How Can The Government Reduce Its Debt?

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It’s no secret that the US is in debt. The current level is debt is well over $15 trillion and the Obama administration projects another trillion dollar deficit every year for the next 10 years. Short of raising the GDP to avoid a global economy meltdown, there doesn’t seem to be a plan B.

While it is very unlikely that some of these options will be taken up, here are a few possible ideas that the US government could feasibly use to reduce their debt.

  1. Raise sales taxes. It would be wildly unpopular amongst tax payers, I’m sure, but the United States has one of the lowest VAT sales tax rates in the world at approximately 10% average. Compare this to the 18% sales tax here in the UK or 25% in the Czech Republic and this is a viable option for the government to look at.
  2. Raise income tax. Another controversial suggestion, but the income tax in the States is pretty low as well. The highest tax rate is 35% for people who earn $373,650 and up. The UK have an income tax of 50% for anyone earning $238,530 or higher and the base rate is 20%, double the base rate of 10% for the lowest earnings in the US.
  3. Open the borders. One of the best things Europe did for the economy was to open up the borders for member states. This would allow workers from other countries to come to the States for work, to start new businesses and, you guessed it, to pay taxes that the country desperately needs.
  4. Sell the interstates. Economist Kevin Hassett believes that the government could raise hundreds of billions of dollars by privatizing the highways. Yes, it would mean that the private companies would add toll booths to these roads, but it would significantly reduce the debt and the private companies would be much more likely to spend money on road maintenance – which means less accidents and other problems caused by poor maintenance.
  5. Reduce business regulations. It costs the economy $1 trillion a year to regulate businesses and government spending to enforce these regulations is $61 billion annually (and rising). By reducing regulations in areas like the financial services, the environment and food production, the national debt could be shrunk considerably.

I’m sure there are many other ways for the government to pay off this atrocious debt, and I’ve even seen one economist suggest selling the billions of dollars in gold sat in Fort Knox, so I am interested to hear your thoughts on how the country can avert this economic crisis.

Ian is a financial writer from the UK who is focused on debt advice and money saving tips. Click here to visit his site.

The Economic Influence Of Corporate Profits

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Peter Lynch once said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” Clearly, his philosophy on economics didn’t hurt his success at the Fidelity Magellan Fund.

Thinking about economics may have been a waste of time in Peter Lynch’s day, but the economy was a one-way street from 1982-2007. Massive borrowing tactics led to increased spending and huge corporate profits. Then 2008 happened, and a different course took shape. Reducing debt and saving money became the Justin Bieber of personal and professional finance.

Too many investors, including financial advisors, do not understand the connection between borrowing, spending, and corporate profits. They continue to invest like Peter Lynch, with a blind eye to the economy. They may know debt-fueled spending is now futile, but somehow still believe in the double-digit growth potential for corporate profits. Unfortunately, this is a pipe dream, and anyone assuming otherwise is headed for a world of disappointment.

Fact:  Corporate Profits Cannot Indefinitely Grow Faster Than The Economy

If you listen to Wall Street analysts’ profit predictions (not advisable), you’ll notice a common trend of large growth rates, sometimes nearing double-digits. While profits certainly can and do grow at double-digit rates for periods of time, this condition cannot continue indefinitely unless the economy is growing at the same rate.

This is one reason why Wall Street analysts almost always prove too optimistic with their profit projections. They project growth that is not realistic. Before moving on, it’s important to review a couple economic facts:

1)       GDP is the common measure of collective spending in an economy, which also means it’s a measure of collective income.

2)       Every dollar we spend is income to another.

The spend and borrow days are gone, replaced with debt reduction, stricter budgets, and as a result, slower growth from the economy. The relationship between corporate profits and slow growth is as follows:

Lower GDP = Lower Spending = Lower Income = Lower Corporate Profits

Thus, corporate profits cannot sustainably grow unless the economy is growing. And booming corporate profits increase the value of stocks.

