Credit, Debt, & Reelection

(David Mansdoerfer) – Just moments ago, the market closed down over 600 points to close below 11,000 – its worst one-day loss since December 2008. Essentially, due to the fact that U.S. credit agencies have downgraded U.S. sovereign debt from AAA to AA+, investors have begun to panic and pull their money out of the stock market and put it toward safer investments such as gold and other precious metals.

While there are also numerous other factors that led to this steep decline, such as Fannie Mae and Freddie Mac also being downgraded, this mess can be squarely placed on the shoulders of the U.S. federal government. Yes, while many of you might have thought I would place the burden on blame on President Obama (for which he deserves his fair share), I blame both parties for getting us into this mess.

Both parties have been drunk on spending and too cowardly to enact any serious reforms. Time after time, we see idealists, from both parties, go off to D.C. and suddenly only care about being reelected. This, for the most part, leads them to try and ingratiate themselves with the people in their district. The way they go about doing this is in the form of spending.

Earmarks, entitlements and inconsistency in the tax code have been the three main causes of the U.S. debt crisis.

On one side, members of congress, who are desperate to win the approval of their constituents, appropriate large amounts of money for pet projects in their districts. Additionally, Washington has fostered a culture of dependency on federal handouts. Today, people are up in arms over any change that would decrease the amount money that they receive.

On the other side, we have a tax system that is riddled with loopholes that benefits certain companies to the detriment of others.

In order to come out of this mess, there needs to be substantial reforms to both sides of the equation.

First, even though earmarks are a relatively small percentage of the federal budget, members of congress need to properly disclose the amount of money they are spending on earmark projects.

Second, serious reforms to Medicare, Medicaid and Social Security need to take place. Even if it means reducing benefits now, long-term solvency is essential to reducing the federal deficit.

Third, there needs to be substantial reforms to the U.S. tax code. While the left is fond of complaining about tax breaks for the wealthy and oil companies, both sides have been equally to blame when it comes to subsidizing non-profitable companies.

A simplified tax code would go a long way in improving investor confidence and relieving the regulatory burden on U.S. citizens.

Now, what would a simplified tax code look like?

Specifically, it would mean decreasing the U.S. corporate tax rate from 35% to 20-25% and eliminating the various deductions that allow companies like GE to pay no federal taxes. What is essential in this, however, is that it must be a revenue-neutral reform. This means that there can’t be an increase in revenue received by the federal government.

This will help improve competition by equaling the playing ground between large-medium-small businesses.

It is essential that both sides of the equation (simplified tax code & spending), be reformed so that the federal deficit can be reduced and the U.S. can start repaying its debt. However, as long as politicians continue to think short-term towards reelection, spending will always be the side of the equation that gets neglected when it comes to reform.

Due to this, the market will remain highly volatile going into the future.

(Mr. Mansdoerfer is the Director of Federal Affairs for Citizen Outreach. You can contact him at david@citizenoutreach.com)