Friday, June 24, 2011

Ramblings on the Debt Crisis

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

I have been asked a lot about the upcoming debt ceiling "crisis", how it would affect the markets and if we should position differently.

Maybe I am too complacent, but at this point I do not believe there is anything serious brewing. I firmly believe that it's just another game of political chicken and someone will blink.

Or maybe both sides blink. But I do not think that Congress gets to the point where they vote down a rise in the debt ceiling. That's an untenable position for a politician.

As an aside, I have heard several unconfirmed reports that it is unconstitutional to default on our debt. If that's true, I am sure the lawyers have lined up their cases. From my seat, the politicians will probably go to the 11th hour and then make a deal.

There have so many opinion pieces written about what to do about our debt and budget deficit. I have written much about this before, so I don't have a lot of new info. I firmly believe this has to be a bi-partisan solution. Congress cannot cut too much too quickly or we will end up in recession very soon. They can't do nothing because at this rate, there will be a debt crisis.

I believe we need to cut $100B - $150B every year for at least the next decade. While that could stymie growth a bit and make us look more like Europe, there would be a light at the end of the tunnel. If we get a little luck, organic growth would increase tax receipts and help even more.

Michael Boskin, former chairman of the council of economic advisors under Bush I, wrote a good piece last week in the Wall Street Journal regarding budget cuts and tax increases. The vast majority of the time (I think he put the number at 75%), tax increases do not lead to increased tax receipts, something I have long believed. Boskin opines that a workable ratio is $4 or $5 in budget cuts for every $1 in tax increases. I think that could be politically tenable and a decent bi-partisan solution.

I also believe that we are in dire need of tax reform. We desperately need to simplify the tax code. Broadening our tax base is a good start. Maybe that's a euphemism for a tax increase, something I have a hard time swallowing, but I don't think so. Our system is broken and needs repair. When someone making 10 million dollars is paying less tax than someone making what is now considered "rich" - $250,000 -something is really wrong.

Let's get rid of the absurd deductions that only the truly rich can take advantage of because they can afford the expensive lawyers to find loopholes. At the same time, we can actually cut the number of tax brackets and tax rates. With the energy and agricultural sectors booming like never before, I have a hard time swallowing tax breaks and worse, subsidies. But with lobbyists running Washington, that's a tall order to correct.

In this country it's still amazing that only about HALF actually pay income taxes. Yes, that's correct. Roughly 50% of Americans pay income tax. At the same time, given what you read in the media, you would think that the lower income earners are footing the bill for everyone else. It's simply not true. The ever shrinking, but much needed, middle class bears the brunt. When the middle class starts to grow again, you will know that our economy and country has embarked on another multi decade run of prosperity.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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