Keystone Pipeline’s Approval is Imminent

Check your calendars ’cause the Keystone Pipeline is getting approved before you know it.

I posted this back in September 2012. As you know, today the Administration received the long awaited report that stated there is no environmental logic for denying the Keystone Pipeline. This report clears the way for the approval of the pipeline and will be the impetus for the upcoming decision.

The protesters fighting against the pipeline have valid concerns and believe in their cause. However in this case they are arguing against the presence of something that is already prevalent in the U.S. … pipelines. If you could see a map of the current highway of pipelines in the heartland you may be frustrated yet our country does use fossil fuel. Until we wean ourselves completely off-the-stuff we need to maximize the asset.

I am not a big fossil fuel junkie but I am reasonable enough to understand the ” all-of-the-above” energy strategy is what is best for a country looking to transition to a better, greener and more sustainable energy future. Although this is not the best or only option, it is an option that is going to happen. Think of Keystone as the last new pipeline not the next new pipeline.

In light of the recent decision to proceed with the Sequester and actually take jobs away from the economy, let’s at least celebrate the fact that Keystone may at least create a few good paying jobs for the middle of the country. We need new jobs and we need new energy options.

To follow is the original post from September 2012. I may have missed my self-imposed January timeline but better late than never.

Check your calendar ’cause the Keystone Pipeline is getting approved before you know it.

Keystone Pipeline’s approval is imminent.

If you looked at the original impetus for quick approval of the pipeline over a year ago, you recall the reasons for denial from the Administration:
1. Approval is a issue for the State Department because it involves another country.
2. It will take more than the 6 weeks given by Congress to complete the approval process.
3. The route chosen was opposed by the Governor’s of the states the pipeline was going through.
4. The route chosen was opposed by environmentalists.
5. Approval was the purview of the Executive branch , not Congress.

Interestingly enough, the Administration reported to Congress soon after the bill was passed containing the provision to approve the pipeline that , as expected, the pipeline was being rejected as applied for. No kidding! We’re dealing with international issues and the President – regardless of party-is never going to cede control of expediting international issues. Congress got exactly what Congress knew they were going to get. Nada.

Although many gnashed, blustered, and spit, the company trying to secure the project did something very entrepreneurial … they began working on a back-up plan that could get approved. You see, that is what smart and effective business people do; they adapt to the situation in front of them and find a way to “get-it-done”.

Over the past year, a portion of the route was approved however it was not the controversial link that would get the product fully integrated from the northern border to the Gulf. That link was the real shiny object which was the source of all of the attention. Yet progress continued.

If you listened to the debate at the time, an actual timeline for approval was in fact laid out. It’s just no one wanted to hear it. Now it appears they are right on track with the timeline.
1. A new route was submitted
2. The opposition from the states is dwindling.
3. The environmentalists are not happy yet the new route did bypass the most sensitive water.
4. The State Department is close to completion on the application approval process.
5. Most importantly, Congress and the American public are not focused on the process so you can see that real progress is actually being made without any sniping.

This represents the perfect climate for getting a deal done.

Although Keystone oil will be refined in the US and then sold on the world market to the highest bidder, the project will in fact be approved. Some will celebrate and some will complain, however from a practical sense America always seems to get the job done when people are working together in good-faith.

Electricity from renewable sources currently makes up 14% of all electricity produced in the U.S.. The percentage will double in 10 years. We are well on our way to a truly integrated all-of-the-above strategy as we discover multiple options to transitions large portions of our energy portfolio from traditional fuels. This process will take time and investment. This journey will also take continued reliance on traditional energy solutions. Keystone is part of that solution and it’s approval is not the end of our world.

By the way, there is a presidential election going on. Do you really think we’re going to wait until January to see this project approved. Not a chance!

Keep your ears peeled. The Keystone Pipeline’s approval is imminent.

Get Off Your Asses!

Sequestration. Some love it … some hate it. From every bit of tape and print i can find from 2011 and 2012, no one that voted to pass Sequestration ever intended it to go into effect as written. It was a stupid bluff that was never supposed to happen. Well, the joke is now on the entire population because it is going to happen. Only a Continuing-Resolution or an actual Budget approved through regular-order in late March 2013 will re-prioritize the sequester cuts. Until then America gets to watch a new reality tv show called : “The Inmates Are Running The Asylum”.

Do the inmates like sequestration? Clearly some do. Most do not. One thing ringing true in this debate is both sides acknowledge cutting $85B from the economy in 2013 and another $110B each year thereafter will have a net impact on jobs. No one believes the net impact on job creation, job retention, wage growth, economic development, or national GDP growth will be positive as a result of this particular sequestration being implemented as the current law call for. The implementation of Sequestration as written will not grow any new jobs in the economy in 2013. Creating even more Unemployed Americans does not shrink federal spending nor reduce the deficit.

I think this current national legislative-sequester-reality should create some real concern on the part of we-the-people. Debt reduction is very important. Job creation is very important. One can’t be allowed to cause the other to damage GDP growth in 2013. I think we can at least agree with that assessment.

I recall the national debate in 2011 and 2012 being completely centered around the caus celeb: “Where are the jobs?” What happened to the chorus of job-creating evangelists in 2013? As a job-creation evangelist myself, it is getting mighty lonely out here because none of my fellow job-focused mates seem to be doing anything to stop the self-inflicted head-slap we call by the pet name, sequestration.

How does Congress spend the last 30 days doing nothing to help business people create one new job while letting something they did do in 2011 go into effect and help people in all 50 States (as well as 3 US Territories) LOSE JOBS?

Most Americans do not want to do something that will eliminate jobs unless those jobs are related to waste, fraud, abuse or have no functional necessity . Most Americans actually want to keep the jobs that make sense, are effective, and help we-the-people realize the promise of life, liberty and the pursuit of happiness. Surely no elected representative of the people would knowingly cut jobs and demand across-the-board just to save a buck even if doing so might actually cost the nation more money and in some cases, more than just money?

Well guess what, the circus is back in town and they are operating by using you, your family, and your business as their net. And yes, they continue to fall off the trapeze.

Two schools of thought are being professed:

1). You believe cutting $600B in defense spending will hurt private sector demand, eliminate the jobs of many working Americans, and potentially weaken our readiness.
or
2). You believe cutting $600B in discretionary spending (FBI, Education, TSA, IRS) will hurt private sector demand, eliminate the jobs of many working Americans, and potentially weaken our quality-of-life and readiness.

However, the elected officials are now saying they do not want to hurt jobs in the process of sequestration. Huh?

In this case, one might say they could reduce the pain of Option 1 by transferring all of the impact to Option 2. Another might say reduce the pain of Option 2 by transferring the pain to Option 1. Both ideas are fairly simplistic and completely idiotic. Why? Because jobs and economic demand are impacted the same in both Option 1 and Option 2. Ridiculous!

Medicare, Military Payrolls, Social Security, Medicaid , Anti-Terror/CIA Black Budgets, VA Medical are all exempt from sequestration cuts. This is considered a win by some. However, as a result of this much spending being off-the-table, the actual cuts to the entire Federal Budget is not 3% as you hear the “simpletons” repeating, it is a cut of more like 8% of every other budget line item.

Let me repeat, sequestration cuts 8% across the board of every budget line item other than Medicare, Military Payroll, Social Security, Medicaid, CIA Black Budgets, and VA Medical. Those programs have zero cuts. This is not a simple 2.5-3% cut of all Federal spending. At 8%, few businesses could ever intentionally accept across-the-board cuts without discretion and still operate a successful business; especially if they could deploy other more intelligent business strategies like new financing, increasing new revenue sources, or dramatically changing the entire business model. Government is not like business in many regards but especially in this regard : Government can’t just get out of the business of representing we-the-people and running an effective Government. No BK for the world’s largest economy. We have to actually make this thing work.

