Natural Born Conservative

Conservative Envy | Romney vs. Gingrich

2012-01-20T22:38:00.004-05:00

* Round 15: GOP Debate

* By: Larry Walker, Jr. *

The first three minutes of the January 19th CNN-GOP Debate was such a crock, that I turned it off, and caught up with the highlights later on. In one less notable tirade, Mitt Romney exclaimed, "Mr. Speaker, you talk about all the things you did with Ronald Reagan and the Reagan Revolution and the jobs created during the Reagan years and so forth. I mean, I looked at the Reagan diary. You were mentioned once in Ronald Reagan's diary. And in the diary he says you had an idea in a meeting of young congressman, and it wasn't a very good idea, and he dismissed it. That's the entire mention."

Well first of all, the book is entitled, “The Reagan Diaries”, not the Reagan Diary.

Secondly, the meeting Romney referred to was concerning what at the time was considered to be a “horrendous” budget deficit.

As Reagan relays, on page 123, Newt's idea for addressing the deficit was to "freeze the budget at the 1983 level". Gosh, what a horrible idea!

Reagan penned that the idea was "tempting", not that it was an outright zany notion. He went on to say that Newt’s idea, although tempting, would “cripple” his proposed defense program.

Actually there's a little more to the story than that.

Reagan said he was worried that an across-the-board freeze on spending, with the exception of defense, would cause every special interest group to demand the same.

So in a sense, Reagan was willing to let the deficit spiral out of control, rather than take up that fight. Do you disagree?

We all know what happened subsequently. That’s right, by the 1990's our nation would face a much more serious budget problem. One which would be combated with higher taxes. That is until this notion was finally quashed by the Gingrich Revolution.

So if nothing else, at least Romney inspired those with curious minds to pick up the Reagan Diaries for a badly needed refresher. And in retrospect, perhaps Newt’s idea wasn't so bad after all, especially in light of our current fiscal crisis.

To be fair, George Romney was mentioned twice, on pages 249 and 415. Each mention was a short little blurb about his being the head of some kind of "volunteer initiative”, or something. Seriously, that's the entire mention. Read it for yourself.

So what was Romney’s point? That his father got mentioned twice, for some trifle; while Gingrich was only mentioned once, regarding the most important issue of this era? Man, was that dumb!

Or was Romney trying to say that being mentioned twice in the Reagan Diaries is superior to once? If that’s the case, then what are we to make of the fact that Mitt Romney wasn’t mentioned at all?

If you ask me, this was just another anemic Romney exchange, worthy of the response it received -- none. Perhaps Romney was signaling that he would never go for a spending freeze, under any circumstance. Who can decipher his reasoning? Nevertheless, he came off as one suffering from a classic case of Conservative Envy. Consequently, Romney is going down.

Sources:

The Reagan Diaries, pages 123, 249, and 415.

Quotation from: Real Clear Politics - Romney To Gingrich: "You Were Mentioned Once In Ronald Reagan's Diary".

New Web Ad | It's Agreed... Newt's Right

2012-01-19T22:44:00.003-05:00

Apparently so!

Newt Gingrich | Americans Want Paychecks, Not Foodstamps

2012-01-17T14:47:00.001-05:00

I know that's right! My very first job was working as a janitor for the United Way, at the age of 16. It was a great learning experience. Some 25 years later, I would start my own company. Dead on! Go Newt!

Manipulation 101: The Real Unemployment Rate

2012-01-15T16:10:00.006-05:00

* Fake it until you make it. *

* By: Larry Walker, Jr. *

The following passage is from my last post, “Labor Force Contraction with Obama - And other hidden truths” :

“Most of the electorate understands that as the size of the labor force shrinks the unemployment rate declines. But is anyone really paying attention? Since this massive decline in the civilian labor force is a verifiable fact, it's not surprising that the Obama Administration and much of the propagandist media have chosen to ignore it.”

Okay, I confess that I was begging the question. I am fully aware that most of the population doesn’t have a clue as to how the unemployment rate is calculated, and that a healthy subset could probably care less. So in this post I will explain in more detail how, as the size of the labor force contracts, the official unemployment rate declines.

First, here are a few key definitions, which are shown in more detail at the bottom of this post.

The term “non-institutional civilian population” includes persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.
The term “labor force” includes all persons, in the non-institutional civilian population, classified as employed or unemployed.
And the term “not in labor force” includes persons aged 16 years and older, in the civilian non-institutional population, who are neither employed nor unemployed.

The table above shows the number of Americans counted as part of the labor force, from 2001 through 2011. It does not include those considered, “not in labor force”. You can see that during Bush’s first three years in office, although the economy was in recession, the labor force grew by 2,929,000 (on a seasonally adjusted basis). In contrast, the labor force has contracted by 739,000 during Obama’s first three years.

The dilemma posed by a declining labor force is that the non-institutional civilian population has continued to grow by approximately 1.1% each year. So in reality, the labor force didn't only decline by 739,000 workers over the last three years (on a seasonally adjusted basis), but rather a total of 6.5 million workers dropped out (on a non-adjusted basis). What this means is that a smaller proportion of the populace is working to support a much larger cluster of retirees, unemployed, and those who have dropped out of the labor force.

As you can see, the labor force grew from 143,800,000 at the end of January 2001, to 154,626,000 by December of 2008, for an increase of 10,826,000 workers over the eight-year period immediately preceding Obama. The labor force was expanding by an annual average of 1,353,250 new entrants prior to 2009. But since January of 2009, the labor force has declined by an average of -246,333 workers per year. However, in the macro sense, the real employment situation is dramatically worse.

When the declining labor force is compared with growth of the civilian non-institutional population, as shown in the table below, it is clear that a total of 6.5 million Americans have dropped out of the labor force during Obama’s three years in office. This is the sum of the amounts highlighted in yellow (below). It is the difference between annual changes in the civilian non-institutional population, minus annual changes in the labor force. It represents the annual increase in the working age population, who are not being counted as part of the labor force.

For example, in 2009, the civilian non-institutional population grew by 2,013,000, yet the labor force declined by 145,000, resulting in 2,158,000 persons who should have, but did not enter the labor force. In effect, they dropped out. In 2010, the civilian non-institutional population grew by 2,029,000, yet the labor force declined by 253,000, resulting in 2,282,000 more persons who should have, but did not enter the labor force. Then in 2011, the civilian non-institutional population grew by 1,788,000, yet the labor force declined by another 272,000, resulting in 2,060,000 more persons who should have, but did not enter the labor force.

In effect, there have been no new entrants to the labor force in the past three years, as 670,000 existing workers dropped out (on an unadjusted basis), and all 5,830,000 potential new entrants fell by the wayside. Overall, 6.5 million working age persons have dropped out of the labor force under Obama. Is this change you can believe in?

The massive decline of new entrants to the labor force, which is shown in the table above, and graphically in the chart at the top, directly impacts the unemployment rate, making the employment situation appear better than it actually is. How so?

First, we must understand how the unemployment rate is calculated. The unemployment rate is calculated be dividing the number of unemployed persons by the size of the labor force:

[ (A) Total Unemployed / (B) Labor Force = (C) Unemployment Rate ]

Thus, the official unemployment rate of 8.5%, as reported by the Bureau of Labor Statistics in the January 6, 2012, Employment Situation Report, is calculated as follows:

[ 13,097,000 / 153,887,000 = 8.5% ]

What this means is that, at the end of the year 2011, 13,097,000 persons were officially unemployed, out of a labor force totaling 153,887,000. And so 13,097,000 divided by 153,887,000 equals the unemployment rate of 8.5%. So how could this result have been manipulated? Why, that’s easy.

Manipulation 101

"There are three kinds of lies: lies, damned lies and statistics." ~ Mark Twain

First of all, it is a fact that not everyone who is actually unemployed is officially counted as such. In fact, according to the Bureau of Labor Statistics, millions of Americans of working age, who are not working, are excluded from the official calculation.

Mathematically, what this means is that they have been removed from both the numerator and denominator of the equation (i.e. from both the number of unemployed and size of the labor force). Those eliminated from the official unemployment equation are classified as, “Not in the Labor Force.”

A subset of those not included in the labor force is referred to as “marginally attached”. The marginally attached are persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached.

When it comes to manipulating the unemployment rate, the main question is: What happens when an equal number of persons are subtracted from both the number of unemployed and the labor force? To answer this, let’s look at an example in the table below.

Starting in the middle of the chart, let’s assume that there are 14,000,000 unemployed persons out of a labor force totaling 140,000,000. That would make the unemployment rate 10.0%. Are you with me so far?

Now, let’s remove 3,000,000, from the labor force, and see what happens. Moving one column to the left, you will note that the unemployment rate falls to 8.0%, or by 2.0 percentage points, as 3,000,000 people are removed. That’s a decline of 20%. Wow! That was easy.

If we were to remove 10,000,000 from the labor force, we would get an even more dramatic result. Moving two columns left of center; you will notice that the unemployment rate falls even farther, to 3.1%, or by 6.9 percentage points, as 10,000,000 people are removed. That’s a decline of 69.0%.

Just to add some perspective, it works both ways. Moving one column to the right, you can see that the addition of 3,000,000 to the labor force causes the unemployment rate to rise to 11.9%, or by 1.9 percentage points (an increase of 19.0%). And finally, the addition of 10,000,000 to the labor force causes the unemployment rate to rise by 6.0 percentage points, or to 16.0% (an increase of 60.0%).

So it may be stated that, the act of removing workers from the labor force causes the unemployment rate to decline. It is also evident that an expanding labor force, in which new workers are unable to find work, should cause the unemployment rate to rise. Another fact is that classifying more workers as "not in the labor force" causes a greater percentage decline in the unemployment rate, than the percentage increase realized by allowing a natural expansion of the labor force. Got it?

Therefore, when the unemployment rate is higher than desired, all one has to do is remove a few million workers from the labor force, and voilà, “We are moving in the right direction.”

Now I’m not necessarily saying that the Obama Administration purposefully manipulated the unemployment rate, but since the Bureau of Labor Statistics is a governmental agency, run by a presidential appointee, it's highly probable. I’m just saying that I no longer have faith in the Bureau of Labor Statistics' ability to remain impartial. Perhaps going forward the functions of this agency, as well as others, should be factored out to private non-partisan concerns.

What’s the real unemployment rate?

The Bureau of Labor Statistics (BLS) itself admits that among those it has subtracted from a labor force, several million actually want to work. So I ask you this, If an individual is not working, but desires to have a job, is he (or she) not essentially unemployed? I say, “Yes”, but the BLS says, “No”. So is this a material issue, or is it diminimus? In other words, how many people are we really talking about?

Well, let’s turn to Bureau of Labor Statistics – Table A-38, Persons not in the labor force by desire and availability for work, age, and sex (below). To be precise, as far as BLS methodology goes, as of December 31, 2011, a staggering 87,212,000 working age Americans were not counted as part of the labor force. Among these, it is reported that 81,077,000 do not want a job, and that another 6,135,000 actually want to work.

To reiterate, in my book, if someone wants a job and doesn’t have one, that person is unemployed and should be counted as such. What’s the point of calculating an unemployment rate, which doesn’t include all persons who are unemployed?

Regarding those included or excluded from the labor force, here are a couple of important items to note:

First of all, the BLS only surveys around 60,000 households per month in order to come up with these figures. So as far as we know, the number of unemployed persons who want to work, but are not counted as part of the labor force, could be much greater than what’s being reported.
Secondly, according to Footnote No. 1, in Table A-38 (above), not everyone reported as wanting or not wanting to work is asked. Wait, so not everyone is asked? You know the old saying, “Never assume.”

So, in light of the fine print, the entire sampling outcome is at best grossly inaccurate, and at worst subject to outright manipulation.

From Table A-38, we can see that 6,135,000 workers, not counted as part of the labor force, actually want to work. So what would happen if we added them back into the labor force? Well, let’s run it and see.

In the table below, when the 6,135,000 workers are added back to the labor force, and rightfully counted as unemployed, the unemployment rate jumps from 8.5% to 12.2% (an increase of 43.5%). Is a deviation of 43.5% of material importance? I would think so.

I would contend, that based on BLS data, the true unemployment rate is 12.2%. But at the same time, since only a small sample is surveyed, who’s to say that a large portion of the other 81,077,000 working age individuals, not counted as part of the labor force, don’t want jobs? Did anyone bother to ask them? No. So the actual unemployment rate could easily be much greater than 12.2%. Are you still with me?

In the table below, I have calculated the maximum unemployment rate. That is to say, what it would be if all 87,212,000 working age individuals, not presently included as part of the labor force, were included. When we count them all, the maximum unemployment rate jumps to 41.6%.

You laugh? Well, I’m not laughing. So, based on information published by the federal government, the actual unemployment rate is somewhere between 12.2% and 41.6%. That leaves a lot of room for play, as the lowest the rate can possibly go is 0.0%, and the highest 41.6%. [By the way, the maximum rate doesn’t include those considered to be employed who, for all practical purposes, really aren’t (see the definition of "Employed", below).]

Disregarding the Bureau of Labor Statistics sampling assumptions, the methodology of which you may find at http://www.bls.gov/, for all we know, a larger segment of the population is becoming homeless, generationally dependent, or permanently unemployable. I believe that there are several million more unemployed Americans, who want to work, than we are being told.

In my entire life-time, neither the Bureau of Labor Statistics nor the Census Bureau has ever called upon me to participate in one of these monthly, 60,000 household employment surveys. So who are they calling? How can they call someone who doesn’t have a phone? Where do these numbers really come from? From what I can tell, that’s classified information. Have they ever called you?

So while Obama tells us on the one hand, “We’re making progress,” in reality, all that’s happened is that a larger segment of society has given up any hope of ever having a job. Based upon the job killing policies of his Administration, I would say this is more likely to be the case today, than at any time in U.S. history. So this is progress? And now Obama wants another term to, “finish the job.” I think we’re already finished; the baby boom implosion will take care of the rest.

The Bottom Line: The official unemployment rate is misleading, and can be easily manipulated. By simply removing two or three million persons from the labor force (a little here, a little there), one can easily trim a couple of percentage points off of the official unemployment rate, and then declare that the economy is improving.

Since the beginning of 2009, the net result of Obama’s anti-success rhetoric, coupled with the most reckless deficit-spending record in U.S. history, has been an increase of 6.5 million workers who are no longer counted as part of the labor force. And on top of this, the economy has lost 1.7 million jobs, since February of 2009. The real unemployment rate isn’t 8.5%, it’s somewhere between 12.2% and 41.6%, perhaps even higher, depending upon one’s perspective.

In light of this reality, I find Obama’s statement, “We are moving in the right direction,” to be most absurd. Come on man! But on the brighter side, there is a tremendous opportunity for a new Administration to step in, in 2013, and show the Socialists, Progressives, and Communists who have taken over the Democratic Party, and the delusional fakers and wannabe’s in the White House, who are on their way out of power, what the “right” direction genuinely looks like. Godspeed!

Definitions:

Labor force (Current Population Survey) - The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.
Civilian non-institutional population (Current Population Survey) - Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.
Employed persons (Current Population Survey) - Persons 16 years and over in the civilian non-institutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations.
Unemployed persons (Current Population Survey) - Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.
Not in the labor force (Current Population Survey) - Includes persons aged 16 years and older in the civilian non-institutional population who are neither employed nor unemployed in accordance with the definitions contained in this glossary. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching. (See Marginally Attached Workers.)
Marginally Attached Workers (Current Population Survey) - Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached. (See Discouraged Workers.)
Discouraged Workers (Current Population Survey) - Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify.

Link to Chart Data: Google Docs

Reference: Bureau of Labor Statistics - Historical Data

Charts: Unemployment Rate vs. Size of Labor Force

2012-01-08T17:40:00.004-05:00

- Courtesy of Liberty Works

* The following charts track the unemployment rate and the size of the labor force. *

The chart above shows that over the first 25 months of the current recovery the unemployment rate has declined from 10.1% to 8.5% while the size of the labor force is virtually unchanged even though the working age population has grown.
Since the beginning of 2008 the working age population has grown by 7.2 million people. Yet the labor force which is normally about two-thirds of the working age population has shrunk over the same period by 49,000.
Thus, 4.8 million men and women who should be included in the unemployment rate calculation as both in the labor force and unemployed are not counted at all because they have become too discouraged to look for jobs.
If those men and women were included in the unemployment rate calculation the December rate would have been 11.3%, higher than any time since 1940.

The second chart above tracks the first 25 months of the Reagan recovery of the 1980s. President Reagan inherited a sick economy and a deep recession that by most measures was worse than what President Obama inherited. As the chart shows, the unemployment rate soared even higher but then there was a steep drop even as the labor force grew by 4.3 million! People did not give up looking for jobs during the Reagan boom because there was robust growth in the economy and employers were creating hundreds of thousands of jobs every month.
[...]
There is a potential downside that could blow up Obama’s propaganda campaign. If the “good news” about the unemployment rate encourages several million people to come back into the labor force and seek jobs, the number officially classified as “unemployed” will increase and the unemployment rate will tick back up as the November election approaches.

Read the full story at - Liberty Works

Thomas Sowell endorses Newt Gingrich

2012-01-07T15:30:00.000-05:00

"Why not vote for the candidate who has shown the best track record of accomplishments, both in office and in the debates? That is Newt Gingrich. With all his shortcomings, his record shows that he knows how to get the job done in Washington." ~ Thomas Sowell

Read the full scoop at Jewish World Review: Republican Voters' Choices

Labor Force Contraction with Obama

2012-01-07T10:17:00.008-05:00

- And other hidden truths

- By: Larry Walker, Jr. -

On January 7, 2012, Barack Obama boasted, “We’re moving in the right direction. We have made real progress.” Then he went on to exaggerate that, “Altogether more private sector jobs were created in 2011 than any year since 2005.” Naturally, such jovial assertions propelled many left-wing moonbats back to work today, if you can call blogging false claims such as that ‘Obama created more jobs in one year than Bush did in eight’, and other malarkey, work. It’s funny that these same cherry-pickers never attempt to match wits when it comes to the national debt. We all know that Obama has borrowed $1.0 trillion more in 3 years, than Bush did in eight, but I digress. So let’s examine Obama’s latest victory on the jobs front, for what it really represents.

Are we heading in the right direction?

To find out, we took a closer look at the official data published yesterday by the Bureau of Labor Statistics (BLS). According to Table B-1, Establishment Data, the American economy has lost a total of -569,000 non-farm jobs since January of 2001. So in terms of jobs growth, what is factual is that not one new net job has been realized over the last 11 years (see table below). So are we headed in the right direction? I am reminded of a quote from the movie “2012” - “When they tell you not to panic, that’s when you run.”

Zooming in a little closer, we can see that -1,663,000 jobs have been lost since February of 2009, the month after Obama’s inauguration (see table below). So although 1,640,000 jobs were gained in the year 2011, and 940,000 in 2010, long forgotten by Obama are the -4,243,000 jobs that were lost during his first year in office. Granted, the fact that the economy is no longer losing jobs is a good thing, but it doesn’t necessarily mean we are heading in the right direction. One would have to examine a number of other factors in order to make that affirmation, such as the recent downgrade to the U.S.A.’s credit rating, and the 333% growth in government debt over Obama’s first three years.

By comparison, George W. Bush, who also inherited a recession from his predecessor, suffered total job losses of -2,199,000 by the end of his third year in office (see table below), while Obama lost -1,663,000 during his first three years (see table above).

So for starters, it is incorrect to state that any jobs have been created since Obama became president, because net jobs have been lost (not gained). Therefore, a more fair and balanced statement would be that, ‘during their first three years in office, Obama lost -536,000 fewer jobs than Bush’. Now as far as I’m concerned, that’s hardly worth breaking out the caviar and champagne. What it really means is that in comparing both presidents up to this point in their terms, Obama is less of a loser than Bush. But two losers don’t make a winner.

Were more jobs created in 2011 than in any year since 2005?

Next, since Obama remarked that ‘more jobs were created in the year 2011 than in any year since 2005’, we must verify his claim. Actually this is not true, as you can see in the table below. The facts show that in 2004, 2005, 2006, and 2007 the economy produced total jobs growth of 2,047,000, 2,496,000, 2,078,000, and 1,092,000 jobs, respectively. So although it may have been correct to state that more net jobs were realized in 2011 than in any year since 2006, because 2,078,000 were realized in 2006, while 1,092,000 were attained in 2007, versus 1,640,000 in 2011, pulling the year 2005 out of a hat was a stretch.

“It is hard to believe that a man is telling the truth when you know that you would lie if you were in his place”. ~ Henry Louis Mencken

Aside from twisting the truth, all that this really means is that fewer net jobs were realized in 2007, 2008, 2009, and 2010 than in 2011. So what? The recession officially ended in June of 2009, and now finally, two and a half years later, Obama beat what are essentially recessionary benchmarks. Congratulations! But what about the -3,600,000 jobs that were lost in 2008? And the -5,063,000 that were lost in 2009? It’s as if a tiny accomplishment, cherry-picked from an arbitrary year, isolated from the rest of recent history, has the power of changing that very history. Sure thing chief!

In the end, over Bush’s eight-year term, from February of 2001 through January of 2009, a total of 1,094,000 net jobs were realized; while during Obama’s first three years in office, from February of 2009 through December of 2011, a total of -1,663,000 net jobs have been lost. So that means Obama must gain another 2,757,000 jobs before his left-wing moonbats can boast of even equaling what they consider to be the miniscule accomplishment of George W. Bush. Good luck with that, since you’ve got less than 12 months to get there.

Omitting Marginally Attached and Discouraged Workers

Now we will turn attention to the unemployed, and the uncounted, marginally attached and discouraged workers. You will note in the data from BLS Table A-15, Alternative Measures of Labor Utilization, (below) that during Bush’s first three recessionary years, the percentage of unemployed, plus marginally attached and discouraged workers averaged between 5.6% and 7.0%. You can also see that during Obama’s first three years, the rate has jumped to an averaged of between 10.5% and 11.0%. In fact, as of December 31, 2011, a larger percentage of Americans are unemployed, discouraged, or marginally attached to the labor force than at anytime since 1994 (when the statistic was first measured). So does this hidden fact somehow back up the words, “we are moving in the right direction”? Only if the direction Obama is espousing entails enslaving millions more to lives of perpetual government dependency. We’ve seen brighter mornings.

The Shrinking Labor Force

Finally, the data from BLS Table A-1, Employment Status of the Civilian Population by Sex and Age, (below) shows the number of Americans counted as part of the civilian labor force, from 2001 through 2011. We can see that during Bush’s first three years, the civilian labor force grew by 2,929,000. In contrast, the labor force has contracted by -739,000 during Obama’s first three years. So is this good, or bad? Well, since the population is growing by 1.2% each year, a contracting labor force means that a smaller proportion of the populace is working to support a larger group of retirees, unemployed, and those who have dropped out of the labor force. So I would say this isn't exactly "morning in America".

As you can see, the labor force grew from 143,800,000 at the end of January 2001, to 154,236,000 by January of 2009, for an increase of 10,436,000 workers over the eight-year period immediately preceding Obama. So while the labor force was expanding by an annual average of 1,304,500 new entrants before Obama, it has suddenly declined by an average of -246,333 workers per year since January of 2009. So as Obama has been out golfing, vacationing and as he now celebrates his grand achievement, better than 1,000,000 Americans have fallen through the cracks during each of his three years in office. These are either not working, not currently looking for work, or have permanently given up looking. They are not counted in the official December unemployment rate.

Most of the electorate understands that as the size of the labor force shrinks, the unemployment rate declines. But is anyone really paying attention? Since this massive decline in the civilian labor force is a verifiable fact, it's not surprising that the Obama Administration, and much of the propagandist media have chosen to ignore it.

The Bottom Line: Obama has lost a total of -1,633,000 net jobs since he entered office. Not one new net job has been gained since the year 2007. The percentage of unemployed, plus marginally attached and discouraged workers stands at 10.5% as of December 2011, versus an average of 5.5% to 7.0% during the prior eight years. The civilian labor force has contracted by -739,000 workers since January of 2009, for an average loss of -246,333 per year, versus average growth of 1,304,500 per year in the eight years prior to Obama. So perhaps, Obama’s latest fabrication isn’t all it’s cracked up to be.

Related:

Obama’s lost labor force - NetRight Daily

Civilian Employment to Population Ratio Lowest Since Carter / Early Reagan … And Flat-lined! Employment Misery Index Increasing! - Confounded Interest

So Now, It's 'Recovery Winter'!! - Joshua Pundit

Obama’s Fraudulent Unemployment Rate - Liberty Works

Voting Without Passion | 2012 Election

2012-01-01T21:10:00.003-05:00

Thoughts from an Independent Fiscal Conservative -

- By: Larry Walker, Jr. -

"What kind of man did you go into the wilderness to see? Was he a weak reed, swayed by every breath of wind?” ~ Mathew 11:7 [New Living Translation]

You either live in a red state, or a blue state. You are either black, or you are white. You are either a millionaire, or you’re in the middle-class. You are either a Republican, or you’re a Democrat. You will either cast your vote for the Republican nominee, or for the Democratic nominee. There is no in-between; there are no other alternatives. So make your choice today. And if you have to hold your nose while voting, then hold your nose and choose between Red and Blue, because that is your patriotic duty. That’s pretty much the way things are, or at least the way some candidates, and propagandist media outlets would have us believe.

Now, back to earth – The truth is you can vote for anyone you want. You are not confined to choosing between the classic Red and Blue. There are literally dozens of people running for president, from Libertarians to Communists. Also, many have forgotten that having a legal right to vote, doesn’t mean one must vote. You have a legal right to drive a car, if you are of age, and secure the appropriate license and insurance, yet not everyone chooses to drive. Some people rely on taxis, limousines or public transportation. No one is forced to drive a car, but everyone has the right to drive. You also have God-given rights to get married, to have children, to buy a home or other property, but not everyone exercises these rights. Thus no person may compel another to vote. Neither are we limited to crawling into those little boxes that politicians and media propagandists have so allotted.

Passion – Each and every vote for a presidential candidate, for which there is no passion, is a waste of one’s legal right. If you are not passionate about a candidate, or a political party, and merely follow the dictates of a third-person, you have not really exercised your right. You might as well have stayed home. Last time I checked, refusing to vote isn’t a sin, but rather a vote against the establishment. I haven’t voted in every single presidential race, or in every single primary. For example, I didn’t vote in the 2008 presidential primary, because I felt no passion toward any of the candidates. I certainly felt nothing for John McCain (and still don’t), and although I felt a little something for Mike Huckabee, the bond wasn’t strong enough to compel me to the local precinct to show my support (although I nearly did).

I did vote in the 2008 presidential race, but my vote was cast more against one candidate than for the other. In other words, I wanted to send a message that I was against the blue party, but I wasn’t really for the red party. Then as today, I feel as though my 2008 presidential vote was merely thrown away. In retrospect, I wish I would have turned my back on the status quo, and supported a third-party candidate. But that was then, and this is now.

"Pathos (Greek for 'suffering' or 'experience') is often associated with emotional appeal. But a better equivalent might be 'appeal to the audience's sympathies and imagination.' An appeal to pathos causes an audience not just to respond emotionally but to identify with the [candidate's] point of view--to feel what the [candidate] feels. In this sense, pathos evokes a meaning implicit in the verb 'to suffer'--to feel pain imaginatively....
Perhaps the most common way of conveying a pathetic appeal is through narrative or story, which can turn the abstractions of logic into something palpable and present. The values, beliefs, and understandings of the [candidate] are implicit in the story and conveyed imaginatively to the [voter]. Pathos thus refers to both the emotional and the imaginative impact of the message on an audience, the power with which the [candidate's] message moves the audience to decision or action." ~ Derived from: Ramage, John D. and John C. Bean. Writing Arguments. 4th Edition. Needham Heights, MA: Allyn & Bacon, 1998, 81-82.

Independent – Since I come from a family of left-leaning independents, having been reared as a free-thinker meant I had to find my own way in the political arena. My parents never attempted to influence my political views. At the age of 20, my very first vote in a presidential race was for Ronald Reagan. I didn’t vote for Reagan because he represented a particular political party (I could have cared less about all that at the time), but rather because I heard the man speak, and I was touched by the emotional and the imaginative impact of his message. In fact, I was inspired enough to change my college major to political science (although it would later change), which led to my interviewing local politicians and working as a volunteer at a local voting precinct.

So how in the world was Ronald Wilson Reagan ever able to reach out and touch a 20-year old black male, from North-Central California, who was dropping in and out of Junior College, and on his way to a life of despair? For me, pathos is the critical element, and it trumps the old red or blue, black or white, rich or poor, Republican or Democratic rhetoric in any era. If your message isn't transcending political ideology, or if you're still trying to convince the public as to why you're qualified to hold office, you really don't have a message, so perhaps you should do us all a favor and just drop out.

