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Monday, April 18, 2011

Ruminations From the Void

I have had a lot to say about our budget issues.  I will never be the first to say that we tax too little, although we probably do tax too little.  But, before the pitchfork and torch crowd makes it's way to my front door, let me explain.  We tax too little for a few reasons.
  1. Tax rates are too high for top earners - when tax rates are too high, income is shifted, hidden or lost which means that fewer taxes are collected.  Solution - lower tax rates for top earners.
  2. Loopholes are too big and there are too many - high tax rates combined with too many loophole deductions means fewer taxes collected.  Solution - lower tax rates while closing the loopholes (deductions).
  3. 45% of Americans pay no income tax - the Reagan and Bush tax cuts have moved too many off the tax rolls.  Refundable tax credits remove many more.  It's hard to believe that those who have cell phones, computers, satellite tv, blue ray players and an x-box can't pay a small share of income tax.  Solution - set a minimum tax rate of 5% that all income earners pay.
Some will agree with me, many won't.  It's easy to just say the rich can afford to pay more.  Our top rate is now 35%, yet the super rich 400 paid an average tax rate of 17% last year.  Rep. Paul Ryan's The Path to Prosperity plan would close many loopholes and lower the top rate to 25%.  Far from a giveaway to the rich, his plan like mine, may just collect higher revenues from these rich than President Obama's plan to end the Bush tax cuts.  Obama is fond of saying that's it's a question of fairness, but it's not.  It's a question of math and his is fuzzy.

For a better look at the math of spending cuts compared to tax rate increases, please read this paper, Large Changes in Fiscal Policy: Taxes Versus Spending by Alberto F. Alesina and Silvia Ardagna.  At 36 pages, it's half the length of Ryan's budget plan, but will do more to convince you of the wisdom of Ryan's approach on spending and taxes.  In it, Alesina and Ardagna write,

For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions
After reviewing the data of many fiscal adjustments (attempts to lower deficits), they find,
In successful episodes total primary spending as a percentage of GDP falls by about 2 percent of GDP. Total revenues actually decline of about half of percentage point of GDP.  Thus, successful fiscal adjustments are completely based on spending cuts accompanied by modest tax cuts! On the contrary, in unsuccessful adjustments total revenue goes up by almost 1.5 per cent of GDP and primary spending are cut by about 0.8 of GDP. Once again this comparison points in the direction of spending cuts as the more successful ways  of fixing budget problems.  Regarding the composition of spending and revenue the most striking comparison is given by the transfers item. In successful adjustments transfers fall by 0.83 per cent of GDP, while in unsuccessful adjustments they grow at about 0.4 per cent, a huge difference between the two episodes of 1.2 percent of GDP. This comparison points in a clear direction: it is very difficult if not impossible to fix public finances when in trouble without solving the question of automatic increases in entitlements. Regarding the composition of revenues, again as above the most striking difference is on income taxes.

I am not a rich person.  If solving our problems was about figuring out who has all the money and then going and taking some of it, I'd be more inclined to listen to what Obama has to say since it's not my money he's after.  But his math and economics couldn't be more wrong.  The truth is that taking more of their money will more likely cause me to be poorer.  And when we run out of their money, then they will come for yours €€and mine.

A Wall Street Journal article by Stephen Moore and Richard Vedder Higher Taxes Won't Reduce the Deficit, points out their research that shows for every dollarthat taxes are raised, the gov't creates more than a dollar of new spending.  Keep this in mind if you still think that raising taxes will fix our problems.

Just ask yourself this question.  If you are in debt because your spouse charges too much on your credit card, is getting a second job to bring in more income your first move?  Don't know about you, but cutting up the credit cards would be my first choice.  Returning some of the purchases would be the second.  Cut back on dining out would be third.  Getting a second job would be somewhere around 15th on my list.  Bringing in more income with a second job, but not fixing the spending issue will move me closer to divorce, not solvency.

Charles Krauthammer makes a worthwhile argument that we should fix the spending side first, get that in order, then consider the tax side.  That should be a decent compromise.  But it won't be seen as one.

On illegal immigration, the conservative position has been to secure the border first, then discuss where we go from there as far as amnesty is concerned.  The question of amnesty isn't the core problem.  The problem is that they are still crossing the border as I write.  Granting amnesty will not eliminate the real problem.

On that same note, higher taxes will not eliminate the deficit.  Spending is the core problem.  Only after that is fixed, can we adjust taxes to fit properly.  I troubleshoot at work all the time.  Identify the core problem first and fix that, then address any secondary issues afterward.

As always, feel free to tell me where I'm wrong, but I ask that you take a moment to read Alesina and Ardagna's paper and Paul Ryan's plan first and please come at me with at least a few facts or stats.  I don't feel like responding to claims of greedy Republicans with ties to shady Wall Street types who want to kill your grandmother and blow up nursing homes so Bush & Cheney can enrich their oil buddies.  I've seen that movie before and it's a bit boring.

