Matters Column

The choices ahead: borrow, raise taxes or cut expenses

November 17, 2012
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The federal income tax may be the cause of the end of our culture as we have known it. It will not be due to its complexity or cost of compliance. It will be because the power to tax one person for the benefit of another is an irresistible tool of political power.

What the president has to understand is if you kill the economy through excess taxation, you destroy your source of funds with which to restructure our culture. Currently, those funds are being borrowed. That cannot go on permanently without disastrous results. That means that eventually taxes will have to be raised or spending cut.

Borrow, raise taxes or cut expenses: Those are the choices we face.

Borrowing is the easiest and most damaging in the long run. You can avoid alienating people with high incomes and avoid alienating people who are receiving entitlements. The term “kicking the can down the road” is an accurate visual depiction of the process.

Politics runs in voting cycles: “Let the people who follow me in office deal with the problem.” Like any family, business or political unit the long-term ramifications are disastrous, but that's the next officeholder’s problem. This is a job for Dave Ramsey.

Cutting cost is the hardest. To the extent it needs to be done, everybody’s ox will get gored. It is the best long-term solution but, politically, it is the hardest.

Liberals will show Grandma being pushed over a cliff. Government contractors will use every lobbyist alive to twist arms and call in chits. Cutting wages and benefits and staff from bloated payrolls will set northern Virginia and western Maryland on fire with heated rhetoric about how government employees have sacrificed their lives for you. Is it a sacrifice if your pay and benefits far exceed the people’s for whom you sacrificed? Our military will have to become smaller and more efficient.

Raising taxes is the most likely tool. Half the population does not pay income tax. How hard is it politically to sell the idea that I am going to take another person’s money and give it to you? We just elected a president who achieved that position based on pretty much that platform.

Immigrants used to come to America for the opportunities. Today, they come for the benefits. If you are new to America and a man says, “Vote for me and all your needs will be met for free,” who are you going to vote for? You just saw it happen.

Conservatives failed to make their case. They let personality defeat competence. Remember, a little bit over 50 percent of our voting population voted to follow the policy of tax and spend. Now that the rant is over, what’s the plan?

A major overhaul of the tax system is unlikely. The flat tax was a dream, and a national sales tax is highly unlikely to be put in place. I think it is safe to say higher-income people will pay more income tax and there will be some cost cutting, but entitlements will remain because they are viewed as entitlements.

The election is over, so now small business must deal with the coming results. We are going to have to plan better and think harder to preserve our assets.

The man in the White House intends to use your assets to implement his social restructuring. The financial cliff coming January first is real. If we had a pragmatist as president, I would be confident that a deal would be cut. Having an ideologue as president has some special dangers. Someone with a business background would negotiate to improve the economy and get us going economically. A president who wants to restructure our culture is going to be less likely to negotiate a deal that will enhance the position of small business.

In the next six months, the backroom folks with pocket protectors are going to be your Spartan defense in protecting your assets. The attorneys and accountants are going to need to pay close attention to what is going on in Washington.

As an example, if the estate tax is allowed to revert to its former parameters, beneficiaries of people of modest estates will see their parents hard-earned savings confiscated by Washington for their agenda instead of paying for grandkids’ education. Sharp pencils and even sharper minds will be needed to salvage what you can of your legacy.

Be sure to stay in touch with your financial  and legal team. It is times like this that their fees will pale in comparison to the benefits. We lost the election but still have the tools to mitigate the damages.

Paul Hense is the retired president of local accounting firm Hense & Associates. He also is past chairman of the Small Business Association of Michigan.

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