Monday, August 29, 2011

Representation without Taxation...

In the United States we take taxes very seriously. Indeed it’s in our blood. One of the key reasons for the American Revolution was taxation without representation. The Colonists did not like the idea of paying taxes to England without having a voice in how those funds would be levied or spent, i.e. they didn’t have representation in Parliament. In some cases they had representation in a state assembly, but the local legislature was in all cases trumped by the government in England.

Building on that initial connection between voting and taxes, in 1964 the 24th Amendment to the Constitution made it explicitly clear that no one could be barred from voting because of a failure to pay any tax. The primary target of the Amendment was Southern states who were limiting the rights of blacks by imposing a poll tax. The Amendment however did not ban simply poll taxes but rather any “other tax” as a bar to elections.

The goal of barring discrimination of black voters was of sufficient consequence that it deserved a Constitutional Amendment. The problem however is that by adding the words “or other tax” the government sowed the seeds for its own demise.

How? By permanently severing the relationship between those who finance the government and those who control it. Today, 51% of income earners pay no income tax at all, while the top 10% pay 70% of all income taxes. In addition, 30% of “taxpayers” actually earned money from the government in the form of refundable tax credits while those on welfare are not counted in the pool in the first place.

Progressives often respond that everyone pays Social Security and Medicare taxes. That is true – assuming someone is employed. In the federal system we have five primary forms of taxes:

First of course is the aforementioned Social Security. Social Security taxes are ostensibly taken from employees to fund (or ideally to supplement) their retirement.

Then there is Medicare, also taken from paychecks, which is intended to provide health insurance to those over 65.

Next there are excise taxes, taken with the specific purpose of supporting particular government programs and funded by the people who use those services. These would include things like gasoline taxes going to pay for transportation projects and airport fees to support airport maintenance and operations.

Then we have the corporate income tax, which is levied on corporate profits. These taxes go into the general fund and are intended to pay for the normal operations of the federal government.

Finally there are personal income taxes. These taxes are often the largest single component of the federal government’s revenue, and like corporate income taxes they are intended to fund the general operations of the government.

Here is the error of the progressive argument. The taxes paid by the bottom 50% of income earners (and those who earn no income) are for either retirement support or to pay for a used service, not the general operation of the government. As such, they are paying no taxes to support the actual functioning of the government. The fact that Congress has been raiding the Social Security “Lockbox” for decades does not change this fact. As long as the government is functioning, Social Security recipients will be the senior creditors on any government expenditures… and it is the people who pay the taxes who will have to make good on those IOUs.

Neal Boortz asks the question: should the vote of a welfare matron on the government dole with a five children be equivalent to the vote of a small businessman who pays $25,000 in income taxes and has 10 employees who support 20 other family members? The obvious answer would seem to be no. Certainly no more than it makes sense to allow your neighbor to negotiate with your boss how much of your salary you will be allowed to keep and how much your neighbor gets to take home in exchange for a kickback to the boss.

Is it now time to flip the colonist’s battle cry on its head? Should there be representation without taxation? Can the United States survive with a growing majority of her population contributing nothing to the running of the government, or increasingly, being net consumers of government largesse? This is not a new issue. "A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." That quote is sometimes attributed to Alexis de Tocqueville and sometimes to Alexander Fraser Tytler. Regardless of its provenance, the notion is spot on. One need look no farther than today’s dysfunctional federal government to recognize the writer’s prescience.

Not only is the government taking all of its income taxes from the top 49% of income earners, but at the same time it’s borrowing trillions of dollars (that those same taxpayers will have to repay) to redistribute to tens of millions of others who are not paying any income taxes. The logical progression of this cleptocracy will be that eventually the most productive members of society will seek refuge in countries where they can enjoy the fruits of their labor. Where will the government look to then as it seeks to fund its redistribution of wealth?

Perhaps now is the time for another Amendment. One that states simply: “In order to be eligible to vote in federal elections a citizen must have paid federal income taxes in one of the previous three years.” Absent that, perhaps it’s time to consider a flat tax, or even better, the Fair Tax. None of these solutions will solve our fiscal problems on its own. Without spending cuts and a smaller, limited government the Grand Experiment is doomed. Creating an exclusive connection between voting and those who pay the government’s bills is a good first step however.

Tuesday, August 23, 2011

Conservatives want SMALL government, not NO government...

Conservatives are constantly being accused of wanting no government. When we talk about wanting to eliminate things like the IRS, the Departments of Energy and Education or rein in rouge agencies like the EPA and the NLRB we are accused of wanting no government at all. That’s simply false. I don’t think I’ve ever heard a conservative speak about wanting to eliminate all government, or even the federal government.

Most conservatives understand that the absence of functional government brings chaos. In an environment where chaos reigns, at some point someone will step in and impose order. That person or group then becomes the de facto government. Perhaps the clearest example of this in recent history was the Taliban takeover of Afghanistan in the mid 1990’s. Although pockets of resistance remained, by the late 90’s the Taliban were firmly in control of the country. Most Afghanis didn’t like the Taliban, but they appreciated the relative order they brought to the country.

Here in America our problem is not a lack of government, but the opposite, too much of it. The strings of regulation end up wrapped around the wheels of the American economy and ends up clogging what might otherwise be a well oiled machine. An unfettered economy would not be flawless, but it would be far more dynamic than the straitjacketed one we have today.

To put this in perspective, take the IRS tax code. According to the Heritage Foundation, it will cost America just more than $400 billion in 2011 to comply with the tax code, and that does not include the cost of the actual taxes themselves. Given that the federal government will take in approximately $2.2 trillion in taxes this year, that means Americans will spend an additional 20% of their tax bill just trying to figure out how to pay the bill in the first place!

How is that even possible? Well, the tax code is approximately 72,000 pages long and it’s broken down into 750 subchapters. Imagine if you are a widget manufacturer with 10,000 employees spread out over 20 states. How many employees would you need to have on staff to make sure that that company was complying with the regulations written on every one of those 72,000 pages? How much time (read: money) would your accounting and legal staffs have to spend to ensure that everything you did was within the IRS’s guidelines? How much time would management have to waste evaluating what product or service to provide or what energy provider to choose depending on what provides the best tax advantage? How about deciding how employee benefits should be allotted between taxable and non-taxable to maximize employee compensation?

As difficult as scenario is, at least large companies can pay for the necessary accounting and legal staffs. Imagine you are a struggling businessman with 5 employees who has to choose between spending money on another employee to help him compete in the marketplace or on someone to decipher the 72,000 pages of the IRS tax code. The fact that an employer (or homeowner or parents of a college student or someone approaching retirement…) has to base many of their financial decisions on what the IRS rules are is bad enough, but for the rules to be so numerous and incomprehensible that it restricts productivity borders on criminal. And to put a cherry on top of it, all of that effort is spent just to figure out how to give the money to the government so they can spend much of it on stuff you'd never pay for if you had the choice.

Lucky for Americans, the tax code is not the only sign of a government gone wild. There is also the Code of Federal Regulations (the codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the Federal Government). The Code covers 163,333 pages, in 226 books. Those are the regulations that cover everything from that ticket on your mattress to the kind of gas you can put in your car to how long an airline can delay a flight to what can be labeled diet in the supermarket to the endless pages of directions and warnings provided with medicine bottles. Unless you are living in Ted Kaczynski’s summer home, not a day goes by that you do not cross paths with hundreds or thousands of these regulations. Like microwaves, you may not see them, but they are there nonetheless, impacting everything from hiring (or not, as the case might be) or marketing or investment decisions for everyone from Fortune 500 companies to neighborhood entrepreneurs.

The Competitive Enterprise Institute estimates that federal regulations cost Americans $1.75 trillion each year. That includes everything from environmental regulations to cable rates to the number of hours employees can work to months of tax compliance research. Add to that the $2.2 trillion Uncle Sam collects in taxes and you have almost 25% of our GDP being directly driven by government. Given the suffocatingly large and restrictive presence of government in our lives, is it any wonder that our economy is moving along at a dying snail’s pace? How many life saving medicines, technological breakthroughs, or even things as simple as more comfortable shoes have not been realized because we waste so much time and money focusing on regulation and compliance? At the end of the day conservatives don’t propose no government, just limited Constitutional government. We’d like to free up the American people to transform this moribund economy into a juggernaut of creativity, productivity, jobs and prosperity. That can’t be done while they are being strangled by government rules and regulations…

Monday, August 15, 2011

Jimmy Carter is Rick Perry's biggest fan...

If Barack Obama were prone to conspiracy theories, he might think the last couple of weeks were part of a plot orchestrated by Jimmy Carter to salvage his own legacy.

First off the Democrats get the GOP to acquiesce to a debt ceiling bill that will result in the federal government raising taxes and increasing spending by over $7 trillion over the next decade. The immediate result is United States government debt being downgraded for the first time in history, something Treasury Secretary Tim Geithner stated unequivocally would not happen only the week before.

Soon thereafter the Fed looked into their crystal ball and decided that economic prospects were so bad that they had to take the unprecedented step of publicly stating that they would be leaving interest rates near zero until mid 2013. It seems as if Keynesians never see – nay recognize - failure, they simply see another opportunity to try and do the same thing over again, only each time a bit bigger.

Up on Wall Street things weren’t going any better. The Dow dropped 600 points the day after the downgrade and it has spent the subsequent two weeks on a daily triple digit roller coaster. All together the market is down almost 10 percent since the beginning of the month.

Those things are tough, but they don’t really add up to much of a conspiracy. Hey, the unemployment rate went down… from 9.2% to 9.1%, that can’t be a bad thing. Unless of course that decline is the result of more people simply throwing in the towel and giving up looking for a job at all. Add to that the decline in productivity and the increase in labor costs and things start to look rather bleak. All this while Obama’s approval ratings slipped to the lowest levels of his presidency.

Across the pond, as if to add gasoline to the proverbial fire, the socialist Mecca of Europe is crumbling from within. In the UK you have waves of chaos and riots perpetrated by youth who’ve spent their lives suckling at the public teat. The little rascals are ostensibly rioting against the police and government budget cuts, but seem to take particular joy in burning businesses and stealing jewelry and electronics. In Greece strikes and protests continue unabated while in Italy Silvio Berlusconi is fighting to keep his country solvent. It’s so bad over there that George Soros is recommending that Greece and Portugal pull out of both the EU and the Euro.

While it’s unlikely that Carter had a hand in any of this, the fact that the Consumer Confidence index is at its lowest level since he was President must give him some hope.

As if an economy on life support was not bad enough, on Saturday Rick Perry finally made it official and announced he was running for the GOP nomination to succeed Barack Obama.

If Perry gets the nomination it will set up a match Vince McMahon could only dream of. For the first time since Jimmy Carter occupied the White House, Americans will have a crystal clear choice between two philosophies that are diametrically opposed to one another.

In one corner you have Barack Obama who is leading the progressive charge that seeks to turn the United States into the train wreck that is Western Europe. In the other corner you have Rick Perry, an avowed 10th Amendment fan, a fierce advocate of small government and an unabashed believer in American Exceptionalism.

Rarely is it the case that voters have such a clear choice between philosophies of government. One need look no farther than the housing market to understand the consequences of the choice to be made. (Pick up a copy of Thomas Sowell’s The Housing Boom and Bust for a full telling of the tale.) California, one of the most unaffordable places to live in the country – not coincidentally the most regulated state in the Union – has seen massive bloodletting in the housing market as a result of the burst of the real estate bubble. Tellingly, despite the massive declines the state is still one of the most expensive places to live in the country. Texas on the other hand – largely due to its dearth of regulation – never experienced a bubble and its real estate has continued to appreciate throughout the recession. At the same time while California has an unemployment rate sits near 12% Texas’s is at 8.2%. And of course the state’s economic growth rate is almost double California’s and it has no income tax while California’s is amongst the highest in the country.

Barack Obama of course is not the Governor of California, he is the President of the United States. California is however the embodiment of everything Barack Obama holds dear, overarching regulation, high taxes, enormous social spending, an illegal alien and union paradise all under the watchful eye of an unassailable green lobby. Given his druthers Obama would indeed turn the United States into California.

At the end of the day, the progressive vs. freedom comparison that Rick Perry offers does not bode well for Barack Obama. No candidate provides a starker contrast of philosophy, and more importantly, actual results, than does Perry. (During the decade he’s been governor Texas has produced more jobs than the other 49 states… combined.) Of course he still needs to secure the nomination, but don’t be surprised if FEC documents show a large donation to the campaign chest from an anonymous donor down in Plains, Georgia.

Monday, August 8, 2011

Obamanomics vs. Reaganomics

Last week, for the first time in history, US debt was cut to below AAA. That wasn’t supposed to happen. For months we saw President Obama and the media pillorying conservatives for inviting Armageddon by opposing the lifting of the debt ceiling without substantive cuts in government spending. When the “Hobbits,” as the Wall Street Journal dubbed them, were undone by the squishy wing of the GOP and we had our “grand compromise,” that was supposed to avoid a downgrade.

Just as many of the Hobbits had suggested, the grand compromise did nothing to allay fears about Uncle Sam’s finances and lo and behold four days after the deal was signed Standard and Poors reacted as any respectable rating agency would and downgraded our debt. (Perhaps they were trying to repair a reputation left in tatters after the debacles of Fannie Mae and Freddie Mac.) Now the country finds itself in the same position it might have otherwise except that now we have an ineffective debt deal that will not only allow spending to grow, but will allow taxes to rise.

In what one wishes was a man bites dog moment, but isn’t, Investor’s Business Daily reports that the Obama Justice Department is forcing banks to make mortgage loans to minorities with poor credit, no job and in some cases allow them to count unemployment and welfare as income upon which to base those loans. One might charitably ask if Eric Holder has been asleep for most of the last decade. What else would explain his wanting to double down on the exact problem that caused the current financial meltdown in the first place?

Keeping with the banking theme for just a moment, there are times when something happens that simply leaves you shaking your head. The way things work in a normal universe, banks earn money by paying depositors and then in turn lending out those same funds at higher rates to borrowers. Today however, in the Bizarro world of Obamonomics, banks are actually charging big customers for the privilege of holding their deposits. Apparently, the current economic prospects in the United States are so bleak that hundreds of billions of dollars are piling up in bank vaults across the country because so little investment / borrowing demand exists. And there we are almost at the heart of Obamanomics: When government makes it more appealing to pay your bank to hold on to your money than actually invest in businesses that could potentially create profits… and jobs. The only missing piece is when the government relieves you of the burden of paying those fees by simply taking your money.

In the event that one might want disagree with the Obamanomics labeling of this economy, let’s take a look at the last time we were in this situation, back in the early 80’s. During the first thirty months of the Reagan administration, unemployment went from 7.5% to 9.4%. During the first thirty months of the Obama administration the rate went from 7.5% to today’s 9.1%. At first glance President Obama seems to measure up pretty well to the Gipper. Not so much… Ronald Reagan came to office with interest rates sitting at 20%. Thirty months later they were still at 9.5%. Barack Obama has had a slightly different playing field, enjoying almost 0% rates since he took office. At the same time, while Reagan ran deficits of 3.5% and 4.7% of GDP during his first two years, Obama has run deficits in excess of 10% of GDP for both of his first two years. Then of course there is inflation. When Reagan took over inflation was sitting at 12% and thirty months later it had dropped to 3%. Obama on the other hand took office with an inflation rate hovering around zero and today it approaches 4%.

Democrats are fond of saying that George Bush left Barack Obama with the worst economy since the Great Depression. Anyone who lived through (or read about) 20% prime mortgage interest rates or had to wait hours to fill up their tanks knows that that statement is a lie. In reality, when faced with a much more challenging environment Ronald Reagan cut taxes, trimmed the nanny state (to the degree he was able – remember he wanted to get rid of the Departments of Education and Energy but his Democrat Congress would have none of that…) and was able to set the foundation for an economic juggernaut, all while never running a deficit in excess of 6.5% of GDP... and while winning the Cold War at the same time. Barack Obama on the other hand, with a staggeringly accommodating interest rate environment and no inflation has managed to bring the economy to a virtual halt by destroying the incentive for investment. Between the massive increase in government regulation and spending as well as the takeover of whole industries, Barack Obama has dealt a body blow to the free market system in this country. All while running staggeringly high deficits and a feckless foreign policy to boot.

Reaganomics was initially coined as a term of derision by the left. Years later, after Reagan brought the country out of the dark and set the foundation for a dynamic and robust economy, the term Reaganomics became a symbol of success. My guess is that thirty years from now when historians look back on the four years of the Obama administration the term Obamanomics will still be wearing its well deserved patina of dysfunction and failure.

