This story broke yesterday from Reuters

Moody’s May Cut US Rating on Tax Package 

Moody’s warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law.

Moody's estimates the tax bill could cost up to $900 billion.
Moody’s estimates the tax bill could cost up to $900 billion.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody’s analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will “adversely affect the federal government budget deficit and debt level,” Moody’s said.

On Monday, the Democratic-led U.S. Congress moved toward grudging approval of President Obama’s deal with Republicans to extend expiring tax cuts, even for the wealthiest Americans, Last week, Moody’s and Fitch Ratings both expressed concerns about the U.S.’s rating longer term, with Moody’s fearing the impact if the tax cuts become permanent. For more, see

In a market obsessed with the euro sovereign debt crisis, the Moody’s note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

Negative Impact

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

Moody’s estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.

This means that the government’s debt relative to revenues will decline much more slowly over the coming two years, to just under 400 percent from 420 percent at the end of fiscal year 2010.

“This is a very high ratio compared with both history and other highly rated sovereigns,” Moody’s said.

Let’s get a couple of things straight about this story. Number one is that tax cuts or tax freezes don’t cost any money. Only tax hikes cost money. We’re talking about taxpayer’s money, not the government’s perceived money as they don’t have any. The only possible cost can come to the taxpayer. Any tax cut is simply increasing the amount of their own money they get to keep. So as you can see, it is quite impossible for a tax cut to cost money. That’s why the whole “tax cuts for the rich” argument is moot. A tax cut for any income level cannot cost money. This is an indisputable fact.

What the left spin equates to is maintaining the same level of spending. Reduce the available revenue from taxes via a tax cut and they perceive that as a cost. What needs to happen is what Obama and Congress have agreed to do through the paygo legislation. Everything must be paid for. If tax revenue drops, then spending levels must drop accordingly. Very simple. So even Moody’s has it wrong here. The nearly $900 billion “cost” of this second Obama stimulus package actually does not cost that much when you eliminate the false tax cut cost. Now normally I would say why quibble here if it makes the package look less appealing. The answer is that Moody’s may factor in the erroneous information and cut the debt rating. Not good.

The costs of this bill will be the unemployment welfare checks, the ethanol subsidy and the estate tax. These are all costs and none of them are paid for in violation of the paygo rules. Let’s keep this in mind since the GOP is overwhelmingly supporting this bill as well. There is massive spending in it and it’s not paid for. So much for the election message being received. So much for the second chance the GOP asked for.

Now the U.S. will also have to absorb the credit rating drop because of it. No one has scored that yet, but it certainly stands to be enormous. Added on top of QE2 and the nearly certain QE3 to come and the future only gets bleaker. So if you thought your work was done and these politicians heard your message, the answer is not even close. The work has only just begun.

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