Guns, Butter and Abortion

Posted by PITHOCRATES - February 24th, 2014

Economics 101

Democrats will cut Defense but not Entitlements because fewer People in Defense vote Democrat

A cornerstone of the Obama presidency is social justice.  Primarily through redistribution of wealth.  Raising taxes to fund a growing welfare state.  To help those not lucky enough to have won life’s lottery.  Such as expanding the food stamp program (Supplemental Nutrition Assistance Program).  Which has grown over 70% under President Obama.

Of course, this costs money.  A lot of it.  Added on top of an already costly welfare state.  Driven by entitlement spending.  Social Security.  And Medicare.  The biggest portions of federal spending.  And it only keeps growing.  Making the welfare state unsustainable without entitlement reform.  But the politicians won’t touch entitlements.  The third rail of politics.  Because they’re afraid of losing votes in the next election.  So they’d rather the country implode instead of reforming entitlements.  And hope that implosion comes after they’re dead and buried.  For as long as they get to enjoy their lives they could give a rat’s behind about future generations.

But they will touch defense spending.  And often do when they are looking for more money for the welfare state.  Even now.  The Obama administration is proposing spending cuts in defense spending.  That will shrink the size of the military.  And cut pay and benefits for some of the lowest paid people in the country.  The people who go in harm’s way for their country.  They won’t touch entitlement spending because it may hurt people that typically vote Democrat.  But they have no problem doing just that to those who wear a uniform to serve their country.  Who don’t always vote Democrat.  Just so they can have a generous welfare state like the European social democracies they so admire have.  Who can have them because they don’t have large defense budgets.  For the United States has been protecting them since World War II.

People can’t pay Taxes to fund a Welfare State without a Job that Provides an Income to Tax

If you watch television you’ve probably heard New York State’s commercials to attract new businesses to New York.  Where the state is promising that businesses will be “100% tax-free for 10 years.  No income tax, business, corporate, state or local taxes, sales and property taxes, or franchise fees.”  Which is a clear admission from the state with the second highest tax burden in the country that high taxes hurt business.

The tax burden is so great in New York that some businesses have moved their operations out of state.  And people with vacation homes in New York who only visit them a couple of weeks out of the year are selling them.  As the state is taxing their incomes as if they are permanent New York residents.  But despite these high taxes New York has suffered great budget deficits.

New York City is a Democrat city.  Their high taxes pay for a large welfare state.  A large public sector.  And the enormous costs of their public sector benefits.  In particular, health care and pension costs.  But their high tax rates have shrunk the tax base.  Because people can pack up and move out of state.  Just as businesses can.  Which is why they are doing a 180-degree turn on taxes.  In a desperate attempt to get businesses to come to New York.  For even if these businesses aren’t paying taxes their employees will.  Income taxes.  Sales taxes.  Property taxes.  Liquor taxes.  Cigarette taxes.  Etc.  None of which they can pay if there are no jobs to give them an income the state can tax.

The Number of Abortions is having a Direct Impact on the Economy and Tax Revenue

New York City released its SUMMARY OF VITAL STATISTICS 2012 THE CITY OF NEW YORK PREGNANCY OUTCOMES this month.  In it you can find why New York City, New York State and the federal government are having such a difficult time paying for their welfare states.  It’s because of liberal Democrat policies.  Not on the spending side of the equation.  But on the revenue side of the equation.

In 2012 there were 73,815 abortions.  Which are future taxpayers that weren’t allowed to be born.  That’s right, before anyone pays the high tax rates of a welfare state they have to be born first.  And when they are not born that’s future tax revenue the government cannot collect.  If we look at a 20 year period (about a generation) and assume 73,815 abortions each of those 20 years that’s 1,476,300 people that never will pay taxes.  If they earned on average $30,000 each that’s $44,289,000,000 of economic activity they never created.  And at a New York State tax rate of 11.7% that’s $5,181,813,000 in lost tax revenue for the state.

But it gets worse.  If you divide this number by two you get the total number of couples (a man and a woman) that could have started a family.  If each couple had 3 children this lost generation could have brought in another 2,214,450 taxpayers into New York City.  Adding them to their parent’s generation and assuming a median family income of $53,046 (an older generation established in their career earning more and a younger generation just starting their career earning less) brings the total lost economic activity for these two generations of possible New Yorkers to $195,779,524,500.  And lost tax revenue for the state of $22,906,204,367.  So the number of abortions is having a direct impact on the economy.  And tax revenue.  Making it necessary to cut guns to pay for more butter.  Whereas if these taxpayers were born we could have both our guns and butter.  And live in a world made safe by the most powerful military in the world.  Peace through strength.  The Ronald Reagan way.  And not a world where our enemies are constantly testing our resolve.  The Jimmy Carter and President Obama way.

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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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Britain wants Parents to choose Work over Raising their Children

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Once upon a time children didn’t have much of a childhood.  In feudal Europe they were born on the land their parents worked.  And they worked the land, too, as soon as they were physically able.  There were no child-labor laws then.  The landowners’ children no doubt enjoyed their childhoods.  As they didn’t have to work.  The wealthy few enjoyed their lives.  While the masses labored away in physical labor.  With no chance of leaving the land they were born on.  For who your parents were determined your lot in life.  With no way to change that.

