More On Tax Planningfrom The Advisor's Professional Library
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
As Washington politicians play fast and loose with the debt ceiling, bringing the creditworthiness of the United States into question—not “can we,” but “will we” pay off United States Treasury debt?—the nation is playing a dangerous game.
To risk a credit downgrade for the United States of America for political reasons is poor judgment because putting the “full faith and credit,” of the United States in jeopardy will mean U.S. Treasury securities will have to pay higher interest rates—not only because of market conditions but because this doubt will make them riskier. See Politics, the Treasury and Risk.
In other words, will politics cause the U.S. to senselessly default on the U.S. Treasury debt and neuter the world’s safe harbor security? What irreparable harm will this do to confidence, that elusive element so necessary for the recovery to continue?
The Financial Times reported early Monday that Deputy Treasury Secretary Neal Wolin said, “this is not something we can afford to let happen or to let people think might happen,” adding, “We are talking about a unique and fragile asset of the U.S.: the full faith and credit idea.”
The importance of this risk cannot be overstated. Taxes will go up to pay higher interest costs on U.S. Treasury securities if the U.S. is deemed less creditworthy—the exact opposite of what Congress and taxpayers want to see. And of course there is a difference in using tax dollars to pay for important programs—whatever your cup of tea is—and using tax dollars to pay interest on debt. Every dollar that goes to pay higher interest rates on U.S. Treasury debt will not reduce the deficit or fund programs. Although bond buyers would
probably appreciate a bit more in interest, the risk associated with the stigma of even potential U.S. default won’t do anybody any good. Higher taxes resulting in no reduction in the deficit is something Congress urgently should seek to avoid.
Politicians should put the country’s interests first, and raise the debt limit to accommodate the debt long before the 11th hour. In fact they ought to reassure the world that the U.S. will not default on its obligations. Then they can concentrate their efforts on creating jobs and reducing the size of U.S. debt. First things first.
Premature Inflation Worries and ‘Deficit Fetishism’
Two Nobel Laureate economists, both with liberal views, have been sounding alarms for some time over the timing of deficit cuts and getting excited too soon over inflation. Paul Krugman, in his blog for The New York Times, posits that the U.S. may be heading toward making the same monetary policy mistake as it did in 1937 if the push to tamp down inflation fears causes the Fed to “raise reserve requirements.”
And Joseph Stiglitz spoke in Denmark, asserting that “deficit fetishism” discourages economic recovery, Bloomberg news reported. See also, on AdvisorOne, Nobel Economist Stiglitz Accuses Budget Hawks of ‘Deficit Fetishism’
What happens to the U.S. now and in the future remains in the balance. If politicians in Washington decide to press to limit the debt ceiling, the outcome—lower credit rating, higher costs to borrow resulting in higher taxes to pay higher rates on U.S. debt—would likely be devastating and permanent. Default on U.S. Treasury securities is avoidable and the credit rating on the United States of America should not be used as a bargaining chip to win a temporary political victory.
Congress must act on behalf of taxpayers and investors.