The next time someone gives you that smooth drawl with those caring eyes and says: “Don’t tell me we can’t find a simple 2-3% cut in our huge Federal budget without all this doom-and-gloom”; smack them in the forehead like a scene from the Three Stooges. They are lying and they know it. They know the entire Federal Budget is not being debated or covered by Sequestration. Make them show you how they deal with a 100% cuts-only model and still add jobs and improve GDP in the economy in 2013 & 2014.

Today, Ben Bernanke testified to Congress. For the first time I thought I heard him give Congress clarity and not “Fed-speak” with his answers. He actually said to damage the nations economic growth and GDP over the next few years by enacting the sequester as written will hurt the country at a time when short-term damage is not necessary. He said the timing of cuts was more important to the economy since the problem is most damaging out past 10 years. He suggested a balanced approach to long-term deficit reduction and the concept of easing and ramping the cuts over a longer period. This is how America can reduce the deficit and not harm job creation.

I listened to his testimony twice and was happy to finally hear him say something actionable for the elected officials. If the elected officials were listening, they received valuable input to deal with an alternative to the looming Sequestration or the coming Continuing Resolution/Potential New Senate Budget in late March.

One last item: spending bills that impact the tax code and appropriations must begin in the House. This is a Constitutional requirement. There is a legislative term referred to as a “Blue-Slip” problem if the Senate goes first. In other words the House can ignore the Senate by Constitutional practice. This actually happened when the Senate passed a bill last year dealing with tax-rates going up over $250k that passed with a majority Senate vote yet the Speaker said the bill did not have any force due to a blue-slip problem and would never go through a House & Senate conference process for passage.

I bring this up because the House needs to get off its collective ass and start doing something that helps the private and public sector create good, effective jobs. After all, we pay them (Congress) to work … not stop the rest of us from working.

“Where are the jobs?”

If the sequester’s implementation is going to hurt effective/necessary/efficient job creation and economic development … why in the hell are we not changing it? It is not acceptable for Job Creation and Economic Development to be the first victims of Sequestration.

I would love to hear your comments.

Sequestration’s First Victims … Job Creation & Economic Development

Sequestration. Some love it … some hate it. From every bit of tape and print i can find from 2011 and 2012, no one that voted to pass Sequestration ever intended it to go into effect as written. It was a stupid bluff that was never supposed to happen. Well, the joke is now on the entire population because it is going to happen. Only a Continuing-Resolution or an actual Budget approved through regular-order in late March 2013 will re-prioritize the sequester cuts. Until then America gets to watch a new reality tv show called : “The Inmates Are Running The Asylum”.

Do the inmates like sequestration? Clearly some do. Most do not. One thing ringing true in this debate is both sides acknowledge cutting $85B from the economy in 2013 and another $110B each year thereafter will have a net impact on jobs. No one believes the net impact on job creation, job retention, wage growth, economic development, or national GDP growth will be positive as a result of this particular sequestration being implemented as the current law call for. The implementation of Sequestration as written will not grow any new jobs in the economy in 2013. Creating even more Unemployed Americans does not shrink federal spending nor reduce the deficit.

I think this current national legislative-sequester-reality should create some real concern on the part of we-the-people. Debt reduction is very important. Job creation is very important. One can’t be allowed to cause the other to damage GDP growth in 2013. I think we can at least agree with that assessment.

I recall the national debate in 2011 and 2012 being completely centered around the caus celeb: “Where are the jobs?” What happened to the chorus of job-creating evangelists in 2013? As a job-creation evangelist myself, it is getting mighty lonely out here because none of my fellow job-focused mates seem to be doing anything to stop the self-inflicted head-slap we call by the pet name, sequestration.

How does Congress spend the last 30 days doing nothing to help business people create one new job while letting something they did do in 2011 go into effect and help people in all 50 States (as well as 3 US Territories) LOSE JOBS?

Most Americans do not want to do something that will eliminate jobs unless those jobs are related to waste, fraud, abuse or have no functional necessity . Most Americans actually want to keep the jobs that make sense, are effective, and help we-the-people realize the promise of life, liberty and the pursuit of happiness. Surely no elected representative of the people would knowingly cut jobs and demand across-the-board just to save a buck even if doing so might actually cost the nation more money and in some cases, more than just money?

Well guess what, the circus is back in town and they are operating by using you, your family, and your business as their net. And yes, they continue to fall off the trapeze.

Two schools of thought are being professed:

1). You believe cutting $600B in defense spending will hurt private sector demand, eliminate the jobs of many working Americans, and potentially weaken our readiness.
or
2). You believe cutting $600B in discretionary spending (FBI, Education, TSA, IRS) will hurt private sector demand, eliminate the jobs of many working Americans, and potentially weaken our quality-of-life and readiness.

However, the elected officials are now saying they do not want to hurt jobs in the process of sequestration. Huh?

In this case, one might say they could reduce the pain of Option 1 by transferring all of the impact to Option 2. Another might say reduce the pain of Option 2 by transferring the pain to Option 1. Both ideas are fairly simplistic and completely idiotic. Why? Because jobs and economic demand are impacted the same in both Option 1 and Option 2. Ridiculous!

Medicare, Military Payrolls, Social Security, Medicaid , Anti-Terror/CIA Black Budgets, VA Medical are all exempt from sequestration cuts. This is considered a win by some. However, as a result of this much spending being off-the-table, the actual cuts to the entire Federal Budget is not 3% as you hear the “simpletons” repeating, it is a cut of more like 8% of every other budget line item.

Let me repeat, sequestration cuts 8% across the board of every budget line item other than Medicare, Military Payroll, Social Security, Medicaid, CIA Black Budgets, and VA Medical. Those programs have zero cuts. This is not a simple 2.5-3% cut of all Federal spending. At 8%, few businesses could ever intentionally accept across-the-board cuts without discretion and still operate a successful business; especially if they could deploy other more intelligent business strategies like new financing, increasing new revenue sources, or dramatically changing the entire business model. Government is not like business in many regards but especially in this regard : Government can’t just get out of the business of representing we-the-people and running an effective Government. No BK for the world’s largest economy. We have to actually make this thing work.

The next time someone gives you that smooth drawl with those caring eyes and says: “Don’t tell me we can’t find a simple 2-3% cut in our huge Federal budget without all this doom-and-gloom”; smack them in the forehead like a scene from the Three Stooges. They are lying and they know it. They know the entire Federal Budget is not being debated or covered by Sequestration. Make them show you how they deal with a 100% cuts-only model and still add jobs and improve GDP in the economy in 2013 & 2014.

Today, Ben Bernanke testified to Congress. For the first time I thought I heard him give Congress clarity and not “Fed-speak” with his answers. He actually said to damage the nations economic growth and GDP over the next few years by enacting the sequester as written will hurt the country at a time when short-term damage is not necessary. He said the timing of cuts was more important to the economy since the problem is most damaging out past 10 years. He suggested a balanced approach to long-term deficit reduction and the concept of easing and ramping the cuts over a longer period. This is how America can reduce the deficit and not harm job creation.

I listened to his testimony twice and was happy to finally hear him say something actionable for the elected officials. If the elected officials were listening, they received valuable input to deal with an alternative to the looming Sequestration or the coming Continuing Resolution/Potential New Senate Budget in late March.

One last item: spending bills that impact the tax code and appropriations must begin in the House. This is a Constitutional requirement. There is a legislative term referred to as a “Blue-Slip” problem if the Senate goes first. In other words the House can ignore the Senate by Constitutional practice. This actually happened when the Senate passed a bill last year dealing with tax-rates going up over $250k that passed with a majority Senate vote yet the Speaker said the bill did not have any force due to a blue-slip problem and would never go through a House & Senate conference process for passage.

I bring this up because the House needs to get off its collective ass and start doing something that helps the private and public sector create good, effective jobs. After all, we pay them (Congress) to work … not stop the rest of us from working.

“Where are the jobs?”

If the sequester’s implementation is going to hurt effective/necessary/efficient job creation and economic development … why in the hell are we not changing it? It is not acceptable for Job Creation and Economic Development to be the first victims of Sequestration.

