Progressive and Regressive Taxes and Marginal Tax rates

Posted by PITHOCRATES - January 6th, 2014

Economics 101

(Originally published July 9th, 2012)

The Beatles fled Britain to Escape a Confiscatory Top Marginal Tax Rate of 95%

George Harrison wrote Taxman.  The song appeared on the 1966 Beatles album Revolver.  It was an angry protest song.  For George Harrison was furious when he learned what exactly the progressive tax system was in Britain.  In the song the British taxman is laying down the tax law.

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman

Should five per cent appear too small
Be thankful I don’t take it all
‘Cause I’m the taxman, yeah I’m the taxman

That’s one for you, Mr. Harrison.  And nineteen for us.  The government.  Meaning that for every £20 the Beatles earned they got to keep only £1.  This is a 95% top marginal tax rate.  A supertax on the super rich imposed by Harold Wilson’s Labour government.  So if the Beatles earned £1 million because of their incredible talent and hard work touring in concert, working on new albums in the studio and making movies, of that £1 million they got to keep only about £50,000.  While the government got £950,000.  If they earned £10 million they got to keep about £500,000.  While the government got £9,500,000.  As you can see 5% is a very small percentage.  Which is why George Harrison got so angry.  The harder they worked the less of their earnings they were able to keep.

Is this fair?  George didn’t think so.  Nor did his fellow Beatles.  For they fled Britain.  Moved to another country.  Becoming tax exiles.  For they were little more than court minstrels.  Who the government forced to entertain them.  Earning a lot of money so they could take it away.  To help pay for an explosion in social spending Harold Wilson unleashed on Britain.  Socializing the UK like never before.  And all those social benefits required a lot of taxes.  Hence the progressive tax system.  And marginal tax rates.  Where the super rich, like the Beatles, paid confiscatory tax rates of 95%.

The Top Marginal Tax Rate was around 70% under President Carter and around 28% under President Reagan

As social spending took off in the Sixties and Seventies governments thought they could just increase tax rates to generate greater amounts of tax revenue.  For governments looked at the economy as being static.  That whatever they did would result in their desired outcome without influencing the behavior of those paying these higher tax rates.  But the economy is not static.  It’s dynamic.  And changes in the tax rates do influence taxpayer behavior.  Just ask the Beatles.  And every other tax exile escaping the confiscatory tax rates of their government.  Because of this dynamic behavior of the taxpayers excessively high tax rates rarely brings in the tax revenue governments expect them to.

Even when it comes to sin taxes government still believes that the economy is static.  Even though they publicly state that taxes on alcohol and tobacco are to dissuade people from consuming alcohol and tobacco.  (The U.S. funded children’s health care with cigarette taxes clearly showing the government did not believe these taxes would stop people from smoking).  Perhaps some in government look at sin taxes as a way to discourage harmful habits.  But the taxman sees something altogether different when they look at sin taxes.  Addiction.  Knowing that few people will give up these items no matter how much they tax them.  And that means tax revenue.  But unlike the progressive income tax this tax is a regressive tax.  Those who can least afford to pay higher taxes pay a higher percentage of their income to pay these taxes.  For sin taxes increase prices.  And higher prices make smaller paychecks buy less.  Leaving less money for groceries and other essentials.

Most income taxes, on the other hand, are progressive.  Your income is broken up into brackets.  The lowest bracket has the lowest income tax rate.  Often times the lowest income bracket pays no income taxes.  The next bracket up has a small income tax rate.  The next bracket up has a larger income tax rate.  And so on.  Until you get to the high income threshold.  Where all income at and above this rate has the highest income tax rate.  This top marginal tax rate was around 70% under President Carter.  Around 28% under President Reagan.  And 95% under Harold Wilson’s Labour government in Britain.  An exceptionally high rate that led to great efforts to avoid paying income taxes.  Or simply encouraged people to renounce their citizenship and move to a more tax-friendly country.

When the Critical Mass of People turn from Taxpayers to Benefit Recipients it will Herald the End of the Republic

Progressive taxes are supposed to be fair.  By transferring the tax burden onto those who can most afford to pay these taxes.  But the more progressive the tax rates are the less tax revenue they generate.  What typically happens is you have a growing amount of low-income earners paying no income taxes but consuming the lion’s share of government benefits.  The super rich shelter their higher incomes and pay far less in taxes than those high marginal tax rates call for.  They still pay a lot, paying the majority of income taxes.  But it’s still not enough.  So the middle class gets soaked, too.  They pay less than the rich but the tax bite out of their paychecks hurts a lot more than it does for the rich.  Because the middle class has to make sacrifices in their lives whenever their tax rates go up.

