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.

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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.

www.PITHOCRATES.com

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LESSONS LEARNED #73: “Politics is about overspending and vote-buying while getting some poor dumb bastard to pay for it.” -Old Pithy

Posted by PITHOCRATES - July 7th, 2011

Great Britain’s Costly World Wars

The 18th century was a time for adventure.  Exploring brave new worlds.  Discovering new species of plant and animal.  And new peoples.  But most of all it was a time for war.  World war.  As the great mercantilist empires raced to establish colonies in those brave new worlds.  And bumped into each other in the process.  Great Britain, Prussia and Portugal fought against against France, Spain, Austria, Russia and Sweden in the Seven Years’ War.  They fought for control of trade routes.  And each other’s colonies.  They fought from 1756 to 1763.  In Europe, Asia, Africa, South America, North America, the Caribbean, the Philippines and on the high seas.

Great Britain’s secretary of state, William Pitt, committed to total war.  He went all in.  Thanks to his allies fighting in Europe on land he had armies available for the colonial theaters.  And he had the Royal Navy.  That ruled the seas.  It was a formidable force.  And the British Empire grew.  From Gibraltar to the Indian subcontinent to the Philippines to the Caribbean.  And, of course, Canada.  It was a great victory.  But a costly one.  As total war tends to be.  And with more empire to manage and protect, Britain needed a larger standing army.  And a larger Royal Navy.  Costing even more money.  Especially in North America.  Where there was a lot of Indian activity on the frontier.  It only seemed fair to King and Parliament that their American colonists paid their fair share.  And the taxation started coming. 

The king needed money.  And the landowners in England were already overtaxed from years of war.  Taxing them further could cause problems in Parliament.  Because they had representation with their taxation.  But there was a lot of untapped wealth across the Atlantic Ocean.  The American colonies.  And they had no representation in Parliament.  So they would tax them to replenish the royal coffers.  And to help maintain the sprawling empire.  So they taxed.  And the Americans balked.  Then Parliament passed some acts to punish the colonists.  One thing led to another that led to a shot at Lexington that was heard ’round the world.  The American Revolution for independence from the British Empire was on.  And it, too, would be costly for Great Britain.  Eight more years of war.  And it would end with the loss of the American colonies.  Worse, it gave the French some ideas that led to the French Revolution.  And, ultimately, Napoleon.  That would plunge Great Britain back into another costly world war. 

Rhode Island:  Smallest State but Biggest Pain in the Ass

But Great Britain wasn’t the only nation with a large war debt.  The new United States of America also had a huge war debt.  And her finances were a mess.  People had debts.  States had debts.  And the Confederation Congress had debt.  Millions borrowed from Holland and France to fight the war.  And money was owed from before the war.  Including to British merchants that had to be honored for America needed trade with the British Empire.  And the protection of that trade provided by the Royal Navy.  So a lot of money was owed to a lot of people.  Which a lot of people didn’t have.  State legislations passed debtors’ laws that provided some relief to debtors by making it okay for them not to repay their loans.  Of course, this destroyed the credit markets.  Because people won’t loan money if the law says no one has to pay it back.  Worse, states were printing their own currencies.  And forcing people to accept it as legal tender.  Even though it wasn’t worth the paper it was printed on.  States were charging import duties on interstate trade.  Other states were charging some states more for their goods.  The love was gone.  States circled the wagons.  The war was over so they said screw the confederation .  It was a mess.  And soon after the war the economy was collapsing.

The United States was the Rodney Dangerfield of the international community.  It got no respect.  And most thought it was only a matter of time before they fell on their face and rejoined the British Empire.  The new nation needed legitimacy.  Which is hard to do when you’re broke.  You have no army or navy.  And the individual states were making their own treaties.  Making their own currency.  Collecting their own tariffs.  Life was simpler for the rest of the world when the Americans were British Americans.  For then she had a single seat of government to treat with.  A single currency.  A uniform tariff.  The Articles of Confederation just wasn’t getting it done.  So there was a drive to revise them to address some of these shortcomings.  Such as a national tariff to help pay down the national debt.  But one of the shortcomings was the revision process itself.  Any change required unanimous consent.  Which was a problem when it came to tariffs.

