FT218: “The withholding tax is the greatest sin government ever perpetrated against the people.” —Old Pithy

Posted by PITHOCRATES - April 18th, 2014

Fundamental Truth

The tariff was the funding source for most of government for about a century.

Once upon a time there was no federal income tax.  No estate tax.  No gift tax.  No payroll tax.  No capital gains tax.  And no corporate tax.  Taxes we take for granted today didn’t exist a century or so ago.  The country was a lot leaner back then.  People kept most of their money.  And took care of their families.

The federal government used to fund everything thing they did with tariffs.  A tax on imports.  Paid in ports.  As ships unloaded their goods.  Far away from most people.  And few people complained.  Our first excise tax was a different story.  A 7 cent per gallon of whiskey incited the Whiskey Rebellion.  After fighting the Revolutionary War to escape the oppressive taxation policies of Great Britain the people were in no mood for a new tax.  The whiskey tax lasted for about a decade.  Then they repealed it.

This left tariffs as the funding source for most of government for about a century.  But even that grew controversial.  And began the divisions between North and South.  The North protected its industry with protective tariffs on iron products, textiles (wool and cotton) and agricultural goods.  Shipped from the more industrialized Britain.  Which Britain responded to with tariffs of their own.  On cotton and other agricultural products grown in the South.  So the more the North protected their industries the more difficult it made for the South to export their raw goods.

In 1913 the progressives reintroduced the income tax and taxed the rich at 1%.

This wasn’t the only difference of opinion the North and South had.  And their differences resulted in war.  The North was able to win the American Civil War with its expansive industry.  But the war devastated the country.  Especially the South.  Which lost about 8.6% of her population.  To get an idea of what an 8.6% population decline is consider this.  That percentage of the current U.S. population is approximately 27 million.  So the losses the South suffered were similar to what the Soviets lost on the Eastern Front during World War II.

The South may have lost more of its population.  But the North suffered nearly the same number of war dead.  She just had a larger population to begin with.  To run all of that industry that won the war.  America’s first modern war was a costly one.  And one that President Lincoln had to turn to a new source of revenue.  The federal income tax.  Which taxed the rich.  At 3%.  Then it taxed the super rich at 5%.  But after they paid down the war debt they repealed America’s first income tax.

Then came the progressives.  And their taxes.  In 1913 they reintroduced an income tax.  Taxing the rich at 1%.  And the super rich at 6%.  To fund an expanding federal government.  Then came World War I.  To fund the war they increased the tax rate on the rich to 15%.  And the super rich at 77%.  The top marginal rate fell during the Twenties.   But FDR raised it back up during the Great Depression.  Until it reached 94%.  Where for every dollar they earned in and above the top income bracket they got to keep only 6 cents.

Few would be able to write a check on tax day to pay their full tax bill.

Then came all the other taxes.  And they just kept coming. Our tax bill grew to staggering amounts.  Which posed a problem for the taxing authorities.  As people just didn’t keep that kind of money around.  They worked.  They raised their families.  And what little they had left they put into the bank for their retirement.  Making it very difficult for them to pay their tax bill when it came.  Especially when it was 30% or more of their entire income.  So what to do?

The Founding Fathers created a nation out of a tax rebellion.  And then when that nation levied its first excise tax they got a little rebellion of their own.  Being opposed to taxes is part of the American DNA.  So the taxing authorities had to somehow hide the large amount of taxes we were paying.  That is, they had to reduce the transparency of these taxes.  For if you don’t know what you’re paying in taxes you really can’t get mad at paying high taxes.

Enter the withholding tax.  The greatest sin government ever perpetrated against the people.  For it takes our money before we ever get it.  Conditioning us to accept ‘net’ pay as the norm.  And making ‘gross’ pay some meaningless payroll jargon.  Because you can’t spend ‘gross’ pay.  You can only spend ‘net’ pay.  Which is the only pay people care about.  Making it not only easier to hide the soaring amount of taxes people were paying.  But because it’s so easy to hide what we’re paying they could raise those taxes to confiscatory heights.  Because we never have that money in our hands.  We never see it.  It goes from our employer to the taxing authorities.  Which is the only way they could collect these soaring amounts.  For few would be able to write a check on tax day to pay their full tax bill.  As people just don’t keep that kind of money around.

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It will be Easier and as Expensive to Smoke Marijuana in Colorado than Regular Cigarettes

Posted by PITHOCRATES - March 10th, 2013

Week in Review

The stoners, the high school and college kids and the baby boomer-hippies of yesteryear are ecstatic about Colorado decriminalizing marijuana.  For now they don’t have to sneak around and buy their weed from some shady drug dealer.  No, today they can walk down the road any time and walk into Harry’s and hold their head up high and say in a loud steady voice, “Harry, I want you to sell me some marijuana.  In fact, today I think I’ll have some Acapulco Gold, for I am a Coloradan.  But people in other states?  They cannot.  Because their states have never made the great leap out of the Middle Ages and the domination of alien Episcopal supremacy.”

(Okay, so I borrowed a little from Monty Python’s The Meaning of Life.  And by a little I mean a lot.  From the scene where the Protestant goes on about being able to buy condoms unlike his Catholic neighbors.  You can see a clip of that scene here but be warned.  It is not appropriate for the workplace.  And not suitable for young children.  If you’re not a man-boy with a somewhat sophisticated yet sophomoric sense of humor you may find this scene somewhat offensive.  But if you are go and buy the two-disc collector’s edition for your personal collection.  So you, too, can impress your friends by quoting these scenes verbatim.  Or alienate everyone around you.  Depending on who your friends are.  But I digress.)

