Tag Archives: political economy

A Tax Proposal

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In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, we 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.  In 2007, according to Government Accounting Office data, we paid an aggregate of $1.15 trillion dollars in taxes on that income.  That’s an aggregate rate of around 6.5%, with the top 10% of taxpayers paying 70% of that bill (compare that with the roughly 20% paid by Republican Presidential Candidate Mitt Romney over the last 20 years, and the roughly 20% paid by Democratic Presidential Candidate Barack Obama last year).

That’s a ton of money for the government, paid by those who actually pay taxes (50% of Americans pay taxes in the range of 0%-3%).

What would happen, though, to revenues if we moved to a flat tax of 10% with no deductions, credits, or other loopholes, and everybody pays?  One immediate result is that the government would collect $1.78 trillion in income tax revenue—a one-third increase.  Think about what that would mean toward paying down our $16 trillion debt.

Such a static analysis is interesting but unsatisfying since it doesn’t consider the dynamics of an economy.  Let’s look at the impact on a hypothetical family of four, making (to keep the arithmetic sort of simple—we’re dealing with the tax system, after all) $100,000 per year, and taking a currently normal set of deductions: married filing jointly, exemptions for dependents (four, in this case), and they donate $5,000 to charity (this is a bit high for a conservative family, and quite a bit high for a liberal family, but we’re keeping the numbers round).  Let’s also say they own a $200,000 house and they’re four years into a 30 year mortgage at 3.5% (a roughly current market rate in the middle of the range of rates Bankrate.com says can be found for the Dallas area in a quick search last Sunday).  We’ll also say they’re healthy, and their other deductions don’t meet the 7% or 2% thresholds.

Their deducitons, then add up this way.  Their annual mortgage interest deduction is in the neighborhood of $6600 dollars.  Four dependents at $3,700 per gives them a total exemption of $14,800. Add their charity giving, and all of these together reduce the family’s income to a taxable amount of $73,600.  The 2011 IRS tax tables put this family’s tax bite at $10,656.

Now take away all those deductions, and bill the family on the top-line (now bottom line, also) $100k at 10%, and they see a drop in their taxes of $656.  That’s a fair amount of beer and pizza.  Or a mortgage payment.

Some might argue that such a no-frills tax system hurts the poor (now they’re payers of taxes, instead of receivers).  Accordingly, what happens when we allow a single exemption: half the then-year Federal Poverty Guideline.  For our family of four, this would be half of $22,350 for 2011, or $11,175.  Now the 10% tax bite is reduced to $8,882—a reduction relative to our proposed system of $1,118 and of $1,774 relative to the current tax system.  Add pretzels to the beer and pizza.  Or another mortgage payment—every year.  Or car payments—every year.

How does this scale to the national level?  Again, only looking at the back of our envelope, and saying that our 2011 non-retired population consists entirely of families of four, that makes 68,000,000 filings taking that $11,175 exemption: a $760 billion reduction in the government’s tax collection relative to the simple flat tax collection, and a $120 billion reduction compared to last year’s collections and a $544 billion reduction compared to 2007’s actual collections.

Looks like a disaster.  But we’re still in the static analysis stage.  Think about the stimulative effect of those additional $1,774 available for private use, instead of government “investment.”  For those 68,000,000 families of four, that’s those $120 billion left in private hands.

All that money represents additional spending and saving and paying down  personal debt (faster, we already are to a certain degree) represents an active, dynamic economy, with all the revenue that will generate in increasing employment (more folks earning income, and so paying taxes), increasing business activity—which feeds investment and hiring—and so on.

The government likes to say that each $1 in its “investment” returns a $1.5 to the economy as that spent dollar circulates and gets spent again and again, multiple times, before it’s fully absorbed.  That compares with each $1 of spending in the private economy returning $1.7, but let’s use the government’s own figure.  Those $120 billion left in private hands through the lower tax rate will return $180 billion, just in the first year.  And it will grow in subsequent years as economic activity continues to increase from this freeing of us from our present, heavier tax burden.  The revenue “deficit” disappears in very short order.

Nor will I get into the premise that tax reform needs to be revenue neutral at all; nor will I get into the fallacious premise that the government is somehow entitled to our money; nor will I get into the need for government to cut spending—this is a tax reform proposal.

The higher total tax revenue I mentioned at the outset?  That results from the far broader base of folks who actually pay taxes under this proposal and so who now have positive reason to be active participants in our political process.

I will ask a question, though, since the idea of losing all those deductions and credits will itself be questioned.  What’s the value of those deductions and credits when their sole purpose is to reduce the tax bite from tax rates that are artificially elevated to begin with in order, in part, to recover the “cost” of those deductions?