As social spending increases governments will use class warfare to increase taxes on the rich.  And they will redefine the rich to include parts of the middle class.  To make ‘the rich’ pay their ‘fair’ share.  And they will increase their tax rates.  But it won’t generate much tax revenue.  For no matter how much they tax the rich governments with high levels of spending on social programs all run deficits.  Because there just aren’t enough rich people to tax.  Which is why the government taxes everything under the sun to help pay for their excessive spending.

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman

Now my advice for those who die
Declare the pennies on your eyes
‘Cause I’m the taxman, yeah, I’m the taxman
And you’re working for no one but me.

This is where excessive government spending leads to.  Excessive taxation.  And confiscatory tax rates.  Taking as much from the wealth creators as possible to fund the welfare state.  And as progressive tax systems fail to generate the desired tax revenue they will turn to every other tax they can.  Until there is no more wealth to tax.  Or to confiscate.  When the wealth creators finally say enough is enough.  And refuse to create any more wealth for the government to tax or to confiscate.  Leaving the government unable to meet their spending obligations.  As the critical mass of people turn from taxpayers to benefit recipients.  Heralding the end of the republic.

www.PITHOCRATES.com

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President Obama transforming America into Socialist Argentina

Posted by PITHOCRATES - November 11th, 2012

Week in Review

President Cristina Fernández de Kirchner has won two landslide presidential elections.  One could say she is more popular in Argentina than President Obama is in the United States.  Well, she was more popular than the American president.  That may be changing (see Argentina protests: up to 1.5 million rally against Fernández de Kirchner by Uki Goni and Jonathan Watts posted 11/9/2012 on the guardian).

The broad avenues of Buenos Aires were crowded on Thursday night by Argentina’s biggest and noisiest anti-government demonstration in a decade, as hundreds of thousands of protesters marched or banged pots to express frustration at President Cristina Fernández de Kirchner.

After a smaller rally in September, the noisy but peaceful protest – estimated at between 250,000 to 500,000 people – marks an escalation of opposition to the Argentinian leader, particularly among a middle class that is upset at inflation, corruption, media controls and suggestions Fernández may want to amend the constitution so she can serve a third term…

There was no single cause of discontent. Many in the middle class are angry at the highest inflation in a decade, estimated at a yearly 25% by private economists, currency controls that have created a black market in dollars, and one of the slowest economic growth rates in Latin America.

Banners and chants also took aim at recent corruption cases and Fernández’s efforts to limit the power of big newspaper and TV conglomerates…

… it marks a political low in Fernández’s decade in the presidential palace. Since succeeding her husband, Néstor Kirchner, in 2007, she has won two landslide election victories and pursued a policy marked by wealth redistribution, greater investment in education, confrontation with Britain over the Falklands and the nationalisation of the Argentinian assets owned by the Spanish oil group YPF.

With the economy faltering, Fernández’s approval rating has fallen below 40%, according to a poll this week, and many of those who joined Thursday’s protest have lost faith in her.

“I voted for Cristina but now I feel let down,” said one middle-aged marcher. “We need more security, more jobs; the government needs to stop lying to us.”

High inflation and slow economic growth.  Kind of sounds like the Carter presidency.  Where we called his high inflation and slow economic growth stagflation.  And measured it by the misery index.  Of course President Carter didn’t suffer any of these humiliating protests in his second term.  For he suffered a humiliating defeat in 1980 that made him a one-term president.

People have often wondered what a second Carter term would have been like.  Some say we saw in President Obama’s first term.  But perhaps it will be his second term that will be more like President Carter’s first term.  Or, perhaps, more like President Cristina Fernández de Kirchner’s second term.  For apart from confronting the British over the Falklands and nationalizing a Spanish oil group (though President Obama would like to nationalize health care) his policies are eerily similar to hers.  The middle class has suffered in the US under President Obama just as they have suffered in Argentina.  And someone in the Obama administration is lying to the American people about Fast and Furious.  And Benghazi.  They both also have low approval ratings despite their ability to win elections.  Of course if that was the other way around in the United States (Republicans winning reelection despite low approval ratings) there would be massive legal actions contesting those election results.

So if you want to see what the future of President Obama’s second term will be like you can look at what’s happening in Argentina.  Which the president is making us look more like with his record spending that have given us record deficits in each of his four years in office.  And a record amount of debt.  Perhaps this is the president’s own way to reform immigration.  Make the economy so bad that there are no jobs here to encourage people to come to this country.  In fact, some of the flow of immigration has reversed as Mexicans are heading back home for better jobs.  As the president has destroyed the US job market with his economic policies.

