Sunday, September 26, 2010

Obama's Unfunded Consumption

Print More Money

Federal Budget FY '08 vs. '10

By: Larry Walker, Jr.

"Knowledge is an inherent constraint on power." ~ Thomas Sowell

Between fiscal years 2008 and 2010, federal government revenues have declined by $359 billion (-14.2%), and government spending has increased by $738 billion (+24.7%), thus leaving a 38.9% hole in the federal budget. In fact, in this fiscal year alone, our public masters will spend a total of $3.7 trillion while taking in a mere $2.2 trillion, which means that the Congress is spending 71.8% more than it is bringing in.

Do you think this might be a problem? If not, stop reading, and just vote for the nearest politician promising: more of the same. But if so, then how do we close the gap?

One way would be to raise taxes on the "rich", which would bring in around $700 billion over the next 10 years, or $70 billion per year. But under this half-baked plan, it will take 10 years just to pay for this years' increase in spending ($738 billion), and it won't even put a dent in our future estimated deficits ($1 trillion per year), nor the national debt which is currently $13.5 trillion (tic, toc, tic, toc, tic, toc....). In fact, with the national debt growing at approximately $100 billion per month, the prospect of robbing the most productive citizens (i.e. small business owners) of an additional $70 billion per year doesn't really amount to a hill of beans.

Common sense ought to tell us that unless either government revenue is raised by more than 71.8%, or federal spending is cut by the same, we will never again see a balanced budget, nor will we ever begin to put a dent in our ever growing national debt. So let's be real about it, when the economy is growing at 1.9% (i.e. not growing), the federal government has no basis for creating a spending gap of 71.8%.

Is all of this spending necessary? Do you even know where our money is going? Let's look at some of the key areas of concern, line by line (since Obama won't). I am not going to go into a lot of detail on each item today, the objective is simply to highlight some key areas of concern.

First, there is the budget function known as 'undistributed offsetting receipts'. Note that revenues from 'rents and royalties on the outer continental shelf' has declined by $14.7 billion, or -80.7%. Overall this area represents $6.5 billion of the current budget deficit. So did we stop charging fees for offshore drilling, stop drilling, or both? How will we make up the shortfall?

Next is the area known as 'allowances'. Allowances? We are adding $18.7 billion to the budget for 'Health Reform', the so called 'Jobs Bill', and for 'future disaster costs' at a time when there is already a $13.5 trillion national debt, and a $1.5 trillion budget deficit. How are we paying for this?

Next is the area known as 'general government'. Do we really need to increase the budget for 'general government' by 44.1% at a time when government revenues have declined so dramatically. Of note, the amount spent on 'general property and records management' has increased by $1.5 billion, or 276.8%? Why are the amounts spent for 'central personnel management' being increased by 1566.7%; 'general purpose fiscal assistance' by 71.4%; and 'other general government' by 267.1%? The unfunded growth of general government adds another $8.9 billion to the deficit.

Moving on to 'Energy', we find an increase in the deficit of $18.3 billion, or 2,917.8%. Under 'energy supply' we have moved from a $418 million surplus, to an $8.8 billion deficit. Why? Does a change of 2,210.3% raise a red flag? And at the same time, we have increased the amount spent for 'energy conservation' by $8.7 billion, or 2,147.4%. Why? Overall, 'energy' represents an unfunded budget increase of $18.3 billion.

And then there's the area of 'income security' where spending has increased by $254.5 billion, or 59.0%. I understand that there are certain mandatory items that may be somewhat necessary, but here we see that 'unemployment compensation' has increased by $148.9 billion, or 328.5%, and that 'housing assistance' has increased by $36.4 billion, or 89.8%. 'Food and nutrition assistance' has also increased by $38.5 billion, or 63.6%. Although most Americans are sympathetic, the question is -- Where is the extra $254.5 billion coming from?

Then we come to the area of 'health' where spending has increased by $91.7 billion, or 32.7%. We see that the amount spent for 'health care services' has increased by $87.5 billion, or 35.3%. And the amount spent on 'consumer and occupational health and safety' has increased by 47.7%. Also included is 'Medicare' spending which has increased by $66.4 billion, or 17.0%. Again, the question is -- How are we going to pay for it?

Next, in looking at the area of 'education, training, employment, and social services' we notice a dramatic increase in spending of $51.2 billion, or 56.1%. Although there may be a desire to increase spending on 'elementary, secondary, and vocational education', a growth rate of 116.1% over 2008 levels is simply reckless. Let's hope that our children are learning something valuable such as, "do as we say, not as we do".

Then comes the area of 'transportation' which represents an increase in spending of $28.8 billion, or 37.2%. And we will pay for this by _______?