Since I officially quit the Republican Party in 2007, I have been a free-agent when it comes to politics. I can vote for whomever I please. I am not bound by the strings of media propagandists. I can vote for anyone who is on the ballot, or any qualified write-in candidate. Nobody will tell me who to vote for, and no one will constrain me from casting my vote for the candidate or party of my choosing. I am free, I am independent, and I will vote, or not vote, according to my conscience. I hope you will do the same.

Clueless? – For the political class, passion is achieved through persuasion, by appealing to voter's emotions. It’s not just about ethos, and logos. So you are credible. So you can make a logical argument. Big deal! Yet you have not persuaded independents, such as me, because you have failed to connect with my sympathies and imagination. What we have today is a president who lacks logic and credibility, but who can win on passion, versus a group of candidates, strong in the former, but woefully lacking in the latter. Thus I may vote in the 2012 presidential race, or I may sit this one out, or perhaps I will send a message this time, by throwing my support to a third-party candidate. I’m not sure about that yet, but one thing that I am sure of is that until I hear a message which fires on all three cylinders, I will not enter into the wilderness, but will rather work to expose every weak reed, swayed by every breath of wind.

U.S. Tax Compliance Costs $44B, not $400B

2011-12-24T15:26:00.010-05:00

Tax Foundation’s Runaway Compliance Estimates -

By: Larry Walker, Jr. -

"There are three kinds of lies: lies, damned lies and statistics." ~ Mark Twain -

According to the Tax Foundation, federal income tax compliance costs were projected to reach $392 billion by 2011, and $483 billion by 2015. Now they say it’s probably in the ballpark of $400 billion as of 2011. So in other words, they figure that it costs taxpayers 20 to 40 percent more than is paid in taxes just to fill out and file the forms. However, what people echoing these numbers overlook is the fact that these figures are based on Internal Revenue Service estimates made during an era in which tax forms were completed with a tax booklet, pencil and calculator, a methodology that even the IRS discontinued in 2006.

The fact that the Tax Foundation assigned a dollar value to outmoded time estimates, based on a taxpayer’s average hourly earnings, is even more appalling. The real eye opener ought to be that a huge chunk of the dollar cost mentioned is not money that anyone actually spends. It is rather the value placed on the time each taxpayer would spend preparing their income tax return if (1) they actually prepared their own tax return, (2) they prepared their return with a tax instruction booklet, paper forms, a pencil, and calculator, and (3) they were compensated for their time.

To prove just how bogus this figure is, I pored over the Tax Foundation’s 2005 report. The first thought that occurred to me is that the reason the report hasn’t been updated since then is because the IRS stopped estimating the time it takes to manually fill out tax forms in 2006, and without these estimates, the Tax Foundation’s theoretical foundation disintegrated. And why did the IRS stop making these estimates? Well, primarily because since it began accepting electronically filed returns in 1990, and set a goal of achieving – “80% of all tax and information returns filed electronically by Filing Season 2007", and with the advent of personal computers and cheap software, the amount of time spent and cost of preparing income tax forms has declined dramatically. Thus, the idea of one toiling for 17 to 23 hours, or longer, over a 2 to 3 page tax return is passé.

One section of the report states that: “When examined by income level, compliance cost is found to be highly regressive, taking a larger toll on low-income taxpayers as a percentage of income than high-income taxpayers. On the low end, taxpayers with adjusted gross income (AGI) under $20,000 incur a compliance cost equal to 5.9 percent of income while the compliance cost incurred by taxpayers with AGI over $200,000 amounts to just 0.5 percent of income.”

What the Tax Foundation is saying is that a person with $20,000 of adjusted gross income would incur a cost of $1,180, or 5.9% of their income, in preparing their income tax return, and a person making $200,000 would expend $1,000, or 0.5% of their income. Does that match your experience, because it’s complete nonsense from my vantage point? Is this even remotely reasonable? Let’s examine this theory in more detail.

Following the Tax Foundation’s logic, we could assign a cost to virtually everything we do, as a function of our annual income. Never mind the fact that we only get paid for the time we actually work. So in other words, if you make $9.61 per hour on the job, and it takes you 2 hours per week to wash your clothes (on your time off), then according to this theory, the real cost of clothes washing is more than $1,000 per year ($19.22 times 52 weeks; plus washing powder, water, electricity, and depreciation of your washing machine and dryer), or more than 5.0% of your annual income.

Carrying this through to its illogical conclusion, for a person who works 8 hours per day, the cost of sleeping 8 hours per night would be equal to their annual income, right? So one can only ponder the cost of watching television, driving to and from work, mowing the yard, etc… You can see how silly this is. To drive the point home, under this theory, if you work 8 hours per day, and have 16 hours of free-time, then the cost of everything you do outside of work would be twice as much as your annual income. In other words, you’re not actually making $20,000 per year, heck, you’re not even breaking even; you’re going in the hole by $20,000 every year. Well, so much for that theory.

Ask an Accountant

I have had the fortune of preparing income tax returns, both in the early 1980’s, before the advent of personal computers, and in the 21st Century with high speed internet and gigabytes of random-access memory. In the early 1980’s it took literally days to complete a complex income tax return. Information would be gathered and written onto data forms in pencil, then shipped off to a main-frame computer processing center. The printed return would then be mailed back in about 3 business days, although a typographical error would easily double this time-frame. Then the taxpayer(s) had to be summoned to come in and sign the return before it could be postmarked.

The cost of preparing an itemized Form 1040 with Schedule A, plus a state tax return, back then averaged around $150. Most non-itemized returns were completed on the spot, with pen and calculator, for around $85. What some people miss is that since $150 in 1981 had the same buying power as $380 today, annual inflation over this period being 3.16%, and since the average cost is still around $150 today (in the Southeast), the cost of preparing income tax returns has actually declined by around 61%, over the past 30 years. But you won’t hear about this from today’s rubber stamps.

It was in 1990 that IRS e-file became operational nationwide, and that year 4.2 million returns were filed electronically. I was working for the IRS at the time. Later on, when I started my own practice back in the year 2000, after doing other things for a few years, part of my mission statement read, “To assist the Internal Revenue Service in their goal: ‘To have 80% of all tax and information returns filed electronically by Filing Season 2007’".

By the year 2007, as per the table below, the percentage of electronically filed returns had only reached 57%, however, many practices, such as mine, were already near the 100% mark. As a result, ever since then, that part of my mission statement has read, “To file 99.9% of all income tax and information returns electronically”. Nowadays, a tax preparer, who prepares more than 10 returns per year, is required to file all returns electronically.

From personal experience, these days it takes about an hour to prepare and e-file the same income tax return that used to take 3 days or longer. Like in many other industries, technology has made tax compliance both cheaper and more efficient. While prices have risen dramatically in other sectors, such as Education and Health Care, the cost of professional income tax preparation has plummeted, on an inflation adjusted basis. Most notably, the time it takes to prepare a return has been reduced from days to minutes. Similarly, the time it takes to receive an income tax refund has been reduced from 6 to 8 weeks, down to 7 to 10 days. This is precisely why the IRS no longer publishes obsolete manual computation time-frames.

The 2005 1040 Instruction Book, on page 79, states, for example, that the time and cost of preparing a Form 1040 with Schedule A and other schedules, but no Schedule D, was as follows (see table below, 3rd row from the top):

Self prepared without software – 16.7 hours | $18
Self prepared with software – 22.7 hours | $51
Prepared by Professional – 12.1 hours | $174

In analyzing this, does anyone out there seriously believe that it would take 6 hours longer to self-prepare a tax return with software, than without? Like that makes sense. And what kind of practice would a professional be running, if it took 12.1 hours to complete each itemized 1040 return? At that pace, a professional would only be able to complete around three 1040 returns per week, and since the regular season only lasts about 12 weeks, would only be able to prepare around 40 returns per season, with a seasonal income of around $6,900. If it really took a professional 12.1 hours to prepare each an every itemized Form 1040, we would indeed have a problem. However, since actual facts and figures reveal that tax preparation really takes a fraction of the time it used to, and costs less than half of what it did 30 years ago, perhaps we don’t have a problem after all, at least not a ‘cost of income tax compliance problem’.

According to Nickel, over at the fivecentnickel.com, his research coming from the National Society of Accountants biennial survey, the average tax preparation fee for an itemized Form 1040 with Schedule A, plus a state tax return, was $229 in 2010. And for a Form 1040 and state return without itemized deductions, the average price was $129. But keep in mind that tax preparation fees vary regionally, so the above averages aren’t necessarily applicable depending on where you live. The lowest costs are in the Eastern South Central region (AL, KY, MS, and TN) where a Form 1040 with a Schedule A and state return averages $137. And the most expensive region is the Pacific (AK, CA, HI, OR, and WA) at $292.

He also found that for those with more complex returns, modern day costs average as follows (again, prices will vary by region):

$212 for Form 1040 Schedule C (profit or loss from business)
$551 for Form 1065 (partnership)
$692 for Form 1120 (corporation)
$665 for Form 1120S (S corporation)
$415 for Form 1041 (fiduciary)
$2,044 for Form 706 (estates)
$584 for Form 990 (tax exempt)
$58 for Form 940 (federal unemployment)

Here in the Southeast, a professionally prepared itemized Form 1040 with Schedule A, plus a state tax return, takes about an hour to prepare, and the fee averages $150. The question of whether a person making over $200,000 will pay more, or less, is actually not based on their income, but rather on how many forms need to be prepared? So if an itemized Form 1040 with Schedule A, plus a state tax return, costs an average of $150 to prepare, that’s generally how much it costs no matter how great one’s income. That’s because the time it takes to prepare such a return would be about the same. If it costs more, it’s most likely due to additional form filing requirements. Thus, the true modern day cost of $150, to prepare such a return, is a far cry from the Tax Foundation’s estimate of $1,000.

At the same time, a basic Form 1040-A, plus a state return, would take around 30 minutes to prepare, with an average fee of $85 ($60 without the state). This is also a major discrepancy from the Tax Foundation’s estimated cost of $1,180, for a person making $20,000 per year. If we were to follow this artificial tack, then we would have to believe that it would take something in the order of 122.7 hours to prepare a basic 2 or 3 page 1040-A return, at a cost of $9.61 per hour (the hourly wage for a person making $20,000 per year). Therefore, the Tax Foundation’s purported $400 billion per year estimate is grossly overstated.

The act of basing an entire tax reform platform on factitious information is called, “fraud”. So who’s been out on the stump quoting these make-believe numbers? Of late, it’s been Mitt Romney, Rick Perry, previously Herman Cain, and a host of others. But it’s time for the public to wake up and realize that the Tax Foundation’s figures are completely bogus.

Sure, some returns take longer than others, some cost more than others, and most businesses require monthly or quarterly accounting and payroll tax services on top of income tax return preparation. But what’s the alternative for a business, to not have any record of whether it is profitable? Can businesses just do away with all record keeping and financial reporting for the sake of skimping on an ordinary and necessary business expense? I don’t think that would be a wise move.

A Gross Overstatement

To conclude, the Tax Foundation’s estimate is a made-up number, based on obsolete data. The true costs of complying with federal income tax laws have declined dramatically over the past 30 years. Thus, anyone floating figures ranging from $400 billion to $500 billion per year must have their head in the sand.

There’s no way you could ever convince me that it takes 122.7 hours, to enter the amounts contained on a W-2 Form into a computer program, or onto a paper form, in order to file a simple 1040-A return. Nor can you persuade me to believe that the cost of preparing such a return could ever reach $1,180. But that’s essentially what the Tax Foundation’s report says.

The correct method of determining any cost is to add up the actual outlay in cash, but since the Tax Foundation has not chosen this method, I must conclude that their estimate is overstated by as much as 88.9%. How did I arrive at this percentage? By sampling.

The 2005 IRS out-of-pocket cost estimates reveal that the most one would pay is charged by tax professionals. Since the fee charged for a simple 1040-A, plus a state tax return, completed by a paid preparer, is actually $85, not $1,180 as they would have us believe, the Tax Foundation’s estimate is off by 92.8% ($85 vs. $1,180). And since the cost of a professionally prepared itemized Form 1040 with Schedule A, plus a state tax return, is actually $150, instead of $1,000, they are off by 85% ($150 vs. $1,000). Averaging these two percentages together results in an overstatement of 88.9%. Thus, I conclude that the Tax Foundation’s estimate, that federal income tax compliance is costing Americans around $400 billion per year, is in reality probably less than $44.4 billion (11.1% of $400 billion).

Frankly, I would be more concerned about real and verifiable IRS statistics, such as the number and amount of refunds being doled out. For example, in 2010, out of the 142,449,000 returns that were filed, 109,376,000 received refunds totaling $328.4 billion, for an average refund of $3,003 per return. Now that’s real money, which, if you think about it, is being summarily piled on to the national debt. So what’s up with that?

Cross posted at: Free Republic

What Does $40 per Week Mean To You?

2011-12-24T15:20:00.002-05:00

- Let's see, to me one thing it means is that the federal government will be adding another $120 billion to the national debt. For my friend Jeff, at Liberty Works, it means – we've been bamboozled again. -

By: BoomerJeff | Liberty Works

"... On Thursday Obama ramped up the theatrics and gave us a preview of his New Year strategy for diverting attention away from his manifest failures. He stepped to the microphones to prove he identifies with the struggles of the helpless against those cruel Republican Scrooges (transcript). His tone dripping with pious solicitude, he began:

We’ve been doing everything we can to make sure that 160 million working Americans aren’t hit with a Holiday tax increase on January First…If you’re a family making about $50,000 a year this is a tax cut that amounts to about a thousand dollars a year. That’s about forty bucks out of every paycheck.

So far the President’s math is correct, since most employees are paid either bi-weekly or semi-monthly.

It may be that there are some folks in the House who refuse to vote for this compromise because they don’t think forty bucks is a lot of money. But anyone who knows what it’s like to stretch a budget knows that at the end of the week or the end of the month forty dollars can make all the difference in the world…
So on Tuesday we asked folks to tell us what it would be like to lose forty bucks every week.

Wait a minute! “Every week?” He just changed it from $40 out of every paycheck to $40 every week! But the temporary tax cut is worth only $19 every week to his hypothetical $50,000 per year family.

You’d have to earn $104,000 a year for Obama’s Social Security tax markdown to be worth $40 every week.

Obama then quoted some of the emails from his “folks” about how they would deal with the loss of $40 per week.

Joseph from New Jersey would have to sacrifice the occasional pizza night with his daughters. My 16 year old twins will be out of the house soon – I’ll miss this.
Richard from Rhode Island wrote to tell us that having an extra $40 in his check buys enough heating oil to keep his family warm for three nights. In his words, and I’m quoting, If someone doesn’t think that 12 gallons of heating oil is important invite them to spend three nights in an unheated home.
Pete from Wisconsin told us about driving more than 200 miles each week to keep his father in law company in a nursing home. $40 out of his paycheck would mean that he could only make three trips instead of four.
Dinner out for child who’s home for Christmas, a pair of shoes – these are the things that are at stake for millions of Americans. They matter a lot.

Obviously these emails are absurd. If you earn $104,000 and have to give up $40 per week, are you really going to have to deny your kids a pizza or a pair of shoes? Will you shiver for three nights without heating oil?

Of course, there are some folks to whom $40 every week would be make a real difference:

A hotel maid who works full time for $8.50 per hour
A construction worker who has been cut back to half time work at $17 per hour
A self employed business owner whose customers were hammered by the recession and now barely survives by depleting his savings. He generated only $17,700 profit this year after paying his employees and the employer’s half of the payroll tax which was not reduced by the Obama payroll tax markdown.

To each of these people Obama’s temporary payroll tax cut is worth not $40 but $6.80 per week.

But much of the media have already begun to help Obama plant a false perception in the minds of uninformed voters that Republicans would deny everyone $40 per week. (For example, see the headline here.)

Obama knows that informed voters will figure out the deception. But he doesn’t care about informed voters. They won’t vote for him anyway."

A Taxing Problem, III: Where Did We Go Wrong?

2011-12-22T22:48:00.002-05:00

- By: Michael D. Greaney - The Just Third Way -

Looking at what has happened to the Federal Reserve and the income tax, we have to wonder what is the root cause of the misuse of these institutions? Where, in other words, did we go wrong?

Trying to be objective, we think it is in how people understand private property and contract, and thus money, credit, banking, and finance. Of these, the (mis)understanding of money appears to be the most immediate problem. Not that the others are unimportant, but the vortex, as it were, seems to swirl around money and credit - according to Henry Dunning Macleod, two forms of the same thing.

Money is legally defined as anything that is accepted in settlement of a debt. It is a contract involving "offer" and "acceptance." It is not, as some theorists declare, a claim issued by the State on the general wealth of society. That is socialism, and is rooted in the understanding of taxation and private property found in Thomas Hobbes's virtual manual for totalitarian government, Leviathan, that denied (abolished) private property:

"A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, 'That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign.' Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth." (Thomas Hobbes, Leviathan, Ch. XXIX.)

That is, the king — the State — is the ultimate owner of everything in the State. That being the case, taxes are not a grant from a free citizenry, but a "retaking" of what the State was pleased to allow the citizens in the first place: "[T]he Kings word, is sufficient to take any thing from any subject, when there is need; and... the King is Judge of that need." (Ibid., Ch. XX.)

It is interesting to note that Hobbes influenced Walter Bagehot (who, incidentally, had enormous contempt for the United States), while Keynes, the virtual demigod of today's monetary and fiscal policy, revered Bagehot.

The fact is, despite the fixed beliefs of modern academics, it is possible to create money to finance new capital formation without first having to cut consumption and accumulate money savings. Keynes did not understand basic bookkeeping or the accounting equation, assets = liabilities + owners equity. Keynes failed to realize that the "multipliers" developed from his theories, especially the "money multiplier," are complete fantasy.

The money multiplier relies on counting the same asset multiple times and shifting ownership around indiscriminately to meet political ends. The Keynesian money multiplier embodies a fatal error that is obvious to anyone who understands double entry bookkeeping or (better) money. That is, the money multiplier theory assumes that checks drawn on one account remain on deposit in another account without ever being presented for payment!

Anyone who has ever balanced a bank statement knows that this is not the case. Checks clear, decreasing the amount in the account and thus the amount of money available, or they remain outstanding, in which case you still can't spend the money because it has already been spent. Drawing checks against money in an account that has already had checks drawn against it is called "issuing bad checks." It is a civil or criminal offense, depending on the amount of the fraudulent check you issued and the jurisdiction in which you committed the offense. It is what Henry Thornton called a "fictitious bill," that is, money with nothing behind it.

The Keynesian money multiplier, however, assumes as a matter of course that banks are engaged in a vast criminal conspiracy by creating money backed by nothing more than checks drawn against money that doesn't exist. (We never claimed that the Keynesian theory made sense — but it's in all the textbooks.) Today's academic economists and politicians dismiss as ludicrous the actual case, that commercial banks create money by accepting bills of exchange and issuing promissory notes that back the demand deposits.

Thus, if we accept today's standard assumptions about money and credit, there is no way to create money for Capital Homesteading so that ordinary people can become owners of capital without first having to cut consumption and accumulate money savings. If we reject the standard assumption, however, and use a little common sense along with some basic bookkeeping, the way is clear for a more rational monetary system than the debt-backed Leviathan that has kept the world locked into the slavery of past savings.

CESJ's Pro-Life economic agenda, for which we make the case in Supporting Life (2010) takes all this into account, reorienting the economy to conform to the natural law-based three principles of economic justice, 1) Participation, 2) Distribution and 3) Harmony ("feedback" or "social justice"), and the four pillars of an economically just society:

A limited economic role for the State,
Free and open markets as the best means for determining just wages, just prices, and just profits,
Restoration of the rights of private property, especially in corporate and other business equity, and
Widespread direct ownership of capital, individually or in free association with others.

In short, to require everyone to pay some tax, regardless whether they have the means or ability to pay, is to force anyone without property — and thus power — into a condition of dependency on the State . . . and keep in mind that "condition of dependency" was, prior to the Civil War, a euphemism for chattel slavery.

Via: The Just Third Way Blog

A Taxing Problem, II: What Happened to the Federal Reserve?

2011-12-19T22:12:00.000-05:00

- By: Michael D. Greaney - The Just Third Way -

Last week we had a few things to say about taxation. Today we have a few more. Mostly today's posting has to do with the way the tax system has been used for purposes other than revenue generation — and the Federal Reserve has been used to provide money for government instead of the private sector, effectively handing over the key to the "money machine" to the State, which is the last place it should be.

To take up the slack and permit unaccountable spending by the federal government, the Federal Reserve has been hijacked from its original and legitimate mission to provide liquidity for private sector investment by rediscounting eligible paper for qualified commercial, industrial, and agricultural capital projects (vide Alexander Hamilton's Opinion as to the Constitutionality of the Bank of the United States, 1791; and the previously-noted McCulloch v. Maryland, 1819), and diverted to funding government by accepting bills of credit that, given a strict interpretation of the Constitution, may be unconstitutional, as it exceeds the specific regulatory, not creative, power granted under the enumerated powers.

We see the tragic results of this "new philosophy" all around us. Government debt has virtually destroyed Europe and is endangering the United States and Japan, making serious inroads on our natural, inalienable rights to life, liberty (freedom of association/contract), and property. Forcing people into dependency on the State has made it much easier to coerce people into accepting programs that they would normally find morally repugnant, with "welfare blackmail" ensuring that the rest give in for the sake of the promised State benefits. Further, because the tax system has been manipulated to meet goals other than mere raising of revenue to defray legitimate expenditures, the IRC has grown so complicated that no single person, even group, can understand it. Even if CESJ's proposed Capital Homestead Reforms were not manifestly in accordance with justice, the reforms could be justified on the grounds of expedience for the sake of increased efficiency and decreased cost of compliance and maintaining the system...

Continued at: The Just Third Way Blog

Image via: MarineBuzz.com

Eligibility Check: Romney vs. Gingrich

2011-12-18T20:40:00.018-05:00

Caveat Suffragator – Let the voter beware.

- Updated!

- By: Larry Walker, Jr. -

When measuring the top GOP contenders in terms of eligibility under the U.S. Constitution, if I had to choose between the two, I have to admit that I am more inclined towards Gingrich than Romney. Like Mitt Romney, I too was born in Detroit, Michigan, but that’s where the similarities end. My parents and grandparents were all born in the State of Georgia, while Romney’s father was born in Mexico.

In contrast, Gingrich’s parents and grandparents, like himself, were all born in the State of Pennsylvania. So when it comes to the question of natural born citizenship, Gingrich clearly passes the test, while Romney’s qualifications are uncertain at best. I don’t believe that because Obama was somehow able to skirt the issue, that Romney, and everyone else who follows, should simply be given a pass. Since we learned the last time around, the issue, as it seems, is more in the hands of the voting public than the courts, it is only fair that we know the facts, and make an informed decision.

When Mitt Romney’s father, George W., made his presidential bid in 1967, questions were occasionally asked about his eligibility to run for President, due to his birth in Mexico, and given the ambiguity in the United States Constitution over the phrase "natural-born citizen". But although questions regarding his presidential eligibility arose, the issue of his status as a U.S. Citizen was never fully addressed. The New York Times article, Celler Suggests G.O.P. Name Group to Investigate Romney's Eligibility, published on May 15, 1967; lead off with, “Representative Emanuel Celler expressed "serious doubts" as to whether Gov. George Romney of Michigan is eligible for the Presidency.” On June 14, 1967, an essay entitled "Natural Born Citizen,” by the Hon. Pinckney G. McElwee of the Bar of the District of Columbia, was entered into the Congressional Record by Texas Representative, Mr. Dowdy. It was written more in the context of a possible candidacy of Governor George Romney (born in Mexico) for president, than regarding his citizenship. George Romney formally announced his withdrawal as a presidential candidate on February 28, 1968.

United States Constitution – Article II, Section 1

Article 2, section 1 of the Constitution states, "No person except a natural born Citizen, or a Citizen of the United States at the time of the Adoption of this Constitution, shall be eligible to the Office of President; neither shall any Person be eligible to that Office who shall not have attained to the Age of thirty-five Years, and been fourteen Years a Resident within the United States."

The addition of a grandfather clause in this paragraph says a lot as to the meaning of natural born. The first thing it says is that being born in the U.S. is not enough to be natural born; otherwise the grandfather clause would not have been necessary. The writers and delegates, having been born in the United States, wanted to be eligible for the presidency, but most were the children of British subjects. Knowing that this eliminated them from being natural born, and thus ineligible, they included the grandfather clause, which expired when the last person alive at the time of the ratification of the Constitution died. So, being a native born citizen is not the same as being Natural Born, for if it were, the framers would not have included the clause.

Background: Newton Leroy Gingrich

Newton Leroy Gingrich was born on June 17, 1943, in Harrisburg, Pennsylvania. His mother Kathleen Daugherty and father Newton Searles McPherson divorced soon after Newt was born. Kathleen remarried to an Army officer named Robert (Bob) Gingrich, who adopted Newt at the age of 3. Gingrich has three younger half-sisters, Candace, Susan, and Roberta. Growing up, the Gingrich family moved around frequently, like many military families. Bob Gingrich served in Korea and Vietnam during Newt's childhood and adolescence, so Newt had a close bond to his mother. In early years, he also spent a lot of time with Newt McPherson's sister Loma and her husband, and with his grandmother, a teacher, who taught toddler Newt how to read.

In 1953, 10 year-old Newt loved reading and animals. He took a bus to Harrisburg, Pennsylvania to lobby the mayor to open a city zoo, for which he was written up in the local paper. In 1954, his father bought Newt an Encyclopedia Americana which he read night after night. In 1956, the Gingrich family moved to Europe -- Orleans, France and Stuttgart, Germany, at the height of Cold War. In 1958, Newt had an "epiphany" at Verdun, France. At the age 15, he visited the battle site and says later this changed his life. It was at Verdun, that Newt Gingrich decided to become a politician who would prevent such carnage in the future.

Ancestry of Newt Gingrich

PARENTS – His father, Newton Searles McPherson, was born in Pennsylvania on February 24, 1923 and died in October of 1970. His mother, Kathleen Daugherty, was born in Enola, PA on November 20, 1925 and died in Harrisburg, PA, on September 23, 2003. His adopted father, Robert Bruce Gingrich, was born on July 22, 1925 and died on November 20, 1996.

GRANDPARENTS – His paternal grandfather, Robert Nelson Kerstetter, was born in Milheim, PA on August 30, 1888. His paternal grandmother, Louise S. McPherson, was born in Pennsylvania on August 1, 1905. His maternal grandfather, Jacob Leroy Daugherty, was born in Pennsylvania around 1890. And his maternal grandmother, Ethel M. Hendricks, was born in Pennsylvania around 1896.

GREAT-GRANDPARENTS – His great-grandparents were John H. Kerstetter, born in Pennsylvania on August 24, 1847, and Julia Kabel, born around 1849; Clarence Newton McPherson, born in Winfield, PA on August 16, 1872, and Hattie Treaster, born in Mifflin Co., PA in October of 1879; and Jeremiah H. Daugherty, born in Pennsylvania in December of 1859, and Rebecca J., born in Pennsylvania in November of 1852.

Background: Willard Mitt Romney

Willard Mitt Romney was born in Detroit, Michigan, on March 12, 1947. He was the youngest child of George W. Romney, and Lenore Romney. His mother was a native of Logan, Utah, and his father was born in a Mormon colony in Chihuahua, Mexico.

Mitt’s father, George Wilcken Romney was born to American parents in the Mormon colonies in Mexico, but events during the Mexican Revolution forced his family to move back to the United States when he was a child. Romney's grandparents were polygamous Mormons who fled the United States with their children because of the federal government's opposition to polygamy.

His maternal grandfather was Helaman Pratt (1846–1909), who presided over the Mormon mission in Mexico City before moving to the state of Chihuahua and who was the son of original Mormon apostle Parley P. Pratt (1807–1857). Romney's uncle Rey L. Pratt (1878–1931) would in the 1920s play a major role in the preservation and expansion of the Mormon presence in Mexico and in its introduction to South America.

George Wilcken Romney's parents were American citizens Gaskell Romney (1871–1955) and Anna Amelia Pratt (1876-1926). They married in 1895 in Mexico and lived in Colonia Dublán, Galeana, in the Mexican state of Chihuahua (one of the Mormon colonies in Mexico) where George was born on July 8, 1907. They are said to have practiced monogamy. George had three older brothers and would gain two more brothers and a sister. Gaskell Romney was a successful carpenter, house builder, and farmer who headed the most prosperous family in the colony.

The Mexican Revolution broke out in 1910 and the Mormon colonies were endangered in 1911–1912 by raids from marauders, including "Red Flaggers" Pascual Orozco and José Inés Salazar. The Romney family fled and returned to the United States in July 1912, leaving their home and almost all of their property behind. Romney would later say, "We were the first displaced persons of the 20th century."

From here on, George Romney grew up in humble circumstances. The family subsisted with other Mormon refugees on government relief in El Paso, Texas for a few months before moving to Los Angeles, California, where the father worked as a carpenter.In kindergarten there, other children mocked Romney's national origin by calling him "Mex". This might explain how Mitt got his middle name, as the State of Michigan is shaped like a mitten.

