Coyote Blog

You decide  (origins and data for chart here)

I am generally opposed to tax increases because they never seem be matched to spending cuts — the tax increases are passed but Congress finds ways to gut the spending cuts.  But I would accept this proposal in a heartbeat:  Return to both Clinton era tax and spending levels.  There, that’s my super committee proposal.   Taxes and spending both targeted at 19% of GDP.    Problem solved.

First, the background.  Veronique de Rugy writes something that is undeniably true, though the Left has played semantic games with words like “trust fund” and “lockbox” for years to try to “shelter” the public from this reality:

In practice, [] the trust fund and interest payments it receives are simply accounting fiction. For years, the federal government has been borrowing the Social Security Trust Fund assets for its daily spending. The fund has nothing left in it except IOUs from the federal government. In fact, even the interest is paid in IOUs.

Hence, the only way Social Security will not go into the red this year and in future years is if the federal government pays back Social Security. But since the money has long ago been consumed, it must borrow money from the public or raise taxes to pay its Social Security debts.

In response, Kevin Drum whips out this absolutely stunning statement:

Back in 1983, we made a deal. The deal was this: for 30 years poor people would overpay their taxes, building up the trust fund and helping lower the taxes of the rich. For the next 30 years, rich people would overpay their taxes, drawing down the trust fund and helping lower the taxes of the poor.¹

Well, the first 30 years are about up. And now the rich are complaining about the deal that Alan Greenspan cut back in 1983. As it happens, I agree that it was a bad deal. If it were up to me, I’d fund Social Security out of current taxes and leave it at that. But it doesn’t matter. Once the deal is made, you can’t stop halfway through and toss it out. The rich got their subsidy for 30 years, and soon it’s going to be time to raise their taxes and use it to subsidize the poor. Any other option would be an unconscionable fraud.

I really had a WTF moment when reading this.  Its hard to know where to start, so here are some reactions in semi-random order:

• For those of you over 40, do you remember such a deal?  No, you don’t, because there never was one.  What happened was that Congress decided to sweep the Social Security surplus into the deficit calculation in order to disguise the magnitude of unsustainable spending, to help prevent the kind of electoral backlash we may well see later this year.  This is Soviet-style history making.
• Here is a thought problem: Picture Tip O’Neil, Speaker of the Democrat dominated House of Representatives at the time, publicly signing on to a deal that the poor would pay higher taxes for 30 years to give the rich a tax break.  It is a total joke to even consider.   The absurdity of such a notion is mind-boggling.
• It took me a while to parse this and figure out what he was even talking about.   For example, there was never a tax increase to the poor during the 1980′s, so what does he mean that the poor would pay more for 30 years?  The only way this can even be the correct view of the world is if one makes two assumptions:
  1. Everything Congress chooses to spend money on is perfectly, morally justifiable and therefore spending levels are a fact of nature beyond our ability to challenge or question
  2. Rich people have the moral obligation to pay for all incremental government programs, and all budget gaps will be closed by new taxes on rich people.  Taxes on rich people, as a corollary, are never too high.

Given these assumptions, then the “Deal” sort of kind of makes sense.  By the progressive “logic” of these two assumptions, social security taxes in an alternate world would have been reduced during the surplus and the general budget deficit would have been filled not with social security surpluses but higher taxes on the rich.

• The previous logic depends on treating social security taxes as unfairly regressive taxes as part of an income transfer / welfare program.  If you treat them as premiums in an insurance program, the retroactive logic trying to cast this as a “deal” in 1983 doesn’t work.  Interestingly, many on the left in other forums have argued against calling social security taxes anything but insurance premiums, including….Kevin Drum

The men in my family of my father’s generation returned home after serving their country and got jobs in the local steel mills, as had their fathers and their grandfathers. In exchange for their brawn, sweat, and expertise, the steel mills promised these men certain benefits. In exchange for Social Security taxes withheld from their already modest paychecks, the government promised these men certain benefits as well.

….These were church-attending, flag-waving, football-loving, honest family men. They are rightfully proud of providing homes and educations for their children and instilling the sorts of values and manners that serve them well as adults. And if I have to move heaven and earth, now that they’ve retired, the Republican party is NOT going to redefine them as welfare recipients.

• Note by the way, that if this really is an insurance program, any private insurer or private pension fund managers in America would be in jail had they done what our trustworthy federal government did.  In effect, they spent other people’s pension money on current operations.

If we want to describe the last 30 year history of Social Security surpluses as a deal, here is what the actual deal was without ex post facto varnish:  Congress in the eighties said that they were going to spend that surplus money now to get themselves re-elected, and some other Congress 30 years hence would have to figure out how to deal with the bare cupboard.   That was the deal.  It was a simple screw you to future generations.

Drum, given his progressive assumptions, fantasizes a deal based on his assumption that the only way to fill in the hole is with higher taxes on the rich, because his mind is incapable of wrapping itself around any other alternatives (see the two assumptions above).

But it is worth noting that the surplus was in the main handed away by the Democrats to the poor and middle class through new entitlement spending.  Its hard to figure how a series of actions that took seniors pensions and frittered it away in a variety of programs that at best helped the poor and in reality probably helped no one but government bureaucrats somehow obligates the rich to pay 30 years of new taxes to clean the whole mess up.

From Chicago Sun-Times

In one of the largest Statehouse rallies ever, thousands of unionized government workers and social-service advocates rallied for an income-tax hike that could avert billions of dollars in crippling budget cuts.Three hundred busloads of people, mostly from AFSCME Council 31, SEIU, the Illinois Education Association and the Illinois Federation of Teachers, converged outside the Capitol while lawmakers were in session.

On several occasions during the late-morning rally, protesters turned away from the stage across from the Capitol to face the ornate seat of state government and chant, “Raise our taxes!” and “Save Our state!”

James King here in Arizona thinks the new “I didn’t pay enough” law here is dumb.

Feel like voluntarily ponyin’ up some of your hard-earned cash to help legislators dig themselves out of the budget crisis they created? Of course you don’t, but that didn’t stop legislators from taking time out of their day to pass a bill that asks taxpayers to do exactly that.

The “I-didn’t-pay-enough fund” is the creation of numb Skull Valley Representative Judy Burges. It asks taxpayers to voluntarily donate money to the state government to help chip away at the state’s $2.6 billion budget shortfall.

What he doesn’t readlize is that it is aimed directly at the folks that are protesting in the example above.   Want to pay higher taxes, then send in a check!  But don’t make the rest of us do so.

It’s hard to imagine a more naked example of rent-seeking than this one

A group representing Arizona hospitals is pursuing a ballot initiative that would tax the state’s high-income earners to help pay the health-care tab for the state’s neediest kids and adults.

The Arizona Hospital and Healthcare Association expects to file paperwork for the initiative later this week, aiming for a place on the November ballot.

It asks voters to raise the state income-tax rate 1 percentage point on income exceeding $150,000 per individual and $300,000 per couple.

The association estimates the initiative would raise more than $140 million each year to pay for health insurance for low-income children and adults, graduate-school medical education and reimbursement to hospitals that care for the poor.

In other words, the government will take the money and hand it over to hospitals to do the things they are already doing.  I could put together a heartwarming story too for my industry — we think there should be a 1% tax on all Arizona residents for kids to visit parks and campgrounds to fight childhood obesity and improve their connection with nature — but you don’t see me rent-seeking like this.