>>  On a related note, former Democrat Presidential nominee Walter Mondale, whom I mention in an earlier blog post, writes in the Washington Post,
We will not be able to control our budget deficits without raising taxes. That simple reality has brought us to a moment of truth in American politics. President Obama’s speech Wednesday lived up to that moment, and now Democrats and Republicans in Congress must take a similar stand.

Many have described my 1984 presidential campaign promise to raise taxes as exemplifying the folly of proposing tax hikes during an election. Although the rebounding economy and improving job picture that year probably had more to do with President Ronald Reagan’s reelection than my pledge did, there are certainly political lessons for anyone considering tax increases today. In particular, avoid generalities, and clearly link taxes to addressing concrete national needs.
Well, if old Fritz wants to starkly contrast the boom of the Reagan Recovery to our current convalescence under President Obama by claiming that a promise to raise taxes will be politically viable now, since we don't have that pesky booming economy and millions of jobs being added quarterly to distract the masses, I will quote the President and say "Go for it."

>>  This headline over at FoxNews is not surprising at all,  Obama's $5 Billion Weatherizing Program Wastes Stimulus Funds, Auditors Find.  Read and we find that in Deleware,
...costs for the low-income housing program stemmed from paying contractors to do simple, inexpensive fixes -- like insulating attics or sealing gaps -- but who instead went the path of replacing furnaces, windows and doors, all at a much greater cost. Much of the work was authorized by an administrator and a contractor, neither of whom is still employed with the state program, the newspaper reported.

"The cash grab that went on was just amazing," Allen Luzak, a weatherization expert with the Delaware Energy Office told the newspaper.

So far, only 689 homes have been retrofitted while roughly 6,000 families are on the waiting list for help. The attorney general's office has been investigating the program for the past year but hasn't filed criminal charges yet
Of the $5 billion allotted, only $2.4 billion has been spent, which by my math means we could be $2.4 billion closer to closing the deficit by cancelling this program right now.

>>  Even as I am preparing to send my daughter off to college in the fall, I can't help but take note of the many voices (with whom I tend to agree), that continue to warn of the burgeoning Higher Education Bubble.  Now Paypal founder Peter Thiel has joined in and even funded an unothodox program that will take 20 kids under 20, remove them from the college system and pay them for two years to start a company. 

Dilbert creator Scott Adams writes that college should teach entrepeneurship, but Thiels plan sounds like a better approach.  The key is the difference between training and educating, as NRO's Phi Beta Con blog addresses. 
Mr. Adams commits an error described in Albert Jay Nock’s 1931 Theory of Education in the United States — confusing education with training. Higher education should develop the mind; trade schools and work experience should develop vocational skills.
And now even one of my favorite comic-strips, Pearls Before Swine, has noted the problem with the overselling of college. (Yes, I am willing to listen to guys who write for the funny papers.  If anyone knows about wasting money on a degree that has little use for them, it's probably these guys.)

>> There are indications that a few NATO nations will request a new resolution from the UN authorizing regime change in Libya.  Based on the current results, either this will happen or the status quo will be locked in moving forward.  Short of a more clear directive, along with boots on the ground, Gaddafi does not appear to be going anywhere, anytime soon.  For the European nations that depend on Libyan oil, this will be an unacceptable result. 

For the Obama administration, the lesson should be that over the last 50 years it has become clear that for success, military action must be an "all-in" action.  From Vietnam to Grenada, Panama to Bosnia and Iraq to Somalia, that lesson should now be clear.  America can no longer choose to act in a half-hearted manner with our military.  Determine a goal and use whatever means necessary to achieve that goal.  The current UN resolution, with it's restriction on ground troops, is wholly antithetical to US involvement and shows the inadequacy of the UN's multi-lateral approach.

>>  Ed Morissey at HOTAIR notes an article in The Fiscal Times by James Cooper that shows "For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes."

As you can see from the chart, tax revenues are not too low.  Even with the recession, our tax revenue as a percentage of household income in still higher than it was just prior to the JFK tax cut when the top effective rate was around 90% of income.  The problem is that transfer payments, which topped out at 5% during the Great Depression are now approaching 20% of personal income.  That, of course is not healthy and definitely not sustainable.

The key to our nation's solvency must come from pro-growth policies that limit federal spending.  President Obama's policies seek to do the opposite.

>>  Not sure if I will be doing much blogging this week.  After work tomorrow, I will be here -

I will be taking my son Nate to a ballgame at Busch stadium.  His birthday was Saturday and this was one of his presents. (Rain, rain, stay away)

After leaving work on Thursday, I will be leaving town with my family - destination Dauphin Island.  I am looking forward to a sunrise Easter church service on the beach.

Please don't be jealous.  This trip will be a replacement for our normal summer vacation.  I will be spending much of the summer negotiating a new collective bargaining agreement on behalf of my union and am unable to make any plans until we have a new agreement in place.  Unlike our President, my travel plans are dictated by my job responsiblities.  (sorry - I had to get a little dig in there)

So, envy me now & I will envy you in the summertime.

God Bless.

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