LESSONS LEARNED #62: “The government’s great dilemma is that the middle class has both the money and the votes.” -Old Pithy

Posted by PITHOCRATES - April 21st, 2011

We’re Moving on Up

Those on the Left see the world through zero-sum eyes.  Especially taxes.  For example, let’s look at the taxes of a group of 100 people.  These one hundred can be broken down into three groups.  Poor (20), middle class (79) and rich (1).  With the following annual salaries.  Poor ($15,000), middle class ($50,000) and rich ($1,000,000).  Based on the 2008 tax tables (with a top marginal tax rate of 35%), they each pay $4,600, $17,000 and $454,000, respectfully.  The total each group pays, then, is $91,000 (poor), $1,342,000 (middle class) and $454,000 (rich).  Which is 4.8%, 71% and 24%, respectfully, of the total tax paid.  The largest group of people pays the largest percentage of the total tax burden.  The middle class.  (All numbers are approximate.)

Now, let’s do a little zero-sum analysis.  And figure out how to make the rich pay a larger share of the taxes.  Hmmm.  How about we raise the tax rate on the rich?  If we raise the top marginal tax rate to 45%, the taxes the one rich person pays goes from 24% to 28%.  And the taxes the middle class pay goes from 71% to 68%.  So, to reduce the tax burden on the middle class, we simply have to raise the top marginal tax rates.  Simple, right?  Wrong.  Because what happens in reality is the opposite of what most would think.  As you raise the tax rate on the rich, the total tax burden shifts from the rich to the poor and middle class.  Why?  Because of one fundamental flaw in their analysis.  Which is this.

http://www.youtube.com/watch?v=p9y4iXAso4I

Life is not zero-sum.  People don’t always stay in the same economic class.  They work hard.  Earn money through the years.  Some even save enough money to open a business.  And some of these do become rich.  And when they do, they pay a lot more taxes than they did when they were poor or middle class.  And this is the very thing that high marginal tax rates discourage.  Upward economic movement.  As the poor move into the middle class.  And the middle class move into the rich class.  This is why low, not high, tax rates shifts the tax burden from the poor and middle class to the rich.  Because low tax rates make more rich people to tax.

The Roaring Twenties were Kicked off by Tax Cuts

Andrew Mellon was a rich banker.  Who understood business.  Warren G. Harding tapped him to be his Secretary of the Treasury.  World War I was over.  And there was a huge war debt to pay off.  Taxes were high.  And the progressives wanted to raise them higher.  But Mellon was a conservative.  And he knew that you just didn’t stimulate economic activity with high taxes.  And that’s what paid the bills.  Economic activity.  People gainfully employed and paying taxes.  So he cut taxes.  They cut the top marginal tax rate from 77% to 25% (a cut of 68%).  Which gave us the Roaring Twenties.  Electricity, appliances, radio, you name it, the modern age had come.  Everyone was working.  And buying stuff.  Times were good.

Sure, you’re saying, but at what cost?  The economy took off into the stratosphere but the rich got a free ride.  With their tax rate cut of 200%, the poor and middle class must have been stuck with the tax bill.  Right?  Wrong.  With the lower tax rates, the rich found it cheaper and easier to pay taxes than to shelter it.  Also, the lower rates encouraged innovation (i.e., the modern age).  Lots of people got rich.  There was a lot of upward movement through the economic classes.  So there were more rich people paying taxes.  In 1920, the very rich paid approximately 30% of all federal income taxes.  That number jumped up to 62% by 1929.  That’s an increase of 108%. 

If the name of the game is funding government, you got to like what happened in the Twenties.  Because the government got fat on tax receipts.  And the richest of the rich were paying about twice the amount of taxes they were at the beginning of the decade.  That is a huge transfer of the tax burden from the poor/middle class to the rich.  And the federal debt?  It fell from about $26 billion to $17 billion.  That’s a decrease of about 35%.  Lower tax rates, tax burden transferred to the rich and a lower debt.  Wow.  Mellon was right.  Cutting tax rates on the rich works.  And it works very well.

The Eighties Economic Boom was Kicked off by Tax Cuts

Ronald Reagan was another conservative who understood business.  He defeated Jimmy Carter who was trying to win a second term.  But the malaise and stagflation of the Jimmy Carter years made him a one-term president.  To lift the nation out of recession, Reagan did like Andrew Mellon.  And cut taxes.  The top marginal rate dropped from 70% to 28% (a 60% cut).  And economic activity exploded.  Especially in Silicon Valley.  And the world went high-tech.  Electronics and computers entered our lives.  A new modern age had come.  Everyone was working.  And buying stuff.  Times were good.  Again.

At the beginning of the Reagan years the top 1% paid about 19% of all income taxes.  At the end of his second term they were paying about 27.5%.  That’s an increase of 44%.  Once again, tax cutsfor the rich transferred the tax burden from the poor/middle class to the rich.  As in the Twenties, the rich found it easier to pay their taxes rather than trying to shelter it.  Also, the lower rates encouraged a lot of entrepreneurial innovation.  We used the first cell phones and personal computers in the Eighties.  A lot of this innovation started small in someone’s garage.  And ended in an IPO on Wall Street as they took their companies public.  Lots of people got rich.  Creating a surge of upward movement through the economic classes.  Making many more rich people to tax. 

The Reagan years were an economic juggernaut.  A lot of people got rich.  But at what cost?  The debt exploded under Reagan.  So those on the Left jumped on this.  They say his tax cuts mortgaged our future.  Impoverished our children.  By not paying our bills along the way.  To that I say, “Nice try.”  That debt had nothing to do with the Reagan tax cuts.  It was a spending problem.  Federal tax receipts in 1980 were $517 billion.  After Reagan’s tax rate cuts, they jumped to $909 billion in 1988.  That’s an increase of about 76%.  Lower tax rates, tax burden transferred to the rich and a 75% increase in federal tax receipts?  Wow.  Reagan was right.  Cutting tax rates on the rich works.  And it works very well.

Conservative Policies Favor the Poor and Middle Class

So there are two great economic booms created by tax cuts.  Both periods lifted the country to a new modern age.  People’s standard of living improved across all economic classes.  And a lot people moved up through the economic classes.  Which is key to the success of tax cuts.  And the reason why those on the Left ignore this and focus instead on zero-sum policies.  Why?

Because the Left knows their economic policies don’t work.  But that’s okay with them.  For their policies aren’t about the economy.  Or your well being.  They are about political power.  There are more poor and middle class people than rich.  No matter how far you slash the top marginal tax rate.  So that’s where the votes are.  And a good way to get those votes is with class warfare.  The rich have an unfair advantage.  And with your vote, they will right that wrong.  Sounds good.  Especially if you’re not rich.  Or don’t know the history of high marginal tax rates.  Of how they transfer the tax burden from the rich to the poor and middle class.

Of course, there’s a problem with this strategy.  It transfers more and more of the tax burden to the people you need votes from.  And the more you choke off economic activity by taxing the rich, the more you starve the treasury of tax dollars from the rich.  Which means you have to come up with more and more clever ways to bleed the middle class.  And they don’t have a problem with this either.  What they have a problem with is that the middle class may figure this out one day.  And vote conservative.  Whose policies actually favor the poor/middle class.

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FUNDAMENTAL TRUTH #62: “The government’s great dilemma is that the middle class has both the money and the votes.” -Old Pithy

Posted by PITHOCRATES - April 19th, 2011

Figures don’t Lie but Liars Figure

Mark Twain said figures don’t lie but liars figure.  And there’s been a lot of that going around.  Lying.  Especially about taxes.  Where the rich just can’t catch a break.  They pay far more tax dollars than the poor/middle class.  Yet you wouldn’t know that based on the political rhetoric coming from the Left.  And the incessant drive to raise the top marginal tax rates.  To make the rich pay their ‘fair’ share.  Or punish them.  For being rich.  So we can lower the tax burden on the little guy.  The working class people struggling to put food on the table for their families.

Of course, anyone taking the time to crunch the numbers, or read a history book, will see something completely different.  And that the Left can only advance their agenda by lying.  Because people with a job want to keep their job.  And they see the Left’s agenda as anti-business.  And job killing.  Anytime you hear government talk about being ‘fair’ look out.  Chances are you are about to be screwed.  For their idea of fairness and equality is truly Orwellian.  The Left’s idea of equality is when they are more equal than everyone else.

So they champion the poor/middle class.  Say they are looking out for their interests.  But they’re not.  They just want their money.  And their votes.  So they’ll say whatever they think they want to hear.  Anything to maintain their positions in government.  The ruling elite.  And one of their most effective tools is class warfare.  At the heart of which is tax policy.

