The Public Sector and the Tax Base

Posted by PITHOCRATES - June 3rd, 2013

Economics 101

All Government Bureaucracies Grow Bigger and Pay their People Very Well

Big cities throughout the United States are suffering financially.  They are drowning under the costs of their public sector employees.  For when the Great Recession hit tax revenues fell.  People lost jobs and paid less income taxes.  People out of work spent less in the local stores causing a fall in sales taxes.  People drove less and paid less gas taxes.  Home values plummeted, reducing property taxes.  Tax revenue fell at all levels of government.  Leaving the big cities unable to pay their bills.  With less help from the governments above them.  While their infrastructures crumbled.  And they struggled to furnish basic city services.

Governments don’t make anything.  They just have people doing things.  So there are little economies of scale.  Just a lot of people.  The public sector includes every worker in the city paid by tax revenue.  The mayor, city council, school teachers, police officers, firefighters, garbage collectors, boiler operators, electricians, janitors, building inspectors, meter readers, bus drivers, etc.   And all the civil servants and bureaucrats that push paper.  Requiring a huge payroll.  And lots of benefits.  In a large city with a population of 1.5 million those costs can look like this:

Public Sector Costs 1

All government bureaucracies have two things in common.  They always grow bigger.  And pay their people very well.  So the above table has three columns.  Showing the growth of the public sector.  (Assuming a constant population to simplify our math).  From 1% of the city population to 2% then to 3%.  So the number of city employees goes from 15,000 to 30,000 to 45,000.  By the time you add in pay, holiday pay, vacation pay, sick days and health insurance the active employee costs are huge.  Going from $1 billion to $2 billion to $3 billion.  Today it is not uncommon for a big city with a population of 1.5 million to have 45,000 public sector workers.  So we will build on that figure.  And add in retiree costs.

As City’s Population Declines so does its Tax Base

Another big perk of working in the public sector are the great pensions.  Something that has long since disappeared in the private sector.  While most of us have to put money away in a 401(k) public sector workers can count on a generous pension during a long retirement.  Perhaps getting as much as 80% of their base pay.  Plus they keep their health insurance.  Which is unlike the health insurance most of us get in the private sector.  For it covers everything.  With few co-pays.  And only the best name-brand pharmaceutical prescriptions.  This is why people want to work in the public sector.  And why they want to retire from the public sector.  Because no one else pays as well.

Public Sector Costs 2

Public sector workers retire long before their counterparts in the private sector.  Allowing them to live a long retirement.  And because they live so long into retirement the city ends up paying for almost as many retirees as they do active workers.  Putting great cost pressures on these cities as more of their workers retire.  Within as few as 2 decades the cost of retired workers can go from $648 million to $1.9 billion.   When we add this cost to the cost of their active workers we get the total cost of the public sector.

Public Sector Costs 3

As time passes and more people retire from the public sector we can see how the cost of the public sector (active and retired) rises from $3.7 billion to $4.4 billion to $5 billion.  Which, of course, the people living in the city have to pay.  The taxpayers.  They pay income taxes, property taxes, sales taxes and a variety of other taxes and fees.  Who by the time the number of retirees reach 40,500 must pay $3,336 per year.  Or $278 per month.  Or $64.15 per week.  Or $9.16 each day.  Just to get a true feel of how much this is do the following exercise.  Each day take a $10 bill out of your wallet or purse and throw it away.  This will approximate the cost of the public sector you pay for.  Until the people start leaving the city.  And as the population declines so does the tax base.  Requiring each person to pay a larger share of the public sector cost.

To pay for an Expanding Government you need a Growing Population

If a city starts losing population it doesn’t reduce the need to pay the bloated public sector.  Both active and retired.  So the fewer people remaining in the city have to pay a larger share of the public sector cost.  Because the public sector union isn’t going to allow the city to lay off any workers.  So it’s up to the taxpayers.  But as the population shrinks it becomes more painful to do.