Until the British ushered in the modern world.  The rule of law.  Representative government.  The Industrial Revolution.  Laissez-faire capitalism.  Free trade.  The necessary things that allowed a middle class.  The chance of upward mobility.  And the nuclear family.  The working father.  The stay-at-home mother.  And children the parents dedicated their lives to raise.  Where children were wanted and loved.  And not just the pain in the ass they are today (see Parents ‘to be able reclaim up to £1,200 of childcare costs’ posted 3/19/2013 on BBC News UK Politics).

Britain has some of the highest childcare costs in the world, with many people with two or more children saying it does not make financial sense for both parents to work…

To be eligible for the new support both parents will have to work – or the one parent in the case of lone parent families – and each parent must be earning less than £150,000 a year.

In two-parent families where one parent does not work, families will not receive support – which is said to underline the government’s support for making work pay…

Mr Cameron said too many families were finding paying for childcare “tough” and were “often stopped from working the hours they’d like”…

Deputy Prime Minister, Nick Clegg said he wanted to help “every family to get on in life”.

He said: “The rising cost of childcare is one of the biggest challenges parents face and it means many mums and dads simply can’t afford to work.

“This not only hurts them financially, but is bad for the economy too. This announcement of a £1bn investment in childcare will make sure it pays to work.”

Making work pay?  Working the hours they’d like?  Can’t afford to work?  What’s more important in Britain?  Family?  Or paying taxes?

Taxes are so out of hand that parents need childcare because they can’t get by on one income.  Like they did before.  But they can’t now.  Why?  What’s the big difference between now and then?  Taxes.  The government grows.  It gives away more stuff.  A college education.  Health care.  Pensions.  But that generosity costs money.  And with an aging population there is only one way to pay for this generosity.  Raising tax rates.  And adding new taxes.  Creating such a large tax burden it leaves people with less disposable income.

The tax bite grew so much that if you were middle class and wanted children it took two incomes.  Making children more of a nuisance than the pride and joy of parents they used to be.  So we become dumping children off at childcare.  Where they entered a cold, institutional childhood.  Instead of the warmth of a nurturing stay-at-home parent.  Is it any wonder why society has become more violent and crime ridden?  Children who see themselves as a burden.  Perhaps feeling unloved.  Or unable to feel empathy.  Perhaps even a little bit angry.  Put it all together and you get societal decay.  And a disincentive to having children.  Leading to an aging population.  Requiring further tax rate hikes.  And new taxes elsewhere.  Which makes it even more difficult to raise children.  So that additional government spending to address one problem only exasperated the problem they were trying to solve.  No.  To help families the state needs to reduce the tax burden.  Not increase it.  Which means they need to cut government spending.  Not increase it.

This would help families raise children.  Even allow a stay-at-home parent.  Which will allow children to grow up in a warm, nurturing family.  Not a cold, sterile, state childcare system.  Where parents will chose their children over having a second income.  Even if it means less tax revenue for the state.  However much that may displease the state.

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FT150: “The Left wants to extend tax hikes down to those earning $250,000 because there are just too few rich people to tax.” —Old Pithy

Posted by PITHOCRATES - December 29th, 2012

Fundamental Truth

If you Confiscated ALL Income from those Earning a Million+ it would be Less than HALF of the Average Obama Deficit

The fiscal cliff yadda yadda yadda the Democrats want to raise taxes and the Republicans’ mothers are whores.  That about summarizes the fiscal cliff negotiations.  The Democrats want to raise taxes.  The Republicans don’t because there is nothing that will kill off an economic recovery quicker than raising taxes.  And the Democrats are mean.  Calling the Republicans a lot of names.  And saying things about them that aren’t very nice.  So once again let’s look at the numbers to see what they say about federal income taxes.  The following numbers come from the IRS (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010).

The Democrats keep saying that the Republicans want tax cuts for the rich paid for by the poor.  But according to these numbers that’s just not happening.  People who earned $15,000 or less paid 0.0% of all federal income taxes.  People who earned $30,000 or less paid less than 1% of all federal income taxes.  It’s the meaty center that paid the taxes.  Those who earned from $75,000 to $1 million submitted approximately 20.5% of all federal tax returns while they paid approximately 62.9% of all federal income taxes.

Now how about those rich people?  Those earning $1 million or more submitted approximately 0.19% of all tax returns.  Less than a quarter of one percent.  And yet they paid approximately 21.9% of all income taxes.  Is that fair?  At these high levels of income people pay basically the top marginal tax rate as only a very small fraction of their earnings falls outside this top rate.  So if we divide the total taxes paid by this 0.18% ($207 billion) by 0.35 (the 2010 top marginal tax rate) you get a total income of $590 billion.  So if you confiscated ALL of their earnings it would be less than HALF of the average Obama deficit ($1.324 trillion).  Meaning that it is IMPOSSIBLE to reduce the deficit with any tax rate on those earning $1 million or more.

