"The Official Portrait of Miss InDiana"

"The Official Portrait of Miss InDiana"
aka "Miss Victory"

Wednesday, February 13, 2008

TAXAHOLICS GET THE DTs - THE FIX IS IN! (get the politicians out of politics -- return to a citizen legislature)

Read this and consider exactly why we need Sean Shepard in Congress. He's not a politician.

U.S. State Credit Outlook Turns Negative on Slumping Economy, Moody's Says

U.S. states' credit ratings may be lowered this year as slumping housing and the weakened economy constrain tax revenue, Moody's Investors Service said.

The rating company changed its credit outlook on states to negative from stable as sales, corporate and income taxes fall below forecasts. States will likely borrow more to fund programs, Moody's said. A downgrade can boost taxpayer borrowing costs as investors demand a higher return for increased risk.

Half of U.S. states, including New York, New Jersey and California, are projecting budget deficits next fiscal year amid the worst housing slump in 16 years. States that had robust residential real estate markets, such as Florida, Arizona and Nevada, have been particularly hard hit, the Center on Budget and Policy Priorities, a Washington-based research group, said in a Jan. 28 study.

Pressures to spend in such areas as education, transportation and health care have not gone away, and, with this an election year, some budget decisions will be especially difficult,'' Moody's Public Finance Team Managing Director Robert Kurtter said in a report released late yesterday.
A slowing economy curbs tax collections, forcing local governments to spend savings, cut funding for programs and borrow or raise taxes.

Several recent indicators have shown economic sluggishness. Gross domestic product increased at an annual rate of 0.6 percent in the fourth quarter, down from 4.9 percent in the prior three months, the Commerce Department reported Jan. 30. The pace of growth was half that forecast in a Bloomberg News survey. Payrolls in January fell for the first time in more than four years, the Labor Department reported Feb. 1.

Across the Board
New York Governor Eliot Spitzer's administration has cut its tax-revenue forecast by $384 million for the coming fiscal year. New Jersey Governor Jon Corzine said he may call for spending cuts in his proposed budget for the year beginning July 1 in anticipation of declining revenue.

California Governor Arnold Schwarzenegger in January proposed across-the-board cuts of at least 10 percent to all spending to fill a $14 billion budget gap. Fitch Ratings last month said it may lower its rating on California's $49 billion of debt because of the deficit.

Moody's said that while states will encounter difficulties this year, the situation won't merit the number of downgrades that occurred during the 2002 economic slowdown because states are better positioned to deal with a budget squeeze.

`Advance Warning'
States have had more advance warning of this downturn, as well as larger reserves,'' Moody's analyst Nicole Johnson said in the report. ``Many states are taking proactive measures and cutting spending before revenues are depleted to the point of drawing down on reserves, while others will draw down from the large cushion of reserves they built up in the last few heady years of the housing boom.''

The decline in tax revenue has led some officials to seek ways to raise money. Massachusetts Governor Deval Patrick in January proposed selling casino licenses to help close a $1.3 billion budget shortfall.

Some states such as Texas and Alaska, which generate revenue from natural resources such as oil, aren't feeling the same pressure. Alaska, which earns more than 80 percent of its budget from oil taxes and royalties, is expected to have a $4.9 billion surplus by the end of 2009.

How quickly states react to negative conditions, and what measures they take, will likely be a large factor in rating movements in the coming year,'' Moody's Johnson said.

Bernanke May Have to Lower Rate Again as Lenders Stymie Fed's January CutsRetail Sales in U.S. Probably Fell for Second Month as Home Prices DroppedBuffett Plan Saves Muni Market, Dooms Ambac, MBIAJapan's Wholesale Inflation Accelerates to 3%, Fastest Since 1981, on OilU.S. Tax Policy Should Adhere to the Three F's

The fix is in. Last week the U.S. Congress passed a $168 billion fiscal stimulus bill, including tax rebates for households and tax breaks for business. President George W. Bush plans to sign it today. The Internal Revenue Service should start issuing tax rebates to 130 million Americans in May, according to the Treasury.