Next is the area of 'agriculture'. We are pouring an additional $8.2 billion, an increase of 44.7% into 'farm income stabilization', and 'agricultural research' while at the same time turning the San Joaquin Valley into a dust bowl. Notice the words 'income stabilization' (i.e. get paid to do nothing).

Then there's the area of 'natural resources and environment' which represents an increase of $15.2 billion, or 47.8%. Although there's some important stuff here, namely 'water resources', the question worth asking is: Why the big increase now, when we can ill afford it?

And lastly, there's the area known as 'international affairs'. We have increased spending overseas by $22.3 billion, or 77.2%. While some politicians falsely accuse other politicians of exporting jobs overseas, the federal government is itself guilty of exporting $51.1 billion of our future earnings overseas. Never mind that we can't afford it, we have increased funding for 'international development and humanitarian assistance' by $12.5 billion, or 88.5%; 'conduct of foreign affairs' by $2.9 billion, or 27.5%; and gone from a surplus on 'international financial programs' to a budgetary drain of $6.5 billion, or a change of 101.7%. Again, who's paying for this?

In conclusion, the federal government has created a 71.8% gap in its 'fiscal year 2010 budget', by increasing its own spending faster than any other growth rate on the planet. With U.S. economic growth at a mere 1.9%, it doesn't take a genius to figure out that we have a problem. The problem is out-of-control spending. No viable entity can spend money at a higher rate than it brings it in, and stay in business for very long. But, the U.S. Congress is not a viable entity. This congress is already $13.5 trillion in debt, and is currently on pace to spend 71.8% more money in FY 2010 than it will take in. It's time for this to end.

Government spending cannot and should not ever increase faster than either revenue growth, or the rate of inflation. Between 2008 and 2010, the annual rate of inflation was only 1.4%, and as stated above, government revenues declined by -14.2%. From a fiscally responsible standpoint, what justification was there for increasing government spending by 24.7%, and for outspending revenues by 71.8%?

Talk is cheap. Step 1: Get Honest. Step 2: Cut Spending.

Sources:

http://www.gpoaccess.gov/usbudget/fy11/sheets/hist03z2.xls

http://www.gpoaccess.gov/usbudget/fy11/sheets/hist02z1.xls

Tuesday, September 21, 2010

A Conservative Proposal for Economic Recovery

Perfection

Perfected by Addressing Our Enormous Trade Deficits

By: Howard and Raymond Richman

With the U.S. federal budget spiraling out of control due to Keynesian policies that are not even making a dent in unemployment, America is hungry for fiscally responsible economics. Mostly, what we hear from conservatives is the supply-siders' recommendations of more tax cuts, like the ones that made the budget deficits much worse during the GWBush years. But there is a fiscally-conservative school of economics: the monetarist school founded by Milton Friedman, the dissertation advisor of one of us (Raymond).

Monetarism recommends balanced monetary growth and balanced budgets in order to attain stable economic growth and avoid inflation and big recessions. It keeps long-term growth in mind while taking short-term economic fluctuations in stride.

On September 16, several conservatives with huge Republican-establishment credentials, proposed a monetarist solution to the current malaise in an op ed that nearly took up a full page in the Wall Street Journal. George P. Shultz (former Treasury Sec’y), Michael J. Boskin (Chair Council of Economic Advisors under first Bush), John F. Cogan (former Dep Director of Mgt and budget under Reagan), Allan Meltzer (prof of econ at CMU and reknown expert on Federal Reserve history), and John F. Taylor (prof of econ at Stanford and undersec’y of Treas under GWBush), outlined their “Principles for Economic Survival.” In general, it was an excellent exposition of fiscally conservative policies for economic recovery. Unfortunately, it wouldn't work.

Shultz et al. are right in their claim that America’s anemic economic recovery has “largely been driven by economic policies that have deviated from proven fact-based principles.” They argue that people respond to incentives and disincentives, citing the work of Nobel-prize-winner, Prof. Edward C. Prescott, who showed that as a result of higher taxes on earnings imposed in Europe from the 1970s to 1990s, (up 28% in Germany, France and Italy), hours worked fell by an average of 22%. And they point out how reckless Congress was and continues to be with huge sums wasted in support of banks and enterprises like GM, Chrysler, Fannie Mae and Freddie Mac. And they correctly point out the waste involved in the rebates of both the GW Bush and Obama administrations.

Unfortunately they say nothing about policies that would correct the enormous trade deficits that have cost the U.S. millions of manufacturing jobs, worsened the distribution of income, and made our current declared enemy, China, strong. American corporations find it very profitable to outsource their production to countries like China and have little incentive to invest at home.