While a sophomore in high school, Mitt Romney participated in the campaign in which his father was elected Governor of Michigan. George Romney was re-elected twice, and Mitt worked for him as an intern in the governor's office. He was also present at the 1964 Republican National Convention where his moderate father battled conservative party nominee Barry Goldwater over issues of civil rights and ideological extremism.

Ancestry of Mitt Romney

PARENTS – His father, George Wilcken Romney, was born in Colonia Dublán, Galeana, Chihuahua, México, on July 8, 1907 and died in Bloomfield Hills, Michigan on July 26, 1995. His mother, Lenore LaFount, was born in Logan, Utah, on November 9, 1908 and died in Michigan on July 7 1998.

GRANDPARENTS – His paternal grandfather, Gaskell Romney, was born in St. George, Utah on September 22, 1871. His paternal grandmother, Anna Amelia Pratt, was born in Salt Lake City, Utah on May 6, 1876. His maternal grandfather, Harold Arundel LaFount, was born in Birmingham, Warwick, UK on January 5, 1880. And his maternal grandmother, Alma Luella Robison, was born in Montpelier, Idaho on August 19, 1882.

GREAT-GRANDPARENTS – His great-grandparents were Miles Park Romney, born in Nauvoo, IL on August 18, 1843, and Hannah Hood Hill, born in Tosoronto Township, Simcoe, Ontario on July 9, 1842; Helaman Pratt, born in a covered wagon during a one-hour stopover on the trail near Mt. Pisgah, Iowa on May 31, 1846, and Anna Johanna Dorothy ("Dora") Wilcken, born in Dahme, Zarpin, Rheinfeld, Schleswig-Holstein, Germany on July 25, 1854; Robert Arthur LaFount, born in Belbroughton, Worcester, UK on March 9, 1856, and Emily Ethel Hewitt, born in Birmingham, Warwick, UK on January 19, 1861; and Charles Edward Robison, born in Nauvoo, IL on December 2, 1845, and Rosetta Mary Berry, born in Albion, Michigan on July 3, 1843.

Conclusion:

If I didn’t research this matter, I would not only be uninformed, but a hypocrite. Now at the time of Mitt Romney’s birth was his father a United States Citizen? Based on publicly available information, he certainly did not appear to be. Did George W. Romney, Mitt’s father, become a naturalized citizen prior to his son's birth? If he did, that information is not in the public domain. What I do know is that many Mormons became Mexican citizens, that Mitt Romney has more than 20 distant relatives going back three generations living in the region of Mexico where his father, George, was born, and that as the son of a Mexican born parent, Mitt Romney is entitled to dual citizenship under Mexican law. On the other hand, Newt Gingrich was clearly born to parents who were citizens at the time of his birth. So in the absence of any evidence to the contrary, that’s all I need to know to sway my opinion.

References:

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

http://en.wikipedia.org/wiki/George_W._Romney

http://www.biography.com/people/newt-gingrich-9311969

http://www.pbs.org/wgbh/pages/frontline/newt/newtchron.html

http://www.wargs.com/political/gingrich.html

http://www.wargs.com/political/romney.html

Obama’s Last Stand | A Level Playing Field

2011-12-16T00:50:00.006-05:00

Unemployment and Educational Attainment

- By: Larry Walker, Jr. -

In a speech given on December 6, 2011, Barack Obama, the Debtor-In-Chief, called for a Level Economic Playing Field. “This isn’t just another political debate. This is the defining issue of our time. This is a make-or-break moment for the middle class, and all of those who are fighting to get into the middle class,” he said. “At stake is whether this will be a country where people can earn enough to raise a family, build a modest savings, own a home and secure their retirement.” Yeah whatever! His populist tone, however, has fallen mostly upon deaf ears, as America has come to realize that the $5 trillion of debt, which he has racked up over the last 3 years, is the real defining issue of our time. And that in spite of all of his irresponsible borrowing and spending, Obama has delivered next to nothing in the way of improved permanent living standards for any American.

News Flash! The recession ended in June of 2009. The economic crisis is over. What we are witnessing at this point is what an economy looks like, some 29 months after a recession has ended, when an emaciated government Administration has miserably failed its people. No, this isn’t a recession, it’s an Obama recovery. If things aren’t moving fast enough for you, it just may be that the Class-Warfare-Instigator-In-Chief has been focused more on disarming the economy than fortifying it. Those who are content with waiting on Obama to remake America, in his own image and likeness, will find themselves waiting a long time, as it originally took some 244 years to get where we were prior to his anointing.

But as for the rest of us, we don’t have to wait any longer than November of 2012 to bury Obama’s dated ideals of crony capitalism and political pandering back underneath the trash heap from which they emanated. As the self-ascribed millionaire, and so called, spokesman for the poor and downtrodden, engages in an irrational personal conflagration to extend a contrived $8 to $16 per week payroll tax cut for most working Americans, while at the same time bankrupting the nation as a whole, most of us realize that it’s going to take a lot more than a temporary handout to fix what is likely a systemic problem.

Does Obama seriously believe that someone hearing his class-warfare vitriol will suddenly be inspired to run out and enroll in a G.E.D. program, or college; or to start a new enterprise? Because I don’t think his divisive tone cuts the mustard. Will an $8 to $16 per week bounty seriously be enough to usher us into the Promised Land? Yeah, right! So Obama has chosen to make his last stand -- the act of doling out a one-year, deficit-financed, premature social security distribution (for the 3rd year in a row), while at the same time handing each American citizen our “fair share” of a national debt, that is now $48,254 for each and every one of us. But it seems to me that he might want to take care of his own issues first, since he (Obama) has already inflated the national debt by 50% of the amount incurred by the first 43 presidents, in just 3 years. The thought of another nickel of reckless spending coming out of this White House makes me want to see him rot in a federal penitentiary, for the rest of his days. After all, has he not essentially stolen the future away from my children and grandchildren?

What is the Playing Field?

So let’s look at the facts surrounding what would be involved in leveling the so called playing field, as Obama so ineptly echoes. According to the Bureau of Labor Statistics (BLS), the unemployment rate among those, 25 years of age and older, who have attained less than a high school diploma is a whopping 13.2%, while it is only 4.4% for those with a Bachelor’s Degree or higher. And according to the U.S. Census Bureau, households with a householder 25 years old and over, with less than a high school diploma have median incomes of $24,787, while those with a Bachelor’s Degree or higher have median incomes of $82,109. So what does that tell you? It tells me that some people achieve more than others, but it doesn’t tell me that the playing field is not level.

The following table, courtesy of the BLS, was split up into four parts, mainly due to the overall size, but also to focus on the characteristics of each category. First, as of November of 2011, the unemployment rate among those age 25 and over who have attained less than a high school diploma was a colossal 13.2%, while the labor force participation rate was a mere 47.0%. That means that while some 10.2 million in this category were employed, another 1.5 million were unemployed, and that there were another 13.2 million people somewhere out there who never made it through high school. Although this is the smallest of the four categories, one’s chances of employment are greatly diminished by not finishing high school.

Next, according to the BLS, the unemployment rate among those 25 years of age and over who are high school graduates was 8.8%, which is still rather high, while the labor force participation rate was 60.3%. That means that while some 33.8 million in this category were employed, another 3.3 million were considered unemployed. Note: It’s curious that the overall unemployment rate dropped from 9.0% in October 2011 to 8.6% in November of 2011, primarily due to the fact that 315,000 workers dropped out of the labor force, and that the civilian labor force among high school graduates -- with no college, fell by 302,000. Is this just a coincidence?

In comparison, for those equipped with a high school diploma, along with some college or an Associate’s Degree, the unemployment rate was 7.6%, which isn’t all that great, but better than the former categories, and the labor force participation rate was also an improvement at 68.4%. This means that while some 33.9 million in this category were employed, another 2.8 million remained unemployed.

Finally, among those with a Bachelor’s Degree or higher, the unemployment rate was a mere 4.4%, while the labor force participation rate was a tolerable 76.0%. What a dramatic improvement. This means that some 45.0 million college graduates were employed, while just 2.1 million were considered unemployed. Thus, one’s chances of employment are immensely greater after attaining a college degree.

So from the above, we can state that we have a civilian labor force of 132.7 million people, 25 years of age or older, and that among these, as of last month, 123.0 million were employed, and 9.7 million were unemployed. And as far as the unemployed, 2.1 million have a Bachelor’s Degree or higher, 2.8 million attended some college, 3.3 million stopped after high school, and another 1.5 million never graduated from high school. Among those who are employed, 45.0 million are college graduates, 33.9 million attended some college, 33.8 million stopped after high school, and 10.2 million dropped out of high school.

What should be rather obvious from the preceding tables is that the higher one’s level of education, the greater one’s chances of employment, especially in a tough economy. So how does Obama propose to level this playing field? Will he give non high school graduates honorary diplomas? Or will he take money and opportunities away from achievers and hand it over to non-achievers? For the most part, all I ever hear from Obama is nonsense such as, ‘tax high achievers and give a portion of their earnings over to non-achievers’, or ‘tax the rich, and give $8 to $16 per week tax cuts to those who already have jobs’. But how would either method fix the achievement inequality gap which is evident in the preceding tables? They won’t.

You see, there is no way to make this playing field any more level than it already is. I mean it is what it is. If you want a good life, the first step is to finish high school, and if you don’t, it’s not the responsibility of those who did to take care of you. If you want to do a little better, then plan on attending college because, even if you don’t finish, your life will be immensely better. Heck, I’m not ashamed to say that I didn’t finish college until I was 32 years old. And I managed to trudge through it with a full-time job, and a wife and four children at home. Had I not done so, my advancement would have been limited at best. And when I finished, I didn’t have a dime of student loan debt. So it can be done, and it must be done in order to obtain anything in this society. That’s just the way it is.

Digging a little deeper, according to the U.S. Census Bureau’s 3-Year Estimates, among those 25 years of age and over, only 27.8% attained a Bachelor’s Degree or higher, while 15.1% didn’t make it through high school (see table below). According to the data, 29.0% graduated from high school (including equivalency), 20.7% attended some college but did not get a degree, 7.5% attained Associate’s Degrees, 17.6% earned Bachelor’s Degrees, and 10.2% obtained Graduate or Professional Degrees. So although 84.9% of Americans graduated from high school, a much smaller percentage went on to complete college. So that brings us to the big question: Does one’s level of educational attainment make any significant difference in economic standing?

Well, according to the U.S. Census Bureau’s 3-Year Estimates, we can see (in the table below) that the poverty rate among those with less than a high school diploma is 24.5%, while it was 11.8% among high school graduates, 8.2% for those with some college, and only 3.7% for those with a Bachelor’s Degree or higher. So the chances of living a life in poverty are greatly enhanced for those who fail to graduate from high school, while being very slim for those attaining at least a Bachelor’s Degree. So does this mean that the playing field isn’t level? Do high achievers have a responsibility to take care of non-achievers? Did some of us start out on a different playing field, other than kindergarten? And is it possible for Obama’s wealth redistribution vision to turn back the hands of time and place everyone back on Square One? The answers to all of the above -- a solid "No".

As I mentioned in, Obama’s Square Deal and Just Deserts, and according to the U.S. Census Bureau, in 2010, households with a householder 25 years old and over with less than a 9th grade education earned median incomes of $21,254 and mean incomes of $30,232, while those with some college earned median incomes of $48,722 and mean incomes of $61,026, and those with a Bachelor’s Degree or higher earned median incomes of $82,109 and mean incomes of $104,555 (see table below). So anyone who wants to earn their ‘fair share’ should be prepared to plot their 'own course', and to complete the necessary steps. How high you reach, and how you get there is simply a matter of free will. So unless Obama is proposing to take away free will, or to somehow make college education mandatory, all of this “level playing field” rhetoric is just smoke.

I will go ahead and submit that America is firmly planted on an even playing field. It begins in kindergarten and ends where it ends, due to personal choices, parental upbringing, and life experiences. I will also state that high achievers do not owe non-achievers a single solitary dime. Nor is it the responsibility of the federal government to improve the lives of those who make bad choices. Sure, government can and should encourage upward mobility, but as the saying goes, “You can lead a horse to water, but you can’t make him drink.” It is not the federal government’s responsibility to knock high achievers back a few steps so that non-achievers can catch up. Sorry, but it doesn’t work like that. Just like God helps those who help themselves, governments should only venture to help those who help themselves.

Now will somebody please explain to me how giving out $8 to $16 per week deficit-financed handouts (i.e. the payroll tax cut), to people who are already working, will manage to level the playing field for the 11.7 million civilian workers who, for one reason or another, didn’t bother to graduate from high school? Or for that matter, for the 37.1 million who chose to climb no higher than high school? My short answer is that it won’t. In fact, nothing that Obama has been spewing will miraculously turn lower levels of educational attainment into higher learning, nor bigger paychecks. For all his rhetoric, Obama hasn’t inspired one American to pick themselves up by the bootstraps and try to make progress.

In truth, all that I’ve heard from Obama are the following misnomers -- society isn’t fair, and under-achievers are owed something by those who have been more successful. Yet it turns out that the most successful members of our society are mainly those who finished high school, and went on to graduate from college. Hopefully someone in the ‘class’, that either didn’t finish high school or is thinking about dropping out, will be inspired by what you have just read, to indeed pick “yourself” up and move forward. And I would to God that some Ronald Reagan protégé would take up the mantle, and again speak those words that so inspired me to pick myself up by the bootstraps, return to school, and seek a better life.

“We must not look to government to solve our problems. Government is the problem.” ~Ronald W. Reagan

Obama’s Square Deal and Just Deserts

2011-12-08T02:05:00.004-05:00

What? Obama Borrowed $5 Trillion in 3 Years?

- By: Larry Walker, Jr. -

It was back on July 3, 2008 when Barack Obama exclaimed, “The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents - #43 added $4 trillion by his lonesome, so that we now have over $9 trillion of debt that we are going to have to pay back -- $30,000 for every man, woman and child. That's irresponsible. It's unpatriotic.”

To be fair, it took Bush a full 8 years to run up a $4 trillion dollar tab, yet just three years into his one-term proposition, Obama has already run up another $5 trillion, by his lonesome. So what does that make him, a genius? Today we have a national debt of $15.1 trillion that we are going to have to pay back -- $48,254 for every man, woman and child, and $133,993 for every U.S. taxpayer. So it may be said that Obama’s record on the national debt is 333 times more irresponsible, and 333 times more unpatriotic, right? But let’s just call it, “Not Fair”.

To be equitable, all that Obama has accomplished, thus far, is to hand every citizen a $48,254 handicap, and to put every U.S. taxpayer $133,993 in the hole. Since I officially became a grandfather in October of this year, the thought of this lying, hypocrite lecturing my children and grandchildren about fairness, as he hands them each their share of $133,993 of the U.S. debt, because they will surely inure their 'fair share', makes me sick. Fair shot, fair share, same rules?

The quotation "All men are created equal" has been called an "immortal declaration". So can Obama top this?

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed....” ~U.S. Declaration of Independence

I didn’t think so. Somebody needs to tell the idiot-in-chief that in America, everybody has a fair shot, everybody pays their fair share, and everyone plays by the same rules; the only exception being perhaps he and his cronies.

According to the U.S. Census Bureau, household income is a product of ones level of education. It’s a fact that households with a Bachelor’s Degree, or greater, earn higher incomes. So if you want more income, you better finish college, otherwise, be happy with what you get, because it could be a lot worse. After all, this isn't the 3^rd world. American’s know the drill, and we make the choices that we need to make, to get where we want to be. And if we fall short, we push our children forward.

Those with less than a 9^th grade education can expect to earn median incomes of $21,254, and mean incomes of $30,232, while those with some college can expect median incomes of $48,722, and mean incomes of $61,026. In contrast, those with professional degrees may expect to earn median incomes of $119,825, and mean incomes of $159,202. So anyone who wants to earn their ‘fair share’ should be prepared to plot their 'own course', and complete the necessary work. How high each wants to rise, and how they get there is a matter of free will.

Don’t lecture me about fairness. As far as I’m concerned it would be fair to put debt ridden administrations, like this one, and their political minions away – in the nearest penitentiary. Yeah, 14 years would send a powerful message. You want to overspend and force me, my children and grandchildren into debt; then you should pay the ultimate price. You talk about a fair deal? Is it fair for the federal government to be sitting on its collective butt, borrowing $4 billion per day on “our” behalf? I say not. That’s why you can take your 2% payroll tax cut and shove it! Then you can get off the stump, cancel that vacation, curb government spending and balance our collective budget. Otherwise prepare to be ‘thrown’ out of office, and to inherit your just deserts.

Related:

National Debt Bomb | 1976 to 2011

Four More Trillion | Not Change

National Debt: A National Disgrace

Photo via: http://ibloga.blogspot.com/2009/02/new-one-trillion-dollar-bill.html

Tax Virtue: The Golden Mean

2011-12-04T15:24:00.004-05:00

Views from the Centre-Right -

By: Larry Walker, Jr. -

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

In philosophy, especially that of Aristotle, the golden mean is the desirable middle between two extremes, one of excess and the other of deficiency. The following links and brief excerpts are from 34 articles on income tax reform, written between November 2009 and December 2011. Authored with an independent fiscal conservative twist, the objective has been to define the golden mean, with respect to income taxes. If something catches your eye, pore over it. And if you are able to apprehend and digest them all, consider yourself wise, and fit for the impending battle. For we all know what’s coming, and we should also realize what happens when a government operates on the wrong side of the road.

Endless Stimulus | Payroll Tax Cut - Dec 01, 2011

Tax Simplification, Part I - Nov 10, 2011

Herman Cain's 9-9-9 Plan, which involves eliminating the 15.3% payroll tax, of which every dime is presently committed to current Social Security and Medicare payments (and then some), fails to address the main problem ...

Tax Simplification, Part II - Nov 17, 2011

“There is no doubt that many provisions in the Tax Code benefit narrow groups of taxpayers, but the dirty little secret is that the largest special interests are us – the vast majority of U.S. taxpayers. Virtually all of us benefit from ...

Herman Cain's 9-9-9 Sham - Oct 23, 2011

Herman Cain argues that the reason we need his 999-Plan is because the tax law is too complicated. But is it really? I've worked with the tax law for 30 years, and I don't think it's all that complicated. It may have some complex ...

3rd Concern with the 9-9-9 Plan - Oct 29, 2011

Since under the current tax code, the taxpayer's in the first example are already in a 35% marginal tax bracket, if they earned an additional $1,000,000, they would pay federal taxes of $698,543 under the current tax code, ...

Obamas 9-9-9 Tax Cut | For the Blind - Oct 30, 2011

Taxing the Rich – 1765 to 2011, Part I - Sep 02, 2011

Taxing the Rich – 1765 to 2011, Part II - Sep 03, 2011

Believing the income tax to be unconstitutional, President Grover Cleveland refused to sign it. The Act became law in 1894 without his signature, but was ruled to be unconstitutional in the following year. In 1895, the Supreme ...

Taxing the Rich – 1765 to 2011, Part III - Sep 04, 2011

Obama's Tax Fallacy - Jan 27, 2010

First of all 43.4% of Americans don't pay any income taxes. That leaves the rest of us. So did 95% of the 56.6% who actually pay income taxes get a tax cut? I doubt it, but even if that were true, it's not 95% of all Americans (or ...

Obama's Tax Fallacy II: Updated - Mar 05, 2010

According to the Tax Policy Center, there were 151 million tax units in 2009 (excluding dependents of other tax units). Out of those 151 million tax units, 65.6 million, or 43.4% had zero or negative tax liabilities here ...

Obama's 1950’s Tax Fallacy - Aug 06, 2011

The table below compares what 1950's tax rates looked like back then, against what they would look like in 2010 dollars. [Note: Tax rates were the same throughout the 1950’s, and the brackets for Single and Married Filing ...

2011 Tax Increase: A Reality Check - Jul 17, 2010

Left-wing pundits are claiming that the Bush tax cuts were for the wealthy, which is simply not true. Next year when the 10% tax bracket disappears, and tax rates return to pre-2001 levels, will represent an across the board tax ...

2011 Tax Jam: Wrong Way, Wrong Road - Jul 24, 2010

In my last blog post, 2011 Tax Increase: A Reality Check, I attempted to point out how the Bush tax cuts applied to all Americans at every level of income, and that with their expiration at the end of 2010, income taxes will rise ...

2011 Tax Hike: Progressive Style - Jul 25, 2010

Obama and the progressives want to somehow let the Bush tax cuts expire for anyone making over $200,000 per year, but it's not clear whether or not tax rates for those below that amount will revert to pre-2001 levels. ...

We Are All Billionaires Now - Apr 17, 2011

Good luck to Democrats in first identifying tax breaks that benefit people with net worth's of over $1 million (or $1 billion). They don't exist. And secondly, since more than half of millionaire households are headed by retirees, ...

Obama's Static Tax Blunder - Sep 03, 2010

"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 ...

Obamacare's Effect on Small Business - Oct 06, 2011

“An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.” ~ Daniel Webster in M'CULLOCH v. STATE, 17 U.S. 316 (1819) - ...

Give Me a Tax Cut, or Give Me Death! - Nov 20, 2009

Do Small Business Owners deserve tax relief? You're damned right! What can you do about it in Washington D.C.? Well, if you want Small Businesses to spend more, hire more, and stop the lay offs, then stop squeezing us. ...

Payroll Tax Cut Forsakes the Poor - Feb 22, 2011

But first of all, extending last year's tax rates actually didn't do anything for anybody (i.e. nothing gained, nothing lost). Secondly, renewing jobless benefits for the long-term unemployed was simply the price we had to pay for a ...

Obamacare's Deadweight Loss - Oct 12, 2011

Obama's Ersatz Rich | The Top 400 - Sep 09, 2010

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. ...

Keeping It Real: Obama's $250,000 Fallacy - Sep 06, 2010

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 ...

Tax Revolt of 2010 | Authentic - Sep 11, 2010

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. ...

Obsolete Government Programs, Part 1 | FICA - Apr 20, 2011

If we were not forced to pay this mandatory tax of 6.2% (12.4% for the self-employed) on earned income up to the limit of $106,800, we would be able to save a greater portion of our own money into the modern retirement ...

Obsolete Government Programs, Part 2 | Medicare - Apr 21, 2011

Medicare is partially financed through payroll taxes imposed by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act of 1954. In the case of employees, the tax is equal to 2.9% (1.45% ...

Real Tax Reform I: Taxing Small Business - Nov 13, 2010

Much of the debate against raising tax rates on the upper bracket centers around how income taxes are computed on small business owners. The debate focuses on the way that pass-through income, which is earned by the ...

Real Tax Reform II: Taxing Corporations - Nov 16, 2010

In Part I, we focused on unfair tax policies surrounding S-Corporations and Partnerships. The prospect of increasing tax rates on business owners is a far cry from what most of us would consider meaningful fiscal reform. Part II ...

Tax Reform 101: Stuck on Static - Nov 18, 2010

Example 1: Static Revenue Policy – Joe the retailer owns a gift shop. One day Joe got sick and tired of lackluster sales and decided to raise prices by 100%. Joe believed that if he doubled prices, while maintaining the same ...

Tax Reform 201: The Optimal Tax Rate - Nov 23, 2010

Those immersed in the static conception of human behavior say that America will never grow its way out of debt. Well, that's a self-fulfilling prophecy if we base our tax policy on the static view. So do they think we can tax our ...

Tax Rates, Earmarks, and Weiners - Dec 20, 2010

For those who think that a top federal tax rate of 35% is too low, there is a solution. How about forking over some of that excess lucre? How about putting your money where your mouth is? The time to stand up for your ...

The Elitist Condescension Tax Credit - Dec 06, 2010

According to some estimates, if made permanent, the Making Work Pay tax credit will cost the U.S. government an estimated $640 billion through 2018. Any idiot who would vote for something that cost so much and helps no one should be ...

Shared Sacrifice and a Free Lunch - Dec 05, 2010

According to the Tax Policy Center, in tax year 2009 there were 151,500,000 tax filers excluding dependents of other taxpayers and out of those 71,000,000 (46.9%) had a zero or negative income tax liability. ...

Debt & Taxes: Obama's Rate of Change - Feb 18, 2010

During the 16 year period ending with fiscal year 2009, GDP achieved an average annual growth rate of 6.8%, while government revenues (taxes) grew at 4.5%, and the national debt grew at 10.3%. Summary: The national debt ...

Endless Stimulus | Payroll Tax Cut

2011-12-01T20:15:00.008-05:00

Common Sense vs. Nonsense: Bankrupting the Future –

By: Larry Walker, Jr. –

Facts: The 2% payroll tax cut not only boosted workers’ take-home pay by $120 billion in 2011, but it also widened the government’s budget deficit, and left the social security trust fund in the red.

Since Social Security and Medicare taxes are collected in order to realize future benefits, why would the federal government choose to refund a portion of those collections today? Are its entitlement programs in such good shape that the government can afford to distribute benefits prematurely? I don’t think so. For that would infer that future benefit payouts are on the decline. However, to the dismay of many, in fiscal year 2011 the net cost of social security benefits increased by 18.9%, over fiscal year 2008, while tax collections declined by 13.5%, widening the breach by 1,678%.

Since at least 1975, a growing portion of social welfare spending has been introduced by Congressional tax-writing committees and administered by the Internal Revenue Service. As I outlined in Tax Simplification, Part II, the Earned Income Credit, Child Tax Credit, and Making Work Pay Credit were primarily responsible for IRS administered giveaways of $171 billion in fiscal year 2010, or if you prefer $1.7 trillion over 10 years. In fiscal year 2011 the amount was upped to $231 billion per year, due to the payroll tax cut. And today, some members of Congress are urging others to increase these tax giveaways to $351 billion annually, which I think will end up costing closer to $471 billion (as explained below). But in all of this pandering, what is even more illogical than charging additional debt to Obama’s unlimited credit line, is the rebating of funds “supposedly” earmarked for future liabilities.

As Sherlock and I proved in Social Security: A Breach of Trust, the federal government has summarily confiscated and spent every dime of the $2.6 trillion surplus, which would have comprised the Social Security Trust Fund, and has replaced it with non-marketable, special-issue, Treasury securities. And since these special-issue securities are an asset to the Trust Fund and a liability to the U.S. Treasury, they therefore cancel each other out. In other words, since there is no surplus, every dime of Social Security and Medicare tax collected today is spent today, therefore any shortfall rests squarely on the shoulders of the general budget. And as you may know, the general budget is currently more than $15 trillion in arrears.

When the Making Work Pay Credit expired at the end of 2010, it was replaced with the 2% Payroll Tax Cut, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The newest tax gimmick allowed a 2% cut in payroll taxes for employees, which reduced the Social Security Tax from 6.2% to 4.2%, without affecting Social Security benefits. But in the big picture, all it really accomplished was to elevate the amount of social welfare tax expenditures already in the tax code, from $171 billion in 2010, to $231 billion in 2011, or by another $60 billion (see table below).

According to an editorial in Bloomberg-Businessweek, the 2% payroll tax cut boosted workers’ take-home pay by $120 billion in 2011. The editors contend that, “… this should stay in force for another year, be extended to the employer portion of payroll taxes, and increased for both employers and employees to a 3% cut.” And further that, “… the payroll tax cut should be widened to temporarily relieve employers of the entire 6.2% levy for new hires and pay raises.” They conclude their unbalanced argument by stating that, “Republicans should be willing to go along. We are talking about tax cuts, after all, that would pump some $240 billion into a struggling economy.”

So in other words, Bloomberg-Businessweek thinks that annual social welfare tax expenditures of $171 billion in 2010, and $231.3 billion in 2011 were not enough. According to the editor’s, social welfare tax expenditures should be increased to $351.3 billion, and conservatives should be willing to go along, to get along. But stepping back from the easel, to gain some aesthetic distance, the inference appears to be that a 10-year tax expenditure of $1,710 billion wasn’t enough, that $2,313 billion is insufficient, and that $3,513 billion is somehow the magic number (assuming that expenditures for the child tax credit and earned income credit remain fixed). I don’t know any true Conservative, in my neck of the woods, which would go along with blowing a bigger hole in the federal budget than already exists, for any reason; especially not to extend another temporary economic stimulus, some 29 months after the recession officially ended.

Endless Stimulus

These days, it’s as if every time a temporary measure expires, its reversal is deemed to be a tax hike. But the expiration of this one-year, one-time, re-election ploy isn’t a tax hike at all; it’s merely the death of what was probably a bad idea in the first place. If we follow the logic that every temporary measure is permanent, then Obama’s entire 2009 stimulus spending binge must represent the new normal, and any reduction in government spending must be deemed a deviation from the norm, and thus a bad thing. But if not a descent towards Greece, where will this road end? Italy? France? Sheol?