I would love to hear your comments.

Are Capital Gain or Dividend Income Taxes Double-Taxation?

The Capital Gains tax is not double-taxation.

How many times have you heard a justification for treating Capital Gain and Dividend Income differently than earned income?

Most often the phrase justification sounds something like this:
“Capital gain should be free from taxation or taxed at a lower rate because to tax gain is taxing income twice”.

The other commonly stated justification is:
“Without a lower rate on Capital gain, inventors and entrepreneurs will never take risks or continue to invest in economic opportunity”.

I see Bigfoot Riding a Unicorn.

Both of these justifications are inaccurate, self-serving, misleading and outright lies.

If you earn $1,000,000 and you pay 40% tax on that million, you end up with $400,000 in net income after taxation. Now frankly, I am a supporter of paying as little tax as possible however I also understand that at some point, the tax rate is the tax rate and I therefore pay it.

Now, if I take my $400,000 and invest it in a new venture or into the market and I am so successful that I generate new gross income of $1,000,000, the Capital Gains tax I would be required to pay will be 25% of $600,000 … not 25% of $1,000,000. Although my gross income from the investment is $1,000,000, I have previously been taxed on $400,000. Therefore my taxable income from the investment is $600,000. That income is not taxed as “personal-income” which would be 39%, it is taxed as investment income and therefore taxed at 25%.

In other words, the new gross income of $1,000,000 is not taxed only the gain over the original $400,000 investment because the $400,000 was already taxed. The $600,000 net gain is taxed only once and taxed at the lower capital gains rate of 25%. I would be paying $150,000 in taxes on the $600,000 in gain netting $450,000 in net income.

Now I have $450,000 to invest again which will also be free from future taxation.

In conclusion, the initial $400,000 gain was taxed once. The next $600,000 in investment gain was taxed once. I am free to use the $450,000 for a future investment which may or may not create a future profit which will be taxed only once as well.

The example works in the same fashion for Dividend Income. Capital Gain and Dividend Income are only taxed once.

Now, I do agree with this reality: capitalists and entrepreneur’s respond to incentives. We respond because any person with any common sense will pick up a dollar laying on the floor if you leave it there. If you offer a lower rate of taxes on investment, it stands to reason that more investment may occur – especially if you offer an added tax benefit in the event the investment loses money, (carry-forward or carried interest write-offs). This gives investors a chance to win when they win and an opportunity to win or at least offset prior winnings when the lose. Not a bad deal.

We just need to be careful not to create a disincentive to ventures that create personal income (like regular employment) because as you can tell, the system needs to create personal income as well as investment income since ventures creating personal income can be as risky as ventures creating capital gains income. I hope this makes sense?

A simple example might be how we currently tax the income a Hedge-Fund Manager makes as 100% investment income while at the same time taxing 100% of the salary the President of Harley Davidson makes as personal income ( or basically any salary for anyone other than a Hedge -Fund manager). In 2012, the Hedge-Fund dude paid a tax-rate of 15% on his income while the Harley dude paid 35%. Why does this make sense and what behavior does this incentive drive? The incentive might therefore create more hedge-fund managers but why did we create this unique incentive for the HF dude and not the Harley dude? Another way to say it is why tax 99% of the people earning salaries over $400,000 at 30+% while taxing a very small group of folks earning 7 figures at 15%?

We can argue which rate is the correct rate but I assure you, there are a handful of hedge-fund managers at that lower rate so how why do they deserve that unique tax treatment? I do not believe there would be zero hedge-fund managers if their income was taxed at the level of the Harley President. Therefore the incentive is a nice benefit for just a few and feels like just another a welfare program.

However, the theory of enticing real capitalists to do that which they should do anyway as risk-taking entrepreneurial capitalists (invest) feels a bit socialist if you think about it. Why do capitalists need government incentives to invest? Most capitalists invest not for the tax rate but for the gain from their successful investment. The opportunity to invent a new product and sell it in a free marketplace for a price that generates a substantial profit and positive rate-of-return is an awesome deal for any business person. The lower tax rates on Capital Gain and Dividend Income are a very nice plus. Whether it is the sole reason for getting investment to occur is suspect; but as I said, we’ll take the good deal for as long as it is offered.

If Capital Gains rates were 0%, would we have more investment? Maybe. Perhaps but only if no other country matched the 0% rate. I mean, who wouldn’t move their money to the region offering 0% as long as you could pull out whenever you wanted without risk?

However, just as we saw in Ireland prior to 2008, a country can only give away their economic wealth for so long. During the 2007 Presidential campaign, one candidate spoke glowingly about Ireland’s very favorable tax rates and how corporations flocked to their shores to take advantage of those rates. However, Ireland was one of the first economies to implode in 2007. Many credit the balance between the proper incentives and the rush to grow at any cost as the main driver of the failure of their economy. 0% of anything is never a recipe for a sustainable business model.

Once again, I am not saying I want to see an end to these sweeteners and incentives for investment. I am a proud user of these incentives. I am just saying we should not confuse tax-rate sweeteners with principled fiscal policy. I know that even without the incentives, if I or any other entrepreneur thought investing $1 would make $2, we would take that deal in a New York minute! In other words, I invest because my investment generates a return … hopefully a huge return and the tax-rate sweetener plays a smaller role in my decision to invest that many imply it does. As I said, if you are giving me a sweetener, I’ll take it but if I have an investment opportunity that stands to make me $5million net profit and my net tax-rate was 15% or 35%, at the same time interest rates are less than 3%, the Federal Funds rate is low, and Bonds are paying less than 5% , I would take the investment plunge even at a 30+% rate.

I just want to be honest and admit these incentives do cost something to offer and in many cases, if a city, state or a country is not careful, they can serve as a type of welfare; especially if they exist but can not be proven to actually drive new investment.

I leave you with one last example. When you get paid and earn a dollar. You then take some of that money to pay for entertainment, vehicles, property, and electronic equipment. In most cases you pay sales/use/property taxes on those purchases. This feels more like double-taxation than taxes on Capital Gain or Dividend income.

Neither Capital Gain taxes or Dividend Income taxes are double-taxation. Don’t let anyone tell you differently.

Calfornia is still the state that creates the future of business

California is still the state that creates the most businesses and is poised to create even more in 2013.

In the coming weeks, you are going to see desperate States sending their hard-earned cash trying to lure California businesses away from the State. They will try. They will win-some. They will lose many more. Why? Because California is an awesome place to start and grow your business.

I apologize in advance for my ethnocentric-like praise of California. I do so not to denigrate the other 49 amazing states in our great nation. We live in the most diverse country in the world and in many ways each state is like its own unique country – which is the secret-sauce in our international success. I would not change a thing. It just seems like no other state has such a bullseye on it like California does. Rooting against California seems to occur more often and I see no benefit to the continuation of this practice.

Therefore, today I rise in support of California because California seems to be oft-vilified for many things it is not. It is high-time you heard someone defend our great state for what it actually is.

California is the 7th largest economy in the world. Although New York and Texas are great states with GDP of over $1.1 trillion each, (amazing economic figures), California has GDP of $1.9 trillion! Last year you may have heard that in 2012, Texas produced the most net new jobs in the country at close to 300,000 (awesome numbers I must say). Untrue. Texas did not produce the most net new job; California holds that honor. What you did not hear is California actually produced the most net new jobs in 2012 at over to 300,000.

Innovation is the key to building a sustainable future for the United States. Which state do you suppose generated the largest number of patent applications and was awarded the largest number of patents? Yes, California. If you have a business creating an alternative energy solution, which state do you think is the largest market for your solution? California. If you have business that needs a market for your products (whether consumer or industry focused) California is the best place to introduce your products because California is home to the most diverse population of people from all over the nation and the world in every economic sub-section.