We believe we should make balanced trade our policy, not free trade. We consider ourselves conservatives but it is not necessary to believe in free trade which is not economics but ideology as we have shown in our book, Trading Away Our Future (Ideal Taxes Assn, 2008) and repeatedly since then.

They blame the policy of low interest rates, embraced by the Fed under Greenspan and Bernanke, for stimulating the housing bubble but fail to mention that the low U.S. long-term interest rates were not caused by the Fed, but by the forced inflow of financial savings from the governments practicing currency manipulation as part of their mercantilist policies, designed to perpetuate trade surpluses with the United States. In fact, they completely ignore trade, apparently not realizing that President Obama's Keynesian policies are failing due to his failure to control the trade deficit.

The fact is that neither Keynesianism, nor supply-side economics, nor monetarism will work in a country whose trade deficit is being manipulated by foreign governments. On the other hand, as we noted in the American Thinker (Keynesian borrowing won't solve our economic problems), the strategy of monetarism (balanced monetary growth combined with balanced budgets) would produce stable growth if a new balanced trade rule is added, producing what we call balanced trade monetarism. We wrote:

The new balanced trade rule is necessary in order to respond to modern mercantilism, the economic policy that maximizes exports and minimizes imports in order to gain market share from trading partners. The latest evidence is the increase in China's subsidies to exporters which has not yet evoked a response from the U.S. government even though China exports four times as much as it imports from the United States and promised to forego export subsidies when it joined the WTO.

China and the other mercantilist governments have been perpetuating and increasing the U.S. trade deficits by buying U.S. financial assets with the dollars earned from their trade surpluses with the United States. For over a decade, American banks passed along the flow of foreign savings to American consumers, offering ever-riskier loans in order to get a high return. But when American consumers could no longer afford the payments, banks went bankrupt and the resulting hole in worldwide demand is causing the worldwide recession.

If the U.S. government switched to balanced trade monetarism, the U.S. could quickly recover since there would be plenty of demand for American products if foreigners bought as much from the U.S. as the U.S. buys from them.

Shultz et al. accuse Greenspan and Bernanke of expanding the money supply overly much, causing the overly-low long-term interest rates that caused the house price bubble. This is simply not true. In fact, for much of the 1998-2006 period of the bubble, the monetary base (M1) was declining, and throughout the period, inflation was low. The Fed only controls short-term rates, not long-term rates. And the overly-low long-term rates were directly caused by the inflow of foreign savings that accompanies unbalanced trade.

While it is true that the Fed could have taken leadership to get the federal government to insist upon balanced trade, they could not have counteracted the actions of the mercantilist central banks by themselves. For example, they could not have purchased Chinese RMB, to counteract the People's Bank of China's purchase of dollars, because they did not have access to those RMB, and if they had found a way to purchase them, the Chinese central bank would not have let them buy Chinese long-term bonds, which are off-limits to foreigners. The Chinese government is fine with its central bank purchasing American bonds, but does not permit reciprocity.

Other than that, Shultz et al. were quite good in their recommendations. Like us, they opposed the arbitrary bailouts of banks and other financial institutions, the massive purchases of long-term debt by the Fed, the temporary stimuli like the 2008 tax rebate and 2009 Economic Recovery Act, cash for clunkers, credits for first-time home buyers, and the health care bill which imposed taxes on savings and investment. They denounced the complex regulations in the 2010 financial reform bill which were left to administrators to spell out, transferring legislative powers to the executive. They denounced the increased federal spending which grew as a percent of GDP to 24% currently, up sharply from 18% in 2000.

How do they propose to grow the economy?

First, they call for a moratorium on changes to the tax code, although they admit that U.S. economic problems are partly caused by our overly high corporate income tax.

Second, they advocate balancing the federal budget by reducing spending, including rescinding unspent TARP and stimulus funds, canceling the subsidies in the health care bill, restoring the Constitutional role of the states and the Constitutional limits on the powers of the federal government.

Third, they advocate reducing the growth of Social Security and health-care entitlements. They urge more costs by the patient when making health care purchases, more health plan options, and more competition. They would start by repealing the new health care law.

Fourth, they advocate that there be a three year moratorium on new regulations of businesses. They advocate closing down, not bailing out, Fannie Mae and Freddie Mac.

Fifth, they urge that monetary policy should be more rule-like. The Fed should announce and follow its rules, including a new rule for pesting its portfolio of mortgage-related securities.