Taxing the Rich Transfers Tax Burden to the Middle Class

There is a fundamental misunderstanding about tax policy in America.  Everywhere, really.  You see, they’ve beaten it into our heads that the way to get the rich to pay their fair share is to increase their tax rates.  You do that and you transfer the tax burden from the poor/middle class to the rich.  The funny thing is, though, when you raise the tax rates on the rich the exact opposite happens.  You transfer the tax burden from the rich to the poor/middle class.  How can this be, you ask?  Well, let me explain.

Consider two income examples.  Someone who makes $50,000 per year.  And someone who makes $1,000,000 per year.  Based on the 2008 tax tables (with a top marginal rate of 35%), the federal income tax each pays is approximately $16,980 and $454,000, respectfully.  Now, what do you notice about these numbers?  That’s right.  The $454,000 is a lot bigger than the $16,980.  It’s over 26 times the amount of taxes the person earning $50,000 pays.  Now think about that.  If only one more person becomes a millionaire (let’s say an entrepreneur quits his day job and creates the next great invention), the government will collect the same amount in taxes it would take from 26 new $50,000/year jobs added to the economy.  Let’s say 2 venture capitalists strike it rich and both become millionaires.  They would add the same tax revenue it would take 52 new $50,000/jobs to generate.  Three new millionaires = 78 new $50,000 jobs worth of taxes.  See a pattern?  The more millionaires there are paying taxes the less the poor/middle class have to pay in taxes.  Or, conversely, the fewer millionaires are paying taxes the more the poor/middle class have to pay.  So the more millionaires there are paying taxes, the more the tax burden transfers from the poor/middle class to the rich.

Well, based on that, the best thing we can do for the poor and middle class is to make as many millionaires as possible.  And how do you do that?  It’s pretty easy.  Sort of like a dog having puppies.  They already know how to do it.  They don’t need any special help.  All they need is for us to get out of their way.  And give them a business-friendly environment.  Where a small business owner will risk his or her life savings on that business to get rich.  Or a venture capitalist will risk his or her money on an untried entrepreneur with a really good idea to get rich.  And how do you get people to take risks and invest large sums of money?  By giving them a chance to get rich in the process.  And you don’t do that with high tax rates.  Because high tax rates increase the ‘cost’ of these investments.  And when the cost gets too high, they look for other things to do with their money.  If the return on investment is taxed to the point that they can make the same return without any risk, they won’t take any risk.  And just leave their money in the bank.

The more Millionaires we have the Less Taxes the Middle Class Pays

Of course this all makes good sense.  But bad politics.  Especially on the Left.  For they are all about fairness and redistribution of wealth on the Left.  And you can’t be fair and redistribute wealth unless you demonize the rich.  Because you have to take wealth from someone before you can redistribute it.  And who has wealth?  Why, the wealthy, of course.  Who are greedy.  Who don’t pay their fair share of taxes.  And profit by exploiting the poor/middle class.  Or so goes the liberal mantra.  So to show how much they care for the poor/middle class, they try to raise taxes on the rich.  By constantly trying to raise the top marginal rates.  Of course, as noted above, doing this actually hurts the poor/middle class.  By making them pay a much larger share of the total tax burden than the rich pays.  Let’s look at some numbers.

We keep hearing about this evil 1% who has the majority of the wealth in this country.  So let’s look at this by the numbers.  One percent is one in one hundred.  So let’s assume we have 100 taxpayers.  One millionaire who earns $1,000,000 per year.  Twenty ‘poor’ people earning $15,000 per year.  And 79 ‘middle class’ people earning $50,000 per year.  Based on the 2008 tax tables, the annual income tax each owes (going from poor to rich) is approximately $4,500, $17,000 and $454,000.  Their total tax contributions (in the same order) are approximately $91,000, $1,342,000 and $454,000.  Or, as a percent of the total, 4.8%, 71% and 24%.  Please note that it’s the middle class that pays the bulk of the tax burden (71%).  Even though they each pay only a fraction of what the millionaire pays.  Because one millionaire can pay only so much.  But the ‘fraction’ 79 middle class people pay adds up.  The sum total of their taxes equals approximately three times what that millionaire pays.  Which proves the point that the fewer millionaires there are the more the poor/middle class has to pay in taxes.

Now let’s say nine people prospered very well and moved from the middle class to the rich.  There are still 20 ‘poor’ people.  But with the 10 people that now earn $1,000,000 per year, there are now only 70 middle class people earning $50,000 per year.  This changes the total tax contributions (going from poor to rich) to approximately $91,000, $1,187,000 and $4,538,000.  Or, as a percent of the total, 1.6%, 20.4% and 78%.  Now the rich are paying the vast majority of all taxes (78%).  Which proves the point that the more millionaires there are the less the poor/middle class have to pay in taxes.

Figures don’t Lie but Liberals will Figure

Well, sure, you can use all your facts and figures to show things that make sense.  But making sense doesn’t necessarily apply in politics.  Because tax policy is a lot more than just funding the government.  It’s about winning elections.  And the one great dilemma in all of politics is this.  The people with the most money to tax are in the middle class.  Because of their numbers.  They may pay less per person than the rich but their numbers add up.  And they are the largest voting bloc.  Because of their numbers.  Which presents quite the problem.  Politicians want their money.  But if they take too much of it they may lose their votes.  So what to do?  You take their money.  While making it look like you’re punishing the rich.

The more government spends the greater this problem gets.  Deficits grow larger.  Which adds to the national debt.  Interest payments on that debt take up an ever larger part of the federal budget.  Add that to out of control growth of entitlement spending and what do you get?  A big problem.  And greater deficits.  Which are getting harder and harder to finance.  Soon you’re borrowing money to pay your borrowing costs.  You need cash.  Or you need to cut spending.  And you know you’re not going to do that.  Because cutting spending doesn’t help win elections.  So you look for more cash.  And you can’t go the easy route and just create more millionaires.  Not after demonizing them so much.  Doing that would be tantamount to saying you were wrong and/or lying all these years.  Besides, the anti-business environment currently in place doesn’t encourage any risk taking by the rich.  So they’re sitting on their money.  Which leaves the middle class.  So we start hearing code words.  Fair share sacrifice.  Tax the rich.  It’s not fair to give millionaires and billionaires tax breaks paid by the poor and middle class.  This means the poor/middle class is about to get screwed.  Either by higher taxes (or reduced tax breaks and credits).  Or they’re going to raise the top marginal tax rates which will transfer more of the tax burden from the rich to the poor/middle class.

Of course, screwing the poor/middle class is what it’s all about.  The Left uses them.  All of the time.  Through lies and deceit.  For our lives would be better if we had a lot more millionaires.  And less progressive tax rates.  That encouraged more economic activity.  And created more jobs.  But the liberal left could care less about that.  Based on the evidence.  And history.  When they run for office they run as moderates.  Because they know they can’t win elections running as liberals.  Barack Obama was the most liberal senator in the Senate.  Yet when he ran some were comparing him to Ronald Reagan.  And you only lie like that for one reason.  To hide who you really are.  Tax and spend liberals.  Who have made the middle class the bank for their tax and spend policies.

So while figures don’t lie, liberals will figure.

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FUNDAMENTAL TRUTH #23: “Those who seek a third party cede the election to the opposition.” -Old Pithy

Posted by PITHOCRATES - July 20th, 2010

THIRD PARTY CANDIDATES are often election spoilers.  Dissatisfied with the direction of their party, they leave that party to form a new party.  This, of course, will split the party they left.  Some may follow.  Most will probably not.

Third party candidates have small followings.  They typically have a single issue that pushes them to leave their party.  That single issue, though, may not be as important to those they leave behind.  And this one issue may be anathema to the opposition.  Guaranteeing very few, if any, will follow that candidate into a third party.

The Green Party, for example, is an environmental party.  Environmental issues, then, dominate their political agenda.  Environmental policies typically do not result in jobs or economic prosperity.  They will draw some people from the Democratic Party.  But only those with extreme environmental views.  They will draw no one from the Republican Party which is more associated with jobs and economic issues than environmental issues.  They, then, would have little impact on the party they oppose.  But they may have a negative impact on the party that they would have otherwise supported.

And then you have your core voters.  They have and always will vote for their party.  Populist movements rarely change the way they vote.  Populist movements may be single-issue.  They may be more of a subset of an existing political party.  Or they may be vague on details completely.  They may be many things but the paramount thing they are is popular.  And they pander to the people that are demanding something.  And whatever that is, they say they will give it to them.  Populist trends, though, don’t sway core voters.

SO WHO ARE in the two core parties?  The liberals?  And the conservatives?

Liberals are pseudo-intellectuals who want to tell others how to live.  Because they are ‘smarter’ than everyone else.  Most have never held a real job.  They inherited their money or made it big in Hollywood or in some other entertainment genre (the guilty rich), are college professors, sponged off of government (the self-proclaimed political aristocracy) or are in the mainstream media. 