My gut feel, though I have no direct evidence, is that this is being rushed through to beat the deadline on Obamacare implentation — my guess being that this will be somehow moot once that program is in place so the hospitals want to get their licks in before anyone really figures out the new health care law.  Once the tax and program is in place, it will be virtually impossible to kill, even if it is irrelevent post-Obamacare.  Anyone have knowlege about this one way or the other?

I love it when Mark Perry rewrites trade stories

“U.S. Steel Unions Score American Consumers Dealt Yet Another Huge Victory Loss As China They Are Slammed With New Steel Tariffs Taxes”

One has to envy pity the insignificant amount of pull U.S. steel workers consumers and steel-using companies have. The majority of U.S.-China trade agitation is caused by imposes signifcant costs on this one relatively tiny huge part of the U.S. economy.

Forcing people to pay money or pay a fine on their tax return to buy a product they currently don’t buy is a tax.  Particularly when that product will likely be over-priced to the young and healthy not buying it today to subsidize the older folks.

The Baucus Health Care bill follows in the tradition of many other pieces of recent legislation in raising taxes in ways such that Congress can claim that it didn’t actually raise taxes.  Here are four such taxes in the Baucus Bill  (note that no one that I know of has read any actual legislative language, so this is based on the press releases by the bill’s authors.  Actual bill language can only be worse).

Employer Penalty is a Tax: In a step right out of Goldilocks, the Baucus bill will impose “penalties” on employers with no employee health care plan as well as on employers who have plans that are “too rich.”  Never mind the insanity of the government micromanaging how an employer chooses to structure his compensation package to employees.  These “penalties” are structured as percentages of wages — the one for having no health care plan was 8% of wages in the last bill.  This is a direct tax on employment, making hiring people more expensive (effectively the same magnitude as doubling the Social Security tax).  So how does this effect the average person?  Think of it this way, for the same wage, you job will be more expensive to a company that it was before the bill, making it less likely you will get hired at that wage.

Insurance Mandate as a Tax: The mandate that everyone must have insurance is a tax on the young and the healthy, as I explained previously:

People focus too much on the penalty itself being a new tax.  But the new tax is actually the requirement that individuals buy a product (in this case a health insurance policy) that they feel has no value (or else they would purchase it of their own free will today).  The government stopped pretending long ago that these younger middle class families will get much value from such a policy.  In fact, if they did get value commensurate with the premiums they will be paying, the mandate would not be achieving its purpose.  The whole point is that healthy people pay more into the insurnace system than they get back to support sick people.  If that payment is mandatory, then it is a tax, even if it is called an “insurance mandate” instead.

In fact, this is made all the more clear when politicians also suggest that cheaper high deductible health insurance plans be banned, as they were in Massachusetts.  Again, the whole point is to get young healthy people to overpay for insurance, and allowing them to buy sensible, cheaper, high deductible insurance defeats the whole purpose.

In fact, the bill’s supporters have explicitly discussed requirements that insurance companies raise the price of insurance to the young and healthy to help reduce premiums for the old and, er, politically more active.  This is a redistributive tax, hidden within an insurance rate structure that will be heavily regulated by Congress.  Though don’t expect Congress to admit this when young folks start to complain, they will say “blame the insurance companies.”  Which is the whole beauty of such a hidden tax.

Corporate Taxes as Consumer Taxes: The plan would place new excise taxes on insurance companies, drug companies, and medical device providers.  But these taxes, particularly in the low margin insurance businesses (Yeah, I know if you only listened to Obama, you would never realize they were low margin but they are) just get passed onto consumers in the form of higher prices.  Congress knows this, but pretends it doesn’t happen, so it can tell the economically ignorant that it hasn’t raised taxes on consumers, and that rising prices are all the fault of the evil insurance companies blah blah, you know the drill.

Price Controls as a Tax: A large part of the Baucus Medicare savings is instituting price controls on doctors and other medical suppliers –  basically cutting their reimbursement rates.  This, by the way, just confirms what we all have known, that Obama and the Democrats don’t have some mysterious win-win way to cut medical costs.  The only levers they have are 1. Price Controls and 2. Denying care.

There is absolutely no difference to a doctor between price controls and a tax.  A cut in the reimbursement rate from $50 to $40 is the same as having a 20% tax put on his $50 reimbursement.  Again, price controls in this context are just a way of hiding a tax.

And this might be the most dangerous tax of all, as such price controls always, by the immutable laws of economics accepted by monetarists and Keynsians alike, reduce available supply.  Doctors, for example, are going to be less willing to stay in the medical profession.  The result is inevitably shortages and long waits, something that should surprise absolutely no one as shortages and queuing are endemic in every government health care system in the world, starting with liberal darling Canada, whose citizens get medical treatment quickly only by crossing the border into the US.

The entire Pacific coast is vying to become the next rust belt.  Only the nice climate and beautiful scenery will keep anyone there.

The Labor Department reported yesterday that Oregon’s unemployment rate soared to 12.4% in May, the nation’s second highest after Michigan’s 14.1%. What to do? If you’re the geniuses in the state legislature in Salem, you naturally raise taxes.

Last week the legislature approved a $2 billion tax hike on personal income and small businesses that haven’t already left the state. The highest tax rate on income above $500,000 would climb to 11% — up from an already high 9%. Oregon will soon boast the second highest income tax rate in the nation, moving ahead of California (10.55%), and only slightly behind New York City (12.6%). Corporations will pay a 7.9% tax on gross receipts, up from 6.6%.

To be fair, Oregon does not really have a sales tax, so it is hard to compare apples and oranges on taxes.  But missing from the article is another factor in their unemployment, and the reason our company ultimately had to leave the state:  Oregon has the second highest minimum wage in the country (just behind Washington State and just ahead of California), and it is getting higher every year as it is automatically indexed to something or other that seems to be rising faster than inflation.

Via Matt Welch, in response to a Paul Krugman editorial lamenting that California’s fiscal problems are all due to prop 13.

Here is where the traditional liberal argument loses me. The California budget “emergency” isn’t a tax problem, it’s a spending problem. State spending in the past two decades, as this Reason Foundation report [PDF] spells out, has increased 5.37 percent a year (and nearly 7 percent for the past decade), compared to a population-plus-inflation growth rate of 4.38 percent. If the budget growth rate had been limited to the population-inflation growth rate, the state would be sitting on a $15 billion surplus right now. Surely enough to dip into during a real emergency. What’s more, despite this alleged tax straightjacket, Californians manage to still pay 21.9 percent in state and local taxes, compared to 14.5 percent for Texas.

In 1933 and 1934, America was on a trajectory to recover from the Depression.  But, before recovering, the economy was to nose dive again, and never really did recover until the next decade.  Historians and economists argue endlessly about this, but I am convinced that the arbitrary and capricious meddling in the economy by the Roosevelt administration caused many folks who would have started investing and bargain hunting with their capital to sit on the sidelines.  The National Industrial Recovery Act (thankfully killed by a mercifully non-packed Supreme Court) was just the most egregious example of the US government making it impossible to evaluate long-term business proposals because the basic foundations of the rule of law were shifting so much.

