War Debt, Seven Years War, Revolutionary War, Articles of Confederation, U.S. Constitution, Central Government, Federal Spending and Fiscal Policy

Posted by PITHOCRATES - February 7th, 2012

History 101

Americans don’t like Paying Taxes

Americans don’t like paying taxes.  A dispute over taxation without representation led to American independence from British rule.  For Britain had been fighting for many years in many wars.  And ran up an enormous war debt.  Which they had to repay.  Because some of that debt was incurred protecting the American colonists from the French and Indians during the Seven Years War, some had a bright idea.  “Here’s a thought,” they said, “Let’s have the Americans pay their fair share.  I mean, fair is fair, right?  Besides, it’ll be a lot easier getting money from the Americans than it will be getting it from Parliament, eh wot?” 

The Seven Years War, though, was a world war.  Fought in many countries and on many seas.  Costing lots of money.  Which Parliament was financing with lots of taxes.  But the British taxpayer had tax fatigue.  And felt they had no more taxes to give.  Or wanted to give.  As they had a say in Parliament raising taxes further was a nonstarter.  But the Americans had no representation in Parliament.  So what could they do?  Turns out they could do a lot.  Now the Americans weren’t unreasonable.  They just didn’t appreciate the, “Oh, by the way, here’s your share of the war debt.  We’ll tax you accordingly.”  Which the British did.  Without so much a by-your-leave.  Rubbed the Americans the wrong way.  If the British had shown them the numbers and gave them a chance to agree on what their ‘fair share’ was they probably would have paid.  And stayed loyal to the Crown.  But the British didn’t.  So the Americans didn’t.

Now fighting wars is expensive.  Especially long ones.  And the Revolutionary War was a long one.  Eight years until they penned their names to the Treaty of Paris (1783) officially ending it.  In these eight years the Americans ran up a great war debt.  And needed to repay it.  Just like the British.  The very thing that started the Revolutionary War.  Now it was the Americans’ turn to raise taxes.  They tried taxing whiskey.  Which led to another tax rebellion.  The Whiskey Rebellion.  For Americans still didn’t like paying taxes.  This time, though, it was a tad different.  Because those they were taxing had representation.  And the new ‘nation’ (a confederation of ‘equal’ states) had the legal authority to impose this tax.  And to put down the rebellion.  Which General Washington did.  To the howls of liberty-loving patriots everywhere.  The tax quietly went away.  But it didn’t solve the nation’s problems.  They were broke.  Needed money.  And they had to get a handle on the massive sums they owed for the world of nations to take them seriously.

Hamilton thought both Jefferson and Burr were Scoundrels but at least Jefferson was a Principled Scoundrel

The new ‘nation’ (that confederation of ‘equal’ states) was the problem.  Just as the world of nations didn’t take the Americans seriously these ‘equal’ states didn’t take the new national government seriously.  There was no taxing authority.  So the federal government could only ask for contributions from the states.  Which often came in late.  And when they did they were often less than they requested.  Some states even refused to pay anything.  Worse, the states were making their own treaties with other nations as well as the Indian Tribes.  Or reneging on the treaties the federal government made with other nations and the Indian Tribes.  The confederation wasn’t working.  They needed something new.  And once George Washington was onboard they called a meeting in Philadelphia (1787) to rework the Articles of Confederation.

Of course they didn’t rework the Articles of Confederation.  They replaced them with a new U.S. Constitution.  And a new nation.  The Preamble to the U.S. Constitution began with “We the people.”  The sovereignty of the new nation wasn’t with the states.  It wasn’t with the new federal government.  It was with the people.  It was a nation of the people, by the people and for the people.  To borrow some words from Abraham Lincoln.  Which meant that although the thing they created had more power than the confederation of states it replaced, its power was limited.  Very limited.  The Framers designed it to do only those things the states could not do well individually.  National defense.  Coin uniform money.  Establish post offices and post roads.  Make national treaties with other nations and Indian Tribes.  Declare war.  Create a standard of weights and measures.  But little more.  In fact, the Constitution listed more things the new government couldn’t do than listed what it could do.  To quell everyone’s fear that they just replaced one far away central power (the British Crown) with another far away central power (the central government of the United States).  Especially when it came to taxes.  Raising taxes required approval by two houses of Congress and by the President.  Making it difficult to raise taxes.  The way Americans liked it.  For Americans didn’t like paying taxes.  And still don’t.

Getting the new Constitution ratified wasn’t a walk in the park.  The size and power of the new central government appalled those Patriots who worked so hard during the Revolution.  James Madison, the Father of the Constitution, joined forces with Alexander Hamilton and wrote a series of articles arguing for ratification.  The Federalist Papers.  And were successful.  Then when Alexander Hamilton was putting the Constitution into action as Secretary of the Treasury in the Washington administration, Madison didn’t like what he saw.  For Hamilton wanted to use the power of government to make the United States an economic superpower like Britain.  His opponents, though, saw a man who wanted to be king.  So Madison joined the opposition.  Led by Thomas Jefferson.  And the politics got ugly.  Before it was done the Jefferson camp would write about an affair Hamilton had.  And the same muckraker who exposed this affair would later write about a Jefferson affair with a slave.  Sally Hemming.  The people in the different camps hated each other.  Especially Hamilton and Jefferson.  They hated each other with a passion.  But they were principled men.  For when the election of 1800 came down to either Thomas Jefferson or Aaron Burr, Hamilton backed his archenemy.  Thomas Jefferson.  Both Jefferson and Burr were scoundrels as far as Hamilton was concerned.  But at least Jefferson was a principled scoundrel.  Burr took great offense to some things Hamilton said about him around this time.  And challenged him to a duel.  In which Hamilton suffered a mortal wound.  Pity.  For Hamilton was a true Patriot.  And perhaps the greatest treasury secretary the United States ever had.

It’s not the Spirit of Alexander Hamilton, Thomas Jefferson or James Madison that lives on in Politics but Aaron Burr

Funny how things change.  The new nation almost didn’t survive because of the opposition towards a strong central government.  And towards federal taxes.  Now federal spending includes just about everything under the sun.  Most of which the Framers excluded from the Constitution.  And the taxes!  They have reached a level none of the Founding Fathers thought would ever be possible.  Even Hamilton.  He was ‘big government’ for his day but he would be disgusted to see what became of his beloved Treasury Department.  And the money they pull out of the private sector economy.  Not to make America an economic superpower.  But to buy votes.  And for personnel gain.  The true underbelly of democracy.  Where people come to public service not to serve.  But to enrich themselves at the expense of the taxpayer.  Like that scoundrel that killed him.  Aaron Burr.

Even worse they use fiscal policy to further their spending ways.  The federal debt grows.  And now whenever a recession rolls around they use Keynesian fiscal policy to ‘lessen’ the affects of the recession.  Which is just a clever way to keep on spending after they’ve run out of money.  Because this spending is now stimulus.  And if the government stops spending it will make the recession worse.  Clever.  And it’s just coincidental that friends of the administration benefit most by this Keynesian stimulus spending.

It would appear it’s not the spirit of Alexander Hamilton that lives on in Washington.  Or Thomas Jefferson.  Or James Madison.  It’s the spirit of Aaron Burr.  Scoundrel extraordinaire.  And role model for the political elite.

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Fiscal Policy

Posted by PITHOCRATES - February 6th, 2012

Economics 101

The Constitutional Convention in Philadelphia (1787) was about Money and Unity at the National Level 

Once upon a time in America federal taxes were small.  As was federal spending.  The Constitution called for little.  The only big ticket items being an army and a navy.  To protect the new nation.  But Americans didn’t like paying taxes then any more than they do now.  There wasn’t even a federal income tax until the 16th Amendment (1913).  So even maintaining an army and a navy was difficult.  Which led to a lot of problems.  For a nation that couldn’t protect herself got pushed around in the rough and tumble world.  And the U.S. took its share of swirlies and wedgies in her infancy.  Figuratively, of course.

Just as kings needed money to maintain their kingdoms, the Americans needed money to maintain their new nation.  Which was the point of the Constitutional Convention in Philadelphia (1787).  It was about the money.  And unity.  Which the new nation (that just gained its independence from Britain) had little of.  So we got a new constitution.  And a new nation.  And the federal taxing and spending began.  Which was small at first.  Too small for Alexander Hamilton.  But far too much for Thomas Jefferson.  In fact, Jefferson thought any federal spending above zero was too much.  And when he was president he slashed government spending.  To the point that it hurt the safety of the United States.  But he also bought the Louisiana Territory.  And used the Navy and the Marine Corps to protect American interests abroad.  These two items alone required enormous amounts of federal spending.  And borrowing.  Another thing Jefferson was dead set against.  And we’re talking sums of money that not even Alexander Hamilton had proposed.  Yet here was Jefferson, the limited-government president, spending and borrowing unlimited funds. Being more Hamilton than Hamilton himself.

Of course, things change.  Even for Jefferson.  The Louisiana Purchase was a deal that no president should have passed up.  Thankfully, Jefferson took that opportunity to more than double the size of the United States.  Without a war.  Unlike Napoleon who was conquering Europe.   But he was burning through money.  And he needed money more than he needed the Louisiana Territory.  Hence the Louisiana Purchase.  Which turned out to be quite the bargain in the long run for the U.S.  And the antimilitary Jefferson flexed America’s might by teaching the Barbary pirates a lesson.  By deploying the U.S. Navy and Marines to the Shores of Tripoli.  The first U.S. victory on foreign soil.  Giving the U.S. respect.  And a cessation of those swirlies and wedgies.

Keynesian Stimulus Spending may lessen the Severity of Economic Recessions

These things cost money.  And the lion’s share of the federal budget was defense spending.  Per the Constitution.  For that was one of the main things the several states could not do well.  Maintain an army and a navy.  Because they needed unity.  One army.  And one navy.  To protect one nation.  So the states and their people could pursue happiness without foreign aggressors molesting them.  So this is how federal spending began.  But you wouldn’t know it by looking at fiscal policy today.

Fiscal policy is the collection of policies that government uses to tax and spend.  But it’s more than just defense spending these days.  Federal spending had grown to include things from business subsidies to Social Security to Medicare to food stamps to welfare to income redistribution to farm subsidies.  And everything else you can possibly imagine under the sun.  None of which was included in the Constitution.  Because neither Jefferson nor Hamilton would have agreed to these expenditures.  But it doesn’t end with this spending.

