The Politics of Tax Rates

Posted by PITHOCRATES - December 19th, 2012

Politics 101

Cash Starved Small Businesses cannot Afford to pay a Dime more in New Taxes

America is staring at a fiscal cliff.  Thanks to the budget debt limit debate in 2011.  The US was in danger of running out of money and defaulting on their sovereign debt.  The Republicans controlled the House of Representatives.  And the House is in charge of the money.  Before increasing the debt limit the Republicans wanted to get some spending cuts to reduce the federal deficit.  The Democrats wanted to raise tax rates (letting the Bush tax cuts expire, returning to the Clinton tax rates) to reduce the deficit.  They couldn’t reach an agreement.  So they did what politicians always do when they want to run away from a problem.  Create a committee.

The so-called super-committee.  Tasked to come up with $1.2 trillion in spending cuts (over ten years) by the end of 2012.  Or else.  With the ‘or else’ being sequestration.  Automatic budget cuts in defense and entitlement spending to the tune of $1.2 trillion.  The politicians knowing how unpleasant sequestration would be were full of confidence that the super-committee would overcome hell and high water to complete their task.  Because sequestration would be so very, very unpleasant.  Of course, politicians being politicians, kept running away from that problem.  And now we’re staring into the face of sequestration.  Taxmageddon.  The fiscal cliff.  Because the Democrats want to raise taxes on everyone earning over $200,000 (single) or $250,000 (married filing jointly).  But Republicans don’t want to because that will raise taxes on the job creators.  Something that won’t make an anemic economic recovery any better.  So let’s look at the numbers and see what kind of damage we’re looking at.

President Obama’s proposal for new tax rates leaves everything at the 28% marginal rate and below the same.  He proposes increasing the 33% rate to 36%.  And the 35% rate to 39.6%.  The new rates kick in at earnings of $250,000 (all the examples here are calculated for a married couple filing jointly).  Which raises the top income band at the 28% rate.  Holding the net tax increase to only $1,115 for a small business owner with a net income of $350,000.  Which doesn’t seem that bad.  But a small business owner with a net income of $350,000 isn’t exactly rich.  Despite paying income taxes like they are rich.  For most small business owners are S corporations or LLCs.  With their net income passing through to their personal income tax return.  So if the business owner lives on enough to equal two incomes (say $75,000 X 2 = $150,000) so his or her spouse can be a stay-at-home spouse that $1,115 comes out of $107,045 ($350,000 – $92,955 – $150,000).  Which is all they can put back into the business.  To pay for new equipment (which isn’t enough for most purchases forcing them to borrow more money and go further into debt).  To repay debt.  To cover unpaid accounts receivable.  To pay for customer write-offs for an employee error on a project.  To pay for a production run that failed to meet specifications that they couldn’t sell.  To pay for inventory shrinkage (damaged, lost and stolen goods).  To pay for employee raises.  Bonuses.  To hire new employees.  Or to pay for the newly mandated Obamacare.  When you factor in all these cost issues a small business owner may face $107,045 of retained earnings is not a lot of money and leaves a very small cash cushion.  Which is why Republicans do not want to raise taxes on small business owners.

Taxing the Rich more will do nothing to Lower the Deficit

Then presidential candidate John McCain opposed then presidential candidate Barack Obama’s proposed tax rate increases in the 2008 campaign.  Saying it would raise taxes on 23 million small business owners. debunked this number saying the actual number is closer to 6 million.  So using their number the additional tax revenue from small businesses would equal about $6.7 billion.  Approximately 0.48% of the federal deficit.  Which will do nothing to reduce the deficit.  But it will take more money away from cash-starved small businesses.  So what about millionaires?  What’s their damage?  And how much will they reduce the deficit?

The proposed tax rates will increase a millionaire’s tax by $30,549.  According to the IRS there were about 119,810 tax returns filed by people earning a million dollars in 2010.  Meaning the proposed increase in tax rates would raise another $3.7 billion in tax revenue from those earning a million dollars.  Which is only 54.7% of the new tax revenue from small business owners generated by those same new tax rates.  And only 0.26% of the federal deficit.  Which will do nothing to reduce the deficit.  So what about richer people?  Will taxing richer people do anything to reduce the deficit?  Let’s look at the numbers for someone earning $5 million.

