National Debt: Whose Problem? Whose Solution?

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My family loves to discuss political issues with great heat and force. For the most part, I stay out of these discussions, because I know how much I don’t know. I am not an expert in foreign policy, economics, government or anything else, so it seems presumptuous to pontificate as if I’m the font of all wisdom.

But when someone speaks with authority and without demagoguery, and it makes sense, that tells me what they have to say is important. So I would like to introduce you today to my uncle, John Luth. If you read the link, you’ll see that this is a man who knows financial and economic matters. I asked his permission to share some of his comments from a recent email discussion, because he’s bringing up a point that I have not heard anywhere else. (Bold face emphasis is mine.):

“Unfortunately both parties are equally at fault. Even the ‘cost cuts’ are against inflated spending in the future as opposed to real cuts.

We need to raise revenues (read income AND social security taxes) significantly AND cut dramatically our spending AND increase everyone’s personal savings rates from < 5 pct to > 10 pct. Folks, we really are out of money and another 2-3 years of the current deficit spending and we will never, ever recover as the math doesn’t work very well now (without all of the above), but once we hit 115-125 pct debt to GDP we will never be able to get debt to go anywhere but flat to up.

I believe the lesson learned (reflected in that trillion dollar loss in US equity values) is that nothing short of the threat of a bullet to the brain will get Washington to make a decision, which is what Wall Street and Main Street are finally realizing. Sad that both ends of the politcal spectrum control our only two political parties.

In a global economy significantly higher tax rates simply mean companies, jobs and even wealthy individuals will, at the margin, leave theUSfor better environments – likeCanada.

As a business owner, my effective tax rate is around 44 pct on average right now, before including social security and medicare taxes I pay both sides as the business owner, so my real tax rate is well over 45 pct, and actually over 50 pct on the first $100,000 of my income subject to social security taxes. Notwithstanding that, wealthy individuals in the US (like me) need to pay significantly more, but the tax base is too narrow to only raise taxes on the top 10 pct – we are too large of a country and too much in debt. And that is where I believe ‘moral courage’ will fade…and we will be in the ‘smoke and mirrors’ world of ‘government accounting’. Reagan (and later Bush) gutted our tax base (both individual and corporate) and now, at the critical juncture when we need more consumer spending, we ALSO need more tax revenue from the ‘middle class’ – and that is the sad state of affairs.

Gov’t expeditures need to go down significantly in today’s dollars, not inflated dollars – and that, unfortunately is where even the Republican members of Congress don’t have the experience, courage or even educational background to deal with these issues.”

If you comment, and I hope you will, please avoid the blame game. I have readers, friends and family all along the political spectrum, from the far right to the far left and all along the middle, like me. I don’t want any more useless hurling of accusations, blaming one side or the other. The fact is, we are ALL part of this. We created the culture of spending and excess ourselves, not just with our ballot-casting, but in the way we live our own lives. If you noticed above, part of Uncle John’s solution is us. Not as participants in the political process, but in the way we handle our own money. (See para. 2 of his quote.)