Members of both parties seemed pleased with themselves and their bipartisan effort. That in itself should tell you the package is pretty benign: It won't help, or hurt, very much. If nothing else, the initiative is certain to help the incumbent re-election effort.
This got me thinking about the misuse, and often abuse, of tax policy. There is no agreement on what tax cuts should do (provide relief to cash-strapped consumers? stimulate business investment and job creation?), not to mention the effectiveness of temporary cuts.

The late economist Milton Friedman won a Nobel Prize for his theory that consumers make decisions about their spending patterns based on long-term income expectations, not current income. More recently, research by Nicholas Epley, a professor of behavioral science at the University of Chicago Graduate School of Business, found that the designation of money given to consumers -- a ``rebate'' versus a ``bonus'' -- determines whether they save or spend it, respectively.

Even decades after the fact, with data in hand, economists can't agree on the effect of a particular tax cut. (It's virtually impossible in a diverse, $14 trillion economy to conduct a control experiment, holding everything else constant except tax rates.)

First Principles
It makes you wonder why the nation's tax policy is always up for grabs. Tax policy is too important to be left to the politicians, who use it for their own purposes, shamelessly defying the principles on which they ran for office.

Isn't it about time we stopped tweaking tax rates to get a little more spending here, a bit more investing there and a lot of votes on Election Day? Here's my motto for the tax system: flatten it, fix it (set it in stone) and forget it.

Income tax rates should be designed to meet the needs of the government (the Founders clearly had a different vision of the legitimate role of the federal government than today's leaders) and nothing else. They should promote economic growth, not punish success. They should be low enough to act as a disincentive for non-economic activity, such as shifting or sheltering income, avoiding or alleviating tax liability.

Simple, Stable
The tax code should be simple enough to put tax preparation firms out of business. (Most of us would be happy to subsidize the education and retraining of accountants in exchange for a postcard-sized return.) Tax simplification requires elimination of deductions and loopholes.
Tax rates should be constant, not subject to ever-changing political cycles. That goes for individuals as well as corporations, whose actual tax rate is 35 percent but effectively is about 22 percent -- and less than that for bigger companies with better tax lawyers.

At some point, the entire corporate tax structure should be thrown out, along with all the murky K-Street tax-earmark loopholes that litter the IRS code,'' writes Larry Kudlow, host of CNBC's ``Kudlow & Co.'' in a column on Realclearmarkets.com.

One option, which I advocated in a column two years ago, is getting the politicians out of politics -- returning to a citizen legislature -- since efforts to get the money and influence-buying out of politics have come to naught. Our elected representatives go to Washington ostensibly to do the people's business but end up feathering their own nests instead.

Life Without 1040
That isn't going to happen. There's a better chance, albeit somewhere between slim and negligible, of getting a similar result by fixing the tax code. (Yes, lobbyists would still line up at the spending trough, but you have to start somewhere.)

By fix, I mean toss it out and start from scratch. Trust me: No one will miss it. Instructions for filing Form 1040, the federal tax form, number 143 pages, according to the National Taxpayer's Union, a non-partisan group advocating lower taxes. That's three times the number in 1985, the year before taxes were ``simplified.''

If the basic form isn't adequate, the IRS has 195 different tax forms with more than 1,000 pages of related publications and instructions.

No wonder Americans are expected to shell out $325 billion this year in federal tax compliance costs, according to the Tax Foundation, a non-partisan tax research group in Washington.
The IRS estimates that households and businesses spent a combined 6.6 billion hours last year filling out tax forms.

Wouldn't life be better without the rigmarole surrounding April 15? Mine would. For that reason, I pledge that if real tax reform ever comes to pass in my lifetime, I will ``donate'' my tax-preparation fee (pay Uncle Sam more than I owe) to the Treasury for the purpose of deficit reduction.

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