I fear we are facing a similar danger.   Everything continues to tell me that had we taken our medicine late last year, we would be entering a recovery over the next few months.  However, the Obama administrations economic interventions have gotten so egregious that there is a real danger investors are going to sit on the sidelines with their capital.  Who knows when your industry will get targeted with compensation restrictions, or higher taxes, or even forced changes in ownership?  Who could possibly feel comfortable making 20-year investments in this environment?  Dale Franks quotes Thomas Cooley:

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that’s because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Postscript: There is legislation pending in Congress to restrict the ability of lenders  (e.g. credit card issuers) from changing rates on existing debt.  They ask if it is fair for someone who took on a debt thinking it would be at 15% to suddenly find it is at 25%.  But how are tax increases any different.  I make 10-20 year investments in my company, and the expected tax rate is a hugely important assumption in whether it makes any sense for me to put my capital in a particular venture.   How is a large increase in taxes on returns from my past investments any different than changing the interest rate on an existing debt?

I have warned for years about government health care being a Trojan horse for government micro-management of personal behaviors.  If government is paying the health care bills, then anything individual action or choice that can conceivably be linked to health are open to regulation.  The latest episode:

Note in particular their emphasis on “health-related excise taxes.” Those discussions are happening in Congress and the administration, too. It’s really looking like tobacco, alcohol, and sugared sodas are likely to get a bit more expensive after health reform. Polling around these policies is proving them more popular than most wonks expected, and they have the secondary benefit of being dual-purpose: They raise money and make Americans healthier.

The fascism of good intentions is on its way.

I see a lot of news stories about Obama supporters scratching their heads at why Obama did not get more respect from other nations.  Why do these countries continue to heap scorn on the US as the US contributes more and more to international efforts?

Here is a hint:

1. These other countries share President Obama’s attitudes about the rich
2. As far as the rest of the world is concerned, the US is rich

The rich in this country pay for most of the programs Obama takes credit for.  When folks say that Obama “cares”, he does so with the money of America’s rich.  In return, he heaps nothing but scorn on the rich, blaming them for any economic problems that may exist and criticizing them for not paying enough taxes.

Mr. President, the other countries of the world treat you and this country exactly like you treat the rich, and for the same reasons.  If that frustrates you, look to your own values first.

We have taken over a demolished campground near Guntersville, AL  (Honeycomb, if anyone is familiar with the area) and are currently in the process of rebuilding it and opening it to the public.  We have not previously done business in Alabama, so here is what we have had to do so far to be legal:

1.  Identified and retained an attorney in the state to act as our registered agent (required for in-state process service)

2.  Registered as a “foreign corporation”  (foreign meaning we are from another state) with the Secretary of State

3.  Registered with the state for a Corporate income tax number

4.  Registered with the state for a business privilege tax number  (Nothing sets me off faster than when I get the pious “doing business in our state is a privilege” spiel from a state.  What an awful theory of government and individual rights that statement represents!)  The privilege tax (which is in some sates, like AZ, a euphemism for sales tax)  seems to be a second income tax in AL, calculated on a slightly different basis. (Update: apparently the first year’s taxes must be paid in advance, at the time one starts business in the state).

5.  Registered with the state (yes, with another ID number) to collect sales taxes

6.  Registered with the state to collect lodging taxes  (By the way, spent a couple of hours with the code trying to figure out what these taxes apply to and what they don’t, as this varies by state.  Also, the tax rate tables are a complicated mess, and can vary for two locations located a few yards from each other).

7. Registered with the County (yes, with another ID number) to collect county sales tax.  Actually, they outsource this collection to a private company called “Revenue Discovery Systems” which is a nice Orwellian name for a private tax collector.  Is tax farming coming back in vogue?

8.  Registered with the County to collect county lodging tax.   (sigh, we are going to have to file multiple reports each month to report all of our transaction taxes – some states actually have unified reporting and payment).

9.  No city taxes, it turns out, because we are just outside of any incorporated areas.  Thank goodness for small favors

10.  Registered for state unemployment taxes  (yes, with another ID number).  This was one of those circularities that really drive you crazy.  I can’t pay people until ADP has the state set up for us in the payroll system, but they need an unemployment number that the state refuses to provide until we have issued at least $1500 in state payroll checks.  Arrrgghhh.  Fortunately (?) ADP will go ahead and start issuing the checks without a number, but there is a $50 per month fee for doing so.

11.  Registered for state income tax withholding (yes, with another ID number).  Again, need this to pay people legally

12.  Don’t know yet if there is County withholding.  There are county income taxes in some places.

Expect in these forms to fill out the exact same data over, and over, and over again.  The state will maintain corporate records in about 6-8 parallel data bases and corporations are responsible for keeping every one of these data bases correct.

What I have not done yet, but know from experience I will have to do

1.  Obtain county occupancy permits or licenses

2.  Obtain county and/or state health inspections

3.  Obtain Coast Guard inspections of the docks

4.  Register with the state and/or county to pay personal property taxes

5.  Get miscellaneous bizarre licenses that are absolutely unpredictable and impossible to discover until we are in violation, like the egg merchant license in KY and CO.

I thought for about 3 microseconds about selling beer and wine in our store, but I am sick and tired of the intrusive, picky, petty, and time-consuming liquor licensing processes in most states, and the income we make from alcohol sales simply doesn’t measure up to the hassle.

Postscript: I try to remember that we should actually be thankful for this mess.  Though it represents almost 20 hours of my personal time to set up, and hours of time each month  filling out forms and reports, not to mention thousands of dollars a year to ADP to help manage, this mess is still orders of magnitude better than what an entrepeneur would face in France or Germany.

Apparently there is some debate about the true cost of Obama’s proposed cap-and-trade system – is it $646 billion?  it is $2 trillion.  My sense is that it doesn’t matter, because these costs are to the total cost of a full Co2 abatement program what shooting the first monkey into space was to the moon-landing program.

Just to get this out of the way, it is absurd to argue this is anything but a tax on individuals.  It HAS to result in a price increase to individuals, for things like electricity, or it is not working.  Price increases are a core feature of the program, not a bug.  The whole point is to reduce fossil fuel use, and in the near term, with infrastructure fairly fixed, this can only be achieved via reduced electricity consumption.  And, unless you are a fan of rolling brown-outs, this in turn will only be achieved by raising the price.   Long-term this reduction might come from shifts in the mix of electricity producing facilities (ie from coal to gas or nukes) but this takes time, and never-the-less the wholesale replacement of perfectly serviceable electrical generation infrastructure will certainly have a cost as well.

Further, now matter what the initial cost is, the costs will almost certainly have to increase by orders of magnitude over the next decades, if the programs is to have its desired benefits of substantially reducing CO2 production  (currently targeted by the administration as an 80-85% reduction).  How much of a price increase is it going to take for you to reduce your home’s electrical use by 80%?  We have examples of parts of the country where electricity rates have doubled in a short period of time, and electrical consumption changed by far less than 80%  (the EPA apparently uses near-term price elasticities around 16%, meaning that a doubling of prices might result in a 16% reduction in demand).

It is probably easier to think about gasoline use (though this initial system will not apply to most transportation uses).  Last year, gas prices doubled.  Did your driving go down by 80%?  Probably not, since a doubling of gas prices reduced driving and demand by about 5-10%.  How high would the price of gas have to go to get you to really cut back your driving by 80%?  Europeans have $8-$9 a gallon gas, and much more onerous regulations on fuel economy in cars, and their per capita consumption has not fallen 80%  over the last decades  (Germany’s per capita gas consumption, for example, has dropped about 20% since 1990).  How high will our gas prices have to go?