I am not sure how the editor’s of Bloomberg-Businessweek arrived at their $120 billion and $240 billion figures, but let’s assume the former is correct. If so, then it would seem to me that since the cost of the 2% tax cut was estimated to have been $120 billion, that upping the employee payroll tax cut from 2% to 3%, and adding an employer tax cut of 3%, would come to more than double the current giveaway. Simple math leads me to a price tag closer to $360 billion [(120 / .02) * .06], than $240 billion. And that doesn’t include adding the 6.2% tax cut on new hires and pay raises, which would up the ante even more. Other than that little boo-boo, the major omission from Bloomberg-Businessweek’s one-sided endorsement of Barack Obama, because that’s what it is, is that any cut in the Social Security payroll tax translates directly into an increase in the budget deficit, and by extension, the national debt.

The following table was extracted from the Social Security Administration’s Consolidated Statements of Changes in Net Position for the Years Ended September 30, 2008 through 2011. If you wish, you may view the actual financial statements by following the links provided at the end of this post. After navigating this rather murky tome, the bottom line, exclusive of appropriations and interest payments derived from the general fund, may be summarized as follows:

The total amount of tax revenues collected dropped from $671.2 billion in fiscal year 2008, to $580.9 billion in fiscal year 2011, or by $90.3 billion. And the total cost of operations jumped to $782.7 billion in fiscal year 2011, from $658.4 billion in fiscal year 2008, or by $124.3 billion. In a nutshell, the fiscal year 2008 annual surplus of $12.8 billion has been transformed into a $201.8 billion annual deficit in just three fiscal years. In fact, expenditures have exceeded revenues by $370.9 billion over the past three fiscal years.

In other words, social security tax revenues have fallen by 13.5%, since 2008, while operating costs have risen by 18.9%. Another way of stating this is that the shortfall in Social Security tax collections, versus expenditures, has widened by 1,678%. This is significant because any shortfall, whether covered by interest on the debt or appropriations, must be siphoned directly from the general budget. In effect, these annual deficits have increased the national debt, while simultaneously compromising the future of our troubled entitlement programs.

Following the wisdom of Bloomberg-Businessweek, and implementing this fraction of Obama’s misnamed American Jobs Act, would add another $120 to $240 billion to what is already a $201.8 billion deficit on the Social Security Administration’s account. The idea of a payroll tax cut is not a bad one in and of itself, for a nation where the net cost of social benefits is on the decline, however under the circumstances, which some of us refer to as reality, it is probably the dumbest idea proffered by the Obama Administration to-date (although that’s pretty much a tossup).

Personally, I can do without the 2% payroll tax cut, since it has done nothing to increase my personal consumption, has accelerated the national debt, and has compromised the future of Social Security. No. I’m not on the band wagon with those harping for more social insurance rebates. Nor am I opposed to a surtax on those making more than $1 million per year, as long as it's accompanied by a greater amount in spending cuts. What good is an equal increase in both spending and taxes? And what government-manufactured problem would a tax cut for some, and a tax hike on others solve? I say, ‘no good’, and ‘none’. As far as I’m concerned, anyone who votes for either keeping or increasing the payroll tax cut, under any circumstance, short of a 10-fold cut in spending, is an idiot. And anyone against raising taxes on taxable incomes greater than $1 million per year, in exchange for a 10-fold reduction in spending, is devoid of common sense.

References:

Social Security Administration 2011 Financial Statements - http://ssa.gov/finance/2011/Financial%20Statements.pdf

Social Security Administration 2010 Financial Statements - http://ssa.gov/finance/2010/Financial%20Statements.pdf

Social Security Administration 2009 Financial Statements - http://ssa.gov/finance/2009/Financial%20Statements.pdf

Related:

Tax Simplification, Part I

Tax Simplification, Part II

Social Security: A Breach of Trust

The Social Security Bust Fund

Newt Gingrich on Amnesty | In his own words

2011-11-23T01:21:00.004-05:00

Updated: During the CNN GOP National Security Debate on 11/22/2011, Newt Gingrich recommended a comprehensive approach to address illegal immigration. Just for the record, what Mr. Gingrich really said about Amnesty follows:

Mr. Gingrich said that any such plan must (A) start with securing the border, then (B) establishing a guest worker program, and finally (C) setting up a board to review the status of each person here illegally. Such a board would distinguish between those who recently came here, and those who are more established. He said that those who recently came here, who don't have family ties, or are otherwise not established, should be sent home. While those who are established, who have been here for 25 years or more, who have children and grandchildren in America, who belong to churches, who have obeyed the laws, and who have paid their taxes, should be allowed to stay legally, but not automatically granted citizenship. For the latter, he recommended using something similar to the Red Card Solution, which would be used as a form of identification, to grant legality, but not as a path towards citizenship.

The Krieble Foundation's Red Card Solution is a proposal which would allow companies to recruit workers from Mexico. The Red Card would permit workers to enter America, and would allow employers and immigration authorities to track them. It would aid in enforcement of immigration laws, with less intrusion by the government. According to the Krieble Foundation:

"It’s a simple solution. Private employment agencies would be allowed to open offices in foreign countries, and authorized to issue temporary non-citizen worker permits. The permits would be “smart cards” with a microchip that includes a photograph, fingerprint or other biometric identification data, and information needed so that border agents, police, and employers could swipe the card and know who the holder is, where he works, where he lives, who issued the permit, when it expires, and any other required information. Employment agencies would be licensed by the government and would be required to run criminal background checks before issuing non-citizen worker permits, much like gun shops do today. Employers would simply post jobs with employment agencies like they do today. Best of all, the program would be funded by user fees, not taxpayers."

Gingrich also recommended that H1 Visas be granted with every graduate degree in math, science and engineering, to encourage foreign students to stay in America.

For the most part, I concur.

National Debt Bomb | 1976 to 2011

2011-11-20T22:50:00.010-05:00

The 4th Deadly Sin -

By: Larry Walker, Jr. -

Definition of Lazy – “encouraging inactivity or indolence” -

The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1972, which included unilaterally cancelling the direct convertibility of the United States dollar to gold and essentially ending the existing Bretton Woods system of international financial exchange. However, it was not until March of 1976 when the world’s major currencies began floating. It is notable that what cost $1.00 in 1976, now costs $3.95, and what costs $1.00 today, cost only $0.25 in 1976, as annual inflation over the period averaged 4.00%.

Meanwhile, since 1976, the U.S. National Debt has grown from $620.4 billion to $15,039.4 billion, in nominal dollars (as of November 17, 2011). So the questions today are as follows: How much of the national debt is attributable to a declining dollar? And, does anyone really care about the looming debt implosion?

Measuring the National Debt in 2011 Dollars

At the close of fiscal year 1976, the U.S. National Debt stood at $620.4 billion. Converting this to 2011 dollars, would have made it equivalent to $2,450.1 billion. So it took the United States 186 fiscal years, from 1791 to 1976, to accumulate today’s equivalent of $2,450.1 billion in debt. This averages out to around $13 billion per year, in today’s dollars, over the entire 186 year period. In contrast, over the last 4 fiscal years, the national debt has grown by a total of $5,006.9 billion, when measured in 2011 dollars. This averages out to borrowing of $1,251.7 billion per year, over the last 4 fiscal years.

Per NationMaster.com, in 1976, the U.S. population stood at 218.0 million. By 2011 the population had increased to 311.7 million, representing an average annual growth rate of 1.2%. At the current rate of growth, the population will reach 1,008 million by the year 2193, 186 years from 2007.

From 1977 through fiscal year 2007, the national debt grew from $2,450 billion to $9,783 billion (in 2011 dollars). That’s an increase of $237 billion per year, or an average annual growth rate of 9.7%. On that trajectory, the debt would reach $185.5 trillion by the year 2193.

From 1977 through fiscal year 2011, the national debt grew from $2,450 billion to $14,790 billion (in 2011 dollars). That’s an increase of $353 billion per year, or an average annual growth rate of 14.4%. On this trajectory, the debt would reach $402.2 trillion by the year 2193.

In fiscal years 2008 through 2011, the national debt grew from $9,783 billion to $14,790 billion (in 2011 dollars). This represents an increase of $1,252 billion per year, or an average annual growth rate of 12.8%. Since the growth rate has been slightly lower over the last four years, as compared to 1977 to 2011, on its current trajectory, the national debt will reach $359.2 trillion by the year 2193.

On a per capita basis, the national debt was $11,237 in 1976 as compared to $47,450 at the end of fiscal year 2011 (in 2011 dollars). Based on its 1977 to 2007 growth rate, the debt would reach $183,997 per capita by the year 2193. At its 1977 to 2011 growth rate, the debt would reach $398,944 per capita by the year 2193. However, at the rate of growth since the end of 2007, the debt will reach $356,327 per capita by the year 2193.

To summarize, measuring in 2011 dollars, the national debt grew by an average of $13 billion per year over the 186 year period ending in 1976, and over the last four fiscal years it has increased at an average of $1,252 billion per year. Putting this into historical context, as compared to pre-1977 borrowing, the federal government is presently incurring the equivalent of 96 years of debt in each new fiscal year.

Another way of looking at this is that since the debt grew from $2,450.1 billion in 1976, to $14,790.3 billion in 2011, it has grown by $12,340.2 billion over the last 35 years, or by an average of $352.6 billion per year (in 2011 dollars). So because since 1976 we have borrowed an average of $352.6 billion per year, versus an average of $13 billion pre-1977, it may be stated that, the United States is currently borrowing at an annual rate which is 2,612.3% higher than its pre-1977 average.

And thanks to the Federal Reserve, what cost $0.25 in 1976, now costs $1.00. So since everything costs about 400% more than it did in 1976, in real terms, government borrowing is only off target by 2,212.3% from its pre-1977 level. Therefore, although the declining dollar is partially responsible for the increased borrowing, it only represents about 15.3% of the problem.

Debt to GDP: 1976 vs. 2011

By the end of fiscal year 2011, the national debt had grown to $14,790.3 billion. Meanwhile, according to the Bureau of Economic Analysis, U.S. Gross Domestic Product stood at $15,198.6 billion, as of the end of the 3rd quarter 2011. So at the close of fiscal year 2011, our debt-to-GDP ratio was 97.3% (14,790.3 / 15,198.6). In comparison, the national debt stood at $2,450.1 billion, in 1976, and GDP was $7,205.7 (in 2011 dollars). So at the close of fiscal year 1976, our debt-to-GDP ratio was only 34.0% (2,450.1 / 7,205.7).

1976 Debt-to-GDP Ratio: 34.0%
2011 Debt-to-GDP Ratio: 97.3%

Measuring the National Debt in Constant 1976 Dollars

Since the dollar has lost 300% of its value since 1976, courtesy of the Federal Reserve, what would the national debt look like had our currency remained stable? Well, according to the table below, the national debt would be $3.8 trillion, as of 11/17/2011, in constant 1976 dollars, as opposed to its present value of $15.0 trillion. More interestingly however, there are five years where the national debt actually declined, when valued in constant 1976 dollars – 1979, 1980, 1981, 2000 and 2001.

Best 5 vs. Worst 5

When valuing the national debt in 2011 dollars, the table below shows that the worst 5 years were 2004, 2008, 2011, 2010, and 2009, with annual debt increases of $595.8, $1,017.1, $1,228.7, $1,651.8, and $1,885.1 billion, respectively. But what’s more disturbing is that, based on the first month and a half of fiscal year 2012, borrowing is currently on pace to reach $1,992.1 billion, which would exceed the fiscal year 2009 record of $1,885.1 billion, making this year, potentially, the all-time worst on record.

The table also shows that the best 5-years were 2000, 1980, 2001, 1981, and 1979, with annual borrowing decreases of $-44.1, $-20.7, $-18.8, $-15.1, and $-11.9 billion, when valued in constant 1976 dollars, respectively.

The chart above reflects the annual change in the national debt, in nominal dollars as compared to constant 1976 dollars. But it’s not like anyone really cares. Who’s paying attention anyway? I definitely have better things to do than worry about what’s going on in Washington, DC. As far as I’m concerned, wherever the buck stops is where the blame lies. So what does Obama have to say, after posting 3 of the worst 5 spending records in modern U.S. history? “…Also to put our economy on a stronger and sounder footing for the future, we’ve got to rein in our deficits and get the government to live within its means, while still making the investments that help put people to work right now and make us more competitive in the future.” So in other words, according to Obama, government needs to spend more and lower its annual deficit at the same time.

Obama recently made the admission that, “We’ve been a little bit lazy over the last couple of decades. We’ve kind of taken for granted — ‘Well, people would want to come here’ — and we aren’t out there hungry, selling America and trying to attract new businesses into America.” So pray tell, exactly who has “gotten a little bit lazy” in attracting foreign investment to America? It looks to me like most of that investment is coming in to cover Obama’s own irresponsible spending, and that the only other attraction would be the lure of higher taxes, and tighter governmental regulations. Oh, and by the way, those Obama manufactured Occupy Protests aren't exactly lending America the aura of stability either. If America has gotten "a little lazy over the last couple of decades", she must have committed the 4th Deadly Sin over the last 3 years.

References:

Nixon Shock - http://en.wikipedia.org/wiki/Nixon_Shock

Dollar Times – Inflation Calculator - http://www.dollartimes.com/calculators/inflation.htm

U.S. Treasury – Historical Debt - http://treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

Tax Simplification, Part II

2011-11-17T00:45:00.009-05:00

Saving $1,756 Billion, Overnight -

By: Larry Walker, Jr. -

According to Article I, Section 7 of the United States Constitution, “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.” And, according to the 16th Amendment to the Constitution, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Thus Congress has the power to pass spending bills, and a responsibility to collect taxes on incomes; however the pair should be administered by separate agencies. Anyone with a background in accounting or auditing knows that an adequate internal control system should include proper authorization and segregation of duties. By granting the IRS the dual responsibilities of administering social welfare payments and collecting taxes, the Congress has left the door wide open for ineffable fraud.

Since at least 1975, a growing portion of social welfare spending, now to the tune of $1.7 trillion over a 10 year period, is introduced by congressional tax-writing committees and administered by the Internal Revenue Service. Such manipulation has introduced government spending policy into what otherwise would be an exercise in economic measurement. Tax expenditures, by way of refundable credits, represent a deviation from the “tax base”, introduce complexity into the tax law, and impose a spending function on an agency best suited to revenue collection.

Delivering Social Benefits through the Tax System

In the 2010 Annual Report to Congress, National Taxpayer Advocate Nina E. Olson focused on the need for tax reform as the No. 1 priority in tax administration. In particular, she has focused on the problem of delivering social benefits through the tax system, which complicates the mission of the IRS, resulting in a dual mission of welfare administration as well as revenue collection. Elsewhere in the report, the National Taxpayer Advocate recommends that the IRS adopt a dual mission statement and hire personnel appropriate to the delivery of social benefits that already have been codified.

Okay, so let’s stop playing games. Nobody wants to get rid of deductions for mortgage interest, state income taxes, medical expenses, charitable contributions, employee business expenses, or ordinary and necessary business expenses. And as far as officially expanding the mission of the IRS, to social welfare appropriator, on top of being the tax collection arm of the government, we don’t even need to go there. So let’s just cut to the chase. The main problem with the income tax code, today, can be found among three refundable tax credits, at the individual level.

It is important to note that neither of the following are what their names imply: The Earned Income Credit, Child Tax Credit, and Making Work Pay Credit (now known as the 2% Payroll Tax Cut) are not tax credits at all; they are merely social welfare giveaways, administered by the IRS. For the most part, neither represents a refund of income taxes actually paid, as such refunds, when combined, are well in excess of the total amount of taxes paid, including in many cases Social Security and Medicare withholding. Common sense dictates that one cannot refund something which has never been received.

The Earned Income Credit (EIC) was signed into law by President Gerald Ford in 1975. The function of the EIC was to offset the burden Social Security taxes placed on low-income filers with children, and to motivate them to work. The earned income credit has grown to be one of the principal antipoverty programs in the federal budget. The only problem is that it is not a part of the federal budget. In 1975, 6.2 million families received an average credit of $201. In 2009, 27.3 million families received an average credit of $2,206.
The Child Tax Credit (CTC) was enacted as part of the Taxpayer Relief Act of 1997. Congress established the child tax credit to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as family size increased. Initially, for tax year 1998, families with qualifying children were allowed a credit against their federal income tax of $400 for each qualifying child. For tax years after 1998, the credit increased to $500 per qualifying child, and was refundable for families with three or more children. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the credit to $1,000 per child beginning in 2003, and extended refundability to families with fewer than three children. It is one thing to want to help lower the income tax burden of families, but entirely another when the burden is reduced below zero.
The Making Work Pay Credit (MWP) was enacted as part of the economic stimulus act ("American Recovery and Reinvestment Act of 2009," or ARRA). The purpose of the credit is to offset part of the Social Security taxes paid by low- and middle-income workers. MWP provided a refundable tax credit equal to 6.2 percent of earnings (the employee share of the Social Security payroll tax), up to a maximum credit of $400 for individuals ($800 for couples). Couples could claim the full $800 credit, even if only one spouse worked.

Can you say redundant? So let me get this straight – The EIC was implemented to offset the burden Social Security taxes placed on low-income filers with children, and to motivate them to work. The CTC was established to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as family size increased. And the MWP was enacted to offset part of the Social Security taxes paid by low- and middle-income workers.

If Social Security and Medicare taxes are collected from all workers, on an equal basis, in order to pay for future benefits, then shouldn’t the act of granting some citizens a premature distribution, of the same, result in a reduction of future benefits? Common sense says it should, but that’s not how this works. Under each of the above tax credits, some citizens are given back all of their Social Security and Medicare payroll contributions, and a portion of their employer’s contributions, and yet they are eligible to reap the full amount of future benefits based on the amount of their rebated contributions. What’s wrong with this picture? Again, common sense would dictate that, if you don’t put anything into the pot, then you don’t get anything out. And if you put something into the pot, then you should have to wait until age 62, 65, or 67 to obtain a benefit, just like everyone else.

“Don't be misled--you cannot mock the justice of God. You will always harvest what you plant.” ~Galatians 6:7

Today, the United States is reaping exactly what it has sown. We have a $15 trillion national debt, a $1.5 trillion annual budget shortfall, and social entitlement programs on the verge of bankruptcy. But instead of balancing the budget, reducing the debt, and placing money into trust funds to cover future liabilities, we are giving millions of low-income families a double benefit. First, they are given refundable credits, absolving them from any stake in the future of this nation, and then they are promised benefits in the future, benefits which will be paid for entirely at the expense of others.

If the government wants to provide public assistance benefits for low-income filers with children, and motivate them to work, it should accomplish this through one of its other redundant agencies, it doesn’t need to use the tax code. The refundable tax credits, listed above, are precisely the kind of social welfare expenditures that have no place in tax administration. According to the Law of Nature, “You will always harvest what you plant.” But as far as the federal government’s logic goes, justice would seem to dictate that either someone else will harvest what you plant, or you will harvest what someone else plants. It’s not even clear, to most American’s, how much is actually being squandered in this seemingly everlasting war on common sense.

Free Money

According to the Joint Committee on Taxation, in 2010, the IRS gave away $55.1 billion by way of the Child Tax Credit, $56.2 billion via the Earned Income Credit, and $59.7 billion through the Making Work Pay Credit. That’s a total of $170.9 billion in a single year, $103 billion of which was refundable. Over a 10-year period, we’re talking about $1.7 trillion in tax credits, just over $1 trillion of which is refundable.

Note: Although the MWP expired at the end of 2010, it was replaced with the 2% Payroll Tax Cut beginning in 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The new credit allows for a 2% cut in payroll taxes for employees, which reduces the Social Security Tax from 6.2% to 4.2%, without affecting Social Security benefits. When combined with the EIC and CTC, million of citizens will receive future benefits without having made adequate contributions. No wonder Social Security is on the verge of bankruptcy.

The federal government has thus, not only come up with a way of returning to millions of Americans the full amount of their social security contributions, but an amount well in excess, since millions of households are eligible to receive all three tax credits. Another major flaw, in all of this activity, is that eligibility for the premature distribution of Social Security benefits doesn’t disqualify or limit any of these tax filers ability to receive other Federal and State social benefits (i.e. Public Housing, Medicaid, Food Stamps, and Temporary Assistance for Needy Families).

If the federal government insists on granting relief to “qualifying” citizens through the tax code, then under no circumstances should such tax credits be refundable. As I stated in Part I, “I think it’s enough to not owe any federal income taxes at all. The concept of transferring one man’s tax payment directly to another taxpayer is most detestable, and unnecessary.” Keep in mind that the refundable tax expenditures above represent amounts over and above the amount of tax initially collected from the affected taxpayers. Thus, these are not income tax refunds at all, they are social welfare payments, confiscated from taxpayers, and handed over to non-taxpayers through the tax code.

Does the act of filing a tax return make a taxpayer?

The reality is that a great number of tax returns are filed simply to receive refundable tax credits. If there were no refundable tax credits, then it is conceivable that several million tax returns would not need to be filed. And if millions of citizens were excluded from filing income tax returns, then that would aid in reducing the size of the IRS, and thus the size of government. Isn’t this what most conservatives want? That brings us to the following questions: How many tax returns are filed each year simply to obtain refunds in excess of taxes actually paid? And, how much money is being squandered in floating social welfare programs through the tax code?

First of all, these days we hear a lot of people whining about the tax code being too complex, so in Part I, we asked the question: How complicated is your tax return? To bring the numbers up to date, we checked the IRS 2009 Data Book (preliminary). We found that for tax year 2009, out of the 140,532,115 individual tax returns filed, only 59.7% filed the more challenging long-form 1040, while 28.4% filed the short-form 1040-A, and 12% filed a simplified form 1040-EZ (see table below). So from this we can see that 40.4% of Americans, who filed 2009 tax returns, filed fairly simple forms.

The data also shows that 65.8% of filers, 92,518,891 out of 140,532,115, utilized the basic standard deduction, while only 32.5%, or 45,640,583, itemized their deductions. It is a fact that only 74.3% of the returns filed contained taxable income, and just 61.3% resulted in an income tax liability. Meanwhile, the majority, 62.6% of filers, claimed tax credits. With 65.8% of taxpayers claiming the standard deduction, 62.6% claiming tax credits and 40.4% filing simple tax forms, there is potential to eliminate the filing requirements for perhaps as many as 56,702,628 households (the lowest common denominator).

The following table was derived from estimates published by the Joint Committee on Taxation (JCT). You will note that the JCT data reflects the total number of returns as 156.8 million, versus the IRS report of 140.5 million. The reason for the difference is that the JCT estimate includes both filing and non-filing tax units. Non-filing tax units include individuals with income that is exempt from Federal income taxation (i.e. transfer payments, interest from tax-exempt bonds, etc...). Note: The JCT data also excludes individuals who are dependents of other taxpayers and those with negative income.

From this, we can conclude that at least 16 million persons, with positive income, are not required to file income tax returns. This is not complicated to follow. Generally speaking, if a taxpayer’s income is less than the applicable standard deduction, and personal and dependency exemptions, then they are generally not required to file a return. The only reason that a return would be filed, when one is not required, would be to obtain a refund of an overpayment of tax withheld, or to receive a refundable tax credit.

From this data we also learn that 81,458,000 out of the 156,878,000 returns, or 51.9%, were considered to be non-taxable. We can also see that 106,865,000 returns out of the total of 156,878,000, or 68.1%, did not itemize deductions. Thus, from the perspective of the US Congress, there should be room for the elimination of additional pointless compliance. Since 16 million Americans were already eliminated from annual filing rites, what would be wrong with exempting several more million, especially those who take out of the tax system more than they put in?

The next chart (above), also from JCT data, shows the distribution of income tax liability by income class. From this, we can see that most of the returns filed, with less than $30,000 in annual income, had negative tax liabilities. In fact, only 10,071,000 returns out of 70,091,000, or 14.4% of those with income under $30,000, were taxable, while 85.6% were non-taxable. Even more striking is that the returns in this income category had a cumulative negative tax liability of $66.9 billion. We may further infer that almost all of the $71.5 billion in taxes, paid by those who made between $40,000 and $75,000 per year was collected for the sole purpose of being redistributed to those who made less than $30,000.

I submit that the mission of the Internal Revenue Service ought to be to collect what is required to fund the federal government, not to redistribute funds received from some taxpayers directly to others. The fact that federal revenue is being spent before the funds ever hit the US Treasury’s coffers should be alarming. What should be clear is that removing the filing requirement for approximately 60,020,000 (70,091,000 – 10,071,000) taxpayers would result in federal savings of at least $66.9 billion per year ($669 billion over 10 years). Since the tax code already eliminates the filing requirement for 16,000,000 persons, the potential exists to exclude an additional 44,000,000 (60,020,000 – 16,000,000). But that’s not the end of the story.

Exponential Growth of the EIC

The following table, derived from the IRS 2010 Data Book, shows that in the first 18 years after implementation of the Earned Income Credit, from 1975 to 1992, the IRS expended a total of $67.5 billion, $49.4 billion of which was refundable.

The next table, derived from the same data book, shows that in the subsequent 17 years, from 1993 to 2009, the IRS gave away a total of $615 billion through the EIC, $530 billion of which was refundable. So the amount of EIC spending grew nearly 10-fold in the second period.

The Earned Income Credit has thus grown from initially giving 6.2 million families an average tax credit of $201, in 1975, to granting an average credit of $2,206 to some 27.3 million families, in 2009. With the current level of spending in excess of $60 billion per year, the IRS will give away more, on the EIC, in the next 10 years, than was spent in the first 35 years of the program. Will the spending ever end?

Waste, Fraud, and Abuse

Social benefit programs add complexity to the tax code and represent a large part of tax expenditures, or government spending structured through the revenue system. To address the complexity and other implications of tax expenditures, the National Taxpayer Advocate has recommended, “adoption of a process to evaluate whether a tax expenditure presents an administrative challenge, and if so, the extent to which it achieves its intended purpose”. I would contend that the answers to her questions are self-evident, and further evaluation is unnecessary. For had the Earned Income Credit been sufficient, then there would have been no need for the Child Tax Credit, the Making Work Pay Credit, or the 2% Payroll Tax Cut. Thus neither program has been effective. Their only accomplishment, thus far, has been to aid in the accumulation of $15 trillion in government debt, a $1.5 trillion budget deficit, and a downgrade to our national credit rating.

The IRS 2010 Data Book reveals that, in fiscal year 2010, 37% of the 1,581,394 individual returns audited by the IRS, involved the Earned Income Credit (above - click to enlarge). Among these, 556,809 returns had adjusted gross income below $25,000, and 28,393 reported adjusted gross income greater than $25,000. These EIC audits resulted in the recommendation of $2.3 billion in additional taxes. Thus, eliminating the Earned Income Credit will not only save the federal government $60 billion per year (or $600 billion over 10 years) in tax expenditures, but it will eliminate the needless filing and processing of millions of returns, and reduce the number of audits by 37%. That’s significant in and of itself, but when we tack on elimination of the Child Tax Credit and Making Work Pay Credit (2% Payroll Tax Cut), we are talking about total savings of $855 billion over 5 years, or $1,710 billion over 10 years.

In addition, Table 28, of the 2010 Data Book (above - click to enlarge), shows that the IRS expended a total of $12.4 billion in its fiscal year 2010 operations. Thus elimination of the EIC, on its own, would allow the IRS to reduce its size by 37%, saving taxpayers an additional $4.6 billion per year ($46 billion over 10 years). Add that to the savings realized through elimination of the social welfare benefits associated with the EIC, CTC and MWP and this proposal will save the federal government $1,756 billion over the next 10 years. That’s more than three times my original goal. Problem No. 1 solved.

So what’s the bottom line? The administration of social welfare benefits through the tax code should be suspended immediately. By so doing, Congress will eliminate the unnecessary annual filing of more than 40 million tax returns, save the federal government $1,710 billion in tax expenditures, reduce the budget of the IRS by $46 billion, and will accomplish all of this without raising taxes, or eliminating critical spending programs.

References:

The Joint Committee on Taxation – Congress of the United States

IRS 2010 Data Book

National Taxpayer Advocate - 2010 Annual Report to Congress: Volume 2

Related:

Tax Simplification, Part I

Study: Michigan among states scaling back low-income tax credits

Natural Born Conservative on Taxes

Tax Simplification, Part I

2011-11-10T03:05:00.007-05:00

9-9-9 Plan | Prejudiced and Convoluted?

- By: Larry Walker, Jr. -

"A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform." ~Russell B. Long -

Herman Cain’s 9-9-9 Plan, which involves eliminating the 15.3% payroll tax, of which every dime is presently committed to current Social Security and Medicare payments (and then some), fails to address the main problem with modern day governing – the budget. Since it was just barely 3 months ago when our nation faced its first ever credit downgrade, any tax reform proposal which doesn’t lead to a balanced budget should be pronounced dead on the campaign trail. Replacing a 35% corporate income tax, a 35% personal income tax, and a 15.3% payroll tax, with 9-9-9, not only doesn’t balance the federal budget, but it shifts the burden of federal revenues to those who can least afford it. All that the 9-9-9 Plan really accomplishes is to disproportionately favor the well-off, while punishing the middle class, the working poor, children and the elderly.

