Injustice in the Tax System?

Burt Fulsom makes an incredibly important point on his blog regarding our current tax system and debt burden:

When we look at the runaway deficits of the last few years (especially the last one year), we can see the dangers of inflation, the ruin of our currency, and even the potential bankruptcy we may face. I want to focus on something else that is often neglected–the sense of injustice in the tax system to pay off the debt. Why is it unjust? Because almost half of all Americans pay no income taxes. What that means is that these non-taxpayers have every incentive to pressure politicians for government services because the burden of paying for these services will fall on others. That fact compounds the problem, and contributes to a real sense of injustice–others get services free, and I have to pay for them. Certainly that contradicts the spirit of the 14th amendment, with its stirring promise that no state could “deprive any person of life, liberty, or property without due process of law.”

The other problem with the “I get government services and you pay for them” mentality is that basing a tax system mainly on wealth taxes is unstable. What about recessions when rich people lose wealth and withdraw investments? Then revenue sharply declines, and deficits get larger. In the current tax system, the top one percent of taxpayers pay almost 40 percent of all income taxes. In California, which has a highly progressive state income tax, 84 percent of taxes are collected from people earning over $100,000 per year, according to Scott Hodge of the Tax Foundation. When those taxpayers suffer in recession, the whole state budget is thrown into jeopardy.

Our Founders were wise. They encouraged a revenue system based on tariffs on imports and excise taxes (especially on vices such as tobacco and whiskey). Those are indirect taxes, and they are paid by people who purchase certain goods. If you can afford the product, you pay a small tax. Such a system is broad-based, and the revenue generated does not fluctuate wildly from year to year. Let’s never forget that under that system, the U. S. paid off the entire national debt by 1836. I salute our Founders for their wisdom.

George Will Sunday Column

From George Will's column today:

In 2013, when President Mitch Daniels, former Indiana governor, is counting his blessings, at the top of his list will be the name of his vice president: Paul Ryan. The former congressman from Wisconsin will have come to office with ideas for steering the federal government to solvency.

Not that Daniels has ever been bereft of ideas. Under him, Indiana property taxes have been cut 30 percent, and for the first time Standard & Poor's has raised the state's credit rating to AAA. But in January 2010, Ryan released an updated version of his "Roadmap for America's Future," a cure for the most completely predictable major problem that has ever afflicted America.

.......To make the economy -- on which all else hinges -- hum, Ryan proposes tax reform. Masochists would be permitted to continue paying income taxes under the current system. Others could use a radically simplified code, filing a form that fits on a postcard. It would have just two rates: 10 percent on incomes up to $100,000 for joint filers and $50,000 for single filers; 25 percent on higher incomes. There would be no deductions, credits or exclusions, other than the health-care tax credit (see below).

Today's tax system was shaped by sadists who were trying to be nice: Every wrinkle in the code was put there to benefit this or that interest. Since the 1986 tax simplification, the code has been recomplicated more than 14,000 times -- more than once a day.

.......Ryan would eliminate taxes on interest, capital gains, dividends and death. The corporate income tax, the world's second-highest, would be replaced by an 8.5 percent business consumption tax. Because this would be about half the average tax burden that other nations place on corporations, U.S. companies would instantly become more competitive -- and more able and eager to hire.

Medicare and Social Security would be preserved for those currently receiving benefits or becoming eligible in the next 10 years (those 55 and older today). Both programs would be madepermanently solvent.

Universal access to affordable health care would be guaranteed by refundable tax credits ($2,300 for individuals, $5,700 for families) for purchasing portable coverage in any state. As persons younger than 55 became Medicare-eligible, they would receive payments averaging $11,000 a year, indexed to inflation and pegged to income, with low-income people receiving more support.

Ryan's plan would fund medical savings accounts from which low-income people would pay minor out-of-pocket expenses. All Americans, regardless of income, would be allowed to establish MSAs -- tax-preferred accounts for paying such expenses.

Time to Pick It Up Men!

Taxation without Representation

All I can say is shame on us for the massive and crippling tax we are building up to hammer down on the heads of future generations of Americans.

Spend just a few minutes on this site and tell me when are not facing an imminent challenge in this nation: http://usdebtclock.org/

The Super Bowl on the Big Screen?

The folks over at Slate have put together an awesome little montage in honor of Super Bowl Sunday:

SCARY STUFF

When you consider the history of socialism (a history of abject failure), the chart below will send a chill through your spine.

Opportunity Cost

This is one of the best and most concise articles I have ever read on the idea of opportunity cost.

The point Mr. Horowitz makes in this article is lost to 99% of people, and I really think it's one of the most important learning points of economics:

Over the weekend, the White House released a report indicating that the stimulus program had directly funded about 600,000 jobs and indirectly "created or saved" a total of 1.5 to 2 million jobs. Later investigation will likely reveal that a good number of these created jobs are non-existent or otherwise shouldn't have been counted. Politicians, both national and local, have every reason to exaggerate numbers like this, and expecting accounting accuracy from the people who pay hundreds of dollars for a hammer has long been an exercise in faith over reason.

