Laffer on Taxes

From a recent WSJ article by Nashville resident and tax expert Art Laffer:

Since 1978, the U.S. has cut the highest marginal earned-income tax rate to 35% from 50%, the highest capital gains tax rate to 15% from about 50%, and the highest dividend tax rate to 15% from 70%. President Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0% for almost all home owners. We've also cut just about every other income tax rate as well.

During this era of ubiquitous tax cuts, income tax receipts from the top 1% of income earners rose to 3.3% of GDP in 2007 (the latest year for which we have data) from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP from 5.4% of GDP over the same time period. (See the nearby chart).

These results shouldn't be surprising. The highest tax bracket income earners, when compared with those people in lower tax brackets, are far more capable of changing their taxable income by hiring lawyers, accountants, deferred income specialists and the like. They can change the location, timing, composition and volume of income to avoid taxation.

Horses Ass

I usually hate group forwards, but I thought the one below sent to me by my dad was pretty classic:

Railroad tracks.

The US standard railroad gauge (distance between the rails) is 4 feet, 8.5 inches. That's an exceedingly odd number.

Why was that gauge used? Because that's the way they built them in England, and English expatriates designed the US railroads.

Why did the English build them like that? Because the first rail lines were built by the same people who built the pre-railroad tramways, and that's the gauge they used.

Why did 'they' use that gauge then? Because the people who built the tramways used the same jigs and tools that they had used for building wagons, which used that wheel spacing.

Why did the wagons have that particular odd wheel spacing? Well, if they tried to use any other spacing, the wagon wheels would break on some of the old, long distance roads in England, because that's the spacing of the wheel ruts.

So who built those old rutted roads? Imperial Rome built the first long distance roads in Europe (including England ) for their legions. Those roads have been used ever since.

And the ruts in the roads? Roman war chariots formed the initial ruts, which everyone else had to match for fear of destroying their wagon wheels.

Since the chariots were made for Imperial Rome, they were all alike in the matter of wheel spacing. Therefore the United States standard railroad gauge of 4 feet, 8.5 inches is derived from the original specifications for an Imperial Roman war chariot. Bureaucracies live forever.

So the next time you are handed a specification/procedure/process and wonder 'What horse's ass came up with this?' , you may be exactly right. Imperial Roman army chariots were made just wide enough to accommodate the rear ends of two war horses. (Two horses' asses.)

Now, the twist to the story:

When you see a Space Shuttle sitting on its launch pad, there are two big booster rockets attached to the sides of the main fuel tank. These are solid rocket boosters, or SRBs. The SRBs are made by Thiokol at their factory in Utah

The
engineers who designed the SRBs would have preferred to make them a bit fatter, but the SRBs had to be shipped by train from the factory to the launch site. The railroad line from the factory happens to run through a tunnel in the mountains, and the SRBs had to fit through that tunnel. The tunnel is slightly wider than the railroad track, and the railroad track, as you now know, is about as wide as two horses' behinds.

So, a major Space Shuttle design feature of what is arguably the world's most advanced transportation system was determined over two thousand years ago by the width of a horse's ass. And you thought being a horse's ass wasn't important? Ancient horse's asses control almost everything... while

CURRENT

Horses Asses in Washington are controlling everything else.

Moving Picture of Unemployment

A pretty fascinating look at the unemployment picture:

Chart of the Day

What Real Leadership Looks Like

Conn Carroll on Mitch Daniels:

When he was sworn into office in January 2005, the state of Indiana faced a $600 million deficit and a subpar AA S&P credit rating. While other states like Illinois and Michigan wildly increased spending in good economic times, Gov. Daniels did the opposite. Between 2005 and 2008, he reduced the state’s rate of spending growth from 5.9% to 2.8% saving $450 million.

Per-capita state government spending in Indiana has fallen eight spots and is now the sixth lowest in the nation. By 2009, the state sported $1.3 billion in cash reserves and an AAA rating. All this was accomplished while Daniels, working with an opposition-controlled lower house, enacted the largest tax cut in Indiana history, slashing property taxes by a third.

On his first day in office, Daniels issued an executive order stripping government unions of their power to collectively bargain. The decision has not only cost the left's perpetual dependence machine millions in taxpayer-funded union dues, but also enabled the state to cut costs by instituting a "pay-for-performance" personnel system. Without a burdensome labor contract, Daniels slashed government employment rolls from more than 35,000 to 30,454, a 14% reduction. As a result, Indiana now has fewer state employees than it did in 1982.

When the Great Recession hit, the historically high-cash reserves that Gov. Daniels had built buffeted the state through tough times. While 40 other states have raised taxes during this recession, Gov. Daniels made it clear to the Democrats in the statehouse that that was not an option for Indiana: “We will not make this recession worse by adding one cent to the tax burden of our fellow citizens.”

Instead Daniels has found ways to cut even more spending. All state agencies were forced to cut spending by 10%. The state sold two-thirds of its airplanes and thousands of other vehicles. State employees did not receive a pay raise in 2009 or 2010. Gov. Daniels even sacrificed himself, cutting his own pay for both 2009 and 2010.

While the surrounding rust-belt states of Illinois, Michigan and Ohio have suffered through unemployment rates well above 10%, Indiana’s rate has been close to the national average of 9.7%. Meanwhile, the July 2010 Department of Labor State Employment report shows that the state has created more jobs over the past year than any state but Texas, and that its over-the-year percentage increase in employment is second only to Kentucky.

Finally, before the phrase "Obamacare" had ever crossed anyone's lips, Daniels had already enacted free-market friendly patient-centered healthcare reform. His Healthy Indiana Program (HIP) helps Hoosiers who do not qualify for Medicaid to enroll in individual health-savings accounts.

The state then contributes up to $1,100 per enrollee to these accounts on a sliding income-dependent scale. These dollars are controlled, and owned, by the individual to spend on health services as he or she sees fit, with almost no interference from government or insurance-company bureaucrats. The plan was immensely successful. Interest in the program was so high that the state had to suspend enrollment (because of federal regulations) a number of times. Today there are almost 50,000 Hoosiers enrolled in the plan.

A Few More Thoughts from Tom Barrack

From Barrack's Chairman's Corner:

The disposition of distressed commercial mortgages has not happened at a scalable level as a result of relaxed mark-to-market regulations; untested special servicers and CMBS waterfalls; tranche warfare amongst holders of various classes of debt; zero interest rates; "pray and delay" and "extend and pretend" strategies. Consequently, the anticipated recycling profits from a massive macro correction in debt has been slow to come and many funds have been frustrated by the lack of product at what they believe to be attractive discount pricing. As a result, there are very few market clearing transactions for non-strategic, long-term buyers.

Many owners realize their equity value is gone but in many cases, due to historically low floating interest rates, can still make debt service if the term of the loan is extended. Everyone is playing for option value and it is a slow moving train, which becomes a bit "Japanese-esque," and the tea leaves tell me that this stage will be here for a while.

Commercial banks feel no pressure to mark the loans to market value because the regulatory requirements have provided a relaxation of LTV mark-to-market tests if sufficient debt service is still available. Consequently, a loan originated in 2007 on a $100 property at 70% LTV and 1.0x DSC with a 5.5% interest rate can still be "OK" at an LTV of 150% because artificially low interest rates are driving up coverage ratios to acceptable levels (see chart below); thus the dawning of "extend and pretend" and "delay and pray."

(1): Floating rate assumes L+100 bps with 30-year amortization

Real estate equity is moving slowly because a substantial disparity between most buyers and sellers still exists. Buyers have been anticipating price corrections as a result of the market downturn and continued deterioration in fundamentals while sellers who are not under bank or mortgage pressure are simply holding their ground. In most cases they have little incentive to sell, and due to their own debt issues, more likely than not, have lots of reasons to hold.

........In summary, solid risk-adjusted returns will be made by true real estate professionals with the tools and the teams to plow and hoe. By being in the marketplace, we will sense when that next repricing opportunity exists and will avail ourselves of it. The business is not about inventing the next iPad or launching the largest leverage buyout. It is about showing up, doing a good job, harvesting reasonable returns for our investors (which will look strong in hindsight against other asset classes), and waiting for the repricing moment.

Dodd-Frank Bill

Bankstock's Thomas Brown weighs in on the Dodd-Frank bill:

New horrors of the Dodd-Frank bill seem to come to light every day. The latest I’ve learned of is the concept of the “qualified mortgage” the bill codifies into law.

What’s a qualified mortgage? Congress has decreed that it’s one that adheres to these eight rules:

1. The mortgage amortizes. No option ARMs need apply.

2. It can’t result in a balloon payment that’s twice as large as the average of earlier scheduled payments.

3. The borrower’s income and financial resources must be verified and documented.

4. Underwriting is based on the full term of the loan, and takes into account taxes, insurance, and other related payments.

5. If it’s an ARM, underwriting must be based on the max rate permitted over the first five years and full amortization (including taxes, insurance, and other related payments).

6. The borrower’s debt-to-income ratio meets standards set by the CFPB.

7. Related fees can’t exceed 3 points.

8. Maximum term is 30 years.

Got all that? The law basically insists that lenders write only mortgages that are qualified under federal standards. So, for instance, a lender that writes a mortgage that’s not qualified will face an onerous risk-retention requirement if it securitizes it. In addition, the lender can be held accountable for up to three years of interest payments and damages, plus attorney’s fees. Borrowers will receive special foreclosure protection. One size had better fit all, or else.

Ugh. This is the worst sort of nanny-state over-regulation. There’s a reason, believe it or not, that the financial industry makes a habit of inventing lending products that have varying features: individuals’ financial needs and profiles vary. Products that take account of those differences can benefit both the borrower and the lender. Take, for instance, a type of mortgage that came to be widely vilified in the wake of the housing blowup, the Alt-A. Alt-A mortgages were originally invented for—and fill a critical need of—would-be borrowers who can’t provide the standard 1099/paystub types of documentation needed in the course of applying for a standard 30-year loan. These individuals might be high-earning self-employeds, such as physicians. Or individuals (actors, say) who don’t draw a regular salary but are paid sporadically instead on a per-project basis. They can be very strong credit risks, but basically have a paperwork problem. Alt-A mortgages provide a way for these folks to get access to credit.

But with the passage of Dodd-Frank, lenders’ ability to develop new loan products to serve the needs of people like this will be severely constrained. This is not a good thing. It’s not good for the lending industry, which will now have, at the margin, fewer profitable opportunities to lend. It’s not good for the economy. And it’s not good for borrowers, who’ll now be forced into plain vanilla lending products whether they’re appropriate or not.

You object, and point out that, in the end Alt-As did come to be abused; to prevent similar abuse in the next cycle, some sort of regulation of mortgage products is warranted. I’ll stipulate that. But Congress, in its wisdom, might have considered stopping short of writing into federal law what an acceptable mortgage looks like.

There’s already no shortage of provisions of Dodd-Frank—the CFPB, for instance, and the bill’s lack of preemption of state laws—that will have the effect of restricting credit and slowing the economy. Word of Congress’s insistence that mortgages adhere to highly restrictive, inflexible codified standards is the latest. I’m afraid it won’t be the last.

VERSUS Ad

This is awesome stuff!

Promises, Promises, and More Promises

From the JP Morgan report that included the charts above:

Some politicians and think tanks (e.g. the Tax Policy Center) have argued that tax revenues and government spending as a % of US GDP are not that high, so there’s room for both to rise. The analysis above renders such claims disingenuous at best. Measures of current spending do not capture the scope and size of government programs that already exist, and which will have to be paid for, although no one knows how. Richard Fisher (Dallas Fed President) likens the US entitlement burden to German attacks on the UK in the 20th century, the costs of which eventually sunk the British pound; except this time, the wounds are self- inflicted.

America's Ruling Class

This entire article is worth reading, but I especially want you to read this section of the article:

Dependence Economics

By taxing and parceling out more than a third of what Americans produce, through regulations that reach deep into American life, our ruling class is making itself the arbiter of wealth and poverty. While the economic value of anything depends on sellers and buyers agreeing on that value as civil equals in the absence of force, modern government is about nothing if not tampering with civil equality. By endowing some in society with power to force others to sell cheaper than they would, and forcing others yet to buy at higher prices -- even to buy in the first place -- modern government makes valuable some things that are not, and devalues others that are. Thus if you are not among the favored guests at the table where officials make detailed lists of who is to receive what at whose expense, you are on the menu. Eventually, pretending forcibly that valueless things have value dilutes the currency's value for all.