I am well aware that some conservatives believe Herman Cain is a gifted mathematical genius, who has it all figured out. And I know that many have bought into his 9-9-9 proposal, without hardly any scrutiny. “Anything is better than what we have now”, some say. Even if it doesn’t make any sense to them, and even though many experts have disputed its claims, an element of conservatives have bought it, lock, stock, and barrel. But I’m not buying it. Herman Cain is human, and no human being is perfect. And to the chagrin of many, there isn’t any such thing as a perfect tax system. For whether a tax is progressive, flat, or regressive, each method involves tradeoffs. There are winners and losers under any policy. And besides, the concept of a flat tax turns out to be nothing more than a myth; there is simply no such thing, as we shall see.

I have never been one to settle for second best. I believe that there is an easier way to achieve the kind of tax simplification that most conservatives really want, a way which is in line with fiscally conservative objectives. And it’s something that could be achieved right now, today. I was never a proponent of taxing those who can’t afford it. The argument that 40% of taxpayers don’t pay any income tax was proffered to counter Barack Obama’s contention that he was going to give 90% of Americans a tax cut. The statistic was used in support of the common sense principle that, you can’t cut income taxes for someone who doesn’t pay income taxes. That was it, and I stand on that to this day. The 40% figure was never intended as a justification for forcing blood from turnips.

But ever since Herman Cain introduced his 9-9-9 Plan, I have heard a few conservatives argue that the poor need to pay their “fair share”. However, my only contention has been that the poor should not be receiving refunds of taxes they never paid. I think it’s enough to not owe any federal income taxes at all. The concept of transferring one man’s tax payment directly to another taxpayer is most detestable, and unnecessary. I have heard a few other conservatives’ state that they don’t care whether or not the federal government can pay its bills. They contend that if the government takes in less money under the 9-9-9 Plan, that Washington DC will be forced to spend less. But that’s not where I stand.

The federal government is already taking in $1.5 trillion less than it spends, so how would Herman Cain’s revenue reduction strategy fix this? It won’t. So the first step (Part I) towards tax simplification is to expose the shortcomings of the 9-9-9 Plan and other flat tax schemes. The second step (Part II) is to outline a plan for tax simplification which will not only eliminate unnecessary compliance, but will in the process, save the federal government $500 billion over 10 years.

Testing Cain’s 9-9-9 Plan

Cain’s main assumption is that the U.S. Tax Code is too complex and should therefore be thrown out and replaced, baby and bathwater. So in other words, he has given up on all other options of reforming the current tax code, and is advocating a radical transformation. I don’t know about you, but I’ve had about enough of fundamental transformations by radicals, on either end of the compass. We all know how Obama’s dream has worked out, but now, instead of simply taking our country back; some conservatives are exhibiting a rather disturbing desire for even more extraneous change.

Whenever a superfluous change is proffered, the first question among conservatives ought to be, “Has it ever been tried before?” And if it has been tried, then this should be followed up with, “How well or how poorly did it work?” But if said change has never been tried, then how would a conservative determine whether or not it would succeed? Well, if a proposed policy has been attempted we just need to analyze the data, and if it has not been tried, then we would simply need to locate and analyze the most similar comparables.

For example, we know that Communism has been tried before, and we know how that worked out. And we know that Universal Health Care plans have been implemented, and we know how they worked out. Real conservatives generally rely on facts and evidence rather than rhetoric. But so far, all we have heard from Herman Cain, and proponents of his 9-9-9 Plan is assertion and rhetoric, rather than analysis and evidence. When challenged, most of them simply resort to name calling and innuendo. But why is no one talking about how combination “flat / consumption tax” plans have fared elsewhere in the world? Well, lucky for us such plans have already been implemented, so there is already evidence available attesting to how well, or in this case, how poorly they have performed.

Flat Tax: Fact or Fallacy?

Most of the EU member states have “progressive” systems under which earners pay higher income tax rates on increasing levels of income. However, seven EU countries – Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Romania and Slovakia – have had “flat tax” systems in place, some for more than a decade. According to a recent study, ‘Workers’ salaries are taxed at higher rates in “Flat Tax” countries than in “progressive” systems’. This is simply a fact, based on analyzing the evidence, not mere rhetoric.

When it comes to Herman Cain’s Plan, as we have repeated three times previously, according to a study on the 9-9-9 Plan conducted by the non-partisan Tax Policy Center:

“The 9-9-9 Plan would cause 95 percent of people making $1 million or more to receive tax cuts averaging $487,300,” and

“Only 16 percent of people making between $50,000 and $75,000 a year would get a tax cut, averaging $1,959, and at least 70 percent of people in this middle-income category would see their average federal taxes rise by $4,326.”

Conservatives who dispute this claim have, thus far, failed to provide any evidence to the contrary.

It should be noted that flat taxes in the seven EU countries generally apply only to the income tax, as none of the seven have eliminated social security taxes. For example, Slovakia has an individual and corporate “flat tax” rate of 19%, but its employers pay a 35.2% contribution to social security, and in addition to the flat income tax its employees have 13.4% of their pay deducted for social security. Add to that Slovakia’s 19% Value Added Tax (VAT) and you have the full package. When you total it all up, the average worker in Slovakia pays total taxes, as a percentage of real gross income, of around 45.5%. So if tax rates are so high in Slovakia that its plan equates to a 19-35.2-19-13.4-19 Plan, then what makes proponents of the 9-9-9 Plan think that it can cover all of the obligations of the United States with such dramatically lower rates? Do they have any evidence, or just words?

In 2006, the International Monetary Fund (IMF) published a working paper by Michael Keen, Yitae Kim, and Ricardo Varsano entitled, The “Flat Tax(es)”: Principles and Evidence. The study describes the world’s most recent flat tax adoptions as, “quite radical reforms, marked more by assertion and rhetoric than by analysis and evidence.” In other words, public opinion has been swayed, more by confabulation than by a careful assessment of facts. Two of the conclusions of the study were as follows:

“In no case does there appear to have been a Laffer effect: these reforms have not set off effects strong enough for them to pay for themselves.”

And, “looking forward, the question is not so much whether more countries will adopt a flat tax, as whether those that have will move away from it.”

So the dynamic implications associated with Cain’s 9-9-9 Plan probably won’t materialize, based on available evidence. And today’s proponents of the flat tax have conveniently chosen to ignore the experiences of other countries. If countries who adopted flat tax policies in the 1990’s are on the verge of returning to “progressive” systems, then isn’t it entirely possible that our current tax framework is already the best in the world? And why wouldn’t it be? Are we not, after all, exceptional?

Tax Simplification

In terms of tax simplification, the authors of the IMF working paper concluded that, “the rate structure itself is commonly not the primary source of complexity in taxation. This comes more from exemptions and special treatment of various kinds. For example, the (limited) survey evidence for Russia does not suggest that the system was widely seen as significantly less complex after adoption of the flat tax.” Herman Cain has already modified his plan to provide exemptions for individuals and businesses associated with “empowerment zones”. He has also included a deduction of dividends for businesses, an exception for capital gains, an exclusion of charitable contributions for individuals, and others, but these are most likely just the tip of the iceberg.

How will the government determine which areas qualify as empowerment zones? Will there eventually be a push for additional exemptions for poor people who reside outside of empowerment zones? What about allowing a deduction for charitable contributions at the corporate level? Then there will likely be an outcry for exemptions for college students, widows, widowers, the elderly, active military, and on and on. Overtime, the overly simplistic 9-9-9 Plan may become more complicated than our present system. One need only examine the Russian experiment to see how convoluted a “simple” flat / consumption tax system may become. What other exemptions will be granted, and how will those be calculated?

As pointed out in the IMF working paper, the presence of a tax-free threshold means that there are really two marginal tax rates (one of them being zero), so that problems of tax arbitrage, withholding and averaging do not disappear under flat tax regimes. There will still be complications, such as in arranging proper withholding from those with multiple jobs (to ensure that they receive the tax-free amount only once). In Cain’s 9-9-9 outline, he states that there will be exemptions for people who either live within, or work within empowerment zones. So where an individual lives outside of an empowerment zone, but works at one job within a zone, and a second job outside of the zone; or where a business owner lives outside of an empowerment zone, but owns multiple businesses located within and outside of such zones, it is possible that the 9-9-9 Plan will create more complexities, not fewer.

Public Servants and Ministers: 0-18-9

Back in the 1990’s when the United States Congress last considered the flat tax, a paper was written entitled, Flat Tax: An Overview of the Hall-Rabushka Proposal. It was written by Mr. James M. Bickley, for Members and Committees of Congress. In the paper, Mr. Bickley affirmed that, “in some instances, a flat tax can be more complicated (rather than simpler) than the tax it replaces”. For example, he points out, that employees of federal, state and local governments, and non-profits would have to add to their wage base the imputed value of their fringe benefits. “Hence, a separate individual wage tax form would be necessary for these employees.” He adds that, “The actual calculation of the imputed value of fringe benefits would be complicated.”

As I mentioned previously, since businesses are not allowed to deduct wages for tax purposes under the 9-9-9 Plan, and since government entities, and non-profits don’t pay income taxes, the simple rule of not allowing a deduction for wages would have no effect upon them. However, under our present tax system, because employers pay a matching portion of Social Security and Medicare payroll taxes, all employers are on equal ground, where they would not be under the 9-9-9 Plan. So how will this be resolved? Will government employees, ministers, and other non-profit employees be taxed at higher rates in order to make up the shortfall? Or will those who actually pay taxes under Cain’s plan unknowingly subsidize such entities? In this matter, Cain’s proposal becomes more complicated, not simpler.

To give us a better idea of the complexity surrounding non-taxable entities, as of the 3rd quarter of 2011, per Table 2.2B - Wage and Salary Disbursements by Industry, the U.S. Bureau of Economic Analysis estimated that the annualized amount of wages and salaries paid in the U.S. was $6.7 trillion. However, out of this amount, $1.2 trillion (or 18 percent) was paid by federal, state and local governments. And according to the National Center for Charitable Statistics, employees of nonprofit organizations would account for 9 percent, or roughly $670 billion of the wages paid in the U.S (2009 data). So overall, without additional rules and regulations, roughly $1.8 trillion of wages paid by governments and non-profits would escape Cain’s 9% business flat tax. Since tax exempt entities don’t pay income taxes, government workers may have to pay additional taxes on their benefits in order to be on a level playing field with private sector employees. Thus, describing the 9-9-9 Plan as “simple and fair” may be a gross overstatement.

How complicated is your tax return?

In his flat tax analysis prepared for Members and Committees of Congress, Mr. Bickley admits that the current income tax system is complex. He is sympathetic to the fact that the federal tax code and regulations are lengthy and continue to expand. He agrees that many taxpayers spend much time, money, and effort complying with the current income tax system. And that the complexity of the tax code and the fear of the Internal Revenue Service (IRS) have caused many taxpayers to pay for professional assistance. I generally concur, but let’s review the facts.

For tax year 2000, a micro-simulation model developed jointly by IBM and the IRS estimated the amount of time and money that individuals spend on federal tax compliance. The authors found that “in tax year 2000, 125.9 million individual taxpayers experienced a total compliance burden of 3.21 billion hours and $18.8 billion.” This translates into an average burden of 25.5 hours and $149 per taxpayer. These are just averages, but it doesn’t sound like that much when broken down to the individual level. For example, when compared to the 9-9-9 Plan, which would raise taxes by an average $4,326 on 70% of people making between $50,000 and $75,000, I would hardly call spending 25.5 hours or paying $149 for assistance a huge burden. The big question is - How many Americans would rather pay $4,326 more in taxes, than spend a couple of weekends preparing their own tax return, or pay less than 4% of that amount for assistance?

Furthermore, I agree with Mr. Bickley that, "the complexity of the income tax should not be overstated." For example, in tax year 2003, only 59.4% of taxpayers (78.75 million out of 132.38) paid for the preparation of their returns. Yet for tax year 2004, the Internal Revenue Service reported that only 34.8% of tax returns (46.19 million out of 132.38 million) were filed by individuals who itemized their deductions. That means roughly 32 million, or 24% of taxpayers paid for tax preparation when they could have simply filed their own 1040-EZ, or short-form 1040-A, which are far from complex.

Are IRS Forms 1040-EZ and 1040-A so complex that 32 million Americans have to pay to have them prepared? I think not. These are after all akin to yesterdays versions of Rick Perry’s postcard sized tax return. You know as well as I do that the reason at least 24% of taxpayers pay to have their tax returns filed is not due to complexity, but rather because they want to receive a refund as quickly as possible, and with the least possible effort. In other words, for at least 24%, paying for tax assistance is a matter of convenience, not a burden. I must admit that cleaning my home and mowing my yard are not that burdensome, and I am pretty adept at either, nevertheless, I choose to pay a housekeeper and gardener. There are things I could do for myself that I would rather not. We shall revisit the 24%, and deal with the remaining 76% in Part II.

In conclusion, no matter how simple Herman Cain’s 9% business flat tax, 9% individual flat tax, and 9% national sales tax sounds, under his proposal some citizens would be covered by a pure 9-9-9 tax; while empowerment zone residents, workers, and businesses would be subject to either 9-0-9, 0-9-9, or 0-0-9 plans; and employees of governments and non-profits may be subordinated to something resembling a 0-18-9 plan. The point is that, what portends to be “fair and simple” may turn out to be “prejudiced and convoluted”, or in other words worse than our present system.

To be continued in - Tax Simplification, Part II

References:

http://www.taxpolicycenter.org/taxtopics/upload/412426-Cain-9-9-9.pdf

http://www.langlophone.com/20100526_edition/20100526_EU27_data_table_flipped.pdf

http://congressionalresearch.com/98-529/document.php?study=Flat+Tax+An+Overview+of+the+Hall-Rabushka+Proposal

http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf

Related:

Herman Cain’s 9-9-9 Sham

3rd Concern with the 9-9-9 Plan

Obamas 9-9-9 Tax Cut | For the Blind

2011-10-30T01:31:00.007-04:00

***2nd Revision***

Even our brightest may be deceived! ~Anonymous Blogger -

By: Larry Walker, Jr. -

Continued from: 3rd Concern with the 9-9-9 Plan -

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

According to a study on GOP flat tax proposals conducted by the non-partisan Tax Policy Center, the 9-9-9 Plan would cause '95 percent of people making $1 million or more to receive tax cuts averaging $487,300'. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

“Only 16 percent of people making between $50,000 and $75,000 a year would get a tax cut, averaging $1,959, and at least 70 percent of people in this middle-income category would see their average federal taxes rise by $4,326.”

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board. So here's what the Obamas actual 2009 tax return would look like against the 9-9-9 Plan.

When you remove a 15.3% payroll tax, a 35% corporate tax, and a 35% individual tax and replace them with 9-9-9, it doesn’t measure up. In order for the Obamas to make up the shortfall they would have to spend $14,755,022 on items subject to the 9% national sales tax (take the tax cut of $1,327,952 and divide it by 9%). That’s almost 3 times their current gross income. So unless the Obamas run out and buy a new house, or otherwise figure out how to spend 3 times more than they make, on items subject to the sales tax, that revenue will never come back from them. The government will either go broke, or the middle class - 70% of those making $50,000 to $75,000 - will really end up paying $4,326 more in taxes, just like the Tax Policy Center said.

As you know (or maybe not), like many others, not all of the Obamas income is from wages paid by an employer. Actually all $374,460 of his wages were paid by US taxpayers. The other 9% tax on his self-employed business income is already included in the table. Obama's business didn’t really have any expenses, so no sales tax would be collected there. So did taxing the Obamas self-employed business income the other 9% make up the shortfall? No. So will the 9-9-9 Plan tax the federal government for the other 9% on Obama’s wages in addition? No.

Does the federal, or do state and local governments even pay income taxes? No. So under the 9-9-9 Plan, what tax return will government entities not be allowed to deduct wages from? When it comes to government workers, their employers will not be paying the other 9%, because their employers don’t pay income taxes. You can add other tax exempt organizations to that list as well. And when it comes to the self-employed, and small business owners, some will benefit and some won’t. Those who make more than $330K will clearly benefit more under 9-9-9, while most everyone else will pay higher taxes. That’s why this dog won’t hunt.

By proof, policies have consequences - The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Source:

http://www.whitehouse.gov/sites/default/files/president-obama-2010-complete-return.pdf

Related:

3rd Concern with the 9-9-9 Plan

Herman Cain’s 9-9-9 Sham

3rd Concern with the 9-9-9 Plan

2011-10-29T21:02:00.001-04:00

Conservatives vs. 999ers -

By: Larry Walker, Jr. -

Under the 9-9-9 Plan, “95 percent of people making $1 million or more would get a tax cut that averaged $487,300.” ~Tax Policy Center -

At a Michigan website entitled, North Star Writers Group, Herman Cain attempted to address some of the criticism to his 9-9-9 Plan. The article, dated October 16, 2011, is entitled, "9 responses to 9 false attacks on the 9-9-9 plan". But somehow Mr. Cain has confused what is merely constructive criticism with “attacks”. I mean it’s as if when one asks Mr. Cain a valid question these days, he either gets it wrong the first time, or he simply pulls the ‘assault card’. Yet, after I criticized Mr. Cain’s plan (not him personally), when I wrote an article entitled, "Herman Cain’s 9-9-9 Sham", I was personally labeled as a Marxist, Communist, as naïve, an idiot, and a left-wing shill. And all of that came from fellow, so called, conservatives. So has Mr. Cain's plan really been “attacked”, or are perhaps the 9 concerns, which he deems to be false attacks, simply valid points?

Personally, I think that when conservatives start calling fellow conservative’s naïve, Communist, Marxist, idiots, and left-wing shills somebody’s got a problem. To contrast, the article I wrote immediately prior to my critique of Mr. Cain’s tax plan was entitled, "Obamacare’s Deadweight Loss", and with that I was practically branded as a conservative champion, by way of private commentary. But apparently, sometime between October 12th and October 23rd, I either lost my mind, or I unwittingly signed on with the Communist Party USA. I’ll let you decide. Okay, so today I’m not going to list all 9 of the concerns that many have with the 9-9-9 Plan, but just the 3rd, and Mr. Cain’s response.

Claim 3: The plan redistributes wealth from the poor to the rich.

Response: “It does no such thing. It is fair and neutral, taxing everything once and nothing twice. What’s more, we are getting ready to propose empowerment zones for economically struggling areas in which the rates will be even lower. That will allow the poor to benefit even more from the plan than they already would.”

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

Also, according to Mr. Cain, “it is fair and neutral, taxing everything once and not twice”. But this is simply not true. As proof, since the 9-9-9 Plan doesn’t allow businesses to deduct wages in determining taxable income, it in effect imposes a 9% tax on wages at the corporate level, and then taxes wages again at the individual level. So how is this not taxing something twice? And further, when the same wages are spent into the economy, they are hit again by a 9% national sales tax. So wages are not only taxed once or twice under Mr. Cain’s plan, but at least three times. Following are two hypothetical examples of what the 9-9-9 Plan will accomplish when it moves from Cain's chalkboard to the real economy.

Example 1

For example, in the table below, a couple has wages of $1,000,000 and only claims the standard deduction and personal exemption(s). Under the current tax code they would pay federal taxes of $334,043, and only $90,000 under the 9-9-9 Plan. Thus, under Mr. Cain’s plan, this couple would receive a tax cut of $244,035. And in order to make up for the shortfall in revenue, by way of his national sales tax, the couple would need to spend $2,711,500 (244,035 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

Example 2

Since under the current tax code, the taxpayer’s in the first example are already in a 35% marginal tax bracket, if they earned an additional $1,000,000, they would pay federal taxes of $698,543 under the current tax code, versus $180,000 under the 9-9-9 Plan. So under Mr. Cain’s plan, this couple would receive a tax cut of $518,543 (see table below). And in order to make up for the shortfall in revenue, by way of the national sales tax, the couple would need to spend $5,761,588 (518,543 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

According to a study on GOP flat tax proposals conducted by the Tax Policy Center, the 9-9-9 Plan would cause '95 percent of people making $1 million or more to receive tax cuts averaging $487,300'. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board.

Laffer’s Folly

In a second article written in the same venue entitled, “Arthur Laffer brings reality to 9-9-9 discussion”, Mr. Cain states that, “Contrary to some of what you hear in current conversation, the theory of the Laffer Curve was proven correct when Ronald Reagan cut marginal tax rates across the board in 1981, and federal revenues soared. So did deficits, of course, and that’s the part you usually hear about. But that’s because federal spending soared even more. Excessive spending, not insufficiently high tax rates, was the problem then and it’s still the problem today.”

Notice how Mr. Cain implies that it was “not insufficiently high tax rates” that was the problem back then, or today. That’s a double negative, but doesn’t Mr. Cain’s statement refute his own plan? If tax rates are not the problem today, but rather excessive government spending, then why are we even talking about a 9-9-9 Plan? A few month’s ago, conservatives were in unity behind a platform of not raising the Bush tax rates, and reducing government spending. Yesterday it was, “We don’t have a revenue problem; we have a spending problem.” But now, suddenly, it seems that many conservatives believe that all of our problems can be solved through Mr. Cain’s proposed wealth displacement. So does Mr. Cain’s plan balance the federal budget? Will it fix Social Security and Medicare’s solvency issues? If the answer is no, then what is the point?

Laffer’s curve - In the 1981 Act, Reagan cut the top tax rate from 70% to 50%, and closed many loopholes. He didn’t propose cutting the top rate to 9% and adding a 9% national sales tax. Reagan later raised the bottom rate from 0% to 15%, and cut the top rate down to 28%. But his plan was reasonable, while Cain's proposition is extreme. On its own merits, the 9-9-9 Plan is extreme enough to fall off the other end of Laffer’s curve. Laffer defined a sweet spot somewhere in the middle - as when tax rates are too high, tax revenues decrease, and when tax rates are too low, tax revenues decrease, but when tax rates are just right, revenues will increase. But I believe that Cain's plan overshoots the sweet spot by a long shot. In other words, if Reagan Era tax rates were the mark, and I believe that they were, then why not just bring them back?

Policies have consequences - The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But even if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Related:

Herman Cain’s 9-9-9 Sham

2011-10-23T23:05:00.004-04:00

More Questions than Answers -

By: Larry Walker, Jr. -

Herman Cain argues that the reason we need his 999-Plan is because the tax law is too complicated. But is it really? I’ve worked with the tax law for 30 years, and I don’t think it’s all that complicated. It may have some complex calculations, mainly related to a few special write-offs and credits, but the basic bedrock of the Internal Revenue Code isn’t at all complex. Following Cain’s logic, if the tax law is so complicated that it needs to be “thrown out” and replaced, then isn’t our entire legal system similarly complex? If you answered yes, then why not just throw out the entire United States Code, shut down all courts including the U.S. Supreme Court, and just substitute the 10-Commandments. Would that work for you? If not, then why would you be in favor of Herman’s Cain’s overly simplistic 9-9-9 Tax Gimmick?

Business Taxes

Under present tax law, business expenses that are ordinary and necessary for the production of income are deductible for income tax purposes. The reason such expenses are deductible is because they represent taxable income to the recipient. There’s nothing really complicated about this. Expenses such as wages, advertising, office supplies, vehicle expenses, postage, legal and professional fees, commissions, rental payments, utilities, uniforms, travel, meals and entertainment, telephone usage, insurance, licenses, interest expense, benefits costs, retirement plan contributions and others, which are incurred for the production of income, are deductible for federal tax purposes. Although state and local governments are exempt from federal income tax, a deduction for state and local taxes is also allowed, under the theory that taxpayers should not be taxed at the federal level on taxes paid locally. All such expenses are likewise deductible in determining an entity’s profitability under general accounting principles. Where the law gets complicated, as far as business taxes are concerned, is when it comes to accelerated depreciation and general business credits.

Accelerated Depreciation

The reason fixed assets are depreciable is that each has a limited useful life, so the cost is spread over the life of the asset. For example, a computer has a useful life of 3 years, such that at the end of three years it generally needs to be replaced, so a business is allowed to write-off the cost over a three-year period. However, special gimmicks have been instituted over the years to accelerate the write-off of assets, such as the Section 179 deduction, and 50% or 100% bonus depreciation, whereby at least half or the entire cost may be written off in the year of purchase. If society wants to get rid of the accelerated depreciation loophole, then all that’s required is for the legislature to change the law back to regular straight-line depreciation. It doesn’t take a genius to figure that out, nor does it require throwing out the entire tax code.

General Business Credits

The other place that the law departs from reality is when it comes to tax credits. General business credits are special privileges which allow a company to receive direct tax credits over-and-above the normal deduction. For example, under the new Small Business Health Care Credit, where a business would normally be able to deduct the costs incurred for its portion of employee’s health insurance, a tax credit may now be taken over and above the regular deduction. Where it gets complicated is in determining which businesses qualify for the credit. In order to qualify a business can have no more than 24 full-time equivalent employees, and the average amount of wages paid per employee cannot exceed $49,999 per year. To obtain the maximum credit, a business can have no more than 10 full-time equivalent employees who are paid an average of less than $25,000 per year.

To determine whether one qualifies for the Health Care Credit, a business must be able to calculate the number of full-time equivalent employees and the average amount of wages paid based on complex formulas. Further complicating matters, the business must include and exclude certain types of employees and certain wages. Finally, if the business does qualify, it must subtract the amount of the tax credit from the amount of the normal deduction. For more on this, see Obamacare’s Effect on Small Business. If Americans wish to get rid of the smorgasbord of general business tax credits, it could be accomplished through legislation. It doesn’t take an Occupy Wall Street protest, or a 999-Plan to make this change. All that’s required is leadership.

Getting rid of accelerated depreciation and general business credits would go a long way toward tax simplification. Once accomplished, tax rates may be reduced to more tolerable levels. It doesn’t take a genius or a 999-Plan to accomplish this.

Problems with Cain’s 9% Business Flat Tax

The most egregious problem with Herman Cain’s plan involves wages. Under current tax theory, when a business pays wages, the employee bears the tax responsibility, not the business. But under Cain’s upside-down theory, businesses will not be allowed to deduct wages from gross income, unless they reside in empowerment zones. So in effect businesses will bear a 9% tax burden on the wages and salaries that they pay, and in addition employees will incur a 9% tax on the same. The double taxation of wages in the 999-Plan represents not only a huge departure from basic income tax theory, but from common sense.

Interest expense is currently deductible for income tax purposes as it represents taxable income to the recipient. But under Cain’s theory, interest will no longer be deductible by the borrower, yet it remains taxable to the lender. This is also an extreme departure from common sense. Under Cain’s theory, a corporate officer who loans money to a majority owned company would be taxed on the interest income received, while his company would incur a 9% tax on the same. Who wants to pay a 9% tax on the interest paid to banks and other lenders? It’s not personal, it’s the principle...

Contributions to employee retirement plans are currently deductible for income tax purposes, because they represent future taxable income to the recipient. But under Cain’s plan, company contributions to retirement plans are apparently not deductible for tax purposes. In effect businesses will bear a 9% tax on such contributions and the recipient will bear another 9% tax upon the withdrawal. Again, this form of double taxation represents an extreme departure from basic income tax theory.

Employer paid health insurance premiums are currently deductible for income tax purposes, and not counted as income to employees, although theoretically it should be taxable to employees. But under the Cain plan, employer paid health insurance premiums will apparently not be deductible. In effect, employers will pay a 9% tax on top of the amount paid towards employee’s health insurance benefits. So an employer will be taxed whether or not it provides health benefits. Since there won’t be any incentive for providing health care coverage under the 999-Plan, what will occur? Will companies continue to pay for health benefits plus 9%, or will they just keep the money and pay the 9%? Absent any other requirements, what would you do?

9% Business Flat Tax

“Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.”

Since Cain doesn’t define the term, “purchases”, what exactly does the above statement mean? Volumes could be written to define this simple statement. For example, does the term “purchases” include services or is it limited to products? If a company buys supplies such as paper and toner, from other U.S. based businesses, are these items deductible, or does deductibility only apply to purchases of goods for resale? If a company employs the services of another business, are such services deductible as purchases? I only ask because if that’s all there is to the proposed tax code, then it’s not clear whether this statement applies to the purchase of services, goods at retail, goods at wholesale or all of the above.

Retail businesses presently buy goods at wholesale, paying no sales tax upon the purchase, but then charge sales tax upon resale. However, service companies buy their supplies at retail; as such products are for internal use and not for resale. Services are not subject to sales tax at the State level, but will they be under the 999-Plan? Will both retailers and service businesses have to pay the 9% national sales tax on U.S. purchases, or are retailers exempt, or are both exempt? If both types of businesses have to pay the national sales tax, then even if such purchases are deductible for income tax purposes, they will have already been subject to a 9% national sales tax upon purchase. The point is that the first half-sentence of Cain’s proposal, by itself, necessitates a myriad of rules, regulations and definitions.