Moreover, one can raise all kinds of questions about whether "creating jobs" should be the goal of economic policy. There's a story about Milton Friedman in China that may be apocryphal but illustrates this point. In observing hundreds of Chinese workers clearing land for a new building using shovels, Friedman asked his hosts "Why are they using shovels? Why not use heavy equipment like an earth-mover?" The Chinese official said "If we did that, we'd lose all of those jobs!" Supposedly Friedman said "Oh, you're trying to create jobs! I thought you were trying to build a building. If you want to create jobs, why not take away their shovels and give them spoons?" I'm sure the Chinese host didn't find that funny, but it perfectly illustrates the point that "creating jobs" is easy (another example: we could destroy all farm machinery); the tougher thing is creating value by saving labor in one place to use it where it is more urgently needed elsewhere. The benefits associated with the disappearance of jobs in making candles or horse-drawn carriages should make us skeptical of the rhetoric of "saving jobs."

Even with those flaws, the Administration's accounting is still one-sided. What it doesn't consider are the jobs lost due to the very policies that are "saving" jobs. Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy. The jobs that weren't created because the private sector lacked access to capital due to increases in government borrowing should be offset against whatever jobs the stimulus supposedly is creating.

The problem, of course, is that what was never created cannot be seen and therefore cannot be counted. The French economist Frederick Bastiat once defined economics as the art of seeing the unseen. It may be true that we can "see" it by recognizing the unseen effects of policies, but if you can't count what you can't see, you'll always lose out in the numbers game. The result is that estimates of the net employment effects of government programs will always be biased in favor of the program's effectiveness. The inability to count what we can't see should give us long and serious pause when reading about the jobs "created or saved" by the stimulus package.

Paul Ryan is on Fire

Congressman Paul Ryan has really been on fire of late.

Here are his thoughts on President Obama's budget and a few charts for good measure:

Over the past few weeks, President Obama has sounded ready to moderate his agenda - and has trumped his ostensible plans for fiscal discipline.

Regrettably, the budget the Administration today submitted to Congress is nothing more than a plan for more of the same - a very aggressive agenda of more government spending, more taxes, more deficits, and more debt - with just a few cosmetic budget maneuvers to give the illusion of restraint. Despite my hope that the President would alter his course, his budget will make an already unsustainable budget outlook much worse.

For the duration of the Administration's 10-year budget, the deficit never falls below $700 billion, and never falls below 3.6 percent of GDP - a level the Administration's own budget director has called 'unsustainable.' Debt held by the public doubles over 5 years, triples over 10, and exceeds 60 percent of GDP as a share of the economy this year - surpassing last year's 50-year high. Debt continues to rise to consume 77.2 percent of our economy by the end of the budget window. Even the countries of the European Union, hardly exemplars of fiscal rectitude, are required to keep their debt levels below 60 percent of GDP.

The Administration will attempt to focus attention on a handful of proposals supposedly aimed at tempering the Federal Government's explosive growth. But these have far more to do with calming Americans' concerns than with doing anything to address them. His pay-as-you-go proposal has been waived or circumvented and only locks in deficits at their current high levels. His non-binding commission simply punts on the critical budget decisions that Members of Congress got elected to make. Finally, his so-called 'freeze' on some discretionary spending follows an 84-percent increase - and has no clear means of enforcement.

The President has contended that many of our nation's problems - fiscal and otherwise - lie in petty bickering and partisanship in Washington. I agree that we should avoid the politics of personal destruction. But, we also should not get lulled into avoiding rigorous debate on policies that will increase spending, deficits, taxes, and debt and hasten our nation's march down a disastrous economic and fiscal course - which, regrettably, is just what this budget would do.

Tom Barrack's Latest Thoughts

Colony Capital's Tom Barrack recently gave us some very educational thoughts on the current mess we are in and how to avoid getting into another mess in the future:

Both distressed investors and investors in distress are anxious and discontent because they are languishing in the doldrums of "status quo." The unanticipated tranquility of zero interest rates and the new mantra of "pretend and extend" by holders of debt instruments have sent both groups into a holding pattern that has become a bit surprising.

The meltdown in the global financial system brought out the big guns. They possessed historical skill and incomparable talent as they harvested new funding. They were convinced that the opportunistic wave of the day would be distress. There are dozens of distress strategies and theories and most of them have not yet resulted in meaningful amounts of attractively deployed capital. Likewise, borrowers who themselves are in distress as a result of high debt loads and underperforming businesses and properties are finding that banks are not interested in lending money. Amazingly, banks also are not in a hurry to perfect their security or foreclose on businesses or properties. We are all stuck in the middle of a flat sea with no waves and no wind.

I was reading one of my son's school admission applications the other night. It was an essay question asking him to discuss what mistakes had he made and what he had learned. He chose a surfing incident in which he was a bit arrogant and he had turned his back on Mother Nature. It reminded me of some great investor guidelines. I have always felt that surfing is a great metaphor for investing. Below are a few credos that characterize both a big wave surfer and a successful investor:

• Know exactly how to exit before you enter.
• Being in the right spot is more important than the size of the wave.
• The waves you let go are more important than the wave you catch.
• If you miss a wave be sure that another will come behind it.
• Stay out of the water when wild amateurs are present.
• Avoid crowded take offs.
• Don't panic in a wipeout and don't fight the current.
• Success is achieved by taking risk, not avoiding risk.
• Push too hard and you get hurt - don't push hard enough and you can get hurt even worse.
• Get in the water yourself to evaluate the current by instinct - the height and direction of the swell, the wind, the tide, the temperature, the coral reef bottoms, the peak, the trough, the time between sets and the position - data without experience will deaden your senses.
• Know where the "impact zone" is and how to stay out of it.
• Humility trumps arrogance.
• You need to be in condition for the worst circumstance in the worst situation not the best circumstance of the best situation.
• A successful outing is being able to surf another day.

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