I have a friend, Bill Bregar, who is an independent thinker and a very smart guy. Like many of us, he is concerned about the future for his children and grandchildren. Bill took the time to write down the key reasons why this election is important and why Romney is the sensible choice.  I think he wrote it for interested members of his family.  It deserves a wider audience.  Take it away, Bill:

I think this election represents a decision point for this country, and that the decision we make will have a far greater effect on our long-term future than any other election in the past 40-50 years. My greatest concerns are the future of the economy and the state of the nation’s finances.  This is because I believe that progress on any of the other big issues may happen, but will either take place far slower or not at all, unless we have a robust economy to allow for the development of and payment for solutions to those issues. The economy depends on the business climate and the fiscal situation.  I do not believe that the President has put forth any viable strategy for solving these issues, and failing to solve them leaves all other issues by the wayside.  Instead, from all I can see, he plans to continue the same strategies that have, thus far, led to a tepid recovery, at best.

The two candidates have significantly different views of how the country works and the role that government should play.  The President holds to the idea that a strong and large central government can best solve our economic problems (as well as all other problems).  He relies on experts to determine the shape of the economy, and he relies on government’s power to spend money to drive economic sectors that he and his experts want to succeed. He would use the tax code to provide incentives to those companies and industries he wishes to support and to deter those he wishes to suppress.  He believes that it’s government’s job to redistribute wealth in the name of “fairness” or “social justice”.   Obama aims at cultural issues (race, class, gender), which appeal to a lot of people, but, I believe he has used these issues to divide the electorate, rather than bring us together.

The Governor sees individuals and businesses as better positioned to determine how to invest their capital. He takes the view that individuals, while acting independently, tend to apply and confirm the principles that have been formulated through the years and use their collective wisdom to determine how to grow their own financial concerns.  It’s the difference between a big bet on a few key industries and companies within them versus spreading your bets to cover the widest possible range.  In investment terms it’s the difference between a balanced portfolio and one that is dependent on one or two large investments.

Supporting free enterprise does not preclude paying attention to some of the excesses of private enterprise.  However, when pressed, free enterprise comes up with better, more efficient solutions to problems.  One, in particular, is the problem of funding the government so it can do the things it must be doing. My contention is that growing the economy is a better solution than simply raising taxes, and it provides both more revenue to the government, as well as jobs for people.  Raising taxes alone is a known deterrent to economic growth.  If it weren’t, why would everyone be so fearful of the potential financial cliff that will take place at the beginning of the year, unless congress takes some action on the deficit problem?  In addition to spending cuts, there will also be tax increases across the board, which most economists predict will send us into another recession or worse.

The President has made a campaign out of increasing taxes on the top income brackets. (Note: the data I am about to cite comes directly from the IRS web site.) We currently rely on the high income earners to pay most of our income taxes at the federal and state level.  In fact, in 2009 (latest IRS tabulated) data available)the top 10% of earners, which includes people whose gross income  exceeded $200,000 (accounted for 43% of the taxable income) and paid 70% of all the federal income taxes.  The total income of the top 10% of wage earners dropped by more than 20% between 2007 and 2009. They paid a total of $610B in taxes in 2009, down from $794B in 2007. That’s a drop of over 20% in revenue, and that accounted for more than 45% of the total loss of tax revenue in 2009 due to the recession.  What this means is that the country takes a much bigger hit when high earners’ income drops because the tax code is so dependent on their revenue.  Furthermore, only 27%  of high earners repeat their earnings for subsequent years, meaning around 75% of high earners move into and out of the ranks annually.  High income is volatile and unreliable, yet we bank on high earners for the vast majority of our tax revenues. And, by the way, the top 25% of earners account for 87% of the revenue.  Would you want rely on 87% of your retirement income to come from just 25% of your investments?  Yet, the administration wants to double down on this by raising the rates on, and thus increase the reliance on the top 10% (not just the 1%).

If you view the government as one big holding company (like Enron), its failure to adequately manage the economy is more catastrophic, the bigger it is, since it takes so many economic decisions out of the private sector.  A small number of people are making the decisions, and they are all concentrated in one entity. The Federal government accounts for 25% of our GDP.  Add in state and local government and it comes to almost 45%.  Forty cents of every dollar the government spends is borrowed money, and the administration wants to increase our spending, and thus our borrowing.