Fiscal policy also ‘manages’ the economy.  Or tries to.  By trying to maintain ‘full employment’.  Which means they adjust tax and spend policies so that anyone who wants a full time job can have one.  Based on Keynesian economics.  And the business cycle.  The business cycle is the cyclic economic transitions between economic expansions and contractions.  The inflationary and recessionary boom-bust cycles.  No one likes recessions.  Because people lose their jobs.  And have to get by on less money.  So Keynesian economists say to lessen the severity of recessions the government can take action to stimulate economic activity.  They can cut taxes.  Because when people pay less in taxes they have more disposable income to spend on economic activity.  Which they say will keep people from losing their jobs.  And create new jobs.  Or the government can spend money.  Picking up the slack from consumers who aren’t spending money.  Thus saving and/or creating jobs.  Which stimulus depends on the political party in office.  In general, Republicans favor tax cuts.  And Democrats favor spending.

All Keynesian Stimulus Spending is Deficit Spending

But it’s not as simple as that.  Because during recessions tax revenues fall.  When people earn less they pay less in taxes.  Far less.  Especially if an interruption in their income puts them into a lower tax bracket.  And if you run through all of your unemployment benefits, it will.  So there’s more to economic stimulus than meets the eye.  For to stimulate a government must borrow money.  Or print money.  Because all stimulus spending is deficit spending.

Keynesians say this deficit spending is not a problem.  Because once the stimulus turns the economy around there will be plenty of new tax revenues to pay back the money they borrowed.  But that rarely happens with a tax and spend government.  Because they like to spend.  As is evident by the ever increasing federal debt.  And when they get more tax revenue they spend that tax revenue.  On anything and everything you can possibly imagine under the sun.  Often times cutting defense spending to help pay for all that other spending.  Despite defense spending being one of the few things enumerated in the Constitution.

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LESSONS LEARNED #83: “Those who don’t pay taxes will always approve higher tax rates on those who do.” -Old Pithy

Posted by PITHOCRATES - September 15th, 2011

To win Elections using Class Warfare you need lots and lots of Poor People

The Democrats want to tax the rich. To make them pay their fair share.  As determined by them.  And they accuse Republicans of cutting taxes for the rich.  Giving them tax breaks.  Credits.  And loopholes.  All paid for by the poor.  Or so they say.  The Republicans deny this, of course.  They want lower tax rates across the board.  For they believe lower tax rates create jobs.  By removing uncertainty for business.  Giving them confidence to invest.  And grow their businesses.  Thus creating those jobs.  The Democrats counter that lower tax rates just make more rich people.

We call this class warfare.  Getting the poor people to hate the rich people.  Blaming the rich for their poorness.  And making the poor understand that if it weren’t for the taxes the poor pay the rich couldn’t have their mansions.  Or their private jets.  Because the poor subsidize the rich in America.  As least according to the Democrats.  As nonsensical as this is.  For mansions and private jets are expensive.  So expensive that the poor can’t afford them.  Yet their taxes can buy them for the rich.  Silly argument, yes.  Then again, class warfare isn’t based on logic.  Or common sense.  It’s based on pure, raw emotion.  Feelings.  The rich are rich.  The poor are not.  And that’s all the poor need to know.

This is how Democrats win elections.  By promising to raise taxes.  Normally, anyone who says they will take more of your money will find it difficult to win elections.  But when you promise to take more of someone else’s money, well, that’s a different story.  You just need one thing.  Lots and lots of poor people.  Who you can make feel good by taxing the rich.  By punishing the rich.  Making sure the rich get their just deserts.  And I don’t mean some hoity-toity crème brûlée.  Which, incidentally, is delicious.  No.  We’re talking about a good ole fiscal smack-down.  A swift kick to the financial bonbons.  The wallet.  It won’t change your life.  If you’re poor.  But it’ll make you feel good.  And that’s what class warfare is all about.  Feelings.

Using the IRS Numbers to see who has been Paying the Bulk of our Federal Taxes

You get tired hearing the same old lies.  No doubt you agree with me.  Regardless of what side of the aisle you hail from.  Some of you are absolutely sure the Democrats are lying.  And some of you are absolutely sure the Republicans are lying.  Can’t be both.  Well, it can be both, I guess.  But one side has to be more truthful than the other.  Considering how diametrically opposed the two sides are.  So let’s ignore the arguments.  Let’s find our own truth.  Let’s go to the numbers.

The IRS breaks downs tax revenue in numerous ways.  One of which is by income groups.  So we looked at these breakdowns.  For the years 1995 – 2008.  This takes us from the midpoint in Bill Clinton‘s presidency.  Through George Bush‘s.  The IRS breaks down incomes across many income groups.  We’ve added some of them together to reduce their numbers down to four groups.  As shown here:

The percent of returns is from 2007.  This is the percentage of total federal income tax returns filed with the IRS.  We picked this year to show where income had trended to before the subprime mortgage crisis.  So, without further adieu, let’s see who has been paying the bulk of our federal taxes.  The rich.  The poor.  Or somewhere in between.

The Rich and Middle Class pay over 90% of all Federal Taxes

We’ve broken these numbers down into the four income groups.  Then we calculated the percentage each group paid of the total tax revenue.  And graphed the results.  As shown here:

(Source:  SOI Tax Stats – Individual Income Tax Rates and Tax Shares)

We can glean a couple of things from these numbers and this chart.  First of all, the middle class still makes up about half of all taxpayers.  And there are very few ‘rich’ people.  Only about 16% in 2007.  And that counts anyone earning $100,000 or more as rich.  Based on how few rich there are and the amount of federal taxes they pay, it’s hard to say that they aren’t paying their fair share.

People earning less than $14,000 virtually pay no taxes.  They hardly paid anything during the Clinton presidency.  And paid even less through the Bush presidency.  If we call these people poor, then the poor aren’t paying for the rich.  They’re not even paying their own way.