“For if the trumpet gives an uncertain sound, who shall prepare himself for the battle?” ~1 Corinthians 14:8

Next, according to Cain, the amounts spent on capital investments will be deductible under his 999-plan. But Cain doesn’t define what he means by the term, “capital investments”. Although he has publicly referred to this passage as meaning the purchase of equipment, he hasn’t defined any limitations. Does this apply to new or used equipment, or both? Capital assets include all tangible property which cannot easily be converted into cash and which is usually held for a long period, including real estate, equipment, etc. Under current law, buildings and other commercial real estate are generally depreciable over a 39 year lifespan, while land is never depreciable. But since Cain doesn’t go into detail, and because he wants to “throw out” the current tax code, we have to ask, will a business be able to write-off the purchase of real estate including land, in full, in the year of purchase? Are there no limitations? Here are some more questions:

If the purchase of capital equipment causes a company to have a net operating loss, can the loss be carried backwards and forward like under current law?
Is the purchase of stock in another business considered to be a tax deductible capital investment under the 999-Plan? The purchase of stock would be treated as an asset and not as a deductible expense under current law, but would it be treated simply as a deductible expense under the Cain plan? He doesn’t say.
Will there even be such a thing as a balance sheet under the new 999-plan, or will businesses simply need to account for gross income, purchases from U.S. businesses, capital investments, imports and exports?
Under the 999-Plan, purchases from non-U.S. located businesses are discouraged. So does the term “purchases” include the purchase of capital equipment? If capital assets are purchased from overseas companies, will they be deductible because they are capital investments, or will they not be deductible due to the “purchases from other U.S. located businesses” clause? Again, it’s not clear.

Net exports are also excluded from the proposed 9% business tax. So it would follow that a U.S. based business, which sells more of its goods overseas than in the U.S., would be exempt from taxes. Thus businesses are encouraged to export their goods and services, which might be beneficial to large manufacturers or retailers, but not to small service based businesses which make up the bulk of the American economy. Does a U.S. company have to be based in the U.S., where it would employ American workers, in order to receive the exemption, or can it open an operation in Mexico, sell its goods there and escape the 9% tax? Cain doesn’t provide any details on the exemption for net exporters either.

“Empowerment Zones will offer deductions for the payroll of those employed in the zone”

Under the 999-Plan, labor intensive companies would not receive a deduction for wages, unless located in empowerment zones. With wages being the bulk of gross income for many service sector businesses, under Cain’s 999-Plan it is possible for a business to have zero or negative income, according to generally accepted accounting principles, and still owe taxes. Also, in spite of the proposed repeal of Social Security, Medicare, and (I guess) Federal Unemployment, since these taxes were previously deductible for income tax purposes, the full effect of their elimination is somewhat mitigated. In other words a business can breakeven, and still wind up having to borrow money at the end of the year in order to pay a tax bill. So will more businesses simply relocate to empowerment zones under Cain’s plan, or will some just get the short end of the stick while others receive a big fat special interest type government subsidy?

“That dog won’t hunt.” ~Herman Cain

Non-Deductible Business Expenses under the 999-Plan

Wages paid outside of empowerment zones
State and local taxes
Federal and State and Local Licenses
Purchases from foreign based companies
Mortgage Interest Expense?
Business Interest Expense?
Retirement Plan Contributions?
Health Insurance Premiums?

Example 1

The following small business corporation has a single-owner, is labor intensive, and is not located within an empowerment zone. As you can see, in the example below, the company has net income of -0- under current law, and net income of 8,088.50 under the 999-Plan. This is attributable to the elimination of payroll taxes which were also deductible for income tax purposes. The company has taxable income of -0- under current law, but would have taxable income of $128,318 under the 999-Plan. This is attributable to its deductions being limited to capital investments and purchases from other businesses, versus all ordinary and necessary expenses. Thus, where Federal, State, and National Sales taxes are all -0- under current law, they would be $21,199.08 (11,548.62 + 7,999.08 + 1,951.38) under the 999-Plan. When the total business taxes are subtracted from net income, after-tax income is -0- under current law, but would be negative (-13,110.58) under the 999-Plan. So the owner will either need to borrow money to pay the taxes, or add money from personal accounts to shore up the company. Let’s hope that the 9% Individual Flat Tax leaves the owner with enough to cover the company’s shortfall.

9% Individual Flat Tax

“Gross income less charitable deductions”

Most of us know what the term “gross income” means, but what does it mean under the 999-Plan. If an individual has a sole proprietorship, will they be taxed on gross income and not be allowed to deduct ordinary and necessary business expenses? Will those who own rental properties pay a 9% tax on gross rental income without the benefit of deductions for mortgage interest, real estate taxes, insurance, repairs and depreciation? Will employees who incur substantial unreimbursed employee expenses be denied the benefit of deducting such costs?

Since there won’t be a deduction for state and local taxes, including real estate taxes, one will in effect pay a 9% tax on the amount of State taxes paid.
Since there will no longer be a deduction for mortgage interest, there won’t be any incentive to payoff an existing mortgage. Homeowners will in effect be paying a 9% tax on the amount of mortgage interest paid. Won’t this cause more families to simply abandon their houses for rentals? Will the plan push us from a private ownership to a public or corporate ownership society?
Since there is no deduction for the amount of national sales taxes paid, taxpayers will in effect pay a 9% tax on the 9% national sales tax as well.
Since there is no deduction for retirement plan contributions, taxpayers will pay a 9% tax on contributions and another 9% on the same money when the funds are withdrawn. If one currently owns a ROTH retirement plan will they receive an exclusion from the 9% tax when the funds are withdrawn?
Will life and disability insurance proceeds, which are currently exempt, be subject to the new tax?
Since the 9% Individual Flat Tax doesn’t distinguish between being married, single, widow, widower, or having one child or ten, what will our society look like after this plan is implemented? Will the population decline, as the cost of raising children is penalized? Will there be fewer marriages?

“Empowerment Zones will offer additional deductions for those living and/or working in the zone”

In other words, it’s not a flat tax after all; it’s a flat tax with exceptions for certain special interest groups. If businesses and citizens race to occupy today’s empowerment zones, will they eventually cease to be empowerment zones? And if no one takes the bait, and the masses instead flee from empowerment zones, what then? Will the government start issuing refundable tax credits, like is does today? Will the plan then become known as the +9, -9, +9, +9 Plan? That’s a 9% flat business tax, a 9% refundable tax credit, a 9% flat individual tax, and a 9% national sales tax.

Example 2

In the example below, individual income taxes are calculated on the owner of the small business corporation in Example 1. The owner is married with two dependents and the only income is wages paid by the company. The taxpayer pays mortgage interest, real estate taxes, state income taxes, and makes charitable contributions as shown in the table below. Under current law, taxable income is $59,355 versus $94,500 under the 999-Plan. That’s because the only item deductible for tax purposes under the 999-Plan is charitable contributions. Thus Federal income tax under current law would be $6,053.10 (8,053.10 minus a child tax credit of 2,000), and $8,505 with the 999-Plan. Although the taxpayer saves $8,032.50 under the 999-Plan by not having to pay Social Security and Medicare taxes, State income taxes would be higher, unless all states with an income tax rewrite their revenue codes, simultaneously.

Thus, after-tax income would be $60,446.65 under current law, and $64,270.00 under the 999-Plan, but that’s before paying the 9% national sales tax. If we subtract out 15% of after-tax income as savings and principal repayments on loans, that leaves the taxpayer with disposable income of $51,379.65 under current law, and $54,629.50 under the 999-Plan. Disposable income is the amount that a taxpayer will spend on items subject to the 9% national sales tax. After allowing for the national sales tax of $5,784.30, the taxpayer will wind up paying $1,960.95 more in taxes under the 999-Plan than under current law. So unfortunately, this small business taxpayer will not save enough on personal taxes under the 999-Plan to compensate for the businesses shortfall of $13,110.58. But how many people own small businesses anyway? More than you can imagine. Does it get better for companies with more than one employee? No. It would only get better if the business and its owner relocated to an empowerment zone.

9% National Sales Tax

“Unlike a state sales tax, which is an add-on tax that increases the price of goods and services, this is a replacement tax. It replaces taxes that are already embedded in selling prices. By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will lead to prices being the same or lower, not higher.”

Once again, volumes could be written to define this overly simplistic statement. Cain has stated publicly that the national sales tax will be levied on the purchase of new houses, cars and other goods, but not on used items. When we were discussing this, someone in my office fired off, “So should I just start buying my clothes from Goodwill?” Why would anyone want to buy a new house if it will cost 9% more? A new $200,000 home would cost $218,000 under Cain’s plan. On face value, that doesn’t mesh with prices “being the same or lower” to me. This means that where a 10% down payment is required, that instead of looking at $20,000, a buyer will now have to come up with $21,800. And since the interest expense will no longer be deductible, what’s the point anyway? One wonders if there will even be any homebuilders left if this plan were to somehow pass.

A brand new $40,000 vehicle would cost $43,600 under Cain’s law, and that’s not including state and local tax, tag, and title. Most Americans can’t afford the former, so why would the latter be an improvement? So even if underlying prices remain the same under the 999-Plan, prices will, at the minimum, rise by 9%. The 999-Plan would only lead to an increase in used car sales, and a decline in automobile production.

Marginal production costs might decline for businesses that are not labor intensive, make all their purchases from U.S. suppliers, or are located in empowermnet zones; but what about labor intensive businesses, those dependent on foreign suppliers, and those located outside of empowerment zones? Under the 999-Plan, it is possible for a business to have a net loss and still owe taxes. As shown in Example 1, if a business spends 70% of its gross income on wages, and the rest on tax deductible expenses, even though it has no profit, it would still owe a 9% tax on the amount of wages paid. Thus where a business would have owed no taxes under present law, it may owe under the 999-Plan, which will drive up, not lower its production costs.

Eliminates double taxation of dividends –

If I heard Cain correctly, corporations would be able to deduct the amount of dividends paid, before computing taxes, so that dividends are only taxed once at the individual level. That’s a good thing, but if the current tax code is simply “thrown out”, and the IRS is shut down, what’s to prevent corporate officer’s from taking all, or most, of their compensation in the form of dividends instead of wages? Since wages won’t be deductible at the corporate level and dividends will, you can bank on this loophole being blown wide open.

Features zero tax on capital gains and repatriated profits –

No tax on capital gains? That reminds me of that old Better Business Bureau film entitled, “Too good to be true.” Yeah, if it sounds too good to be true, it probably is. Just like with dividends, if there is no longer an IRS, and if the current tax code is “thrown out”, what’s to prevent corporate officers and employees from being paid in stock, rather than wages, and then cashing in on tax-free capital gains later?

Also, since charitable contributions are the only deduction allowed under the 9% Individual Flat Tax, what happens with capital losses? Will capital losses be deductible against ordinary income, only against capital gains, or not deductible at all? He doesn’t say. So when Cain “throws out” the current tax code, and shuts down the IRS, who will write the new code? Will there be some kind of 999 Super Committee, charged with coming up with new tax theories, while barred from referencing the previous code?

Not taxing repatriated profits sounds good, but it also provides an incentive for companies to relocate overseas. So it’s either Mexico, or an empowerment zone, eh? Flip a coin. Although some have advocated for such a measure in lieu of another stimulus, no one was saying that it should be a permanent pillar of U.S. tax policy. Cain has merely picked up on a popular topic and wrapped it into what I would call basically a sham.

“Let’s get real.” ~Herman Cain

Okay, let’s get real. Cain is light on specifics, so one is resigned more to asking questions than analyzing data. It all sounds good on television, but the plan appears to be constructed mainly out of neat little sound bites designed to appeal to weak-kneed conservatives, rather than out of substance. Yes I am an accountant, and I am for simplifying the tax code, but I can’t go along with a plan that lacks common sense. In my opinion, we shouldn’t throw out our current tax code in favor of a poorly constructed plan, instigated by someone who knows nothing about income taxes. Herman Cain may know how to turnaround a pizza parlor, and he was a great local talk show host, but an accountant or economist he’s not.

Anyone serious about simplifying the tax code should be talking about the following:

Eliminating accelerated depreciation
Eliminating general business tax credits
Eliminating personal tax credits
Eliminating the alternative minimum tax
Lowering marginal income tax rates

That would be a good start. If you don’t think that eliminating the above and lowering tax rates would greatly simplify the income tax code, then you don’t know anything about income taxes.

If the 999-Plan were to somehow miraculously survive a left-wing insurrection, how would the 43 States that have an income tax calculate their taxes? Since most of the States begin with federal adjusted gross income and allow federal itemized deductions, and since under the 999-Plan federal adjusted gross income is simply gross income, and itemized deductions are limited to charitable contributions, then won’t all States have to rewrite their tax codes as well? States will have to decide whether they want to allow deductions for mortgage interest, property taxes, and other expenses which are currently deductible, and if they don’t, then the burden of State taxes will rise, further diminishing the effect of the 999-Plan.

Finally, since the 999-Plan interferes with or supplants other federal laws, it will necessitate repeal of the Federal Insurance Contributions Act, and involve drastic changes to how Social Security and Medicare benefits are calculated. Will Social Security benefits be based on gross income, whether earned or unearned? Will future benefits simply come out of the general fund? If so, then will paying social insurance benefits out of the general fund put a strain on the rest of the federal budget, leading to tax hikes in the future? Will the Federal Unemployment Act also be repealed, since it is part of the payroll taxes employers pay?

There’s more to 9-9-9 than 9-9-9. As far as I’m concerned, the 999-Plan is a total sham, and because Herman Cain has staked his entire campaign on it, he’s not fit to be President of the United States. What America lacks is leadership. Offering to lead the nation down an unproven, untested, and unsound path is no different than what we have today. What most of us want to hear from prospective presidential candidates is what will replace Obamacare, which regulations will be repealed, how the size of government will be reduced, and how the federal budget will be balanced. Herman Cain’s 999-Plan is nothing more than a diversion, designed to win a primary and lose an election. If you want four more years of Obama, then vote for Cain.

“WHEN THE FOLLOWERS ARE READY, THE LEADER WILL APPEAR.”

References:

http://www.hermancain.com/docs/999-for-web-10-12.pdf

Related:

Obamacare’s Deadweight Loss

Obamacare’s Effect on Small Business

Obama’s Economic Reduction Plan

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again

Obamacare’s Deadweight Loss

2011-10-12T23:41:00.002-04:00

Why you should repeal it right away! -

By: Larry Walker, Jr.-

“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” ~Milton Friedman -

Failure to repeal Obamacare by January of 2013 will result in deadweight losses in the American economy. Although static revenue believers contend that the federal government will be able to line its pockets through a new source of revenue, inefficiency will occur in the private sector causing the loss of existing and future jobs, a decline in income tax revenues, less private sector health insurance coverage, and fewer business expansions. In fact, many small businesses will be left with lower revenues, after paying the so called shared responsibility penalty, causing them to either price themselves out of the market, downsize, or shutter, depending on market conditions.

What is Deadweight Loss? – It’s an economic term which represents the costs to society created by market inefficiency. Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. To see how deadweight loss occurs with Obamacare, let’s use an expanded real world example.

TEA, Inc. is a small Georgia based parts assembly plant with 50 full-time employees, not including its single owner. The company doesn’t provide health insurance for its employees due to a low profit margin, as doing so would impair its ability to continue as a going concern. However, the owner wants to expand in order to increase profits through horizontal integration. The company’s pre-tax net profit is projected to be $150,000 for each plant it operates, and each plant is expected to employ 50 full-time employees. Prior to the passage of Obamacare, TEA Inc.’s owner had planned on opening a second plant in 2012 and a third in 2013 creating an additional 100 jobs, but this misguided legislation has pretty much killed that dream. How’s that?

Well, since TEA, Inc. already has 50 full-time employees, it will be required by Obamacare to either provide and pay for at least half the cost of health insurance for its employees in 2014, or pay a penalty of $2,000 on each (excluding the first 30). In analyzing the financial impact, TEA, Inc. determines that 25 of its employees will require family plans, and 25 will require self-only plans. TEA, Inc. expects the ratio of family versus self-only plans to remain about the same as it expands. In examining the average cost of small group premiums within the Georgia market, it is known that self-only plans cost an average of $4,612, and family plans cost $10,598 (see Obamacare’s Effect on Small Business).

Single Plant Option

Prior to Obamacare, with its one existing plant, TEA, Inc. would have net income of $150,000, would pay federal income taxes of $41,750, and would be left with after-tax income of $108,250 (see table below). Assuming all things are equal, by 2014 when TEA, Inc. is mandated to provide health insurance at its existing plant, its health care expense will be $190,125 leaving it with a $(40,125) net operating loss, and no federal income tax liability. Since this is out of the question TEA, Inc. will be forced to either reduce its number of full-time employees to below 50, or pay a shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play portion of the “play or pay rules”, if it does not reduce its workforce before 01/01/2013, then by 2014 it will be forced to pay a shared responsibility penalty of $40,000 ($2,000 per person on 20 of its 50 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $150,000, will pay federal income taxes of $41,750, and will have after-tax income of $108,250. However, after paying the shared responsibility penalty, the company will be left with just $68,250 or $40,000 less than it would have had before Obamacare (see table below). What will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. still has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

Options: If TEA, Inc. reduces its current workforce by one full-time equivalent employee, it can avoid paying the $40,000 penalty in 2014, but it must eliminate that position before the end of 2012, due to the twelve month look-back rule contained in Obamacare’s fine print. By doing so, TEA, Inc. will save the amount of one employee’s wages, less the increase in applicable federal taxes, and will avoid paying the $40,000 shared responsibility penalty, making the company better off. Unfortunately, this might be the best option available under the circumstances. So far, the deadweight loss is one full-time job.

Two Plant Option

If TEA, Inc. opts to push ahead and open the second plant, prior to Obamacare it would have net income of $300,000, would pay federal income taxes of $100,250, and would be left with after-tax income of $199,750. Assuming all things are equal, in 2014 when TEA, Inc. is mandated to provide health insurance at its old and new plant, its health care expense will be $380,250 leaving it with a net operating loss of $(80,250), and no federal income tax liability (see table below). Since this is out of the question TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 50 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play part of the “play or pay rules”, if it proceeds with the expansion, then by 2014 it will be forced to pay a shared responsibility penalty of $140,000 ($2,000 per person on 70 of its 100 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $300,000, will pay federal income taxes of $100,250, and will have after-tax income of $199,750. However, after paying the penalty, the company will be left with just $59,750 or $140,000 less than it would have had before Obamacare (see table below).

It’s worth noting that even after doubling its profits, TEA, Inc. would be left with less money -- $59,750, than it would have had with just the one plant -- $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business). The best option appears to be to not open the second plant, and to reduce the number of full-time employees at the initial plant by one. Thus, the deadweight loss has increased to 51 full-time jobs.

Three Plant Option

If TEA, Inc. decides to trust in “hope and change” and moves ahead with adding yet a third plant, pre-Obamacare it would have net income of $450,000, would pay federal income taxes of $153,000, and would be left with after-tax income of $297,000 (see table below). Assuming all things are equal, in 2014 as TEA, Inc. is mandated to provide health insurance at all three plants, its health care expense will be $570,375 leaving it with a $(120,375) net operating loss, and no federal income tax liability. Since this is impossible, TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 100 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play aspect of the “play or pay rules”, if it proceeds with its expansion plans, then by 2014 it will be forced to pay a shared responsibility penalty of $240,000 ($2,000 per person on 120 of its 150 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $450,000, will pay income taxes of $153,000, and will have after-tax income of $297,000. However, after paying the shared responsibility penalty, the company will be left with just $57,000 (see table below).

It’s notable that even after tripling in size, TEA, Inc. would be left with less money –- $57,000, than it would have had with just two plants –- $59,750, and even less than it would have had with just the one plant –- $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

The best option for TEA, Inc. appears to be to forget about opening a second and third plant, and to reduce the number of employees at its existing plant. By doing so, TEA, Inc. will be able to maintain its present after-tax net income of $108,250, plus the savings achieved by eliminating a job, which yields the optimal result. Thus, in this real-life scenario, the deadweight loss created by Obamacare is 101 full-time jobs. In addition, 49 full-time employees are left without health insurance, and by 2014 will be forced to either pay a tax or secure their own health insurance coverage. Failure to repeal Obamacare means that this entrepreneur’s dreams of expansion will be destroyed, and 101 potential employees will be left on the sidelines. Obamacare will impose unnecessary deadweight losses upon the American economy, which will be multiplied many times over.

Forcing the free-market to accept and live with market inefficiency just doesn’t work out so well in a free market society. Any so called Jobs Bill which doesn’t immediately repeal this irresponsibly enacted, job killing, legislation isn’t a jobs bill at all. In my humble opinion, the Patient Protection and Affordable Care Act (PPACA) should be repealed right away. You should repeal it, right now! Be sure to sign the White House Petition to Repeal Obamacare. You must sign by 10/22/11. “Live free or die.”

Obamacare’s Effect on Small Business

2011-10-06T00:58:00.015-04:00

Unaffordable Care Act | Jobless, Unshared, and Irresponsible -

By: Larry Walker, Jr. -

“An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.” ~ Daniel Webster in M'CULLOCH v. STATE, 17 U.S. 316 (1819) -

Although Barack Obama boasts of having implemented 17 tax cuts for small business during his one-term proposition, as I pointed out in Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again, not one item on the list actually meets the definition of a tax cut. #1 on the list was the Small Employer Health Insurance Tax Credit, which is found in Internal Revenue Code Section 45R. The goals of the Section 45R credit are supposedly as follows: (1) to help offset the cost to small businesses that offer employee health insurance coverage, and (2) to encourage small businesses not providing health insurance to start offering coverage.

But unfortunately, the overall effect of the Patient Protection and Affordable Care Act, will be to encourage large employers, those with 50 or more full-time employees, to drop health insurance coverage, reduce the number of employees, or cut weekly work hours to less than 30 in order to avoid paying the so-called shared responsibility penalty. Neither will the new legislation encourage smaller companies, those with fewer than 50 full-time employees, to offer health insurance, as it merely provides a six-year subsidy for those with fewer than 25 employees, encouraging them to limit their growth to 24 or fewer full-time employees, and it does absolutely nothing for companies with between 25 and 49 full-time equivalent employees.

Code Section 45R – Small Employer Health Insurance Tax Credit

The tax credit is available from 2010 through 2015. For 2010 – 2013 the maximum credit is 35% of qualified premium costs paid by for-profit companies, and 25% for non-profits. The maximum credit is only available to employers with no more than 10 full-time equivalent employees (FTE’s), who are paid average annual wages of $25,000 or less. A reduced credit is available on a phase-out basis for employers with between 10 and 25 FTE’s, who are paid average wages of $25,000 to $50,000. In effect, the credit is reduced by 6.667% for each FTE in excess of 10, and by 4% for each $1,000 in average annual wages paid above $25,000. For example, an employer with 13 full-time equivalent employees who are paid average annual wages of $45,000 will not receive a tax credit. No tax credit is available for employers with 25 or more FTE’s, or who pay average annual wages of $50,000 or more.

From Unaffordable Care Act

In 2014 through 2015, the credit increases to 50% of the amount of qualified premium costs paid by for-profits, and 35% for non-profits, however by then, the employer must participate in a state insurance exchange in order to obtain the credit. [Note: Each state is required to create an insurance exchange by January 1, 2014 which must include an American Health Benefit Exchange, as well as a Small Business Health Options Program (SHOP) Exchange.]

Full-Time Equivalent Employees (FTE’s) – For purposes of the Code Section 45R Credit, the number of FTE’s is determined by dividing the total number of hours worked by each employee (but not more than 2,080 per employee) by 2,080. This is based on a 40 hour work-week for all 52 weeks of a calendar year. The result is rounded down to the nearest whole number. An employer with 25 or more employees may still qualify for the credit if it employs part-time or seasonal workers. Seasonal workers are disregarded in determining the number of FTE’s as long as they work for less than 120 days during the tax year, however the amount of health insurance premiums paid on their behalf is still counted in determining the amount of the Section 45R credit. The number of FTE’s is calculated by totaling all hours worked by each full-time employee, each part-time employee, and each seasonal employee (working more than 120 days) and then dividing the total hours worked by 2,080.

Example: TEA Corporation has 7 employees who worked 2,000 hours each, and 5 who worked 1,500 hours each, during the tax year. The number of FTE’s is calculated by totaling all the hours worked, and dividing the result by 2,080. In this case, TEA Corporation has 10 full-time equivalent employees.

Average Annual Wages – Average annual wages is calculated by dividing the total amount of wages paid for the year by the number of FTE’s. However, certain employees are excluded from both the FTE and average annual wage calculations as follows: sole proprietors, partners in partnerships, greater than 2% owners of S-Corporations, greater than 5% owners of C-Corporations or other entities, and most family members (including children, step-children, siblings, step-siblings, parents, step-parents, nieces or nephews, aunts or uncles, and in-laws).

Example: TEA Corporation paid total annual wages of $250,000, not including the wages paid to its owner. Since TEA Corporation has 10 FTE’s, its average annual wages are $25,000 ($250,000 / 10).

Premiums – Only health insurance premiums paid by the employer under a qualifying arrangement are counted in calculating the Code Section 45R tax credit. For 2010, employers were allowed to count the total amount of premiums paid for the entire year, even though the health reform plan wasn’t passed until March 23, 2010. However, in order to qualify, the employer must pay at least 50% of the total premium costs. Employers are only allowed to count the amount the company pays and not the amounts paid by employees. Health insurance coverage also includes amounts employers pay for dental, vision, long-term care, nursing home care, home health care, community based care or any combination thereof.

The amount of an employer’s premium payments that counts is capped by the amount of average premiums for the small group market in the state (or an area within a state) in which the employer offers coverage. The average premium for the small group market in a state or area is determined by the Department of Health and Human Services (HHS). The IRS released the average premium for the small group market in each state for 2010 in Revenue Rule 2010-13 (table at left-hand). For example, in 2010, the limits in Georgia were $4,612 for self-only coverage, and $10,598 for family coverage.

Carry Back and Carry Forward – The Section 45R credit is not refundable to for-profit companies. Any unused portion may be carried back 1 year and carried forward for 20 years, however a credit earned in 2010 may only be carried forward. Note: Companies with no tax liability will not receive any immediate assistance from the Section 45R credit. So for example, a company taking advantage of the 100% bonus depreciation provision, or other tax benefits, and the Section 45R credit in the same year may not gain any immediate benefit from the health care credit.

Health Insurance Deduction and Tax Credit – Under Internal Revenue Code Section 162, long before health care reform, employers have generally been allowed to deduct the cost of providing health insurance coverage for employees. However, going forward the IRS has interpreted that the amount that may be deducted must now be reduced by the amount of any Code Section 45R credit.

Example: A Georgia Based Small Business

TEA Corporation is a Georgia based company with a single owner and 10 full-time equivalent employees, average annual wages of $25,000 per year, and it provides self-only health insurance coverage. TEA Corporation pays 50% of the total premium for each employee. These figures were chosen specifically; since in order to qualify for the maximum Section 45R credit an employer can have no more than 10 FTE’s, average wages of no more than $25,000, and must pay at least 50% of its employee’s insurance premiums.

Because the total amount of premiums cannot exceed $4,612 for self-only coverage within the State of Georgia, the total amount of premiums paid by TEA Corporation, for purposes of the tax credit, is limited to be $23,060 (2,306 X 10). Assuming the company is in a 34% income tax bracket (i.e. taxable income is between $75,000 and $100,000 per the table below); the Section 162 deduction would normally save the company $7,840 (23,060 X 34%) in taxes.

Now, since the company qualifies for the maximum Section 45R credit of 35%, it will receive a tax credit of $8,071 (23,060 X 35%), however it will only be allowed to deduct health insurance expenses under Section 162 of $14,989 (23,060 – 8,071). So the Section 162 deduction of $14,989 saves the company $5,096 (14,989 X 34%), in addition to the Section 45R credit of $8,071, for total tax savings of $13,167 (5,096 + 8,071). So in effect, the new tax credit benefits the company by an additional $5,327 (13,167 – 7,840), or by $532 per employee, because the company would have already saved $7,840 (23,060 X 34%) prior to Obamacare.

From Unaffordable Care Act

If in the example above, TEA Corporation was not able to afford health insurance prior to Obamacare, then how does the Section 45R credit change things? Won’t the company still have to shell out an additional $23,060 to cover the employer’s share of health insurance costs? Yes. And although it will be eligible for the Section 45R credit, it won’t realize the $13,167 in tax savings until its tax return is filed in the subsequent year. So in effect, the company’s cost per employee will have risen by $2,306. Adding to the dilemma is the fact that the amount each employee must contribute also increases by $2,306. So both the company and its employees will be poorer at the end of the year, although the employer may have a chance to recoup about 57% (13,167 / 23,060) of its costs through subsequent year tax savings, and its employees will receive health insurance.