Government-centered economics is not a ticket to prosperity. Government is neither well-suited nor good at “investing”.  Putting money into basic research is a far more effective way for the government to spend money than to pick a company and fund it.  This is why so many of the administration’s attempts to fund startups have failed and why so few jobs have actually been created.  When government takes money out of the private sector and moves it to favored industries, politics inevitably plays too big a role.  The stimulus package produced far fewer jobs than it should have, and the cost per job has been in the mid-high hundreds of thousands of dollars. (Creating a job within the private sector costs a fraction of that amount.)  The result is that fewer people are working, and the tax revenues more workers could have brought in have not been realized.  Remember that the government, unfortunately, is not using its own money.  It’s using ours, but because it is not responsible to make a profit, losing money means nothing. We are paying disproportionately for their mistakes.

The stimulus should have been used to fund infrastructure and other direct job production in the private sector, as promised. Instead, much of it went to administration-picked companies (crony capitalism), states used their share of the stimulus to shore up their governments, the Federal government added 132,000 jobs, and who knows where the rest of the money went.  The simple point is that the stimulus, no matter how well-intentioned, was heavily influenced by politics, and as a result, has largely failed.

To be fair, many proposed infrastructure projects were never started.  They were held up by the very regulations that have stymied business growth. The red tape required to even begin such projects has held up their progress to this day.  The President recognized this, and it’s possible some of these projects will come to fruition, but for now, there have been far too few of them to have had any real impact.

My larger point is that with an economy that is limping along, we cannot generate the levels of income and wealth that will produce adequate tax revenues.  Contrary to the wishful thinking of many, raising taxes on the rich will never realize the level of revenue desired.  First, there isn’t enough money there, even if they were taxed at 100%. (Actually, if we did that, the rich would simply stop earning income at the point over which it would be taxed at 100% and there would be no additional revenue.)  Imagine taking all the wealth from the wealthy and redistributing it.  The wealthy would no longer have investment-generated income, and thus there would be no tax revenue from them.  Furthermore, the money that would be redistributed would likely generate far less or no tax revenues, because, at best, it would be taxed at a much lower marginal rate! At worst, the money would not be used for investment purposes, but rather for consumer level spending.  While this would help, bureaucratic overhead would result in much less money being actually distributed. Second, the wealthy know how to adapt to changing tax structures to avoid paying unreasonable amounts. History shows that raising the tax rates on the rich does almost nothing to increase revenue.   Tax revenue is almost entirely dependent on GDP. The share the rich pays tends to remain constant at around 20% of their income no matter what the rate. Raising capital gains tax rates almost always results in fewer realized capital gains.  Investors would rather wait for better tax rates, or they will reduce their realized gains to only a necessary minimum.

The most effective way to increase revenue is to reform the tax code in a way that insures that people can’t employ gimmicks and loopholes to avoid paying — something that has been proposed to and by the current administration (Simpson-Bowles, for example), but no leadership has emerged, either from the President or the Senate, to even begin the process.  That would also have a positive effect on the economy.

But don’t take my word for it.  Read Bob Woodward’s excellent book, “The Price of Politics”.  He provides details of budget negotiations between congress and the administration in 2011.  It’s not pretty. However, there’s a section that talks about the administration’s push to tax the rich more.  Woodward confirms that the total take would be less than 10% of what’s actually needed to make a dent in the debt, but also notes that several prominent Democrats admitted to him directly, that taxing the rich is nothing more than “symbolic”.  However, Woodward also reports that the Simpson-Bowles Commission had and still has bi-partisan support.  They proposed lower tax rates and removing most itemized deductions, along with some tax increases. That commission was the President’s commission.  He has failed to adopt its recommendations.  Had he embraced them, we would not find ourselves in this situation.

But the economy is affected by other factors.  My other major point has to do with the continuing debt.  The long-term implications of our current debt are grim. High levels of debt slow the economy. Right now we are printing money to inject more liquidity into the economy in the hope that as it flows to banks, they will increase their lending and help fuel a stronger recovery.  However, banks are not lending and cash-rich businesses are not investing.  They are uncertain about their tax liabilities and they don’t see the demand from consumers that warrant more hiring and growth. They are burdened by regulations, many of which are unreasonable. Furthermore, pouring newly printed money into an economy devalues the currency, which will ultimately take the form of inflation.  Interest rates will ultimately rise, and short-term debt, as it comes due, will be replaced by significantly more expensive debt.  Inflation will reduce the value of our savings, it will make goods more expensive, and as the government has to pay higher and higher interest rates on the debt, there will be fewer and fewer funds available to run the country.  Some of what I say here has been disputed by economists, but this is my analysis.