Where was I?  Oh yes, Colorado has solved all of their problems.  They’ve decriminalized marijuana so responsible adults can enjoy this drug responsibly while no kids will.  (Yeah, right.  Pull the other.)  And they’ve figured out a way to bring more money into the state treasury by encouraging people to smoke marijuana.  Even though they frown on people smoking regular cigarettes.  And pretty much banned cigarette smoking everywhere.  For that stuff can get into your lungs and kill you.  First-hand smoke.  Second-hand smoke.  Even third-hand smoke.  That ashtray smell left behind long after a smoker extinguished his or her cigarette.  So Colorado is serious about the harmful effects of smoking tobacco.  Unless it gets you high.  Then apparently the smoke isn’t that bad for you after all.  But just don’t dare light up a cigarette in public anywhere in Colorado.  But if you do, to be safe and save yourself from the judgmental stares of others just make you regular cigarette look like a marijuana joint.  And then you can light that up anywhere and everyone will be cool with you.  Apparently.

So Colorado is doing the responsible thing for responsible adults who will now all follow the letter of the law.  Even though they used to violate state and federal law before Colorado decriminalized marijuana.  Which was and still is classified as a schedule I controlled substance.  Along with heroin and cocaine.  Which carry some pretty stiff penalties if you’re caught carrying.  So these people were willing to break a law that carried stiff penalties when the drug was still illegal.  But that shouldn’t be a problem now that it’s legal (see Tax, and tax again: America’s first market for recreational marijuana will be far from free posted 3/9/2013 on The Economist).

FREE-THE-WEED campaigners speak not of “legalising” marijuana but of “taxing and regulating” it. True to their word, the ballot measure they placed before Colorado’s voters last November, which won the support of 55% of them, was called the Regulate Marijuana Like Alcohol Act and contained provisions for a 15% excise tax. Now that the law is taking shape, the signs are that one of the world’s first fully legal marijuana markets (Washington state also backed legalisation) will have all the taxes and rules anyone could have wished for…

Most importantly, the group wants to maintain, for three years, the “vertical integration” model that has governed Colorado’s medical-marijuana industry. Under this system retailers must grow at least 70% of the dope they sell. This forces licence-holders to master a suite of skills from cultivation to distribution. The task-force also suggests that for the law’s first year, only established medical-marijuana dispensaries should be granted retail licences. Some campaigners mutter about protectionism, though grudgingly admit that dispensaries deserve some reward for their pioneering (and risky) work.

Mr Finlaw admits that vertical integration makes it hard to apply the excise tax: licence-holders will have an incentive to undervalue their product. That may help explain another proposal: to slap a tax on marijuana sales, on top of existing state and local sales taxes and the proposed excise tax. No figure will be presented to the legislature, but an “example” of 25% was floated in hearings.

Regulators say they need the funds to enforce their rules. But set taxes too high, fear campaigners, and you leave the illegal market in place, which destroys one of the principal purposes of legalisation in the first place. Either way, any new taxes will have to be approved again by Colorado’s voters, probably in November.

With that level of taxation it is unlikely to make it any less expensive than the weed they used to buy.  And now that the penalty for buying ‘improper’ marijuana may be only as severe as being caught with cigarettes on you purchased in a low-tax state.  Unless you have a tractor trailer full the punishment will be a slap on the wrist.  When Canada raised their cigarette tax drug dealers turned to smuggling cigarettes.  Just as lucrative.  With far less risk.  Yes, the illegally imported marijuana may sell at a lower price than in the past but with it being legal they will be able to make up for a lower profit per sale on volume.  Because a lot more people will be smoking marijuana now.  Besides, a lot of those kids will not be able to walk into Harry’s.  They’ll still need to buy their stuff on the black market.

Over-tight rules create opportunities for and cosy relationships between the industry and regulators. But Colorado’s legislators must perform a balancing act, because they are being watched by the federal government. Marijuana remains illegal under federal law…

Some members of the prohibition industry are running out of patience. On March 5th the president of the International Narcotics Control Board, an arm of the UN, said that marijuana legalisation in America violated international treaties and threatened public health.

Ironic, really.  It’s the Left that is pushing for the decriminalization of marijuana.  Despite their relentless assault on Big Tobacco and making it pretty much illegal to smoke a regular cigarette anywhere outside your home or car.  And they’re closing in on those, too.  If you have children.  Because of that third-hand smoke.  It is also the Left that wants to keep ceding power and sovereignty to the United Nations.  And here they are.  Violating an international treaty of that august body that they hold so dear.  Go figure.

The Left is an inscrutable bunch.  With politics driving their every action.  They champion individual liberty when it comes to sex and drugs but want to put you in jail for smoking a legal cigarette.  Because smoking is bad for your health.  Unless that smoke is from marijuana.  Then it’s no big deal.  They want a big world government to pass environmental regulations they can’t pass in their own country to regulate and punish capitalism but then ask who does the UN think they are telling them they can’t violate a treaty they don’t like?  Like decriminalizing a schedule I controlled substance?

Individual liberty for those who think like them.  And oppressive and punishing regulations for those who don’t.  This is the political Left.  Which is also the way things were in an absolute monarchy.  A totalitarian fascist, Nazi or communist regime.  An Islamist theocracy.  And any other oppressive regime where those in power lived by a different set of rules than those who they ruled over.  Despite expressing equality and egalitarianism it was more times than not like life for the poor animals on George Orwell’s Animal Farm.  Where everyone was equal.  Only some were more equal than others.

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Excessive Sin Taxes on Alcohol in Britain does not create Higher Tax Revenue

Posted by PITHOCRATES - December 23rd, 2012

Week in Review

Potheads want to decriminalize marijuana because they like getting high.  Especially high school kids and college kids.  Who aren’t known for making responsible decisions.  Binge drinking, drunk driving, smoking cigarettes, stealing prescription drugs from their parents, unplanned pregnancies, sexually transmitted diseases, etc.  Things that just don’t happen much to married men and women raising a family in the suburbs.  Who actually grew up and became responsible adults.

