Class Warfare

Posted by PITHOCRATES - January 3rd, 2013

Politics 101

Over 99.5% of all Rich People ARE paying Federal Income Taxes

President Obama won reelection by denigrating Mitt Romney.  He didn’t win by running on a successful record.  He did not win by running on a plan to pull the economy out of one of the worst recoveries in history.  No.  He won it by getting people to hate Mitt Romney.  And by getting people to hate Republicans.  Who they painted as evil rich people who want nothing more than tax cuts for the rich.  And to take away birth control and abortion so only rich people can have access to them.  As well as taking welfare benefits from the poor.  It’s called class warfare.  And it can be very effective.  For it won President Obama a second term despite a horrible first term by almost any metric you measure it.  At least based on the majority of the electorate that just believed the rich aren’t paying their fair share.  So let’s just see who is paying what (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 above chart shows who are NOT paying any federal income tax.  Approximately 40% of all taxpayers.  Are these the evil rich people like Mitt Romney?  And those rich Republicans?  No.  Contrary to the Left, it’s not the rich.  They’re paying their taxes.  It’s the poor and the middle class not paying their fair share.  Those earning $5,000 and less pay virtually no federal income taxes.  Over 80% of those earning from $5,000 to $13,000 pay no federal income taxes.  You have to get up to those earning $25,000 or more before more than half of that income group pays any federal income taxes.

We don’t see who actually pays the majority of federal income taxes until we get into the middle class.  Where those who DON’T pay any federal income taxes rapidly drop away.  Those at the low end of the middle class taking advantage of the tax code to maximize their tax credits and deductions (mortgage interest, energy tax credit, medical and dental Expenses, child and dependent care credit, etc.) to reduce their tax bill.  While those at the higher end of the middle class are likely small business owners suffering a business loss.  Or a personal or business bankruptcy.  Approximately 0.8% of those earning $100,000 – $200,000 pay no federal income taxes.  While less than half of one percent of those earning $200,000 or more pay no federal income taxes.  Perhaps this tiny sliver of income earners are not paying their fair share.  But one thing for certain is that over 99.5% of all rich people ARE paying federal income taxes.

Those earning $1,000,000 and more account for less than 1% of Tax Exemptions and Deductions

So are the rich taking advantage of the tax code to reduce their taxable income and federal tax bill?  We hear a lot about tax loopholes.  Those perfectly legal tax credits and deductions written into law by the United States Congress.  That both those on the Left and those on the Right take advantage of.  Yet those on the Left have convinced enough of the electorate that these legal credits and deductions are tax evasion.  And that only the rich on the Right are using these to evade paying their fair share.  So who is taking the biggest advantage of the tax code to reduce their tax bill?  In 2010 this totaled about $3 trillion.  Is this why those earning $100,000 or more paid no income tax?  For those few not paying any federal income tax?  Not exactly.  (The dollar amounts in the following charts are in thousands of dollars.)

In 2010 taxpayers claimed in total about $3 trillion in exemptions and deductions.  The deficit in 2010 was about $1.3 trillion dollars.  So perhaps this is the reason why we had a deficit in 2010.  This is what the Left would have us believe.  It’s those tax loopholes that the evil rich take advantage of to avoid paying their fair share of taxes.  The only problem with this is that it’s not the rich taking advantage of these tax loopholes.  It’s the poor and middle class.

Those earning $1,000 and less account for less than 1% of these exemptions and deductions.  Those earning $1,000,000 and more also account for less than 1% of these exemptions and deductions.  It’s those earning from $1,000 to $1,000,000 that are taking advantage of these tax loopholes.  Especially those earning from $50,000 to $200,000.  The only income groups claiming 10% or more of the nearly $3 trillion in exemptions and deductions claimed.  So not only are the evil rich paying federal income taxes whatever they claim as exemptions and deductions doesn’t even come close to what the poor and middle class are claiming.

Prosperous Economic Times brought about by Tax Cuts INCREASED Tax Revenues

These numbers don’t exactly support the claim that the rich aren’t paying their fair share.  They’re paying federal income taxes.  And what tax loopholes they exploit hardly makes a dent in the amount of tax revenue the IRS collects.  Which can only mean one of two things.  Either the poor and middle class need to pay more federal income taxes.  Or the federal government is just spending too much.  Well, as we just witnessed in the fiscal cliff debate, President Obama and the Left want to raise taxes.  Blaming the record Obama deficits on the Reagan and Bush tax cuts.  Their deal includes higher income tax rates on households earning $450,000 or more.  But NO spending cuts.  Which will be a problem.

In 2010 the total adjusted gross income totaled just over $8 trillion.  Most of which came from 4 income groups.  About a trillion each from those earning from $50,000 to $75,000, from $75,000 to $100,000 and from $200,000 to $500,000.  Those earning from $100,000 to $200,000 earned in total almost $2 trillion.  Which means the new higher tax rates aren’t going to bring in much new tax revenue.  Because they aren’t taxing the people with the money.  The middle class.  And with some additional spending instead of spending cuts the deficit will only grow larger.  So this whole fiscal cliff debate was nothing but theatre.  For it wasn’t about deficit reduction.  It was about politics.

The Left wants to destroy the Republican Party.  And to do that they need to turn prosperous economic times brought about by the tax cuts of the JFK, Reagan and Bush administrations into the source of all our problems.  Yes the economy boomed, goes the argument, but at what cost?  Massive deficits.  Deficits not brought about by tax cuts.  But by spending.  For those prosperous economic times brought about by tax cuts INCREASED tax revenues.  The deficits resulted from spending increases greater than the revenue increases.  But with a successful campaign of class warfare they have revised history.  Those deficits are now the result of the rich not paying their fair share.   Which helped them increase tax rates on the rich today.  Because the Left got everyone to hate the rich.  And the Republican Party.  Even though the rich are the only ones paying their fair share.  In fact, they’re paying more than their fair share.  But the majority of the electorate doesn’t know this.  Because of that successful campaign of class warfare.


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One Former Australian Bank Official accuses the Elderly of using $100 Notes in Massive Welfare Fraud

Posted by PITHOCRATES - September 29th, 2012

Week in Review

What’s the biggest problem of a welfare state?  Fraud.  Which large piles of money always seems to attract.  As well as changing personal behavior.  Some are even saying it’s turning the elderly into the greatest fraudsters in all of Australia (see Pensioners fume at welfare fraud claims by Henrietta Cook posted 9/25/2012 on The Sydney Morning Herald).

Former senior Reserve Bank official Peter Mair said elderly Australians were committing welfare fraud on a massive scale and are behind the extraordinarily high number of $100 notes in circulation…

Yesterday, BusinessDay revealed there are now 10 $100 notes in circulation for each Australian, far more than the more commonly seen $20 notes…

In a letter to the Reserve Bank governor, Glenn Stevens, dated July 4, Mr Mair laid the blame squarely on elderly people wanting to get the pension and hiding their income in cash to ensure they qualified for the means-tested benefit.

If you have too much income or too much money in the bank you could have too much wealth to qualify for a means-tested pension.  So the former senior Reserve Bank official is suggesting that people close to retirement are withdrawing their money from the bank to draw down their bank accounts to more easily qualify for those means-tested pensions.  And those $100 bills make it easy to hide piles of cash in a pensioner’s house.  Perhaps needing only one well hid suitcase full of $100 bills to hold all of those bank withdrawals.  At least, that is what the former senior Reserve Bank official is suggesting.

Finance Minister Penny Wong has warned elderly pensioners to properly declare their incomes. Senator Wong said today she had “not been looking looking under pensioners’ beds lately”.

“But I would say we have a system of means testing for access to the pension and people are required to declare their assets and their income in order to access them,” she told reporters in Canberra…

Mr Mair said that in 1996 when the green plastic $100 note replaced the grey paper note, the Martin Place headquarters of the Reserve received regular visits from retirees wanting to withdraw large quantities of the new notes. He said the commercial banks had sent them to the Reserve because they did not have enough $100 notes on hand.

Mr Mair said the return for an Australian close to getting the pension who held $10,000 in cash, rather than declaring it, was “enormous”.

“If putting it under the bed or in a cupboard means you qualify for the pensioner card, you get discounted council rates, discounted car registration, discounted phone rental – in percentage terms the return is enormous,” he said.

So there is a clear advantage to hiding your wealth.  Which the high denomination bills allow one to do.  So the obvious solution to this alleged welfare fraud would be to eliminate those high denomination bills.

His letter to the governor proposes phasing out the $100 and $50 denominations.

“Cards and the internet have delivered a body blow to high-denomination bank notes. They are redundant,” he said. “There is no longer any point in issuing them except to facilitate tax dodging. The authorities would announce that from, say, June 2015 every $100 and $50 note could be redeemed but no new notes would be issued. After June 2017 every note could only be redeemed at an annual discount of 10 per cent. It would mean that, after two years, each $100 note could only be redeemed for $80, and so on.”

Or perhaps they could lower tax rates.  If they are using these $100 bills for tax evasion perhaps taxes are just too high.  Apparently there is an underground cash economy solely to evade or mitigate taxes like the GST and the carbon tax.  It would appear they could come out further ahead if they just cut taxes instead of having all of these taxes (and tax enforcement) for a welfare state that people may be gaming.  It would be so much cheaper for people to pay their own way and not provide for everyone else (as well as the environment) through these excessive taxes that people aggressively try to evade.

The events happening in Australia provide an answer to the commonly asked question.  Are we taxed too much?  A question the Australians are clearly answering in the affirmative.  As most people feel who have a GST as well as a carbon tax.


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Greek Debt Crisis, Social Democracy, Welfare State, Keynesians, Inflation, Tax Evasion, Common Currency and the Eurozone

Posted by PITHOCRATES - June 19th, 2012

History 101

Higher Debt Balances accrue Higher Interest Costs that Reduce Income

The Greek debt crisis has been in the news for a long time.  Which has contributed to the Eurozone sovereign debt crisis.  Most people understand that it’s bad.  But they may not understand how bad.  Or understand what exactly happened.  What caused it.  And why they can’t fix it.  For it’s been a crisis since 2009.  And all we hear is that it’ll be apocalyptic if we don’t bail out Greece and save the Euro.  Which would be bad.  As most apocalypses tend to be.

To get a general understanding we’ll use an analogy.  Let’s say you just got a new job and are now earning $80,000 annually.  Your future is bright.  And you’re very happy.  You buy a big house.  And you run up your credit cards furnishing it with lots of nice stuff.  Because you’re earning $80,000 a year and can easily afford it.  Well, perhaps not easily.  But you can still put food on the table.  And take a nice vacation with your better half.  But then a recession sets in.  They cut your bonus.  And some of your benefits (taking a large health care deduction out of your check).  But that house payment remains the same.  As do your credit card bills.  So you cut out the vacation.  And eat more hamburger and less steak.  To adjust to the lost income.  Then worse comes. 

You lose your job.  Go on unemployment.  Which doesn’t pay your bills.  So you desperately look for a new job.  In the bad economy the best job you can get pays only $50,000.  Which is a lot more than unemployment.  But a far cry from $80,000.  You can keep making your house payment.  But you have to slash nonessential spending.  And cut up your credit cards.  Because those high credit card balances require a payment that’s almost as big as your house payment.  Almost your entire paycheck goes to your creditors.  All because you started spending money you didn’t have because you thought that $80,000 job would never go away.  In fact you spent based on what your income would grow to.  Beyond that $80,000.  This is the Greek debt crisis.  Only without the spending cuts.

A Policy of Constant Inflation Monetizes Old Debt and Bumps People up into Higher Tax Brackets

Like the rest of Europe Greece became a social democracy.  Which is socialism-light.  The people learned they had the keys to the treasury.  All they had to do was to vote for people who liked using that key.  And they did.  Government spending soared beginning in the Seventies.  The public sector grew.  Creating a lot of government jobs.  With some generous pay and benefits.  But the country was also a welfare state.  Which meant everyone got a state pension.  State health care.  And other state social benefits.  You didn’t have to work for the government to enjoy the generosity of the state.  And the state was generous.

And the generous government spending just grew more generous.  Strong economic growth allowed more spending.  And more borrowing.  (From 2000 to 2007 Greece led the Eurozone in economic growth.  Which probably sealed their fate.  Because the increased spending during boom times they could never sustain during bad economic times.  And bad economic times were coming.)  Budget deficits became a part of the Greek government.  For they were also Keynesians.  Who believed in the value of running deficits.  And accruing debt.  They devalued their currency.  Which helped make their exports cheaper.  And it monetized their debt.  A policy of constant ‘but manageable’ inflation made old debt worth less.  And easier to pay off.  Just as inflation made people’s savings accounts worth less over time.  But running budget deficits year after year increased their outstanding debt.  Starting slowly at first.  Then growing greater.   Prior to 1984 Greek debt as a percentage of GDP was below 40%.  By 1998 it was above 60%.  By 1990 it was above 80%.  By 1994 it was above 100%.  By 2010 it was above 140%.  By 2011 it was above 160%. 

The Keynesians don’t see a problem with this.  Because they believe if you keep depreciating the currency the older debt just goes away.  It’s like redeeming a $100 savings bond from 1875.  Back then $100 was a lot of money to the government.  Today it’s the loose change they drop from their pockets that isn’t worth bending down to pick up.  Metaphorically, of course.  In time with steady inflation those old debts simply become chump change.  And there’s something else Keynesians love about inflation.  It’s a hidden tax.  Sometime it’s not possible politically to raise taxes.  So they can use inflation to bump people into higher tax brackets.  Making them pay a higher percentage of their income to the government.  Which brings us to another Greek problem.

At the Heart of the Greek Debt Crisis is the Welfare State

Greece is a welfare state.  Like other welfare states they have to fund that welfare with taxes.  So they have high tax rates.  Because it’s what the people want.  That welfare state.  Which requires those high tax rates.  But they have a problem.  People don’t like paying taxes.  Especially the Greeks.  Who have taken avoiding paying taxes to an art.  Which plays a big problem in the Greek debt crisis.  People demanding all of that government spending.  Yet refusing to pay the taxes to pay for it.  Causing great problems.  Especially when they joined the common currency.  The Euro.

The common currency changed things.  They could no longer depreciate their currency.  Because it wasn’t their currency anymore.  It was the Eurozone’s currency.  Joining the Euro was like giving a bunch of people credit cards and telling them they had to restrict their purchases so that their annual deficit and total debt fell below certain percentages of their income.  And those numbers to join the Euro were as follows.  Their deficit had to be below 3% of GDP.  And their debt had to be below 60% of GDP.  If all the members kept within these limits they would maintain their good credit rating.  And be able to use their ‘credit cards’ responsibly.  And not shock the European Central Bank when they opened the credit card statement at the end of the accounting period.

It appears that Greece massaged their numbers with some creative bookkeeping to meet the requirements to join the Euro.  And to stay within the currency union they may have misreported their economic numbers.  (When the crisis began the Greeks officially reported that their deficit was 5% of GDP.  Which exceeded the allowable 3% but was salvageable.  After some outside audits they revised their 2009 deficit up to 15.6% of GDP.  Making the crisis more of an apocalypse).  Why did they do this?  Because they wanted to keep spending.  But they couldn’t depreciate their currency anymore.  The economy was in recession which higher tax rates wouldn’t help.  Not to mention all of the tax evasion.  So that left borrowing as their only avenue to sustain that excessive government spending.  Sort of like trying to solve the problem of having your credit cards cancelled for nonpayment by getting new credit cards to use to accumulate even more debt that you can’t repay.  They’ve gotten one bailout package already.  And a second one is theirs if they commit to some austerity.  Which the people have rejected.  At least those rioting in the streets.  And considering how generous those benefits had been it’s hard to blame these people.  For life as they knew it is over for them.  Thanks to irresponsible government spending that made them dependent on the government.

So there are a lot of factors that caused the Greek debt crisis.  But at its heart is one thing.  The welfare state.  For if there was no excessive government spending they wouldn’t have had those large deficits.  Debt.  Or debt crisis.


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Move over Greece, there’s a new Financial Crisis in Town and it goes by the Name of Italy

Posted by PITHOCRATES - November 13th, 2011

Week in Review

Another social democracy in the Eurozone is having a financial crisis.  And it’s even worse than the crisis in Greece.  In fact, it makes Greece’s problems look tame in comparison.  Because it’s Italy this time.  And their economy is huge.  As is their debt.  The Euro may not be able to survive if Italy doesn’t.  It’s so bad Berlusconi will reign.  To save Italy.  And the Eurozone (see Italy at Breaking Point, Merkel Calls for ‘New Europe’ by Reuters posted 11/9/2011 on CNBC).

“It is a step in the right direction,” Swedish Finance Minister Anders Borg said when asked about Berlusconi’s plan to resign.

“There has been no proper understanding of the problems being faced in Italy.” Even with the exit of a man who came to symbolize scandal and empty promises, it will not be easy for Italy to convince markets it can cut its huge debt, liberalize the labor market, attack tax evasion and boost productivity.

Huge debt?  A costly labor market.  Tax evasion?  Poor productivity?  These are the hallmarks of a social democracy.  The welfare state.  Because those generous benefits are costly.

A costly labor force makes the products they make uncompetitive.

The more people consuming taxpayer pay and benefits the fewer people pay taxes.  And the higher the tax rates on those who still pay taxes must be.

The higher the tax rates the unhappier the taxpayer.  And the more they try to evade paying those taxes.

An uncompetitive work force is a nonproductive work force.  And a nonproductive workforce does not grow the economy.  Because expansion capital is paying for a nonproductive workforce.  Not expansion.

It is inevitable.  The collapse of a social democracy.  Because the welfare state consumes more than it produces.  Which is why all the social democracies in the Eurozone have debt crises.  Because spending is always increasing.  And they borrow ever more to pay for that spending.


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