The administration has yet to face the debt.  It continues to propose spending programs that cannot be sustained.  The White House’s own 2013 budget projects a total of over $9T  in deficits per year for the next 10 years, taking us to $25T in debt by 2022!  (See p. 6 of http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/13msr.pdf )  It is true that this budget is projected to bring down the percentage of GDP the debt represents, from over 90% to about 80% in that period.  But, I don’t believe the economy can grow fast enough with this level of taxation and spending to keep the country from turning into Greece, or worse.  Entitlements and pensions take up so much of the budget that we are running out of time to address them without permanent harm.  When one accounts for future interest expenses on the debt, entitlements and some amount of reasonable military expenses, there’s nothing left for discretionary spending.  Something has to give, and I don’t see any possibility that the current administration will ever really take on these issues. When our bills come due, meaning when our debtors demand that we pay them off, we could default.  And that would trigger a world-wide recession or worse.

All this is to say is that those things that many of us hold dear – the environment, health care, welfare, and virtually every other social program, cannot be funded and sustained – not unless the economy is allowed to grow.  Our children and grandchildren will pay for our debt through higher taxes and a reduced standard of living.  Included in that standard of living will be significantly higher costs for college and medical care.  I believe that we can control our spending on these issues until we get our house in order with less damage than would occur if we continue down the current path.

The President simply doesn’t seem to want to do what’s necessary to allow businesses to grow. He expressed hostility to business directly in his book “Dreams from My Father.”  There he stated that working in a NY law firm was like being “behind enemy lines”. He has demonized the wealthy as fat cats and plutocrats.  (This is neither presidential nor does it bring people together. Why would he expect support from this sector?) He plans to levy additional tax burdens on businesses, possibly raising the already high 35% rate to 40%, most of which will be borne by small businesses.  Businesses have tried, without success, to impress this upon the President and have been consistently rebuffed.

His plans for raising the estate tax to impose a federal marginal rate of 45% on estates greater than some arbitrary amount (2-5 million) will hit small businesses being passed to heirs with high valuations and low liquidity, requiring heirs to sell off assets to pay the taxes.  In many cases this will destroy the businesses and the livelihoods of those heirs.

The President’s policies are similar to those of the New Deal.  How did the unemployment rate fare during the New Deal?  The following table shows the unemployment levels from 1931 (just prior to the beginning of the New Deal) to 1939.

1931          15.9

1932          23.6

1933          24.9   < FDR, New Deal begins; contraction ends March

1934          21.7

1935          20.1

1936          16.9

1937          14.3   < recession begins, May

1938          19.0   < recession ends, June

1939          17.2

These numbers are about 10-12 percentage points higher than what we are experiencing now.  And when you factor in the people who have left the labor pool and are not counted in unemployment figures, the numbers are only a point or two different.  If the present policies are continued, estimates are that we will not see employment at the 5-6% level for at least a decade.  What does this mean for job seekers coming out of college over the next 10-15 years?  It means that, like today, only 50% will find jobs commensurate with their degrees.

There are a few simple strategies that could have a huge impact.  First, lower domestic corporate tax rates so that they, at least, compete with those of other countries (ours is the highest in the world).  Second, lower or eliminate the tax rate for repatriated dollars (profits that companies make overseas that they bring back into this country).  Right now, companies simply leave those profits off shore and grow their businesses there. Those two measures alone will give executives some confidence that they will have enough money to re-invest and grow their companies.

One more measure would seal the deal.  Businesses spend over a $1.5 trillion dollars a year contending with regulations. In 2011, the Obama administration issued regulations costing businesses over $230B and comprising 82,000 pages of the Federal Register.  What’s necessary to oversee these regulations, and how much of them are really necessary?  This is just not realistic, no matter how important the regulations may seem.  Lightening the regulatory load would free up hundreds of billions of dollars that could be put to better use.  There are plenty of regulations that could be lifted, even if just temporarily, that could have a high positive impact on growth.

Romney’s economic policies support these ideas.  They are not, as the President would say, a reversion to the “failed” Bush policies (the unemployment rate during the Bush administration was in the 5-6% level). The President’s plans for the future, to the extent that there are any, are a continuance of his present plans.  I do not see how more of the same will produce a different result.   If a company’s profits are taxed at 35-40%, it simply cannot invest money in capital and employees at the rate it would were those taxes lower.

My contention is that some of our national priorities have to wait until we get our fiscal house in order and restore economic growth. This wouldn’t be as harmful in the long run as not solving our economic problems.  That, in turn, could get us to the point where we could, in fact, devote resources sufficient to get at those other issues.  It’s like building the house before the foundation to spend money we don’t have on issues that, while important, can wait for the foundation (the economy) to be built to the point where expenditures on them could be made.  Unfortunately, I don’t see the current administration as being willing or able to support this approach.