So if you hear a loud banging sound in Washington DC don’t worry.  It’s just the Argentine-style protest against our anti-capitalist president.

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2012 Endorsements: JFK and Ronald Reagan

Posted by PITHOCRATES - October 31st, 2012

2012 Election

JFK did all the Democrat things to Stimulate the Economy out of Recession but none of it Worked

John Fitzgerald Kennedy (JFK) was a Cold War warrior.  Not to mention a World War II combat veteran.  He warned Nikita Khrushchev that any Soviet interference with U.S. access to West Berlin (located behind the Iron Curtain in East Germany) would be an act of war.  Which meant a nuclear war with the USSR.  The Soviets responded by building the Berlin Wall between East and West Berlin.  Blocking free passage between East and West.  JFK authorized the Bay of Pigs Invasion to topple the Soviet-backed Castro government in Cuba.  The invasion failed for the lack of air support.  Castro feared another US invasion.  Shortly thereafter the Soviets installed intermediate-range ballistic missiles in Cuba.  To counter US missiles placed in Turkey.  Once discovered JFK ordered a quarantine of Cuba.  A US naval blockade.  Leading to the Cuban Missile Crisis.  And the closest the US and the USSR ever came to all out nuclear war.  Khrushchev and JFK finally resolved the crisis.  Khrushchev agreed to remove their missiles with a public US guarantee that they would never invade Cuba.  And a private promise to remove those US missiles from Turkey.

JFK sent the Special Forces to South Vietnam to stem the spread of communism in Southeast Asia.  He also initiated the coup that toppled the government of Ngo Dinh Diem (though he did not call for his assassination).  Leading to America’s long involvement in the Vietnam War.  And Kennedy’s Secretary of Defense helped make all of this military action possible.  Robert McNamara.  One of the ‘Whiz Kids’ who helped to rebuild the Ford Motor Company.  And he ran the Department of Defense like he ran Ford.  By the numbers.  He made it more efficient.  Saving a lot of money from the existing budget.  While JFK added an additional $8 billion (about $58 billion in 2011 dollars) of defense spending.  Paying for a lot of the weapons a Cold War warrior needed.  However, he was still concerned about the size of the deficit.  So JFK also included some domestic spending cuts to help offset the increases in defense spending.  But it wasn’t enough.  He had a deficit.  Worse, he had a recession.

JFK did all the Democrat things to stimulate the economy out of recession.  Typical Keynesian economics stuff.  Government spending.  And keeping interest rates artificially low.  But it wasn’t working.  One of the problems was that Keynesian stimulus just doesn’t work.  But another problem was the baby boom following the war.  Who grew up and were looking for jobs in the Sixties.  That just weren’t there.  He needed some really solid economic growth to create those jobs.  And for that he turned to supply-side economics.  What we would later call Reaganomics.  He created a more business-friendly environment.  He offered businesses tax credits for investments in new machinery and equipment.  He accelerated depreciation schedules, allowing businesses to expense their assets more quickly.  Which encouraged investment into new assets.  And he proposed tax cuts on both business AND personal income.  It worked.  Unleashing an economic boom that lasted until 1966.

When Reagan entered Office he did what JFK did and created a Business-Friendly Environment

Ronald Reagan was a Cold War warrior.  While President Carter pursued a policy of detente with the Soviet Union Reagan’s policy was more in keeping with JFK’s policy.  He called the Soviet Union the Evil Empire and pursued a goal of destroying it.  And like Kennedy he built up a strong military.  Reagan invaded Grenada when hard-line communists overthrew a moderate socialist government.  While there were Cuban construction workers and military personnel building a 10,000 foot reinforced runway.  Which would be handy for the Soviets to use in their Central American activities.  Which Reagan also opposed in Nicaragua.  As he helped the Mujahideen resist the Soviets in Afghanistan.  Reagan revived the Carter-canceled B-1 Lancer bomber program.  He introduced the MX intercontinental ballistic missile program.  And when the Soviets deployed SS-20 intermediate-range ballistic missiles Reagan deployed Pershing medium-range ballistic missiles in West Germany.  Then he took it up a notch and introduced a strategic ballistic missiles defense system.  The Strategic Defense Initiative (SDI).  When Reagan gave a speech at the Berlin Wall’s Brandenburg Gate with Mikhail Gorbachev in attendance he said, “General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate! Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall!”