These proposals are all reasonable. But then they show a woeful misunderstanding of international economics. They advocate a combination of fixed exchange rates and every country agreeing to target for inflation. Do they really think that trade flows are determined by differences in inflation (i.e., purchasing power parity)? Do they not understand that exchange rates are determined by supply and demand in currency markets and that the mercantilist countries manipulate those markets so that they get manufacturing investment while we do not? Do they not understand that when a country gets more investment than its trading partners, its currency should strengthen, whether or not it has inflation? The following graph, shows the low level of U.S. manufacturing investment over the last decade which has caused the U.S. trade deficit to grow despite a falling dollar since 2003 and our low rate of inflation:

Their advocacy of a multilateral agreement to control inflation is more of the internationalism that is killing the American economy. America has the ability to solve its economic problems without requiring a world government. All we have to do is to insist on balanced trade using the scaled tariffs that we recommend, which would be authorized by a special WTO rule for trade deficit countries. Such tariffs are scaled to the size of each of our trade deficits with each mercantilist country and would last only as long as trade with a particular country remains unbalanced.

Shultz et al. are on the right track. Like us, they believe that economic stability is best maintained through a combination of balanced monetary growth and balanced budgets, but, unlike us, they have not yet figured out why the Fed's balanced monetary growth policy has not worked since 1998. As a result, they have not figured out that a third plank needs to be added in order for monetarism to work in the presence of mercantilism, not just balanced monetary growth and balanced budgets, but also balanced trade.

Source: Richmans' Trade and Taxes Blog

Wednesday, September 15, 2010

Obama’s Inverted Wealth Curve

Stuck on … 1993

By: Larry Walker, Jr.

We have taken time out of our busy lives this month to focus on the income tax debate. We have touched upon static versus dynamic revenue analysis, the present value of money, and the history of income taxes. Today, I will address something that's been on my mind since the summer of 2008. The question of the day: How did Obama arrive at the idea that an income of $250,000 per year is rich?

Here’s the famous video clip:

But where did the amount come from? Either he pulled it out of thin air, or he lifted it from someone else.

I think I found the answer. And not only that, I think Obama is completely off-base, and in fact stuck on the idea of 'wealth redistribution' by any means, even if by deception.

A quick examination of the 1993 tax rate schedules will reveal that the top tax bracket of that year was $250,000, under Bill Clinton’s Omnibus Budget Reconciliation Act. I’m sure that Bill Clinton is flattered that Obama thinks so highly of his budget balancing ability, although it was actually implemented by a Republican Congress, that he would latch on to the top tax bracket of the era. However, the major flaw in Obama’s appraisal is that he has failed to adjust for inflation.

In fact, $250,000 of income today was equal to $164,275 in 1993 (calculate it here). And, $250,000 earned in 1993 is the equivalent of $380,460 today. You see, annual inflation over the 17 year span was 2.5%. In fact, the top tax bracket today will be $380,460 when adjusted for inflation. Taxable incomes have been adjusted for inflation every year since 1986. So does Obama have a problem with adjusting for inflation?

What Obama has been proposing boils down to this: Instead of allowing people who make over $250,000 per year in 2011 the benefit of an inflation adjustment, he wants to tax them in 1993 dollars, while taxing everyone else in current dollars. The effect is to redistribute wealth through a ‘big government’ sham. In effect, taxpayers who made between $164,275 to $250,000 in 1993 will be pushed into the top tax bracket by 2011.

If Obama was playing it straight, he would simply propose to increase the top tax rate to 39.6% on people making more than $380,460, which is exactly what would happen if the Bush tax cuts were to expire without action. But instead, we are being asked to tolerate, as intellectually reasonable, the idea that some taxpayers deserve the benefit of an inflation adjustment, while others do not. We are being asked to lower the bar of the top tax bracket to $164,275 in 1993 dollars.

If we are dumb enough to accept Obama’s proposal, in time we will achieve our longed for flat rate tax, but unfortunately the rate will end up being 39.6% for everyone.

So it is in the land of n'importe quoi. A land where quarter-millionaires and millionaires are one in the same, and where yesterday's ‘One Hundred and Sixty Four Thousandaire’ gets to join them.

Where is the party of know?

References:

http://www.dollartimes.com/calculators/inflation.htm

U.S. Federal Individual Income Tax Rates History, 1913-2010

Related:

Tax Revolt of 2010 Authentic

Obama's Ersatz Rich The Top 400

Keeping It Real: Obama's $250,000 Fallacy

Obama's Static Tax Blunder

Saturday, September 11, 2010

Tax Revolt of 2010 | Authentic

Budget Cuts

From Servitude to Bondage

By: Larry Walker, Jr.

War has oft been used as an excuse for raising taxes, and tax hikes have sometimes led to war. Prior to the imposition of the income tax, the federal government’s primary source of revenue was through tariff duties. Tariffs were taxes imposed on certain imported goods which were produced by cheap foreign labor. Protectionists demanded higher tariffs to protect Northern industries from cheaper imports. Southerners favored lower tariffs as a means of encouraging foreigners to import their cotton and other agricultural exports. Some historians say that it was the bad blood over tariffs, between the years of 1828 and 1861, which actually lead to the Civil War.