There’s another aspect to this, also, and that’s the idea of business taxes.  American businesses “pay” taxes, nominally, at a rates as high as 35%, the highest rate in the known world.  Leaving aside examples like GE, which paid no net taxes on revenue of around $148 billion in 2010 (a result of our corporate tax system being as Byzantine as our personal income tax system), our businesses paid in the aggregate some $370 billion in Federal income taxes in 2007 (to keep the year of interest consistent).

I used quotes on “pay” taxes on purpose, though.  Even though the business’ officer signs the tax check, the business isn’t paying a penny of those taxes.  From the business’ perspective, the tax bill is just another cost of doing business, and that cost is passed on to its customers in the form of prices that are elevated to cover that cost, just as the price is set to cover all the other costs that a business encounters.  The customers—you and me at the end of a chain of intermediaries and stores—are the ones who are paying that tax through that elevated price.

My tax reform proposal, then, includes this: eliminate the business income tax altogether.  Reduce our tax bite even further, in the form of reduced prices.

What’s the outcome of this loss of $370 billion in revenue to the government?  First, see the multiplier discussion above.  Then, consider our neighbor to the north; Canada’s example offers an answer.  The chart just below, from the Cato Institute’s “Corporate Tax Competitiveness Rankings for 2012,” shows the effect on the Canadian GDP over the years since 2000 that the Canadians have been drastically reducing their corporate tax burden.

The effect has been nil: corporate revenues as a per cent of GDP have been stable over the entire period of steady reductions.

The chart below shows Canada’s GDP growth in real terms since 1999; I constructed it from these data.

Plainly, drastically reducing (eliminating in my case) the corporate tax bill has no material effect on GDP.  Not only did the rapidly falling tax bite not impact the Canadian government’s corporate tax revenues as a per cent of Canadian GDP, that reduction had no negative effect on the GDP itself.

It’ll be the same in the US, with the single difference that Federal tax revenue as a per cent of US GDP will drop, some, from the elimination of Federal business income taxes.  The per cent of GDP won’t go to zero, though, because I’m only talking about the Federal tax burden; states will remain free to tax—in competition with their fellow states—their domiciled businesses.

This is Stupid

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Spiegel Online International is describing another European hare-brained scheme in the mill for “bailing out” Greece.

Greece’s lenders are reportedly considering further relief in the form of a partial debt haircut for the crisis-wracked country, the Financial Times Deutschland reported on Friday.

…

Martin Blessing, chairman of Germany’s second-largest bank, Commerzbank, has also said a second debt haircut is likely.  “In the end we will see another debt haircut for Greece, in which all creditors will take part,” he said on Thursday in Frankfurt.

And

And though a second debt haircut would be tantamount to bankruptcy for Greece, it would also enable Athens to tackle the extreme debt that has so far hindered economic recovery.

And in a blatant case of demanding this be done with OPM (at least from the IMF’s perspective; the IMF wholeheartedly approves this second bailout),

[T]he IMF is pushing for debt restructuring from public lenders, who currently hold over two-thirds of the country’s total debt of some €330 billion [$426 billion], according to the newspaper.  However, neither the IMF nor the ECB would take part in such a debt haircut, placing the burden on the euro-zone members, the paper added.

I have a couple of questions.  Wasn’t the first haircut, functionally, a Greek bankruptcy?

Second, if you’re not going to hold the Greeks accountable and responsible for their obligations and commitments, why bother at all?  Why not just forgive the entire debt, and let them resume their profligate ways?  You’ll only bail them outprop them up again, next time, anyway.

In the end, here’s the IMF (and ECB, but at least this organization has honorably committed its own creditors’ money) saying, “Debt.  Very dangerous.  You go first.”  Still, the burden, as the IMF and ECB suggest, should be wholly within the euro zone, or rather (say I) more particularly, it should rest entirely with the private investors who loaned their money to Greece—the private holders of Greek sovereign debt.  Europe’s taxpayers should not be—should not have been—put on the hook any further than they already were from the moment it became known that the Greek government was unable to repay its debt.  Indeed, those taxpayers should not have been put further onto the hook from the moment it became known that the Greek government had lied about its financials in order to gain admittance to the euro zone.

Here’s an alternative thought—work with me on this; it’s an idea of responsibility—how about not bailing them out, again?  Instead, let them go bankrupt, and thereby free them to start over.

More About Jobs

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Last week, in a presage of the nearby future, Alpha Natural Resources, a major coal producer, announced that it would be forced to reduce production by 16 million tons of coal per year, which will force the closure of eight mines in Virginia, West Virginia, and Pennsylvania, and the elimination of some 1200 mining jobs—400 of these miners right away.

