The Definition of Insanity

Insanity: doing the same thing over and over again and expecting different results.

This little quote is commonly ascribed to Albert Einstein, but that is not certain. Nonetheless, it is funny and insightful. I suspect most of you see other people doing this around you, and heck, admit it, each of us has done this at least a few times. Try a little harder, a few more hours, a little more effort, one more chance…

Well, here we are. We essentially reelected the same people and left the powers that be in the White House, Senate and House of Representatives as is. And everyone has already said “I have been reelected to do what we have been trying to do…”

The President wants to raise taxes on “the rich1” as part of any deal.

Senate Minority Leader Mitch McConnell (R-KY) says read his lips – no tax hikes.

House Speaker John Boehner has spoken about closing tax loopholes while lowering tax rates as part of a balanced approach to spending. But no tax hikes, period.

So, this is different? Well, maybe. The Fiscal Cliff lies just ahead, a devastating combination of slashes in spending and tax hikes, and very likely a return to recession and even higher unemployment if it happens.

Geez, are we going to do this again?

I guess we are. But maybe the immediate threat of the fiscal cliff will get their attention, now that they have finished using it for political advantage. Maybe. The President today invited legislators to the White House for talks next week. Perhaps the beginning of an effort to exert some leadership on this issue. In fact, Speaker Boehner specifically invited the President to exercise leadership and not leave it to Congress. Progress? An opportunity? Maybe.

Today’s press

Today we linked three articles on this topic:

  1. New York Times:  Obama and Boehner Circle Each Other on Budget Impasse
  2. Fox News/AP:  Boehner call on Obama to ‘lead’ on averting ‘fiscal cliff’
  3. Wall Street Journal: Let’s Review: Obama’s Plan to Limit Tax Breaks

These articles outline the issues pretty well so we won’t repeat all of that; you ought to read them. We will offer a few comments. In fact, two comments on the articles themselves caught my eye:

  1. Smart money will flow elsewhere.
  2. The second AMT will be worse than the first

What is coming will likely be yet another CPA/Attorney full employment act. More pain and complexity and taxes ostensibly aimed at “the rich” will certainly mean more time and resources expended finding ways to avoid these things. And worst case, people with capital tend to flee taxes that are too onerous. We have seen this play before.

AMT was originally enacted to ensure “the rich” paid their “fair share2” and ended up being an issue for the middle class – if we go over the fiscal cliff, millions of middle class Americans will be hit with this thing. Anyway, now we are going to have another one? Only inside the beltway could that not be considered another obvious example of insanity (see definition, above).

Above all, remember that all the projections of tax revenue raised by new taxes or higher tax rates are static, they ignore the fact that circumstances change, and that people and companies respond to these things by changing behaviors, or even leaving. The revenue projections (or “costs” in the case of tax cuts) are simply fanciful, because many reactions follow and everything changes.

As a very sad and ongoing example, look at the lack of job creation in the U.S. during this anemic recovery. Corporations are sitting on trillions of dollars of cash instead of investing and hiring in the U.S. as they wait for all the uncertainty to be resolved. Then they will respond.

Think about this one. If taxes on corporations in the US, among the highest in the developed world, are not reduced, and if new taxes on all sorts of things are introduced, along with regulations and Obamacare and all its costs, taxes and requirements, what will the result be? I do not have a crystal ball, and I cannot be confident that I can predict what everyone will do. But this worst case scenario would not fill me with confidence for the US economy and especially not for any improvement in our chronic unemployment.

But what if some real statesmanship emerged here, and people in Washington stopped the games for a few days and put the country first? Compromised in meaningful ways for the good of all? Miracles can happen; it would not be the first time.

So stay tuned, and let’s all hope for signs that we not only get some real action for a change, but sensible action. We can all recall divided governments (under Reagan and Clinton, for example) where the deals got done and positive change happened. So let’s try one more time, one more chance…

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Roger Hewins
Roger Hewins

President

Roger Hewins is the President of Hewins Financial Advisors, based in North Palm Beach, FL. Roger has more than 30 years of experience in investment management, helping bring the sophisticated financial advice typically reserved for large institutional clients to everyday investors, from high-net-worth individuals and families to small businesses and retirement plans.

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The Definition of Insanity

time to read: 4 min