The Rich may be paying Lower Tax Rates but they’re paying Far More Tax Dollars than most of Us

All right, so it won’t reduce the deficit.  But the Democrats say we must do this to be fair.  Meaning those earning more should pay more even if it’s only symbolic.  To punish success.  As if they’re not being punished already for their success.  We’ve all heard about Warren Buffet’s secretary paying a larger tax rate than he pays.  But talking percentages isn’t the same as talking dollars.  Because a small percentage on a much larger earnings amount will produce more tax revenue than a higher tax rate on a smaller earnings amount.  So let’s look at dollar amounts to see if the rich are paying their fair share.  Or whether we’re punishing them enough for their success.

The rich paid a smaller percentage of their earnings in taxes but paid far more in actual dollar amounts.  Which is the only thing that allows government to pay for things.  Dollars.  Let’s assume Warren Buffet’s secretary falls into the income range $50,000 to $75,000.  Who paid on average $4,310.92 in federal income taxes.  Now compare this to what rich people paid in income taxes.  Those earning from $1 million to $1.5 million paid on average $306,779 in federal income taxes.  Or more than 71 times what someone earning $50,000 to $75,000 paid.  Those earning $1,500,000 to $2,000,000 paid 102 times more than that lower income earner.  Those earning $2,000,000 to $5,000,000 paid 179 times more than that lower income earner.  Those earning $5,000,000 to $10,000,000 paid 407 times more than that lower income earner.  Those earning $10 million or more paid 1,389 times more than that lower income earner.

The rich may be paying lower tax rates but they’re paying far more tax dollars than most of us.  An inordinate amount.  If you look at it in terms of government services people consume (which is what taxes pay for) are those earning $10 million or more consuming 1,389 times the government services those earning $50,000 to $75,000 consume?  No.  If anything, they consume far less government services than most people.  Because they live the good life.  The good life their high earnings provide.  Being that the rich are paying far more than their fair share you can only conclude then that these excessive taxes are punitive.  To punish their success.

The only way to Achieve Real Deficit Reduction is to Increase Taxes on the Middle Class or Cut Spending

So what can we conclude?  The rich are paying more than their fair share of taxes.  The amount of tax dollars they’re paying could even qualify as being punitive.  As they are so great any further increase in rates on the rich is not likely to increase tax revenue.  First of all as they are already paying so much they will take every tax shelter advantage they can to minimize the further confiscation of their earnings.  But more important than that is that there are just so few rich people.  Even though the rich pay on average hundreds of times more in federal income taxes than that meaty center it’s the meaty center where most of the tax revenue comes from.  Because there are so many more people in the meaty center.  And by graphing the number of tax returns from each income bracket and the amount of tax revenue they pay we can understand why the Democrats are so adamant to raise taxes on those earning as little as $250,000.

The blue line (Series 1) is the number of tax returns filed in thousands of people for each income bracket (the left vertical axis).  The red line (Series 2) is the total tax revenue in millions of dollars each income bracket produces (the right vertical axis).  You can see the meaty center of tax revenue (from those earning $75,000 to $1 million).  And you can see the meaty center of those filing tax returns (form those earning $30,000 to $200,000).  As you can see the meaty center of tax filers and tax payers are not the same.  As the tax code shifts the tax burden onto the higher income earners.  And in this chart we can see why the Democrats want to increase tax rates on those earning $250,000 and more.

The drawback to progressive tax rates is that it shifts the tax burden onto fewer people.  Who must pay more in taxes than is their fair share.  And that worked for awhile until government grew so large.  But as our aging population has increased the costs of Medicare and Social Security (and soon Obamacare) there just aren’t enough rich people to tax to pay these soaring costs.  And they will have no choice but to shift the tax revenue graph to lower income people.  So they can capture more people (and incomes) under this graph.  Yes, they want to tax the rich more.  But only for the symbolism.  For once they’ve punished them by forcing them to pay their ‘fair’ share then they can raise tax rates on everyone else.  Which is the only way they have a snowball’s chance in hell of achieving real deficit reduction.  Increasing taxes on the middle class.  Well, that, or cutting spending.  Which could provide serious deficit reduction.  By shrinking the size of government. The very cause of those massive deficits.  And accumulated debt.  But shrinking government is, of course, crazy talk for those on the Left.  Who would rather let the country sink into insolvency before agreeing to that.

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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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Jobs and Unemployment, Taxpayers and Tax Consumers

Posted by PITHOCRATES - March 19th, 2012

Economics 101

The Privileged Class enjoys the Good Life Today by Buying Votes with Government Benefits

Jobs are everything.  They pay your bills.  They pay the government’s bills.  And they pay for all those government benefits.  Especially those government benefits.  Which are little more than a pyramid scheme.  Where the few collecting those benefits are at the top of the pyramid.  And those with the jobs paying the taxes to fund those benefits are at the bottom.  And every good pyramid scheme needs to do one thing.  To keep the base growing at a greater rate than the top grows.