Conservatives typically have jobs.

Few people agree with liberals so they have to offer special privileges in exchange for votes and political power.  They get the support of the poor because they get the poor dependent on their charity.  They get the entertainment elite by stroking their intellectual vanity.  They get the various minorities and single-issue groups by throwing a few bones to them (i.e., by buying their votes).  They get Big Business with crony capitalism.  They get the unions in exchange for anti-business legislation.  They get the young by being weak on drugs and morality.  They get a lot of women because of their abortion stance.  They get the illegal immigration community because they dangle citizenship in front of them while getting as many as they can addicted to welfare (so when they do become citizens they will become good Democrats.  Of course, with the majority of illegal immigrants in question being Hispanic, it will be interesting to see how that loyalty will play out.  A lot of Hispanics are practicing Catholics.  Will they continue to support the party that attacks their religion and religious values?  After all, they’re leaving a corrupt nation where only the ruling elite live well.  They come here for a better life for themselves and their families.  And many work hard for it.  With their religious values being a strong part of their lives.  Will the liberals tempt them with their welfare state after citizenship?  Time will tell).

Many agree with conservatives because they, too, just want to work and provide for their families.  And they would like their children’s future to be a good one.  (Again, the Hispanic question is interesting.  For they have conservative values, too.  Amnesty for illegals may be a Faustian bargain, but wouldn’t be ironic if it’s the Democrats who are selling their souls?  I mean, this large bloc of Catholics could very well vote for the religious right after citizenship.)

So liberals must appeal to their base during the primary election to get their party’s nomination.  Once they have that, they then must start lying about who they really are during the general election.  Because their views and opinions are minority views and opinions. 

The conservatives just need to be themselves.  When Ronald Reagan did just that, he won in a landslide.  Twice.

LET’S CRUNCH SOME numbers.  Some simple numbers.  Let’s say there are only 11 voters.  America is a center-right country based on honest polling.  So let’s say that 4 voters are conservative and 3 voters are liberals.  The 4 in the middle are independents and moderates.  So what happens at an election?

If all of the independents and moderates do not vote, conservatives win (4-3). 

Liberals cannot win unless some moderates and independents do vote.  So liberals must encourage the moderates and independents to vote.  And, of course, to vote for them.  While making sure their base votes (‘vote early and often’ is their mantra).  As well as some criminals.  And some dead who haven’t been purged from the election rolls.

Independents and moderates, therefore, determine elections.  And the general election is all about getting these votes.  Both sides turn down the volume on the ‘extremist’ positions they held during the primaries.  Conservatives talk about bipartisanship and reaching across the aisle.  Liberals campaign as conservatives.  (Bill Clinton ran as a new kind of Democrat with some very conservative planks in his platform.  When he won, though, he moved so far back to the left that he lost the House and Senate at the midterm elections, proving once again America is a center-right country.)

So back to our little example.  If the conservatives get 2 of the 4 independent and moderate votes, they win (6-5).  Liberals need 3 of their votes for the same winning margin.  Advantage, conservatives.

Now let’s look at a rift in the conservative party.  Two leave and form a third party.  And take 2 votes with them.  For the sake of argument, let’s say these two call themselves the Anti-Abortion Party.  It is doubtful that any liberals will leave their party to join them.  And it is doubtful that independents and moderates would make overturning a Supreme Court decision a key voting issue.  They tend to tack to a centrist course through the prevailing political winds.

So the Anti-Abortion Party candidate will only get 2 votes.  This candidate will not win.  That leaves only 9 votes in play.  Which means getting only 5 votes will win the election (less than a majority of the total 11).  All the third party candidate did was to make it easier for the liberals to win.  They only need 2 of the 4 of the independent and moderate votes.  Conservatives now need 3.  The third party took the conservative advantage (only needing 2 additional votes to win) and gave it to the liberals.

THE MORAL OF the story here is that a vote for a third party candidate is a vote for the opposition.  The lesser of two evils may still be evil, but it is still ‘less’ evil.  You should never lose sight of that.  If a political statement is only going to result in the greater evil, it is better to be more pragmatic than idealistic when voting in a general election. 

The energy of a third party or third party-like movements (such as the new Tea Party) should be marshaled during the primary election.  To get good candidates who can win general elections.  And who will remember that they are the people’s representative, not a member of a privileged, ruling elite.

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