You see, tariffs are a source of revenue.  Imported goods come in on ships.  That have to dock.  In a port.  Before they offload a customs official reviews the manifest.  And verifies the cargo.  It’s simple math.  You have a list of what’s on a ship.  You apply a tariff.  Get your money.  Then you let the ships unload their cargo.  It’s very straight forward.  All you need is a port.  Which Rhode Island had.  And she refused to give up her right to collect those tariffs.  Because they collected a lot of revenue.  From her merchants.  And from all the merchants in the land-locked states that used her port.  It was very lucrative.  Her taxpayers loved it.  Because someone else was paying their taxes.  They were getting a free ride.  Thanks to those tariffs.  Which was great for them.  But it almost doomed the fledgling new nation.  Because whenever the Confederation Congress tried to amend the Articles of Confederation to include a national tariff, Rhode Island always voted “no.”  She refused to give up her cash cow.  Even if it meant the collapse of the new nation.  (Eventually delegates would meet in Philadelphia in 1787 and write a new constitution to replace the Articles of Confederation.  And some 100 years later America became a superpower.  No thanks to Rhode Island, of course.)

The EU and their Mercantile Emissions Trading Scheme

A clever government is always trying to think of ways to get other people to pay for their excessive spending.  And by ‘clever’ I mean devious.  To find some dumb bastard to pick up their tab.  Preferably not their own taxpayers.  Especially taxpayers who vote.  Because that’s the funny thing about taxpayers.  They don’t like paying taxes.  They will because they understand certain public goods require public funding.  Like an army and a navy to protect their nation from foreign enemies.  They’ll pay for these because they don’t want to be invaded or have their cargo ships boarded by pirates on the open seas.  But they’re not going to willingly pay for a big fat welfare state.  Not if they have to make sacrifices in their own lives so others don’t.  That’s just slavery by another name.  People just don’t like oppressive governments that take their money.  Or their liberty.  But if they could get some nice government benefits without having to pay for them, why, that’s a different story.

This is a lesson governments have learned well.  This is the basis for socialism (from those according to ability to those according to need).  And the progressive income tax (the more you earn the more you pay).  You get the smaller group of rich people to pay more than their fair share.  Then you take their money and spend it on the larger group of poor people who will forever love you.  And vote for you.  It’s a sound theory.  Until you can’t raise taxes anymore without throwing the economy into recession.  Or causing a taxpayer revolt.  So advanced nations that can’t tax anymore have found other sources of revenue.  Thanks to global warming.

Global warming is a hoax created to impose more government control over our lives.  To create more fees.  And a font of new taxation.  The University in East Anglia led the charge in this false science.  Leaked emails have since proven that they did play with the numbers to advance their agenda.  Though debunked it still has deep roots in the UK.  And Europe.  They refuse to let it go because of the riches it promises to deliver.  And with the UK and Europe suffering debt crises, they need those riches.  And the European Union is acting bold.  And extralegal.  They created an Emissions Trading Scheme (ETS).  Anyone that produces carbon dioxide has to pay for that privilege.  And that ‘anyone’ is pretty much everyone in industry and transportation.  By buying permits that ‘allow’ you to emit this product of combustion.  Including all international flights flying into EU airspace.  Which the non-EU airlines have a problem with.  Who are already struggling under the high cost of fuel.  But the EU is standing firm.  To save the planet.  And coincidentally pouring vast sums of money into their coffers.  So they can transfer the cost of their irresponsible government spending to non-Europeans buying tickets to travel to Europe.  But this can’t end well.  Other nations will respond with some measures of their own to ‘tax’ EU planes coming into their airspace.  Worse, when they can no longer sell the fraud of global warming to a gullible people, the nations who bought those permits may want their money back.  To help with their own irresponsible spending.  And with the sums involved, they will no doubt exhaust no legal avenues.  Perhaps even exploring other avenues.  Something extralegal.  Just like they did in the EU when they set up their ETS.