What is the largest agricultural state? California. The largest defense infrastructure? California. Alternative energy capital of the nation? California. Largest number of K-12 schools, community colleges and higher education colleges and universities? California. Largest cross-border trade? California. Most innovative new water technology? California. Why water? You have to be really creative if you want to live in a desert. If the world needs it, California may be the best place to create and distribute it.

You may have read stories proclaiming California a lost state. The state government is said to be controlled by liberal socialists that can not pass budgets on-time and can never balance the budget. Unions are supposedly killing the state. Environmental rules are supposedly choking off industry. It has been stated that the energy industry can’t build energy plants. Newspapers have written that as a result of high-personal income taxes, every millionaire is making plans to leave for sunny pastures in Florida. Texas Governors make the annual pilgrimage to California with tax-breaks in hand – attempting to lure California businesses to the Lone Star State. Texas believes that Texas must be swallowing up all of California’s major corporations. Even education is said to have suffered due to bloated teacher salaries and benefits making the quality of education is so poor, graduates can not find jobs. It is even assumed crime must be rampant and the streets are polluted with gang-bangers flooding over the border with Mexico. All must be lost.

What a crock!

While there may be elements of truth in the stories retelling the projected demise of California, the real story of California is this: these stories are mostly lies and old news. Kind of the difference between watching television with rabbit-ears versus simultaneously streaming 3 stations of live-television on your smart-phone. The “Califaters” (cal-i-faters : defined as people that make a living hating-on California) need to catch up to the “now” and stop living in the past. California is a state the is helping bring America back from the 2008 bottom and as California goes, so goes America.

We all need a strong California and cheering for California’s success is great for the entire country.
California is a great place to innovate, protect our national interests, start a business, receive an education, learn a trade, start a career, recreate, entertain, and raise a family.

Are there areas where California must improve. Yes. The great news for California is everybody in the state is working towards continuous improvement because California believes it can and must constantly do better.

What makes California so strong? What is our secret-sauce? I say it is “Migration”. Immigration from nations of the world and migration from the other 49 states. The entire world wants to come to California. When your state is the magnet for the best and the brightest; when your state is the largest economic marketplace, encourages risk, innovation, education and the ability to live open and free, your state will be the economic engine for a entire nation …. for the entire world!

In California we often hear the phrase “no one is actually FROM California”. While not completely accurate for obvious reasons, what is true is the fact so many wonderful souls choose to leave other states and other countries for a shot at the California dream. Even more awesome is these very souls can choose to stay or leave and seem comfortable doing so. Even those that have “fled” California seem to still find a way to come back to the state. Heck, do you know how many candidates for President still have homes in California?

Don’t get me wrong by implying we are the only state that benefits from Immigration and Migration. We just seem to use the constant flow of new migration to in-turn drive innovation and economic development in the state which in-turn contributes to our outstanding GDP numbers.

A few truths: personal income tax rates are too high in California. At a low of 10.3% on incomes below $250k and a high of 13.3% on incomes over $680k, no one paying those rates is smiling. However, let us be very clear, California is a state that produces tons of people earning a lot of money because California has the most dynamic economy in the world. As a matter of fact, California is the 7th largest economy in the WORLD. If you are a Capitalist and an Entrepreneur, California is the magnet that pulls you towards it. Besides, California is a great place to raise a family and that is something every employer must consider not just for themselves, but for the quality-of-life of their valuable employees and their families.

Here is what is most amazing about California. While no one wants to pay more in taxes, ever, all tax increases in the State must be approved by voters. The more focused the tax, the higher the threshold, 50.01 for general revenue taxes, 55 – 66 2/3 for specific taxes. When California wants to tax itself, it is the residents that have to vote it in. In other words, Californians have to choose to be the highest taxed state in the nation if they want to pay for that which they believe makes California … California.

While personal income taxes are too high and sales-tax rates high as well, our property taxes are stable and moderate. Proposition 13 guarantees property taxes may rise past a fixed percentage and as a result a Californian will never lose their home due to out-of-control property tax escalation.   This is a benefit of great value, especially to older American property owners.

 

As a business owner, I would prefer to live in a state with no personal income taxes, no property taxes, and no sales taxes; yet still provides a great education opportunities, access to jobs, a high quality of life, safety, security, and great weather.  I would also prefer to eat limitless french fries without gaining weight. It is clear I am simply not going to get all of my wishes met in California or any other state for that matter.  Yet California is the place so many choose to call home and locate their businesses.

However, I would like to see California live within its fiscal means, lower the tax burden and become more competitive in its ability to attract, retain and grow businesses. We need elected officials to means-test any new revenue or spending.  We need to make sure any spending has a sustainable funding source or never be approved in the first place.  Regulation needs to be smart and necessary and include sunset provisions to ensure the regulation is actually producing the desired result in order to continue or sunset.  We need to stop looking at residents to be the big piggy-bank for stupid and necessary legislation.

I will use my position as a business owner, father and Californian to work with all elected officials to make California the best place to grow a business. As businesses grow and succeed, they grow the economy and the economic-cycle churns out prosperity.  As with laws that reformed our insurance industry, workers compensation and our pension system in San Diego, all of us can work together to keep California successful if we are doing it for the right reasons – making California the best place to grow a business, educate a workforce, enjoy a high-quality-of-life,  and raise a family.

If you want to resolve California’s budget issues, grow employment. If you want to grow employment, attract and retain those businesses that can succeed elsewhere but choose to succeed in California. We have to stop acting as the marketing arm of other states who can cherry-pick California businesses because we keep by creating our own self-defeating, knuckle-headed rule-making that only serves to hurt our economy.

California has terrific assets that can attract and retain every kind of entrepreneur that wants to live the American dream. Let us pull together and make sure we stop the self-inflicted wounds which inhibit economic prosperity and work on removing any unnecessary roadblocks to success. Growing our economy is how we raise wages, increase environmental sustainability, create new jobs, fund education, increase safety and security, build preventative health care models, and preserve open-space. It is by building the best economic model that we deliver the best social structure which benefits all and continues to draw the best and brightest to our state. It is not about pitting business against the people. It is all about the synergy of the people working together to grow and sustain a great business-climate for the benefit of all people in the state.

Our proximity to the Pacific as well as our proximity to Mexico, our largest trading partner, give me hope that California is poised to grow Asia-based companies as well as bring international manufacturing from China back to our Maquiladora’s in Baja-California. By working closely with Mexico, we can make the San Diego region and economic juggernaut. The acceptance and growth of our Mega-Region prospects gives me hope that a California Renaissance is close at hand. It is failed thinking to believe the United States has lost it manufacturing base forever, As long as we continue to innovate, we will need a place to manufacture and our neighbor to the South has everything we need. We can design the robots that make the robots that manufacture the Tesla or anything else we can divine.

So, when you see an out-of-state Governor on television telling you that California is dead, remember what California is and what California is not.  Hell, let’s at least thank him for the spending he produces every time he visits our great state.  It makes total sense for Governors from the other 49 states to do everything they can to attract California  businesses because California is doing the same thing to them every day by being the economic engine of the nation.  Every business in California needs to demand our state is doing everything it can to retain them and continue to attract others to the state.  A successful economy benefits every business in the state.

Therefore, rumors of the demise of California have been greatly exaggerated. Cali is back ; in truth we never left!  California is the state that creates the future of business, innovation and education.  Tell a friend.

 

Smart Americans – Winning the battle against high energy costs

Smart Americans are no longer whining about the cost of energy, they are doing something about it. From investments being made by average people as well as like investments being made by sophisticated multi-million dollar businesses, people are taking the cost of energy seriously. Now the pace of adoption to alternative solutions has reached critical-mass and no one that has adopted will ever go back.

Solutions ranging from wind, solar, geothermal, fuel cells and battery power are available at retail stores for all to purchase. Most important, vendors and installers have solid track-records placing these solutions into the market and removing the risk borne by the early adopters.

