The Deficit – One Big Hoax or a Looming Catastrophe?

I have spent five blog postings discussing the deficit as one big hoax. I did so not because I think that it is something that can be ignored, but rather because as used by the Republican Party, (and their ostensible tail that wags the dog, the Tea Party) it was being used not because of a real concern about the consequences of the deficit, which after all they created with malice aforethought, but rather as a weapon with which to try to destroy our safety net, and I spent those many words demonstrating this.

To summarize, they inherited a huge surplus from the Democratic Clinton Administration and turned it into a huge deficit, one even larger than it appeared because so many expenditures, such as the wars in Iraq and in Afghanistan were taken off- budget, as was the drug enhancement in Medicare, which, by the way, President Obama has restored to the budget, making the deficit seem larger by comparison.

Their Vice-President, Dick Cheney, famously declared: "Reagan proved deficits don't matter."

And the famous Ryan budget, which provides for the abolition of Medicare ostensibly to reduce the deficit, in fact increases the deficit, something that our media has not, to my knowledge, even mentioned. I had to go the The Economist to get the shocking fact that the Ryan budget not only does not reduce the deficit, but in fact increases it by $6 trillion over the next decade.

It was for that reason, as well as an article in the financial advisory letter of Fidelity Monitor that I called the Deficit a Big Hoax.

But if the reader will return to my blog posting entitled "The Deficit – One Big Hoax (Part I)" they will find near its end the statement: “But let me be clear! The deficit does matter! It needs to be reduced over time. But there is no urgency about doing this, and it can, and should be done with some targeted cuts, which I will identify hereafter, and with mostly revenue enhancements.”

Here I must refer to a comment, which I received from Edwin S. Bernstein Esq. of Boynton Beach, Florida, who wrote in response to my post referred to above,

“I think that the deficit matters…. We do need to balance our budget…”

If Bernstein had read my post to the end, he would have found my comment quoted above that deficits matter, but more important I take exception to his statement that “We do need to balance our budget…”

The fact is that the last time we had a truly balanced budget was in 1969 (Clinton’s surplus depended on counting the Social Security surplus in the budget, though the projection of surpluses in future years was real) and during this whole time it was never a problem. However, at some point the size of the deficit matters, though where that point lies is problematic.

The idea of a Balanced Budget amendment is sheer lunacy and would put our economic policy into a straight jacket. In supporting this, proponents often try to compare the US Government either to a corporation or to family budget. It should be fairly obvious that neither comparison is apt, since the responsibilities of the government are entirely different from either. But even if we were to accept the comparison it must be noted that neither a business, nor a family, ever manages without debt. Large businesses borrow to acquire assets they need, or to expand, and small businesses often have to borrow just to meet their next payroll. In addition both businesses and families strive to increase their income, while Republican dogma prescribes a deliberate lowering of income or revenues, The extent of borrowing can easily be seen if one looks at the corporate bond market, and few families could buy a car, not to speak of a house, without borrowing. The municipal bond market shows the need for borrowing by municipalities. Our infrastructure, whether of highways or railroads, or for that matter our electric grid could not have been built without borrowing. And can anyone imagine an emergency, such as a major war, requiring large outlays, leaving us with a Constitutional restraint requiring unimaginable tax increases or abject surrender and the proposed Constitutional Amendment would make the imposition of tax increases blockable by a small minority.

The problem we face is not the size of our present deficit but the size of our debt projected into the future, if we had done nothing, (and the much criticized deficit reduction agreement the President has signed off on, has reduce this looming catastrophe) and if we do nothing, we face a non-sustainable deficit, which I will discuss in greater depth hereafter.

But before I do this, (and this will once again have to be a multi-part presentation) I want to examine the oft-repeated charge that the Obama Administration, while it may have inherited a large deficit, made it much larger through irresponsible policies. Thus if we compare the last Bush budget in 2008 with Obama’s first budget in 2009, we find that the 2008 budget had a deficit 460 billion. In 2009 Obama’s budget showed a deficit of 1.41 trillion or an increase of $950 billion, a staggering increase, and one that Republicans, and even some news organization, have been pointing to with disapproval. But rarely if ever have we seen a breakdown of how this increase occurred. Once again the media doesn’t give us the facts. But they can be found through hard work.

-$320 billion were due to declines in tax receipts due to the effects of the recession
-$245 billion—resulted from outlays for the Troubled Asset Relief Program (TARP) and net payments to Fannie Mae and Freddie Mac.
-$200 billion American Recovery and Reinvestment Act of 2009 (ARRA)
-$185 billion due to increases in primary budget categories such as Medicare, Medicaid, unemployment insurance, Social Security, and Defense – including the war effort in Afghanistan and Iraq, which had previously been off budget.
-While the American Recovery and Reinvestment Act of 2009 (also known as the stimulus bill) was estimated to be $787 Billion at the time of passage, only some of it kicked in 2009, with some in 2010 and later, which is why only $200 billion of the $787 billion are shown above.

See the Congressional Budget Office Monthly Budget Review .pdf and here.

For those who may be interested in how the stimulus bill broke down $288 Billion was in the form of tax incentives, $155.1 billion for Health Care, $100 billion for education, $82.2 billion was for Aid to low income workers, unemployed and retirees, $105.3 billion was for Infrastructure Investment, $7.2 billion was for Government buildings and facilities, $10.5 billion was for Communications, information, and security technologies, $21.5 billion was for Energy Infrastructure, $27.2 billion was for Energy efficiency and renewable energy research and investment, $14.7 billion was for Housing, $7.6 billion for Scientific research and $10.6 billion was for miscellaneous items. See here and footnotes therein.

The CBO estimated that enacting the bill would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, by $399 billion in 2010, and by $134 billion in 2011, or $787 billion over the 2009-2019 period. Ibid.

As for its effectiveness several independent macroeconomic firms, including Moody's and IHS Global Insight, estimated that the stimulus saved or created 1.6 to 1.8 million jobs and forecasted a total impact of 2.5 million jobs saved by the time the stimulus is completed. The Congressional Budget Office considered these estimates conservative. The CBO estimated according to its model 2.1 million jobs saved in the last quarter of 2009, boosting the economy by up to 3.5 percent and lowering the unemployment rate by up to 2.1 percent. Congressional Budget Office Monthly Budget Review .pdf and Ibid.

For the 2010 fiscal year the spending came to $3.456 trillion with tax receipts of $2.162 trillion, or a deficit of $1.294 trillion, which is a decrease in the deficit $116 billion.

(For those who may not be used to such astronomical figures, a trillion is 1,000 billion)

Given these figures it is hard to fault the Obama Administration for creating either the present fiscal shortfall or the projected one.

However, a review of the Congressional Budget Office projections gives us pause about the future. The CBO gives us a number of projections, the rosiest of which, makes a number of assumptions, not the least of which is that none of the Bush tax cuts would be extended beyond 2012, which is when they are currently set to expire. Since they will expire unless Congress extends them this could not be blocked by Republicans. However, the President pledged in his campaign that only those making less than 250,000 would be exposed to higher taxes. If this campaign promise were kept a large chunk of revenue would be lost. Furthermore, for the purpose of this projection they assume that the alternative minimum tax, which is impacting more and more middle class voters would not be adjusted, which is almost inconceivable, because if allowed to continues in its present form, it would make a mockery of the graduated income tax. Assuming these unlikely scenarios the CBO projects that government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt (emphasis added) would decline to the lowest percentage of GDP since before World War II. See the highlighted portion of CBO’S 2011 Long-Term Budget Outlook.

But not only are these projections based on some unlikely specific tax scenarios, they assume that the tax receipts would rise to 23% of GDP, a level that has not been seen in decades and much higher than the taxes under the Clinton Administration, and even than they do not include Medicare, Medicaid and Social Security spending. These are specifically excluded in the projections, which I believe is the correct approach. I believe that these programs should be taken out of the deficit projections, and should be treated as problems separate and distinct from the budget and the deficit.

In a way they already have been for the way the government budget is calculated masks the impact of these programs on the total budget or even on their own viability. An examination of the CBO’s paper entitled: "The Impact of Social Security and Medicare" shows the impact these programs have on the Federal budget. As the paper explains:

“Under the Congressional Budget Office's latest budget projections for the next 10 years, those trust funds are estimated to run sizable surpluses. However, those surpluses reflect more than an excess of dedicated revenues over spending. A substantial portion results from internal transfers between Treasury accounts--credits from the general fund of the Treasury to the trust funds. Thus, although the trust fund surpluses may accurately reflect the programs' spending authority, using them to gauge the programs' budgetary impact distorts their net effects..."

Similarly, from 2003 to 2026, instead of running a cumulative surplus totaling $6.5 trillion, as estimated by the Social Security and Medicare trustees, the programs would run a cumulative deficit totaling $6.6 trillion.

Therefore I will defer a discussion of these programs until my next post.

But before I close I feel it my duty to disclose the pessimistic projections by the CBO. Under what they consider the most likely scenario given the realities of the political process, the CBO projects that; “Debt as a share of GDP (Gross Domestic Product) would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035” See: CBO’s 2011 Long Term Budget Outlook .pdf a portion of which has been both highlighted and underlined in the document referred to.
Clearly the Bush Tax cuts must not be extended, and not just those for people earning over $250,000, and the cuts provided for in the Budget Control Act of 2011 (BCA), are an essential component of getting our deficit under control, without undermining our Social Safety net.

Continuing Discussion About Barack Obama’s Effectiveness.

In my last post entitled: "Bulletin with Humor" I wrote: “I intend hereafter to discuss where we should cut expenditures, where additional revenue should be sought, and will also distinguish between what I believe is desirable but politically impossible and what might actually be achieved, if not now, at some future time. I will also try to address the economic theories that lie at heart of political philosophy and evaluate their merits and to what extent our political leaders have been adhering to such economic theory as their foundation."

I have now decided to put this off to my next post and to revert to the ongoing debate which we have been having about the merits of the President’s policies and the constant charge that he is ineffective and a poor leader, which comes from both sides if the political spectrum.

In my long debate with Leonard Levenson Esq. of Manhattan, NY, which can be found in my blog posting "The Trojan Horse – Comments II (continued)," I had the very unusual result of having my protagonist actually admit that I am right.

This was so satisfying that I cannot resist quoting it again:

You may have a point when you suggest that my anger at Obama is really disappointment at the lack of progress that I hoped for. Perhaps no Democrat could have made any substantial progress against the know nothing Republicans. I think I would have preferred a battle royale (even a losing one) than accepting a weakened Health care Bill, an inadequate deficit reduction bill and the many other compromises, which Obama probably was forced to make.

I only wish that more people had such an open mind.

At this point I want to conclude this debate by sharing with my readers an exchange, which I had with Robert Malchmna Esq. of Brooklyn, NY. He called to my attention a New York Times Magazine article entitled "What Would Hillary Clinton Have Done?" I assumed that the article was sent to me with approval and wrote back:

Thanks! Yes I do find it interesting. It parallels to a large extent what I have been saying, and say even more emphatically in my next post.

But then Malchman called to my attention a comment that he had posted on the Times web site that clearly indicated that he agreed neither with me nor with the Times article; He wrote:

I think in broad policy areas, the writer is correct that there was little to distinguish Obama and Clinton during the primaries. The reason I voted for Clinton (and I agonized over it) is that I was afraid that Obama's first years in office would be like Bill Clinton's and Jimmy Carter's -- that is, a struggle to understand how to move the levers of power and to get a legislative agenda through Congress. Clinton, both from her time as First Lady and by then eight years as Senator, knew how to work those levers.

I believe my fears have proved correct. Obama certainly has some substantial accomplishments, but where's the strong public option for health care? Where's the closing of the budget gap by taxing families making over $250,000? Indeed, where's the surtax on incomes over $1 million? Obama failed to strike while the iron was hot, with a House majority and 60 votes in the Senate before Ted Kennedy's death. That health care didn't pass until late in his second year is a disgrace. That the Bush tax cuts were left to the lame-duck session and extended for the wealthy is a disgrace. That the debt-ceiling issue wasn't resolved at the same time as the Bush tax cuts is a disgrace. Obama seems woefully naive about Republicans and their single-minded goal to defeat him, regardless of the damage they do to this country. I don't think Clinton is so naive; she appreciates the machinations and goals of the vast, right-wing conspiracy. No one can know for sure, of course, but I think the country would have been better with President Hillary Clinton.

I frankly was taken aback and disappointed and responded with:

-------------------------

Dear Robert,

I was rather surprised and disappointed by your Comment 21 as posted to the Times site.

I keep preaching facts first, then opinions based on those facts. You assume that "Clinton, both from her time as First Lady and by then eight years as Senator, knew how to work those levers. But there is no evidence to support this. There are no facts to support this. It is pure speculation. Her accomplishments as Senator are hardly existent.