The Soviets couldn’t keep up with the spending as their command economy was a mess.  It was a different story in America.  In fact, it was Morning in America.  Not only did the Americans spend the Soviets to the brink of collapse they did that in what those on the Left call the Decade of Greed.  Because economic times were so good there was excessive materialistic consumption.  So while the Soviets stood in line for soap and toilet paper the Americans enjoyed Sony Walkmans, CD players, VCRs, new cars, big houses and all the delicious food you could eat.  Americans had a weight problem.  While the Soviets had a malnutrition problem.  The Soviet Union would collapse about 3 years after Reagan left office.  George H. W. Bush, Reagan’s vice president, having the honor to be in office at the end of the Soviet Union.

Like JFK Reagan also had a recession.  As he entered office following the disaster of the Carter presidency.  Carter did all of the Keynesian stuff like JFK.  Using inflation to try to end unemployment.  Which only gave the nation high inflation and high unemployment.  Stagflation.  And malaise.  But unlike JFK Carter refused to try something different when it didn’t work.  When Reagan entered office, though, he did what JFK did.  He created a business-friendly environment.  That included tax cuts.  Tax cuts that stimulated economic activity.  So much economic activity that federal tax receipts went up even though tax rates went down.  So Reagan’s deficits weren’t a revenue problem.  They were a spending problem.  Much like they are today.  Much like they always are.

If JFK and Ronald Reagan were Alive Today they would likely Endorse the Republican Candidates Mitt Romney and Paul Ryan

The attacks on 9/11 didn’t just happen.  It was the last in a chain of events.  There was the 1993 World Trade Center Bombing.  The New York City Landmark Bomb Plot (1993).  The Khobar Towers Bombing (1996).  The United States Embassy Bombings (1998).  The Millennium Attack Plots (2000).  The USS Cole Bombing (2000).  Then 9/11.  Until 9/11 we treated all of these events as criminal offences.  Not acts of war.  While Osama bin Laden and his al Qaeda acted from the start as if they were fighting a war.  Not breaking the law.  President Obama is also reluctant to call these radical Islamist attacks war.  When a radical Muslim in the US Army killed fellow soldiers on an Army base because of America’s ‘crimes against Islam’ the president called that workplace violence.  And when an American ambassador asked for additional security in Benghazi someone in the Obama administration denied the request because President Obama had killed Osama bin Laden.  And defeated al Qaeda.  Having to beef up security to defend against a growing al Qaeda presence, though, would have gone against that narrative of defeating al Qaeda.

The current so-called economic recovery is about the weakest on record.  Despite doing the normal Keynesian things to revive the economy.  Including an almost trillion dollar stimulus package.  Leading to record deficits.  Money the government had to borrow.  Borrowing which required an increase in the official debt ceiling.  This excessive debt and government spending cause the first downgrade of US sovereign debt.  All of this to fix the economy.  Only the economy is not fixed.  And the people who can’t find a full time job holds steady at 14.7% (U-6 unemployment rate).

So if JFK and Ronald Reagan were alive today who would they support in the 2012 election?  Who would a couple of Cold War warriors who risked nuclear war to protect the United States support?  These practitioners of supply-side economics who brought their economies out of recession to record economic growth?  Probably not the candidates foolishly hanging on to failed Keynesian policies despite a real unemployment rate of 14.7%.  Or the ones refusing to accept that we are still being targeted and killed by al Qaeda and other radical Islamist elements in the ongoing War on Terror.  No.  If JFK and Ronald Reagan were alive today they would likely endorse the Republican candidates Mitt Romney and Paul Ryan.

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Progressive and Regressive Taxes and Marginal Tax rates

Posted by PITHOCRATES - July 9th, 2012

Economics 101

The Beatles fled Britain to Escape a Confiscatory Top Marginal Tax Rate of 95%

George Harrison wrote Taxman.  The song appeared on the 1966 Beatles album Revolver.  It was an angry protest song.  For George Harrison was furious when he learned what exactly the progressive tax system was in Britain.  In the song the British taxman is laying down the tax law.

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman

Should five per cent appear too small
Be thankful I don’t take it all
‘Cause I’m the taxman, yeah I’m the taxman

That’s one for you, Mr. Harrison.  And nineteen for us.  The government.  Meaning that for every £20 the Beatles earned they got to keep only £1.  This is a 95% top marginal tax rate.  A supertax on the super rich imposed by Harold Wilson’s Labour government.  So if the Beatles earned £1 million because of their incredible talent and hard work touring in concert, working on new albums in the studio and making movies, of that £1 million they got to keep only about £50,000.  While the government got £950,000.  If they earned £10 million they got to keep about £500,000.  While the government got £9,500,000.  As you can see 5% is a very small percentage.  Which is why George Harrison got so angry.  The harder they worked the less of their earnings they were able to keep.