Even solutions for treating water are taking off in San Diego. You may know this already but San Diego was one of the first Counties to fully adopt low-flow toilets and shower-heads. Now these devices are in every new building built over the past decade, saving individuals and businesses millions in combined water costs. Over the next decade the savings related to energy will be even larger than those already experienced in the water area.

As a matter of fact, San Diego not only approved the largest Desalination plant on the West Coast in November 2012, San Diego also brought their newest water-powered energy plant online. This first-of-it’s-kind plant transfers water between dams – generating energy during peak demand when energy costs are highest and drawing the water back at night when energy costs are lowest. This places more power on the grid during the time it is most needed while utilizing a source that would otherwise be sitting in a reservoir in a stand-by mode … basically slowly evaporating.

Smart Americans are taking charge of high-energy costs and saving millions in the process.

As of today, unleaded gasoline in San Diego is averaging $4.00 per gallon – $80.00 per tankful for the average vehicle that will go 300 miles per tank. It is not uncommon for working San Diegans to travel an average round trip of 50 miles per day meaning most will fill up once per week. What are San Diegans doing about this?

Well, I for one replaced a gas-powered Mercedes SUV that averaged 14 miles per gallon with a diesel-powered Mercedes SUV that averages 28 miles per gallon. Same vehicle, same performance; 50% improvement in fuel economy. My fuel dollar goes twice as far.

I am clearly not alone. The number-one selling vehicle model in 2012 was the Toyota Prius. At 40-45 miles per gallon, this vehicle is saving owners real dough and making the high-cost of gasoline just a bit less painful. The owners of the Chevy Volt are no longer being sneered at for spending $40k on their vehicles because they are most happy with their styling, vehicle quality and most importantly, they do not have electric-anxiety because they have a vehicle that gives them a gasoline option as well as an electric option. Tesla offers an all-electric model that gets 350 miles per full-charge; a model that has BMW and Audi owners trading their gas-models for the highly-styled Tesla.

These are now over 35 American car models offering hybrid solutions so in the words of the great poet, Charlie Sheen … WINNING!

I, along with many other American’s have also invested in transforming my largest liability, my home and office, into better performing assets by lowering the cost of energy. My corporate office was built to a high-level of sustainability and we achieved LEED CI GOLD. The letters mean more to me than to you but the practical benefit of my office building is by focusing on sustainability , we have lowered our energy and water consumption by over 50%, reduced our costs related to disposal of waste by over 70% and reduced our space requirements by 18%. All told, our move to sustainability 5 years ago with our new building has reduced my capital expense by over $200,000 and my operating expense by $120,000 in just 5 years.

Today my residential neighbors have adopted similar philosophies and are saving as well. One neighbor drilled a well and no longer purchases water from our water utility. Another neighbor removed all grass from their landscape and planted only natives saving 75% off their water bill. 2 neighbors are using either solar panels or fuel-cells as their primary energy system. The solar-user has cut their energy costs by 60% while the fuel-cell user cut theirs by 70%. Another neighbor switched out their A/C unit for units with the highest EER available -driving down their cooling costs.

My home does not have one interior light-fixture that is not an LED fixture. Frankly I save money keeping the lights on! Our block even committed to only LED Christmas lights. Everyone is saving and no one feels like they had to give anything up.

Smart Americans are kicking-ass and taking names. They have seen the problem by looking in the mirror. They have been the great-consumer of every molocule of water, unit of electricity, and square-foot of space. Yet we are all the change we were looking for. Our decision to get energy independent is lowering all of our costs …. forever!

Along the way as we adopt this new strategy, we are also driving economic activity for the nation. That deserves an “Amen”! Amen.

In the future, look to the energy industry to continue to drive-up costs. As business people they are now dealing with the perfect storm. Even without cap&trade or cumbersome carbon-trading regulations, smart American’s are simply “opting-out” and buying less of their product. Do you know how most monopolies react when less of their product is being purchased? They simply charge more to make up the difference. This model only works when the audence is trapped or captive. A nation without options is a captive audience and will simply have to eat-it. That description no longer fits the smart American.

Don’t be their chump. Get as independent as you can without going full “Grizzly-Adams” and living in the forest. Sustainable solutions are abundant and available. We have better options today than we have ever had and they are right in front of us for the taking.

Become a smart American and start winning the battle against high-energy costs.

California Forges Ahead With Its Health-Insurance Exchange While Others Dither

State-Run Health Insurance Exchanges …which States are making progress?

When did dithering equate to leadership? Never. California is not dithering and is leading the way on State-Created Healthcare Exchanges. As you all know, I am on the board of San Diego’s largest Hospital system and we have been working to understand the full impact of Obamacare and the implementation of State-Run Health Insurance Exchanges.

Everyone in the California healthcare profession understands this simple fact : “Uninsured people cost billions to the State of California and our Healthcare providers”. The Exchanges will offer some new options that will reduce the number of uninsured Californians and we are all watching closely.

While we are all watching the Exchange’s become a reality in California, I have been listening to 17 “Denyasaurus” Governors (not in California) explain why they are choosing to abandon the concept of State-Created Health-Insurance Exchanges and instead allow the Federal Government to set up the Exchanges in their states. What? States that hate federal involvement actually asking for federal involvement? I must be dreaming? Do I see “Bigfoot Riding a Unicorn” again?

More on that later.

California is steaming ahead with their Exchange and the board responsible for creating the Exchange has already arrived at a benefit package. They have chosen a benefit structure that resembles an existing Kaiser plan. This package of benefits is already in the market and appears to be well accepted by workers, individuals and employers in the State already covered by Kaiser. In other words, instead of attempting to create a new benefit structure which no insurer in the state would be offering and might struggle to implement, they instead chose a plan already functioning in the state at a very visible premium. Smart.

Although full details of the Exchanges are under development and States are working with Health and Human Services on the details and the rules, California has now published an RFP to all insurers that want to write insurance in the new Exchange. By arriving at the benefit structure to be included in the Exchange, the insurers are able to develop a cost model for the service and are moving closer to being able to identify the premium cost for providing the service. The benefits package chosen by the California Exchange and the fact all insurers are singing out of the same hymnal should ensure the public is provided the same options regardless of the insurer. Cool.

We are seeing an influx of new insurers and are seeing a new-wave of insurers that are developing plans that are a direct-link between the patient, doctor and the hospital with drastically-reduced operating expenses because the plans no longer need traditional “insurance-brokers” to be sold in the state. These insurers are instead acting more like “Visa and MasterCard” – simply functioning as a source of reimbursement instead of attempting to intercede in the concept of care-management. They choose to leave care-management to the docs. Not bad.

No one knows if these new “insurers” are going to make it however one thing is clear, the interest in insuring a large population of Californians is very appealing to a number of companies.

Californians that qualify for the Exchange will be able to do 2 things they could never do:

1. Purchase a suite of health insurance benefits at the same price as offered to everyone else in the State. No more small-group insurance cost that is too expensive. Now, an insurer that writes in the State Exchange will charge everyone the same price. California residency is the “Group” now.

2. Purchase health insurance that belongs to the individual and not the company. This insurance will be portable and will give the individual a measure of security they have never had before.

I will update you on the progress of the California Exchange model as it develops over the next few months.

One more bit of news. Although the shortage of Primary Care doctors has been declining for years, California is seeing a surge in medical professionals. While it takes time to build a workforce, there appears to be a realization that while the independent doctor with cash patients may be on the decline, the number of doctors and medical groups working for someone else is on the increase. Dr. Welby will always have a place in California’s diverse economy, as will Specialty Doctors; however, the market has turned. The concept of managing the working details of the business operation is being replaced by a new care-giver model – with Docs working for someone else. These new care-givers are the source of a growing workforce in the state which is not expected to abate..

Before I close, I want to get back to Governor Denyasaurus and attempt to understand the logic … or the absence of logic, of their willingness to let the Feds set up exchanges in their States.