Why do politicians do this?  Give out so many benefits?  Simple.  For votes.  Specifically, to buy votes.  We’ve come a long way from the Founding Fathers’ America.  Adam Smith’s invisible hand and free market capitalism.  Representative government.  The things that let all people enjoy life.  Not just the noble class.  This change began in England.  Ironically with the noble class.  Who presented Magna Carta (1215) to King John.  Saying they paid the taxes.  So they were going to have a say in how the king spent those taxes.  As well as protect their privileges and liberties.  And Parliament was born.  Changing England forever.  The American Founding Fathers built on this.  And improved on England’s form of government.  The constitutional monarchy.  By getting rid of it.  Along with heredity power.  And the nobility.  The Founding Fathers had put an end to privilege.  Pity it didn’t last.

There has always been a privileged class.  And there will always be one.  There will always be a small elite group trying to live a privileged life.  Once we called them the aristocratic landowners.  Today we call them politicians and government workers.  Who are a little craftier than their landowning forbears.  For they just can’t have the right last name.  Or marry a good last name.  Because, technically, there is no aristocracy these days.  No.  They need the taxpayers to vote them this good life.  And fund it.  By paying higher taxes.  Which means the taxpayers will live less of a good life to give the politicians and government workers their privileged life.  Hence the government benefits.  And the buying of votes.  Because no taxpayer in their right mind will sacrifice their good life to support a privileged class.  The nobility wouldn’t do it for King John in 1215.  And taxpayers won’t do it now.  So the privileged class buys votes with these benefits.  Particularly from those who don’t pay taxes.

Jobs Matter because the Taxes of the Taxpayers have to balance the Consumption of the Tax Consumers

There are two types of people in the world.  Those who like high taxes.  And those who don’t.  Those who like them are the politicians and government workers who live a privileged life.  And, of course, those who don’t pay taxes but receive government benefits (another steadily growing group).  These are the tax consumers.  Then you have those who don’t like high taxes.  Those with real jobs in the private sector.  The taxpayers.  As government grew from our Founding so did the number of tax consumers.  Which, of course, required more taxes.  And higher tax rates.  On the shrinking group of people with jobs paying the taxes.  To support the growing group of politicians, government workers and recipients of those government benefits consuming those taxes.

This complicates the pyramid scheme.  As you have fewer people supporting more people each taxpayer has to pay a larger and larger share of the tax burden to support the tax consumers.  Meaning you have to increase tax rates further.  Which isn’t easy to do.  Worse, as workers pay more in taxes they have less to spend in the economy.  Thus reducing economic activity.  Businesses hire fewer workers.  As more businesses go through this the unemployment rate begins to rise.  Which means, of course, the number of taxpayers begins to fall.  Making it harder to provide the taxes for the tax consumers.  A group that continues to grow even when the unemployment rate rises.  Because government is like a bacteria.  It takes on a life of its own and grows simply by splitting and creating new bureaucracies.  A growth that never stops.  And soon the rate of that growth overtakes the growth rate of the taxpayers.  Violating the one cardinal rule of pyramid schemes.  Keeping the base growing at a greater rate than the top grows.

This is why jobs matter.  For everyone.  The taxpayers.  And tax consumers.  Because the taxes of the taxpayers have to balance the consumption of the tax consumers.  A fact lost on many voters.  Who don’t understand (or don’t care) that the freer their ride the less free the life of the taxpayer.  Who believe these government benefits can keep coming no matter how many people are working.  They are perfectly all right with the unemployment rate going to 100%.  And having the government provide everything free of charge.  But government can’t do this.  Even with the power of the printing press to print money and give it away.  Because if no one works who is going to build the houses we buy with that free government money? 

Taxpayers voting on How the Government Spends their Money ensures Responsible Government Spending

Someone has to work.  Because houses (and the other things we buy) don’t spontaneously appear.  So who will build them?  Would you labor to build something when the government gives you money?  Even if you don’t have to work?  Probably not.  The only reason we work is for a paycheck to buy the things we want.  The more things we want the harder we work.  That’s incentive.  Take it away and no one will work.  Just as if you tax someone too much you’ll take away their incentive to work harder.  And to vote to raise taxes.  Which is why jobs matter.  Because they pay the bills.  They pay your bills.  They pay the government’s bills.  And they pay the bill for all those government benefits.

Politicians can buy votes by giving away more government benefits.  Converting taxpayers into tax consumers.  Preserving their privileged life.  However, there is a limit to this.  Because as you convert taxpayers into tax consumers you reduce the tax revenue to pay for those benefits.  Especially during periods of high unemployment.  And if they raise tax rates to make up for the reduction in taxpayers this will increase both the rate and duration of unemployment.  By increasing the cost of doing business.  And leaving workers with less money to spend.  Both of which reduce sales revenue.  And the need for workers.  Over time this combination of high spending obligations and low tax revenue can have dire consequences.  And can bankrupt cities.  States.  Even countries.

This is why the nobles met King John on the field of Runnymede.  And presented him Magna Carta.  The nobles were paying a lot of taxes for the king’s wars on the Continent.  If the king continued he could have bankrupted them.  So by making the king apply his Great Seal to Magna Carta they were forcing him to, among other things, spend responsibly.  As they, the taxpayers, now had a say in how the king spent their taxes.  The only way to ensure responsible government spending.  And when politicians and government workers maintain their privilege by having those who don’t pay taxes vote to raise taxes on those who do it removes all responsibility from government spending.  So they spend.  And they tax.  To pay for that spending.  Hurting job creation in the process.  Which is a very big problem.  For jobs are everything.

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LESSONS LEARNED #85: “The rich pay more than their fair share of income taxes to provide tax relief for the poor and middle class.” –Old Pithy

Posted by PITHOCRATES - September 29th, 2011

Investors Pay a Lower Tax Rate on Investment Income because Investing is Riskier than Earning Income

There’s a lot of class warfare going on right now.  It’s open season on anyone deemed to be rich.  You have President Obama saying the rich don’t pay their fair share of taxes.  That it isn’t right for Warren Buffett’s secretary to pay her taxes at a lower tax rate than her boss.  Statements like this can be very misleading.  Because Warren Buffett’s secretary pays nothing in tax dollars compared to what Warren Buffett pays.  But it sure fans the flames of class warfare.  Which helps when you want to raise taxes on someone.  (Or get reelected).  Because no one wants their own tax rates to go up.  Just those on others who make more than they do.

Except, of course, Warren Buffett.  And some other millionaire investors.  Who are asking President Obama to raise their taxes.  And he has obliged.  At least, he’s trying.  He wants to implement a millionaire’s income tax.  A little extra from those who can most afford it.  Of course, Warren Buffett won’t pay this millionaire’s income tax.  Because he doesn’t pay income taxes.  He’s an investor.  He pays capital gains taxes.

Investors pay a lower tax rate on capital gains than on income.  Because investing has risk.  Working doesn’t.  You never risk losing your income by working.  But you risk your capital by investing.  Hence the lower rate to encourage this risky behavior.  Investing in others.  Like entrepreneurs.  Some of who strike it rich.  Many more, sad to say, fail.  And investors lose everything they invested.  It’s a risky business for investors.  That’s why when their investments pay off they pay off big.  To cover all of those investments where they lost everything.  Raising tax rates on investors, then, would dissuade investment.  Stop the job and wealth creation these successful  entrepreneurs provide.  And deprive the treasury of all the tax revenue they would have created.

The Rich are Paying a Premium in Taxes for being Successful

Let’s look at some data.  Let’s mine some IRS tax returns.  See who is paying income taxes.  And who isn’t paying their fair share.  Let’s break the numbers down into 4 groups.

The poor and middle class (those earning up to $50,000 per year).  The middle class/upper middle class (those earning from $50,000 to $100,000).  The elite white collar and small business owners (from $100,000 to $500,000).  And the rich (over $500,000).  These breakdowns and labeling is not an exact science.  But it’s close enough for analysis.  Below we’ve graphed both percent of total income.  And percent of total taxes paid.  For each of these groups.  All data is mined from SOI Tax Stats – Individual Income Tax Rates and Tax Shares.  And crunched in an Excel spreadsheet.

These are the rich people.  Note that they pay a larger percentage of total taxes than their percentage of total income.  The red line is always well above the blue line.  On average their share of taxes is 8.54% greater than their share of income for the years graphed.  So the rich are paying a premium in taxes for being successful.

Of particular interest is what happens to the rich during a recession.  At both the early and late 2000s recessions their share of income tanked.  As did their share of taxes.  Their share of total taxes fell some 5% in the early 2000 recession.  With a third or so of all taxes coming from these rich, when they lose money so does the U.S. treasury.  This quickly revised those Clinton projected surpluses into deficits.  And it wasn’t anything George W. Bush did.  This was the fallout from the bursting of the dot-com bubble (it was the irrational exuberance that made all of this wealth and tax revenue in the first place.  That and the Lost Decade in Japan.  Not the Clinton tax rate hikes).  Rich people lost money; rich people paid less taxes.

And speaking of Democrat Bill Clinton, note how the rich got richer when he was president.  Not what you would expect from a Democrat.  The champions of class warfare.  But it is true.  While Bill Clinton was president the rich’s slice of the income pie grew approximately 10.51%.  Gee, I wonder what happened to the poor and middle class during this same time.

White Collar Workers and Small Business Owners have a Tax Share Greater than their Income Share

Now let’s take a look at the elite white collar workers and small business owners.  Management, professionals, doctors, lawyers, entrepreneurs, etc.  Here we see that they, too, pay a larger percentage of total taxes than their percentage of total income.  But not as much.  Their tax premium for success is not as great as it is for the rich.  It averaged approximately 3.42% for the years graphed.

Note that the recession didn’t have as great as an effect on them as it did for the rich.  They don’t have as much to gamble with.  The less risk the less reward.  And the fewer losses.  Besides, with small business owners slow and steady wins the race.  They pour all of their investment capital (i.e., their earnings) into their businesses.  And then work 80+ hours a week to wring out every last dime from that investment.

Some industries weather recessions better than others.  Some just get by.  Conservative by nature, they expand during good times.  But not too much that they can’t sustain the larger size during bad times.  For they aren’t rich enough to absorb large losses during really bad times.  Unlike rich investors.  So their income growth is flatter.  But more steady.

The Middle Class/Upper Middle Class have a Tax Share Less than their Income Share

Now the middle class/upper middle class.  Those earning from $50,000 to $100,000.  Typically those living well while still working for someone else.  Note that their share of the tax burden has been in a decline.  Much like their income.  However bad that is, they do pay a smaller percentage of the total tax than their percentage of total income.  The blue line is above the red line.  In other words, they have a tax discount.  A discount that has averaged 5.33% over the years graphed.

Interestingly, these graphs are almost the mirror image of those earning $500,000 or more.  Particularly strange is that their share of the income increases during times of recession.  Which probably reflects their incomes being a larger percentage of the remaining pie after the rich lose so much during bad economic times.

Did the Poor and Middle Class get Poorer under Bill Clinton?

And now the poor and middle class.  Whose share of the tax burden has also been in decline.  As has been their income.  But they, too, pay a smaller percentage of the total tax than their percentage of total income.  Their tax discount has averaged 6.62% for the years graphed.  Which is even more generous than that given to those earning $50,000 to $100,000.

Remember how the rich got richer under Democrat Bill Clinton?  Well as they got richer the poor and middle class got poorer.  Again, not what you would expect from a Democrat in office.  While Bill Clinton was president the poor and middle class’ slice of the income pie decreased approximately 11.85%.  Can this be true?

When the Rich get Richer the Poor get Fewer in Numbers

Well, yes and no.  If you look at the number of returns filed you find out something interesting.  Not only did income decrease for those earning $50,000 or less, their numbers shrank, too.  To illustrate this we’ve compared the number of income tax returns for our income group breakdowns for the years 1996 and 2000 (the beginning and end of the Clinton years for the data graphed).

There was a net decline of 8.85% of people earning $50,000 or less.  Where did they go?  To a higher income group.  The poorest earners in our breakout decreased in numbers.  While the higher income groups all increased in numbers.  Meaning when the rich get richer the poor get fewer in numbers.  In other words, a rising tide raises all boats.

The Best Way to Raise Tax Revenue is to let Rich People get Rich

So what have we learned?  First of all, the rich pay more than their fair share in taxes.  In fact, they pay a portion of the taxes of those earning less than them.  That is, the rich provide tax relief for the poor and middle class.

So the rich getting richer is good.  The richer they get the larger percentage of the total tax burden they pay.  And the more people they move from lower income groups to higher income groups.  By providing investment capital to entrepreneurs.  Who create jobs.  That give the poor and middle class better opportunity.

And the more jobs the more taxpayers there are.  So you have the rich getting richer and paying more taxes.  And these new employees in higher paying jobs paying more in taxes.

Now that’s good tax policy.  If your goal of tax policy is to raise tax revenue.  And if it is then the best way to do that is to let people get rich.

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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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LESSONS LEARNED #75: “Lower income tax rates generate more tax revenue by making more rich people who pay more income taxes.” -Old Pithy

Posted by PITHOCRATES - July 21st, 2011

Inflation is a Bitch

The top marginal tax rate during the Eisenhower administration peaked at 92%.  When it wasn’t at 92% it was at 91%.  This was post-war America.  A happy time.  They even named a TV series after this time.  Happy Days.  Life was good.  There were jobs aplenty.  And lots of baby making.  Everyone lived happily ever after.  Until the war-devastated economies rebuilt themselves and didn’t need American manufacturing anymore.

Things started to change in the Sixties.  Sure, a top marginal tax rate of 92% was high.  But few paid it.  Creative accounting and useful tax shelters avoided that punishing rate.  But government was still fat and happy with the money it was collecting.  Until the Vietnam War came along.  Johnson‘s Great Society.  And let’s not forget the Apollo moon program.  With renewed competition for American manufacturing, trouble in the oil-rich Middle East and rising inflation, the Seventies weren’t going to be happy.

And they weren’t.  Oil shockNixon shockStagflationMiseryKeynesian economics says to tax and spend to tweak the economy back to health.  When you can’t tax enough, you borrow.  When you can’t borrow, you print.  Nothing is more important than creating demand where no demand exists.  Give consumers more money to spend and ignore the debt, deficit and inflation.  The problem is, inflation is a bitch.

Reaganomics increased GDP 82.9%

Ronald Reagan routed Jimmy Carter in the 1980 presidential election.  Carter’s economic numbers were some of the worst in history.  Double digit interest rates, unemployment and inflation.  All being flamed by an expansionary Keynesian monetary policy.  Until Paul Volcker took over the Fed during Carter’s last year or so in office.  And there really is only one way to cure a bad inflation.  With a bad recession.  And the Reagan recession of the early 1980s was one of the more severe ones.

Reagan was from the Austrian school of economics.  Supply-side.  His Reaganomics embraced the following tenets: cut spending, cut taxes, cut regulation and cut inflation.  In 1980 the top marginal tax rate was 70%.  When he left office it was 28%.  During his 8 years in office he took GDP from $2,788.1 billion to $5,100.4 billion (an increase of 82.9%).

The Reagan critics will note this explosive economic growth and say, “Yeah, but at what cost?  Record deficits.”  True, Reagan had some of the highest deficits up to his time.  But those deficits had nothing to do with his tax cuts.  For Reagan increased tax revenue from $798.7 billion to $1,502.4 billion (an increase of 88.1%).  Those deficits weren’t from a lack of revenue.  They were from an excess of spending.  And, therefore, not the fault of the Reagan tax cuts.

A Downward Trend in Prices is like an Upward Trend in Wages

And the Reagan critic will counter this with, “Sure, the economy grew.  But the rich got richer and the poor got poorer.”  Yes, his income and capital gains tax cuts made a lot of rich people.  But they also transferred the tax burden from the poor to the rich.  In 1980, the top 1% of earners paid 19.1% of all federal income taxes.  By the time he left office that number grew to 27.6% (an increase of 44.8%).  Meanwhile the bottom 50% of earners paid less.  Their share fell from 7.1% to 5.7% (a decrease of 18.9%).

Of course, the Reagan critic will then note that Reagan slashed domestic spending to pay for his military spending.  Well, yes, Reagan did spend a lot.  He increased spending from $846.5 billion to $1,623.6 billion (or an increase of 91.8%).  But he made a tax deal with Congress.  For every new $1 in taxes Congress would cut $3 in spending.  Those spending cuts never came.  Hence Reagan’s monstrous $200 billion deficits.  That’s a lot of money for both guns and butter.

But the greatest thing he did for low-income people was curbing inflation.  High inflation makes everything cost more, leaving low-income people with less to live on.  In 1980, inflation was at 13.5%.  When Reagan left office he had lowered it to 4.1% (a decrease of 69.6%).  No one benefited more from this reduction in inflation than low-income people.  A downward trend in prices is like an upward trend in wages.

The Reagan Economy was Better than the Clinton Economy

The Reagan critic likes to point to the Clinton years as a better economic period with better economic (and fairer) policies.  The Nineties were a period of economic growth.  But even with the dot-com bubble near the end of that period the Clinton GDP growth of 56.9% was less than Reagan’s 82.9%.   

Whereas Reagan achieved spectacular GDP growth while fighting inflation, the Clinton growth did not have to slay the inflation beast.  In fact, inflation rose from 3.0% to 3.4% during his two terms, indicting the GDP growth was not as real as Reagan’s.  Reagan’s was measured with a strengthening dollar.  Clinton’s was measured with a weakening dollar.  Also, real prices fell under Reagan.  While they rose under Clinton.  Making life more expensive for low-income people under Clinton than under Reagan.

Thanks to the dot-com boom, though, Clinton continued to transfer the tax burden to the rich.  He experienced a wind-fall of capital gains tax revenue when all those rich dot-com people cashed in their stock options.  In 1992, the top 1% of earners paid 27.4% of all federal income taxes.  By the time he left office that number grew to 37.4%.  This was an increase of 35.9% (compared to Reagan’s 44.8%).  Meanwhile the bottom 50% of earners paid less, too.  Their share fell from 5.1% to 3.9%.  This was a decrease of 22.7% (compared to Reagan’s 18.9%). 

Over all, though, Clinton’s policies increased tax revenue 69.8% compared to Reagan’s 88.1%.  And this was with the dot-com boom thrown in.  Had there been no dot-com bubble (that burst after he left office) no doubt his GDP and tax revenue would have been less.  Some of this economic dampening perhaps being caused by his increase of the top marginal tax rate from 31% to 39.6%. 

Both Reagan and Clinton made more Rich People

Reagan’s tax cuts led to an economic boom.  He cut inflation making life more affordable for lower-income people.  And he transferred the tax burden to the rich.

Clinton increased taxes.  His economic boom was good but not great.  A big part of his GDP growth and tax revenue was due more to irrational exuberance than real economic growth. 

But both Reagan and Clinton made more rich people.  And these rich people paid more taxes.  And because they did low-income people paid less.  Which would seem to prove that the best way to increase tax revenue (and make the tax system more progressive) would be to create more rich people.  And yet the very people who want to do this advance policies that work against these objectives.  Why?

Politics.  Sure, the Austrian school of economics has a proven track record over the Keynesian school.  But Austrian school economics has a terrible side affect.  It doesn’t grow government.  And all the economic growth and tax revenue doesn’t mean a thing if you lose your comfy federal job.  At least to a Big Government politician.

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FUNDAMENTAL TRUTH #75: “Lower income tax rates generate more tax revenue by making more rich people who pay more income taxes.” -Old Pithy

Posted by PITHOCRATES - July 19th, 2011

The top 1% of Earners pay close to 40% of all Federal Income Taxes

Poor people pay little income taxes.  Rich people pay a lot of income taxes.  Everyone else pays somewhere in between.  The tool to make this happen is the progressive tax system.  Government designed it so that people with more income pay more taxes.   Via progressive tax brackets.  And the current (2010-2011) brackets (for head of household) are:

  • 10% on first $12,150
  • 15% on income from $12,150 – $46,250
  • 25% on income from $46,250 – $119,400
  • 28% on income from $119,400 – $193,350
  • 33% on income from $193,350 – $379,150
  • 35% on income over $379,150

If you earn $8,000 you owe $800.  Simple.  If you earn $83,600 you owe $15,668.  If you earn $450,000 you owe $131,435.  If you earn $2,500,000 you owe $848,935.  See the pattern?  Earn more.  Pay more.  Almost as if you’re penalized for being successful.

Of course, low-income people often don’t pay any federal income taxes.  In fact, a lot of people don’t.  About half.  Thanks to tax credits, deductions and exemptions.  But when you’re a rich CEO earning a multimillion dollar salary there aren’t enough tax credits, deductions and exemptions to avoid your taxes.  That’s why the top 1% of earners pay close to 40% of all federal income taxes.  Something we should thank them for.  Instead of demonizing them.

The higher the Top Marginal Tax Rate is the more the Rich avoid paying Income Taxes

There are no Mom and Pop hardware stores anymore.  The big box home improvement stores like The Home Depot, Lowe’s and, for those of you old enough to remember, Builder’s Square put them out of business.  Because of greedy consumers like you.  And me.  Who want to get the best value while shopping.  And if we can buy something of equal quality at a lower price we do.  We work hard for our money.  We spend it carefully.  Wisely.  And we don’t pay more for something when we can get the same for less elsewhere.

It’s the same for rich people.  When they shop.  And when they invest their wealth.  Or their ability.  They look at their options.  Create a new business?  Work at an established business?  If you’re highly skilled you can earn a lot of income.  Which rich people take into consideration.  But there are costs.  Payroll taxes.  Employee compensation and benefits.  Compliance and regulation costs.  And, of course, the progressive tax system.

The higher the top marginal tax rate the less incentive they have to start or run a business.  The less incentive they have to create jobs.  And the more likely they won’t start or run a business.  Instead they’ll invest their money and pay the simpler and (so far) lower capital gains tax.  And this is what happens.  The higher the top marginal tax rate is the more the rich avoid paying income taxes, leaving the middle class to pick them up.  Just like you avoided that Mom and Pop hardware store on your way to The Home Dept.  And with an abundance of government debt available, the rich can invest and live on interest.  Sitting on the sidelines.  Watching the rest of us struggle to find a job.

You don’t need Employees to live on Interest Income

So, the progressive tax system is a way to make rich people pay more.  To transfer the tax burden to them.  And it does.  To a point.  But if you try to tax them too much they’ll just drop out of the economy.  And take their jobs with them.  Which is a double whammy.  We lose some of that generous 40% of income taxes they pay.  And we lose who knows how many thousands of jobs.  And taxpayers.  Thus transferring the burden the other way.  Away from the rich.  To those less able to afford it.

The progressive tax system is supposed to make paying taxes easier on the poor.  The less you earn the less you pay, leaving you with more money for the necessities of life.  Whereas the rich can afford to pay more so they do.  But a flat tax is a progressive tax, too.  The more you earn the more you pay.  For example, going to a 15% flat tax, our sample earners above would change their taxes owed as follows:

  • $8000:  $800  →  $1,200
  • $83,600:  $15,668  →  $12,540
  • $450,000:  $131,435  →  $67,500
  • $2,500,000:  $848,935  →  $375,000

It’s still progressive.  And, yes, the rich will pay less individually.  But there will be more of them.  For this lower income tax rate changes the dynamic.  It will be more profitable to get off of the sidelines and get back into the economy.  Because a flat 15% income tax rate will beat or equal the capital gains tax.  And the profit from creating or running a business will blow away the earnings on a portfolio of treasury bonds.

Better still are the jobs.  You don’t need employees to live on interest income.  But you need them to run a business.  More jobs mean more taxpayers.  So more rich people are back in the economy earning income and paying income taxes.  And more employees are working.  That’s more payroll taxes.  And more personal income taxes.  In the end, the numbers win.  More jobs.  More GDP.  And more federal tax receipts.

Keeping People Poorer and more Dependent on Government

If the goal of government tax policy is to raise tax revenue, the logical thing to do would be to design a tax code that creates more rich people.  A lower top marginal tax rate does this.  So does a flat tax.  Such a tax policy will create incentives to earn income instead of living on capital gains from investments.  Each rich person will pay less income tax individually but there will be far more of them paying income taxes overall.  And they will create jobs.  The more jobs there are the more payroll taxes and personal income taxes there are.

History has shown that cutting tax rates has done just that.  The Mellon tax cuts of the 1920s.  The JFK tax cuts of the 1960s.  The Reagan tax cuts of the 1980s.  The Bush tax cuts of the 2000s.  So if the record shows that lower tax rates produce more tax revenue, why are we always trying to raise the top marginal tax rates?  Simple.  Politics.

Being in politics is the closest you can get to being part of an aristocracy in the United States.  Unless you’re born a Kennedy.  Whether its ego or the graft, people aspire to be in the privileged few.  Life is better there.  If you have no talent or ability.  Other than being able to tell a pretty good lie.  So you use class warfare to get the masses to support you.  And the progressive tax system.  Which keeps people poorer and more dependent on government.  Like it used to be in the old days when there was an aristocracy.

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