Social Security Set to Rise 0.3%

The Social Security Administration announced today that social security benefits would be increase 0.3% in 2017 to account for cost of living adjustments. This amounts to about $60 per beneficiary per year. Social Security is often times considered a “third rail” topic as it directly impacts a very large, politically active group of voters.

At some point in time, though, Social Security is going to have to be addressed by the United States. There aren’t enough workers paying into the program to guarantee the long-term solvency of the fund and the benefits received by retired workers – in numerous cases their only retirement funding – are near poverty levels.

Bernie Sanders’ voiced his displeasure with the increase, projecting an expansion of the program.

By expansion of the program, Sanders and many progressives actually mean removing caps from the employee and employer contributions going into the fund. I disagree with this approach as it disproportionately impacts small business owners who are responsible for both sides of the tax, currently at 12.8%.

What the United States really needs is to scrap the entire system and start over. In my mind, the idle system would shift toward a public-private model that protects low and middle income workers by allowing them to build a inheritable asset.

The execution of this idea – a subject for a more detailed report in the future – would include the following:

  • Worker contributions to a private account
  • Public-private return guarantees
  • Fee-free support

Again, the full idea will be available at a future date, but we must begin to start thinking about new institutions, not further funding broken programs.

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What Does Minnesota Teach Us About Running a State?

Minnesota has been on fire lately.  With a low unemployment rate and state-level surplus, it would be easy to point at the Governor’s increase in both the income tax rates and minimum wage as “proof” that high taxes solve all problems.  The Daily KOS did just this in a post this past February, but be warned Daily KOS readers: even the Governor that enacted these measures notes that it isn’t because of them that the state is in its current position.

It is Minnesota’s economic successes, not tax increases, that have produced our present budget surplus

– Governor Mark Dayton

What can other states and, for that matter, the country do to emulate what Governor Dayton already knows?  Well for starters, all states can recognize that state taxes on businesses do far more harm than good.  Dayton’s administration has pushed tax breaks and subsidies for businesses to attract them to (or keep them from leaving) Minnesota.  Businesses can then expand through capital investments and hiring.

The sweet spot – right where Minnesota is – comes from a state that invests in education and infrastructure while keeping taxes and regulations on business low / manageable.  Minnesota’s higher state income tax rate allows the state Government to benefit from the increased economic output of the business community and the people of Minnesota, in turn, benefit from the increase in funding to education and infrastructure, both which are rated highly in Minnesota.

For states like Rhode Island, languishing at 48th place in the same CNBC review, the Minnesota model offers a playbook of what could be done to improve the state’s positioning.  Implementing this type of program needs to be done with care, though, as a blanket copy will likely result in a high tax state bleeding wealthy residents.  Further, the allure of higher tax revenues consistently causes some states to hire bodies into non-value add Government bureaucrat positions.  No State in the union is currently hurting because of a lack of Administrative roles.

The key points that States should target include:

1. Cut business taxes and remove regulations that prevent business formation and / or expansion (for example, cutting costs on business licenses for business that do not deal with food or dangerous materials).

2. Create “Economic Improvement” zones in a similar manner to New York State to attract businesses to the state or to encourage expansion of existing businesses within the State.  The rationale here is simple, no / low income taxes on a business that hires 100 employees at livable wages is an easy trade to make when the alternative is those same 100 households on welfare.

3. Invest in infrastructure projects.  A UK-study noted that there are links between strong, modern infrastructure and economic growth.  A State investing in infrastructure projects not only gets the short-term positive impact of the capital investment on employment and tax revenue, but also gets the long-term ability to remain competitive and flexible in the face of changing economic conditions.

4. Investments in public education and training.  Drawn from increasing tax revenues (fueled by points 1-3), state-level education programs should invest directly into Pre-k to 12th grade, community college, vocational, public college, and rapid re-training programs.  Well-educated workers are a key component to attracting new businesses to a state and there have been countless examples of businesses placing new facilities near education hubs (Recently several businesses opened new facilities in Pittsburgh, PA because of the robotics work being done by Carnegie Mellon).

These aren’t hard ideas for a state to tackle, so why do many states fall down?  First, many states continue to languish in debates about exactly “what” policies to enact.  This inaction never accidentally produces the desired outcomes so politicians need to learn how to compromise.  Second, many states that want to raise taxes attempt to do so with a fire and brimstone campaign against the state’s wealthy.

Well-educated, wealthy citizens have the ability to leave the state if the message becomes too toxic (see California), but many wont if there is a clear plan in place for what these tax increases are for.  Maybe that is the clearest point that Minnesota makes: don’t demonize the business and wealthy communities as a way to popularize support for new taxes.  Instead create a win-win and let them come to you.

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The Senate Needs to Bring the Hammer Down on Sen. Corker

In a Wall Street Journal report this morning, it was revealed that Sen. Corker (R-TN) filed tax amendments going back to 2007 to report $7m of previously undisclosed income.  Sen. Corker sits on the powerful Senate Banking Committee and its jointly responsible for ethics and oversight of the financial sector.