Problems: (1) In tax years 2010 through 2013, the federal government is going to somehow magically come up with $13,167 to cover 57% of TEA Corporation’s health insurance premiums, and do the same for potentially thousands of other similar small businesses, but who’s going to pay for this? Won’t the tab simply be added to the seemingly unlimited national debt balance? (2) And since employees will have to pay for potentially half of their own health insurance costs, each one who wasn’t previously covered by health insurance, and more specifically those making less than $25,000 per year, will have to figure out how to live off of approximately $2,306 less in disposable income. Does this sound like a good deal for those making under $25,000 per year, or even $50,000?

More Problems: (1) Of course, if any of the 10 employees in this example require family coverage, the costs for both the employer and employee will go up dramatically, as will the government’s cost of the subsidized tax credit. In the example above, the employer and employee obligation rises from $2,306 to $5,299 per year, or half of the average premium for small group family plans of $10,598. (2) Then in 2014 and 2015, as the Section 45R Credit increases to a maximum of 50%, the federal government’s (i.e. taxpayers) share increases by even more. This additional federal spending, though tax expenditures, will only add to the federal government’s current national debt balance of $14.7 trillion and ticking, until the tax credit well runs dry in 2016. (3) If small companies can't afford it now, how will those who employ fewer than 25 workers be able to afford health insurance after 2015?

Exempt Organizations – Meanwhile, tax-exempt organizations will receive a “refundable tax credit” of up to 25% of the amount of health insurance premiums paid between 2010 and 2013, and 35% in 2014 and 2015. This refundable tax credit is limited to the amount of federal tax withheld from employees’ paychecks, the amount of Medicare tax withheld from employees, and the amount of Medicare tax matched by the employer.

Problem: Since exempt organizations don’t pay income taxes, the cost of the refundable Section 45R tax credit will never be recovered. In effect, individual and for-profit business taxpayers are subsidizing the tax credits granted to small non-profit organizations. Non-profit organizations, which are not even subject to the income tax, are being allowed to receive refundable income tax credits based on the amount of payroll taxes paid essentially by their employees. So in this respect, all Obamacare does is to giveaway more tax expenditures to folks who don’t pay any federal income tax. Wasn’t this already a major problem prior to Obamacare?

Large Employers – “Play or Pay”

Although Obamacare doesn’t mandate small employers to offer health insurance coverage to their employees, it does include play or pay rules which apply after 2013. The provision is intended to encourage employers to offer coverage or to pay a shared responsibility penalty. The play or pay rules only apply to large employers, those with 50 or more full-time employees. [Note: Employers who offer free choice vouchers to qualified employees were supposed to have been exempt from the penalty, but this provision was repealed in 2011.]

Problem: Employers who employ 25 or fewer employees are given an incentive to begin or to continue health insurance coverage, but are not required to provide it; while those with 25 to 49 employees are given no incentive, and are not required to provide insurance; and those with 50 or more employees are given no incentive, but face penalties for not offering adequate and affordable coverage by 2014.

Shared Responsibility Penalty – The shared responsibility penalty will apply to two groups of employers after 2013: (1) Large employers that do not offer health insurance coverage. (2) Large employers that offer coverage but have one or more employees receiving premium assistance tax credits or cost-sharing because the coverage is deemed unaffordable. If even one employee receives premium assistance tax credits through a state insurance exchange, then the penalty will be $2,000 per full-time employee (not including the first 30 workers). And if the employer offers what is deemed to be unaffordable coverage, then the penalty will be $3,000 for any employee who receives premium assistance tax credits through a state insurance exchange up to a cap of $2,000 for every full-time employee.

[Note: Unaffordable coverage is defined as when the premium required to be paid by the employee is more than 9.5% of the employees’ household income. In such cases the employee is eligible for a premium assistance tax credit and cost-sharing reductions, but only if the employee declines to enroll in the employer’s coverage and purchases coverage through a state insurance exchange.]

Large Employer Problems:

(1) Large employers need to know how much household income each employee has including all working adults within their households.

(2) For purposes of the shared responsibility penalty, a Large Employer is an employer which employed an average of at least 50 full-time employees during the preceding calendar year. In other words, those with an average of 50 or more full-time equivalent employees in 2013 will be subject to the penalty in 2014, even if they have reduced the number of employees by that time.

(3) Full-Time Equivalent Employees for Large Employers - Unlike the definition of full-time equivalent employee for small employers, for purposes of the shared responsibility penalty, a full-time employee is defined as one who works an average of 30 hours per week. Employers who think they won’t be affected by the penalty or the employer mandate need to read the fine print.

Conclusions

By offering incentives to micro-sized businesses, those with 25 or fewer full-time employees with average wages of less than $50,000, and no incentives to larger companies, Obamacare discriminates against job creators.
Since employers with fewer than 25 employees are not required to provide health insurance coverage, and are not penalized for not providing coverage, most employers who qualify for the tax credit are not taking the bait. Let’s face it, health insurance plans drive up business costs even with a generous tax credit. And since the tax credit expires at the end of 2015, what is the catalyst which will make health insurance more affordable in the future? Will businesses and their customers have more money in their pockets as a result of Obamacare?
Employers with more than 25 full-time employees and fewer than 50 fall between the cracks. For them, there is no incentive to provide health insurance coverage and no penalty for failing to provide it. It’s as if they don’t exist, which clearly displays the discriminatory aspect which Obamacare casts upon job creators.
Meanwhile, large employers, those with 50 or more employees working at least 30 hours per week, receive no incentive to provide coverage, yet will be punished for not providing it. In the end, some large employers are encouraged to reduce the number of full-time equivalent employees to below 50 before 2013, to reduce the number of hours worked for some employees to below 30 per week, or to simply pay the shared responsibility penalty of $2,000 on each employee (excluding the first 30), rather than commit to even more costly health insurance contracts.

If TEA Corporation, in the example above, had 100 employees requiring self-only coverage, and paid 50% of the premiums, then its health insurance expense would be roughly $230,600. However, if TEA Corporation simply opted to pay the shared responsibility penalty of $2,000, on the 70 applicable employees, it would have to pay the IRS a penalty of just $140,000, in lieu of the $230,600 cost of insurance. But, if TEA Corporation is not able to afford $230,600, to pay for health insurance on its employees, it is compelled by the rule of law to hand over $140,000, money that it may or may not have, to the federal government under the play or pay rules. Is this fair?

The way things stand today, if by the year 2014 a large employer can’t afford health insurance, in spite of Obamacare - which does nothing to make it more affordable, or if providing health insurance would jeopardize its ability to continue as a going concern - in the Obama economy, then it still must pay the shared responsibility penalty, even if it means laying off workers, shuttering operations, or filing for bankruptcy. In other words, America’s job creators will either play, pay or be destroyed. If this job killing law is not repealed by 12/31/2012, the unemployment rate will continue to soar, because the companies which will be most affected are compelled to take action before then. In fact, in order to ensure that they are not blindsided by the one year look-back rule which begins on 01/01/2013, many companies are already taking action.

In my humble opinion, the Patient Protection and Affordable Care Act cannot be repealed fast enough. Be sure to sign the White House Petition to Repeal Obamacare. You must cast your Vote by 10/22/11.

Related:

Final: Obamacare | The Macro View

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again

Obama’s Economic Reduction Plan

2011-09-22T22:10:00.008-04:00

Private Equity vs. Government Redistribution

- By: Larry Walker, Jr. -

“A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants. Still other seed fell on good soil, where it produced a crop—a hundred, sixty or thirty times what was sown. He who has ears, let him hear.” ~ Matthew 13:3-9

For many, the American Dream consists of the hope of freeloading off of the good fortune of others for their entire lives. Yet for some, the dream is comprised of one day saving enough capital to invest in a business of their own. And for a few, the dream is to one day save enough to invest through a private equity group. For those aspiring towards business ownership, sometimes a little help is needed, and that help, in many instances comes though private equity firms. And why would anyone dream of investing in a private equity firm? Well one big reason is that under current law, around 58% of the profits realized by private equity firms are taxed as long-term capital gains rather than as ordinary income. Long-term capital gains are currently taxed at the maximum rate of 15%, while ordinary income is taxed as high as 35%. The lower tax rate on long-term capital gains helps to compensate for the opportunity cost of investing for the long haul, and also enables a greater portion of the profits to be reinvested into the next venture, which can ultimately lead to the accumulation of a great deal of wealth.

Another reason many dream of investing in private equity groups is because they feel a calling to help fellow Americans reach their dreams. Unlike bloated, deficit-financed, short-sighted, big government wealth redistribution schemes, private equity is good for America. However, if the carried interest (the long-term capital gains earned through investing in private equity) were to suddenly be taxed at the same rates as ordinary income, then there would no longer be an incentive to invest in long-term private business endeavors. Private equity firms fund and co-manage thousands of private businesses in the United States, employing millions of American workers, and these businesses are dependent upon stable long-term investments. If big government takes away the incentive to save and invest in long-term endeavors, then there will be no long-term investment. It simply won’t be worth the risk. And without long-term private equity investment, thousands of businesses, millions of jobs and the American Dream will be choked out of existence.

Carried Interest vs. Ordinary Income

Ordinary income is mostly comprised of net business income, fixed compensation, interest, dividends, rents, royalties, and short-term (less than a year) capital gains. Unlike ordinary income, there is greater risk involved with long-term (more than a year) capital investments. Private equity firms typically make investments over a 3 to 7 year term. The risk of tying up capital savings for many years is that the investment might be lost entirely, or may not return any profit at all. So is carried interest the same as ordinary income? Centuries of sound and settled tax policies say no. But Barack Obama, a novice, with no business experience, and a track record of failed economic policies; and Warren Buffett, a retiring billionaire, who has profited from lower taxes on carried interest during his lifetime, say yes. So who’s right, centuries of proven economic science, or 32 months of butt kissing and B.S.?

The Obama-Buffett Rule presumes that carried interest is the same as ordinary income and should be taxed at ordinary income tax rates of up to 35%, instead of at capital gains rates of up to 15%. The contention that the profits earned through long-term capital investment, which involves placing previously taxed income at risk through investing in risky business ventures, which employ hundreds of thousands of American workers, and which help drive the American economy, should be taxed at the same rate as fixed compensation, such as wages earned from labor, is quite a leap. The problem with Obama’s latest Socialist twist is that unlike fixed compensation, which is properly taxed as ordinary income, carried interest, garnered through private equity investments, only rewards general partners if, at the end of the term, the fund actually results in a net gain.

To break this down further, you have on the one hand wage earners, who work 40 hours per week, get paid weekly (or semi-monthly), consume most of their pay, and have taxes withheld from each paycheck. And on the other hand, you have private equity partners who work on a project for 3 to 7 years, expending capital and sweat equity, aiding in the employment of thousands of tax paying workers, helping make tax paying businesses profitable, and ultimately hoping to, at the end of the term, regain their investment along with a handsome profit. So is carried interest the same as ordinary income? Is all income created equal? Is Capitalism the same as Socialism? Do words still have meaning?

Private Equity in Action

Within the State of Georgia there are approximately 30 private equity firms, which have invested an estimated $26 billion in Georgia-based companies, which back approximately 340 private companies, which employ more than 175,000 U.S. workers. If more capital is diverted away from private equity investments, through errant tax policies, and instead invested in tax-free securities or some other jurisdiction, then where will the capital to fund these Georgia businesses come from? It’s not likely to come from banks, which are currently paying investors taxable interest of between .01% and 1.0% on savings. And it’s not likely to come from the federal government which is currently $14.7 trillion in debt. Thus, when private equity capital is finally taxed out of existence, there will be no capital, and most of these 340 companies will cease to exist, along with 175,000 jobs.

In the State of Illinois there are approximately 137 private equity firms, which have invested an estimated $72.9 billion in Illinois companies, which back approximately 450 private companies, which employ more than 350,000 workers in the U.S. The State Employees’ Retirement System of Illinois had nearly $525 million invested in private equity as of June 30, 2008, about 5 percent of the System’s total pension fund portfolio of more than $11.4 billion. And as of June 30, 2009, the Illinois’ Teachers Retirement System had $2.34 billion invested in private equity, about 8.2 percent of TRS’ total portfolio of nearly $29 billion. Are the billions of dollars that Illinois pension funds invest in private equity firms any more or less important than any other American citizen’s savings? I think not. If the government takes away the incentive of private equity partners, then where will this capital go? If you say, “To the Banks”, again you err. If you say, “Directly into businesses”, then who will oversee and manage these investments, the government? Yeah, right, just like Solyndra.

It’s Math!

And then there’s this hogwash about wealthy people paying lower tax rates than middle income earners. Does anyone really believe this? All you have to do is glance over at one of our “progressive” tax rate schedules, to know that’s not the case. Since our tax rate structure is “progressive”, the rates increase along with income. One’s combined tax rate is never the same as their bracket rate. In other words, you may be in a 25% bracket, but that doesn’t mean you’ll fork over 25% of your taxable income. As you can see below, married couples with ‘ordinary taxable income’ of $25,000 pay a tax of 11.6%, those with $50,000 pay 13.3%, and those with $100,000 pay 17.2%; while married couples with ‘ordinary taxable income’ of $250,000 pay a tax of 24.0%, those with $1,000,000 pay 32.0%, and those with $10,000,000 pay 34.7%.

In terms of dollar amounts, on the low-end, 11.6% of $25,000 translates into $2,900, while on the high-end, 34.7% of $10 million works out to around $3.5 million. So is paying $2,900 in taxes greater than or equal to paying $3.5 million? It’s math! One must also consider that five times out of ten, that $2,900 liability gets magically turned into a tax refund of up to $8,000, as nearly half of all American workers are either not liable for any income tax whatsoever, or fall into the negative category. So perhaps the words “fair share” could be more appropriately expressed as “unfair and not-shared”.

From Taxing the Rich

Although it may seem fair for Obama and Buffett to compare a private equity partner with $10,000,000 of carried interest, to a married couple with taxable wages of $100,000, it’s really not. It’s like comparing oranges to apples. Although the wage earning couple will pay federal taxes of 17.2% versus the carried interest earners 15.0%, in the end, the couple will have paid a total of $17,250 in taxes, versus $1,500,000 for the private equity partner. So is $17,250 greater than $1,500,000? “It’s math!”

The real difference is that a private equity partner may then turn around and reinvest most or all of the remaining $8,500,000 into the same company that the married couple works for, thus enabling them to continue their very employment. In terms of economics, the multiplier effect on private equity investment generates many times the tax revenue paid by the partner himself. Just add up the taxes collected on all the additional wages, salaries and business profits he helps to generate. But if that capital be muzzled, the result will be less free-enterprise and even higher levels of unemployment. Thus, while earning a salary is productive, it’s nowhere near as productive as carried interest. Perhaps there’s a reason why some of our tax policies are the way they are! “It’s math!”

If Obama and Buffett really wanted to compare apples to apples, then they would be comparing a married couple with carried interest income of $10,000,000, to a couple with long-term capital gains income of $10,000,000. Each will pay $1,500,000 in taxes. So is fairness still an issue? The truth is that no American is prevented from saving his or her own money and investing in activities generating similar capital gains. Anyone can do it, and will reap an equal reward -- a maximum 15% long-term capital gains tax. But if the government ever takes away this incentive, or begins to discriminate against certain forms of long-term gains, then you can kiss the American Dream goodbye.

Government Subsidies vs. Private Equity

If the government steps in and confiscates a larger chunk of the profits earned by private equity firms, then there will be that much less capital to reinvest in new acquisitions. And what will the government do to make up the shortfall? Will the government invest in and manage new enterprises? Perhaps, the federal government will subsidize more companies like Solyndra, but then who gets the ‘return on subsidy’ (ROS), if and when the government is successful? Will every taxpayer get an equal slice of the pie? That’s highly doubtful. More than likely, the money will simply be absorbed into the federal government’s irresponsible $1.3 trillion per year budget deficits, or into its $14.7 trillion national debt, or used to pay unemployment compensation, or to dole out more food stamps, neither of which will create new jobs. In other words, the money will be pilfered and consumed rather than invested in viable job creating enterprises. And we all know that America needs more jobs, not more debt, unemployment compensation and food stamps.

Private equity investors fund American businesses which employ millions of American workers. By investing in non-public companies they typically hold their investments with the intent of realizing a return within 3 to 7 years. Shouldn’t there be some reward for committing previously taxed income for 3 to 7 years, in order to help businesses grow, and to enable employment for millions of workers, with no guarantee of a profit let alone return of the original investment? I say, yes. Obama and Buffett say, no. Where they err in their quest for “fairness” is in that 42% of the profits earned by private equity investors are already taxed at ordinary tax rates, while just 58% represents carried interest. They also fail to realize that such profits are typically reinvested back into the cash account to fund the next acquisition. You would think that at least Buffett would understand this concept, since most of his earnings have been likewise reinvested.

Hell No!

With Obama’s brand of math, one would surmise that if the government could just confiscate the $1.4 trillion in annual private savings, and use it to pay the $1.4 trillion of annual government deficits this would somehow bring about “balance”. But all it would really bring about is a permanent state of depression, mass government dependency, and even greater deficits once the government runs out of other people’s money. And considering that the best the federal government could possibly do, by confiscating additional tax revenue, is to immediately absorb it into its irresponsibly amassed $14.7 trillion in accumulated deficits, over $4 trillion of which was squandered by Obama himself, the answer to the request for more revenue is still, “Hell No”. Cut spending, stop squandering the tax dollars we’re already paying, and stop regurgitating the same old lies over and over again.

Although the federal government does employ a couple of million workers, about 59% of the money used to pay them is already confiscated from taxpayers, while the other 41% is merely borrowed from the Federal Reserve Bank and from countries like China. Every dime taken away from private investors and spent by the government is a dime taken away from private businesses and private sector workers. Once the point of no return was breached, back in 2010, there was no longer enough personal income to cover the amount of federal debt, on a per capita basis, and if this is not corrected soon, it will lead to the death of the American Dream. If there is already not enough income to pay the government’s debt, then why is Obama begging for higher taxes? When there is nothing left but government, then what? Will the government pay everyone a subsidy of say $50,000, and then proceed to levy a 100% tax on everyone in order to fund itself into infinity? Isn’t this exactly where Obama’s plan leads?

The failure of Obamanomics can be summed up in a few short phrases: If it produces jobs, tax it. If it keeps producing jobs, regulate it. And when it stops producing jobs, subsidize it. Thus Obama’s plan for deficit reduction, like his Jobs Act, is just another gimmick leading to economic reduction, job destruction, government dependence, poverty and the end of the American Dream. Obama gave it his best, but his best just wasn’t good enough for America. Hey Obama, "Hell no, and good riddance."

*** BTW - Raising the tax rate on carried interest from 15% to 35% would result in a 133.33% tax hike, or to 39.6% would equal a 164.0% hike, just in case anyone is still considering this madness. ***

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~Calvin Coolidge (Address to the General Court beginning the 2nd year as Governor of Massachusetts January 8, 1920)

References:

Private Equity Info

Private Equity Growth Capital Council

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again

2011-09-10T21:00:00.011-04:00

- 6 Temporary Stimuli, 17 Tax “Cuts”, and Zero Results

- By: Larry Walker, Jr. -

As I carefully chronicled in, “Obama: The Era of Flimflam Economics, Part II - Untimely and Proven to Fail”, the policy theory, known as economic stimulus, was designed by economists as a tool for implementation at the onset of a recession, with the goal of either softening its effects, or averting a downturn altogether. However, in the real economy, economic stimulus has yet to be proven successful at doing either. In February of 2009, partisan windbag, Barack Obama declared, "What do you think a stimulus is?", implying that the idea was for the government to borrow and spend near a trillion dollars on anything, but then later at a Jobs Council, after the money had been squandered, he admitted that, “Shovel-Ready Was Not as Shovel-Ready as We Expected”.

Short-Term Stimulus vs. Long-Term Policy

To summarize, it was near the end of 2007, when prominent economists began advising the federal government that the economy was heading into a recession, and that it could be avoided if the government would implement an economic stimulus program. They proffered that in order to work successfully, such a stimulus needed to be targeted, timely, and temporary. As far as timeliness was concerned, tax refund checks needed to reach taxpayers in a matter of weeks not months. But economists must have forgotten that they were dealing with the federal government. How in the world would the federal government be able to: (1) agree on and pass legislation, (2) send it on to the IRS for interpretation and implementation, and (3) expect for tax refund checks to start rolling out in a couple of weeks, especially in the middle of the tax filing season?

The first economic stimulus package of the Great Recession was proposed in January of 2008. Even though a similar stimulus plan was attempted and failed in 2001, nevertheless, Congress was suckered in through panic mode once again. This time they would fling $150 billion to the wind, but by the time the checks reached taxpayers, in April of 2008, it was too late, the recession had commenced. Looking back, it turns out that the recession officially commenced in December of 2007 and didn’t end until June of 2009. So why is it that millions of job losses, millions of home foreclosures, hundreds of bank failures and trillions of dollars in government debt later, politicians still seem to be hell bent on the premise that temporary stimulus policies work?

In February of 2009, a year after the first failed tactic, Barack Obama enacted a second stimulus plan. The American Recovery and Reinvestment Act of 2009 turned out to be nothing more than a gigantic, nearly $1 trillion, spending program. Although his borrow-and-spend policy was designed to be temporary, it was neither targeted nor timely. So the questions then and now are: Why was the federal government still trying to implement a stimulus program 14 months after the recession began, when every honest economist knows that the idea is to inject stimulus either prior to or just as a recession commences? By February of 2009, was it possible for a stimulus plan to prevent something which had already occurred? And lastly, why is the federal government still toying with the idea today, some 27 months after the recession has ended?

It should be rather obvious by now that economic stimulus programs don’t work in the real world. Although the theory may look impressive on a chalk board, the federal government is not an efficient institution for implementing a positive jolt to the economy, let alone much of anything else. It should also be clear that there are economic recovery policies which have been proven to work, time immemorial, once a recession has passed. For example, The Tax Reduction Act of 1964, The Economic Recovery Tax Act of 1981, The Tax Reform Act of 1986, The Deficit Reduction Act of 1993, and the Jobs and Growth Tax Relief Reconciliation Act of 2003 were all long-term plans which stabilized and grew the economy following recessions.

What’s lacking today is a long-term tax policy which would inject a sense of stability and predictability to the economy at large. Small businesses don’t make plans based on hope and change, what we need is to know what our income tax rates and incentives will be for the next 8 to 10 years. Yet, Obama has wasted nearly 3 years already, passing one temporary measure after another, and now it's more of the same. As far as I’m concerned, it’s over for Obama. With the knowledge that long-term tax policies have been used as effective recovery tools following recessions, and that short-term stimulus programs have never been successful, why in the world is Obama trying to subject the nation to another stimulus prototype now, some 3 years and 9 months after the Great Recession began? Is it because we’re on the verge of another recession? And if we are on the verge of a double-dip, knowing that temporary stimulus programs don’t work in the real world, why would we ever allow Obama and Congress to waste more time, and money that we don’t have, with yet another futile stab?

From Main Street to Washington, DC

Having been an accountant and tax advisor for many small businesses, including my own, through at least the last two recessions, I know first hand which tax policies have worked and haven’t, and which have been important to small businesses versus the completely useless. For example, after passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003, there was a sense of stability, and future plans could be implemented without the lingering fear that something would change or be taken away the following year. Its key policies which helped small businesses, within my orbit, were as follows:

Stable and well defined Personal and Corporate Income Tax Rates and Brackets.
Accelerated Depreciation through Section 179 and Bonus Depreciation within clearly defined limits and timeframes.
Increasing and well defined limits on IRA and Qualified Retirement Plan contributions.
Stable and declining tax rates on capital gains, and qualified dividends.
Defined and stable tax credits such as the energy efficiency credit, child tax credit, education credit, and the life-time learning credit.
Stable, declining and well defined Estate tax rates and brackets.

In contrast, the policies I have witnessed since February of 2009, have made planning next to impossible and pretty much pointless. For example, we knew that the tax rates and most of the policies implemented by #43 would expire at the end of 2010, so that was pretty much the end of the planning cycle, however the recession cut many plans short well before 2010. In fact, many small businesses didn’t make it through 2008, and some went under in 2009. As for the survivors, well what we’ve all been waiting for are the permanent policies which will carry us through the next decade. But thus far, all we’ve seen is a series of temporary tax measures, many with erratic nonsensical start and end dates, and most of which have been completely useless at a time when gross business income has for the most part been depressed.

Obama’s 17 Phantom Tax Cuts for Small Business

Obama has implemented 17, so called, tax cuts for small business. For the complete list, see the Feb. 25, 2011, posting on the official White House blog entitled, "Seventeen Small Business Tax Cuts and Counting." The post is touted as enumerating 17 small business tax cuts and credits created or extended through legislation signed by Obama, since February of 2009. But what is important to remember is that it’s not how many tax cuts have been implemented, but rather, whether or not they have been effective. Overall, I would have to give the Obama policies a grade of “D”. Obama’s 17 small business tax policies (or as he calls them “cuts”), and their effectiveness from my point of view follows, but first, here’s a short summary:

Eight of them were included in American Recovery and Reinvestment Act (aka the economic stimulus), the Affordable Care Act (aka the health care law), and the Hiring Incentives to Restore Employment Act (aka the Hire Act). Among the cuts: the exclusion of up to 75 percent of capital gains on key small business investments; a tax credit for the cost of health insurance for small business employees, and new tax credits for hiring Americans out of work for at least two months.
Another eight came via the Small Business Jobs Act, signed by President Obama in September of 2010. These included: adding deductions for business cell phone use; creating a new deduction for health care costs for the self-employed; allowing greater deductions for business start-up expenses; eliminating taxes on all capital gains from key small business investments, and raising the small business expense limit to $500,000.
Three months later, he signed a tax bill that raised the expense limit to 100 percent of small business new investments until the end of 2011. It also extended the elimination of capital gains taxes for small business investments through the end of 2012.

From the Recovery Act, HIRE Acts, and Affordable Care Act

1. A new small business health care tax credit

We didn’t have any businesses qualify for this credit. The calculation was very complex, so it wasn’t readily known whether any businesses would qualify until after the end of the tax year. It’s kind of difficult to shoot for something when even your accountant says, “I don’t know. I’ll let you know as soon as the IRS puts out some regulations showing us how it will be calculated.” And then well into the following year, “I’ll get back to you as soon as the IRS releases the appropriate tax forms.” One business came close to qualifying, but the employees’ salaries turned out to be too high. Who knew?

The small businesses I deal with don’t normally determine what their employees salaries and benefits will be based on temporary government policies. And they don’t sit around waiting on the IRS to publish forms and regulations when a decision is needed right away. In other words, when a business needs 4 more engineers, due to demand, negotiations don’t center on keeping salaries below a certain threshold in order to qualify for a one-year, one-time tax credit. And negotiations for health care plans center more on the affordability of monthly payments, and are not recklessly entered into with the hope of receiving a one-time tax credit, to be realized in some subsequent year.

Most small businesses in my sphere don’t offer health insurance, simply because it’s cost prohibitive, so the idea of a one-time tax credit, to offset the cost of something unaffordable to begin with, turned out to be pretty much a waste of orating skills, paper and ink. It sounded good though, and I guess that’s what counts with Obama and his cronies.

2. A new tax credit for hiring unemployed workers

I would say three businesses may have qualified for this credit, and mostly by luck. Others thought they would qualify, but it turned out that the new hires had not been unemployed for at least 60 days which disqualified them. I got lucky by hiring someone who had been unemployed for more than 60 days, and was luckily hired a few days after the law went into effect. But it wasn’t like I was hunting for someone who would qualify, and didn’t even know about the credit at the time because the details were not readily available. Again, I don’t know of any small businesses that hire people based on temporary tax credits, most hire people when they are needed to meet the objectives of the organization.

Also, since our payroll tax software wasn’t set up to account for the credit, because it was implemented after the start of the tax year, and since IRS Form 941 was not updated when the credit went into effect, it turned out to be more of an accounting nightmare than anything else. Personally, I would have gladly forgone the credit in exchange for not having to figure out how to account for it. Thank God that’s over with. Can we please just have some stability so we can run our businesses without something changing every few months?

3. Bonus depreciation tax incentives to support new investment

Section 179 depreciation has generally been sufficient. Although, bonus depreciation is advantageous at times, it’s more advantageous when a business has a loss, which is generally not the goal. If net income is high enough to write-off all equipment purchases, why would anyone choose to write-off half? Like I said, there is an application, but it mostly applies when net income equals zero, and one wishes to accelerate a loss. There were a few takers, but come to think of it, most of those went out of business due to the losses already incurred.

Uncertainty - From a planning standpoint, the other looming question was that, if the Bush tax cuts were going to expire at the end of 2010, might the depreciation expense perhaps be better utilized in the year rates were set to increase rather than while rates were low? Thus it may have made more sense to just delay any purchases until 2011, or 2012 rather than accelerate the write-offs while tax rates were still relatively low. Again, a stable long-term tax policy trumps temporary measures any day.