The next income group also shows a continuous decline.  Those who start to earn some serious money for the first time in their lives pay little in federal taxes.  Less than 10% for the last fifteen years.  And less and less as the years go by.  So, clearly, those earning less than $30,000 per year are hardly paying any federal taxes at all.  And are not subsidizing the rich in any shape, manner or form.  If anyone is being subsidized, it is those earning less than $30,000.  Some 33% of all taxpayers.  And who’s paying their way?  The rich and middle class.

So who’s paying the most in taxes?  The rich and middle class.  In that order.  In fact, they are paying about 90% of all federal taxes.  And have been for the last 15 years.  (Or more.)  During Clinton.  And Bush.  In fact, the rich paid a larger percent of all taxes under Bush (the Republican) than they did under Clinton (the Democrat).  Not exactly what you’d expect based on the political rhetoric.  And the middle class paid less under Bush than they did under Clinton.  In further fact, everyone except the rich paid less in taxes under Bush than they did under Clinton.  So whoever says the ‘rich’ aren’t paying their fair share are either lying.  Or grossly misinformed.

The more Rich People there are the Bigger Percent of Total Tax Dollars they Pay

Notice the top two graphs.  They’re almost mirror images of each other.  As the rich pay more in taxes, the middle class pay less.  This is a good thing, yes?  Transferring more and more of the tax burden to the rich?  It’s what the Democrats say they want.  So it’s interesting to see when the rich pay more in taxes.  During good economic times.  When policies are favorable to business.  And there are lower tax rates.  Never was more of the tax burden transferred to the rich than it was than after the Bush tax cuts.

There are a couple of things happening here.  During recessions (early 2000s and late 2000s), tax revenue from the rich fell.  Because businesses revenue fell.  So business profits were down.  As were income taxes.  On businesses.  And highly paid employees these businesses laid off.  So overall tax revenue was down.  Which made the middle class’ portion of tax revenue a greater percentage of the total.  Not because they were paying more.  But because the rich were paying less.  Which explains the mirror image of these two graphs.

But there’s something else happening, too.  Remember when the Democrats said tax cuts don’t create jobs?  They just create more rich people?  Well, they were partially right.  As the economy expands so does wealth.  Employees leave their companies and start their own businesses.  People advance in their careers and make a lot more money.  Entrepreneurs strike it rich with new innovation.  And you know what all of this means?  People leave the middle class.  And join the rich.  Where they pay more taxes than they ever did before.  Transferring more and more of the tax burden from the middle class to the rich.  Which also explains the mirror image of these two graphs.

The more rich people there are the bigger percent of total tax dollars they pay.  So if the Democrats were true to their word they wouldn’t punish the rich.  Instead, they would focus their energy on making more rich people.  To help the poor and middle class.

The Democrats sacrifice the Poor for Votes

Now it’s interesting how the different political parties interpret these graphs.  Republicans are interested in the top two.  They would like to make business friendly policies to grow business.  And create jobs.  Make as many rich people as possible.  So more and more of the tax burden can be transferred to them.  Not by high tax rates.  But by robust economic activity.

The Democrats, on the other hand, are interested in the bottom two graphs.  Those making $30,000 or less.  They want to see these graphs falling to zero.  And they want to increase the total number of people earning $30,000 or less.  Because those who don’t pay taxes will always vote for you if you promise to raise tax rates on the rich.  And the more poor there are the more political power the Democrats have.  I mean, that 33% who pays virtually no income taxes?  Who do you think they’re going to vote for?  That’s right.  Whoever promises to punish the rich.  And punish they will.  For they want to transfer as much of the tax burden to the rich as possible.  Not by robust economic activity.  But buy punitive tax rates.

This is class warfare.  Based on raw emotion.  Feelings.  Not logic.  Or common sense.  They get the poor angry.  And blame the rich for their poorness.  This is how they win elections.  They lie.  The Democrats.  And say they are punishing the rich.  When they are in fact punishing the poor.  And the middle class.

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The Debt Limit Debacle goes on, Obama and the Democrats unable to Govern Responsibly like Responsible State Governors

Posted by PITHOCRATES - July 17th, 2011

An Explosion of Government Spending will require an Explosion of New Taxes, Borrowing and/or Printing

Blah, blah, blah.  And the budget debate goes on.  It is interesting that it is the Republicans that are being intransigent.  They’re the reason why there is no deal.  But the Democrats aren’t intransigent when they’re being intransigent.  Funny how that works.  Well now there’s a fallback plan.  In case the Republicans refuse to compromise and agree to all of the Democrat’s terms.  Here it is (see Five questions on the debt-ceiling debate posted 7/15/2011 on The Washington Post).

The third, and increasingly likely, option is a fallback proposed by Senate Republican leader Mitch McConnell (Ky.). Congress would allow Obama to raise the debt limit in three increments totaling $2.5 trillion. It would also vote on resolutions disapproving of the debt increases, letting Republicans formally blame the increases on Obama.

To get House Republicans behind the deal, McConnell and Senate Majority Leader Harry Reid (D-Nev.) are revising it to include $1.5 trillion in cuts to government agencies and a new bipartisan committee to produce a framework for long-term debt reduction. Obama signalled Friday that he could live with the McConnell-Reid fallback.

So they will agree to disagree and let Obama do what is ‘best’ for the country.  And let him have full blame for doing it.  It’s a trap.  So when the nation implodes under unsustainable debt and a destroyed economy, the Republicans can point at Obama and say, “He did it.”  The Republicans may win the battle.  But they will lose the war.

A new bipartisan committee?  Didn’t we already do this?  The president’s own bipartisan committee of Erskine Bowles and former-Sen. Alan Simpson already did this.  And Obama promptly ignored their recommendations.  Then Joe Biden gave it a whirl.  And failed.  Then the president sat in meetings himself.  And failed. 

Another committee?  Why?  It’s just going to fail, too.  They need to cut government spending.  They know it.  All of these bipartisan committees know it.  Even the Chi-Coms know it.  But Obama and the Democrats just aren’t going to do it.  They’ll just keep wasting time with these meetings until they can get the Republicans to cave.  Because that’s their idea of compromise.

A “grand bargain” would mean settling for smaller tax increases on the wealthy than if Obama simply let the George W. Bush-era tax cuts expire at the end of 2012. And it could impede the economic recovery by ratcheting back government spending, thus reducing demand.

A bargain implies two competing viewpoints reconciled to best satisfy both sides.  It doesn’t work well when the Democrats simply reject the Republican’s views in toto.  And hold on to failed, dogmatic Keynesian economic policies.  For if government spending worked there would be no recession.  Or a budget debate to raise the debt limit. 

This pervasive view that these Keynesian policies are accepted as the only viable policies by the Democrats is the reason why we’re in the mess we’re in.  It appears that no amount of empirical evidence discrediting Keynesian economics will ever dissuade the Democrats from their reckless spending ways.  Thickheaded, stubborn and imbued with an air of all-knowing condescension and infallibility, they will let the country crash and burn before ever considering the idea that maybe they aren’t as brilliant as they think they are.

But as Obama sees it, the debt-ceiling crisis has offered an opportunity to fulfill his grand if nebulous campaign promise to get serious about attacking the nation’s fundamental problems. Being able to campaign on a major debt deal could outweigh giving up the chance to attack Republicans over Medicare. Settling now for a smaller tax increase on the wealthy would spare Obama a divisive fight over the Bush tax cuts. And getting the nation’s fiscal house in order could make it easier to win support for spending on education, research and infrastructure in a second term.

As for the economy, Obama seems to have adopted, at least to some degree, the Republican theory that businesses will invest more if they see Washington getting a handle on the debt. And a 10-year debt deal could be arranged so that few of the cuts went into effect immediately — there could even be some upfront stimulus included in the deal.

More spending?!?  You’re going to get your fiscal house in order (i.e., reduce the deficit) by spending more?  Well there’s only one way of doing that then, isn’t there?  With massive new taxes.  And not just on the wealthy.  These are going to have to reach deep into the middle class.  Because Obama has increased the deficit by a trillion dollars.  He’s the king of deficit spending.  He’s taken deficit spending to uncharted heights.  And it will take trillions in new taxes to reduce his deficits.  And this is the problem.  He is spending too much.

The Reagan Revolution was animated by “supply side” theory, but Ronald Reagan himself presided over several tax increases after his initial big cuts of 1981. He escaped GOP opprobrium, but George H.W. Bush caught his party’s ire when he signed a 1990 deficit-reduction deal with higher taxes. George W. Bush passed two big tax cuts, which nonpartisan budget experts now say were a major factor in today’s deficits.

Those ‘budget experts’ are no doubt Big Government Keynesian economists who love stroking their egos by advising governments on macroeconomics.  Talk to an Austrian School economist and you will hear a far different story.  And one that better stacks up against history.

Reagan made a deal with Tip O’Neil and the Democrats to cut $3 dollars of spending for every new $1 in taxes.  Of course, the Democrats lied.  They never honored their spending cuts promise.  Still his tax rate cuts nearly doubled tax receipts.  So tax rate cuts can and have increased tax revenue.  It was the out of control spending of Tip and company that gave Reagan those $200 billion deficits.  Chump change by Obama’s deficit standards. 

Bill Clinton fell ass-backwards into an economic boom thanks to the irrational exuberance of the dot-com bubble.  Money from capital gains tax from all those exercised stock options poured into federal coffers.  Then the bubble popped.  And George W. Bush started his presidency with the dot-com recession.  So, in response to the recession, Bush cut taxes in 2001 and 2003 to stimulate the economy.  In 2003 federal tax receipts were $1.782 trillion.  In 2008 they increased to $2.524 trillion.  That’s an increase of $742 billion.  Or an increase of 41.6%. 

So, no, the Bush tax cuts did not cause the deficit.  It was TARP (caused by the Democrat’s poor oversight of, and profiting from, Fannie Mae and Freddie Mac and their great subprime mortgage scam).  Obama’s stimulus.  And Obamacare.  An explosion of federal spending that will require an explosion of federal taxes, borrowing and/or printing to pay for.  No, this isn’t George W. Bush’s deficit.  This is Obama’s deficit.

A Shortage of Health Care Workers in Canada?

And speaking of national health care, let’s take a look at how well it is working in Canada (see Interactive Billboards: Bringing Billboards To Life by Misty Belardo posted 4/24/2011 on Bit Rebels).

An example of a great interactive campaign is this interactive billboard placed at bus stops. The campaign’s objective was to raise awareness about careers in public service. The challenge for the ad agency was to create enough interest in people so that they might seriously consider pursuing a career in public health. The big idea was to give people the feeling that they are capable of saving a life.

