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Progressives and Taxes

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Some of our friendly wealthy have been saying that they want to pay more taxes, and that because they’re willing to do so, everyone else who’s “rich” (i.e., individuals with $200k and couples with $250k of annual income) should be required to pony up, too—even though these other  folks aren’t rich: most in this income range are the small businesses that are the job engines that would run on all cylinders if government would only get out of the way.

Progressives are awfully willing to spend other people’s money; let’s see what would happen if they (voluntarily) spent their own, instead.  But before we get to that, let’s look at who actually gives what to, oh, say, charity.

According to the GivingUSA Foundation, Americans donated over $300 billion to charity in 2008, of which individual Americans gave nearly $230 billion.  This total breaks out rather interestingly.  According to Arthur Brooks, President of the American Enterprise Institute, as reported by him in a The Wall Street Journal column in January 2009, folks who considered themselves conservative or very conservative, donated between 3.5% and 4.5% of their income, while those who considered themselves liberal or very liberal donated between 1.2% and 1.5% of their income.  And these rates were pretty constant over all income levels—including the poor.  No wonder these skinflints want to spend everyone else’s money—they don’t want to have to spend any of their own.

Since Warren Buffet made his plea in the New York Times article at the link in the first paragraph above, he’s been invited to just write a big check to the US Treasury, if he thinks the government needs his money so badly.  Of course, he demurred (and, also of course, as The Wall Street Journal noted a few days after Buffet’s column in the NYT, he omitted mention that most of his income is in forms only the Buffet super-rich can access).  Other Progressives also have been invited to make donations to the US Treasury, but they deflect the suggestion, insisting it’s ridiculous to ask them just to write their own checks; individuals can’t do this alone; it has to be a collective thing.

Okay, let’s look at the Progressive collective and do some back-of-the-envelope calculations.  According to a Gallup poll in 2010, about 31% of all American registered voters were members of the Democratic Party.  According to a Pew poll in the same year, about 47% of registered voters were members of the Democratic Party, or leaning that way (one supposes something like a registered Independent with Democratic Party tendencies).  For this calculation, I’ll use 40% Democrats to sort of cut a middle ground between the two polls and pick up some of those leaners.  And because the round number makes the arithmetic a bit easier.

For 2010, the Federal government collected some $1.1 trillion in personal income taxes from all individual taxpayers.  Actually, this estimate bounces around a bit, depending on whether we use Census Bureau aggregations, revenue collections as a per cent of GDP, and so on, but we’ll use this figure; it’s pretty much in the middle of the range, which isn’t all that broad.

If we naively assume that all Americans, registered voter, leaner, or otherwise, sort out roughly along the lines of those two polls, we can use 40% of all Americans as Democrat in some way, and these 40% of Americans paid around $440 billion of those $1.1 trillion of taxes.

Progressives are all quite dedicated to our country’s welfare, and they want our Federal government to have more money so our country can be even better off.  So, what if they all chipped in a bit more for Uncle Sam’s Treasury department, in the form of a donation to Treasury?  If they donated, over and above their ordinary tax bill, just an amount equal to 10% of that tax bill, they’d donate in their aggregate an additional $44 billion to the Feds.  That’s a drop in the ocean of the Obama Debt, but that ain’t walkin’ around money, either.  That’s still serious change.  And 40% of Americans aren’t the onesies and twosies that Progressives insist would defeat the purpose of these individual donations.  Except in the eyes of these Progressives: since 40% isn’t everybody, it is just trivial individual effort.

On the other hand, they aren’t far wrong, either, about the triviality of their donations.  If these Progressives gave to Treasury as generously as they do to charity, they’d only be donating about $6.6 billion.  And given the spread between current revenue and current Federal spending, that would be an empty gesture.

Greed and Envy

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Caution: long post….

Greed is wanting more than we have, not because we need more, but simply because we’re dissatisfied with what we have.

While Dante defined envy as “a desire to deprive other men of theirs,” modern usage stems from another meaning: a painful, even resentful, knowledge that someone else has something that we lack, and we want it, too.

But “Greed is good,” Gordon Gecko said, and he wasn’t far wrong.  More accurately, we should never underestimate the power of greed to do good in the world.  Envy is a part of this, in a way; it’s another aspect of greed: it can give a focus to what it is we want that’s more than what we have: sometimes we want that specific thing that he has, if only because he has it already.  Adam Smith understood this; these are his invisible hand.