4. 75 percent exclusion of small business capital gains

This was of no use whatsoever from my vantage point. One would have to purchase qualified small business stock after February 17, 2009 and before January 1, 2011, and then hold it for five years in order to take advantage. None of our small businesses make a living through buying and selling small company stock. The only practical use I could see was for owners planning to sell their stake in a company, but they would have had to acquire that stake between the dates above, so it wasn’t much use to existing business owners. My first impression was that it was a policy designed for those looking to make a quick exit and perhaps relocate overseas, but the five year hold time destroyed that dream. If you’re interested in how convoluted this provision turned out to be, there’s an interesting article here.

5. Expansion of limits on small business expensing

Did anybody in Washington, DC get the memo that surviving small businesses just got hammered for two years straight, and thus had no money left, and no desire to go out on credit for new equipment, if credit could even be obtained? All I can say is that the old limit of $25K seemed to be more than sufficient to cover replacement items. I haven’t witnessed any considerable expansion plans since 2006.

6. Five-year carryback of net operating losses

This was yet another policy more useful for those who lost money and were on their way out of business, than for those fighting but keeping their heads above water. I took this as more of a policy of defeat than future success. I guess the government figured that a small tax refund from five years ago would encourage small businesses to keep hiring while losing money in the meantime. I had a couple of businesses utilize the five-year carryback, but unfortunately they are no longer in business.

7. Reduction of the built-in gains holding period for small businesses from 10 to 7 years to allow small business greater flexibility in their investments

This was another waste of paper and ink. This policy only helped out S-Corporations who were formerly taxed as C-Corporations, and had built in gains at the time of conversion. A built in gain is the difference between the fair market value of an asset and its tax basis at the time of the conversion. I’m sure some businesses out there took advantage, but really, how many C-Corporations switched to S-Corporation status? I think I advised one to do it maybe 10 years ago, but other than that it hasn’t always been the best move due to built-in gains, undistributed net profits, the number of shareholders, or the owner’s personal tax situation. The majority of the small businesses in my neck of the woods have been S-Corporations from inception, generally based on my advice. So did anyone actually benefit from this provision? I have serious doubts.

8. Temporary small business estimated tax payment relief to allow small businesses to keep needed cash on hand

Since estimated tax payments are made throughout the year in order to reduce or eliminate the amount owed when the tax return is due, the full amount being due by March 15th, why would I advise any small business to skimp? I had no takers here either. Most small business owners who make estimated tax payments want their taxes covered by tax time, and don’t want to skimp on estimated tax payments during the year, and then get stuck with a gigantic tax bill later. If a business took advantage of this and then didn’t have funds to pay on March 15th it would only snowball into perpetual tax debt. ‘Once you get behind, you never catch up.’ So this was another waste of paper and ink. Hey, do we look stupid or what? Why not just cut the doggone tax rates, and stop playing games?

From the Small Business Jobs Act

9. Zero capital gains taxes on key investments in small businesses

Zero is right! Like I said in number 4 (above), it was of no use whatsoever when 75% of the gain was excluded, from my vantage point. To slip through this loophole, one would have had to purchase qualified small business stock after September 27, 2010 and before January 1, 2011. Since there were only three month’s to gear up, and it was the holiday season, I’m pretty sure no one took advantage, but if you did, please shout it from the rooftops. None of our small business clients make a living through buying and selling small company stock. The only practical use I could see was for an owner planning to sell their stake in the company, but to gain any benefit, they would have to acquire that stake between the dates above, and so it wasn’t much use to existing small business owners. My first impression was that it was a policy designed for those looking to make a quick exit and perhaps relocate overseas, but the five year hold time once again destroys that dream. This was another waste of paper and ink. If you’re interested in how convoluted this provision turned out to be there’s an interesting article here.

10. Raising the small business expensing to $500,000

I didn’t have any small business clients who were able or desired to purchase anywhere near $500K of new equipment. Since this doesn’t apply to real property, it’s generally well beyond the needs of most of the small businesses in my area. Thus, I had no takers. This might be a great policy for well capitalized startup businesses, but the number of startups has been on the decline, and most that I know of haven’t had that much capital. Since the write-off is limited to a businesses net income, $500K is generally beyond the earnings of most first year enterprises. This is generally a good policy to implement in the middle of a recovery in order to maintain growth, but not in the midst of a weak economy. Thus to me, it amounted to another waste of paper and ink.

11. An extension of 50 percent bonus depreciation

Hey, didn’t we try this already? See number 3 (above).

12. A new deduction for health ~~care~~ [insurance] expenses for the self-employed

This is actually a bit misleading. It should read 'deduction for health “insurance” expenses', not 'health “care” expenses'. Since most of the small businesses we advise are S-Corporations, owner-employees with company paid health insurance, were already allowed a 100% deduction for health insurance long before this Act. The amount paid is included in their wages, but not subject to Social Security and Medicare taxes, and is allowed to be written off in full on their personal returns. This results in a total offset on the personal return, and a higher wage deduction on the S-Corporation return. I suppose it helped some sole-proprietors, Schedule C filers who have health insurance, but it didn’t affect anyone within my practice. Why walk when you can fly?

13. Tax relief and simplification for cell phone deductions

Most small businesses actually using cell phones for business purposes were already deducting the business usage portion. This provision only helped to avert a threatened crack down on the deduction which would have made it more costly to maintain records proving every call was business related, but since the crackdown never occurred, the effect upon small businesses was a sigh of relief, but no additional savings. In other words it saved us from having to spend more to comply with yet another ridiculous government regulation, but was really just a wash. Nothing was really saved, and nothing gained, in other words, it may have sounded good, but the effect was nil.

It’s akin to the government making 1099’s mandatory for all vendors, cancelling the regulation before implementation, and then claiming to have saved businesses money. No. You didn’t save us money. What you did was give us two years of uncertainty and unneeded stress, that’s what you gave us. That’s why government should just get out of the way.

14. An increase in the deduction for entrepreneurs’ start-up expenses

Although this policy temporarily increased, in 2010, the amount of start-up expenditures entrepreneurs could deduct from their taxes from $5,000 to $10,000, most of the start-up expenses that come across my desk are in the $100’s not thousands. And in cases where there are larger amounts, but little initial year net income, taking the write-off over 60 months is sometimes more plausible, especially when one doesn’t know whether tax rates will be higher in subsequent years, which by the way, we still don’t know.

15. A five-year carryback of general business credits

This policy allowed certain small businesses to “carry back” their general business credits to offset five years of taxes. I didn’t have any business clients qualify for any of the general business credits last year, and none who were really targeting them. In fact, the last business I can remember taking advantage of one of these credits was advised to do so through a tax scam. They paid the scammer an upfront fee in same amount as the credit they were assured to get back from the IRS. But in the end, all they got was an IRS audit resulting in the disallowance of the credit, had to pay the IRS back, and then had to sue the scammer to be made whole. I’m sure there are legitimate uses for some of these credits; I just haven’t dealt with any small businesses lately where any of them would have made a difference. You may view a full list of the credits here. In my view, most are either obsolete, redundant, or serve only a narrow base of special interests. Anyone serious about tax reform has my permission to strike the entire list.

16. Limitations on penalties for errors in tax reporting that disproportionately affect small business

The bill would change the penalty for failing to report certain tax transactions from a fixed dollar amount – which was criticized for imposing a larger penalty on small businesses – to a percentage of the tax benefits from the transaction. There was a time that all tax penalties were based on a percentage of taxes owed, but that’s no longer the case. Unfortunately this new provision doesn’t limit the effect of the $195 per month penalty the IRS currently charges, per shareholder, for each part of a month that an S-Corporation or Partnership return is filed late. S-Corporations and Partnerships, which have no income tax liability, are currently assessed the penalty, even though the late filing typically affects only a limited number of owners, or sometimes just one. If the government was serious about helping small businesses, they would stick to the old percentage of tax benefit policy (i.e. no tax benefit, no penalty), and eliminate this unfair charge on small businesses immediately.

And from the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act

17. 100 percent expensing

Hey, didn’t we do this twice already? See numbers 3 and 11 (above). This provision only applies to qualified property placed in service after September 8, 2010 and before January 1, 2012. So for those who purchased qualifying equipment on or before September 7, 2010, too bad, you should have waited. This is a prime example of another wacky implementation date from Obama. It’s also the provision that allows up to 100% of the price of an SUV or Corporate Jet to be written off in the first year, a provision signed into law by Obama, who later railed against the same.

This might be a good thing for some, but so far we haven’t seen any great demand for purchasing new equipment, no matter the incentive. Most small businesses, within my scope, are trying to pay off the debt from yesteryears purchases, and not looking to expand, or to replace equipment unless it’s an emergency. In other words, it’s not just hiring that’s down, it’s the economy as a whole, and with that comes dealing with slow paying customers, managing debt, grappling with price competition, and cutting back on expenses - including the purchase of new equipment. Thus, upping bonus depreciation from 50% to 100% looks good on paper, but it’s another temporary measure which in my estimation will not provide the spark needed to boost the economy.

Conclusion

Overall, most of Obama’s so called tax “cuts”, listed above, may make good sound bites, but I haven’t found them to have much practical application in the real world. There was a time, not so long ago, that the term tax cut, meant exactly that. It meant that tax rates were reduced. None of the provisions above represent reductions to income tax rates or adjustments to tax brackets, so they are not technically tax cuts. They are merely temporary ploys, targeting special interest groups, requiring one to either borrow and spend money, or jump through unreasonable (often impossible) hoops simply to obtain an additional deduction or credit.

Meanwhile, on Main Street, a permanent reduction in personal and corporate income tax rates, from the get go, would probably have had a greater impact, even if it were done in stages, with super low rates for two years followed by modest increases over the next eight, or something. None of Obama’s 17 tax deductions, credits, or extensions have really mattered much to me or to most of my small business clients, and the stuff he’s talking about now won’t make much of a difference either. If it’s temporary, and if it requires jumping through hoops, borrowing money, or meeting time frames beginning in the middle of the year - or starting on some arbitrary date in some odd month, then just forget it. It would be a heck of a lot easier to just cut overall income tax rates for one year, and then provide fixed rate schedules for the next decade. Is that so difficult? Is it really? If JFK, Reagan, Clinton, and ‘W’ could do it, why couldn’t Obama?

It’s all over for Obama now, time to move on. He had his chance, and blew it. The era of temporary stimulus boondoggles is over. Instead of thinking targeted, timely and temporary, it's time to move towards a plan that’s broader based, strategic and permanent. Now it’s up to Congress and the 2012 presidential candidates to outline a long-term strategy and take it to every corner of the country.

Taxing the Rich – 1765 to 2011, Part III – War on Taxes: 1964 to 2011

References:

DNC Chair Wasserman Schultz says Obama has signed bills with 17 small business tax cuts

Taxing the Rich – 1765 to 2011, Part III

2011-09-04T20:22:00.001-04:00

– War on Taxes: 1964 to 2011

– By: Larry Walker, Jr. –

"The largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of federal income taxes on private purchasing power, initiative and incentive." ~John F. Kennedy, Jan. 24, 1963, special message to Congress on tax reduction and reform

From Taxing the Rich

Recap: 1776 to 1912

In 1765, Great Britain imposed a series of taxes upon the American Colonies, in order to pay for its lengthy French and Indian War (1754-1763). After the war, the British forced upon the Colonies, the Stamp Act of 1765, requiring the purchase of tax stamps for any printed documents including newspapers, legal documents, marriage licenses and more. This was followed by the Townshend Acts of 1767 which were passed: to raise revenue in order to pay the salaries of governors and judges so that they would be independent of colonial rule; to create a more effective means of enforcing compliance with trade regulations; to punish the province of New York for failing to comply with the 1765 Quartering Act; and to establish as precedent the British Parliament’s right to tax.

Just like the Tea Party Movement of today, our founding fathers resented insidious taxes and regulations imposed upon them without their consent. Then as now, it is simply a matter of ‘taxation without representation’, an act which early Americans likened to tyranny. By 1773, when the East India Company was granted a virtual monopoly on the importation of tea, it was the last straw. In protest, a group of Boston citizens disguised as Mohawk Indians boarded a ship and dumped 342 chests of tea into Boston harbor. The Revolutionary War ensued, and the United States of America was born. Today, the Affordable Care Act is only a symptom of the disease. The disease being: overregulation, overburdensome covert and overt taxes, unsustainable federal debt, and a small minority of ideologues, with socialist tendencies, forcing their will upon the people.

The first income tax proposed by the United States Government was intended to fund the American Civil War (1861). Prior to this, the government was funded strictly through customs duties, tariffs levied on imported goods. During the War of 1812, the government experimented briefly with excise taxes on certain goods, commodities, housing, slaves and land, but a tax on income was out of the question. What is significant is that prior to 1861, or for the first 86 years of American history, whether a citizen had an annual income of $800, $250,000, $1,000,000 or $10,000,000, every dime was considered to be private property of the individual, and not subject to any federal claim.

In 1862, the first Revenue Act was revised, before any tax was due, and the Revenue Act of 1862 launched the first progressive rate tax in U.S. history. The Act established the office of the Commissioner of Internal Revenue, and specified that the 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 ($13,400 in 2011 dollars), was taxed at a rate of 3.0%; those earning over $10,000 per year ($224,000 in 2011 dollars) were taxed at a 5.0% rate. Through 1912, the income tax only existed for 11 out of the first 137 years of American history, from 1862 to 1872, while no income tax was imposed upon private citizens for 126 years. The income tax was a temporary measure imposed to fund the American Civil War. During the era, the highest tax rate assessed on married couples occurred between 1865 and 1866, when those earning the equivalent of $250,000 (in 2011 dollars) paid a tax of 8.4%, those earning $1,000,000 paid 9.6%, and those earning $10,000,000 incurred a tax rate of just 10.0%.

In the midst of the Panic of 1893, an amendment to the Wilson-Gorman Tariff Act of 1894 was passed, establishing a flat 2.0% tax on all incomes above $4,000 per year (about $104,000 today). The amendment would have exempted from taxation the salaries of state and local officials, federal judges, and the president. Believing the tax to be unconstitutional, President Grover Cleveland refused to sign it. The Act became law in 1894 without his signature, but was ruled unconstitutional by the U.S. Supreme Court in the following year.

Thus America remained the land of the free, free of an income tax from 1873 through 1912. But behind the scenes, the Democratic Party was fast at work, conjuring legislation which would ultimately destroy the freedoms won by Americans in 1776. Democrats proposed a constitutional income tax amendment in their party platforms of 1896 and 1908. Theodore Roosevelt endorsed both an income tax and an inheritance tax, and in 1908, became the first President of the United States to openly propose that the political power of government be used to redistribute wealth.

In 1909, the income tax amendment passed overwhelmingly in the Congress and was sent off to the states. The last state ratified the amendment on February 13, 1913. The Sixteenth Amendment owes its existence mainly to the West and South, where individual incomes of $5,000 or more were comparatively few. Sold to the public as a tax on the rich, the income tax initially applied to less than 1.0% of the population, but that would be short lived. The aspirations of power hungry, greedy and wasteful politicians would soon change the federal government into the conundrum it is today.

From Taxing the Rich

Recap: 1913 to 1963

In April of 1913, President Woodrow Wilson summoned a special session of Congress to confront the perennial tariff question. He was the first president since John Adams to make an appeal directly to Congress. Under the guise of reducing tariffs, the Act turned out to be nothing more than a means of reinstituting a federal income tax. The argument followed that since a reduction in tariff duties would lead to lost revenue, an income tax would be required to makeup the shortfall. We should be mindful of this deception as Barack Obama attempts to twist arms during his upcoming special session.

World War I commenced on July 28, 1914 and lasted until November 11, 1918. Since the income tax was initially imposed as a means of funding war (1861), its original intent now combined with an element of wealth redistribution, lead to one of the most convoluted tax rate schedules of all time. The War Revenue Act of 1917 expanded the tax rate schedule from 7 to 56 tiers. Rates were hiked to a range of 6.0% to 77.0% in 1918. The 1918 tax rate schedule was so convoluted that taxpayers were thrown into a higher bracket with every $1,000 to $2,000 of additional income.

Although the war ended in 1918, income taxes were not significantly reduced until 1924. In 1919 the top rate was gradually lowered to 73.0%, then to 58.0% in 1922, and to 46.0% under the Mellon Tax Bill of 1924. By 1924, the tax rate schedule contained just 43 tiers compared to 56 in 1918. The bottom rate also gradually declined from 6.0% in 1918 to 2.0% in 1924. Then in 1925, under the leadership of President Calvin Coolidge, the bottom rate was reduced to 1.5%, the top rate slashed to 25.0% with a reduced top bracket, and the tax rate schedule was simplified to 23 tiers from 43.

In the midst of the Great Depression, President Herbert Hoover relapsed, imposing higher tax rates and expanding the number of tax brackets from 23 to 55. In 1932, the bottom rate was increased from 1.5% to 4.0%, and the top rate was hiked from 25.0% to 63.0%. Franklin Roosevelt would later increase the top rate to 79.0%, in 1936, where it remained through 1940. Hoover had in effect reinstated wartime tax rates during a time of peace. Errantly believing that higher taxes would increase government revenue, Hoover was the first president to prove that raising taxes during a recession only prolongs the downturn.

Thanks to Hoover, and his successor Franklin Roosevelt, the Great Depression wouldn’t end until America entered the 2nd World War. After Hoover opened the door, FDR removed the hinges, gradually raising rates from the bottom up. President Franklin Roosevelt believed and stated that, “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” This would mark a critical turning point in American history, as the purpose of the income tax had shifted from a temporary means to fund the Civil War, to a measure reinforcing lower tariff duties, to a tool for redistributing wealth, and ultimately to the price of living under the rule of a tyrannical dictator.

Following suit, bottom tax rates were raised from 4.0% in 1932, to 10.0% in 1941, to 19.0% in 1942, and to a record high of 23.0% in 1944. His successor, Harry Truman, would continue the tradition. After initially lowering the bottom rate to 20.0% in 1949, Truman raised it to 20.4% in 1951 and to 22.2% in 1952. The bottom rate was then locked in at 20.0%, by President Dwight Eisenhower, where it remained from 1954 through 1963. The top rate was likewise increased by FDR, climbing from 63.0% in 1932, to 79.0% in 1936, 81.0% in 1941, 88.0% in 1942, and to a record high of 94.0% in 1944 -- during the height of the 2nd World War. Truman later lowered the top bar to 91.0% in 1946, and then raised it yet again to 92.0% in 1952. Eisenhower would fix the top tier at 91.0%, where it would remain from 1954 through 1963.

During the first 51 years after reinstatement of the income tax (1913 – 1963), the bottom rate commenced at 1.0%, peaked at 23.0%, and settled at 20.0%. Meanwhile, the top rate was nudged in at 7.0%, peaked at 94.0%, and ended the period at 91.0%. Imagine being in the top tax bracket with an opportunity to make an extra $1 million, and facing the prospect of handing over $910,000 of it to the government, while clutching to a paltry $90,000. Was that fair? Does it sound like a plan for economic prosperity and jobs growth? As we shall see, neither John F. Kennedy nor Ronald Reagan thought so.

From Taxing the Rich

The Tax Reduction Act of 1964

"Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate." – John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session

Finally in 1963, President John F. Kennedy was able to restore a measure of common sense to the overburdening income tax system. However, shortly after rebuking the “tax the rich” intelligentsia, JFK was assassinated in November 1963. He was succeeded by Lyndon Johnson who signed his vision into law. Under the Tax Reduction Act of 1964, the bottom rate was lowered from 20.0% in 1963, to 16.0% in 1964, and then to 14.0% from 1965 through 1976, and then later reduced to 0.0% in 1977 where it remained until 1986. The top rate was likewise reduced from 91.0% in 1963, to 77.0% in 1964, and then cut to 70.0% in 1965 where it remained until 1981.

Note: It was also during this era, that the Earned Income Credit (EIC) was signed into law by President Gerald Ford in 1975. The function of the EIC was to offset the burden Social Security taxes placed on low-income filers with children, and to motivate them to work.

From Taxing the Rich

In 1965 married couples with taxable income equivalent to $250,000 today paid a tax of 28.6%; those earning $1,000,000 paid 50.3%; and those earning $10,000,000 forked over 67.9% of taxable income (see table below).

From Taxing the Rich

During the entire 18 year period marking JFK’s tax reform legacy, married couples with taxable income equivalent to $250,000 today would have faced an average tax rate of 31.0%; those earning $1,000,000 would have paid an average rate of 52.8%; and those earning $10,000,000 would have forked over an average of 68.6% of their taxable income.

The Economic Recovery Tax Act of 1981

“We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much” ~Ronald Reagan - 40th US President (1981-1989)

In 1981, President Ronald Reagan, in the Jeffersonian spirit, with the wisdom of Lincoln, and the knowledge of Coolidge, took over where Kennedy left off. Summing up the folly of big government, he declared that, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” The Economic Recovery Tax Act, which went into effect in 1982, would maintain the bottom rate of 0.0%, and slash the top rate from 70.0% to 50.0%, but this was only the beginning.

In 1982 married couples with taxable income equivalent to $250,000 today paid a tax of 38.3%; those earning $1,000,000 paid 47.1%; and those earning $10,000,000 forked over 49.7% of taxable income (see table below).

From Taxing the Rich

The Tax Reform Act of 1986

The Economic Recovery Tax Act of 1981 was only a prelude to Reagan’s ultimate goal, tax reform. His objective was to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other tax preferences. Under the Tax Reform Act of 1986 the bottom rate was raised from 0.0% to 11.0%, and the top rate slashed from 50.0% to 38.5%. As of 2011, the Act is the most recent major simplification of the tax code, drastically reducing the number of deductions and the number of tax brackets.

From Taxing the Rich

In 1987 a married couple with taxable income equivalent to $250,000 today paid a tax of 30.5%; those earning $1,000,000 paid 36.5%; and those earning $10,000,000 forked over 38.3% of taxable income (see table below).

From Taxing the Rich

The Tax Reform Act of 1986 culminated in the most simplified rate schedule since the days of Abraham Lincoln. Between 1988 and 1990, the tax rate schedule contained only two tiers, with a bottom rate of 15.0% for couples making under $56,504, and a top rate of 28.0% for those making $56,504 or more.

Between 1988 and 1990, married couples with taxable income equivalent to $250,000 today paid a tax of 25.1%; those earning $1,000,000 paid 27.3%; and those earning $10,000,000 had a tax liability of 27.9% of taxable income (see table below).

From Taxing the Rich

Although George H. W. Bush would ultimately raise taxes by adding a new top bracket of 31.0%, in 1991 through 1992, during the entire 11 year period, married couples with taxable income equivalent to $250,000 today would have faced an average tax rate of 30.5%; those earning $1,000,000 paid an average of 37.2%; and those earning $10,000,000 would have incurred an average tax liability of 39.3% of taxable income.

The Deficit Reduction Act of 1993

"I'll tell you the whole story about that budget. Probably there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too" ~Bill Clinton - 1995

Bill Clinton’s Deficit Reduction Act of 1993 was nothing more than a tax hike. It was far from stellar, simply adding two new brackets above George H. W. Bush’s, but one positive aspect was that it represented a permanent change. The tax rates and brackets remained constant from 1993 through 2000, with an annual adjustment for inflation. The Act kept Reagan’s 15.0% and 28.0% brackets, and Bush’s 31.0% bracket in tact, and merely added two new brackets to the mix -- 36.0% and 39.6%.

Note: Clinton is also responsible for implementing the Child Tax Credit, as part of the Taxpayer Relief Act of 1997. The credit was designed to provide tax relief to lower-income families. Initially, for tax year 1998, families with qualifying children were allowed a credit against their federal income tax of $400 for each qualifying child. For tax years after 1998, the credit increased to $500 per qualifying child, and for families with three or more children, the child tax credit was refundable.

From Taxing the Rich

During the 8 year period, 1993 through 2000, married couples with taxable income equivalent to $250,000 today enjoyed an average tax rate of 27.1%; those earning $1,000,000 incurred an average rate of 36.0%; and those earning $10,000,000 gave up an average of 39.2% of taxable income (see table below).

From Taxing the Rich

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

“He said, tax the rich. You've heard that before haven't you? You know what that means. The rich dodge and you pay.” ~George W. Bush - 2004

In 2001, George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act. The Act maintained the 15.0% bracket, and modestly reduced Reagan’s 28.0% bracket, Bush’s 31.0% bracket, and Clinton’s 36.0% and 39.6% brackets, to 27.5%, 30.5%, 35.5% and 39.1% in 2001. Then in 2002, the Act added a new 10.0% bracket (making it an authentic across the board tax cut), maintained a 15% bracket, and further reduced the remaining brackets to 27.0%, 30.0%, 35.0% and 38.6%.

Note: EGTRRA also enacted a stair-step schedule that raised the Child Tax Credit from $500 to $1,000 over a 10 year period. It also made a portion of the credit, known as the additional child tax credit, refundable.

The following year, Bush would sign the Jobs and Growth Tax Relief Reconciliation Act of 2003 which provided the rates in force today. The Act maintained the 10.0% and 15.0% brackets, and reduced the remaining brackets to 25.0%, 28.0%, 33.0%, and 35.0%. As of today, although Barack Obama has delivered numerous speeches and proposed various temporary tax relief measures, such as a 2.0% cut on the employees’ portion of Social Security taxes (which threatens to accelerate the programs demise), he has offered nothing in the order of permanent tax reductions or reforms.

From Taxing the Rich

Between 2003 and 2011, married couples with taxable income equivalent to $250,000 today are accustomed to an average rate of 24.0%; those earning $1,000,000 have incurred an average of 32.0%; and those earning $10,000,000 are accustomed to paying an average tax of 34.7% of taxable income (see table below).

From Taxing the Rich

Pressing On

“Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race.” ~Calvin Coolidge

When a taxpayer has enough deductions and credits to not owe any income tax, that should be the end of the matter, but that’s not the case today. No. Ever since enactment of the Earned Income Credit in 1975, followed by the Child Tax Credit in 1997, the federal income tax has become one of the government’s primary tools for the redistribution of wealth. Today, billions of dollars are transferred from one taxpayer to another before the funds ever reach federal coffers. Nowadays, a family with no tax liability at all may receive a “tax refund” of as much as $8,000 per year. This is most outrageous, and a matter which should be on the table for Congressional reform today, not tomorrow. In fact, on September 2, 2011, the Treasury Department’s Inspector General for Tax Administration reported that, in 2010, $4.2 billion in refundable credits were paid to individuals not even authorized to work in the United States. The federal government’s days of sitting around begging for more tax revenue, while recklessly giving away the dollars we currently pay are over.

When we examine the tax rates levied on upper incomes since the Revenue Act of 1913, we find that the average rate paid by married couples with taxable income equivalent to $250,000 today is 23.3%, while those earning $1,000,000 have paid an average tax of 38.6%; and those earning $10,000,000 have paid an average rate of 55.7%. The weighted averages are essentially the same, at 23.3%, 38.6%, and 55.8%, respectively (see table below).

From Taxing the Rich

But of course, if we take into account the first 137 years of American history prior to 1913, when the income tax was for the most part nonexistent, the historically weighted averages are actually significantly lower. We must never forget that out of 236 years of American history, the United States has only put up with an income tax for 110. That’s why many American’s are pressing towards a return to the low rates of Coolidge, while some long for the rates promised in 1913, and still others for repeal of the 16th Amendment.

Today we have Barack Obama, a man who seems curiously decoupled from any sense of American history. By repeatedly delivering the same broken record speech about raising taxes on millionaires and billionaires, while simultaneously proposing to apply the top tax rate to those earning $250,000, Obama has made himself the laughing stock of POTUS’. What gives? Did he miss the 1960’s, 1970’s, or 1980’s? Perhaps Obama was living outside of the country during a key decade, missing a segment of history that most Americans my age remember. I would suggest to Obama or anyone else proposing a radical change in U.S. tax policy, to first learn something about American tax history, and then proceed with caution. We must never forget that it was ‘taxation without representation’, an act of tyranny, which led to the first American Revolution.

Since 1913, the highest average tax rate assessed on taxable incomes of $250,000 has been 32.2%, during precarious times, the lowest 1.3%, and the historical weighted average 23.3%. So with that in mind, one can only imagine where Barack Obama is coming from as he delivers speech after speech hinting at raising taxes on millionaires and billionaires, a feat he portends to accomplish through ushering those making $250,000 into the top tax bracket. If we can learn anything from the past, it should be clear that tax rates on incomes of $1,000,000, $10,000,000 or more are lagging behind their historical weighted averages, while rates on those making $250,000 are within tolerance. So where’s the legislation spelling out the addition of upper brackets on those making millions and billions per year? Obama should either place a proposal in line with his rhetoric on the table, or simply step aside.

From Taxing the Rich

References / Related:

Taxing the Rich, Part I

Taxing the Rich, Part II

Spreadsheets: Historical Income Tax Data

Images: Tax Tables and Charts

Tax Foundation - Income Tax Tables: 1913 to 2011

Tax Acts of the United State, 1861 through 2010

The Origin of the Income Tax

Quick Revolutionary War Tour 1765-1777

Natural Born Conservative on Taxes

CPI Adjusted Dollars: