Archive for category Taxation
They Never Learn: Leftists Won’t Cut As Long As They Can Tax and Borrow
Posted by Tom in Deficit, Fed, Federalism, State Finances, Taxation on January 8, 2011
Illinois legislators, facing a $15 Billion deficit, $54 Billion unfunded pension liability and the highest state borrowing costs in the nation, are considering, what else, 75% income tax increase, from 3% to 5.74%, according to an IBD editorial, Illinois Taxes: How Blue Can You Get? And this, despite the preponderance of evidence showing that businesses, jobs and people flee high-tax states.
A chart illustrates the great migration and resulting great reapportionment:
But Illinois pols don’t have the same long view perspective that muni bond investors have, so the borrowing spigot is now in jeopardy. Michael Corkery picks up the story in his WSJ article, Bond Buyers’ Eyes Are on Illinois. The smart investors like Bill Gross of Pacific Investment Management are avoiding Illinois bonds. The state has been paying its vendors in IOUs. And “Illinois has struck fear in bond buyers’ hearts because, they say, more than many other financially troubled governments the state has increasingly relied on debt to pay bills, rather than making deep spending cuts or raising income taxes to increase revenue.”
So Illinois debt costs are the highest of the spendthrift states, including CA and NV.
People and businesses vote with their feet as the great migration from the high tax states to the business friendly low tax states well illustrates. As the IBD editorial exhorts: “Stop worrying about the distribution of the golden eggs and start worrying about the health of the goose!”
The only ray of hope here is Ben Bernanke’s statement Friday: “We have no expectation or intention to get involved in state and local finance,” Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, “should not expect loans from the Fed.” For the full discussion see, Bernanke Rejects Bailouts in today’s WSJ.
I would argue for a statutory prohibition against such Fed loans, a statutory provision for voluntary state bankruptcy, and a constitutional amendment precluding federal bailout of the states.
USA, the Nation of Institutionalized Uncertainty
Posted by Tom in Centrally Managed Economy, Economics, Federalism, Fiscal Policy, Taxation on December 14, 2010
John McKinnon, Gary Fields, and Laura Saunders put together a marvelous indictment of our country’s tax policy rightly placed on the front page of today’s WSJ, ‘Temporary’ Tax Code Puts Nation in a Lasting Bind. One chart, like one picture, is worth a thousand words. Here’s the chart:
Since the late ’90s we have gone from fewer that a dozen tax sunset tax provisions to 141 today! From astonishing stuff like tax rates to industry dependent stuff like tax subsidies to personal stuff like estate taxes, capital gains, tax breaks for families, and the infamous AMT.
The all too obvious point: planning is impossible. Even with the recent compromise on the two year extension of tax rates, it is only two years! Employment, expansion, investment decisions go way beyond two years. ”This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.”
So, in the short time of one decade we have created a tax code that promotes uncertainty. We have thus stymied growth and harnessed the ‘animal instincts’ that have made this country great. We have also driven capital to foreign shores as well as the jobs that follow that capital. There are several concrete examples of the wait-and-see effect of this policy in the article. The economic statistics support the authors’ premise. How absolutely stupid, this policy!
Tax codes should provide payment for necessary government responsibilities. In a federal government with constitutionally limited powers, these are few.
Tax codes should not subsidize preferential industries or socialistic policies. Yet they are so used. And extensively so, ethanol, wind energy, solar energy, residential real estate industry, real estate finance, employer provided health care and insurance.
And the kicker, these mandated economic distortions are the cause of the financial straights we find ourselves in today!
We should eliminate all the subsidy nonsense in the tax code and initiate a flat tax that pays for necessary federal government services. But that won’t happen in our lifetimes. Thus, I fear we will continue on the path of decline as the nation of lasting uncertainty.
I recommend a full reading of the subject article.
Federal-State Downward Spiral is Intractable
Posted by Tom in Centrally Managed Economy, Constitution, Economics, Federalism, Government Regulation, Nevada, State Finances, Taxation on December 8, 2010
In theory, the depression-vintage, federal-state unemployment insurance program was supposed to build reserves in good years so those reserves could be paid out in years of high unemployment. Like other federal government programs it doesn’t work that way.