But it’s just not the kids getting high.  There are a lot of ‘responsible’ adults who want to decriminalize marijuana, too.  Most of who spent their high school and college years stoned.  But they make a more responsible argument for the decriminalization of marijuana.  For it would end all of our budget woes if the government regulated and TAXED marijuana.  Equating getting high with responsible governing.  And if there is one thing we know whenever the government regulates and taxes something it encourages people to buy more of that something, flooding government treasuries with cash (see Alcohol duty fraud: Action needed, say off-licences by Emma Forde posted 12/22/2012 on BBC News Business).

UK tax authorities are not doing enough to tackle alcohol duty fraud, claims a leading off-licence chain.

Bargain Booze told the BBC that the number of stores telling HM Revenue and Customs that they face illegal competition is rising…

Alcohol duty fraud in the UK often involves exporting alcohol to the EU – untaxed – and then bringing it back into the UK with false paperwork.

This method exploits EU rules which state duty does not have to be paid on alcohol when it is being transferred between registered producers or wholesalers – it is only paid when it enters the marketplace.

But the BBC’s 5 live Investigates programme has learned that some lorries containing duty-unpaid alcohol meant for export never even leave the UK…

The illicit alcohol ends up in the hands of rogue wholesalers and retailers who then sell it on at prices which legitimate traders say are only possible if duty has been evaded…

Representatives from the alcohol retail industry claim the total cost to the Exchequer could be billions of pounds: “HMRC view the loss of revenue to the Exchequer at £1.2bn, but that excludes wine. Within the trade, the real cost to the Exchequer is viewed as something in excess of £4bn a year,” says Keith Webb…

The cash-and-carry owner, who did not want to be named due to fear of reprisal from criminal gangs, says it would have to pay around £19.35 for a box of six bottles of Echo Falls Chardonnay – of that, £11.40 would be duty.

The same amount and brand of lager would cost £16.56, with duty at £9.36 per case.

You just can’t add a 57-59% excise tax on something and expect the criminal element not to take advantage of that.  That’s just too juicy a profit to pass up.  And an easy and safe profit to make.  For they don’t have to traffic in an illegal substance.  They’re just doing the tax evasion part of illegal drug trafficking.  Making it a far less risky crime.  So why wouldn’t they exploit the government’s regulating and taxing of alcohol?  This is a gift handed to them on a silver platter.  And the same thing would happen with marijuana.

There is a problem with sin taxes.  The purpose of a sin tax is to dissuade people from participating in an unhealthy behavior.  Such as drinking and smoking.  So as they raise these taxes people buy less of these things.  Meeting the goal of a sin tax.  But if you use that same sin tax for revenue purposes you have a problem.  For the more you dissuade that behavior (i.e., the more you raise the tax rate) the less people will participate (i.e., the less tax revenue they collect).  The two (dissuading behavior and raising tax revenue) are mutually exclusive.  You can dissuade unhealthy behavior.  Or you can raise revenue.  But you can’t do both.  Which is why we have sin taxes and not outright prohibitions on these behaviors.

Governments are less interested in their stated purpose (dissuading unhealthy behavior) than they are in raising revenue.  For they are desperate to find new sources of revenue to pay for their irresponsible spending ways.  Which is why alcohol and tobacco products in the U.S. have very high excise taxes.  As well as laws setting minimum prices.  They say these are to protect the consumer from predatory pricing.  Something few consumers ever complain about.  Low prices are good.  The lower the better.  The only people hurt by predatory pricing are businesses that can’t compete at those lose prices.  And governments trying to collect confiscatory excise taxes on sinful behavior.  To avoid the problems they’re having in the UK with their alcohol duty fraud.

Governments don’t want criminals profiting off these high excise taxes by selling alcohol to consumers at lower prices.  They want the consumers to pay higher prices so they can give more of their income to the government.  To help pay for their irresponsible spending.  Which they never consider cutting to solve their budget problems.  They only consider new sources of revenue.   Or raising tax rates.  Which will happen with marijuana.  Opening the door for less risky profit taking for the criminal element the more they decriminalize it.  And the more they tax it.

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Jefferson, Hamilton, Washington, Whiskey Rebellion, French Revolution, New French-British War and Proclamation of Neutrality

Posted by PITHOCRATES - August 23rd, 2012

Politics 101

America’s First Tax was a 25% Excise Tax on American Whiskey made from Corn

Thomas Jefferson held a dinner party where he, Alexander Hamilton and James Madison met to resolve some issues.  Hamilton was stressed out.  He was facing strong opposition for his assumption plan.  Secretary of the Treasury Hamilton wanted to assume all the states’ debts and lump them into the federal debt.  To get the nation’s finances in order.  Establish good credit.  And raise revenue for the new nation.  The Virginians, Jefferson and Madison, offered their assistance if Hamilton would give them the nation’s capital.  Hamilton got his assumption.  And the Virginians got the nation’s new capital on the Potomac River.  Across from Virginia.  Where they could keep a close eye on the nation’s business.  And everyone lived happily ever after.

Well, not exactly.  There was already growing discontent across the land.  Hamilton understood business and commerce.  And banking.  Farmers don’t like bankers.  Or commerce.  Or business.  Many in the south and on the frontier worked the land.  As yeoman farmers.  Families working small farms that they owned.  They believed, as Jefferson believed, that the most honorable work in America was farming.  And that America’s future was the growth of farming.  Small farms.  Owned by families working the land.  Yeoman farmers.  Proud.  Pure.  And wholly American.  This despite Jefferson being a member of the slave-owning planter elite.  Who indulged in little physical labor.

So the south and the frontier were no Hamilton supporters.  They didn’t like his high finance ideas for the new nation.  And they especially didn’t like his whiskey tax.  A tax of 25% on western corn products.  Which you made whiskey from.  The new American alcoholic beverage of choice after they eschewed beer.  The beverage of choice before the rebellion.  When they were all content British citizens.  But an excise tax on corn products was little different from the excise taxes that caused the colonies to rebel against Great Britain in the first place.  Sure, there was one subtle difference this time.  The whiskey tax was taxation with representation.  And, technically speaking, legal.  But on corn?  The new tax seemed to fall unfairly on the West.  Which had a corn economy.  And used the whiskey they made from it for money.  So these frontier people were not just going to sit idly by and take this new taxation without a fight.