The billboard consisted of a huge interactive screen that illustrated a patient dying (as morbid as that may be). When a passerby pushed the hand marks on the sign, the electrocardiogram beeped, indicating that the man came back to life. Right at that moment a message read “Choose a career in public health, visit SaveLives.com.” It would be interesting to find out how many people interacted with the billboard, and even more importantly, how many of those registered and inquired about that career. Usually for campaigns like this it takes a couple months to find out the results.

The ad is apparently to attract health care workers in the province of Québec, Canada.  Which means they must have a shortage of health care workers.  And must be rationing care.  For that is an expensive way to advertise.  And you don’t do that unless the need is critical.  Whereas in America, it is one of the few growing sectors of employment.  Until the government takes it over under Obamacare, that is.  Then the Americans, too, no doubt, will be advertising to get more people to work in the bloated bureaucracy that American health care will become.

And it’s going to be bad in America.  The debate over raising the debt limit so they can pay their current bills?  Those bills don’t even include the explosive costs of Obamacare.  Those costly benefits are yet to kick in.  When they do there will be a whole lot more people covered by the same amount of health care workers, thus creating a shortage of them.  Which will require the rationing of limited health care resources.  (Unless the government finds an extra trillion dollars in some old coat in the closet.)  And then Obamacare will limp along like Medicare.  Chronically in the red.  And forever threatening to cut providers’ pay.

The State Governors know how to Govern

Part of Obama’s grand plan is to pass a lot of costs along to the states.  Because they can.  And states have to bite the bullet and absorb these costs.  Because they can’t pass them onto anyone else.  Or print money.  We call them unfunded mandates.  State governors call them bull [deleted expletive].

You see, states don’t have the options of the federal government.  They can’t be forever silly and irresponsible.  They can’t bluster in hyperbole, thump their chests with pride for a job not done and then just kick the can down the road.  They have to do what Obama and the Democrats in Washington won’t do.  Govern (see For governors, a personal toll from budget battles by Dan Balz posted 7/16/2011 on The Washington Post).

Talk to state executives gathered here at the summer meeting of the National Governors Association and it quickly becomes clear that the budget fights this year have not just left political scars, but some personal ones as well. As Washington Gov. Christine Gregoire (D) put it, “I’ve just come through a session in which I made rotten decisions.”

In Gregoire’s view, those decisions weren’t bad because they failed to solve the state’s budgetary problems or left her budget hopelessly out of balance. To the contrary, Gregoire oversaw cuts of more than $4 billion that balanced her biennial budget.

Like many governors, Gregoire cut pay for state workers, reformed the state pension system, asked state employees to pay more for health care and retirement, eliminated cost-of-living increases for some retired state employees and revamped the state’s worker compensation system.

She cut education spending and raised college tuition.

Now that’s governing.  Doing the right thing no matter how much it pains you.  This is the way it’s supposed to be.  Politics just isn’t a game, a path to riches and a fat pension.  It’s doing what’s best for the people you govern.  Even when it goes against your own personal philosophy.

We’ve come a long way from the Intent of the Founding Fathers

It’s just more of the same from Washington.  And this is what Thomas Jefferson feared.  And why he hated Alexander Hamilton so.  Permanent government debt is a dangerous thing.  It can give you an out of control federal behemoth.  Intruding ever more on our individual liberties to feed it’s appetite for ever more revenue.  Which is what Washington is today.

Jefferson cut federal spending so much he could hardly defend American shipping.  Today the federal government collects in taxes enough to pay for one Apollo moon program each month and it still isn’t enough. 

We’ve come a long way from the intent of the Founding Fathers.  Lucky for them they didn’t live to see what we’ve done to their beloved republic.

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FUNDAMENTAL TRUTH #40: “Big Government is more efficient when old people die sooner.” -Old Pithy

Posted by PITHOCRATES - November 16th, 2010

Revenues Must be Greater than Costs in Both Private Business and Government

Private business must make a profit.  That means the costs of their business can NOT exceed their revenues.  There may be times when costs do exceed revenue.  Such as during a recession.  Or when another business offers the same goods or services for less.  If these periods last too long, a business must act.  Find ways to increase their revenues.  Or cut costs.

Apple continues to innovate and create new products that people want.  This keeps their revenues greater than their costs.  GM, on the other hand, has not.  Their costs have exceeded their revenues.  So they have cut back on production.  And laid off people.  But, in the end, they still needed a government bailout to survive.

Government can tax and print money.  And run perpetual deficits.  So they don’t hold themselves to the same standards as private business.  But if they tax too much or print too much money, it can push the economy into recession and/or inflation.  So they try to make their revenues (taxes) cover as much of their costs (government spending) as possible. 

A Growing Population Can Fund Social Security and Big Government

If you go back 100 years, there was no Social Security.  No Medicare.  No big federal government.  That’s the way the Founding Fathers wanted it.  They minimized the money and reach of the federal government.  Because they were students of history.  They knew governments tended to oppress their people when they had money and power.

In the first century or so of our nation, it was easier to keep the size of government small.  Our population was small.  A big federal budget would require huge per capita taxes.  But that changed as the population grew.  Soon, it was possible to have big federal budgets from modest federal taxes.

We saw the growth of Big Government beginning around the turn of the 20th century.  First it was Woodrow Wilson and the Progressives.  Then came FDR.  He gave us Social Security.  Which was basically a Ponzi Scheme.  It worked at first as all Ponzi Schemes do.  As long as more people are entering into the scheme than collecting benefits, Social Security was sound as a pound.