Spend First, Pay Later, then Suffer the Consequences

That’s the problem with spending first then trying to figure out clever ways to get someone to pay for that spending later.  Politicians tend to look at short-term benefits.  Not long-term consequences.  Had Great Britain known what the ultimate price would be for their tax policies they no doubt would have pursued a different course.  And avoided the 8 years of the American Revolutionary War.  And the subsequent Napoleonic Wars.  Which all added up to quite the pretty farthing.

Of course, Great Britain’s woes go back to the costly Seven Years’ War.  Which grew out of a trade war.  Resulting from the mercantile policies of competing empires for overseas colonies.  And trade.  The EU’s ETS is sort of a throwback to those mercantile policies.  That may very well result in a trade war itself.

Funny how history repeats.

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FUNDAMENTAL TRUTH #73: “Politics is about overspending and vote-buying while getting some poor dumb bastard to pay for it.” -Old Pithy

Posted by PITHOCRATES - July 5th, 2011

Washington is Show Business for the Ugly

The founding of America heralded the end of aristocratic rule.  And this is a problem.  For aristocrats.  Those who feel they’re better than everyone else.  Especially those who aspire greatness, and wealth, through political office.  Such as Liberal Democrats.  And RINO Republicans.  Those who like to mingle in the world of the beautiful people.  Rubbing shoulders with the fabulously rich.  And A-List celebrities.  Attending the best parties.  Meeting the best people.  Eating the best food.  Drinking the best booze.  It’s a beautiful life.  The only problem is the price of admission.  You have to be rich and/or talented to get in.  And rich and talented aspiring politicians aren’t.

At least, not at first.  But politics offers them that opportunity.  Rush Limbaugh said Washington is show business for the ugly.  There may be a lot of truth in that.  You see, the beautiful people are, well, beautiful.  That’s their ticket to celebrity and fame.  And access to that beautiful life.  From movie stars being discovered sitting at a drug store counter to talentless reality stars.  Being attractive can be a shortcut to fame.  Beautiful people go the front of the line at the best clubs.  And often get a free pass in.  Because people want to be around beautiful people.  Even if they’re unknown.  That’s the power of being beautiful.  Which can be a problem for the beautifully challenged.

Of course, having talent is a way around not being beautiful.  Those nerds in high school went on to be millionaires.  Even billionaires.  Those geeky guys that never had a date in high school now have the most beautiful women chasing them.  For their money, of course.  But they are still chasing them.  And they learned something.  It’s not important to be beautiful.  As long as you’re rich.  Because it turns out that money can buy a lot of happiness.  Sure it’s the shallow and superficial kind.  But you’ll be at the best parties.  Rubbing shoulders with the other fabulously rich.  And A-list celebrities.  That’s a pretty sweet life.  And one that many covet.  But what do you do if you’re neither beautiful nor talented?  You, of course, go into politics.

You have to be a Real Good Liar

Those with no talent or ability can try to trade in on their appearance.  If they’re considered too ‘ugly’ to get by on their looks alone then they can enter a career of lying.  Politics.  Where you say you care about the little people and promise to give them things if only they will vote for them.  You do anything to get into office.  Because once you do you’re set for life.  Salary and benefits for Congress people are better than anything you’ll get working in the private sector.  And the retirement package is insane.  You live the rest of your life with a large percentage of your Congressional salary.  And you keep a lot of the perks from your Congressional days.  In other words, being elected to office is a ticket into a new aristocracy.  Just like in days of old.  And once you’re in people will treat you as if you are better than everyone else.