Their logic: “…let the Feds be responsible for providing and managing the exchanges in my state because we Governors do not like the Feds telling us what to do, (States-rights), and we think the exchanges will fail. We also think the exchanges will cost our states too much money to administer”.

Keep in mind , many of these States are enthusiastic supporters of States-Rights and also have the highest percentage of uninsured residents. These States also won their argument against the Feds by challenging an Obamacare provision that would force the states to set-up their exchanges by denying them Medicaid reimbursement on non-Obamacare programs. The Supreme’s told the Feds “no blackmail would be allowed”. States won the right to say no. Now what?

What does the dog do when it actually catches the car??

What is very interesting is how these states now seem to understand the needs of their population and are therefore asking the Feds to set up the Exchanges that those at 130-150% of the poverty level may access. In addition, these exchanges allow businesses with under 50 employees – especially lower wage paying businesses – to fell good about not offering healthcare at work because they know their employees will be able to procure health insurance through the Exchanges. The States clearly see the Exchanges have a benefit to the State and their residents. Yet something is holding them back.

One more point, hospitals and providers are going to freak when they find out their State chose to stick them with more unreimbursed care – especially when there was a way to provide them with relief via Obamacare.

As you know, the Feds reimburse 100% of the cost of a State-run Exchange for 4 years and the reimbursement falls to a low of 90% over a 10 year period. The savings related to exchanges is expected to save a state between 8-12% of their uninsured cost over a 10 year period so the 10% not being reimbursed is anticipated to be a wash. Yes, I know you’re skeptical as we should all be, however the reality is this: uninsured healthcare costs related to poor and working class folks are costing States $millions so something must be done to get these folks insured.

Now the concept of savings covering the 10% gap can be pie-in-the-sky wishful thinking or there will be States that get it figured out and make it work. Either way, the fact that the costs are covered for 4 years is enough to get the other 33 States to set up their own exchanges in a creative manner that will reduce the long-term cost of un-reimbursed healthcare expense for uninsured residents.

I am still laughing at these Gov’s because I predict over the next 6 months, with the exception of a few die-hards, the hold-outs will eventually set-up their own exchanges … quietly and out of the view of the cameras. These Dinos will ultimately care about their extinction as all of them surely know the value of getting poor and working-class residents covered under some type of health plan.

Until then, California steams ahead with the creation of their State-Run Heath Insurance Exchanges.

$800B Cut in Deductions; Which Specific Tax-Deductions Are Being Eliminated?

How do you permanently eliminate $800B in Tax-deductions? It is possible and it is easy to provide the specific answer. Where are the specifics?

I for one am encouraged that we will get a bevy of specific answers over the next 30 days. I am glad to see the public negotiations going on between the elected officials because this means there are substantive private negotiations taking place as well.

Recently two plans for deficit deduction were presented publicly. Both plans have a revenue component. One asks for $1.6T in revenue by allowing the current temporary tax-rates to expire and return to 1994 levels. If this happens , presto , new revenue appears! As long as there are no new tax-cuts, the new revenue can work to reduce the deficit.

The other plan leaves those tax-rates in place and instead seeks to raise revenue by eliminating $800b in tax-deductions. By keeping all of the tax-rates in place, the deficit grows by $1.6T so the elimination of $800B in deductions still requires $800B more in savings or cuts or deduction eliminations from somewhere else. The result of this theory produces zero net new revenue. Not a dime since the $1.6T would be used to pay for $1.6T in tax-cuts.

In the words of Sesame Street: ” … one of these things (revenue plans) is different from the other”.

Today, I am going to focus on the revenue-only portion of the the new House plan since the President’s revenue plan is already very specific – return to 1994 tax rates on all income over $250k. Let Capital Gain, Dividend , and Inheritance tax rates return to 1994 levels as well. We all understand how he gets to $1.6T. What we do not know is how the House Speaker gets to his new revenue target. Let’s see if we can gain more clarity.

I would like to focus on the area of deductions being discussed since one of the plans has now provided a written revenue target of $800b over 20 years. The simple concept is to eliminate deductions totaling a specific targeted amount. What is not clear is which deductions are being eliminated and which taxpayers is being impacted.

In order to assist you, I am providing an excellent tool created by the Washington Post. This tool allows anyone to see the specific value of all of the current deductions – broken down by IRS tax sections. Within about an hour of using this tool, you will have answers to just about every one of your questions related to what is normally a complicated discussion.

[Update: Here is a link to a great resource which details all 172 tax deductions. http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/ ]

The total value of all 172 individual and corporate tax deductions is approximately $1.1 trillion per year. Which deduction must be cut in order to achieve the goals of the House Leaders new plan without retarding growth, cutting jobs, or driving up the national debt?

The value of the top 25 deductions for corporations, investors and business interests is approximately $460 billion or nearly 42% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).

You do the math.

The top 25 tax deductions enjoyed by individual non-business specific taxpayers by random order of value are:

1. Mortgage Deduction – $ 88.7 billion
2. Earned Income tax credit – $ 62.5 billion
3. Employer Plans. – $ 42.2 billion
4. IRA Plans – $ 15.0 billion
5. Charitable Contributions – $ 39.6 billion
( non-health )
6. Charitable Deductions – $ 4.5 billion
( health only)
7. Medical Savings Accounts – $ 1.9 billion
8. Capital Gains Exclusion – $ 27.6 billion
on home sales
9. Credit for homebuyer expense – $ 10.4 billion
10. Step-up basis of Capital Gain $ 50.9 billion
at death
11. Additional Deduction for elderly – $ 2.5 billion
12. Capital Gains (except agriculture- $ 37.6 billion
timber, iron ore and coal
13. Exclusion of interest on Life – $ 21.2 billion
Insurance savings
14. Property Tax Deduction. – $ 19.3 billion
15. Parental personal exemption – $ 3.0 billion
for students age 19 & older
16. Charitable contributions – $ 4.5 billion
( education only )
17. Exclusion of scholarship and – $ 3.0 billion
fellowship income
18. Credit for child & dependent – $ 1.9 billion
care expense
19. Making work pay tax credit – $ 44.0 billion
20. American Opportunity tax credit – $ 14.4 billion
21. Lifetime learning tax credit – $ 3.9 billion
22. Child Credit – $ 42.5 billion
23. Exclusion of taxes/benefits for – $ 13.3 billion
Armed Forces personnel
24. Deductibility of non-business – $ 37.7 billion
state & local taxes
25. Discharge of mortgage debt – $ 1.4 billion

The value of the top 25 deductions for individuals is approximately $460 billion or nearly 42% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).

The top 25 tax deductions enjoyed specifically by corporations or specifically high-earning businesses and investors by random order of value are:

1. Employer contributions for health – $173.0 billion
Insurance premiums
2. Employer Plans – $ 42.2 billion
3. KEOGH IRA Plans – $ 15.0 billion
(self employed)
4. Credit for small business. – $ 2.6 billion
health expenses (additional)
5. Interest exclusion on – $ 3.6 billion
hospitable construction bonds
6. Self Employed Medical. – $ 6.2 billion
Insurance Premiums
7. Additional Deductibility of – $10.0 billion
Medical Expenses (large)
8. Energy Production Credit. – $ 1.6 billion
9. Alcohol Fuels Credit. – $ 3.1 billion
10. Special Credit -Oil & Gas. – $ 4.2 billion
11. Credit for low-income. – $. 6.0 billion
housing investments
12. Accelerated Depreciation for – $17.5 billion
machinery & equipment
13. Exclusion of net inputed – $47.0 billion
rental income
14. Graduated corporation – $ 3.3 billion
income tax rate
15. Deduction for US production. – $13.8 billion
activities
16. Exemption from passive loss – $10.9 billion
rules for rental loss
17. Carryover basis of Capital – $ 4.8 billion
gains on gifts
18. Expensing of certain small – $ 6.7 billion
investments
19. Graduated Corporation – $ 3.3 billion
Income tax rate
20. Treatment of qualified. – $23.6 billion
dividends
21. Accelerated depreciation on – $13.0 billion
buildings other than housing
22. Exclusion of interest on bonds – $ 2.4 billion
for educational facilities
23. Employer provided child care – $ 1.4 billion
exclusion
24. Credit for increasing research – $ 3.9 billion
activities
25. Deferral of income for foreign – $41.4 billion
controlled corporations

The value of the top 25 deductions for corporations, investors and business interests is approximately $593 billion or nearly 55% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).