To greatly oversimplify things, here’s how that invisible hand works.

A man wants something he doesn’t have; he may not be entirely clear on what it is, but he can describe his shortfall at least to some extent.  Another man offers to develop and then make a widget which he says will generally satisfy the first man’s shortfall.  He’ll then sell it to the first man if he will pay for the labor, materials, and a little extra for a profit.  The two agree on the terms of the transaction, and in short order, one man has a widget he didn’t have before, and the other man has some money he didn’t have before.

Another man sees the first man’s widget and tells the second man he wants one like that.  A conversation occurs, and in short order the third man has a widget, too, and the second man has a bit more money.

Soon a fourth man approaches the second and says that if the second will make a bunch of widgets, the fourth man will buy them all and resell them elsewhere.  Now lots of people have widgets, the widget maker has much more money, and a seller is making money.

A fifth man comes along and says this to all those who’ve bought widgets: “All your widgets look alike.  I have a fine selection of gee-gaws that you each can add to your widget to make it a truly unique possession, which no one else has.”  And others see the gussied up widgets and want—and conclude transactions to obtain—widgets that are just like this man’s, or just like that man’s.

A sixth man says he can improve on the widget: he can make a Widget DeLuxe, or a wodget, either of which is better than even a gussied-up widget.  And so on.

All of those original players—buyers, developers, manufacturers, sellers—are better off for these free exchanges: each has, as a result of the exchanges, something of value to him that he didn’t have before, and he got it at a price he considered worth paying—whether in labor or in money—in order to get that thing.  On top of that, additional jobs were created—additional sellers; manufacturer helpers; after-market developers, manufacturers, and sellers—and these new job holders are all better off than they were before: they have jobs, now, and the wherewithal to buy widgets, if they wish.

In all of this economic growth, in all of this wealth increase, greed and envy played their roles in driving the system.  Every participant acted on his own self-interest, every participant did what he did to satisfy himself alone.  Yet as a result of the interactions of these individual self-interests, these individual greeds and envies, everyone in the system became better off.

It’s true that the wealth distribution was uneven.  In this simple scenario, the original widget maker seems to have the largest gain, and the sellers seem to have the next largest.  But even the meanest widget buyer is better off now than he was before, and he’s better off in a way that would have been impossible without this commerce: he has a widget he couldn’t even contemplate before because it didn’t exist before, and he has options for a better widget or a wodget, as well.

Notice a critical aspect here, though.  This system was a free market, within which participants to an exchange were able to come together and reach their agreements along parameters that were entirely agreeable to them, and to them alone.  No one was forced into an exchange he didn’t want, no one was barred from an exchange in which he wanted to participate, and each one was free to act solely on his own desires.

Greed and envy are two-edged swords, though, and they certainly can overwhelm a free market.  There is a role for government intervention, and it is to protect all of us from the plainly rapacious.  But that intervention must work to preserve free market mechanisms—the very mechanisms that channel our venalities and convert them to accidental strengths for our common good. This kind of government intervention must enforce contracts, and it must ensure transparency so that every participant can readily understand what it is he is getting—or selling—when he enters that market for his own selfish purposes.  But it must leave each participant free to act in his own self-interest.

When the market isn’t free, when the market is centrally controlled—even when the market is nominally free, but government intervenes too much—the capacity of commerce to turn greed and envy to our common betterment is overwhelmed.  When government intervention favors this or that selected group, for instance—one group didn’t get as wealthy as another, let’s say—then our greed and envy are simply channeled away from functional (if accidental) cooperation for the common good toward simple, resentful, isolated greed and envy: “Why do they get special treatment?  Why can’t I, too?”  Members of the other groups—whether government-designated groups or self-styled (now that government has set a precedent of special groups for special treatment)—stop working to gain the wherewithal to buy, they stop working to produce.  These groups insist, instead, that government intervene in their favor, too.  In short order, the market is no longer producing, and wealth and well-being deteriorate.

Thus, government intervention too easily suppresses the essential cooperative nature that is men and women acting in our own self-interest—including our own greed and envy—to arrive at exchanges voluntarily between those of us who want and those of us who have, or can produce, or can create.  Intervention cannot look to control the forces of the free market, to control by government fiat our greed and envy, without destroying that free market.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary,” James Madison wrote.  But we’re not, and they don’t; we must limit government’s market interventions, as we must government’s power generally.  Greed and envy are part of our nature, but only a free market has the capability of channeling those base parts to our collective benefit.

