Let's start with basic economics. The U.S. is over-spending its income to the tune of $1 trillion every year. The federal deficit equals our gross domestic product, putting us in the same economic position as PIIGSUS (Portugal, Italy, Ireland, Greece, Spain, United States).
The thing that differentiates us from the others is that for the time being, the U.S. dollar is the trading medium for almost the whole world. As I wrote recently, that soon will change as the BRICS (Brazil, Russia, India, China, and South Africa) just decided to use a market basket of their own currencies when trading among themselves.
The BRICS were tired of seeing that every time we printed more currency, we devalued the dollar. As the fastest growing economies in the world, they embraced a stable currency, namely, their own. This means the dollar is no longer the only game in town for trading.
Who's to blame? Ask your favorite politician and you'll quickly learn it's "the other party's fault."
There's an unchallenged rule in economics that states "Savings = Investment." The rule is a basic tenet of all economies including capitalism, socialism, communism, and all other "isms." As a country, a very large part of our aggregate savings is in the form of retirement funds in 401(k)s, IRAs, and pension plans. These savings are all tax advantaged. This means the income earned by these funds is not taxed until it's paid out.
Some of it isn't taxed at all as it's paid in like Social Security. The big advantage is that the growth of the funds is untaxed and that allows the money invested to accumulate about 30-40 percent faster than if it were taxable. This was viewed as a good thing in the past because the Feds thought the tax paying jobs created by this investment was worth the price of the loss of taxes on the annual increase in those retirement accounts. Savings = Investment, but Investment means jobs.
Our economy by some governmental measures has run at 14 percent unemployment, so investment for job creation is critical. President Obama wants to start taxing the investment accumulated by American workers at any time their accumulated retirement savings, including IRAs, 401(k)s, and pension plans are $3 million or more. Initially the proposed arrangement would save the government $9 billion annually on the deficit of $1 trillion or 9/1000s of the annual problem.
The real problem is it's a direct tax on investment funds. It is the equivalent of taxing your savings account rather than taxing the interest earned on your savings account. It's a tax on your hard earned wealth and it's a job killer because it takes the investment capital and spends it for day-to-day operations of the government. In economics, government expenditures are all just expenses. The president can't get enough cash to run his programs by just taxing income.
He has proposed taxing capital just like Mrs. Kirchner in Argentina. She just took all of the retirement funds and said "Trust me, I'm going to pay you at retirement." That line sounds like the Social Security Trust Fund that was used for day-to-day operations of the government and now exists only as a promise.
I know the government is made up of folks elected by us. It looks like Pogo was right when he said "We have met the enemy and he is us." Either the deficit gets under control or we are the real losers as individuals.
In order to get the deficit back in line we must address Social Security, Medicare, and Medicaid because they are the majority of the government's spending. There are only three ways to do it: 1) Increase contributions through new taxes. 2) Decrease benefits. 3) Raise the eligibility standards by raising the age or the entry requirements for the programs.
At stake is our already eroding privileged trade status in the world and therefore eroding jobs. That part can be changed but "Savings = Investment" is forever.