Population Growth Rate and Big Government Peak and Crash in the 1970s

A growing population means a growing tax base.  The more babies are born, the more future taxpayers there will be.  And when FDR gave us Social Security, it wasn’t uncommon for a family to have 10 or more children.  That’s a lot of future federal taxes they could count on.

Then came LBJ.  He saw what FDR did.  Liked it.  Then tried to outdo him.  He gave us his Great Society (to end poverty and racial injustice).  And Medicare (health care for those 65 and older).  And other stuff.  But these programs were very, very expensive.  So he raised taxes.  A lot.

Then it all crashed in the 1970s.  The increase in taxes to pay for all that government spending stalled the economy.  When they tried to stimulate it with monetary policy, they unleashed inflation.  The U.S. dollar was convertible to gold then.  Which is a bad thing when you’re printing money.  For when you depreciate your currency, you increase the value of gold as measured by your currency; it takes a lot more devalued dollars to buy the same amount of gold.

Well, foreign governments exchanged their dollars for gold.  So much so that Nixon suspended the convertibility of dollars into gold in 1971.   Without the gold restraint on printing money, they printed even more.  We had both recession and inflation.  Stagflation.   Double digit inflation, interest rates and unemployment.  This malaise made Carter a one-term president.

Birth Control and Abortion – The Death Knell of Big Government

So what happened?  Where did it go all wrong?  It goes back to the number of taxpayers.  Something happened between FDR and the 1970s.  We weren’t having as many babies.

Instead of 10 or more children in families, many families were having only 2 or 3 kids.  Widespread use of birth control and abortion drastically reduced the population growth rate of the country.  Fewer taxpayers were being born than before.  Which meant that more people would be entering retirement than there would be new taxpayers entering the work force to pay for these retirees.

This is how Ponzi Schemes fail.  When there are more people drawing benefits than paying into the scheme, the whole house of cards collapses.  And this is a big problem for government.  To support their massive spending, they need more, not fewer, people entering the work force.

How can Government Save Social Security and Medicare?  Old People Just Need to Hurry Up and Die.

Well, there’s a couple of ways to address this problem.  First there’s the revenue side.  They can increase the taxes they collect.  By raising tax rates on individuals.  Or by simply creating more individuals to tax.  Such as amnesty for illegal aliens.  But both of these options are difficult to do without hurting your chances at getting reelected.

Then there’s the cost side.  They can cut benefits.  Increase the Social Security retirement age.  But these, too, have political consequences.  Because these old coots tend to vote more than any other demographic.  Which can make them a real pain in the behind.

Of course, if they would jut die before reaching retirement age, the government doesn’t have to pay them or their survivors.  And if they’re dead, they won’t be consuming any Medicare benefits.  You see, not only are they the most vocal group at election time, but they are also the most costly when it comes to government benefits.  The government could kill two birds with one stone if these old codgers would just hurry up and die.

One Way for Big Government to Cut Health Care Costs:  Death Panels

The government doesn’t see your mother or grandmother.  They’re looking at numbers in columns.  They are having trouble increasing the numbers in one column (tax revenue).  And are having trouble keeping the numbers in the other column from growing (benefits).  Because of old people.  Who don’t work anymore.  Or pay much in income taxes.  But they consume the lion’s share of the benefits.  They’re the biggest thorn in the government’s side.  If it wasn’t for them, their programs wouldn’t forever be facing bankruptcy.  You can see why they aren’t the government’s favorite people.

So they increase the retirement age.  In hopes more will die before reaching retirement.  And those who do reach retirement age, well, they’ll have fewer years left to enjoy their benefits.  And they make cuts in the Medicare program.  Disallow some reimbursements.  Maybe prod a few seniors to an earlier death.  Why?  Because these kinds of cost savings are the only cost savings that will have any impact in a government-managed system.

Then there’s the holy grail of Big Government.  Government-managed universal health care.  Obamacare, in its latest manifestation.  And, of course, it will end up just like Social Security and Medicare.  For the same reasons Social Security and Medicare ended up the way they did.  But Obamacare will have a new twist.

Government panels will determine who gets medical treatment.  And who doesn’t.  Based on a ‘return on investment’ analysis used to manage and optimize health care costs.  Will medical treatment result in more taxpaying years for the patient?  If yes, treatment approved.  If not, treatment not approved.  If anything, the government’s death panels will be a model of efficiency.  On paper.

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LESSONS LEARNED #34: “Sure, until you win the lotto you’re all for sticking it to the rich.” -Old Pithy

Posted by PITHOCRATES - October 7th, 2010

Buddy Can You Spare a Dime

In the old days, we used to jail people who didn’t pay their debts.  Even in the United States.  A couple of signers of the Declaration of Independence even served time in a debtors’ prison.  We took it seriously.  Honoring your debts.  For those who didn’t, they found themselves inside a jail until they did.  Or until they died.

We jailed some people over small sums.  The severity of the punishment (broken families, disease, starvation, privation, physical abuse, etc.) was often extreme in comparison to the size of the debt owed.  In time we would move away from such barbaric justice.  No, in the modern, caring world, we don’t torment those who are down on their luck and find themselves penniless.  You see, the modern world is a caring world.  We abhor the sufferings of our fellow man.  So we show them kindness.  Charity.  We forgive them their debts and help them rebuild their lives.  Well, most of us do.

If you find yourself owing the IRS, you better pay up.  For they will send you to prison.  And take whatever you have.  They will destroy your life.  And your family.  Because they want to make something perfectly clear.  You don’t f*ck with the IRS.  They play to keep.  All the time.

The War on Alcohol

The 18th Amendment prohibited “the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes.”  The government may have shut down supply, but the market remained.  Enter criminal gangs.  Who furnished the supply to meet the demand.

None did it better than Al Capone.  His gang ruled Chicago.  People admired him.  After all, he wasn’t hurting anyone.  He was just giving the people what they wanted.  A way to relax and blow off steam.  Like we do today when we enjoy an alcoholic beverage with our friends.  But the gang violence grew.  The pictures following the Saint Valentine’s Day Massacre were just too gruesome.  Soon thereafter the FBI branded Scarface as public enemy #1.

Bootlegging, prostitution, murder, extortion…Capone broke a lot of laws.  But he crossed the line.  He committed a crime that was so heinous that it would land him ultimately in Alcatraz, America’s most secured federal prison.  That crime?  Income tax evasion.

On the Road Again

Willie Nelson is a big time Democrat.  He’s into saving the environment.  Animal rights.  Legalizing marijuana.  Helping the farmers.  And he’s a regular peacenik.  So you’d think he’d be a big fan of Big Government.  Well, yes and no. 

He became very wealthy by the 1980s.  And like a good Democrat, he tried to shield some of that wealth from the IRS.  He parked some of it in some talk shelters.  Then came along Ronald Reagan.  He understood what Andrew Mellon understood (Secretary of the Treasury for Warren G. Harding).  High tax rates made rich people hide their money.  Lower tax rates encouraged rich people to invest their money.  When Mellon cut the tax rates wealthy people paid more taxes and less wealthy people paid fewer taxes.  The progressive tax system worked even better at lower tax rates.  Tax revenue increased as the wealthy invested their money instead of finding creative ways to hide it.  It worked for Reagan, too.  He even closed tax shelters as a further incentive for the wealthy to invest their money to grow the economy and create jobs.  That worked, too.  Savvy wealthy people everywhere were putting Americans back to work.  Only one small problem.  The not so savvy wealthy were caught unawares.

Willie Nelson didn’t move his money from his tax shelters.  When Reagan disallowed those shelters, his money sat there accruing federal taxes.  And interest and penalties.  He blamed and sued his accountants.  The accountants countered that they only did the accounting and taxes.  They were not investment advisors.  Anyway, the IRS seized his assets.  He went on the road again and often to pay off his tax bill.  His total bill came to about 16 million in back taxes, interest and penalties.  Which he paid.  As he no doubt would have from the get-go if he had sought appropriate counsel to help him negotiate the 1,000+ page U.S. tax code.

Easy Money – For the IRS

There are many stories like Willie Nelson’s.  Even Treasury Secretary Timothy Geithner, the smartest man in America, couldn’t figure out his own taxes.  (But we were to excuse him for this because no one else was as qualified as he was to write and administer the U.S. tax code).  But it’s not only the not-so-savvy celebrity rich and the intellectually challenged intellectuals who have trouble with the U.S. tax code.  The poorest of the poor who never had money can sometimes run afoul of the IRS.

Playing the lotto.  Millions do.  Most lose.  And they’re lucky that they do.  Many lotto winners have their lives take a turn for the worse.  Friends and relatives you don’t know are reacquainting themselves with you.  Well, not you so much as your new found wealth.  Con men target you.  Charities.  Neighbors.  Some spend the money fast.  Or recklessly.  Develop drug addictions.  Get robbed.  Even murdered.  There are a lot of stories out there.  Just search the Internet.

When you win the lotto, you can take a lump-sum payment.  Or you can take a series of payments.  Either way the IRS taxes this as income.  And the amount of these payouts will most probably push you in the highest income tax bracket during the period of these payouts.  So the IRS likes lotto winners.  Your odds of winning are slim to none but someone always wins.  And that’s a tax bonanza for the IRS.  Not-so-savvy people who become rich overnight.  The full force and power of the U.S. government falling on some poor schmuck who probably never had a tax liability in his or her life.  Money just doesn’t get any easier. 

Capital Gain or Income?

Some may sell the rights to their future payments.  It’s sort of like selling a rental property.  For example, take a house that rents for $1,000 per month and sells for $150,000.   The buyer gets those future rent payments.  The seller gets the money back that they paid for the house and, hopefully, a capital gain (i.e., they sell the house for more than they paid for it).  The seller pays a capital gains tax on their capital gain.  They do not pay any further income tax on the rental income that the buyer now collects.

Some lotto winners see selling their rights to future payments in the same light.  And that they should only pay a one-time capitals gain tax (at a lower capital gains tax rate) in lieu of the higher income tax rate.  The IRS begs to differ.  And they usually get their way.

Sadly, some buyers advised those selling their rights that they could pay the lower capital gains tax rate.  Which they did.  And faced heavy tax bills for back taxes, interest and penalties as a consequence.  Once again, easy money for the IRS.  You can search the Internet for stories like these, too.

Pay or Else

Whether a gangster, a celebrity, a Democrat brainiac or a low-income lotto winner, we all share something in common.  Whatever our politics, when it comes to our money, we all try to avoid paying our ‘fair share’ of taxes.  We may demand that other rich people pay their taxes, but we will do everything we can to avoid paying our taxes.  But we play a dangerous game when we do.  For those who do and lose, they learn a painful lesson.

You don’t f*ck with the IRS.

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