Public Sector Costs 4

By the time the population falls to 500,000 the amount of taxes a person must pay to support the public sector amounts to a house payment.  Or $192.46 per week.  Or $27.49 each day.  Can you imagine taking three $10 bills out of your wallet or purse every day just to throw them away?  Probably not.  Because no one would.  Cities just can’t keep increasing the tax burden on their people.  For there is a limit.  And when a city reaches it they start borrowing.  Which is how cities go into debt.  And flirt with bankruptcy.  Because of these bloated public sectors.  That grew when the cities grew.  But they didn’t shrink as their populations shrank.

We have ignored corporations in our exercise.  Which increase the tax base.  But we have also excluded additional costs.  Buildings, vehicles, equipment, housing assistance, food assistance, fuel for city vehicles, car insurance, property insurance, liability insurance, lawsuits, etc.  If we factor these things in the numbers will only look worse.  As the cost of the active and retired workers increases there’s less money to pay for the basic city services.  So they deteriorate.  Which when added to the higher taxes chase even more people out of the city.  Reducing the tax base further.  Leaving even less money for the basic city services.

When the population declines so does the city.  As the public sector workers consume a greater percentage of the shrinking tax base cities suffer increasing urban decay.  As there is little money for anything but the public sector workers and their benefits.  For when it comes to paying for government population is key.  You need a growing population to pay for expanding government.  To spread the costs of a bloated public sector over as many people as possible.  And you can’t do that with a declining population.  Which is why big cities flirt with bankruptcy during bad economic times.  For they can pay for their bloated public sectors only during the best of economic times.  And only during the best of economic times.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , ,

Internet Sales under Assault

Posted by PITHOCRATES - June 19th, 2011

The Public Sector against the Consumer

According to some, Amazon.com hates teachers.  And children.  Because their Internet sales are shorting tax coffers everywhere that pay for teachers and child welfare (see States look to Internet taxes to close budget gaps by Chris Tomlinson posted 6/19/2011 on the Associated Press).

State governments across the country are laying off teachers, closing public libraries and parks, and reducing health care services, but there is one place they could get $23 billion if they could only agree how to do it: Internet retailers such as Amazon.com.

That’s enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.

So they want to tax the Internet.  So they can keep 46,000 teachers on the payroll.  And if my math is correct ($23 billion/46,000) that comes to $500,000 per teacher.  Wow.  We do pay teachers well.  Maybe that’s the problem.  The cost of the public sector.  I’m willing to guess that most teachers are not quite making $500,000 per year.  If you were listening to the news during that Scott Walker episode in Madison, Wisconsin, you’re more under the impression that a ‘typical’ teacher makes less than $100,000.  So if that is true, where is all of that money going?  And should we even be trying to sustain such a grossly inept and mismanaged system where one teacher costs on average $500,000 per year?

Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a physical presence, such as a store or office. When consumers order from out-of-state retailers, they are required under state law to pay the tax. But it’s difficult to enforce and rarely happens.

What?  Do you mean people are not reporting their out of state purchases so they can pay their use tax?  Why, that’s preposterous.  Why would anyone do that?  We’re not overtaxed.  Then again, maybe we are.  Perhaps the people are speaking.  And that’s what they’re telling us.

With sales tax revenue slumping more than 30 percent in most states between 2007 and 2010, lawmakers across the country are grasping for ways to collect those unpaid taxes. Retailers and lawmakers in several states have proposed ways to solve the problem, some with more support than others.

“The problem is that some out-of-state e-retailers openly flaunt the law, arguing that it doesn’t apply to them,” said Texas state Democratic Rep. Elliot Naishtat, who has offered a bill to require more Internet sellers to collect Texas sales tax. “It’s about potentially generating hundreds of millions of dollars for our state.”

But it’s not a simple matter of getting them to collect out of state sales taxes.  These Internet retailers will have to hire an army of people just to process all these extra taxes.  For example, New York state has a sales tax.  So does New York City.  Over in Illinois, Cook Country has their own county tax.  State taxes.  County taxes.  City taxes.  It can get pretty complex.  I mean, the brick and mortar store doesn’t have a problem.  Every sale has the same tax.  It’s a bit different selling nationally.