If we go by her and her husband’s accomplishments, they are meager indeed. As fist lady she spectacularly failed to get any traction in her own party for her health care bill and as I said in my post "The Trojan Horse - Comments":

Clinton did a terrific job in raising taxes early in his term, which together with an agreement with Fed Chairman Greenspan, to lower interest rates, brought on the eight most prosperous years in a very long time and wiped out the deficit. But he was lucky to get it passed. It passed by a tie vote in the Senate with the VP breaking the tie, which by the way shows that bringing prosperity is not a sure fire way to win a mid-term election.

Nevertheless, Clinton after losing the midterms, swung Right, employed that hired gun, Dick Morris, became famous for triangulation, and presided over, among many other things, the repeal of the Glass–Steagall Act, which probably was largely responsible for the bank crisis, presided over the abolition of Welfare, signed into law the "Don't Ask, Don't Tell" and couldn't stop the enactment of the Defense of Marriage Act (DOMA). (And this wasn't just in the first term, it extended into the second.)

Yet the base never savaged him. Somebody tell me why these Presidents are treated so differently?

Well, maybe because Obama unrealistically promised both to be a post-partisan and a transformational President, which are contradictory and impossible to achieve. But it should have been obvious that these are aspirational goals, not achievable ones.

You say: "Obama failed to strike while the iron was hot, with a House majority and 60 votes in the Senate before Ted Kennedy's death." without getting the facts as to how long this window was. If you count when Franken was sworn in and when Kennedy died we have a window of less than two month from July 8, 2009, when Franken was sworn in and August 26th when Kennedy died. Not too much of a window to get anything done in a Senate where the rules, at best, require slow movement. But even that is deceptive because the 60 votes were never really there because Kennedy was hospitalized on January 21, 2009, long before he died, and after that made only rare appearances on the Senate floor. Furthermore there were Democratic defections, most notably Lieberman, who threatened to himself lead a filibuster against the public option, and some other Dems as well.

Compare Obama's achievement against any other Democratic President (set forth in my blog posts "The Trojan Horse - Comments" and "The Trojan Horse – Comments II") since Roosevelt with the exception of Johnson, and he comes out well ahead in accomplishments, despite the fact that he has faced far more partisan and reckless opposition.

The Bush tax cuts extension was a calculated decision that getting the treaty with Russia, unemployment insurance, and some other stimulative measures was a careful balancing act. The economy was first and we could not leave a major security risk, and the tax cut extension was for only two years, not as you imply for an indefinite period.

On the debt ceiling issue, 20/20 vision is wonderful. Did anybody, and I mean anybody, worry about a debt ceiling that had routinely been passed every time it came up, at that point. Oh, but Obama is tasked with seeing things that nobody else saw. And who says he could have gotten it. If he had raised it and not gotten it, he would have been savaged for having been the one who gave the Tea party the idea. Besides a two year extension would have been almost unprecedented.

It is very easy to list things undone. But what counts is what was done. Compare all the Democratic Presidents since Roosevelt with the exception of Johnson, including Kennedy, for their accomplishments.

FACTS FIRST, THEN OPINIONS!!!!!

Regards,

Emil

-------------------------

I was disappointed not to have received a concession from Malchman similar to what I got from Levenson.

But the Pundits keep up their attacks on Obama. I have came across another two lately, both in Newsweek, which under the aegis of Tina Brown tries to recover its audience by becoming ever more sensationalist. They are “The Untransformational President" by Michael Tomasky, where the author says; “He signed a debt deal in which the Republicans took him to the cleaners” but like all the others neglects to tell us what the deal is or why he considers it to be a bad deal. Facts – Where are the facts? I have demonstrated, heretofore that it was in fact an advantageous deal. and "Oval Office Appeaser" by William Broyle, who compares our President to Chamberlain. (Talk about over the top) Apparently these people, like the Tea Party, consider any compromise to be appeasement, no matter how advantageous it is.

Are these friends? Or as Lenny Levenson referred to them “putative friends?”

Now we have had a hurricane that descended on our East coast. Will Obama be tasked for not having stopped it, or at least be charged, no matter what he does, with having a Brownie moment, so that it can be claimed that Obama is the new Bush. Does anybody really believe that?

I am reminded of an incidence when my daughter was about three years old and a thunder and lightening storm descending upon us. She was frightened and she said to me: “ Daddy, Make it Stop!” I explained that I did not have that power, and she exclaimed, “Well, You could at least try!”

We are not children and the President is not our Daddy!!! He is not God, nor a dictator, nor does he have a magic wand!!!