Monday, August 1, 2011

$2 trillion in cuts? Washington's fantasy math vs. Tea Party "Hobbits"

The past week has been a nothing if not confusing… From the President talking about his plan which mysteriously no one ever saw to John Boehner fighting off an attack from Tea Party “Hobbits” because they said his plan was almost interchangeable with Harry Reid’s. As of Sunday night the Boehner, Reid, Obama triad had cobbled together something that “cuts” federal spending by $2.4 trillion while raising the debt ceiling by about the same. Finally! Some clarity that makes this mess easy to understand for we simpletons…

Not so fast… Just a quick question… if federal spending is going to be cut by $2.4 trillion, why do we need a debt limit increase? In 2012 the federal government is expected to take in $2.2 trillion in taxes yet spend $3.7 trillion, $1.5 trillion more. Well, if you take $2.4 trillion in spending cuts out of a $3.7 trillion budget, you should have expenditures of only $1.3 trillion. That must mean that taxpayers should be getting $900 billion of the $2.2 trillion they will be paying in taxes back. Stupendous! Imagine, when people work together there is no limit to what they can accomplish.

Don’t spend that refund check just quite yet… Unfortunately, real numbers and accounting clarity are not Washington’s strong suit. The $2.4 trillion in savings doesn’t come from next year at all. It comes out of the projected INCREASE in federal spending over the next ten years. So, not only is this magical $2.4 trillion cut not come out of actual spending, it isn’t even cutting all of the expected deficits over the next decade.

Let’s see if I can explain this. The Congressional Budget Office has what they call the Baseline. That Baseline is basically what would happen over the next decade given current projections of spending and tax revenues. According to its January 2011 estimate, the CBO predicts that Uncle Sam will run a total deficit over the next decade of $7 trillion, or an average of $700 billion a year. Wow, $700 billion in deficits a year for a decade! Tax revenues must be expected to fall off of a cliff… Actually, no. They are expected to more than double to about $5 trillion in 2021 from $2.2 trillion this year. Unfortunately however, by 2021 the federal expenditures are expected to grow to $5.7 trillion from today’s $3.7 trillion.

According to Washington math, if the federal government decided to simply stop growing today, and spend only $3.7 trillion a year (which is what they will spend in 2011) for the next decade, that would be a $9 trillion spending cut. ($37 trillion in outlays vs. the CBO’s current $46 trillion projections.) Only in Washington can you spend the exact amount of money yet pat yourself on the back for cutting spending. And there is a bonus. If they were actually to do that, the federal books would go from a $7 trillion deficit to a $2 trillion surplus.

And just to put this in a bit more perspective, freezing at current levels would be enshrining the ludicrously high annual outlays that Barack Obama put in place – up from $3.1 trillion two years ago, which itself is up from $1.8 trillion when George Bush became president. In 2000, the United States had a population of almost 300 million people and a federal budget of $1.8 trillion. By 2011, while the population had grown 3% to 311 million people, the federal budget had grown by over 100% to $3.7 trillion. By 2021 the population is expected to grow by 9% to approximately 340 million people. The federal budget however is projected to grow 65% to $5.7 trillion. So in a period of a mere two decades federal spending will have grown from approximately $6,000 per person in the United States to $16,700 per person.

Let that sink in. By 2021 the federal government will be spending $16,700 for every man, woman and child in the country. They will also be collecting $14,300 for every person in taxes to pay for it and borrowing another $2,000. We’re almost there. How do things feel so far?

That’s exactly what the Tea Party congressmen were fighting against when they were pilloried by the Wall Street Journal, Bill Krystal and John McCain. They don’t want faux cuts that make for nice headlines but do nothing to rein in spending and begin to put the country’s fiscal house in order. They are not even talking about rolling expenditures back to what they were when Barack Obama took office, not to mention the glory days when Bill Clinton left us with a surplus driven by a “Peace Dividend”. No, they are simply talking about freezing spending where it is today and cutting the hundreds of billions of dollars in waste to finance the growth in critical programs.

Washington exists in a universe all by itself and it’s comfortable playing with make believe numbers and budgets. Unfortunately however the people who have to pay the very real bills for such chicanery can’t get by with make believe numbers and promises. The Tea Party nation recognizes that and sent a message to Washington in November to stop the tomfoolery. This budget deal demonstrates clearly that they didn’t get the message. One election however is rarely sufficient to clean out all of the deadwood from a rotting foundation. Keep that in mind the next time you hear some career politician or someone in the media wringing their hands about those Tea Party “Hobbits” who refuse to get on board and do things the way Washington has always done them. Hopefully after the 2012 election Washington will start looking a lot more like Middle-earth.