Laws and regulations nowadays are longer than ever because length is needed to specify how people will be treated unequally. For example, the health care bill of 2010 takes more than 2,700 pages to make sure not just that some states will be treated differently from others because their senators offered key political support, but more importantly to codify bargains between the government and various parts of the health care industry, state governments, and large employers about who would receive what benefits (e.g., public employee unions and auto workers) and who would pass what indirect taxes onto the general public. The financial regulation bill of 2010, far from setting univocal rules for the entire financial industry in few words, spends some 3,000 pages (at this writing) tilting the field exquisitely toward some and away from others. Even more significantly, these and other products of Democratic and Republican administrations and Congresses empower countless boards and commissions arbitrarily to protect some persons and companies, while ruining others. Thus in 2008 the Republican administration first bailed out Bear Stearns, then let Lehman Brothers sink in the ensuing panic, but then rescued Goldman Sachs by infusing cash into its principal debtor, AIG. Then, its Democratic successor used similarly naked discretionary power (and money appropriated for another purpose) to give major stakes in the auto industry to labor unions that support it. Nowadays, the members of our ruling class admit that they do not read the laws. They don't have to. Because modern laws are primarily grants of discretion, all anybody has to know about them is whom they empower.

By making economic rules dependent on discretion, our bipartisan ruling class teaches that prosperity is to be bought with the coin of political support. Thus in the 1990s and 2000s, as Democrats and Republicans forced banks to make loans for houses to people and at rates they would not otherwise have considered, builders and investors had every reason to make as much money as they could from the ensuing inflation of housing prices. When the bubble burst, only those connected with the ruling class at the bottom and at the top were bailed out. Similarly, by taxing the use of carbon fuels and subsidizing "alternative energy," our ruling class created arguably the world's biggest opportunity for making money out of things that few if any would buy absent its intervention. The ethanol industry and its ensuing diversions of wealth exist exclusively because of subsidies. The prospect of legislation that would put a price on carbon emissions and allot certain amounts to certain companies set off a feeding frenzy among large companies to show support for a "green agenda," because such allotments would be worth tens of billions of dollars. That is why companies hired some 2,500 lobbyists in 2009 to deepen their involvement in "climate change." At the very least, such involvement profits them by making them into privileged collectors of carbon taxes. Any "green jobs" thus created are by definition creatures of subsidies -- that is, of privilege. What effect creating such privileges may have on "global warming" is debatable. But it surely increases the number of people dependent on the ruling class, and teaches Americans that satisfying that class is a surer way of making a living than producing goods and services that people want to buy.

Beyond patronage, picking economic winners and losers redirects the American people's energies to tasks that the political class deems more worthy than what Americans choose for themselves. John Kenneth Galbraith's characterization of America as "private wealth amidst public squalor" (The Affluent Society, 1958) has ever encapsulated our best and brightest's complaint: left to themselves, Americans use land inefficiently in suburbs and exurbs, making it necessary to use energy to transport them to jobs and shopping. Americans drive big cars, eat lots of meat as well as other unhealthy things, and go to the doctor whenever they feel like it. Americans think it justice to spend the money they earn to satisfy their private desires even though the ruling class knows that justice lies in improving the community and the planet. The ruling class knows that Americans must learn to live more densely and close to work, that they must drive smaller cars and change their lives to use less energy, that their dietary habits must improve, that they must accept limits in how much medical care they get, that they must divert more of their money to support people, cultural enterprises, and plans for the planet that the ruling class deems worthier. So, ever-greater taxes and intrusive regulations are the main wrenches by which the American people can be improved (and, yes, by which the ruling class feeds and grows).

The 2010 medical law is a template for the ruling class's economic modus operandi: the government taxes citizens to pay for medical care and requires citizens to purchase health insurance. The money thus taken and directed is money that the citizens themselves might have used to pay for medical care. In exchange for the money, the government promises to provide care through its "system." But then all the boards, commissions, guidelines, procedures, and "best practices" that constitute "the system" become the arbiters of what any citizen ends up getting. The citizen might end up dissatisfied with what "the system" offers. But when he gave up his money, he gave up the power to choose, and became dependent on all the boards and commissions that his money also pays for and that raise the cost ofcare. Similarly, in 2008 the House Ways and Means Committee began considering a plan to force citizens who own Individual Retirement Accounts (IRAs) to transfer those funds into government-run "guaranteed retirement accounts." If the government may force citizens to buy health insurance, by what logic can it not force them to trade private ownership and control of retirement money for a guarantee as sound as the government itself? Is it not clear that the government knows more about managing retirement income than individuals?