It is time to stop bellyaching and concentrate our fire on those whose vision for our country is anathema to me, and I hope to most of you. It is time to close ranks unless anyone out there truly thinks that the candidates of the Republican party dominated by the Tea Party, will do anything other than make our short range situation worse, and destroy all the things that we have built, in a truly bi-partisan way, from Theodore Roosevelt (R), to Wilson (D), To FDR (D), to Johnson (D) to Nixon (R) and even Clinton who wiped out our deficit and put us on the path to wiping out our National Debt, now Barack Obama (D) and even Eisenhower (R) who so meticulously built our Highway System, now under attack as just another socialist boondoggle that needs to be privatized.

The Deficit & Spending

That we are in an economic downturn there can be no doubt but to blame it on the normal cyclical effects of the business cycle and to the price of oil is to ignore, as some would like, the failed policies of the past eight years. When this Administration with its Republican Congress took office we had just completed eight years of economic prosperity. When Clinton took office he inherited from twelve years of Republican misrule a failing economy (see here) and a $290 billion deficit. When he left office eight years later he had succeeded in turning that into a $100 billion surplus that was expected to quadruple in the decade ahead. There was even an expectation that before long the National Debt accumulated since the founding of the Republic would be wiped out. Now eight years later we have, according to the Office of Management and Budget, a deficit projection of $482 billion, the largest deficit in American history eclipsing the previous record of $413 billion set in fiscal 2004. See here.

Deficits matter! In fiscal year 2006, the U. S. Government spent $406 Billion on interest payments to the holders of the National Debt, which for the most part is China. Compare that to NASA at $15 Billion, Education at $61 Billion, and Department of Transportation at $56 Billion. It is the third largest item in the Federal budget after Defense and the Departments of Health and Human Services. If that 406 billion were available it could have been spent at least in part, on shoring up our infrastructure, which is collapsing, on education, and the myriad needs of our country. Right now numerous vital agencies, such as the FDA are under funded. When Congress recently passed a bill putting tobacco under the jurisdiction of the FDA the White House objected on the ground that the FDA is having enough problems dealing with its present jurisdiction for foods and drugs but never considered giving it the resources that it needs. Our National Parks are under funded and not being maintained. Our educational system is in crisis. And of course our energy needs are not being addressed.

In 2001, when this Administration took office gasoline was priced at about a $1.60. Now it is over $4.00. Who is to blame? It is a matter of world supply and demand but the supply has been relatively steady. It is demand that has skyrocketed. Many have pointed to China and India as the culprits and to be sure their demand has gone up. But their demand is a fraction of ours particularly when counted on a per capita basis. According to T. Boone Pickens, a leading oil magnate, (and incidentally a man who helped finance the Swift boat attacks,) we were importing 24% of our oil in 1970. By 1990 that had gone up to 42%. Now in 2008 we are importing 70% of our oil at a cost of $700 billion a year or $7 trillion over ten years. Yet when it was proposed that the CAFÉ gas efficiency requirements on autos be raised early in this Administration, this Administration and its cohorts in the Republican Congress wouldn’t hear of it. When other conservation measures were proposed, they wouldn’t hear of it. Instead, they gave away billions of dollars to the oil industry

They like to blame China and India and other emerging economies for causing the increased demand, but again according to Pickens the Chinese have 44 cars per 1,000 people as compared to 750 cars per 1,000 people in the US. The whole world consumes 85 million barrels of oil of which the US consumes 21 million or 25% even though the US population is only 4% of the world population.

Some talk about our present economic malaise as being part of the business cycle, exacerbated by greed in the housing and financial markets but fails to point out that Republican policies were to blame. Now the Administration, through its Secretary of the Treasury, Henry Paulson, is calling for regulations but that is closing the barn door after the horse has gotten out. It is the failure to anticipate and to have put regulation in place before the crisis is at the heart of the crisis just as the failure to address the oil crisis before it came upon us is to blame.

They talk about posturing but fail to talk about the real posturing that is being fostered upon us. Instead of real solutions to our problems we are offered drilling off shore. Aside from fouling our beaches and our environment it would do nothing for our economy or the price of oil either in the short run or the long. As Pickens points out we can’t drill our way out of this mess. Any oil extracted would not come on the market for ten years and even then the amount extracted would be insignificant and do nothing to favorably effect supply or the price of this commodity. And McCain stands there and postures and postures and in typical Rove manner slanders and slanders.

In the end they offers us the same policies that got us into this mess. His solution is to cut out wasteful spending, something we can all be for, but that is a bromide that keeps being offered and never turns out to be a solution. The idea that taxes must be reduced and reduced and never increased is what got us into this horrendous deficits, not just on the national scene but in the States as well. Both New York and New Jersey are facing budget crisis.

They talk about Social Security being taxed, but fail to tell us that this is a tax that was proposed by the Reagan Distraction or that it was intended to shore up Social Security and that every cent of that tax goes back into the Social Security Trust fund. Nobody has proposed its elimination, and its elimination would further undermine the solvency of SS.

As for the ATM it is unfortunate that this was not indexed for inflation. As it has been pointed out too much revenue is being generated from this tax for it to be eliminated, but it will be adjusted as it has been in the recent past so that it does not hit the middle class, and it will be indexed for inflation. Even then it will be a large loss of revenue for the Federal government and means must be found to make up for this loss.

The suggestion that tax collections be stepped up is a sound one but there has not been the will on the part of the Bush Administration to tap this source and McCain, despite disclaimers appears to have adopted every one of the Bush policies. It should be noted, however, in order to accomplish this, new laws targeting off shore tax shelters would have to be enacted and there seems to be no desire on the part of Bush/McCain to pursue this avenue. In addition additional funding for IRS’ enforcement would have to be appropriated not something Bush/McCain team has given any indication of favoring.

However, there is no reason why income earned from capital gains should be taxed at a lower rate than income earned from labor. We take pride in being a country that has a work ethos but taxes our labor as if it had less value than a passive return on capital. It is this, of course that causes the enormous inequality in the burden of the rich whose main source is return on capital as opposed to the middle class which earns most of its income from the effort of its labor, whether white collar or blue.

First we must bring our taxes in line with our expenditures. We cannot go on with an ever-increasing deficit. We cannot do this simply by cutting out waste. Cuts in other areas are simply not possible without hurting the middle class and the poor. We must pay for the war in Iran and in Afghanistan and its aftermath, which will cost billions even after those wars are concluded in replacing equipment and caring for our wounded veterans. We will not tolerate an attack on our main social programs such as Social Security, which McCain referred to recently as being an outrageous system, or Medicare or Medicaid. We should put a stop to the huge subsides paid to farm corporations but that is not about to happen. There are definite limits on our ability to substantially cut expenditures.

Thus if we increase tax on capital gains we can close the budget gap and then substantially reduce the tax burden on our working population.

Without a doubt middle class working people invest in the market and any increase in the capital gains tax would, to a limited extent, impact those people but the impact on someone who has a $10,000 or even a $100,000 investment in the market is miniscule, and can be more than offset by lower taxes on his salary or wages. If budget balance is achieved a lowering of taxes on labor may be possible. Right now earnings on capital are favored in so many ways that it is no wonder that that billionaire, Warren Buffet said that his tax rate is lower than his maids. We should consider lowering the payroll tax on the lowest earners and make up for the loss to the SS trust fund by increasing the cap on contributions. Capital gains are favored in so many ways other than by the low rate that substantial additional revenue can be obtained from this source simply by requiring brokers to notify the IRS when a security is bought and its purchase price. Right now brokers are only required to notify the IRS when a security is sold, so that short of an audit, the taxpayer can easily misrepresent its basis and its purchase date.

Under the present code even the small capital gain on investments is taxed only when security is sold but tax payers who are wealthy enough to let the securities increase in value until their death escape paying any tax either by them or their heirs. When the Security is passed to the heir, the heir does not inherit it with a basis of the purchase price, but rather gets a new basis as of the value of the security at the time that he inherits it. This is patently unfair to those who because they need the proceeds of the security before dying must pay capital gains taxes.

The Bush tax cuts which expire in 2010 had this expiration date built in because the figures of lost revenues were so large that the Administration knew that without the cutoff date it could not be passed. This is still true. The revenues lost from a total renewal of this ill conceive tax cut would lock our deficit in and assure its growth for decades to come. That is why no Republican Congress extended it when they had the majority. To now ask the Democratic Congress to take this irresponsible step is the height of Chutzpa. It should be allowed to expire, though tax adjustment to protect the middle class will be passed or as Obama has said, “No tax increases for people making under $250,000.” Personally I would have made that $150,000 but the promise has been made and will be kept.