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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Tobacco, Smoking, Cigarettes, Sin Taxes, Obesity, Health Care Costs, Lost Tax Revenue, Abortion, Deficit and Debt

Posted by PITHOCRATES - June 5th, 2012

History 101

The Government saves Money in the Long Run when People Smoke because they Die Earlier than Nonsmokers 

A lot of people like to smoke.  Before we knew any of the adverse health effects of smoking it was as wholesome as apple pie in America.  American tobacco was one of the first cash crops of the United States.  Because it was in such high demand throughout the world.  During the American Civil War many officers chain-smoked cigars.  We put cigarettes in our soldiers’ C-rations in World War II.  Some of the most iconic photographs of battle-weary soldiers, seamen and airmen have a cigarette dangling from their mouths.  Our favorite parents from the Fifties’ sitcoms smoked cigarettes in their homes with their children playing on the floor at their feet.  If you watch AMC’s Mad Men everyone smoked cigarettes.  All of the time.  At work and at home.  In restaurants and in hospitals.  Even while pregnant.  Then the attacks against Big Tobacco began.

First they started with the sin taxes.  Greatly increasing the cost of cigarettes.  Which increased their opportunity costs.  People had to give up other things to continue to enjoy their cigarettes.  Especially the poor.  The rich still could enjoy their cigarettes without making sacrifices in their life.  And kept on smoking.  Movie stars and rock stars always have a cigarette hanging out of their mouths.  To look cool.  Which is why teenagers started to smoke.  Not because of Joe Camel.  But to look cool like their favorite movie stars and rock stars.  So people kept smoking their cigarettes.  While the government bureaucrats started tallying the health care cost of smokers.  To recover the health care cost of smoking government bureaucrats sued Big Tobacco.

According to ‘health care experts’ in the government smoking costs the health care industry some $100 billion annually.  Which is why they’re constantly raising taxes on cigarettes.  Why they sued Big Tobacco.  And why they’re ostracizing smokers everywhere by making almost every area a nonsmoking area.  But they still haven’t made smoking illegal.  Why?  High sin taxes and lawsuits.  Smoking is a cash cow for government.  And the dirty little secret about smoking is that the government saves money in the long run when people smoke.  Because of those sin taxes.  And because smokers die earlier than nonsmokers.  Up to a decade or more.  And it is in that last decade of life that seniors cost government the most.  Another decade of Social Security benefits.  And Medicare and Medicaid benefits.  Those benefits smokers paid into all of their lives.  Who forfeit them when they die early (and they don’t get passed on to their heirs).  Unlike the nonsmokers who don’t have the decency to die before collecting all of their Social Security and Medicare benefits.  Adding another decade or so for a whole sort of health ailments to inflict their fragile bodies.  Requiring more hospitalization.  Medication.  And nursing home care.  Expenses smokers help cut short by dying earlier.  Such as from an early heart attack before they even get a chance to have a lengthy and expensive hospital stay.

The Loss Tax Revenue from Abortions in the Eighties over Three Decades is Approximately $4.98 Trillion 

So government is increasing the opportunity costs of something people enjoy.  Smoking.  When in the long run smokers’ early deaths save the government money.   Not to mention those sin taxes fattening the tax pot when they’re alive.  So it’s a specious argument that the government is spending more on them in health care costs than nonsmokers who live another 10-20 years.  So why do they do it?  To boost tax revenues.  And smokers are just a convenient scapegoat.  Like the obese.  Where those on the Left make the same arguments.  Where according to ‘health care experts’ in the government obesity costs the health care industry some $150 billion annually.  Even though these people like smokers live shorter lives.  So while they’re consuming that $150 million the government is keeping about 10-20 years of their contributions to Social Security and Medicare.  So it is again a specious argument that the government is spending more on obese people than thinner, healthier people who live 10-20 years longer.  Who could, say, fall and break their pelvis requiring an extensive and expensive hospital stay.  As well as rehabilitation and possibly nursing home care.  And yet those on the left have campaigned to remove toys from Happy Meals.  And made it illegal in New York to buy a big cup of soda pop.  Why?  Again, to boost tax revenue.