The Washington Administration took Decisive Action in Suppressing the Whiskey Rebellion

This first tax was to help finance Hamilton’s assumption.  But it was more important than the revenue it would raise.  The whiskey tax was a matter of principle.  It was probably poor policy.  And probably not the smartest thing to do.  Picking a fight with the toughest and most fiercely independent people in the country.  Frontier people.  Who lived off the land without any of the city comforts enjoyed back east.  But the tax was the law.  And the first test of the new nation.  If the government retreated in the face of opposition to a law passed by Congress their experiment in self-government would fail.  For as unpleasant as taxation was it was the reason they formed a new nation in 1787.  To levy taxes so they could pay their past debt.  And their current bills.  So President Washington and Hamilton hunkered down on the tax.

And the riots came.  The Whiskey Rebellion.  Around Pittsburg.  Kentucky (aka bourbon country).  The backcountry of the Carolinas.  And elsewhere.  They refused to pay the tax.  And attacked the tax collecting apparatus.  Even the courts.  It was war.  The spirit of ’76 was alive again.  Protesting a distant central power trying to impose a tax on them.  Washington offered amnesty if they just dispersed and went home.  They refused.  So Washington raised an army of some 13,000 strong.  Larger than any army he commanded during the Revolutionary War.  And led the army west with Hamilton to meet the insurrection.  The first and only time a sitting president led an army.  As the army approached resistance melted away.  So Washington handed command over to Henry “Lighthorse Harry” Lee (a Revolutionary War veteran and hero) and returned to the capital in Philadelphia.  Hamilton remained with the army.  As the army arrived the insurrection collapsed.  The army caught some rebels and tried them.  And two received death sentences.  Who Washington later pardoned.

Score one for the rule of law.  Washington was pleased with the outcome.  Hamilton, too.  They took decisive action to subdue an insurrection.  The people in general were happy that they restored peace.  And that the country didn’t collapse into anarchy.  All in all a win-win for the people and the government.  Almost.  Not everyone saw it in this light.  Some saw a king leading an army against his own people.  A professional army.  Little different from British redcoats.  Or Oliver Cromwell’s New Model Army a century or so earlier.  A professional standing army squashing those who disagreed with the government.  And Jefferson did not like it.  Nor did a lot of those in the south.  Or on the frontier.

President Washington issued a Proclamation of Neutrality in the New War between Great Britain and France

Seeing Hamilton ride at the head of an army only reinforced Jefferson’s opinion of him.  A power-hungry, British-loving puppet master.  And the puppet was President Washington.  The dislike between Hamilton and Jefferson turned into outright hostility.  They had two different visions of America.  And these two visions were mutually exclusive.  Cabinet meetings became insufferable as Hamilton and Jefferson constantly fought.  And the French Revolution didn’t help matters any.  The radical Jefferson supported the radical French.  Who he knew and sat with in the Jacobin clubs while he was in France.  Jefferson was all for overthrowing monarchies.  So when the French and British declared war on each other it was a no brainer who to support for Jefferson.  Vive la France!

Of course there was only one problem with that position.  About 75% of U.S. exports went to Great Britain.  Even more of her imports (approximately 90%) came from Great Britain.  And then there was the Royal Navy (RN).  Who still ruled the high seas.  And all the international trade routes.  In addition to the RN there was the British Army.  Who still occupied forts on the American western frontier.  And who were still in contact with their Indian allies from the Revolutionary War.  Couple this with the fact that the U.S. had no comparable army or navy.  And was already having trouble on the frontier with the Indians (from the influx of settlers into the western territories).  So siding with France against Britain was not the smart move.  Yes, the French were instrumental in helping the Americans achieve their independence from Great Britain.  But America was a country emerging from 8 years of war that just had to suppress a tax rebellion over a sin tax.  She did not have the wealth to enter a European war.  Besides, the Americans were supported by the monarch (King Louis XVI) the French were overthrowing.  Which complicated matters.

Washington and Hamilton saw things differently than Jefferson.  More like realists than the idealist Jefferson.  The Revolution was over.  The British and Americans were no longer enemies.  But important trade partners.  That shared a common British past.  Of laws and traditions firmly established in what was once British America.  So Washington issued his Proclamation of Neutrality (1793).  They would support neither in this European war.  Which infuriated the French.  And Jefferson.  For though they were neutral it was clear that their neutrality would favor the British.  As well as Hamilton.  And it did.  But it also favored America’s best interests.  For another long war would have probably bankrupted the nation.  And perhaps resulted with her partitioned among the European nations.  For the French Revolution lasted for a decade.  And the Napoleonic Wars it begot lasted another 11 years.  Which let us not forget the French lost.  In large part due to the Royal Navy.  And Great Britain’s wealth generated by her international trade.  Something the Americans could not have altered had she entered the war on France’s side.  A wise foreign policy call by President Washington (and yet another time he saved his country).  But it was one that tore his administration apart.  Firmly establishing the opposition party.  With Jefferson at its head.  With but one purpose.  To destroy Hamilton.  And to lead the nation away from where Hamilton was taking it.

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FT131: “If liberals say sin taxes hit low-income and young adults disproportionally they must know they have photo IDs.” -Old Pithy

Posted by PITHOCRATES - August 17th, 2012

Fundamental Truth

Liberals want to Tax the Poor while Looking Like they’re not Taxing the Poor

A sin tax is an excise tax.  An excise tax is a flat tax.  Everyone pays the same amount.  Which liberals/progressives find unfair.  As these taxes hit low-income people disproportionately.  Whether it’s someone living on low wages.  Or on limited government support.  They live on a small amount of money each week.  And if they buy alcohol or cigarettes those sin taxes consume a large proportion of their weekly spending money.  By greatly increasing the price for alcohol and cigarettes.  When you hear things like ‘placing a bulls-eye on Joe Six-Pack’s back’ it refers to a low-income guy that enjoys drinking beer.  But drinking beer is difficult for him to do because the current tax structure favors the rich.  Who can more easily afford excise taxes.