According to climate alarmists, Co2 levels in the atmosphere have already passed a point of no return leading us to a tipping point and rapidly accelerating temperatures.  As a result, again according to alarmists, incremental reduction steps that slightly slow the rate of increase of Co2 are useless — only enormous reductions in Co2 output that result in declining world Co2 levels will suffice to save us from doom.

What this means is that Obama’s cap-and-trade scheme as currently configured is both expensive AND useless, as it will, by almost any estimation, make only a trivial dent in Co2 growth  (similar to the Kyoto treaty, where even supporters admit that full compliance would have made an immeasurably small difference in global temperatures).   A real plan that would actually hit the goals he has set for us would be so expensive as to make even $2 trillion seem cheap.  This is just a toe in the water, to set up the infrastructure — the real cost increases come later.  Using a fairly crude analogy, Obama is merely grabbing the waistband of our underwear now — he won’t start to pull and twist until later.

The (flawed) theory of government stimulus plans is that in certain economic under-capacity situations, government spending can have a multiplier effect.

The Anti-planner shows that, as far as government spending on mass-transit is concerned, $9,150 of taxpayer subsides per rider generate about $6,100 in average savings per rider.  Every dollar of public transit spending destroys about 30 cents of value, which I guess makes it the anti-stimulus.

Update:  Yeah, I know, transit supposedly eliminates all those externalities.  But most rail transit plans typically reduce congestion by fractions of a percent, even by their builder’s estimates, while energy savings is wildly over-estimated.

Why is this concept so hard to get across – averages do not reflect individuals.  Individuals move up and down through the averages all the time, such that the “rich” and “poor” today are often circumstantially different people than they were 10 or 20 years ago.  But Kevin Drum and the left will never get it

Over the past three decades, these families have seen their incomes double and triple while the rest of the country stagnated.

Repeat after me — the families in the 1986 rich are NOT the same families in the 2006 rich.  Some overlap, of course, but many do not.

Even if all the averages were stagnant, it could be very possible for every individual in the average to be doing better year over year but have the averages stagnate.  For one, individuals typically gain income as they age and gain experience.  The reason the averages don’t move with them is that new workers, both teenagers and poor immigrants, move onto the list from outside, often at the bottom.  If you look at the same group of people today and ten years ago  (therefore leaving out new entrants into the work force over that period and what they do to the averages) you will find them doing much better.

And I thought this was funny:

by getting the centrist optics right, Obama has been able to move more boldly than he otherwise could have.  Republicans who paint him as the second coming of Karl Marx just look like idiots these days.

Note that he is not arguing Obama is not acting like Karl Marx, just that he is successfully avoiding being percieved as such.  Boy, that sure must be a real communications achievement for a man who gets so much tough scrutiny and skepticism from the media ;=)

By the way, does anyone else find it weird that the Democrats have decided to do battle with Ruch Limbaugh, rather than any actual, real Republic elected official.  Is this a Democratic strategy, to find someone they can safely demonize without political power to strike back, or a Republican strategy to use Limbaugh as a stalking horse to save them from taking tough opposition positions?

I remember Democrats scoffing at GWB’s on-time tax refund checks last year.  I agreed with them at the time, thought potentially for different reasons, saying that one-time rebates are far less attractive than permanent rate changes, and a rebate that just increased the national debt was robbing Peter to pay his dad.

So I am not sure how the Democrat’s explain this any differently (from an email I got from the SSA)

Dear Colleague:

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This new legislation provides a one-time payment of $250 to Social Security and Supplemental Security Income beneficiaries.

Over 60 million beneficiaries will receive a one-time payment. We expect all payments to be delivered by late May 2009. To assist us in issuing these payments as quickly as possible, beneficiaries should not contact Social Security unless they do not receive their payment by June 4^th. As we move to implement the new legislation, we will continue to provide updates to keep you informed of our efforts in this area.

You can learn more about these one-time payments at www.socialsecurity.gov.

We ask that you share information about these efforts with members, colleagues and any parties who would find them of interest.

I look forward to the opportunity to discuss this important legislation with you.

Sincerely,

Cheri Arnott

Associate Commissioner

for External Affairs

The only difference I see is 1) the rebate is going to a lot of people who do not even pay taxes and 2) by giving it to social security beneficiaries, the generational wealth transfer is all the more stark.  Now we are robbing Peter to pay his grand-dad.

You see, kids, government has to closely regulate evil capitalists, because these capitalists sometimes make investment mistakes, like making highly leveraged investments in risky bubble assets.  The government must be the one to watch over their shoulder, because well-meaning public servants would never make such a mistake themselves:

The California Public Employees’ Retirement System (CalPERS)is now warning California’s cities that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers, reports the Wall Street Journal. Some communities are already cutting municipal services and they are blaming CalPERS, not Proposition 13. Dan Cort, mayor of Pacific Grove, has been quoted as saying, “CalPERS could bankrupt us faster than anything else.”

According to the Journal, CalPERS has lost almost a quarter of the $239 billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund’s distress, but less well known is that CalPERS makes extensive investments in real estate — investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money. While this worked well in a rising market, now that real estate has tanked CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year ending in June.

Note especially the text in bold.  It takes some effort to lose more than 100% of your investment in one year.  They would have been better off investing with Bernie Madoff, since a 100% loss would have been better than 103%.

The inherent flaw in every call for government action is not the “insight” that business people sometimes are wrong, even way wrong.  The flaw is assuming that anyone in government is more capable, or has superior incentives, to make better decisions.

The very essence of business decision-making is prioritization and trade-offs.  The same is true in the government, its just that the objective function is reversed:

GM is warming up the propaganda engine for the next run at Congress. “Look, the first thing we had to cut was our electric car program!”.

And here I thought that because GM has still, after 30 years, failed to realize their business model needs to change that maybe management there were slow learners.  But they seem to be very, very adept at learning the government game.

When I was in the corporate world, if I wanted extra funds for my projects, I would have to go in and say “Here are all my projects.  I have ranked them from 1-30 from the most to least valuable.  Right now I have enough money for the first 12.  I would like funding for number 13.  Here is my case.”

But the government works differently.  When your local government is out of money, and wants a tax increase, what do they threaten to cut?  In Seattle, it was always emergency services.  “Sorry, we are out of money, we have to shut down the fire department and ambulances.”  I kid you not — the city probably has a thirty person massage therapist licensing organization and they cut ambulances first.   In California it is the parks.   “Sorry, we are out of money.  To meet our budget, we are going to have to close down our 10 most popular parks that get the most visitation.”  The essence of government budgeting brinkmanship is not to cut project 13 when you only have money for 12 projects, but to cut project #1.

I can just see me going to Chuck Knight at Emerson Electric and saying “Chuck, I don’t have enough money.  If you don’t give me more, we are going to have to cut the funds for the government-mandated frequency modification on our transmitters, which means we won’t have any product to sell next month.”  I would be out on my ass in five minutes.  It just floors me that this seems to keep working in the government.  Part of it is that the media is just so credulous when it comes to this kind of thing, in part because scare stories of cut services fit so well into their business model.