There are two reasons for this trouble.  One is long-run beneficial and is simply part of the creative destruction that a free economy goes through—quickly and with greater strength on the other side, including for those whose jobs are lost in the near-term, if the economy is free from government interference.

This reason is the improving technology that makes natural gas more cheaply extractable than coal.

But the other reason is government interference.  Kevin Crutchfield, ANR’s CEO, puts it plainly and simply at the feet of the government’s

regulatory environment that’s aggressively aimed at constraining the use of coal.

And make no mistake about it; this is a deliberate policy.  Here’s what the then-and-now Democratic Presidential Candidate had to say about coal production back in 2008:

If somebody wants to build a coal-powered plant, they can, it’s just that it will bankrupt them[.]

It’s important to note that Obama’s policies really are anti-coal—and so, intended or not, anti-job—and not just ANR’s bad fortune or failure to operate cleanly.  As Congresswoman Shelley Moore Capito (R, WV) points out,

The president’s extreme policies are crippling entire towns and making it harder for workers to find jobs.  Because of  the president’s War on Coal, thousands of West Virginia families have to worry about where their next paycheck is going to come from.

Is the EPA well-intended, but misguided?  Not a bit of it.  The timetable for meeting its new standards is virtually impossible to meet, and the standards themselves unattainable.

But it’s alright.  All those unemployed coal miners will have clean air.  Just no money for food on their families’ tables, or for rent/mortgage payments with which to keep roofs over their families’ heads.

Promises and Policies

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Fox News reports this from the CBO:

Nearly 6 million Americans—most of them in the middle class—will face a tax penalty for not carrying medical coverage once President Barack Obama’s health care overhaul law is fully in place, congressional budget analysts said Wednesday…a 50 percent increase [over CBO’s report from last year].

Recall Democratic Presidential Candidate Barack Obama’s solemn promise from his 2008 campaign, repeated constantly over these last four years.  He’s not going to raise taxes on any one of us with less than $200,000 of annual income, or on couples of us with a combined annual income less than $250,000.

The CBO said why this sharp increase had occurred, too.

…most of the increase in its estimate is due to changes in underlying projections about the economy, incorporating the effects of new federal legislation, as well as higher unemployment and lower wages.

How’re those several promises

  • that promised no-tax-increase
  • unemployment held under 8%
  • everyone pays their “fair share”
  • failure to achieve would produce a one-term presidency (yet he’s running for a second term)
  • and so on

and our “recovery” working out for you?

With all this government “help,” we’re having trouble building anything anymore.

Splitting Up Major Banks?

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Because they’re too big to fail?  Because government bureaucrats are jealous of success?

Spiegel Online International‘s Martin Hesse and Christoph Pauly are reporting that the EU actually is considering just such a thought:

EU Commissioner Michel Barnier has asked experts to examine the possibility of splitting up major European banks to avoid future bailouts at taxpayers’ expense.

Certainly, the EU (and others making the same “argument”) couch the move in suitably plaintive terms:

Many banks are so big that no country can afford to allow them to fail.  This is why the government bailed out a number of financial companies starting in 2008, a move that allowed major banks like Deutsche Bank to grow even larger.

Yeah, that worked out well, didn’t it?  Aside from the growth possibilities for the governments’ favored few, how’s the recovery such bailouts were supposed to facilitate working out?

Then, Germany’s Monopolies Commission head, Daniel Zimmer, had this:

Taking a more-of-the-same approach in the treatment of major banks is not an option.  First of all, in contrast to 2008, many countries no longer have the resources to bail out banks.  Second, taxpayers are no longer willing to foot the bill for the financial industry’s mistakes.

Zimmer, though, is arguing for government mandating the structure of a bank to facilitate its government-ordered breakup in an economic crisis.  But he’s not listening to his own words.  Countries (including the US) don’t have the resources for bailouts, and taxpayers don’t want to foot the bill for any more bailouts.

Nor should they have to.  The government interventions into the market place in the US in the ’30s and since 2008 and the EU’s intervention since 2008 only prolonged the crises they were intended to alleviate.  This has cost the taxpayers far more than the bailouts themselves in lost jobs, lost incomes, higher personal costs (when they had any jobs/income at all with which to pay them—most especially in the ’30s and with an inflation time bomb ticking down from the US’ monetary “easing”) and from that, lost revenues for the respective governments.

And never mind the morality of protecting failure by not allowing a free market to punish it suitably.

Here’s a thought (are you listening, Barack?).  Work with me on this, it’s kinda conservative.  How about avoiding future bailouts of major banks by…not bailing them out?