Jobs

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Jobs is Job One in America, or ought to be, so how’s that working out, exactly?

We’re not in a recession anymore—that ended two years ago.  The economy is growing, too—at a 1.4% rate for the second quarter of 2011, and it’s expected to grow at less than 3% for all of next year (the Fed had been projecting, as recently as last April, a 2012 growth rate of over 4%).  Never mind that it sure doesn’t feel like that to the 14 million Americans who are out of work, or who are badly underemployed.

Let’s review the bidding.  After the debt ceiling agreement was concluded in August, President Obama pivoted to generating jobs, after two years of one of the highest unemployment rates our country has seen since the Great Depression, two years during which he pushed his pet projects at the expense of putting Americans back to work.  His first move was admirable, on the surface: he called on the private sector to hire or train 100,000 unemployed veterans or their spouses by the end of 2013.  His incentive to business was a couple of temporary tax credits for the purpose.  Then he proposed to pay for this with some permanent cuts in Defense: a $400 billion cut in the Defense budget passed that same month (yes, by the Republican House, as well as the Democratic Senate).  That this will force the discharge of still more sailors, soldiers, marines, and airmen is unimportant: they’ll just queue up for Obama’s 100,000.  And he wants reductions in the GI Bill, which has educated countless veterans.  However, at the time of Obama’s proposal, unemployment nationally was over 9%, unemployment among Black Americans was over 15%, and unemployment among military veterans was in the neighborhood of 8.5%.  Was the President serious here, or was he just vote pandering?  One might ask Rep Maxine Waters (Dem, CA).

This is only one example of the failure of trying to give special treatment to select groups.  It doesn’t work, but it does angrify other special groups, who get jealous.

But there’s a larger problem here, and to grow jobs, the entire current set of policies must change.  Government spending is not stimulative, Obama’s claim to the contrary: “So then you get the argument…this is not a stimulus bill, this is a spending bill.  What do you think a stimulus is?  That’s the whole point.”  Government spending is inhibitive of growth: it directly crowds out private sector spending; it drives up prices, which crowds out private sector spending; to the extent that government spending is funded by government borrowing, it crowds out private sector borrowing, which reduces private sector spending; and on and on.

Government spending to stimulate the economy was known to be a failure as far back as FDR’s administrations.  FDR’s Secretary of the Treasury Henry Morgenthau finally figured out, writing in his diary,

We have tried spending money. We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

Sound familiar?

Keynesian “stimulus” spending does not work.  And even Keynes didn’t intend “stimulative” spending to be a permanent régime, but only a temporary bump.

On the other hand, temporary tax cuts don’t work, either.  All such temporary tax “stumuli” do is bring future consumer and business spending forward to the present.  When that spending is done, and the temporary tax cuts expire, spending falls off a cliff, as the spending that would have been done (that future having become the present) has already been done.  On top of this, there is no new spending to take its place—especially in an economic environment like today’s, with our high unemployment, few consumers able to afford more than the bare necessities and struggling to afford these, and few businesses willing to increase spending in the face of falling consumer demand.

More than just these two examples exist, though.  It’s hard to run economic experiments; there are no labs in which to try ideas.  But our history has empirical data from additional efforts at stimulation both with spending and with temporary and permanent tax cuts, together with their results on economic growth and accompanying job growth.  This article from The Wall Street Journal summarizes that history.  It’s a history of the failure of government spending and of temporary tax cuts to stimulate and of permanent tax cuts to foster private sector growth and job growth—by leaving private money in the hands of the experts at money handling: those who earned the money, the private citizen and the private business.

Or we can just go with this President’s same old same old: all those unemployed/underemployed Americans are just getting soft.  They just need to take off their bedroom slippers.  Put on their work shoes.  Shake it off.  Stop complainin’.  Stop grumblin’.  Stop cryin’.  They have work to do.

Somewhere.  Over the rainbow, maybe.

Obama, the European Left, and US Global Leadership

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“The Broken Jug” is one of the most frequently performed plays in German theater. With the village judge Adam, who passes judgment on a crime he committed himself, Heinrich von Kleist created one of the classic comedic figures of world literature.

US President Barack Obama currently seems to be portraying a modern version of Kleist’s village judge. He is increasingly vocal in his criticism of Europeans for supposedly having exacerbated the ongoing economic crisis with their caution. His audience, however, seems to sense that the plight Obama is lamenting originated in his own country.