Randy York called our attention this morning to a Reno Gazette Journal item announcing a 50% increase in the unemployment insurance rates paid by Nevada employers for each employee, $180 on average. On top of that the federal tax will increase by $21 to $77 per average employee; this to cover interest on Nevada’s debt to the federal government with the current balance at $579 million but growing by $300 million in 2011! So Cindy Jones the administrator of the Nevada Employment Security Division argues the necessity, though strangely she is supported by people in the Chamber of Commerce.
Randy analogizes this to “spending our way out of debt,” arguing that the new mantra is that “we can tax our way back to a healthy business environment and lower unemployment.” What are they thinking! Jerry O’Driscoll says the “unemployment benefits have turned into long-term welfare.” Joe Morabito points out that even Denmark cut the benefit duration down to two years and only then did people find work! Indeed, there is a significant amount of economic thought that maintains the unemployment benefits have the unintended effect of extending the duration of unemployment.
The consequences, unintended or otherwise, here in Nevada will be to increase unemployment, close businesses, and frighten California businesses that would have otherwise settled here upon their left coast exits. Note too, this is at a time when Nevada has the highest unemployment rate in the nation.
Now this is only one federal-state tie. There are others in education, medicaid, environment, highways, airports, federal land management, energy, you name it. The relationships involve grants with strings, funding with local tax requirements, joint funding, and unfunded mandates. The major state budget deficits center on medicaid and education both involve federal programs.
I wonder how well off the states would be without all this federal “help?” Missouri, my home state, for instance, has no illegal immigration problem to speak of because the voters designated English as the official language and in another action required law enforcement officers to verify immigration status. Illegals have no mandated access to welfare like food stamps or healthcare. State action. Problem avoided or solved! Now I don’t want to seem flippant, but I wonder how the economy would improve if states took over unemployment insurance and severely limited its scope and duration?
Now consider the federal-state partnership in this downward spiral. That lopsided, unconstitutionally intended relationship is at the heart of the problems. The states have ceded control of problems that they should more appropriately handle. And the federal government has too much control of things it has no business being in in the first place. Our federal system is upside-down and likely to remain so until we restore some sense in the citizenry that we are a republic composed of sovereign state and the citizens thereof, from whence all political power and responsibility derive.
So my take: return election of the senators to the states, preclude federal bailout of spendthrift states, and provide a bankruptcy mechanism for states to legally and politically extricate themselves from their prior unsustainable excesses. Some of them in fact owed to the federal government!
Just a thought!
Animal Instincts on Hold
Posted by Tom in Academics, Business, Centrally Managed Economy, Deficit, Economics, Employment, Energy Facts & Policies, Liberalism, National Debt, Taxation on December 5, 2010
Christina Romer, who headed the Obama economic team but has jumped ship for the coddling confines of that bastion of leftist thought, the University of California Berkeley, penned an op-ed yesterday in that bastion of leftist propaganda, the New York Times, It’s the Big Questions That Slow Growth. In fairness, she gets the slow growth, non-investment, high unemployment correct: uncertainty is the culprit, it’s holding back the recovery.
Now she dismissed uncertainty over the future of the Bush tax cuts because the difference between the current 35% top rate and Obama’s 39.6% top rate is simply too small to put hiring and spending decisions on hold. Then she throws up an uncertainty monster saying that the future tax increases to deal with the “grossly unsustainable” budget deficits could be modest or “enormous.” OK, let’s say you’re a corporation that could build a factory and employ 1500 workers in Nevada or in South Korea; each option is close, but the prospect of enormous U.S. tax increases scares you. Uncertainty? You bet!
She posits “climate change” and dependence on foreign oil as problems that will not go away by “tabling plans to deal with them” which makes it harder for companies to plan and invest. Yeah, right! How about banning offshore drilling, or regulating the CO2 we exhale from both ends! Or what about the FCC discussing expropriation of investments in bandwidth all for so-called “net-neutrality?” Uncertainty that you didn’t mention Christina!
In a real knee-slapper she pans the uncertainty caused by the volatility of the economic forecasts. Let’s see, if you’re an economist forecasting the future of this or that, don’t you have the same access to the follies of leftist Washington as the businessman does?