All right, let’s go to the source of that tax revenue problem.  Let’s look at a decade of lost tax revenue.  From 1980 to 1983 there were about 1,300,000 abortions each year.  In 1984 there were 1,333,521 abortions.  In 1985 there were 1,328,570 abortions.  In 1986 there were 1,328,112 abortions.  In 1987 there were 1,353,671 abortions.  In 1988 there were 1,371,285 abortions.  In 1989 there were 1,396,658 abortions.  In 1990 there were 1,429,577 abortions. 

Had these abortions not happen in 2006 there would have been an additional 1,300,000 taxpayers aged 26.  In 2007 there would have been an additional 1,300,000 taxpayers aged 27 and an additional 1,300,000 taxpayers aged 26.  And so on.  If you crunch the numbers over a 30-year period by decades you get an additional 72,006,665 people paying taxes at all levels of government in the first decade (2006-2015).  An additional 146,913, 940 tax-paying people in the second decade (2016-2025).  And an additional 88,169,092 tax-paying people in the third decade (2026-2035).  The average age in the first decade is 29.  It’s 32 in the second decade.  And 42 in the third decade.  Assuming those age 29 earn on average $30,000 annually, those age 32 earn on average $40,000 annually and those age 42 earn on average $50,000 we get the following incomes per decade: $2.16 trillion, $5.88 trillion and $4.41 trillion, respectively.  Assuming that we pay approximately 40% of all our earnings in taxes at the city, state and federal level the lost tax revenue (at all levels of government) for those same decades equals $864.1 billion, $2.35 trillion and $1.76 trillion, respectively.  For a grand total of loss tax revenue for those three decades of approximately $4.98 trillion.  Or on average $165.9 billion per year.  These numbers are conservative.  Yes, some of these people may not survive to become taxpayers.  But some of these could become millionaires and billionaires, paying more in taxes.  There could have been another Lady Gaga, Madonna, Oprah Winfrey, Warren Buffet, Bill Gates, Barbara Streisand, George Clooney, Steve Jobs, etc.  A few of these added to the calculations would make the lost tax revenue numbers larger.

From the Government’s Perspective Abortion has a Far Greater Opportunity Cost than Smoking and Obesity 

This is the opportunity cost of the abortions in the Eighties.  So much loss tax revenue that the government has attacked smokers and the obese.  Whose health care costs are not adding much if anything to the federal budget.  Thanks to their early deaths compared to nonsmokers and thin people.  (If the government starts refunding remaining Social Security and Medicare benefits to the surviving family that may change.)  Yes they are costing the health care system.  But their costs are just brought up earlier in their lives as opposed to someone living 10-20 years longer making the nursing home to hospital to nursing home roundtrip a few times in the last 10 years or so of their life.  Because they have lived so long.  And had a chance to suffer every disease and trauma those smokers and obese can’t due to their early deaths.

It is interesting to note that the federal deficit in 2006 was $282.14 billion.  The lost tax revenue from the Eighties’ abortions was on average $165.9 billion per year in those three decades.  Granted not all of that money would have been federal taxes.  But with the conservative estimate of that loss tax revenue it is safe to say it would have come close to balancing the federal budget.  And if you factor in the abortions of the Seventies (there were fewer than in the Eighties but they would have been higher earners in the 2000s) the federal deficit may have become a surplus.  At least holding the federal debt to the $9.34 trillion it was in 2006.  Perhaps even reducing it.

Smoking and eating an unhealthy diet may be bad for you.  But it probably doesn’t cost the government anymore in tax dollars.  But they increase the opportunity costs of these things we enjoy to dissuade us from enjoying them.  So those who enjoy smoking and eating and drinking ‘bad’ things enjoy life less.  By not choosing what they want to choose.  Why? To pay for the lost revenue from another choice that government doesn’t try to dissuade people from.  Abortion.  Which from the government’s perspective has a far greater opportunity cost than smoking and obesity.  And yet government paints a bulls-eye on the back of smokers and the obese.  Why?  Because they’ve so demonized and oppressed them they can.  While the abortion issue too much of a sacred cow to those on the Left.

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