in. (It sure beats pretending recession doesn’t exist while bankrupting our grandchildren.)
So how do we plug the economic gap left by dramatically reduced government spending?
Cut Market taxes! Flatten the tax code! And throw out all of this bogus regulation that doesn’t work and is clogging the arteries of American enterprise! (i.e. Sarbanes-Oxley, No Child Left Behind, Dodd-Frank, and ObamaCare, to name a few.)
What the government needs to do right now is incentivize economic growth and vitality. Lower taxes increase spending power for consumers and provide greater incentives for investors to invest and businesses and entrepreneurs to create and innovate. Thats what we need!
For instance, when taxes on rich people go down they’re more willing to take on more risks – in other words, they're more willing to invest in new businesses, new products, and new markets – the riskiest of all propositions. Why? Because they stand to make more money on their success.
Profit is the motivator of all markets.
Lower taxes on investment (capital gains taxes) provide greater incentive for investors to invest in a fragile economy where risks are so high. They also provide more room for investors to offset losses which are sure to occur in the high risk times and high risk venues that propel markets upward -- like product and market innovations. This is the kind of investment that creates long-term job benefits. America needs that, too.
One story not being covered by the mass media is the fact that President G.W. Bush outraised President Obama. President Bush averaged $2.4 trillion in tax revenues during his last term in office, while President Obama is raising just $2.1 trillion. Both presidents were big spenders, though President Obama makes his predecessor look like a fiscal conservative.
Lower taxes increase revenue – the key is not to spend those revenues (like President Bush did) but to payoff debt! America needs more free-market investment and less government spending right now. Lower taxes are means to that end.
And for those who believe that higher taxes will solve America’s problems – it’s time to think again. Just as increased debt ceilings result in more debt, higher taxes only translate into more reckless government spending. And that’s two things we don’t need right now.
America needs more ingenuity – lower taxes and less government are incentives enough.