Solutions, you bet, she has ‘em: “How do we resolve uncertainty about future growth? The Federal Reserve, Congress and the president need to reaffirm that they will do whatever it takes to restore the economy to full health. They could take a lesson from President Franklin D. Roosevelt, who declared in his 1933 inaugural address that he would treat the task of putting people back to work “as we would treat the emergency of a war.”
“They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high.”
Christiana Romer is typical of the political and academic hacks our leftist president has surrounded himself with, all puff with no concrete proposals to cut the big, behemoth intrusive, overreaching government. Uncertainty is indeed the problem, taxes, Obamacare, financial regulation, EPA, FCC, Fannie/Freddie, you name it. What it gets down to is that these academic “elites” think that they know what’s best for us, for the economy. They think they know more than Adam Smith’s invisible hand or Friedrich Hayek’s animal spirits! That hubris is their fatal flaw!
Christiana Romer is in a safer place now happily ensconced in academia. Safer, that is, for the nation. There she will only poison young liberal minds pretending to educate them in economics.
Hope And Change
With condolences to my liberal friends……..
Comrade Obama Opts for No Growth No Jobs Just to Punish the Wealthy
No surprise that the candidate who thought the Warren Court should have favored more redistribution, and who argued to Joe the Plumber that “spreading the wealth around is good for everybody,” as president would favor taxing the wealthy over growing the economy to create jobs. So Obama who is reasonably astute at least in an academic sense refuses to recognize the validity of Hauser’s Law.
Yesterday’s WSJ featured an op-ed by Kurt Hauser, who first enunciated it, There’s No Escaping Hauser’s Law. Hauser observed the effects of tax increases and reductions over the last sixty years. He measured the effects of these moves in marginal rates on tax revenue as a percent of GDP. The discovery is that the tax revenue as a percentage of GDP is constant, regardless of tax increases or decreases, constant at just under 19% of GDP. The only variable it turns out is whether GDP increases and by how much.
High bracket taxpayers are typically investors, entrepreneurs and business people who take risks with capital to produce growth in revenue, profits, and yes, jobs. As marginal tax rates increase there ia less incentive to take the risks necessary to produce those profits and jobs simply because there is less net return on incremental profits earned. With less risk taking, there is less GDP against which Hauser’s 19% constant is applied.
Hauser’s post war research is impressive: “Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.”
“Why? Higher taxes discourage the “animal spirits” of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.”
So, in truth it would benefit all citizens more if the GDP were higher rather than lower. Likewise the higher it is, the better it will be for the common man. Instead Obama desires a redistributive socialism. The predictable result: lower growth, less federal revenue, greater deficits, more debt.
2012 can’t come too soon!
There is No Spoonful of Sugar – The Case for Higher Taxes
Posted by Tom in Deficit, Financial Crisis, Monetary Policy, Taxation on November 18, 2010
This post is abbreviated from a more extensive essay by Stephen Benavides, a CPA and tax attorney.
If I were asked to give a professional opinion on the income statement of the United States I would be forced to qualify it or include a statement that without drastic and material changes of fortune the United States would cease to exist as a going concern. The three largest items in the budget for 2009 (the last year for which we have complete records) are Social Security, Medicare, and interest on the national debt. None of these three are discretionary. In addition, the defense budget for that year is about the same as the interest on the national debt, but can defense spending be thought of as discretionary? ……
That same $2.4 trillion in tax revenue, representing the sum total of all taxes collected in the United States by the federal government, is sufficient only to pay for three of these four items. Unfortunately, we are now spending $4 trillion a year and one way of looking at our situation is that everything other than Medicare, Social Security, and interest on the national debt is being paid for with borrowed money. That is a 40% structural revenue shortfall!….
The United States is insolvent. From an accounting standpoint, from a business standpoint, for the sake of our sanity and the welfare of our children, this is unsustainable and borders on madness. A day of reckoning is here for our nation and its people. The longer we wait, the worse it will be, not only for ourselves but for the rest of the world since it is pretty obvious that when the United States start sneezing the rest of the world will soon have our cold.