Some banks were forced to accept TARP bailout funds even when they didn’t want, or need, the money.  Wells Fargo is one such bank reportedly so ordered.  The rationale for this was that the more banks who took the bailout lucre, the less stigmatized, or embarrassed, would be the banks who took the money because they really had messed up and “needed” the government handout.  Now, with the debt-based monetizing effort in the US having disastrously failed to stimulate our economy, the Obama team is lecturing the Europeans on the proper handling of their debt crisis: print more money, and lend it to the Greeks (and the Italians, the Spanish, and whoever else approaches with their tin cups) for the asking.  He’s hoping that with more nations following this US example, the humiliation of the failure will be masked by numbers of others doing the same thing.

Not only are the Europeans having none of this, they’re learning this lesson (though they may end up paying for southern Mediterranean irresponsibility on the backs of honest Germans, Finns, and Slovaks, anyway—responsibility is a hard political sell), and they are growing reluctant to keep the lending fire hose freely spraying.  Indeed, as the rest of the Der Spiegel Online article at the link above shows, the European Left simply views Obama with derision.  Notice the parallel the European Left draws in Der Spiegel Online‘s choice of parable.  The Judge did it, and tried enthusiastically to cover up his role in it by blaming another.  And Europeans know that Obama did it, and is now simply trying to cover his tracks, both by blaming others, and by trying to suck yet others into his error.

Like a doctor caught prescribing performance-enhancing drugs, Obama has not chosen to cease his activities. Rather he is trying to ensure that as many people as possible have access to his wares.

All this from the man who wowed the sycophants in Tiergarten Park in 2008 with his lofty phrases of peace and reconciliation.  With Obama now the laughing stock of the European Left, his erstwhile overseas base, how much influence can he expect to have for the United States on the world stage?  How much influence can we Americans expect our President to have on the world stage?

“The Broken Jug” ends with the judge having been found out and run out of town.  Obama has been found out in the US, and he’s being found out in Europe.

Tax Reform = Flat Tax

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Caution: long post….

President Obama and his Progressive Democratic Party insist that all of us should pay our “fair share” of the nation’s tax requirement.  I agree: all of us should pay our fair share.  The top 10% of Americans by income paid nearly 70% of the total personal income taxes collected by the Federal government in 2008, while the bottom 50% paid nearly 3% (that’s no typo) of the total in 2008.  Further, the rich may be getting richer, but they’re also paying more in income taxes.  In 1999, those top 10% paid a little over 66%, and the bottom 50% paid 4% of the total.

It’s time to reform the tax code and make it easy for all of us to pay our fair share.  In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on.  According to Government Accounting Office data for that year, Americans paid an aggregate of $1.15 trillion dollars in taxes on that income.  The present tax system is perceived as unfair by all participants, and they have arguments for their views.  Progressives view the rich, paying 70% of the total tax receipts, as not paying enough to be fair.  On the other hand, modern Conservatives consider that the bottom 50%, paying little to no taxes, also to be not paying enough.  Further, the complexity of our tax code is proverbial; not even professional tax accountants understand it well, and the IRS’ own advisors often provide erroneous help to inquiring taxpayers.

Our personal income tax code should be simplified, with the various filing statuses and tax brackets replaced with a single filing category and tax bracket.  Each household should pay a single, flat rate: all income above a level equal to half the then-current year Federal Poverty Income Guideline should be taxed at a rate of 10%.

Tax breaks, tax subsidized transfers, deductions for this or that expense—including the mortgage interest deduction and medical expense deduction—should be eliminated.  Note that this will include the standard deductions for family dependents; the Poverty Guideline includes an adjustment for family size.  Further, the elimination of all those deductions, credits, exceptions, and so on will greatly reduce the ability of special interest groups, and of politicians generally, to manipulate the tax code for their own ends.  The removal of the market distortions created by using tax policy for social engineering and wealth redistribution will lead to falling prices for those subsidized goods, and it will make it easier for all participants in the market—we Americans—to make our own decisions.  Finally, this equal percentage paid by all still leaves the actual dollars paid in taxes quite progressive: a man making $20,000 per year above that exempted income amount will pay $2,000 in Federal income tax.  A man making $200,000 per year above that same exempted income amount will pay $20,000 in Federal income tax.

The present corporate tax structure leads to the following distortions (among others) of business incentives in the United States: because it is imposed on income from capital, it biases decisions about how much to save and therefore influences overall capital investment and business growth.  It also creates a bias in favor of financing through the use of debt.  Further, because the law treats a corporation as a separate taxable entity, from which shareholders subsequently receive a portion of their income in the form of dividends or capital gains, the relatively beneficial tax treatment of capital gains under the personal income tax code creates a bias against paying dividends.  Finally, because the corporate tax code also uses schedules for depreciation that do not correspond to real wear and tear on equipment, it creates a bias in investment and production toward those capital assets more lightly taxed.

From these high, complex, and in some cases unrelated to reality, tax requirements, we can see that our corporate tax code discourages foreign companies from investing in the US or from setting up branches of their operations in the United States (known as “insourcing” in the same way American companies sending work outside the US is known as “outsourcing”).  Our tax code also creates incentives for American companies to build their new branches in other nations with lower corporate tax rates (Ireland, for instance, before it was dragooned into accepting an unneeded European Union bailout, taxed corporations at 15%).  Both of these incentives tend to reduce employment in the US, since the companies involved opt for foreign locales.

It’s time to apply a flat tax to corporations, also, and that corporate rate also should be 10% of all income (note that, even though the government and the Courts have said that corporations are “persons,” there are no Federal Poverty Income Guidelines for corporations, thus there is no income exemption here), both domestically earned and foreign-earned.  Tax subsidies, deductions, credits, and so on should be eliminated.  The elimination of these will have the same decision-making outcomes and economic effects as their elimination from personal income questions: the biases will disappear, and free market participants will make their own decisions.

To be sure, there will be disruptions in various markets while the changes ripple through the economy, but with the simplified code, compliance will increase (an increase in revenue for the government), and more importantly, the net result of the elimination of the market distortions will be a small decrease in overall prices that will go along with wages and salaries that have not dropped commensurately (wages do not fall at all as rapidly or as easily as do market prices).

There have been suggestions of having a national sales tax in lieu of any sort of income tax.  A tax on consumption would amount to everyone paying “their fair share,” and it would represent a great simplification of the Federal tax code.  The simplification argument could certainly be true.  However, a consumption tax would hit the poor much harder than it would anyone else.  Some consumption is absolutely necessary and cannot be avoided.  Everyone must buy food, everyone must make rent or mortgage payments, everyone must pay transportation costs of some sort.  A tax on these necessities would be a cost to the poor disproportionate to the costs others are paying: a consumption tax is regressive; there is nothing flat about it at all, in any way.

Some will argue that the poor could get a tax refund at the end of the year, based on some rule for refunds, just as income tax refunds are available now.  This, though, does not address the current tax burden that they would have to suffer for an entire year before they could get that refund.  Their cash flow would suffer, and later remediation would do nothing to eliminate the ongoing pain.

Others will argue for not taxing food, or fuel, or rent payments.  Making such exceptions, though, would only be the camel’s nose in the tent.  There are always worthy causes that should receive special tax treatment.  If we start making such exceptions, we will very shortly have a consumption tax code every bit as Byzantine as our present income tax code.

Yet others will argue that a flat income tax is itself regressive, and more so than a consumption tax.  However.  A tax on income does not hit those who do not work, but must still buy necessities.  A tax on income, in fact, is completely independent of the market choices anyone makes.  Compare, also, the amount of consumption taxes paid by the two men in our example above.  Let’s assume, for the sake of argument, that actual necessities—food, housing, and transportation, for instance—cost $18,000 per year.  Let’s assume, further, that comfort-level expenses—dining in restaurants, a better house, a fancier car, a better entertainment system, music and movie DVDs, for instance—cost an additional $18,000 per year.  Finally, let’s assume a consumption tax rate of 10%.  Our man making those $20,000 above the exempted amount is going to pay all of those $18,000 for necessities—those expenditures are unavoidable.  Let’s assume that, as a responsible adult, planning for his family’s future, he splits his remaining $2,000 of income between savings and comfort-level expenses.  His sales tax bill, then, will be 10% of $19,000, or $1,900: a slight reduction in his tax bill compared to his flat tax bill.  Let’s say our man making those $200,000 above the exempted amount buys all of those comfort-level items in addition to the necessities; his consumption expenditures, then, are $36,000, and he has a consumption tax bill of $3,600.  He’s paying less than a fifth of his flat income tax bill.  Indeed, our “rich” man would have to spend, voluntarily, 95% of his income on consumption alone—as our “poor” man had to do—in order to have the same relative consumption tax bill.

Tax reform is a flat tax.