Ok my friends, you now have the exact same data the politicians have. You can now decide exactly what to keep and what to cut.

You may have heard some in Congress have already stated they will not cut Mortgage interest deductions, child education deductions, employer healthcare deductions, dividend income deductions, or charitable contributions. As you can see, it gets much harder to achieve $80B per year in tax-deduction savings (approx $800B over 10 years), if you do not affect the aforementioned deductions.

You may have also heard about a concept that Congress would have a limited deduction “bucket” of $17k, $25k, or even $50k. This means an individual or Corporation can only take a maximum of deductions in a single year. This idea is not in writing anywhere so it is nothing to be taken seriously at this point. Only when Congress settles on a real number in the bucket can anyone evaluate whether the bucket is big enough to work.

You now understand the value of the top 50 deductions which make up over 90% of all 172 deductions. I would be nice to specifically see how those offering an $800B plan to eliminate or cut deductions are getting there. To be very clear, cutting $800B in deductions while leaving all tax-rates in place still adds at least $800B to the deficit so we still have not solved the deficit challenge.

Sequestration – How To Get $1.2T Without Killing Demand In The Economy

Demand is what drives business growth, opportunity and economic prosperity.  Over the past few years, demand has contracted in many industries, yet over the past 24 months, we have begun to experience a slow and measurable path towards real GDP growth.  Demand is increasing in the US and American businesses are in fact responding appropriately by slowly and carefully increasing investments.

In 2011,  Congress (The Super-fail Committee) created a self-inflicted wound commonly referred to as Sequestration.  With December 31, 2012 fast approaching, Congress has turned the situation into what is commonly referred to as the” fiscal–cliff”.  If Congress has its way, it will attempt to destroy growth for the foreseeable future by inaction and stupidity.  And to think, these folks are getting paid to reach this conclusion.

First, let’s start off with a baseline.  Sequestration.

Congress wants to reduce the deficit by $1.2T over the next 10 years by implementing across-the-board cuts of $600B from Defense and $600B from the Discretionary budget.  VA, Homeland/National Security, Medicare and Social Security were excluded.  Sequestration is how Congress refers to this process.

To be clear, the Discretionary budget includes the FBI, National Institute of Health and Farm subsidies to name just a few; while Defense includes Pentagon, spending, weapons systems and troops.  Each of these budgets represent jobs and demand.

For the people that say government does not create jobs, the sequestration reality clearly contradicts that assertion.  Observe the gnashing-of-teeth going on as defense contractors and Congress warn of massive job losses if the government reduces spending.  Government not only creates many jobs of its own, it creates the demand for solutions that unleashes the private-sector to satisfy that demand.  The private-sector responds by creating innovative solutions, products and services – which in turn creates value for the entire nation.  This is how private industry and the public sector work together in a healthy symbiotic manner that can create economic prosperity for all citizens.

However, cutting $1.2T out of the economy in the manner outlined in Sequestration will negatively impact demand to the point where the cascading effect will be major job loss, de-funding research and development, elimination of valuable services, and further consumer/business contraction.

Yes, there are expenditures in the discretionary budget and the defense budget that can be trimmed; however, by practicing the naive concept of straight-line cuts without any departmental input or strategic logic, we put efficiency at risk.  In other words, I might be willing to cut 100% out of a low-priority program while needing to invest 5% more in another program to make it more efficient.  Cutting both programs by the same percentage is not prudent.  As long as a department can achieve the ultimate cost-reduction goal while preserving the effective deployment of the mission, why would we want Congress to tell them exactly how to do it?

While they dither, let’s see if we can find our own solution which can be implemented over the next 30 days.

Solution:

1.  Issue a directive for the individual departments to identify spending cuts totaling  $550B (not $1.2T) in spending and give to the appropriators in Congress by December 30.  $275B in discretionary, $275B in defense.  Since these departments have been staring at $1.2T in cuts for the last 12 months, they have already determined how to cut $550B and can provide those answers quickly.

As a business person, I understand that allowing the individual departments to budget to a net goal (scalpel)  is preferred over an across-the-board (hatchet) cut since it encourages the departments to prioritize and build performance-based budgets. The economy can handle $550B in spending cuts if done in a strategic manner.

2. The President has offered $450B in savings from Medicare.  Don’t be an idiot – take it.

3.  Tax rates are returning to Clinton-era rates.  We can hate it/fight it/deny it but everyone knows that after this particular election, tax revenue is going to be on the table.  If you can get a deal to permanently exempt the first $250k in adjusted income from taxation – for all Americans –  don’t be an idiot – take it.

Some might feel it best to let these tax cuts expire for everyone and they may be right.  However, that plan does not seem to be in vogue.   However, the tax cut will cost the Treasury $650B.

This means upper-income rates are going up to 39%.  Treasury savings will be $450B.

4.  Fight to limit the increase in Capital Gains rates to 25% versus 40% and keep Dividend rates at 25% as well.  By the way, neither capital Gain or Dividend income is ever “taxed-twice”.  What is taxed is the gain, not the principal.  If you earned $100k in adjusted income and paid taxes of $35,000, you are left with $65k.  If you then invested your $65k in stock that either dispersed a dividend of say $5k or sold your stock and earned $5k, you are taxed on the $5k not the underlying principal of $65k.

To be honest with you, if you lost the $5k and lost the entire $65k, you can actually take that loss against your future gain/earnings.  In America, we reward “capital and investment risk” … twice.  So in reality, you are only taxed once on principal and once on gain but if you lose money, you actually are credited for losing principal.  Treasury savings will be $300B.

5.  Make this all happen the first week of January so those finding it impossible to ever support a tax-rate increase can be freed from their self-imposed restriction.  Since the rates expire on December 31, 2012 and that expiration was approved by a previous Congress, any rise in rates is actually the fault of the previous Congress.  “Yeah … that’s the ticket .  This allows the Congress in place in January to go on record as permanently lowering taxes for current and future generations of tax-paying Americans.

6.   Spending for the budget actually fell  last year lowering the need to cut the full $1.2T.  The spending reduction is projected to save $50B over 10 years; therefore lowering the Sequestration goal to $1.150T

Goal : Achieve $1.2T in reduced spending or new revenue.

Solution: Achieved a combination of cuts, reductions and revenue valued at $1.2T.  ($1.2T -$550b – $450B + $600B – $450B -$250B – $50B = $0).

This resolves the dollars necessary to stave off Sequestration.

This does not deal with the “BIG DEAL” of $3T more in deficit reduction but it does take us off the cliff and add certainty to the marketplace.

This does not deal with the expiration of the Unemployment benefit extension , the Medicare tax-holiday or the Doctor-fix for Medicare; which represent a cost of close to $130B.  However, I have also not accounted for the change in the Inheritance Tax once the rates expire on December 31, 2012.  The 10-year value of the Inheritance-Tax change is over $120B .

I have also not added any new spending for infrastructure and education as the President has requested in his $4T “BIG PLAN”.  He is asking for at least $80B in new spending.

Nor have I attempted to capture the elimination of any deductions at this time since i am not exactly sure how long it will take for everyone to be honest about which to eliminate   As you know, the total value of all deductions – individual and corporate, is over $100B per year.

Nor have I accounted for the savings related to ending the wars.  Many have panned the President for using spending related to the wars in his savings calculations.  Unfortunately, many in the public do not recall the Bush Administration purposely excluded the cost of the wars from their budgets and Congress did not add the costs either.  These costs were considered extraordinary expenses and were treated as an off-budget line item.  Supposedly, since no one knew how long the wars would last, no one thought they should actually include the spending in their 10 year budget projections.  The GAAP gods were not be happy.