Like all good tax guys I hate income taxes as much or more as any of you but I’m also a businessman. There is no magical way to get us out of this mess. The medicine is going to be bitter and there is no spoonful of sugar to help the medicine go down. The medicine that no one wishes to talk about is a material tax increase. By material, I don’t just mean an increase in tax on the wealthiest 1% of the country. I happen to believe that all citizens should be paying taxes yet our progressive system allows almost 50% of our citizenry to pay no federal income tax at all. I happen to feel strongly that everybody should be paying taxes and find arguments to the contrary revolting……
I hope this rant raises your attention level all the way to outrage! If you are not there yet, consider this: The Federal Reserve just raised your “taxes” again and took as much as 7-10% of your net worth by printing up billions and debasing the currency. This was a planned, considered move to monetize the debt and pay off our obligations with cheaper dollars. They have almost certainly set an inflationary spiral into motion as holders of our debt will want to be paid off or get substantially more interest to continue to finance our madness. Inflation is the most insidious of all taxes. An increase in marginal income tax rates only affects new and future income. Inflation taxes not only our future income but taxes our previously taxed income and all the wealth we have previously amassed in after-tax dollars. It is already too late to stop this from hurting you and your families.
My thanks to Steve Benavides for this post.
Deficit Reduction-Competing Plans
Posted by Tom in Business, Centrally Managed Economy, Congress, Deficit, Democrats, Entitlements, Environment, Financial Policy, Foreign Trade, Government Regulation, National Character, National Debt, National Endowments and GSEs, Social Security, Taxation, Unions on November 17, 2010
Now we have another deficit reduction plan to compare the the Obama Deficit Reduction Commission plan, this the “Bipartisan Policy Center Debt Reduction Task Force” announced by Alice Rivlin and Pete Domenici. Here’s the WSJ high level comparison:
We won’t reduce deficits and their concomitant generation burdening debt until we reform congressional spending. Listening to another commission or task-force will not do the trick. Congress must get serious and tell the truth to the America people–there is no free lunch, THERE IS NO FREE LUNCH!
In addition to reducing the deficit, we must promote an environment for growth: certainty of taxation well into the future, certainty of limited regulation of business, and elimination of rent-seeking-giving subsidies and regulations.
All the principles of freedom and growth are anathema to the current state of Obamaism: Instead of reforming Medicare, Medicaid and Social Security Obama’s Democrats added Obamacare as an additional unsustainable entitlement with concomitant business and personal uncertainty. Instead of cleaning up the Fannie-Freddie generated financial mess Obama’s Democrats continued the charade of propping them up to do more future damage. Instead of cutting unnecessary spending, Obama’s Democrats passes such folly as cash for clunkers and bought GM for the UAW. So, bottom line, oppose Obama’s Democrats while they’re in office and turn them out of office ASAP.
A few basic economic growth imperatives;
- Repeal Obamacare while eliminating employer tax benefit subsidies, while eliminating interstate insurance competition barriers and while enacting stringent malpractice tort reform; reform Medicare over time as a high-deductible insurance policy with means testing; and reform Social Security with later retirement, means-testing and private accounts as an option for the means tested high-earners.
- Go for a flat, low-rate income tax both personal and corporate, eliminating extraterritorial corporate taxation, and all personal deductions, including home mortgage deductions.
- Eliminate all federal agency rule-making. If Congress can’t define it specifically as a law, then it should not govern, period! Now, there will obviously be extremely well defined and narrow exceptions to this like the difference in typeface, boldness or color of signs and warnings!
- Abolish all subsidies and mandates, farm subsidies/mandates, green subsidies/mandates, ethanol subsidies/mandates. If a product or service is not in and of itself economic enough or green enough to make it in the free market, then it should fail. In no case should it be subsidized.
- Eliminate all trade barriers that protect unions or their work rules. The Mexican trucking proscription under NAFTA is an example.
- Negotiate, sign and ratify as many free trade deals as are reasonable. As the world’s largest consumer, we hav the leverage, if we would only use it intelligently.
- Preclude all public service unions. Repeal Taft-Hartley and minimum wage laws.