Someone earning $5 million will pay an additional $214,549 in taxes.  Which is a huge increase.  But according to the IRS there were only 16,574 people who earned $5 million.  Which brings the total increase in tax revenue to only $3.6 billion.  Which is a $100 million less than the millionaires.  And only 0.25% of the federal deficit.  Meaning it will do nothing to reduce the deficit.  Even though they are taking an additional $214,549 away from each person earning $5 million.  That’s a lot of money from each person that results in no significant deficit reduction.  Which is the purpose of the higher proposed tax rates.

We’re simply Spending More than our Tax Revenue can ever Hope to Pay For

Crunching these numbers further we find that the proposed higher tax rates will increase tax revenue by $38.2 billion for everyone earning a million dollars and more based on 2010 IRS tax information.  Which is only 2.7% of the federal deficit.  Which is less than the automatic increases included in baseline budgeting.  Which means these proposed tax increases won’t do anything to reduce the deficit.  In fact the deficit will still grow larger.  Thanks to baseline budgeting.

The problem is that there aren’t enough rich people to tax.  The top 10% of earners are already paying 70% of all federal income taxes.  To raise new tax revenue you have to go to the middle class.  Based on the IRS there were 44,637,653 people filing income tax returns who earned between $50,000 and $200,000.  If each of these people paid an additional $1,115 like those small business owners that would raise an additional $49.8 billion in tax revenue.  Which is 3.6% of the federal deficit.  If you increased their taxes by $2,500 that would increase tax revenue by $111.6 billion.  Or 8% of the federal deficit.  Which may actually keep the deficit from growing.  But it won’t pay it down.

To get serious deficit reduction from the rich you have to take very large sums of money from them because there are so few rich people.  And even then it’s probably not possible to raise tax revenue enough to offset the automatic spending increases included in baseline budgeting.  But it’s a different story with the middle class.  Because there are so many more people in the middle class than there are rich people.  You can keep the deficit from growing by taking a far smaller amount from each of them than you would have to take from the rich.  You could even take enough to overcome the automatic spending increases of baseline budgeting to keep the deficit from growing.  But even the middle class doesn’t have enough people in it to wipe out a $1.4 trillion deficit.  Or make a dent in the federal debt.

No.  The only way to make any significant deficit reduction is with spending cuts.  Which the Democrats are steadfast against.  Because spending is their power.  It’s why people vote for them.  Which is why they will fight for increasing tax rates to the bitter end.  And never negotiate them away.  To continue the facade that new revenue can reduce the deficit.  Even though no amount of new revenue can.  Only spending cuts can.  For our spending has long since passed the Rubicon.  We’re simply spending more than our tax revenue can ever hope to pay for.  And any further increases in tax rates only reduce economic activity.  Causing the small business owners to stand fast on expanding and hiring.  Because economic growth is rewarded with punitive taxation.  So they will grow less with every increase in tax rates.  And with every increase in tax rates tax revenues will fall.  Which will lead to a downward spiral of deficits, debt, lowered credit ratings and possible default.  But anything is better to Democrats than admitting they are wrong.


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Leyden Jar, Electric Charge, Galvanic Cell, Voltaic Pile, Anions, Cations, Daniell Cell, Zinc-Carbon Battery and Alkaline Battery

Posted by PITHOCRATES - December 19th, 2012

Technology 101

Luigi Galvani made a Dead Frog’s Leg Twitch when he hit it with the Electric Discharge Shock from a Leyden Jar

The field of electricity took off with friction generators.  Dragging something across another substance to produce an electrical charge.  Like sliding out of your car on a dry winter day.  Producing an electric discharge shock just before your hand touches the metal door to close it.  Atoms in materials are electrically neutral.  There are an equal number of positive particles (protons) and negative particles (electrons).  Friction can transfer some of those electrons from one surface to another.  Leaving one surface with a net positive charge.  And the other with a net negative charge.  These charges equalize after that electric discharge shock.  Returning the atoms in these materials to an electrically neutral state.

Further exploration of static electric charge led to the development of the Leyden jar.  A precursor to the modern capacitor.  A glass jar with metal foil on the inside and outside of a glass bottle.  The foil sheets act as plates.  The glass as a dielectric.  An electrode attached to one plate received an electric charge from a friction generator.  The other plate was grounded.  The dielectric helped the plates hold an electric charge.  Benjamin Franklin did a lot of experiments with the Leyden jar.  He noted how multiple Leyden jars could hold a greater charge.  Commenting that it was like a battery of cannons.  Giving us the word battery for an electrical storage device.

Luigi Galvani made a dead frog’s leg twitch when he zapped it with the electric discharge shock from a Leyden jar.  Furthering his experiments Galvani found that he could reproduce the twitching by placing the frog’s leg between two different types of metals.  Creating a galvanic cell.  Which created an electric current.  Alessandro Volta recreated this experiment while substituting the frog tissue with cardboard soaked in salt water (an electrolyte).  Creating the voltaic cell.  Piling one voltaic cell onto another created a Voltaic Pile.  Or as we call it today, a battery.

A Daniell Cell created a Current by Stripping away Electrons from one Electrode and Recombining them on Another

What Galvani and Volta discovered was a chemical reaction that caused an electric current.  The Voltaic Pile, though, had a limited life.  To improve on it John F. Daniell added a second electrolyte.  Creating the Daniell Cell.  Which extended the life of a battery charge.  Allowing it to do useful work.  Becoming the first commercially successful battery.  Powering our first telegraphs and telephones.  Even finding their way into our homes operating our doorbells for a century or so before Nikola Tesla brought alternating current electric power to our homes.

The chemical reaction in a Daniell Cell created an electric current by stripping away electrons from one metal electrode in a solution (anode oxidation).  And recombining electrons onto another electrode of a different metal in a different solution (cathode reduction).  Each electrode is in an electrolyte solution.  In a copper-zinc Daniell Cell the anode is typically in a solution of zinc sulfate.  And the cathode is in a copper sulfate solution.  A salt bridge or porous membrane connects the different electrolytes.  When an electric load is connected across the ‘battery’ electrodes it completes the electrochemical system.

Each electrolyte contains ions.  Atoms with a net positive or negative charge.  Positive ions are cations.  Negative ions are anions.  The cathode attracts cations.  Where they combine with free electrons to return to a neutral state.  The anode attracts anions.   Where they give up their extra electrons to return to a neutral state.  This chemical activity dissolves the zinc electrode.  And deposits copper on the copper electrode.  (This electrolysis is the basis for the metal plating industry.)  It is the dissolving of the anode that gives up electrons that travel from one electrode through the electric load to the other electrode.  Doing work for us.  By lighting our flashlights.  Or powering our portable radio.  When the anode dissolves to the point that it cannot give up anymore electrons the chemical reaction stops.  And we have to replace our batteries.

An Alkaline Battery will produce more Useable Power and have a longer Shelf Life than a Zinc-Carbon Battery

Of course, the zinc-carbon batteries we use for our flashlights and radios are not wet cells.  They’re dry cells.  Instead of an electrolyte solution the common battery is made up of dry components.  The zinc anode is the battery casing.  Just inside the battery zinc casing is a paper layer impregnated with a moist paste of acidic ammonium chloride.  This separates the zinc can from a mixture of graphite powder and manganese (IV) oxide (pyrolusite).  In the center of the battery is a carbon rod.  The zinc casing is the negative electrode (anode) and the carbon rod is the positive electrode (the cathode).  The chemical reactions are the same as they are with the wet cell.  The zinc casing (the anode) becomes thinner over time.  When holes begin to appear the battery will leak creating a sticky mess.  As you no doubt experienced when taking an old set of batteries out of a flashlight that hasn’t been used in years.

An alkaline battery looks similar to a zinc-carbon battery.  But there are many differences.  Instead of an acidic ammonium chloride electrolyte an alkaline battery uses an alkaline potassium hydroxide electrolyte.  The little nub (positive terminal) on top of the battery does not connect to a carbon rod in the center of the battery.  It connects to the outer casing.  Inside this casing is a mixture of graphite powder and manganese (IV) oxide (pyrolusite).  Then a barrier to keep the anode and cathode materials from coming into contact with each other.  But lets ions pass through.  On the other side of the barrier is the anode.  A gel of the alkaline potassium hydroxide electrolyte containing a dispersion of zinc powder.  In the middle of the battery is a metal rod that acts as a current pickup that connects to the bottom of the battery (the negative terminal).

Alkaline batteries are the most popular batteries today.  Because they have a higher energy density than a zinc-carbon battery.  Meaning that an alkaline battery will produce more useable power than a comparable sized zinc-carbon battery.  And they have a longer shelf life.  But with these benefits comes costs.  They can leak a caustic potassium hydroxide.  An irritant to your eyes and skin.  As well as your respiratory system.  As they age they can produce hydrogen gas.  Which can rupture the casing.  If a battery leaks potassium carbonate (a crystalline structure) can grow.  If this crystalline structure reaches the copper tracks of a circuit board it will oxidize the copper and metallic components.  Damaging electronic devices.  But the benefits clearly outweigh the risks.  As about 80% of all batteries sold in the U.S. are alkaline batteries.


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