And it’s the same for cigarette smokers.  There has been a war on tobacco.  And it’s been so successful that a lot of college-educated people don’t smoke these days.  For it is politically incorrect to smoke today.  They’ve banned it from restaurants.  From the office.  Even outside in some places.  Some are even trying to ban it in people’s homes if they have children.  Progressives hate smoking so much that they have placed enormous sin taxes on cigarettes.  Making it very difficult for Joe Six-Pack to buy his cigarettes.  And it is the low-income and those without college educations who tend to smoke these days.  So the people who can least afford to pay these high sin taxes pay most of them.

Progressives want to raise tax rates on the rich.  Because they have more money and therefore should pay more in taxes.  According to them.  So they can transfer the cost of government away from the low-income to the high-income.  And they’ve succeeded.  Today almost half of all taxpayers pay no federal income taxes.  While the top 10% of earners pay approximately 70% of all federal income taxes.  Yet despite this huge transfer of wealth from the rich to the poor sin taxes have continued to rise.  Meaning the liberals want to tax the rich.  And they want to tax the poor.  While looking like they’re not taxing the poor.  By ascending their self-righteous soapboxes.  For they know better than we.  Sin taxes, they say, are for our own good.  They discourage bad behavior.  And encourage good behavior.  Behavior that they approve of.  And it’s only coincidental that they these taxes fall disproportionately on Joe Six-Pack.  Then they try to take the little income remaining from poor Joe by selling him lottery tickets.  Something else more lower income people buy than rich people.  For rich people are already rich.

Obamacare combines the Joy of a Colonoscopy with the Fear and Loathing of an IRS Audit

Most people would rather have a colonoscopy than sit through an IRS audit.  Why?  Because a colonoscopy is more enjoyable.  It only takes a couple of hours as an outpatient in the hospital.  Your odds are better for getting good news after a colonoscopy than after an IRS audit.  And doctors are happy to give good news to their patients.  While IRS agents are happy when they can take your money.  The more of it they can take the happier they are.  And with today’s tax code they can always find money to take from you.  Especially if you’re a business owner.  Or a movie star.  Where you can lose your pension, your children’s college fund and your house if you made a mistake or trusted an untrustworthy accountant.  So given the choice people would choose a colonoscopy over an IRS audit almost any day.  Even without the anesthetic.

And speaking of health care and the IRS, how about that Obamacare?  The liberals’ solution to ‘fix’ health care.  Even though it wasn’t broken.  Americans have long opposed any form of national health care.  They opposed it when Hillary Clinton tried to put a plan together behind closed doors.  And they still oppose it.  Based on that majority of the population that wants to repeal Obamacare.  Which they passed into law thanks to some backroom deals.  And fun with numbers.  The big selling point was to keep the cost of it below what the wars in Iraq and Afghanistan cost.  If the liberals could keep the price tag below a trillion dollars over a ten year period they could say it wouldn’t cost Americans an extra dime to give ‘free’ health care to everyone.  Because they would just transfer all of that war spending to health care spending.  Despite those trillion dollar deficits.  A debt approaching $16 trillion.  And an economy wallowing in the Great Recession.

So how did they do it?  Keep the cost under a trillion dollars?  By being devious.  The data they submitted to the Congressional Budget Office (CBO) included ten years of expenditures but only 6 years of benefits.  Because 6 years of benefits cost about a trillion dollars.  Well, almost.  They also stole about $700 billion from Medicare.  So the real cost of Obamacare over a ten year period is closer to $3 trillion.  Or about three times the cost of the wars in Iraq and Afghanistan.  How’s that for free health care?  So Obamacare is really, really expensive.  Which is why Obamacare forces all Americans to buy health insurance.  Even the young and healthy who would rather put that money into a house payment while they are young and healthy.  And how are they going to enforce this?  By combining the joy of a colonoscopy with the fear and loathing of an IRS audit.

Getting a Photo ID is too Costly, too Complex or just too Time Consuming unless you’re a 16-Year-Old Anxious to Drive

Because of Obamacare everyone will have to prove to the IRS that they have bought health insurance.  Which means if you want health care you better file your federal income taxes.  Have a Social Security number.  And have proven to your employer that you are a legal citizen.  With two pieces of documentation.  Like a Social Security card.  And a photo ID.  Pretty intense requirements.  And much more stringent than it used to be when anyone could go to the emergency room and receive treatment.  Today if you’re sick you better hope dotted your ‘i’s and crossed your ‘t’s.  Because in Obamacare before you can get a colonoscopy you have to first answer to the IRS.

And Joe Six-Pack?  We love you.  Because you’re just an average Joe.  The backbone of America.  Working hard and raising your family.  So who are we to begrudge you a cold beer after a hard day’s work?  Or a smoke?  We won’t judge you for enjoying those things.  Because a lot of us enjoy those things, too.  Even if it’s not politically correct.  Or in our best interests.  Or behavior those ‘better than us’ would approve of.  Just make sure you have your photo ID before you buy your beer.  Or your pack of smokes.  Because unless you look old you aren’t buying either without one.  Even if you’re a grizzled war veteran.  And been to hell and back in Iraq or Afghanistan.  Because even a Purple Heart won’t get you beer or a pack of cigarettes without a photo ID.

The liberals have made it harder for you to get health care.  Or to smoke.  And they’re not making it any easier to drink adult beverages.  If you want to do any of these things you better suck it up and get a photo ID.  Because proving who you are, how old you are and whether you are a legal citizen are very important to liberals.  Unless, that is, you want to vote.  Then they don’t give a damn.  They even say asking for a photo ID to vote is only a way to disenfranchise the low-income and young adults.  So they can’t vote.  Because getting a photo ID is too costly, too complex or just too time consuming.  (Except for all those 16-year-olds anxious to drive.)  Yet these are the very same people who acknowledge that the low income and young adults pay a disproportionate share of sin taxes.  Which they pay on those things you can only buy with a photo ID.

So why this bizarre and inconsistent behavior on the part of liberals?  Well, it must have something to do with the vote.  And based on their devious behavior in passing legislation people don’t want, one can only assume that their lax attitude is for one reason.  Making it easier for them to win elections when they pursue policies that the people don’t want.  Like Obamacare.  Which is why when it comes to the vote they want anyone to be able to walk in off the street and say they’re whoever they say they are and vote.  Unlike the ‘hell’ people have to go through to buy a beer, a pack of cigarettes, getting a job or collecting their lottery winnings.  Yes, if you win the big one you’ll need a photo ID to claim your money.  But you don’t need it to vote.  Because voting just isn’t as important as these other things.

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FT123: “It takes both a tax rate and economic activity to generate tax revenue.” – Old Pithy

Posted by PITHOCRATES - June 22nd, 2012

Fundamental Truth

There is an Incredible Amount of Economic Activity behind a 20-Ounce Bottle of Soda Pop 

Have you ever considered all of the economic activity that had to happen before you could buy a cold 20-ounce bottle of soda pop from a convenience store?  First of all, building that convenience store itself required a lot of building supplies.  And construction workers to build it.  People in factories hired people and bought materials to build the food equipment, coffee equipment and coolers.  The people utilities hire make sure the store has access to electric power, gas, water, sewage, telephone and Internet access.  Transportation companies deliver food and merchandise to the store.  Who buy trucks and vans from dealerships who buy them from automotive manufacturers.  They hire drivers for their vehicles and workers for their warehouses.  They buy fuel for their vehicles.  Refineries provide the fuel and they hire people and buy petroleum oil.   Which provides more jobs in the pipeline, railroad, trucking, shipping and oil drilling industries.  Who all hire people and buy things built by other people.

The food and merchandise came from plants that hire people and buy material.  The one brand of soda pop you purchase hires many employees and operates one or more bottling plants.  They buy advertising that provides jobs for others.  They buy cans and bottles that come from suppliers who make them out of raw material that still others extract out of the ground.  These suppliers hire even more people and buy even more materials.  There is label or artwork on the cans or bottles that other people are hired somewhere to provide.  Their offices operate with computers and software built, shipped, installed and programmed by others.  They maintain a web presence which creates further jobs.  Their employees use smart phones the company purchased from others who hire people and material to build them.  And hire even more people to maintain and operate the networks.

And the list goes on.  There is an incredible amount of economic activity behind that 20-ounce bottle of soda pop.  In a vast complex of horizontal and vertical business relationships.  Each providing their little part in the big picture that lets us walk conveniently into a convenience store whenever we want and buy a cool and refreshing beverage in a 20-ounce bottle.  Now multiply this for every product in that store.  And for every store in the country.  Millions of people working in millions of jobs earning a paycheck.  And each paycheck deducts payroll taxes.  Such as Social Security, Medicare, state unemployment, federal unemployment and workers’ compensation.  Each check (in most states) deducts federal and state income withholding taxes.  Some cities even deduct a city withholding tax.  Businesses pay taxes on their earnings.  On their personal and real property.  Just as homeowners pay real property taxes on their homes.  And there’s more.

In 1992 the Middle Class paid approximately 40% of their Total Earnings in Taxes

If you look at your cellular bill there are taxes itemized on it.  When you go to the store you pay a sales tax on most purchases other than food.  Some people even pay a city sales tax.  If you buy cigarettes or drink alcoholic beverages you pay an excise tax.  Or sin tax.  They tax the gasoline you buy for your car to pay for the roads we drive on.  If you buy sugar in the store you’re paying a sugar tariff.  If you make a capital gain on your investments you pay a capital gains tax.  And on and on.  Throughout that complex of horizontal and vertical business relationships there are taxes.  Just as consumers pay taxes throughout their ordinary day.  It adds up.  According to CATO, in 1960 the middle class paid about 30% of their total earnings in taxes of every kind at every level.  In 1992 that number rose to 40%.  And is no doubt rising.

Staying with the 1992 number, this means for every dollar you earn you ultimately can only spend 60 cents of that dollar on you.  The other 40 cents goes to some governmental coffer.  Or looking at it in another way say you gross $800 a week.  Your net pay will be less for the taxes you see withheld from your paycheck.  But when you add the other taxes you don’t see you really only get to spend $480 of that $800 you earned.  Or if you gross $41,600 annually you’ll be paying approximately $16,640 in taxes of every kind at every level of government.  In a word – ouch.

Yeah, we all know that we pay a lot in taxes.  Most of us are just resigned to it.  But with all these debt crises (at the city, state, federal and international levels) it does make you think a little more about all those taxes we pay.  And the cries to get the rich to pay their ‘fair share’.  The amount of taxes the rich pay are even worse.  The percentage numbers may be lower if they pay a lower capital gains tax rate on an investment portfolio, but they are paying from hundreds of thousands to hundreds of millions in tax dollars.  Which dwarfs our $16,640.  Yes, they can afford it more than those less rich can.  But that misses an important point.  Tax rates alone do not make tax revenue.  You have to have a prosperous economy, too.

The more People that are Working the more People pay Payroll, Income, Excise and Property Taxes

You cannot tax yourself to economic prosperity.  For if the number of jobs remains the same while we increase tax rates that will only leave businesses and consumers with less money to spend to create economic activity.  And when they spend less in economic exchanges all those taxes we apply to those economic exchanges will generate less tax revenue.  This is why cities, states and national governments have deficits during poor economic times.  Because there is less economic activity to tax.  All you have to do is some simple arithmetic to see why.

Say there is a city with 250,000 working middle class people.  Each earning on average $41,600.  So each contributes $16,640 in taxes at the various levels of government.  Or $4.16 billion in total tax revenue.  Now say a recession comes along.  And the city suffers 10% unemployment.  Putting 25,000 people on the unemployment rolls.  This will reduce that tax revenue down to $3.74 billion.  Or reducing tax revenue at every level by $416 million.  Just about a half billion dollars in lost tax revenue.  All while government benefits increase at every level to cover those 25,000 unemployed.  Add a second city and that could add up to $1 billion in lost tax revenue.  Ten cities could reduce tax revenue at all levels by $5 billion.  Causing deficits at the city, state and federal levels.  It adds up.  And they cannot make up those shortfalls by increasing tax rates.  Because higher taxes reduce economic activity.  Which is what generates those tax revenues.

Now consider the alternative.  Say the government removed some costly regulations for businesses.  Or they repealed Obamacare.  But only removed some costly regulations while leaving tax rates as they are.  This business-friendly environment would encourage businesses to rehire people.  Let’s say they rehire all 25,000 laid-off employees.  If they did they would, of course, restore that lost $416 million in tax revenue.  Without raising tax rates on anyone.  The point being that you can’t generate tax revenue without economic activity.  So any policy that would discourage economic activity would reduce tax revenue.  For the more people that are working the more people pay payroll and income taxes.  The more people that are working the more money consumers will have to spend and pay taxes on their purchases.  And the more people that are working the more houses they will buy which would bring in more property taxes.  Higher tax rates can’t make this happen.  Only economic activity can.

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LESSONS LEARNED #17: “The raison d’être of federalism is to keep big government small.” -Old Pithy.

Posted by PITHOCRATES - June 10th, 2010

ALEXANDER HAMILTON WAS a real bastard.  John Adams hated him.  Thomas Jefferson, too.  George Washington looked at him like a son.  Aaron Burr killed him.  Politics.  It can get ugly.

Hamilton’s father was having an affair with a married woman in a loveless marriage.  Fathered two children with her.  First James.  Then Alexander.  Both born on the British island of Nevis in the Caribbean.  His father then moved the family to the Danish island of St. Croix.  Shortly thereafter, Hamilton’s father abandoned his family.  Alexander was 10ish (there is some disagreement about his year of birth). 

At age 11ish, Alexander became a clerk at Cruger and Beekmen, an import-export firm.  There he learned about business and commerce.  People noticed his talent and ability.  Soon, they collected some money and sent him off to the American colonies for a college education.  Hamilton’s fondest memory of his childhood home was seeing St. Croix disappear into the horizon from the ship that delivered him to America.

Hamilton’s father did have some nobility in his lineage but he squandered it before it could do Alexander any good.  He was an illegitimate child (a real bastard).  His father abandoned him.  His mother died while he was young.  He had little but ability.  But that was enough to take him from St. Croix to the founding of a new nation.

Hamilton served in the Continental Army.  He served as General Washington’s aide-de-camp.  Hamilton was in the know as much as Washington.  His understanding of business, commerce and money made him acutely aware of the financial disarray of the Army.  And of the Continental Congress.  What he saw was a mess.

The Continental Congress was a weak central government.  It could not draft soldiers.  It could not impose taxes to pay her soldiers.  It could only ask the states for money to support the cause.  Contributions were few.  The congress tried printing money but the ensuing inflation just made things worse.  The Army would take supplies for subsistence and issue IOUs to the people they took them from.  The Congress would beg and borrow.  Most of her arms and hard currency came from France.  But they ran up a debt in the process with little prospect of repaying it.  Which made that begging and borrowing more difficult with each time they had to beg and borrow.

The army held together.  But it suffered.  Big time.  Washington would not forget that experience.  Or Hamilton.  Or the others who served.  For there was a unity in the Army.  Unlike there was in the confederation that supported the Army.

WARS ARE COSTLY.  And France fought a lot of them.  Especially with Great Britain.  She was helping the Americans in part to inflict some pain on her old nemesis.  And in the process perhaps regain some of what she lost to Great Britain in the New World.  You see, the British had just recently defeated the French in the French and Indian War (aka, the 7 Years War).  And she wanted her former possessions back.  But France was bleeding.  Strapped for cash, after Yorktown, she told the Americans not to expect any more French loans.

Wars are costly.  The fighting may have been over, but the debt remained.  The interest on the debt alone was crushing.  With the loss of a major creditor, America had to look elsewhere for money.  The Continental Congress’ Superintendent of Finance, the guy who had to find a way to pay these costs, Robert Morris, said they had to tax the Americans until it hurt they were so far in debt.  He put together a package of poll taxes, land taxes, an excise tax and tariffs.  The congress didn’t receive it very well.  Representation or not, Americans do not like taxes.  Of the proposed taxes, the congress only put the tariffs on imports before the states.

Rhode Island had a seaport.  Connecticut didn’t.  Rhode Island was charging tariffs on imports that passed through her state to other states.  Like to Connecticut.  Because they generated sufficient revenue from these tariffs, their farmers didn’t have to pay any taxes.  In other words, they could live tax free.  Because of circumstance, people in Rhode Island didn’t have to pay taxes.  Connecticut could pay their taxes for them.  Because of the Rhodes Island impost.  And the Robert Morris’ impost would take away that golden goose.

As the congress had no taxing authority, it would take a unanimous vote to implement the impost.  Twelve voted ‘yes’.  Rhode Island said ‘no’.  There would be no national tax.  ‘Liberty’ won.  And the nation teetered on the brink of financial ruin. 

DEFALTION FOLLOWED INFLATION.  When the British left, they took their trade and specie with them.  What trade remained lost the protection of the Royal Navy.  When money was cheap people borrowed.  With the money supply contracted, it was very difficult to repay that debt.  The Americans fell into a depression.  Farmers were in risk of losing the farm.  And debtors saw the moneymen as evil for expecting to get their money back.  The people demanded that their state governments do something.  And they did.