- Eliminate all unnecessary government spending like, NPR, NEH, Department of Education, etc.
- Eliminate and forego all unfunded mandates to the states. Federalism must be re-energized and government pushed down to lower levels.
We need to get the point across to the American people that we are broke. We can’t afford the free lunches anymore. We need individual responsibility. We are not a socialistic nation.
In short, if we got government out of the way, this country would once again blossom!
Just Say No….Chris Christie Has the Guts To
Posted by Tom in Centrally Managed Economy, Democrats, National Character, National Debt, State Finances, Taxation on October 29, 2010
The Feds offer New Jersey a “free lunch” in the form of a railroad tunnel under the Hudson River to New York. This monster has grown from $5 Billion to $7.6 Billion in 2005 to $8.7 Billion in 2008 to somewhere between $10.9 Billion and $13.7 Billion last summer. The “catch” was that New Jersey would be on the hook for cost overruns!
These guys are the drug pushers. The “drugs” in this case are the taxes we pay from the money we earn. The pushers give the first few samples out for little or no cost. Gradually the users become addicted. They start using the rent money for drugs, the grocery money, then whatever they can steal. They are degraded, dependent, and despoiled. The pushers have complete control over them. Witness today’s Democrats and our entitlement dependent society. The symbiotic relationship keeps the pushers in power and the addicts fixed. Fixed with your hard-earned money.
It’s no different with dependent states and federal projects with their attendant union dependents. Governor Christie has the guts to say no. “I cannot place upon the citizens of the State of New Jersey an open-ended letter of credit,” said Garden State Governor Chris Christie yesterday. Yesterday’s WSJ editorial, Christie Gets Off the Train, appropriately recognizes this rare leader.
Chilling Comparison-Will History Repeat?
Posted by Tom in Business, Economics, Education Facts & Policies, Entitlements, Financial Policy, Monetary Policy, National Character, National Debt, Taxation, Welfare on October 4, 2010
Donald Luskin, chief investment officer of Trend Macrolytics, LLC posted an interesting chart in his WSJ op-ed, The Trade and Tax Doomsday Clocks. It charts the Dow Jones Industrial Average in the 1930s against the same average from mid 2009 to today with the depression forward, 1932 to 1936, as a scary warning. Here’s the chart:
The article points out that Obama’s upcoming tax increase, allowing the Bush cuts to expire on those most able to invest productively, is dangerously close to the Roosevelt tax increases of the 30s. FDR tipped the economy into a “depression within a depression.” Obama is close to the same thing.
Luskin then shifts to trade noting that the House passed the “Currency Reform for Fair Trade Act” which adds dangerous new powers to the infamous Smoot-Hawley Tariff Act, the proximate cause of the Great Depression. This bipartisan vote is a shame. 99 Republicans participated in this homage to Herbert Hoover; they should know that his name “lives in infamy” for erecting those tariff barriers. Hopefully the Senate Republicans will hold out. If not, another source of economic growth will wither.
These observations alone are frightening enough, but when coupled with the WSJ front page article, Americans Sour on Trade, portend something akin to an upcoming depression. In essence a majority of Americans tend to favor protectionism or, at least, are against the economies of outsourcing. Understandably economic ignorance is prevalent, fostered by our leftist institutions of higher education. But, in fairness, conservatives have not convincingly explained the compelling economic benefits of free trade.
Finally and in nail-in-the-coffin fashion, we have the growing international trend of beggar thy neighbor competitive currency devaluations. Japan is the most recent example. The Fed with its impending QE2 threatened is another. What is the dollar worth, the pound, the Euro? If world trade stops or dramatically slows, depression or worse is assured.
I say that as a layman with no credentials. But it is becoming obvious that the socialized world cannot sustain itself in its current level of consumption without productive investment and growth. The U.S. is trending away from that growth regimen. Obama is penalizing productive investment and limiting growth by increasing the size of government.
So, we must economically educate the ignorant products of our universities, vote for leaders who have the guts to reform our unsustainable entitlements, and decrease the size and take of our government.
Meanwhile, one of my Irish friends sums it up nicely, “…guns and gold, Tom, guns and gold!”