It’s a fairytale life.  And a lot of people want it.  People that you have to beat in some election.  Often without the help of any voter election fraud if you’re just starting your political career.  So you have to be a real good liar.  You have to suspend all reason and logic.  And promise, promise, promise.  Even with astronomically high deficits you promise to give people more if they vote for you.  Because you have a plan.  You’re going to shift the tax burden to those who can afford it.  Go after the rich who don’t pay their fair share.  And cut corporate welfare.  With these savings you will be able to spend more on the poor and disadvantaged.  It’s a powerful sales pitch.  And it works well if they are not well educated (thank you public education) and don’t understand taxes and their impact on the job-creating economy.  Also, the more poor and disadvantaged they are the better.  Because the rich and middle class aren’t going to vote higher taxes on themselves.  Only the poor and disadvantaged (who are not well educated on taxes and their impact on the job-creating economy) will continuously vote to raise taxes on those who have more than they do.  Classic class warfare.  So it’s important that your programs fail.  Because you don’t want to help these people.  Not if you’re relying on them to help you sustain your better life.

Of course having a large percentage of the population dependent on your government policies and programs isn’t enough.  It will make the elections easier but it isn’t going to pay the bills.  These people are, after all, a burden.  They consume a lot of the tax base.  But most don’t pay any taxes.  Sure, you can live a comfortable life on a Congressional salary.  But there’s so much more to be had out there with the power to write laws and regulations.  When you can decide winners and losers in the economy you wield considerable influence.  And that influence is worth something.  Especially to crony capitalists.  Who look to profit not by competing in the free market.  But by having friends in high places.  Friends who will reward them well in exchange for a little cash and perks thrown their way.  And by a little I mean a lot.  Of course the good politician makes sure these crony capitalists are only profitable with their help.  Because the less they need their special favors the less of their cash and perks find their way to Washington.

Higher Tax Rates ultimately Reduce the Amount of tax Dollars Collected

Politics is nothing more than a ballet of leverage.  Who has pull.  Who can use it best.  And who is willing to screw the little guy.  You use the poor and disadvantaged to win elections.  But you do everything within your power to keep them poor and disadvantaged so they can keep helping you win elections (we’ve been fighting a war to end poverty since LBJ‘s Great Society of the 1960s and we haven’t won it yet which should tell you something).  You use crony capitalism to enhance your wealth and wellbeing.  But you make sure this corporate welfare only serves one person.  You.  So you don’t necessarily want to see your crony capitalists doing well in the free market.  Far from it.  For if they can do well without your help they’re not going to stay your bitch.

So, to succeed in politics you need to do a couple of things.  You need to redistribute wealth from those who create it to those who don’t.  And form mutually exclusive relationships with crony capitalists.  We call it tax and spend.  And legislation.  They use the progressive income tax system to spread the wealth.  And write legislation that rewards their friends while punishing the enemies of their friends.  Taxes for revenue.  And legislation for power and wealth. 

But the revenue is never enough (as the deficits show).  Despite the progressive income tax system.  Where, in the name of fairness, the richer you are the more taxes you pay.  And the poorer you are the fewer taxes you pay.  But keeping as many people as poor as possible has its drawbacks.  The more poor there are the fewer there are paying taxes.  Which requires raising taxes on the non-poor.  The rich.  And the middle class.  Which has a real big side affect.  After a point, higher taxes reduce economic activity.  It’s the law of diminishing returns.  The higher tax rates ultimately reduce the amount of tax dollars collected.  So they consider other sources of revenue besides the income tax.  Money that is ‘outside’ of the economy.  Money that’s ‘parked’.  Untouched by income and excise taxes.  Such as estates of the dead.  And the wealth of the living.  There is an estate tax.  But no wealth tax.  Yet.  And, oh, do they want one.  Like in some European countries.  Because the rich don’t work.  They invest.  They don’t live on income.  They live on ‘investment’ income.  Capital gains.  Which is taxed at a lower capital gains rate.  Not the confiscatory rate of the progressive tax system.  Worse, as the government sees it, they only pay taxes on their capital gains.  Not their capital.  Their wealth.  And that’s a lot of money parked outside the economy that they want a piece of.