While a thorough investigation still needs to be completed, it is only reasonable to demand that the Senate strip Sen. Corker of his role and press all available charges against him for these transgressions against the American people.  The integrity of the financial markets is paramount to a strong, fair economy.  What Sen. Corker has demonstrated is a blatant disregard for the principles that guide this country.

The Federal Government has long felt that mandatory minimum sentencing for minor drug crimes was “essential” for a strong America.  How many kids have had their lives ruined for having a little bit of weed on them?  Someone who has benefited from insider knowledge, cheated the American people by lying on his tax return, and done nothing to strengthen the public’s trust in one of the country’s most important industries should be locked up.

Sen. Corker has done far more damage to this country and should be punished accordingly.  It is encouraged that you take the time to contact your Senators and press them for a swift, thorough investigation.  You can do so by clicking here.

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Understanding Syria

The conflict in Syria is spawned one of the worst humanitarian crises in recent memory.  Millions of both pro and anti Assad refugees are fleeing the war torn region for the greener pastures of Europe.  Assad’s administration is waging open war on several fronts, but to truly understand the conflict, it is important to understand the players, who roughly break down into the following groups:

  • Pro-Assad militias and the Syrian Armed forces
  • Anti-Assad militias (broken into multiple factions), but supported by the Coalition forces
  • ISIS / ISIL
  • The Russian and Iranian Armed Forces

Assad’s forces are now being openly supported by the Russian Armed Forces, a new development in the conflict.  With Russian bombers hitting both ISIS and Anti-Assad groups, the mixture of tensions has begun to escalate.  Further, Russian President Putin has indicated that he is sending 150,000 troops into Syria to support Assad’s ground forces.

This change flies directly in the face of the US-led Coalition’s approach in Syria – one that has sought to train “moderate” rebel groups and provide bombing support when needed.  Several analysts have noted that the US-led strategy has been to funnel ISIS toward Assad’s forces.  This means bombing ISIS when they are too close to Anti-Assad militias, but avoiding direct conflict with ISIS when the group is engaged with the Syrian military.

Senator John McCain is not afraid to hide the intentions of the US-led Coalition: collapse of the Assad Government before the removal of ISIS.  This approach would ensure a new Government could be picked that would be more open to playing ball with Western powers.  This also allows for a “2 birds with 1 stone” victory.  Removal of a labelled Dictator and removal of a terrorist organization.

On paper, Senator McCain loves this approach, but Russia’s new involvement will alter the US-led strategy quite a bit.

Most importantly, a link must be discovered to the age old driver of these conflicts: energy.  Early signs point to the proposed Qatari  gas pipelines to Europe which would reduce reliance on Russian gas.  Assad, a Russian supporter, just happens to be at the crossroad of these conflicts for power.

 

Middle-East-map” by W123Own work. Licensed under CC BY 3.0 via Commons.

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Overseas Profits Could Drive Infrastructure Spending

Noted in an article on Reuters, the 500 largest US Corporations hold around $2.1 Trillion in profit overseas.  The argument that these companies make is that the profits have been produced outside of the US and, therefore, have been subjected to non-US tax laws.  US tax law currently allows these profits to remain tax-free if the profits stay overseas and the company believes that the capital will be used on international operations.

Where this gets tricky is when tax strategists are able to route earnings through global tax havens that allow these companies to claim “foreign taxes paid” while taking advantage of the countries with extremely low or non-existent corporate income tax rates.  US Corporations have long advocated that the 35% rate held in the United States is too high relative to international tax standards and puts American businesses at a disadvantage.

There is a lot of truth to that belief.  Higher income taxes encourage tax strategies such as these to avoid paying the tax.  American businesses that derive the majority of their earnings through domestic operations are also at a disadvantage relative to their more international peers (See Domestic Manufacturing) given their inability to take advantage of the same strategies.

What the United States needs is a comprehensive plan to settle this issue that is both beneficial to US citizens and the corporations generating the earnings.  One potential solution is to tie a smaller tax rate to the capitalization of a US Infrastructure Bank.  A tax rate of 10% on repatriated funds, for example, could raise billions of dollars in capital for such a bank that could then be loaned / granted to projects throughout the United States.

Taking this idea a step further, allowing US corporations to deduct up to 50% of the taxes owed on the repatriated funds for use on short-term, capital investments in domestic operations or research and development would help drive the type of activities that lead to both job creation and economic growth.

To illustrate, image a US corporation that has generated $10B in profits overseas that wishes to repatriate some of those funds.  This business may decide to bring back $2B in profits under the proposed plan triggering a $200M tax charge.  This business, wanting to expand an existing factory could then elect to use $100M of the tax charge on their capital plan while sending the remaining $100M to the Infrastructure Bank.  The remaining $1.8B is free to use as the organization sees fit.

Under the current environment, this economic activity may not take place!  A plan such as this opens up a significant number of doors for capital investment in the United States.  Our country is in need of innovative ideas that put politics on the back burner, global tax reform should be one of those ideas.

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Jobs Report – Looking Under the Headline

The most recent jobs report was released today and was immediately met with a tepid response.  While the economy add another 215k jobs in July, the unemployment rate remained steady at 5.3%.  The Obama Administration took to social media to highlight this figure as the 65th straight month of job growth:

Others were not as impressed, especially on Wall St. where the employment gains were accepted as a sign of mediocrity.  One month does not make or break an economy though, so let’s look at some more detailed data:

Unemployment measure July 2014 July 2015
U1 2.8 2.1
U2 3.1 2.6
U3 6.5 5.3
U4 7.0 5.7
U5 7.8 6.4
U6 12.6 10.4

The Federal Government uses a number of different measure to gauge “employment” within the economy with the most reported number being derived from the U3 calculation.  This is the official unemployment rate and represents the percent of Americans that are unemployed relative to the size of the civilian labor force.  Critics will note that the U3 number only includes those civilians who are actively trying to participate in the labor market – meaning that if you gave up, you aren’t counted.

Instead, these group point to the U5 and U6 numbers which include all civilian workers, discouraged workers, and those marginally tied to the labor market (U5) as well as those working part-time for economic reasons (U6).  These measures both show improvement in the economy much like the U3 number, but what the U6 number also shows is that there is still a large number of individuals that are discouraged about finding work or working part-time (below their skill set) because no other job is available.

Adding 215k is a sign that the economy continues to move forward.  The data also points to an increased likelihood that the Federal Reserve will start to increase interest rates (in either September or December).  The employment numbers after that event will be the most telling.  Further, the next administration will need to continue to address the underemployed and the long-term unemployed that appear to be locked out of the economic recovery.

Image: thepoeticsproject.com

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Digging In: How Would Sen. Rubio Help Small Business?

Small businesses employ a significant percentage of the American workforce so it was great to see the FOX Moderators allow a question that asked Sen. Rubio to explain how he would promote small business in the current economic environment.  Sen. Rubio’s response was a bit rough around the edges, but could form the basis of a strong pro-small business platform going forward.

The buzzword reference to Obamacare aside, the content of Sen. Rubio’s response makes a lot of sense.  Small businesses make up a large part of the economy, but are often overlooked when significant policies and reforms are pushed through DC.  Sen. Rubio’s point to connect the impact of the Dodd-Frank Act to the struggles of Community Banks, who are the primary lenders to small businesses, is one that his campaign could solidify and present to the nation in an understandable manner.

In 2014, Federal Reserve Governor Daniel Tarullo noted in a speech to the Community Banker Symposium that:

One recent study found that loans extended by rural community banks to small businesses default less frequently than similar loans granted by their urban counterparts, and that the performance advantage is greater when the bank and the borrower are located in the same county.

A message that stresses “community, trust, and hometown business” is a hard one not to appreciate, especially with trust in the financial system at all time lows.

If there is indeed evidence that smaller creditors promote small businesses and that a fall in the number of these creditors is linked, in part, to the Dodd-Frank Act, then the Rubio Campaign has a strong plank to play to.  However, the facts supporting this plank and the overall potential strength of the position are meaningless if Sen. Rubio cannot connect the dots in a straight-forward manner.

The Senator’s response last night didn’t quite get there for the average viewer.

Regardless of the facts supporting the position that: regulatory compliance for smaller lenders is forcing these banks to close or consolidate which, in turn, tightens the credit pools for small businesses, blind calls to repeal Dodd-Frank will be met with stiff opposition from the Democrats who will respond by saying anyone in favor of a repeal supports deregulation and works for Wall St.  The opportunity is there for the taking and with the right message, this position could resonate with voters.  File this under “higher risk, higher reward.”

Where did the 25% Tax Rate Come From?

Within Sen. Rubio’s response was a call to decrease the corporate income tax rate for small businesses to 25% which was similar to the cut that was proposed by President Obama’s Administration.  This is an interesting call to make as reducing this tax rate for those organizations that may not have the resources available to adopt complex tax strategies that help to lower their rate would have a positive net impact on small businesses.

Unlike the personal income tax brackets which are progressive by nature, the corporate income tax rate is static at 35% (at the Federal level).  This rate can make it difficult for small corporations to push income back into the company that could then be used on wages, job growth, and other investments.

Sen. Rubio may have something here, but it appears this plan was also ‘out of the blue.’  There are no mentions to a corporate tax rate cut on the Sen. Rubio campaign website so any additional details about how this plan would work and to which organizations it would apply are not available.  At any rate, the Rubio campaign should explore this tax cut and determine if it is worth incorporating into the Senator’s overall economic vision.  Again, promoting small business is going to resonate with a large number of voters, but a half-baked plan will be destroyed by this candidate’s political opposition as “favoring the rich and big business.”

Image Credit: FOX News

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