So of course, with billions of dollars of waste, absurdly high labor costs, stupid-large executive compensation, etc., GM chooses to cut funding the project that is most important to Congressional Democrats and the new Obama administration.

I hate to pick on Kevin Drum twice in a row, but my God is this the worst economic prescription you have read of late:

The only sustainable source of consistent growth is rising median wages. The rich just don’t spend enough all by themselves.

The flip side of this, of course, is that rich people are going to have to accept the fact that they don’t get all the money anymore. Their incomes will still grow, but no faster than anyone else’s.

How do we make this happen, though? I’m not sure. Stronger unions are a part of it. Maybe a higher minimum wage. Stronger immigration controls. More progressive taxation. National healthcare. Education reforms. Maybe it’s just a gigantic cultural adjustment. Add your own favorite policy prescription here.

This isn’t just a matter of social justice. It’s a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama’s biggest economic challenge. Until median wages start rising steadily and consistently, we haven’t gotten ourselves back on track.

This is so crazy, its is hard to know where to begin.  And since it is after midnight, I will keep it short.  But here are a few thoughts:

• Note the embedded theory here of income and wealth, which is really startling.  For Drum and most of the left, income is this sort of fountain that spews forth on its own out in the desert somewhere.   Rich people are the piggy folks who crowd close to the fountain and take more than their fair share of what is flowing out.  There is absolutely no recognition that possibly wealth is correlated with individual initiative, work, intelligence, and behaviors.  More on zero-sum economic thinking here and here.

• I am sick and tired of the “stagnant median income” meme.  How many times does this have to be debunked?  But the quick version is

1. Median total compensation per individual is not stagnant, it has risen steadily.  The only way to show stagnant incomes is to look only at cash wages, and ignore the shift in compensation value to health care and other non-cash benefits.  Also, folks trying to push this meme typically look at household income rather than individual income, but since household sizes have been shrinking rapidly, it skews the data.
2. Median income numbers are weighed down by strong (legal and illegal) immigration.  New immigrants entering at the bottom bring the median down.  If one were to look at apples and apples, ie the same people without immigrants ten years ago and today, one would see strong median income growth.  Just to drive the point home, if there have been 10 million new immigrants at the poor end of the economy, then one needs to count up the list of incomes 10 million spaces to get the true apples-to-apples median income comparison.
3. Individuals matter, not medians.  Even with a stagnant median income, all individuals can and probably are doing better as incomes improve with age.
4. A lot more here

• I feel like I am living in some weird new incarnation of Brave New World or Midas World where the government sets its highest purpose as promoting ever-higher consumer spending.  The last such goal the government set for itself was increasing home ownership.  And that worked out really well.
• This is back to the 70′s time, something I have been predicting for a while.  How is it that educated people can believe that protectionism + strong restrictions on the free movement of people + higher taxes + government tilt of the labor management bargaining power further towards the unions + creation of a massive new government bureaucracy = increased prosperity?  I think of all the crap I catch from leftists that I am somehow anti-science and anti-reason for being a climate skeptic.  But economics is a science too, and willful ignorance of that science is far more destructive than other instances of scientific ignorance to which they point.
• Isn’t protectionism + strong unions + comprehensive 3rd party-paid health care + high government regulation exactly the approach the US auto industry has taken.  How’s that working out?

What better way to inaugurate the new blog site than to rant about a Kevin Drum post?  Drum posts this chart today from the NY Times showing a drop-off in the effective total tax rate (income+social security+other stuff) at very high income levels.

Well, no freaking duh.    I suspect that this has been true practically forever.  Why?  Because this is NOT an income tax chart, it is a total tax chart.  And as such, it includes social security and medicare taxes (collectively, with a couple of other minor things, called “payroll taxes”.  These taxes, about 8% of total income, are a flat tax with a cap around $100,000.  This means that everyone with income under $100,000 pays 8% of all income.  Someone at $5,500,000 (midpoint of the $1 million to $10 million band) pays only 8%  of the first $100,000 or an effective rate of 0.146% of total income on payroll taxes.  For someone in the top 400 taxpayers, the rate is close to zero.   So you really have to add 8 percentage points or so to the higher rates to make them comparable ex-Social Security to rates for earners under $100,000.

Now, we can argue about the regressive structure of Social Security.  But many on the left have opposed making it more progressive.  They want Social Security to perceived as an insurance program, not a welfare/transfer program.   To be insurance rather than welfare, effectively the same income that is used as the basis for benefits must also be the income basis for taxation.  Income over $100,000 is not used to calculate benefits, so it is not taxed.

Here is one person on the left making this point in 2005:

…when his aides presented him with their initial Social Security proposals 70 years ago, FDR balked: “No dole,” he said, “mustn’t have a dole” — because he knew instinctively that welfare programs are both fundamentally unpopular as well as corrosive to the human spirit. Conservatives understand this better than liberals, and know perfectly well that the best way to kill something is to convince the public that it’s actually a welfare program.

But that’s not what Social Security is. It’s a modestly progressive social insurance program that’s paid for by everyone and that benefits everyone. If it ever stops being that, if it ever stops being universal, it will eventually cease to exist. Don’t let anyone fool you into thinking otherwise.

The person who wrote this was … Kevin Drum.  It is wildly disingenuous to look at income taxes and payroll taxes mixed together.  It is even more so given Drum fully understands why payroll taxes are structured as they are.

Which is all not to say that there is not a really halide point in the article that people in the 100,000-200,000 range are getting hosed.  But I would submit this hosing is more due to work by Drum’s intellectual allies than the reverse.  Phase-outs of deductions  occur mostly in this range in the tax code, as does phase-in of the AMT.  Both are leftish creations.

Also, there has clearly been something regressive in the tax code for the top 1% of earners over the last 10+ years.  I am not sure what it is, because it certainly is not in the base rate schedule.  My guess is that they just spend a hell of a lot more on managing their tax bill than you or I do.  I am sure if I spent a million dollars on tax advice, I would cut my bill by 3 percentage points.  Of course, that is a losing proposition for me, but a winning proposition for someone who makes $100 million a year.  But hasn’t this always been the case?  And won’t it always be the case, at least until we decide to radically simplify the tax code?

I wrote more about Drum’s 2005 post here.  I demonstrated how Social Security is promising me a negative rate of return on my money here.  I showed despite Drum’s protestations that Social Security is in fact mostly a transfer program here, if one defines a transfer as the difference in the return I get from SS and the return I would get on the private market.

I propose a survey.  We will ask 500 CEO’s of large company’s and 500 small business owners just one question

1.  Do you agree/disagree with the following statement:  In order to make my business more competitive in international markets, the federal government needs to raise taxes and expand its scope

How many out of the 1000 would answer "Agree?"  Well, at least the number won’t be zero, as long as you ask the NY Times:

…the taxes collected last year by federal, state and local governments in the
United States amounted to 28.2 percent of gross domestic product. That
rate was one of the lowest among wealthy countries – about five
percentage points of GDP lower than Canada’s, and more than eight
points lower than New Zealand’s. …the meager tax take leaves the United
States ill prepared to compete. From universal health insurance to
decent unemployment insurance, other rich nations provide their
citizens benefits that the U.S. government simply cannot afford.
…revenue will prove too low to face the challenges ahead.

I love the part about unemployment insurance particularly — other countries are more competitive than we are because they pay their citizens more not to work.  Huh?  Daniel Mitchel responds:

The editorial conveniently forgets to explain, though, how America is
less competitive because of supposedly inadequate taxation. Is it that
our per capita GDP is lower than our higher-taxed neighbors in Europe?
No, America’s per capita GDP is considerably higher. Is it that our disposable income is lower? It turns out that Americans enjoy a huge advantage in this measure. Is our economy not keeping pace? Interesting thought, but America’s been out-performing Europe for a long time. Could higher rates of unemployment be a sign of American weakness? Nice theory, but the data show better job numbers in the United States.

I also would point out the general direction of net immigration, which has always been towards the US from nearly every country in the world rather than the other direction.

The favorite argument du jour for more taxes is that the US has more income inequality than other countries.  Well, that is sort of true.  Our rich are richer than theirs.  But are our poor poorer?  In fact, as I posted here, the data (from a liberal think tank) shows that they are not.   The poor in European countries have a higher percentage of a lower median wage.  When you normalize European income distribution numbers to percentages of the US median wage, you can see our poor do at least as well as those in Europe, while our middle class and rich do better.

The US poor still trail countries like Switzerland, but that is because of very different immigration realities.  The US numbers for the bottom quartile are weighed down by tens of millions of recent immigrants (both legal and not) whereas those of Switzerland and Norway are not.  If you left out recent immigrants, my guess is that the US poor would be the richest in the world.

Welcome to the Carnival of the Capitalists and my second time hosting the COTC.  Note that several people tried to submit multiple posts – when that happened, I picked just one to include this week.

Many thanks to Silflay Hraka for starting the Carnival of the Vanities, of which this is a spin-off, to showcase smaller blogs to a wider readership.  Look for future Carnivals of the Capitalists at these sites (you can submit articles here):

December 26, 2005      Multiple Mentality   

January 2, 2006      Chocolate and Gold Coins   

January 9, 2006      The Social Customer Manifesto   

January 16, 2006      Wordlab   

January 23, 2006      Patent Baristas   

January 30, 2006      PHOSITA   

While you’re here, feel free to look around — this post will tell you more about what I do at Coyote Blog.

In what has now become a tradition of my hosting the COTC, and, in true capitalist fashion, I have taken on a sponsor for this week’s Carnival:

This Carnival of the Capitalists is Proudly Sponsored by… ACME Maker of fine anvils for over 50 years

Government Spending and Regulation

Here at Coyote Blog, I have been warning for years that government-funded health care is a Trojan horse for more regulation of your personal life.  I hate it when I am right.

Porkopolis,
a blog highlighting the insanities of pork barrel spending, offers an
out-of-the-box alternative to rebuilding New Orleans at government
expense.

BardsEyeView takes a look at the Federal Budget through the lens of Shakespeare.  Really.

Joshua Sharf at A View from a Height looks at government price and supply regulation of taxis, and wonders what’s the point.

Taxes

Jeff Cornwall at the Entrepreneurial Mind gives us the happy news that 2006 will bring us more IRS audits and more people paying the AMT.

Property Rights

Multiple Mentality asks why a man in Atlanta was handcuffed and arrested for selling his own property.

This Carnival of the Capitalists is Proudly Sponsored by… ACME Escalating crises since 1952

Blogging and the Internet

Kicking over My Traces observes that robot blogs are clogging up Technorati, and that Google blog search does a better job of weeding these out

Wayne Hurlbert of Blog Business World is, not surprisingly given his blog’s name, bullish on professional blogging and business blogs.

Similarly, ProHipHop is bullish on the business of podcasting.

Barry Welford
brings us a fable to illustrate that InternetLand or cyberspace can be
as complex and confusing to executives as Wonderland was to Alice

The China Stock Blog has the 12 hottest search term keywords in China.   Not sure the Coyote is doing well on any of these…

Gaurav Agarwal’s Blog
observes that while computers have penetrated the developed world,
mobile phones have been much more popular in the develop ping world.

Marketing and Growth

Elisa Camahort in Worker Bees Blog reinforces the idea, via two customer service tales, that a bad customer experience can last a lifetime.

Fire Someone Today goes after the difference between "small business owner" and "entrepreneur", and posits that every self-described small business owner who is not focused on growth is probably a hobbyist, a slave, or an impending failure

Jim Logan advises aiming customer communications at the customers, not at grammatical nitpickers.

This Carnival of the Capitalists is Proudly Sponsored by… ACME The secret to Glenn Reynolds success

Business Opportunities

Jane’s Fit by Five enjoys getting her first "press" credential and reviews the Fortune Innovation Forum

Anita Campbell at Small Business Trends is doing her annual trends series, and spoke by phone with noted futurist Watts Wacker who gave his forecast
of trends we can expect to see in 2006, along with a bit of advice
about how to interpret and use trends.

Starling David Hunter investigates the success of the $15 apple in Japan, and draws some broader conclusions about the nature of business opportunity.

Barry Ritholtz observes in the Big Picture that the film industry has been much savvier in responding to market and technology changes than has the music industry.

Personal Finance

My Money Blog deconstructs Ameriprise Financial and finds their hiring criteria and training seem to support his concerns about the company (Lots of interesting comments to the post as well with further information)

All Things Financial has a positive review of Lee Eisenburg’s book "The Number", which discusses the dollar figure you need to have set aside to retire the way you want to retire.

Free Money Finance lists 10 questions you should be asking about your retirement

Why Homeschool discusses the importance of early economics training for your kids, and some approaches for teaching them outside of the classroom.

Searchlight Crusade responds to privacy concerns over real estate and mortgage forms, and explains why you have few alternatives to providing your information if you want to close the deal.

Jim at Blueprint for Financial Prosperity describes how he saved $200 on a car repair by ordering parts himself, but still letting the mechanic do the work.

David Porter advises you to make sure you understand your ARM in the light of recent interest rate increases.

This Carnival of the Capitalists is Proudly Sponsored by… ACME Leader in dehydration technologies

Wall Street & Investing

Retired at 30 announces the brand-new Carnival of Investing, which seems like a pretty good idea given how many investing and personal finance posts the CotC is attracting.

George at Fat Pitch Financials discusses the phases associated with
publicly traded corporations going private to avoid Sarbanes-Oxley
regulations.

The Internet Stock Blog analyzes what impact the new Google music search function may have on other search and music sales-related stocks.

Mike Price discusses his value-investing strategy

The Japan Stock Blog brings news that the XBOX 360 is not selling well in Japan, for reasons that may be bad news for Microsoft.

Triple Pundit reports that institutional investors are beginning to press insurance companies over their risks/exposure to global warming.

Michael Cale of Financial Methods argues that based on current inflation and interest rates, investors should
allocate more assets to bonds and gold and fewer assets to equities.

Triple Witching Friday has camera-phone pictures of the floor melee that ensued from MIzuho’s $335 million trading error, potentially one of the most expensive typos in history.

Patri Friedman of Catallarchy argues that index funds using the S&P 500 are not true index funds as the composition of the index is actively managed by humans

Having just exercised some employee stock options, Early Riser explores potential investments for his money.

Economic Forecasts

Financial Options has a summary of economic indicators for release next week, with commentary.

This Carnival of the Capitalists is Proudly Sponsored by… ACME Never be without a date on Friday night

Economic & Business Theory

James Hamilton in Econbrowser takes another stab at bringing sanity to the gas price "gouging" meme.

The Prudent Investor discusses a seismic shift in power in global financial markets from west to east.  "When a conflict-torn dwarf nation like Serbia can sell debt maturing in
20 years with a coupon of 3.75% while the USA has to pay 4.50% for the
same maturity it is high time to throw the old dogmas of investing
overboard."

Sophistpundit looks at the effect of tradition on journalism and the evolution of successful media companies.

The Common Room draws from a book written in the 1870s where ‘Aunt Sophronia’ advices her nieces on economic principles.

Thinking about Peter Drucker leads David Foster of Photon Courier to some conclusions about what is wrong with today’s business schools.

Health Care and Malpractice

Good News!  InsureBlog reports that it may be getting easier for cancer survivors to get life and health insurance.

This Carnival of the Capitalists is Proudly Sponsored by… ACME California Dreamin’ with Earthquake Pills

Business Practices

David Daniels in Business and Technology Reinvention argues that companies’ use of forced stack ranking of employees is out of date.

Ed at Daily Dose of Optimism observes that when a Japanese business struggles, its execs often get a pay cut.  He wonders why this logical practice is much rarer in the US.

Jack Yoest writes that corporations don’t seem to be showing their traditional hesitation at firing employees before Christmas.

Joe Kristan tells us a tax fraud story and draws the moral:  Don’t cheat on your taxes and then piss off the CFO who is helping you do it.

200Motels engages the Three Stooges to explain why Enron is pushing up daisies.

The Coyote Within (hmmm, coyotes and business blogs) provides us a business fable about finding out your true character.

Humor and Other

Wordlab looks at politically correct alternatives to "Christmas"

Noah Kagan advises the occasional reversal of holiday gift-giving.

Gill Blog has a picture of the portable inflatable meeting room

Closing Notes

Thanks to the Original Illustrated Catalog of Acme Products for the advertising copy.  You can find more ACME promotional material here.

Thanks, its been fun.  Gotta go…

This Carnival of the Capitalists is Proudly Sponsored by… ACME Escape from it all with the Smoke Screen Bomb

Earlier this week I posted my thoughts on taxation, which included thoughts on taxation and class warfare and linked this recent WSJ editorial on tax shares paid by the rich.

Today, Kevin Drum rebuts the WSJ editorial with a post of his own.  Though I find Mr. Drum’s consistent socialism and the-rich-will-be-first-against-the-wall rhetoric tedious, he is a smart guy and does have a point.  There is, as usual, a mixed message in the data.  However, this also means, as I will point out in a second, that Drum is guilty of picking and choosing his data points just as much as does the WSJ.

Drum points out, rightly, that while the share of taxes paid by the "super rich" (his term for the top .5% of income earners) has increased, their share of income has increased faster, such that their rates have gone down (god forbid that anyone violate the left’s rule of the tax ratchet that says that tax rates may always go up but can never ever come down).  Using the same study as the WSJ, he rebuts this table of share of tax burden…

…with this chart , including Drum’s subtle annotations in red:

His point is that the Super Rich actually pay lower rates now and the middle class pays higher rates, or as he puts it:

So shed no tears for the super rich in America. Their incomes have tripled in
the past couple of decades and at the same time their tax rates have decreased
by 9 percentage points. That’s a pretty sweet deal in anybody’s book.

Here are some thoughts on Drum’s rebuttal:

Drum cherry-picked data too:  I will get back to the folks in the top 1 percentile in a minute.  Leaving them aside for a minute, note that Drum’s storyline breaks down for everyone else.  If you compare the merely rich in the 1-20th percentiles, they got a smaller reduction in the Bush tax cuts than anyone in the middle and lower quintiles.  For example (comparing the 1999 before tax cut and 1999 after tax cut lines) the 1-5% richest got a rate reduction of 0.21%, while Kevin’s favored group at 40-60% got a 1.45% rate reduction.

Don’t blame this administration for previous tax increases:  Drum is correct in saying that the tax rate has risen for the middle class over 20 years, but incredibly disingenuous not to explain why.   Note that the 1 point rise (which presumably Drum wants to hang on the current administration) actually consists of a 2.5 point rise from past tax increases, AMT creep, and payroll tax changes (passed by Democratic Congresses and generally supported by Drum) offset by a 1.5 point cut courtesy of the current administration.  Drum is in fact using data that clearly disproves his ongoing "tax cuts for the rich" mantra.  By the way, it is also interesting to see a good "progressive" ignoring progress on the lower two quintiles to decry higher taxes on the upper middle class — seems like an interesting shift in focus.

Payroll taxes skew the picture:  Including payroll taxes (social security and Medicare) in these numbers causes funny things to happen.  Why?  Because social security tax is straight-out regressive since it is flat up to about $90,000 in income and then zero after that.  This means that the total tax rate shown for the lower quintiles will include nearly 8% for payroll taxes (if this looks funny to you because it seems to imply that the lowest quintile must be paying negative income taxes, you are right, they are paying negative income taxes via the EITC).  However, as incomes rise above $90,000, taxpayers get an effective total rate reduction.  For an income of $180,000, a taxpayer only is effectively paying 3.1% to Social Security.  At $1 million, they are only paying 0.56%.  So, even if income tax rates were perfectly flat with no deductions for anything, those in the 1% category of richest people would have a total rate including payroll taxes over 5.5% points lower than the middle class.  If you recast the numbers above leaving out payroll taxes, you would not see the decrease in rates into the 1% group, the numbers would continue to increase, as can be seen here (from government data):

So, for income tax rates, there is still progressivity all the way to the top.  If you want to argue Social Security taxes, fine, but don’t use Social Security tax effects to make a point about income taxes

By the way, in terms of the regresivity of Social Security, the defenders of that program need to stick with a story – is it a transfer payment or is it a government run insurance program?  If it is a government run insurance program (as defenders want to argue, since that seem more palatable to the public) then the $90,000 income cutoff makes sense:  Since the program does not pay benefits based on any incomes higher than this, "premiums" shouldn’t be based on higher incomes.  Update: Kevin Drum says in this post that Social Security is

a modestly progressive social insurance program that’s paid for by everyone and
that benefits everyone. If it ever stops being that, if it ever stops being
universal, it will eventually cease to exist.

OK, but stop lumping the "premiums" of this program in with income taxes to try to prove a point about the income tax system.

All that being said, there may be something funny going on in the top 1%:  As pointed out above, a portion of the apparent rate reduction for the top taxpayers is in fact due to the odd math surrounding Social Security taxes.  Any income tax cut, even if it is progressive, can make total taxes more regressive by shifting the mix to the very regressive social security tax. All that being said, the taxes of the very very rich are odd, because their income streams are so very different than those of you and I.   In particular, that weird mess of targeted tax reductions that I have decried on any number of occasions come much more into play in the very rich’s tax returns, with results that are almost impossible to understand or forecast.  If Drum wants to use this data to argue for flat taxes and an elimination of deductions, I am all ears.

Generally, in any discussion of taxes, I focus on the foundations of
property rights, to argue that taxation is no different than
stealing.    Most of us agree that grabbing someone else’s money at
gunpoint is immoral.  I do not hold to a theory of government that says
that this immoral action is suddenly moral if 51% of my neighbors
sanction it.

Anyway, I am going to leave behind the moral basis (or lack thereof)
for taxes and focus instead on five practical problems that a
well-crafted tax system should be able to avoid.

1.  Complexity and Preparation Time

I probably don’t need to go into great depth on this one to convince you that taxes and tax returns are ridiculously complex.  We all know how complicated even the individual 1040 has become, so much so that using tax preparation software is nearly de riguer for most middle class taxpayers.  Last year, our federal and state income tax returns for the company were over 400 pages long.

For a small business, the tax preparation burden goes much further.  For example, the burden of payroll tax preparation, not to mention staying on top of compliance issues, is so high that no sane business person does payroll in house any more.  Quarterly state and federal unemployment and withholding tax returns must be filed, with salary detail to the last penny for every single employee.   As a result, everyone uses a service like ADP, and though this solves the workload problem, it still costs money – about $12,000 a year in our case.  That’s not the tax bill, just the cost to keep up with the government paperwork. 

But with payroll taken care of, businesses still must file sales tax returns, excise tax returns, detailed property tax returns, census data requests, labor and commerce department surveys, and of course income tax returns.  Each of these typically have to be done at the state level and in many cases separately for every single county and city where we do business.  Each in and of itself is horribly time consuming – see this example for property taxes, this one for sales taxes, and this one for government surveys. 

In Kentucky, for example, we have to file quarterly state withholding tax returns, quarterly payroll withholding returns in each county we operate in, a quarterly state unemployment return, an annual property tax return in each county, and annual income tax return at the state level, an annual income tax return in each county, a monthly sales tax return, a monthly survey for the US Department of Labor about Kentucky headcount levels, an annual foreign corporation renewal, a new hire report whenever we hire a new employee, and a monthly report to the workers comp state fund

2.  Disguising the Tax Load

Quick, how much total do you pay in taxes?  Perhaps the greatest innovation of statists in the 20th century was the tax load shell game – the clever balkanization of the tax load that makes it nearly impossible for the average person to truly know how much they pay in taxes to the government.

Start with income taxes.  OK, April 15 has just passed, but even so, how many people know how much they paid in income taxes last year?  For many people, this is the single largest expense they have, but the total amount is disguised by the fact that most income taxes are taken out as direct payroll deduction.  Statists and leftists everywhere in the US should get up in the morning and give thanks for direct payroll deduction — without it, if every American had to write a single check once a year for the sum total of their annual income taxes, there would have long since been a revolution.

OK, so you don’t know how much you paid in federal, state and local income taxes.  But in addition to that, how much did you pay in social security and medicare (typically about 8% of salary)?  Property taxes (typically 1-2% of your home value)?  How about sales taxes (typically 6-9% of your purchases)?  What about vehicle licensing fees and special taxes on hotels and airfare and rent cars?  If you add all these up, the average American pays about 30% of his/her salary in taxes.  The Tax Foundation has a great chart summarizing this shell game, with relative burdens expressed as days of work each year required to pay the tax.  Note that on average, your federal income tax is only 1/3 of the total of what you are paying:

 
So those are the direct ones, but how much are you also paying in higher prices due to government import duties?  What about the 8% FICA and medicare that employers pay on your behalf – how much higher might your salary be if they did not have to pay these?  What about corporate taxes – you may not pay them directly, but they certainly get passed on to you in the form of higher prices and lower dividends.  What else? – try this list on for size.

3.  Taxes on Wealth and Savings

Most taxes are on income or sales, and so they are at least marginally calibrated with an individual’s cash flows.  The exceptions to this are property taxes and inheritance taxes.  These two taxes both go after an individual’s savings — property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you’ve saved when you die.

Lets take property taxes first.  Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle.  To a large extent, I think this is a myth – people may be working harder but their effective standard of living is way, way higher than say 30 years ago.  But one of the things that definitely creates a treadmill are property taxes. 

Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house.  Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house.  Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years).  For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up).  In 1965, they paid $375 a year in taxes.  Today, they have to pay $5,625.  In other words, their property taxes today are over 22.5% a year of the original price they paid for the house.  Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately.  But what if they didn’t want to?  What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever.  The answer is, because of property taxes, they can’t.  Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country.  Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream.  It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most.  In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.

The estate tax has many of the same origins and issues.  The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax.  Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes.  Again, the law of unintended consequences crops up – estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations.  The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations.  While used for many purposes today, LBO’s, that bogeyman of the left, were invented to manage this estate tax forced sale problem.

Asymmetrical Information has a thoughtful series of posts going on estate taxes.

4.  Picking Favorites for Special Treatment

One of the defining characteristics of statist politicians of both the left and the right is that they think they are smarter and more moral than the average American, and certainly than the average American businessman.  Statists and technocrats distrust markets and assume that they can succeed in managing the economy in general and individual decision-making in particular where markets have "failed" to reach whatever end-state politicians would prefer.

Therefore politicians insist on using tax policy to reinforce (or discourage) certain behaviors or to influence certain outcomes or to frankly enrich some favored group.  Examples are all around us, but include:

• Subsidizing farmers and propping up farm commodity prices for no apparent reason than because farmers somehow have a moral halo around them that other businessmen do not.  This is not a big-small issue, since much of these subsidies go to huge conglomerates and millionaires.
• Subsidizing corporations in many industries
• Subsidizing local relocation of favored industries
• Subsidizing billionaire sports team owners  and the local lodging industry
• Subsidizing billionaire movie producers
• Taxing certain non-politically-correct products (and more)
• Subsidizing home buyers vs. home renters
• Subsidizing corporate debt vs. corporate equity

5.  Class Warfare and Punishing Success

Many of the taxes we pay – income, property, estate – have strong class warfare origins.  Heck, the income tax and the Constitutional Amendment that made it possible because Americans were told that only the richest 1% or so would ever have to pay it.  Today, tax debate is littered with class warfare arguments. 

Today, the richest 1% of Americans pay about a third of the total individual taxes, and the richest 10% pay two-thirds.  The richest 50% of Americans pay 100% of the taxes (in the other half, some pay a bit, and some get a bit back in EITC, but the net is zero).  So, a small percentage of Americans pay for the services and government
cash subsidies enjoyed by the majority.  So how do we treat these
people?  As heroes, or benefactors, or as the most productive?  No we treat them as evil parasites who are not
doing their fair share.

By the way, These shares paid by the rich actually went up after the Bush tax cuts (yes, that’s not a typo).  The very fact that this statement might seem unbelievable points to how much ridiculous class warfare demagoguery permeated the last election.  By the way, these numbers are for income taxes.   The numbers for total taxes, including the regressive payroll taxes, yields slightly different numbers but the same results, as outlined in TaxProfBlog today.

The fact is that most "progressive" taxes are in fact punishing the successful and most productive.  The Left loves to wave Paris Hilton around as an example of the useless and unproductive rich who presumably should be taxed into poverty.  They want to obscure the fact that 99% of the rich got to be rich honestly, through hard work, and via the uncoerced interaction with others.  Because saying that your government rewards success with its highest tax rates and confiscates the vast majority of its operating funds from the people who would employ this money the most productively, um, doesn’t sound very good.

UPDATE:  I have more here, including a rebuttal of Kevin Drum.