“There are over 8,000 taxing jurisdictions in the United States,” said Jonathan Johnson, president of Overstock.com, which has offices only in Utah. “We think it’s wrong that states are trying to cause out-of-state retailers to be their tax collectors.”

After all, Johnson said, these retailers do not use any state services where they don’t have offices.

The added cost would be huge.  And ultimately passed on to the consumer.  Sure, they’re trying to shake down the big Internet sellers, but all that money will be coming out of our wallets.  And purses.

Traditional retailers are complaining loudly to their elected officials, saying the current structure creates an unfair playing field…

“We get people all the time who come in, talk to a salesman for 15 minutes to half an hour … and then go, and we know they are going to buy it online because they can save money. In theory, they are stealing our time,” Burger said. “We’re losing at least 15 percent to online, out-of-state, so we’re losing anywhere between $3 million and $5 million a year in business.”

As it always is when a consumer finds a bargain.  It’s the competition that complains.  Not the consumer.  They attack anyone who can give the consumer the same value for less.  But they do have a point.  They are losing sales because of their physical location.  And the high taxes that they can’t escape.  Owed to an out of control public sector that can never collect enough taxes to satiate their desire to spend.  I mean, when was the last time any government jurisdiction ever lowed their tax rate?

“Local retailers complained that the big-box stores were coming in and taking their business, and the Wal-Marts of the world said they had a better business model and the world has changed,” Johnson said. “Today, the business model has changed and we can take cost out of the supply chain by doing business the way we do on the Internet. And for Wal-Mart, of all people, to be saying it’s not fair that Amazon and Overstock can’t be forced to be tax collectors is ironic.”

Talk about the pot calling the kettle black.  Stomping out their competition was one thing.  But having the shoe on the other foot is just unfair.

Traditional retailers have lobbied for the Main Street Fairness Act, which was reintroduced in Congress this spring by Sen. Dick Durbin, D-Illinois. The act would be “a helping hand to state and local governments at a time that they need it the most,” he said.

To help state and local governments?!?  This should be our concern?  Helping those people who can’t control their spending?  While Americans suffer through record long-term unemployment during the worst recession since the Great Depression?  We want to figure out how to take more money away from consumers so we can afford more $500,000 teachers?  All the while further stifling economic activity?  Just so we can help the more important people?  Those in the public sector?  Our servants?  Yeah, right.

A component of the proposed federal law is a requirement for states to adopt the Streamlined Sales and Use Tax Agreement, which would standardize sales tax laws and filing requirements for Internet retailers. To sweeten the pot, states would reimburse companies for any additional costs involved in collecting it…

Overstock’s Johnson and Paul Misener, vice president for global public policy at Amazon, said they would support a national standard using the Streamlined Sales and Use Tax Agreement.

“We’ve long supported a truly simple, national approach, evenhandedly applied,” Misener said. “This is federalism at work, and many states are making the right decision to seek a federal solution.”

Federalism at work?  Thomas Jefferson would beg to differ.  Consolidating more power into the federal government is not federalism.  It’s consolidation.  It’s a weakening of the states.  And a weakening of federalism.  A national sales tax?  Everyone knows the federal government has always wanted this.  And once they get it that will be another tax rate that they will never lower.  With a federal debt already over $14 trillion dollars, do we really want to give them a new tax that can justify even more spending?

Pulling more Money out of the Private Sector during a Recession is a Bad Idea

Government has a spending problem.  At the federal, state, county and local level.  The IMF has warned that we are playing with fire with our budget deficits.  And S&P may downgrade our credit rating.  Perhaps this is a good time to cut some of that spending.  To eliminate some of that spending that’s giving us those deficits.  Instead of pulling more money out of the private economy which will only make a bad situation worse.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , ,