Class Warfare

Posted by PITHOCRATES - January 3rd, 2013

Politics 101

Over 99.5% of all Rich People ARE paying Federal Income Taxes

President Obama won reelection by denigrating Mitt Romney.  He didn’t win by running on a successful record.  He did not win by running on a plan to pull the economy out of one of the worst recoveries in history.  No.  He won it by getting people to hate Mitt Romney.  And by getting people to hate Republicans.  Who they painted as evil rich people who want nothing more than tax cuts for the rich.  And to take away birth control and abortion so only rich people can have access to them.  As well as taking welfare benefits from the poor.  It’s called class warfare.  And it can be very effective.  For it won President Obama a second term despite a horrible first term by almost any metric you measure it.  At least based on the majority of the electorate that just believed the rich aren’t paying their fair share.  So let’s just see who is paying what (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010).

The above chart shows who are NOT paying any federal income tax.  Approximately 40% of all taxpayers.  Are these the evil rich people like Mitt Romney?  And those rich Republicans?  No.  Contrary to the Left, it’s not the rich.  They’re paying their taxes.  It’s the poor and the middle class not paying their fair share.  Those earning $5,000 and less pay virtually no federal income taxes.  Over 80% of those earning from $5,000 to $13,000 pay no federal income taxes.  You have to get up to those earning $25,000 or more before more than half of that income group pays any federal income taxes.

We don’t see who actually pays the majority of federal income taxes until we get into the middle class.  Where those who DON’T pay any federal income taxes rapidly drop away.  Those at the low end of the middle class taking advantage of the tax code to maximize their tax credits and deductions (mortgage interest, energy tax credit, medical and dental Expenses, child and dependent care credit, etc.) to reduce their tax bill.  While those at the higher end of the middle class are likely small business owners suffering a business loss.  Or a personal or business bankruptcy.  Approximately 0.8% of those earning $100,000 – $200,000 pay no federal income taxes.  While less than half of one percent of those earning $200,000 or more pay no federal income taxes.  Perhaps this tiny sliver of income earners are not paying their fair share.  But one thing for certain is that over 99.5% of all rich people ARE paying federal income taxes.

Those earning $1,000,000 and more account for less than 1% of Tax Exemptions and Deductions

So are the rich taking advantage of the tax code to reduce their taxable income and federal tax bill?  We hear a lot about tax loopholes.  Those perfectly legal tax credits and deductions written into law by the United States Congress.  That both those on the Left and those on the Right take advantage of.  Yet those on the Left have convinced enough of the electorate that these legal credits and deductions are tax evasion.  And that only the rich on the Right are using these to evade paying their fair share.  So who is taking the biggest advantage of the tax code to reduce their tax bill?  In 2010 this totaled about $3 trillion.  Is this why those earning $100,000 or more paid no income tax?  For those few not paying any federal income tax?  Not exactly.  (The dollar amounts in the following charts are in thousands of dollars.)

In 2010 taxpayers claimed in total about $3 trillion in exemptions and deductions.  The deficit in 2010 was about $1.3 trillion dollars.  So perhaps this is the reason why we had a deficit in 2010.  This is what the Left would have us believe.  It’s those tax loopholes that the evil rich take advantage of to avoid paying their fair share of taxes.  The only problem with this is that it’s not the rich taking advantage of these tax loopholes.  It’s the poor and middle class.

Those earning $1,000 and less account for less than 1% of these exemptions and deductions.  Those earning $1,000,000 and more also account for less than 1% of these exemptions and deductions.  It’s those earning from $1,000 to $1,000,000 that are taking advantage of these tax loopholes.  Especially those earning from $50,000 to $200,000.  The only income groups claiming 10% or more of the nearly $3 trillion in exemptions and deductions claimed.  So not only are the evil rich paying federal income taxes whatever they claim as exemptions and deductions doesn’t even come close to what the poor and middle class are claiming.

Prosperous Economic Times brought about by Tax Cuts INCREASED Tax Revenues

These numbers don’t exactly support the claim that the rich aren’t paying their fair share.  They’re paying federal income taxes.  And what tax loopholes they exploit hardly makes a dent in the amount of tax revenue the IRS collects.  Which can only mean one of two things.  Either the poor and middle class need to pay more federal income taxes.  Or the federal government is just spending too much.  Well, as we just witnessed in the fiscal cliff debate, President Obama and the Left want to raise taxes.  Blaming the record Obama deficits on the Reagan and Bush tax cuts.  Their deal includes higher income tax rates on households earning $450,000 or more.  But NO spending cuts.  Which will be a problem.

In 2010 the total adjusted gross income totaled just over $8 trillion.  Most of which came from 4 income groups.  About a trillion each from those earning from $50,000 to $75,000, from $75,000 to $100,000 and from $200,000 to $500,000.  Those earning from $100,000 to $200,000 earned in total almost $2 trillion.  Which means the new higher tax rates aren’t going to bring in much new tax revenue.  Because they aren’t taxing the people with the money.  The middle class.  And with some additional spending instead of spending cuts the deficit will only grow larger.  So this whole fiscal cliff debate was nothing but theatre.  For it wasn’t about deficit reduction.  It was about politics.

The Left wants to destroy the Republican Party.  And to do that they need to turn prosperous economic times brought about by the tax cuts of the JFK, Reagan and Bush administrations into the source of all our problems.  Yes the economy boomed, goes the argument, but at what cost?  Massive deficits.  Deficits not brought about by tax cuts.  But by spending.  For those prosperous economic times brought about by tax cuts INCREASED tax revenues.  The deficits resulted from spending increases greater than the revenue increases.  But with a successful campaign of class warfare they have revised history.  Those deficits are now the result of the rich not paying their fair share.   Which helped them increase tax rates on the rich today.  Because the Left got everyone to hate the rich.  And the Republican Party.  Even though the rich are the only ones paying their fair share.  In fact, they’re paying more than their fair share.  But the majority of the electorate doesn’t know this.  Because of that successful campaign of class warfare.

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Japan clings to the same Keynesian Policies that have Failed for over 20 Years

Posted by PITHOCRATES - December 30th, 2012

Week in Review

The fiscal cliff negotiations are all about deficit reduction.  The Right wants to do it with spending cuts.   The Left wants to do it with new taxes.  So they can spend more.  This is why they can’t reach an agreement.  The Right wants to reduce the deficit.  While the Left wants to increase spending.  For benefits.  For education.  For investments in Green Energy.  For infrastructure.  For economic stimulus.  Which will only increase the deficit.  So the Democrats are not exactly sincere when they talk about deficit reduction.  Which is why they can’t make a deal with the Republicans.  Who are serious when they talk about deficit reduction.

Another reason why the Democrats want to spend so much money is that they are Keynesians.  Who believe the government can bring an economy out of a recession with stimulus spending.  Despite that failing every time we’ve tried it.  In the United States in the Seventies.  Again during the Obama administration.  In the Eurozone.  In Asia.  Especially in Japan.  Where they’ve been trying to stimulate themselves out of a recession since their Lost Decade.  The Nineties (see Japan’s New Stimulus: The Race With China To The Bottom by Gordon G. Chang posted 12/30/2012 on Forbes).

The universal consensus is that the fall in manufacturing bolsters the case for Shinzo Abe’s plans to stimulate the economy.  The new prime minister is pursuing a broad-based program of shocking Japan out of its fourth contraction since the turn of the century.

First, Abe is going to prime the pump in a big way…

Second, Abe is going to push the yen down to help struggling exporters…

Third, the just-installed prime minister is leaning on the Bank of Japan to open up the taps…

Markets may love Abe’s stimulus solutions, but they are at best short-term fixes.  Tokyo, after all, has tried them all before with generally unsatisfactory results.  What Japan needs is not another paved-over riverbed—past spending programs have resulted in useless infrastructure—but structural reform to increase the country’s competitiveness.

Tokyo’s political elite, unfortunately, has got hooked on the false notion that governments can create enduring prosperity.  Two decades of recession and recession-like stagnation in Japan are proof that repeated government intervention in the economy does not in fact work.

If you keep trying to stimulate yourself out of a recession with Keynesian policies for over twenty years perhaps it’s time to give up on those failed policies.  Of course to do that may require some spending and tax cuts.  And you know how well that goes over with big government types.  It’s why the Americans can’t make a deal to avoid the fiscal cliff.  And why the Japanese are going to try more of the same failed policies of the past.

Another impetus for these bad policies decisions is what’s happening in China.  Whose economy is much younger than Japan’s economy.  So they don’t have years of failed Keynesian policies digging their economy into a deep hole.  And because of that they’re going to go big.  Their stimulus is going to include the building of cities.  And that’s what the Japanese see.  That, and the (one time) economic explosion of their export economy.  Something they once had in Japan.  And would love to have again.  So they are going to follow China’s lead.  Even though their economic expansion is pretty much at its end.

Although there has been a “recovery” beginning in October, it looks like the upturn is already running out of steam.  China’s technocrats know they’re in trouble: they are apparently planning to increase the central government’s planned deficit for 2013 by 41% to 1.2 trillion yuan ($192 billion).  At present, it is now slated to be only 850 billion yuan.  Much of the shortfall is going toward an urbanization push next year.  Last year, Beijing announced its intention to build 20 new cities a year in each of the following 20 years.

The two biggest economies in Asia are ailing at the same time, and both Beijing and Tokyo have decided that government intervention is the shortest path to long-term growth.  Neither government’s program, however, looks viable.  Unfortunately, both China and Japan are going down the wrong road at the same time.

This could help the U.S. economy.  If they enacted spending cuts for their deficit reduction they could cut tax rates to spur the economy along.  And make the U.S. competitiveness soar while Japan and China dig themselves into deeper holes.  But the Americans, being the foolish Keynesians they are, are going to follow the Japanese and the Chinese into economic stagnation.  And with President Obama’s reelection they will stay Keynesian.  Drive over the fiscal cliff.  And compete with the Japanese to see who can have more lost decades

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Defying Economic Sense the 1% now support Higher Tax Rates on their Income

Posted by PITHOCRATES - December 29th, 2012

Week in Review

Now everyone is ganging up on the Republicans.  In the fiscal cliff showdown.  The Republicans want some deficit reduction coming from spending cuts.  They have modified their position to allow some higher tax rates.  But they want those spending cuts.  Which the Democrats simply refuse.  They want all deficit reduction to come from higher tax rates.  Now even the 1% are saying to tax them more.  At least, according to a new poll (see Majority of Rich Want Themselves Taxed More: Poll by Robert Frank, CNBC, posted 12/24/2012 on Yahoo! Finance).