The off-balance budgeting process made the budget appear lower yet everyone knew we were still going to spend the money for the wars because no one was talking about ending them.  Long-term deficits forecasting would not include the wars.

Obama included the wars in his budgets – immediately creating deficit spending in his first budget.  He took a lot of heat for his “on-budget” war model because it added and compounded the deficit.  However, now that he is out of Iraq and getting out of Afghanistan, (date-certain), he is removing $1T from his 10 year budget forecast.  This is how he can claim $1T in budget savings.

When it is time to negotiate the BIG DEAL, as you can see, there are a number of opportunities.

However, for now, we are focused on the $1.2T related to Sequestration and we appear to have a solution for that particular problem.

 

Fiscal Cliff Issues Will Be Solved … We Have The Plan

The fiscal cliff will be solved. Stop fretting, my friends because the solution is not only logical, it is imminently doable.

The Fiscal-Cliff components are:

a). $1.2 trillion in mandated spending cuts to Domestic and Pentagon programs.
b). $ 44 billion in the unemployment-benefit extension.
c). $100 billion in the temporary payroll-tax reduction.
d). $ 6 billion in the medicare-doc reimbursement fix ( currently a one-year fix).

Oh me, oh my … what to do??

Before I spill the beans, let me first correct a few inaccurate statements made by “the undertakers”. These are the folks that see “Big Foot Riding A Unicorn” whenever they seek to confuse facts with their own fiction.

Statement:
“President Obama increased the federal government deficit by $1 trillion in his first year”.
Lie. The CBO reported on January 7, 2009 that the 2009 budget deficit was projected to be $1.2 trillion. This was 13 days before President Obama took office. By the end of Obama’s first year, the deficit grew by an additional $290 billion. Obama deserves the fault for the $290 billion increase but the rest of that deficit was all from the prior administration.

The $1 trillion deficit statement is often quoted because people don’t realize the Fiscal Year 2009 budget is for the the period October 1, 2008 – September 30, 2009. The 2009 budget was President Bush’s budget not Obama’s.

Statement:
“The current administration is spending more as a percentage of GDP than at any point in history”.
Lie. Since 1947, (the first year this data was tracked), the average government spending to GDP was 20.2%. The Reagan Administration averaged a spending level of 20.7% of GDP.

Under the Obama spending, spending has averaged 19.2% to GDP.

Statement:
“Government spending has increased in every year of the current administration”.
Lie. Government spending peaked in the second quarter of 2009 and has fallen in every year since. Government spending in Fiscal Year 2012 is $billions below Fiscal-Year 2011.

Statement:
There is no way to reduce the cost of government by $1.2 trillion over a 10 year period without destroying the country”.
Too pessimistic and completely inaccurate.

I found these sites very valuable and they are the source of the attached charts;
http://www.factchecker.org/2012/06/obamas-spending-inferno-or-not/
http://www.economix.blogs.nytimes.com/2012/07/27/big-government-isnt-so/

http://www.economix.blogs.nytimes.com/2012/07/27/biggovernment-isnt-so/
www.economix.blogs.nytimes.com/2012/07/27/biggovernment-isnt-so/

www.washingtonpost.com/blogs/fact-checker/post/revisiting-the-cost-of-the-bush-tax-cuts/2011/05/09/AFxTFtbG_blog.html

OK, enough of that crud. Let’s move forward and start solving problems. How do we resolve the “self-inflicted” Fiscal-Cliff?

Here is the plan:

Congress created the “Super-Committee”,(which I refer to as the “Super-Fail” Committee), to devise a way to cut $1.2 trillion in government spending over a 10 year period. Unfortunately these knuckle-heads politicized the make-up of the committee and filled it with too many people empowered only to say NO.

As a result, this group of Fiscal-Einstein’s concluded they would force across the board cuts in Domestic spending and Pentagon spending equaling $600 billion each. $1.2 trillion over 10 years. They would exclude Medicare, VA, National Security, and Social Security. The concept was that no sentient being would take this kind of hatchet to the budgets of the Pentagon and all Domestic spending. Surely saner minds would intervene and save the crazy folks from the crazy folks. This would be a terrible time for anyone in Congress with a mirror, (“I have seen the enemy and them is us”).

These elected officials gave themselves 12 months to negotiate a better solution to find the $1.2 trillion in savings. Well, with 1 month to go, these folks still have not done their jobs!

Therefore a real plan will be presented this week by the newly elected President and many practical folks in the Senate. With the election over and the President granted the authority to get the country moving forward, tomorrow he will present his solution to the “Super-Fail” Committee’s failure to do their jobs.

Goal – Reduce the cost of government over a 10 year period by $1.2 trillion with a combination of cost reduction and new revenue.

1). Plan: First $600 billion

Effective January 2013, individual departments of the government will be told to work with their organizational structure and within the next 30 days, find $600 billion in spending cuts or reduced spending over the next 10 years. $300 billion in Domestic spending and $300 billion in Pentagon spending. Not $600 billion each. Instead of a hatchet or illogical across-the-board -cuts, these cuts would be logical and surgical. They would be driven by what will be best for the country and the function of the specific departments.

Believe me, these folks already know how to get to $300 billion because they have spent the last 11 months painfully trying to find a way to get to $600 billion each. They will be relieved to only have to hit $300 billion each without destroying their ability to serve the American people.

Now that Paul Ryan himself admitted that his own budget reduced the growth of spending and therefore counted the reduction in growth as “spending cuts”, the Republicans can accept the concept that reductions in planned spending are in fact “spending-cuts”. Happy days!

Ok, we have cut $600 billion. Good job. $600 billion to go.

2). Plan: Let all the 12 years of Bush and Obama tax cuts expire. Savings = $1.5 trillion over 10 years. The best data I can find shows the tax cuts cost between $1.8 billion-$2.1 billion during the combined 10 years of Bush and Obama. I am using $1.5 billion in order to be conservative.

The tax-cuts have to be allowed to expire since it is the only way many Republican’s can still claim to have never “raised taxes”. Once they expire, everyone will clamor for credit for new tax cuts.

Give them their wish in 2013.

Pass a new 2013 Middle-Class tax cut for those earning less than $200k in adjusted income.
Cost $700 billion.

$800 billion in new revenue remains.

Use $600 billion to pay down the remaining $600 billion shortfall.

What to do with the remaining $200 billion?

3). Well we could and should use it to pay down the deficit. However, it is more likely that we will use:

A). $44 billion to extend Unemployment Insurance for another 12 months. Jobs are coming back.
B). $55 billion to fix the Medicare Doc fix for 10 more years as Obamacare takes effect.
C). $99 billion to extend the payroll-tax reduction for 12 months. We need to end the payroll-tax extension sooner versus later since we do not want to negatively impact the sustainability of the system. However, there is a way to smooth the impact by gradually easing America back to pre-recession payroll tax rates after the first 6 months of the year.
D.) $2 billion to pay down the deficit. We have to start somewhere.

Fiscal-Cliff issue is solved.

Let me repeat, fiscal-cliff is solved.

I’m sure there are a plethora of ideas to deal with the fiscal-cliff; however, my position is if you are looking for a plan that does not wreck the planet, you are free to use mine. I’m being a bit goofy here but you see my point.

I believe on Friday at 1:30 PM eastern, President Obama will present a framework for resolving the fiscal crisis that will be imminently doable, reasonable and practical. It does not matter that some will fight against common-sense because it will be clear the leverage exists to solve the “self-inflicted fiscal-cliff. The tax-cuts are going to expire and everyone that watched this election knows full well the President told everyone exactly what he intended to do; he committed to let all of the tax-cuts expire and then pass new cuts on the FIRST $200k in adjusted income for EVERY TAXPAYER.

The fiscal-cliff issues will be solved because there is a plan that makes sense.