Is this fair?  George didn’t think so.  Nor did his fellow Beatles.  For they fled Britain.  Moved to another country.  Becoming tax exiles.  For they were little more than court minstrels.  Who the government forced to entertain them.  Earning a lot of money so they could take it away.  To help pay for an explosion in social spending Harold Wilson unleashed on Britain.  Socializing the UK like never before.  And all those social benefits required a lot of taxes.  Hence the progressive tax system.  And marginal tax rates.  Where the super rich, like the Beatles, paid confiscatory tax rates of 95%.

The Top Marginal Tax Rate was around 70% under President Carter and around 28% under President Reagan 

As social spending took off in the Sixties and Seventies governments thought they could just increase tax rates to generate greater amounts of tax revenue.  For governments looked at the economy as being static.  That whatever they did would result in their desired outcome without influencing the behavior of those paying these higher tax rates.  But the economy is not static.  It’s dynamic.  And changes in the tax rates do influence taxpayer behavior.  Just ask the Beatles.  And every other tax exile escaping the confiscatory tax rates of their government.  Because of this dynamic behavior of the taxpayers excessively high tax rates rarely brings in the tax revenue governments expect them to.

Even when it comes to sin taxes government still believes that the economy is static.  Even though they publicly state that taxes on alcohol and tobacco are to dissuade people from consuming alcohol and tobacco.  (The U.S. funded children’s health care with cigarette taxes clearly showing the government did not believe these taxes would stop people from smoking).  Perhaps some in government look at sin taxes as a way to discourage harmful habits.  But the taxman sees something altogether different when they look at sin taxes.  Addiction.  Knowing that few people will give up these items no matter how much they tax them.  And that means tax revenue.  But unlike the progressive income tax this tax is a regressive tax.  Those who can least afford to pay higher taxes pay a higher percentage of their income to pay these taxes.  For sin taxes increase prices.  And higher prices make smaller paychecks buy less.  Leaving less money for groceries and other essentials.

Most income taxes, on the other hand, are progressive.  Your income is broken up into brackets.  The lowest bracket has the lowest income tax rate.  Often times the lowest income bracket pays no income taxes.  The next bracket up has a small income tax rate.  The next bracket up has a larger income tax rate.  And so on.  Until you get to the high income threshold.  Where all income at and above this rate has the highest income tax rate.  This top marginal tax rate was around 70% under President Carter.  Around 28% under President Reagan.  And 95% under Harold Wilson’s Labour government in Britain.  An exceptionally high rate that led to great efforts to avoid paying income taxes.  Or simply encouraged people to renounce their citizenship and move to a more tax-friendly country.

When the Critical Mass of People turn from Taxpayers to Benefit Recipients it will Herald the End of the Republic

Progressive taxes are supposed to be fair.  By transferring the tax burden onto those who can most afford to pay these taxes.  But the more progressive the tax rates are the less tax revenue they generate.  What typically happens is you have a growing amount of low-income earners paying no income taxes but consuming the lion’s share of government benefits.  The super rich shelter their higher incomes and pay far less in taxes than those high marginal tax rates call for.  They still pay a lot, paying the majority of income taxes.  But it’s still not enough.  So the middle class gets soaked, too.  They pay less than the rich but the tax bite out of their paychecks hurts a lot more than it does for the rich.  Because the middle class has to make sacrifices in their lives whenever their tax rates go up. 

As social spending increases governments will use class warfare to increase taxes on the rich.  And they will redefine the rich to include parts of the middle class.  To make ‘the rich’ pay their ‘fair’ share.  And they will increase their tax rates.  But it won’t generate much tax revenue.  For no matter how much they tax the rich governments with high levels of spending on social programs all run deficits.  Because there just aren’t enough rich people to tax.  Which is why the government taxes everything under the sun to help pay for their excessive spending. 

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman

Now my advice for those who die
Declare the pennies on your eyes
‘Cause I’m the taxman, yeah, I’m the taxman
And you’re working for no one but me.

This is where excessive government spending leads to.  Excessive taxation.  And confiscatory tax rates.  Taking as much from the wealth creators as possible to fund the welfare state.  And as progressive tax systems fail to generate the desired tax revenue they will turn to every other tax they can.  Until there is no more wealth to tax.  Or to confiscate.  When the wealth creators finally say enough is enough.  And refuse to create any more wealth for the government to tax or to confiscate.  Leaving the government unable to meet their spending obligations.  As the critical mass of people turn from taxpayers to benefit recipients.  Heralding the end of the republic.

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