The first income tax was levied in 1861 at a flat rate of 3%, but was quickly replaced with a progressive structure. The income tax was intended to be a temporary measure to help pay for the Civil War, but eventually became the primary source of federal funding. When the first full fledged progressive tax was imposed in 1913, it only applied to about 1% of the population. Today, roughly 60% of Americans are affected by income taxes, and every working person is subject to a Social Security tax of 6.2% levied on the first $106,800 of wages, and a Medicare tax of 1.45% on all wages. It's interesting to note that the top tax rate of 7% imposed in 1913 was less than the minimum rate of 7.65% imposed on most workers today (and let's not forget that employers get soaked with a matching amount).

The Revenue Act of 1861

The Revenue Act of 1861 included the first U.S. Federal income tax statute. The Act had been motivated by the need to fund the Civil War. It introduced the federal income tax as a flat rate tax. The income tax was to be "levied, collected, and paid, upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever”.

Rates under the Act were 3% on income above $800 ($19,389 in 2010 inflation adjusted dollars) and 5% on income of individuals living outside the country. It was signed into law by Abraham Lincoln, the first Republican President.

The Revenue Act of 1862

The Revenue Act of 1862, also imposed to help fund the Civil War, and also signed into law by Abraham Lincoln, imposed the first progressive rate tax in U.S. history. The office of the Commissioner of Internal Revenue was established, with the Act specifying that Federal income tax was a temporary measure that would terminate in the year 1866.

Annual income of U.S. residents, to the extent it exceeded $600 ($13,632 in 2010 dollars), was taxed at a rate of 3%; those earning over $10,000 per year ($227,214 in 2010 dollars) were taxed at a 5% rate. With respect to the income tax liability generated by the salaries of "officers, or payments to persons in the civil, military, naval, or other employment or service of the United States, including senators and representatives and delegates in Congress", the law also imposed a duty on paymasters to deduct and withhold the income tax, and to send the withheld tax to the Commissioner of Internal Revenue.

The Revenue Act of 1913

The Revenue Act of 1913, signed into law by Woodrow Wilson, re-instituted the federal income tax as the primary source of revenue for the federal government. It would require only a few years for the federal income tax to become the chief source of income for the government, far outdistancing tariff revenues.

The previous effort to tax incomes (Wilson-Gorman Tariff of 1894) had been declared unconstitutional by the Supreme Court because the tax on dividends, interest, and rents had been deemed to be a direct tax not apportioned by population. That obstacle, however, was removed by ratification of the Sixteenth Amendment on February 3, 1913.

The 1913 Act provided in part that:

“ . . . subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever . . . “

The incomes of couples exceeding $4,000 ($88,100 in 2010 dollars), as well as those of single persons earning $3,000 or more ($66,100 in 2010 dollars), were subject to a one percent (1.0%) federal tax. Further, the measure provided a progressive tax structure (shown below), meaning that high income earners were required to pay at higher rates.

It has been said that less than 1% of the population paid federal income tax at the time.

Tax Rates: 1913 vs. 2010

The following table shows what the 1913 tax rates would look like in current dollars:

Amazing! That's what our tax rates would look like today, if we had a fiscally responsible and efficient government. Under the first Revenue Act imposed after ratification of the 16th Amendment, most Americans would be exempt from taxes today.

Exemptions

In 1913, a single taxpayer was allowed an exemption of $3,000 ($66,100 in 2010 dollars), while a married couple was allowed $4,000 ($88,100 today). The following table compares the standard deduction and personal exemption(s) provided today versus what was allowed in 1913.

National Debt: 1913 vs. 2010

Nowadays, the excuse for raising taxes isn't related to war, it's related to a drive to help irresponsible politicians pay for their devil-may-care spending sprees. The national debt in 1913 was about $64 billion, in 2010 dollars, which is 211 times less than today's appalling $13.5 trillion. Even with the lowest tax rate today being greater than the top tax rate in 1913, politicians have managed to 'muck things up'.

So how high need our tax rates grow in order to keep pace with the national debt? If we were to presume that tax rates are a function of the amount of revenue needed by the federal government, then tax rates should either shrink or grow in line with the need. The answer (shown below) would require a bottom rate of 211% and a top rate of 1,477%, or 211 times the rates of 1913.

Meanwhile, Washington continues to borrow at a rate of $100,000,000,000 per month. The first priority of the Congress should have been tax and spending reform, yet we find ourselves in a bigger mess than the one they promised to clean up. To raise taxes on producers would only bring economic disaster. To cut taxes would mean a much smaller federal government, fewer entitlements, and a surge in economic activity. It's time.