Can’t Corporate Profits Grow Faster Than The Economy By Taking Up A Larger Portion Of Total Income (GDP)?

Yes, but on a temporary basis. Could McDonald’s decide to keep a larger share of the dollar from selling hamburgers to increase its bottom line? Definitely, but that doesn’t make the strategy sustainable over time.

1)       Competition. Without raising prices, McDonald’s can increase its profit from hamburgers only at the expense of someone else in the burger-making process. An example would be reducing employee wages or forcing the farmer to lower his prices.

Once Wendy’s, Burger King, and Carl’s Jr. figure it out, they could easily follow suit. They may even expand, or hire McDonald’s most efficient employees at higher wages, increasing productivity at McDonald’s expense.

This is how a free market system works. Competition keeps profits at reasonable levels. If profits are too low, businesses shut down because it’s no longer worth the trouble. Large profits pit entrepreneurs against each other looking for their piece of the pie. Inevitably, profits settle back to the middle.

2)       Workers won’t allow it. The workforce may be fine with massive corporate profits temporarily, but that indifference will morph into outrage over time. Wage increases will be demanded, recruiters will be in contact, unions will form, strikes will organize, etc. The Occupy Wall Street protests serve as a good example of what to expect when the income gap grows wider.

What’s The Diagnosis On Corporate Profits Today?

Total corporate profits as a percentage of total income (GDP) have historically moved up and down within a range, but eventually return to the average. Current profits are sitting closer to the top of that range, meaning it’s likely they’ll begin descending soon. Corporations will find it tough to keep these profits consistent unless the economy grows at a sustainably strong rate. Investors and their financial advisors would be wise to take this reality seriously. With the decline of spending and rise of frugal saving, creating growth in that scenario will not be easy.

Randy Godsell is president and co-founder of Godsell & Hughes Financial, Inc., a Milwaukee- based fee-only financial investment firm. As a CFA, CFP, and CPA, Randy has 20+ years of experience understanding the financial needs of every portfolio, big and small.

Get Lean and Mean With Payroll Outsourcing

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Today’s businesses have been inundated with insight into how best to reduce costs, how best to manage their workforce, and most importantly, how best to become “lean and mean”. However, does becoming lean simply involve securing short-term cost reductions, reductions that allow the company to immediately return to profitability? Or, does it also mean companies should focus on long-term savings that help to stabilize the company’s future? Well, it’s really about mitigating the effects of rising costs, while also finding a middle ground between short-term profitability and long-term viability. While nobody likes to hear the word “layoff,” we also know that it’s sometimes an unavoidable outcome for companies with an unsustainable cost structure. However, are there other solutions, ones more ideally suited to finding that aforementioned middle ground? More to the point, are there solutions that don’t involve layoffs, but that can also achieve the same end goal of reduced costs? In fact, there are.

Reduce Fixed Costs With Outsourcing

Most companies immediately assume that to outsource a given business function means to reduce overhead. However, that’s not always the case. One of the biggest concerns with outsourcing is the tradeoff between cost savings and maintaining a company’s core competencies. For instance, outsourcing marketing is often a risky proposition because it involves handing over a company’s value proposition to an outside entity. Outsourcing IT is also problematic because of the consequences of working with an IT firm that fails to deliver. However, what about outsourcing payroll to payroll service providers? Will eliminating a company’s manual payroll processes allow it to both reduce costs and upgrade its core competencies? Yes, it will. In fact, a vast majority of today’s companies employ some form of payroll outsourcing. What can a company expect when moving forward with such a decision?

•             Cost Savings: Using an outside firm provides a number of immediate benefits. First, companies no longer have to concern themselves with penalties for late income tax filings; today’s firms assume full responsibility and provide a guarantee that covers any late fees imposed by the IRS. Second, outside payroll firms are compensation management and tax experts. These companies provide their customers with a number of ingenious ways to save money. Third, they understand the market and know how to help companies manage their workforce. Finally, they eliminate the high costs associated with manual payroll management, costs that most companies simply choose to ignore.