When the debtors became the majority in the state legislatures, they passed laws to unburden themselves from their obligations.  They passed moratoriums on the collection of debt (stay laws).  They allowed debtors to pay their debts in commodities in lieu of money (tender acts).  And they printed money.  The depression hit Rhode Island hard.  The debtors declared war on the creditors.  And threw property laws out the window.  Mob rule was in.  True democracy.  Rhode Island forced the creditors to accept depreciated paper money at face value.  Creditors, given no choice, had to accept pennies on the dollars owed.  No drawbacks to that, right?  Of course, you better pray you never, ever, need to borrow money again.  Funny thing about lenders.  If you don’t pay them back, they do stop lending.  The evil bastards.

Aristotle said history was cyclical.  It went from democracy to anarchy to tyranny.  Hamilton and James Madison, future enemies, agreed on this point.  A democracy is the death knell of liberty.  It is a sure road to the tyranny of the majority.  If you don’t honor written contracts, there can be no property rights.  Without property rights, no one is safe from arbitrary force.   Civilization degenerates to nature’s law where only the fittest and most powerful survive.  (In the social utopias of the Soviet Union and Communist China, where there were no property rights, the people’s government murdered millions of their people).

WINNING A WAR did not make a nation.  Before and after the Revolution, people thought in provincial terms.  Not as Americans.  Thomas Jefferson hated to be away from his country, Virginia.  Unless you served in the Continental Army, this is how you probably thought.  Once the common enemy was defeated, the states pursued their own interests.  (Technically speaking, they never stopped pursuing their own interests, even during the War).

In addition to all the other problems a weak Continental Congress was trying to resolve, states were fighting each other for land.  A localized war broke out between Pennsylvania and Connecticut over the Wyoming region in north east Pennsylvania.  And a region of New York was demanding their independence from that state.  Hamilton helped negotiate a peaceful solution and the confederacy admitted the new state, Vermont.

There were problems with the confederation.  And people were getting so giddy on liberty that that they were forgetting the fundamental that made it all possible.  Property rights.  States were moving closer to mob rule with no check on majority power.  And the smallest minorities held the legislation of the Confederate Congress (the Continental Congress renamed) hostage.  Land claims were pitting state against state with the Congress unable to do anything.  Meanwhile, her finances remained in shambles.  She had no credit in Europe.  And creditors wanted their money back. 

They were choosing sides.  And you can probably guess the sides.  Hamilton had no state allegiances, understood finance and capital, saw how an impotent congress was unable to support the Army during war, saw provincial interests hinder national progress and threaten civil war.  George Washington, Virginia’s greatest son, had long looked to the west and saw America’s future there.  Not Virginia’s future.  His war experience only confirmed what he believed.  America had a great future.  If they could only set aside their provincialism and sectional interests.  James Madison saw the tyranny of the majority in the Virginian State House first hand.  He liked partisanship.  He liked competing ideals debated.  He did not want to see a majority stampede their vision into law.

These were the nationalists.  Madison wanted a strong federal government to check the tyranny of the states.  Hamilton wanted to do away with the states altogether.  Washington wanted what was best for these several united states as a whole after so many labored for so long during the Revolutionary War.  Ultimately, he wanted to capitalize the ‘u’ and the’s’ in united states and make it a singular entity.

On the other side were many of the old 1776 patriots.  Many of who did not have any army experience.  Such as Thomas Jefferson.  In them, the Spirit of ’76 was alive and well.  The Revolutionary War was to free the states from the yoke of British oppression.  They remained provincials.  They did not spend up to 8 years in an army made up of soldiers from different states.  They had no sense of this nationalism.  They saw everything through the eyes of their state.  And a strong central government was just another yoke of oppression in their eyes.

THE ANSWER TO all of their concerns was federalism.  Shared sovereignty.  The states would give up a little.  And the new central government would take up a little.  The drafters of the Constitution set up a 3-branch government.  It included a bicameral legislature.  Membership in the House of Representatives would be proportional to a state’s population.  They would have power of the purse.  Including the authority to levy taxes.  In the Senate, each state would get 2 senators.  They would be chosen by the states’ legislatures (a constitutional amendment changed this to a popular vote).  This was to keep the spending of the House in check.  To prevent mob-rule.  And to check national power.  Each chamber would have to approve legislation for it to become law.  But each chamber did not need to have unanimous approval. 

That was in the legislature.  In the executive branch, the president would be head of state and execute the laws written by the legislature.  He would also conduct a uniform foreign policy.  The president could veto legislation to check the power of the legislature.  And the legislature could override the president’s veto to check the power of the president.  Where the law was in dispute, the judiciary would interpret the law and resolve the dispute.

At first glance, the people didn’t love the U.S. Constitution.  Those at the convention didn’t either, but they thought it was the best they could do.  To help the ratification process, James Madison, Alexander Hamilton and John Jay wrote a series of essays, subsequently published as the Federalist Papers making the case for ratification.  Those opposed wanted a Bill of Rights added.  Madison did not think one was necessary.  He feared listing rights would protect those rights only.  If they forgot to list a right, then government could say that it wasn’t a right.  He acquiesced, though, when it was the price to get the Virginian Baptists on board which would bring Virginia on board. 

Madison promised to add a Bill of Rights after ratification.  So the states ratified it.  And he did.  The final document fell between what the nationalists wanted and what the ‘states’ government’ people wanted. 

OVER THE FOLLOWING years, each side would interpret the document differently.  When Hamilton interpreted broadly to create a national bank, to assume the states’ debts and to fund the debt, the other side went ballistic.  Madison, the father of the Constitution, would join Jefferson in opposition.  For they believed the point of the constitution was to keep big government small.  Hamilton was interpreting the ‘necessary and proper’ clause of the Constitution to make government big.  Nasty, partisan politics ensued.  And continue to this day.

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