Something ‘outside’ the Economy to Tax

But a wealth tax has its problems, too.  You can move wealth.  If you tax wealth the wealthy will just invest their wealth elsewhere.  Like rich Europeans have done.  No.  They need something better.  Something the rich can’t escape.  And, ideally, finding something ‘outside’ the economy to tax.  Something like the Las Vegas model.  The casinos in Vegas bring a lot of money into the city.  The casinos are very profitable.  And Las Vegas and Nevada profit well, too (before the subprime mortgage crisis, at least).  Many other cities have tried to cash in on these fat profits but have failed to match the success of Vegas.  Caesars Windsor is doing well because it is in a smaller city across the border from a larger metropolitan area.  A metropolitan area with a lot of people.  And if just a fraction of them crossed the border it would swell the Windsor economy.  And like Vegas, Windsor does have a little vice to offer.  A bit of the naughty that you can’t get in that metro area.  For the good people of Metro Detroit have a higher legal drinking age.  They don’t have gentlemen’s clubs with nude dancers that serve alcohol.  And prostitution is illegal.  But all of these things (to a certain extent) are available in Windsor.  Just across the border.  Where, like Vegas, what happens in Windsor stays in Windsor.  Plus Windsor has an active nightlife.  Safe streets.  And a touch of an international flair.  The money poured into Windsor.  When Detroit finally added three casinos to get a little piece of that action that’s what they got.  A little piece.  The casinos were money makers.  But Detroit did not enjoy the boom that Windsor did.  Why?

Windsor did well for the same reason Vegas did well.  They’re both destination cities.  People travel to them.  They’ll fly there for a vacation.  Or cross an international border for a night out.  These are the people spending and losing their money in these casinos.  Not the good people of Windsor.  Or the good people of Las Vegas.  It’s outside money coming into the local economy.  Which is a net add.  The problem Detroit has is that it’s not a destination city.  It’s cold in the winter.  It’s suffered blight and decline.  And still has a reputation as being unsafe.  People aren’t going there.  It’s just the people already there that are gambling away their money.  These people are just going out to dinner less.  Going out to fewer movies.  Going out to fewer clubs.  Etc.  The problem in Detroit is that there is no new money coming into the economy.  All that casino money was just local money people were spending someplace else in the local economy.

Despite what they say, politicians know high taxes don’t stimulate economic growth.  It just transfers money from one person to another to spend.  There’s no net gain.  Like in Detroit with their casinos.  They would love a wealth tax.  But the rich could easily avoid it by moving their wealth.  But there is something that even they can’t avoid.  Taxing energy.  Rather, the emissions created by energy.  In the name of combating global warming.  Cap and trade.  Emissions trading.  Making people buy ‘permits’ for their emissions.  That can be traded.  Creating a permit exchange similar to a stock exchange.  Governments forcing private entities to buy ‘shares’ of pollution.  Brilliant.  Because you can’t escape the use of energy.  It is a part of our very existence.  So you can’t escape it.  And the Europeans have taken it to the Las Vegas model.  The European Union (EU) will force international airlines flying into EU airspace to pay in essence an extralegal tax.  Which is the greatest kind of tax a government can use.  A tax whose full benefits will go to their constituents.  But a not a dime of which their constituents will pay.  If you put this to a referendum, the people will pass it.  Because people will have everything to gain.  And nothing to lose.  Other than the trade war such an extralegal tax would most likely provoke.  And the accompanying economic crash and withering recession.

In the mean time, though, the ruling elite, the new aristocracy, will be able to maintain their privileged lives.  Mingling with the beautiful people.  The fabulously rich.  And A-List celebrities.  Which is really all they care about anyway.

www.PITHOCRATES.com

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