•             Improved Internal Core Competencies: Companies looking to upgrade their core competencies are often befuddled as to how they should free up their internal resources. In this case, there is a difference between resource allocation and utilization. Outsourcing payroll allows companies to free up internal resources, which in turn allows them to better manage those resources. Companies can then divert these resources to other more important needs. This flexibility provides management with the impetus to improve the company’s internal core competencies. Once these competencies are upgraded, the company is then able to stabilize its cost structure.

Granted, outsourcing is never a guaranteed success. There are a number of potential pitfalls, ones that most companies rarely take the time to consider. However, while there are risks with outsourcing, those risks aren’t as much of a concern when outsourcing payroll management. In fact, today’s payroll outsourcing firms make it easy to move forward. They help reduce costs, eliminate costly errors from manual processes, and help to improve the company’s internal service capabilities.

Citations:

This guest post was written by independent journalist Patrica H. Hugley who frequently blogs about accounting and payroll services.

5 Overlooked Ways People Hurt Their Credit Score

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In many ways, credit scoring is quite intuitive; obviously you will have a bad score if you don’t pay your bills!

But there are many things with scoring that are not so obvious. From my experience of running a forum about credit for 4+ years, what follows are 5 of the most overlooked ways I see people damaging their credit score.

1. High Credit Utilization

If you’re not familiar with this term, in a nutshell it refers to the percentage of a credit limit you are using. So for example if you have a $1,000 credit limit and use $400 of it, that’s a 40% credit utilization rate.

Using too much of your credit is actually bad for your score. Ideally, you should never exceed 20-30% of a credit card’s limit. Even if you pay your bill in full each month, keep in mind that this calculation is typically based on the statement’s closing balance (the amount due, before you pay).

2. Tiny charge-offs

A bad debt – no matter how small it is – will really mess up your credit score! I have heard from people on my forum who had a bad debt as little as $4.00 (yes, four dollars!) that has actually prevented them from getting a mortgage, despite the rest of their credit report being flawless. Why is this? Because the way FICO works, any delinquency is going to hurt you no matter how small it is.

Do you have any tiny debts lingering on your report? The good news is you can find out for free through the government-mandated site, AnnualCreditReport.com. There’s no need to pay for your credit report from those scammy sites when you can get it for free. My AnnualCreditReport.com review discusses how it works.

3. Too many applications

If you apply for a credit card, you have nothing to lose, right? Wrong!

When you apply for credit, something called a “credit inquiry” is placed on your credit report. Having too many of these will end up hurting your credit score. This is why it’s a bad idea to apply for credit cards (or loans) on a frequent basis.

Don’t let the cashier at the department store sweet talk you into applying for their store card to save 10% off, as those savings probably aren’t worth having another hard credit inquiry. The same holds true when it comes to airline and cash back credit cards; no matter how great their bonus is, don’t apply for these offers too frequently.

Inquiries stay on your credit report for 24 months, but it’s only during the first 12 months where they will affect your FICO score.

4. Too few accounts

Even though going on an “application spree” is bad, you don’t want to do the opposite and never apply for accounts. Why? Because to have a good credit score you need to have a diverse mix of accounts on your report. That doesn’t mean you need to have a ton – you can actually achieve a great score with as few as 2-3 credit cards and 1-2 loans on file.

5. Idle accounts

If you’re like me, there’s a good chance you have several old, unused credit cards. Don’t cancel them, because FICO takes into account the average age of your accounts (the older, the better). So it’s best to keep them open.

However in order for the banks to keep reporting them, it’s a good idea to use them once in a while. It doesn’t mean you have to use them for a big purchase; just buying a $10 pizza will still count as activity! Every 3-6 months you should “dust off” your old cards by making a purchase or two. Be sure you pay the bills in full of course, to avoid any interest charges on them.

Author: Mike runs Credit Card Forum which is a consumer resource about using credit responsibly.