References:

http://en.wikipedia.org/wiki/Revenue_Act_of_1913

http://en.wikipedia.org/wiki/Revenue_Act_of_1861

http://en.wikipedia.org/wiki/Revenue_Act_of_1862

Thursday, September 9, 2010

Obama's Ersatz Rich | The Top 400

Benjamins

Tax Statistics of the Truly Wealthy

By: Larry Walker, Jr.

"Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave." ~ William Cobbett, English political commentator, 1827.

Barack Obama (II) talks a good game, but his reasoning doesn’t mesh up with reality. He rants about the rich getting $100,000 tax cuts while he seeks to jack tax rates on those who can hardly be considered rich. It’s not the family who earns $250,000 who received a $100,000 tax cut, it’s the über-rich.

It’s also likely that the people making $200,000 to $250,000 today were not making it during the 1990s, and have never known a tax cut. These folks were not subject to the 39.6% rates imposed under Bill Clinton. For them, the Obama tax increase of 2011 will be a first. These folks didn’t get a tax cut during the last eight years, they earned their way to this level during the Bush years. After all, incomes are not static. You don’t come out of college and make $250,000 per year on day one, it comes with time. Make no mistake about it -- what Obama is proposing is a tax increase.

Instead of manning up and imposing a scaled surtax on people making, let’s say, over $1,000,000, $2,000,000, $5,000,000, $10,000,000 and $100,000,000, Obama has chosen to draw the line at a paltry $250,000. Could this have something to do with the fact that the Obamas personal income was $5.5 million last year? Is this a strategy to keep himself and his buddies on the top while holding the rest of us down? After all, making $5.5 million per year is like making $250,000, 22 times; which is the same as the difference between making $50,000 and $1,100,000. So based on the same theory, should we start taxing people making $50,000 at top marginal rates as well?

If the goal is to tax the "rich", it would be very easy for Obama to raise taxes on them. All he has to do is add some new upper level tax brackets such as I mentioned above. In fact, such a tiered system existed back in 1921. As outlined in my last post, “Keeping It Real: Obama's $250,000 Fallacy”:

The Revenue Act of 1921 contained additional tax brackets above the $100,000 level to tax the super rich. They were as follows (in 1921 dollars) : $100,000 @ 56%, $150,000 @ 57%, $200,000 @ 58%, $300,000 @ 71%, $500,000 @ 72%, $1,000,000 @ 73%. Translating this into 2010 (inflation adjusted) dollars would yield the following, respectively: $1,113,139 @ 56%, $1,669,709 @ 57%, $2,226,278 @ 58%, $3,339,418 @ 71%, $5,565,696 @ 72%, and $11,131,392 @ 73%.

Why don’t we do that? Let’s tax Obama and the truly wealthy at 56% to 73%. And let’s go back to the 1926 tax tables and tax people making less than $48,000 per year at 1.4%, and those making $48,000 to $96,000 at 3.0%. Surely, Obama shouldn’t have a problem with this. Democrats either need to put up or shut up. Personally I prefer capping top tax rates at 25% as first implemented under Calvin Coolidge in 1926, but I'm just entertaining Obama's ersatz logic.

But don’t worry, if you’re currently making $200,000 to $250,000, or aspiring to get there one day, our present progressive federal government will make sure that you never earn your way into the upper-crust. It’s hard enough already, but nearly impossible with the federal government standing by, eager to confiscate 36% to 40% in income taxes, plus another 7.65% to 15.3% in Social Security and Medicare taxes, every year. And soon there will be health care, and possibly energy taxes to boot. Meanwhile, the truly wealthy laugh at the idea of making a petty $250,000. While averaging a cool $1,325,996 per day, and being taxed at essentially the same rate, the über-rich have it pretty good, comparatively speaking.

If progressives want to talk stuff, maybe it would be wise to check the facts first. Do you think that an income of $250,000 is wealthy? Check out the following:

The Top 400: IRS Statistics of Income, Tax Year 2007

The following averages are taken from the IRS report entitled, “The 400 Individual Income Tax Returns Reporting the Highest Amount of Adjusted Gross Incomes in [2007]”. The incomes of the top 400 represented the top 1.59% of all adjusted gross income reported on 2007 income tax returns (the latest available).

  1. The average adjusted gross income reported was $344,759,000.
  2. The average amount of salaries and wages reported was $29,413,000, on 306 returns.
  3. The average amount of taxable interest per return was $27,074,000.
  4. The average amount of dividend income reported was $24,506,000.
  5. The average amount of net capital gains reported was $228,551,000.
  6. The average amount of net business income reported was $3,182,000, on 49 returns.
  7. The average amount of net business loss was $2,590,000, on 84 returns.
  8. The average amount of Partnership and S-Corp income claimed on 202 returns was $83,025,000.
  9. The average amount of Partnership and S-Corp net loss claimed on 185 returns was $25,245,000.
  10. The average amount of charitable contributions deducted on 389 returns was $28,512,000.
  11. The average amount of taxable income per return was $296,241,000.
  12. The average amount of income tax paid was $57,311,000 per return.

Should we really be talking about capping incomes at $250,000 while there are people making an average of $344,759,000 and sitting around collecting $27,074,000 per year in interest? These are not so much the small business job creators, but rather people like the Obamas, those who already have it made and are mucking things up for the rest of us. Oh, and by the way, if you divide the average amount of income tax paid by the truly wealthy, by the average amount of taxable income, it only comes up to 19.3%, nowhere close to the top marginal rate of 35.0%.

How would you define rich?

How does $250,000 per year stack up against $344,759,000?

Important question: Can the Obama policy of keeping current tax rates in place for everyone making less than $250,000 be considered the same thing as a tax cut? I didn’t think so. Will this be enough to spark the kind of economic growth and job creation that our economy so desperately needs? Only if nothing equals something.

What we need is less government and more freedom. We need a tax overhaul. We need a tax system that is equitable, one that does not take advantage of a crisis by destroying the hopes and dreams of the people, and one that will spark the kind of economic recovery that we so desire. Yes, we need additional tax cuts, not a tax increase. And no, $250,000 isn’t rich. If you want to tax the rich, then create some upper level tax brackets and do it, otherwise enough of this nonsense.

I agree with the American Independent Party's (AIP) platform position on the federal income tax:

“We consider the federal income tax to be destructive of our liberty, privacy, and prosperity. Therefore, we are working to bring about its complete elimination and the repeal of the Sixteenth Amendment to the U.S. Constitution. We recommend that the current system be replaced by an equitable, simple, noninvasive, visible, efficient tax, one that does not destroy or even infringe upon our economic privacy and liberty.”

For more on the AIP Platform click here.

References:

http://www.irs.gov/pub/irs-soi/07intop400.pdf

http://www.helium.com/items/879023-slavery-past-and-present

http://www.cesj.org/homestead/reforms/tax/taxjustice.html

http://aipnews.com/talk/forums/thread-view.asp?tid=16673&posts=5#M43279

http://larrymwalkerjr.blogspot.com/2010/09/keeping-it-real-obamas-250000-fallacy.html

Monday, September 6, 2010

Keeping It Real: Obama's $250,000 Fallacy

You've Been Robbed

Legalized Robbery

Collecting more taxes than is absolutely necessary is legalized robbery. ~ Calvin Coolidge

- By: Larry Walker -

The question of the day: Why is making $250,000 a year suddenly considered wealthy? The Obamas made $5.5 million last year. Is that wealthy?

Contrary to popular belief, $250,000 in 2010 had the same buying power as $20,722 in 1926. Annual inflation over this period was 3.01%. An income of $250,000, adjusted for inflation, would have placed a taxpayer in an 11% tax bracket in 1926. In order to have been considered in the top tax bracket back then, in today's dollars, would have required taxable income in excess of $1,206,419. The 1926 tax tables are shown below along with equivalent 2010 dollar amounts:

Click to Enlarge

So in inflation adjusted dollars, people like the Obamas would have been considered wealthy in the 1920's and should rightfully be in the top tax bracket today. On the other hand, folks making $50,000 to $250,000 today, would have been barely considered middle class back in 1926.

The Revenue Act of 1921 contained additional tax brackets above the $100,000 level to tax the super rich. They were as follows: $100,000 @ 56%, $150,000 @ 57%, $200,000 @ 58%, $300,000 @ 71%, $500,000 @ 72%, $1,000,000 @ 73%. Translating this into 2010 dollars would yield the following amounts, respectively: $1,113,139 @ 56%, $1,669,709 @ 57%, $2,226,278 @ 58%, $3,339,418 @ 71%, $5,565,696 @ 72%, and $11,131,392 @ 73%.

President Calvin Coolidge, under the Mellon Tax Bill, slashed top rates from 73% in 1921, down to 25% in 1926. The new top bracket was 25% for anyone making over $100,000 ($1,206,419 in 2010 dollars). So under the Revenue Act of 1921, the Obamas would have been forking over 72% of their income to Uncle Sam, but only 25% under Coolidge. What a relief that would have been. The "Roaring Twenties" had arrived, catapulting multitudes into the middle class.