American Express Publishing and The Harrison Group found that 67 percent of the top one percent of American earners support higher income taxes. Their support has grown since the election. This summer, 62 percent of them supported higher taxes.

Some might say the rich are hoping to tax people richer – or poorer — than themselves. The top one percent consist of people making more than $450,000 a year. But the survey clearly shows most One Percenters favor taxing themselves. More than half say that they support taxing those making $500,000 or more…

“There is an absolute willingness for the vast majority of the One Percent to take a tax increase,” said Jim Taylor, Vice Chairman Harrison Group. “What the Republicans think is not necessarily what their constituents think.”

Ask yourself this.  Why are super rich movie, television and music stars staunch supporters of the Democrat Party?  Is it because in their music studies they minored in economics?  No.  I don’t think so.  I would even go so far as to posit that they cannot differentiate between classical economics, the Austrian school of economics, the Chicago school of economics and the Keynesian school of economics.  Though they are staunch supporters of the last one.  Because the Democrats embrace Keynesian economics as it enables big government spending.  So why are super rich movie, television and music stars staunch supporters of the Democrat Party?   So they can escape the bitter attacks on wealth business owners face.

These superstars live lives like Roman Emperors.  All without having a real job.  So they have no understanding of economic fundamentals.  Or the first thing about scraping the cash together to make a payroll.  But they do know that if they support and campaign for Democrat candidates they can enjoy their obscene wealth without someone attacking them for living like Roman Emperors.  Could it be the reason why the superrich 1% are coming out in favor of higher tax rates on themselves?  Perhaps.  For there is no good economic reason to do so.

Raising taxes on them will not make a dent in the deficit.  In fact, if you added all the federal income taxes those earning $200,000 or more paid in 2010 (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010) it comes to approximately $489 billion.  If you divide that number by the highest marginal tax rate (at high income levels most income is taxed at the highest marginal tax rate) that comes to about $1.397 trillion.  Which is just over the average Obama annual deficit of $1.324 trillion.  So if you confiscated 100% of all earning from those earning $200,000 or more it will pay for one year’s deficit.  So taxing the rich a few more percentage points will do NOTHING to reduce the deficit.  The deficit is just too big.  And there are just too few rich people.  No, the only way to reduce the deficit by higher taxes only is to hit the middle class with a huge tax increase.  Or you could cut spending.  Which would require no new middle class tax.  Like the Republicans want.

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FT150: “The Left wants to extend tax hikes down to those earning $250,000 because there are just too few rich people to tax.” —Old Pithy

Posted by PITHOCRATES - December 29th, 2012

Fundamental Truth

If you Confiscated ALL Income from those Earning a Million+ it would be Less than HALF of the Average Obama Deficit

The fiscal cliff yadda yadda yadda the Democrats want to raise taxes and the Republicans’ mothers are whores.  That about summarizes the fiscal cliff negotiations.  The Democrats want to raise taxes.  The Republicans don’t because there is nothing that will kill off an economic recovery quicker than raising taxes.  And the Democrats are mean.  Calling the Republicans a lot of names.  And saying things about them that aren’t very nice.  So once again let’s look at the numbers to see what they say about federal income taxes.  The following numbers come from the IRS (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010).

The Democrats keep saying that the Republicans want tax cuts for the rich paid for by the poor.  But according to these numbers that’s just not happening.  People who earned $15,000 or less paid 0.0% of all federal income taxes.  People who earned $30,000 or less paid less than 1% of all federal income taxes.  It’s the meaty center that paid the taxes.  Those who earned from $75,000 to $1 million submitted approximately 20.5% of all federal tax returns while they paid approximately 62.9% of all federal income taxes.

Now how about those rich people?  Those earning $1 million or more submitted approximately 0.19% of all tax returns.  Less than a quarter of one percent.  And yet they paid approximately 21.9% of all income taxes.  Is that fair?  At these high levels of income people pay basically the top marginal tax rate as only a very small fraction of their earnings falls outside this top rate.  So if we divide the total taxes paid by this 0.18% ($207 billion) by 0.35 (the 2010 top marginal tax rate) you get a total income of $590 billion.  So if you confiscated ALL of their earnings it would be less than HALF of the average Obama deficit ($1.324 trillion).  Meaning that it is IMPOSSIBLE to reduce the deficit with any tax rate on those earning $1 million or more.

The Rich may be paying Lower Tax Rates but they’re paying Far More Tax Dollars than most of Us

All right, so it won’t reduce the deficit.  But the Democrats say we must do this to be fair.  Meaning those earning more should pay more even if it’s only symbolic.  To punish success.  As if they’re not being punished already for their success.  We’ve all heard about Warren Buffet’s secretary paying a larger tax rate than he pays.  But talking percentages isn’t the same as talking dollars.  Because a small percentage on a much larger earnings amount will produce more tax revenue than a higher tax rate on a smaller earnings amount.  So let’s look at dollar amounts to see if the rich are paying their fair share.  Or whether we’re punishing them enough for their success.

The rich paid a smaller percentage of their earnings in taxes but paid far more in actual dollar amounts.  Which is the only thing that allows government to pay for things.  Dollars.  Let’s assume Warren Buffet’s secretary falls into the income range $50,000 to $75,000.  Who paid on average $4,310.92 in federal income taxes.  Now compare this to what rich people paid in income taxes.  Those earning from $1 million to $1.5 million paid on average $306,779 in federal income taxes.  Or more than 71 times what someone earning $50,000 to $75,000 paid.  Those earning $1,500,000 to $2,000,000 paid 102 times more than that lower income earner.  Those earning $2,000,000 to $5,000,000 paid 179 times more than that lower income earner.  Those earning $5,000,000 to $10,000,000 paid 407 times more than that lower income earner.  Those earning $10 million or more paid 1,389 times more than that lower income earner.

The rich may be paying lower tax rates but they’re paying far more tax dollars than most of us.  An inordinate amount.  If you look at it in terms of government services people consume (which is what taxes pay for) are those earning $10 million or more consuming 1,389 times the government services those earning $50,000 to $75,000 consume?  No.  If anything, they consume far less government services than most people.  Because they live the good life.  The good life their high earnings provide.  Being that the rich are paying far more than their fair share you can only conclude then that these excessive taxes are punitive.  To punish their success.

The only way to Achieve Real Deficit Reduction is to Increase Taxes on the Middle Class or Cut Spending

So what can we conclude?  The rich are paying more than their fair share of taxes.  The amount of tax dollars they’re paying could even qualify as being punitive.  As they are so great any further increase in rates on the rich is not likely to increase tax revenue.  First of all as they are already paying so much they will take every tax shelter advantage they can to minimize the further confiscation of their earnings.  But more important than that is that there are just so few rich people.  Even though the rich pay on average hundreds of times more in federal income taxes than that meaty center it’s the meaty center where most of the tax revenue comes from.  Because there are so many more people in the meaty center.  And by graphing the number of tax returns from each income bracket and the amount of tax revenue they pay we can understand why the Democrats are so adamant to raise taxes on those earning as little as $250,000.

The blue line (Series 1) is the number of tax returns filed in thousands of people for each income bracket (the left vertical axis).  The red line (Series 2) is the total tax revenue in millions of dollars each income bracket produces (the right vertical axis).  You can see the meaty center of tax revenue (from those earning $75,000 to $1 million).  And you can see the meaty center of those filing tax returns (form those earning $30,000 to $200,000).  As you can see the meaty center of tax filers and tax payers are not the same.  As the tax code shifts the tax burden onto the higher income earners.  And in this chart we can see why the Democrats want to increase tax rates on those earning $250,000 and more.

The drawback to progressive tax rates is that it shifts the tax burden onto fewer people.  Who must pay more in taxes than is their fair share.  And that worked for awhile until government grew so large.  But as our aging population has increased the costs of Medicare and Social Security (and soon Obamacare) there just aren’t enough rich people to tax to pay these soaring costs.  And they will have no choice but to shift the tax revenue graph to lower income people.  So they can capture more people (and incomes) under this graph.  Yes, they want to tax the rich more.  But only for the symbolism.  For once they’ve punished them by forcing them to pay their ‘fair’ share then they can raise tax rates on everyone else.  Which is the only way they have a snowball’s chance in hell of achieving real deficit reduction.  Increasing taxes on the middle class.  Well, that, or cutting spending.  Which could provide serious deficit reduction.  By shrinking the size of government. The very cause of those massive deficits.  And accumulated debt.  But shrinking government is, of course, crazy talk for those on the Left.  Who would rather let the country sink into insolvency before agreeing to that.

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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.  FactCheck.org 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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The British Government takes over Royal Mail’s Underfunded Pension Fund for Short-Term Deficit Reduction

Posted by PITHOCRATES - March 18th, 2012

Week in Review

The U.S. Postal Service (USPS) is going broke.  Why?  Two reasons.  People email and text today.  Even pay their bills online.  So they’re not mailing letters.  And every piece of mail the people don’t mail is lost revenue for the USPS.  Which can be a problem in an organization that has a high overhead.  And an aging and retiring workforce.  Which brings us to the second reason.  Pensions.  Just like in Britain (see Government to take on Royal Mail pension to pay down debt by Matt Falloon posted 3/19/2012 on Reuters).

Chancellor George Osborne will use a 28 billion pound ($44.36 billion) asset transfer from taking on the Royal Mail’s pension fund to pay down government debt next year, a government source said on Sunday.

The transfer of the state-owned mail company’s pension scheme – subject to European Union approval and due to be announced in next week’s budget – will reduce the government’s budget deficit next year, while the liabilities from the scheme, worth 37.5 billion pounds, will show up on the government’s accounts across the next two decades as they are drawn on by scheme members…

In the long run, however, there will be an overall cost to the Treasury from the transfer because the scheme’s liabilities outweigh its assets.

The Royal Mail is no different than the USPS.  People are emailing, texting and paying their bills online in Britain, too.  Which means neither 20th century postal service can make it in the 21st century.  They both need to reinvent themselves.  And fast.  But the LAST thing either nation should do is to bail out their postal service.  Not when each nation is struggling under record deficits.  For this will only delay the day of reckoning.  And make it far more costly.  Allowing greater losses to accrue.  In the face of growing pension payouts.

Short-term fixes for long-term problems is very bad policy.  It’s what we call kicking the can down the road.  It doesn’t fix any problems.  It only makes them more difficult to fix.  Burying the country under ever growing deficits.  And placing incredible tax demands on taxpayers not even born yet.   So you know the Americans will follow suit.  And bail out the USPS.  Because of late they seem to have a penchant for making bad decisions.

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The Supercommittee Succeeds in Preventing Deficit Reduction without Raising Taxes

Posted by PITHOCRATES - November 27th, 2011

Week in Review

The supercommittee failed.  Deadlocked over higher taxes.  What a surprise.  And by surprise I mean it’s what everyone expected.  Because it never had anything to do with deficit reduction.  It was just yet another opportunity for Democrats to raise taxes.  And when they failed it was yet another opportunity to blame Republican intransigence.  While all the time refusing to budge from their demand for new taxes (see Supercommittee Failed, and Spending Is Still the Problem by Curtis Dubay posted 11/25/2011 on The Foundry).

Overspending, especially on entitlements such as Social Security, Medicare and Medicaid, is the cause of our debt problem.

Higher taxes are unnecessary because there is enough revenue flowing into Washington as long as Congress holds spending to historical levels. According to the Congressional Budget Office (CBO), with all current tax policies, including the Bush tax cuts, tax revenue will surpass its historical average as a share of the economy in a decade. And should the economy break the shackles of growth-impeding Obama policies faster than CBO anticipates, tax revenues will exceed that mark much sooner.

On the other hand, in 2021 the federal government will spend 26 percent of the economy, well in excess of its historical average of 20 percent. And it will keep growing on this trajectory, primarily because of the growth in entitlements. The data is clear. We have a spending problem – not a taxing problem.

They’re forecasting tax revenue at record amounts.  Yet it’s not enough.  It’s never enough.  Why?  Because the government spends it faster than they can collect it.  And that’s the problem.

Advocates of raising taxes often resort to the argument that debt reduction requires spending cuts and tax increases. But they’re merely revealing their preference for bigger government. Higher taxes lead to bigger government because Congress always spends the extra revenue it raises. The new taxes never go to deficit reduction. That’s why any deal that offers spending cuts in exchange for tax hikes is fundamentally unbalanced – despite the president’s claims.

Higher taxes would go to pay for the spending increases that President Obama and his allies foisted upon the country – including stimulus spending, Obamacare, and a host of other big government programs. Unless they’re reformed, entitlement programs would also devour new tax revenue as more baby boomers retire.

Presidents Reagan and George H.W. Bush learned the tax-and-spend lesson the hard way. They agreed to deals that were supposed to cut spending and raise taxes. While the tax hikes became permanent law, succeeding Congresses were under no obligation to abide by the agreed-upon spending levels and quickly undid them. The same would be true today if Congress strikes a similar deal.

How to you get a deficit?  By spending more than you collect in taxes.  Note the word ‘spending’.  That’s key.  Because if you don’t spend more than you collect in taxes you don’t have deficits.  Record lows in tax revenue didn’t cause Barack Obama’s record deficits.  Record government spending caused those record deficits.  Again, spending is key.  Because you have to overspend to get a deficit.

This isn’t chicken and egg stuff.  Spending clearly came first.  Then deficits.  So the logical and rational way to deficit reduction is to cut spending.  Not to raise taxes.  Because raising taxes just supports further overspending.  And you know they will.  Because they always do.  Because you don’t buy votes with deficit reduction.  You buy votes with spending.

Which is why the supercommittee failed.  Because it was supposed to fail.  If the full House couldn’t agree to spending cuts neither could a supercommittee.  Because they all report to the same leadership.  This was just theater to raise the debt ceiling.  And a delaying tactic by the Democrats who hoped they could turn public opinion into favoring tax hikes.

So now what?  I’m guessing more lies.  And more theater.  At least until 2012.  When the curtain finally falls on this tragic comedy.

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Japan Raising their Consumption Tax may not have Caused their 1997-98 Economic Slump but it sure didn’t Help

Posted by PITHOCRATES - November 20th, 2011

Week in Review

Poor Japan.  Always used as the example of what not to do (see Two things to remember about Japan posted 11/14/2011 on The Economist).

Between 1994 and 2008 American GDP grew 3% a year while Japan’s grew 1.1%… Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth.

This means that the Japanese population was aging more than the American population.  More people growing older and retiring.  Pulling out of the workforce.  And maintained by the taxes paid by the decreasing number of those still working.  Similar to the projections in the U.S. about Social Security going bankrupt for the same reasons.  Only Japan appears to be further down that road than America.  Which means things will only get worse in America.  If we keep doing what the Japanese are doing.

In April, 1997, the government raised Japan’s consumption tax. That is now routinely cited as a cautionary tale against premature fiscal tightening since it was followed by a steep recession.  But a closer examination suggests the tax increase alone cannot explain the length and depth of the 1997-98 slump… In July, Thailand devalued, touching off the Asian crisis, a major negative for Japanese exports. Then, in November, a series of banks and investment banks collapsed: Sanyo Securities, Hokkaido Takushoku Bank, Yamaichi Securities and Tokuyo City Bank.

This is what happens when you play by Keynesian economics.  First of all you’re in a tax and spend mentality.  And this tax and spend mentality is what destroys economies.

Raising taxes is the worst way to reduce your deficits.  Because your tax policy didn’t cause your deficit.  Your spending did.  If you want real fiscal tightening decrease your SPENDING.  Do that and you’ll see real deficit reduction.

As far as currency manipulation?  Well, if you want to play by Keynesian economics this is what’s going to happen.  For the Keynesian way to work requires the honor system.  To have responsible fiscal policy.  And not to cheat with monetary policy when you don’t.

If you want to prevent currency manipulation then make it harder to manipulate your currency.  Bring back the gold standard.  If you don’t want to do that than just quit bitching about currency manipulators.  Because this isn’t a perfect world.  And cheaters are going to cheat because the game rules make it easy to cheat.

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If Taxing the Rich won’t Reduce the Deficit then it’s not Tax Reform, it’s Class Warfare

Posted by PITHOCRATES - September 25th, 2011

The Rich are Paying Far More in Taxes than People like Warren Buffet’s Secretary

It’s tax reform.  It’s not tax reform.  They may not have their story straight.  But this much we know.  Obama’s Warren Buffett tax will do nothing for deficit reduction.  But it sure will fan the flames of class warfare (see WH self-contradicts, admits tax hikes arent reform by Joel Gehrke posted 9/25/2011 on The Washington Examiner).

President Obama and White House Senior Adviser David Plouffe have adopted contradictory rhetoric regarding  President Obama’s proposed tax increases, which the president has touted as “tax reform…”

Plouffe responded that “the president would like to do tax reform . . . But absent tax reform,  the president believes the right way to get our fiscal house in order is to ask the wealthy to pay their fair share.”

So according to Plouffe, raising taxes isn’t tax reform.  It’s to punish the rich.  That’s what making them ‘pay their fair share’ means.  Even though, right now, they’re paying more than their fair share.  Far more.  (More on that later.)  Obama, though, sees it differently.  And the way he sees it punishing the rich is reforming the tax code.

When two people can’t get their story street it typically means one thing.  They’re lying.  And can’t keep their stories straight.

Now, the Republicans say they’re in favor of tax reform.  Let’s go.  Let’s reform this tax code.  And let’s reform it based on a very simple principle:  Warren Buffett’s secretary should not be paying a higher tax rate than Warren Buffett. It’s a simple principle.

Why not?  Warren Buffett is still paying more tax dollars.  The rich are paying far more in taxes than people like Warren Buffet’s secretary.  So why keep saying this?  Can be for only one reason.  To punish the rich.  And to show the people that you want to vote for you that you’re punishing the rich.

Wallace pointed out to Plouffe that “the top 10 percent pay 70 percent of federal income taxes. Meanwhile, 46 percent of households pay no federal income tax at all.” Plouffe countered that “you can manipulate the statistics in any way you want,” and also said that “they are making a ton of money” while “we have inequities,” presumably in the tax code. And then Plouffe offered what would qualify as an argument for tax reform, except that Plouffe is admittedly not pushing for tax reform:

The American people are screaming out saying it’s unfair that the wealthiest, the largest corporations who can afford the best attorneys, the best accountants, take advantage of these special tax treatments that the lobbyist have, along with lawmakers, have cooked in the books here. So, the question is: how are we going to move forward as a country?

Wallace interjected, “Because 70% isn’t enough?”

For tax revenue?  Yes.  That 70% should be enough.  Perhaps too much.  But for class warfare?  No.  Because there’s a lot more money they can take from the rich.  And the more they take the more votes they gain from that 46% that doesn’t pay any federal income taxes.

It’s not that the President is Losing White Independents.  It’s just that Blacks Refuse to Give Up on Obama.

So why the class warfare?  Because it’s election time.  And when you don’t have a good record you don’t win reelections running on that record.  So you don’t.  Instead, you go class warfare.  Pit one group against the other.  Find narrow slices of the population that you can turn against your political opposition.  And, if you get enough of these slivers, you may just have a chance at reelection.  Despite your horrible record while in office (see Obama 2012 campaign’s Operation Vote focuses on ethnic minorities, core liberals by Peter Wallsten posted 9/25/2011 on The Washington Post).

President Obama’s campaign is developing an aggressive new program to expand support from ethnic minority groups and other traditional Democratic voters as his team studies an increasingly narrow path to victory in next year’s reelection effort.

The program, called “Operation Vote,” underscores how the tide has turned for Obama, whose 2008 brand was built on calls to unite “red and blue America.” Then, he presented himself as a politician who could transcend traditional partisan divisions, and many white centrists were drawn to the coalition that helped elect the country’s first black president.

The problem is that Obama is about as partisan as they come.  That’s why the tide has turned against him.  A lot of people hated George W. Bush.  And thought Obama was going to bring in the love.  Make the country as a whole link arms and sing Kumbaya.  But that hasn’t happened.

He spent more than George W. Bush.  Giving us record deficits.  And he keeps blaming his spending on the rich not paying their fair share of taxes.  The people see what’s going on, though.  They’re not blind.  It’s his spending.  Not a lack of taxes.  And all that spending hasn’t done a thing to help the economy.  The economy was, after all, far better under George W. Bush.  So they’re seeing the same old tax and spend liberal.  Not the candidate that was going to get us all to link arms and sing Kumbaya.

But not everyone is turning against this president.  The blacks haven’t turn on him.  They would have but for one reason.  He’s black.  The black community is furious with him.  But they still can’t abandon him.  As the chair of the Congressional Black Caucus, Maxine Waters, said in Detroit.  “If we go after the president too hard, you’re going after us. When you tell us it’s all right and you unleash us and you’re ready to have this conversation, we’re ready to have the conversation,” Waters said.

Today, the political realities of a sputtering economy, a more polarized Washington and fast-sinking presidential job approval ratings, particularly among white independents, are forcing the Obama campaign to adjust its tactics.

Operation Vote will function as a large, centralized department in the Chicago campaign office for reaching ethnic, religious and other voter groups. It will coordinate recruitment of an ethnic volunteer base and push out targeted messages online and through the media to groups such as blacks, Hispanics, Jews, women, seniors, young people, gays and Asian Americans.

It’s not that the president is losing white independents.  It’s just that blacks refuse to give up on Obama and join the exodus from him.

When you’ve been a poor president.  When your policies have made things worse.  There’s only one thing you can do.  You do everything to divide the American people.  Drive wedges.  Find reasons.  Why blacks should hate Republicans.  Why Hispanics should hate Republicans.  Why women should hate Republicans.  Why seniors should hate Republicans.  Why young people should hate Republicans.  Why gays should hate Republicans.  Why Asians should hate Republicans.

When you have failed you become what you said you weren’t.  Or stop pretending to be something you never were.  And you incite hatred.  Fan the fires of class warfare.  You pursue policies that further divide the American people.  Even if those policies hinder the economic recovery.

The campaign officials say they have not given up on wooing independents, and the 2012 presidential election will certainly involve a fierce fight for the college-educated whites and suburbanites who were more likely to back Obama in 2008 than the working-class whites who have always been more skeptical.

By ‘college-educated’ they mean ‘favorably-educated’.  Universities lean left.  Continuing the work of the public school teachers.  Both of who depend on government funding.  And growing tax rates.  So they need government to grow.  And will always vote for the party that will grow government.  And will ‘teach’ their young students to do the same.

Working-class people, on the other hand, have spent more time in the real world.  They’ve had a chance to get deprogrammed from their public school indoctrination.  That’s why it’s harder to fool the working-class.

When you’ve ‘Jimmy Cartered’ the Economy you can’t Run on your Record

It’s election season.  Little more than a year to go before the 2012 election.  So candidate Obama is back.  Running like he wasn’t the president for the last 3 years or so.  Somehow trying to explain to his most loyal base that he’s made things better than his predecessor.  George W. Bush.

But he hasn’t.  However you measure it.  GDP.  Unemployment rate.  Consumer confidence.  Whatever.  And the kicker is that the cause for the Subprime Mortgage Crisis that started under Bush wasn’t caused by Bush.  Putting people into houses they couldn’t afford was a liberal Democrat policy.  So housing wasn’t exclusive to only those who could afford a house.  Policies the Obama administration favors.  And policies that they want to implement again.  Despite having just suffered the Subprime Mortgage Crisis because of those policies.  Why?  Because it gets you more votes at election time.

So when you’ve ‘Jimmy Cartered‘ the economy you can’t run on your record.  The best you can hope for is to paint your political opponent as being everything the slivers of your most loyal base hate.  Attack the rich.  And promise more free stuff to that 46% that doesn’t pay any federal income taxes.

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Taxing the Rich in America, Taxing Everyone as Rich in Europe

Posted by PITHOCRATES - September 24th, 2011

Spending is so Great the Only Way to get Serious Deficit Reduction is with Spending Cuts

Dan Greenhaus with BTIG looked at Obama‘s proposed Buffet Tax.  Crunched the numbers from the 2009 U.S. tax returns.  And found that the Buffet Tax is more politics than deficit reduction (see A Little Bit Of Math On The ‘Buffett Tax’ by Joe Weisenthal posted 9/19/2011 on Business Insider Politix).

Nonetheless, if we add up the $1,000,000 and above categories, we get taxable income of $623.6 billion that resulted in $177.5 billion in income tax paid, a rate of less than 28.5%. If we were able to somehow change that tax rate to say 35%, an increase of more than 7 percentage points, the income tax paid in 2009 would have been over $218 billion or an increase of a bit less than $41 billion. If we were able to do this over ten years, the U.S. would have extra income of $410 billion. All from raising taxes by seven full percentage points on those making income over $1,000,000.

Unfortunately, $410 billion is “only” about 7% of the deficit we expect to incur over the next ten years. That is not an inconsequential portion but considering the debate surrounding hiking tax rates by any amount, let alone generating an increase sufficient see a seven percentage point increase in taxes paid, as well as the negative consequences such a sharp adjustment would engender, this hardly seems to be the “only” place to go to achieve debt reduction.

The magnitude of the deficit is too great to pay with new taxes.  As it is now, the 2011 deficit will come in at $1.65 trillion.  A 7% tax rate hike would net an additional $41 billion.  Or $410 billion over ten years.  This would reduce the 2011 deficit from $1.65 trillion to $1.61 trillion.  Not impressive.  Remember, Standard and Poor’s wanted to see $4 trillion in debt reduction over the next decade.  And $410 billion is a long way from $4 trillion.

Take a close look at these numbers.  A $1.65 trillion dollar deficit.  And taxable income as reported to the IRS of $623.6 billion.  The deficit is 2.6 times the total taxable income from those making $1 million or more.  In other words, you could tax away all of their money and the government would still run a deficit.

The spending is so great that the only way you’re going to get serious deficit reduction is with spending cuts.  Because spending is big enough to cut to make a difference.  Unlike taxing the Warren Buffets.  Whose incomes aren’t big enough to make a difference.

So when Keynesian tax and spend liberal Democrats talk about serious deficit reduction it’s just misdirection.  They know they can’t reduce the deficit.  But that’s okay with them.  For that isn’t their goal.  They want to raise taxes for a different reason.  They like to spend.  It’s how they get power.  And votes.  But when you run such massive deficits it’s hard to spend more.  Unless you raise taxes.  And that’s why they want to raise taxes.  Not to reduce the deficit.  Which is impossible to do with tax hikes.  They’ve just run out of money.  And they want more to spend.

Left of Center Welfare States are Always Good for Vote-Getting

And if you think it’s bad on this side of the Atlantic, you should see what they’re doing on the other side.  The Europeans have a lot of social democracies.  Left-of-center governments.  With huge welfare states.  Which is always good for vote-getting.  But it comes at a price.  High taxes.  And lots of debt.

To keep spending at their levels of spending they have raised tax rates on the ‘rich’.  And lowered the threshold for being ‘rich’.  The Business Insider crunched the numbers and put together a little slideshow showing the tax rates.  And what it means to be rich in these countries.  We pulled the data from the slide show and put them into tabular form below (see These Are The Toughest Taxes For Europe’s High Earners by Nick Jardine posted 9/24/2011 on Business Insider Europe).

We calculated the numbers above based on the threshold salary that puts these taxpayers into the top tax rate.  And the tax rate.  All numbers are in U.S. dollars.  The numbers very a little from the Business Insider slideshow possibly due to rounding error.  Or other tax considerations.  But the numbers were close enough to fill in the blanks where needed.  Though it may not be completely accurate, the numbers should be close enough in magnitude for the purpose of discussion.

When they couldn’t Tax the Rich Anymore, they Taxed the Middle Class.  By Redefining them as Rich.

Depending on your political persuasion, you no doubt will draw different conclusions from these numbers.  A Keynesian liberal Democrat will say Germany isn’t taxing their rich enough.  That they are the richest of the rich.  And that they should probably tax everyone earning over, say, $100,000 at the highest rate.  Like in Greece.  A non-Keynesian will see it differently.  They will note that only the German economy is rich enough to bailout the poorer nations of the Eurozone.  Particularly Greece.  Meaning that the more rich people you let be rich the more tax revenue you will have.

A non-Keynesian will think it’s not fair that a rich German only gets to keep $3,581 from the $6,511 he or she earns every week.  The Keynesian will have no problem with that.  Of course, they may not think it’s fair that a Belgian only gets to keep $446 of the $892 he or she earns every week.  They’ll think it’s fair to take about half of what the rich make.  But they don’t think it’s fair calling someone rich who makes only $46,349.  Or calling someone rich who only makes $20,613.  Especially if they earn more than they do.  And currently pay no income taxes.

None of these countries started out at these income thresholds or tax rates.  They’ve lowered income thresholds through the years.  And they’ve raised tax rates.  Whenever their governments spent more money than they had.  Employing class warfare they vilified the rich.  Raised their tax rates.  And when they couldn’t raise tax rates on the rich anymore, they raised taxes on the middle class.  By redefining them as rich.  And they then paid the higher tax rates.  It’s gotten so bad in some countries that people who pay no income tax in America would be paying the highest tax rate in some European countries.  But it all starts with taxing the rich.

With Keynesians in Power you’ll never see Spending Cuts because that’s how Democrats Buy Votes

We have to be careful of what we ask for.  Such as taxing the rich.  Because we may be rich ourselves one day.  As the threshold for being rich shrinks over time.  First it was the billionaires.  Then the millionaires.  Then those earning $200,000 or more.  Then those earning $100,000 or more.  Down to as low as $20,000.

Fair is fair they’ll say.  So you’ll agree to make the rich pay their fair share.  And then those earning less than you will also agree to make the rich pay their fair share.  And by rich they’ll mean you.  Until all earners will be taxed at the highest rate.  To support those non-earners who vote Democrat.

But no matter how much they’ll take it will never be enough.  Because you can’t reduce the deficit/debt by raising taxes.  They’re just too big.  The only way you can reduce these is by reducing the thing that made them so big.  Spending.  But that’s not likely to happen.  As long as Keynesians are in power.  Because that’s how Keynesian tax and spend liberal Democrats buy votes.

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