Now let's bring it up to today. How did the lower tax brackets of 1926 grow from being between 1.4% and 14%, all the way to today's level of 10% to 33%? And let's not forget about the 7.65% (15.3% for the self-employed) that we all get soaked for in Social Security and Medicare taxes. Under the Social Security Act of 1935, the FICA tax was set at 1% of the first $1,400 in wages. It's interesting to note that $1,400 in 1935 is the equivalent of $22,562 today, and yet the rate today (exclusive of Medicare tax) is 6.2% (12.4% for the self-employed) of the first $106,800 in wages. It's called legalized robbery.

When voters finally drop this left, right bickering and start looking at the facts they are going to wake up one day and realize that we've all been bamboozled. We've been getting robbed for so long that we don't even know the difference. The following table compares today's tax rates with 1926 rates for comparable incomes.

Click to Enlarge

In reviewing our current tax tables, it is apparent that a couple making $250,000 in 2010 would have been taxed at a rate of 11% in 1926, and yet the rate is now 33%. Also, those in the top tax bracket, those making over $373,650, would have had tax rates between 14% (at the low end), and 25% for the super rich, and yet the rate is now 35%. Then along comes Obama proffering to raise the top rate up to 39.6%. The problem is that the whole tax system is out of whack.

Under Obama's 'made up' theory, a couple making $250,000 should be taxed at the same rate as a couple making $5.5 million or more. Is that fair? Should a couple who makes $250,000 be taxed at the same rate as a couple making $11 million or more? Who's kidding who?

Annual income, as defined in current tax tables, needs to be appropriately adjusted for inflation. Tax rates, on the other hand, should be adjusted back towards the historical lows, not adjusted for inflation (as eventually they would exceed 100%). There is not one section of the Internal Revenue Code that has been consistently adjusted for inflation, neither the standard deduction, nor personal exemptions have kept pace. Tax brackets have been lowered and raised seemingly based on the whims of politicians, and not based on historical inflation adjusted incomes, and that's wrong. It's just plain wrong.

It's time to stop playing games with the American people, and time to start governing honestly. I'm sick and tired of rich Washington politicians, like the Obamas, trying to pretend that they're on the same level as everyone else. The Obamas are millionaires and should pay accordingly. But let's be fair about it, making $250,000 a year in 2010 is not rich, it wasn't considered rich in 1926, and it's not rich today.

What we need is real tax reform, not more of the same. If you're not part of the solution, you're part of the problem, and unfortunately, Obama is part of the problem.

Sources:

http://www.dollartimes.com/calculators/inflation.htm

http://en.wikipedia.org/wiki/Revenue_Act_of_1926

http://en.wikipedia.org/wiki/Revenue_Act_of_1921

Friday, September 3, 2010

Obama's Static Tax Blunder

Make Believe

Revisiting Static vs. Dynamic Tax Revenue

Comments by: Larry Walker

The Obama Administration's static view on tax policy can never succeed. We all know that Obama is an ideologue who thinks that people who make more money should pay a higher share of taxes, and yet we already have a progressive tax system. But apparently that's not good enough for Obama. Under our present system, roughly 40% of those fortunate enough to be employed don't pay any income taxes at all, while the top 5% of income earners pay 60% of income taxes, and those considered in the top 50% pay 97% of the tax burden. There are some on the other side of the ideological playing field who think this to be unfair, and are promoting a flat tax. But there's more to the story.

The reasoning behind Obama's economic team, or what's left of it anyway, would go something along these lines:

"If we cut taxes, our revenue will decrease, and if we raise taxes, our revenue will increase." "So let's compromise. Let's keep taxes the same on the many, and raise them on the few, that way we'll increase our revenue, and we'll get re-elected too."

Sounds smart, but does it work in real life? True, under a static view of revenue, if taxes are cut, revenue will decrease, and if taxes increase so will revenue, but is government revenue the only concern? What about economic growth? What about restoring confidence in a broken system? What about growth of the job market? Will raising taxes on everyone making over $250,000 per year, and keeping taxes the same for everyone else bring about a robust economic recovery? I think we've been down this road before. The following report, written in 1996, by the Congressional - Joint Economic Committee, already provides the answer.

Source: http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=9576a929-37b4-497c-9b06-4bf3481f9f0a

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April 1996

The Reagan Tax Cuts: Lessons for Tax Reform


During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.

Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.

Tax Rates and Tax Revenues

High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton's Council of Economic Advisers in 1994: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth." Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.

The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.

Conclusion

The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is disproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.

Christopher Frenze
Chief Economist to the Vice-Chairman

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Endnotes:

1. Joint Economic Committee, The Mellon and Kennedy Tax Cuts: A Review and Analysis, 1982.

2. Feldstein, Martin and Daniel Feenberg, The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases, NBER, 1995.