We Need an Economic "Gamechanger"

I've done my best over the past few days to emphasize that President Obama's "tax the wealthy" plan has the potential to do great harm to our floundering economy while doing nothing to overcome our pile of debt.  The idea that increased tax rates will result in associated revenue increases is not backed up by historical data. 

Throughout the past several decades, the top tax rate has fluctuated from as high as 91% in the early '60s to 28% at the end of the '80s to our current 35%.  Yet despite the huge difference between 91% and 28%, our revenue has consistently remained around 18% of GDP. 

The changes in actual tax revenue tracks more closely to economic contraction/expansion than tax rates.  In good economic times, even with an expanding GDP, revenue as a percentage of GDP increases, whereas as revenues decrease as a percentage of GDP during recession, despite a falling GDP.  During our current economic hard times, revenue sits at about 16% of GDP, but reached 21% at the height of the '90s tech bubble.

Conclusion #1:  If you want to increase revenue, you need to expand GDP.

It's time to toss aside the class warfare talk of what's fair and just talk about what works.  Raising tax rates is not stimulative and does not correlate with increased revenues or an expanding GDP, so there is no economic value in doing so.

But something must be done.  Doing nothing is not an option.  The following chart shows us that we can't just wait for something good to happen.

The biggest problem we face is not a true lack of revenue, but an explosion in our spending.  Even aside from the temporary spending measures put into place over the past few years, our entitlement growth will continue us on an unsustainable path.  Tax revenue in this chart is displayed at the historic average of 18% of GDP.

For those who believe that simply raising taxes will bring in enough additional revenue to fix this problem, here is another chart.

As it shows, even if we assume that we could hold revenue at our highest recorded percentage to GDP, we would still be swamped by the rising red ink.  What we are left with is this - we are not on a path to recovery, we have lagging revenue with no realistic plan to increase it and even if we could magically assume record revenues, it still wouldn't be good enough to bring our deficits under control.

The fact is we are at a crossroads.  We cannot continue down the path that we are on.  The same game of small adjustments here and there will not be sufficient.  It's at moments like this, that something drastic needs to happen.  What we need is a gamechanger and it is this - dramatically cut spending to expand the economy.

I can hear the collective gasp arising from the gallery, but wait a moment before you hit that "close tab" button.  I can show evidence of how this has worked before.

Our debt currently sits at 42% of GDP, the highest it has been since WWII.  But in the early '90s, Canada's overspending had put its debt at 53% of GDP.  At that point, they began a gamechanging plan.  They cut spending very dramatially and instituted new market reforms and tax cuts.  They consistently balanced the budget.  This chart shows the results.

The Canadian economy boomed as spending was cut.  Average growth matched the highs of the mid-90s U.S. economy until the 2009 recession took its toll.  Despite a small uptick, their debt is again on a downward trajectory and sits 10% less than before they changed course.  Their dollars are now more valuable than ours as our debt levels are heading in the opposite direction.

During that same time period, Japan was following the same Keynesian spending plans that Obama is proposing.  The results were atrocious.  Economists now refer to that time period as Japan's "Lost Decade".

The Keynesian economic model has been refuted time and again.  Look at how government spending affects states.  In data compiled from 1968-2008, here is a quick summary:

• When a state's Senator ascended to the chair of one of the top-three committees, earmarks in the following year increased between 40% and 50%, and discretionary state-level Federal transfers increased about 10%.  In the median case, that represented a $200 million increase in Federal spending directed to that state.

• In response, the average firm in the median state cut its employment growth rate by 3% to 13%, reduced capital expenditures by approximately 15% or $39 million, R&D expenditures by roughly 10% or $34 million and experienced a decline in sales.  They also increased their dividend payouts by 13%, suggesting fewer investment opportunities.  These results were even more pronounced for firms within industries targeted by the Federal spending and for firms that did not have overseas operations, and therefore were more exposed to the effects of the increase in Federal spending on their home state's economy.

Co-author Professor Coval says, "Our findings suggest that they (public policymakers) should revisit their belief that Federal spending can stimulate private economic development."

Conclusion #2:  Spending cuts expand the economy while increased government spending causes contraction.

In other words, cutting into the deficit by dramatically decreasing government spending can help grow the economy, producing jobs which will increase tax revenue helping pay down the (now reduced)deficit.

As Paul Ryan has stated many times, "We don't have a revenue problem, we have a spending problem".  They say the first step to recovery is understanding that you have a problem.  Getting both parties to admit that we have a problem can lead us to the real gamechanger that we need. 

Until then, expect more nonsense about what's fair as Congress and the President fight over who will be allowed to get in the lifeboats as the unsinkable United States of American slowly takes on more water.

Why the "Buffett Rule" Can't Work

At first glance, President Obama's new tax on the wealthy - the so-called "Buffett Rule", in honor of Billionaire investor Warren Buffett - will appear to be a good step to bringing our sky-rocketing budget deficit under control.  This year's fight over the debt ceiling only produced $38 billion in spending cuts, so it's hard to see a way forward without some new revenue.  The wealthiest Americans, primarily those who can rightfully be called millionaires, can surely spare a little change to help the country out.

Daniel Indiviglio, puts pen to paper in the Atlantic to calculate just how much it will help us to have the rich pay their "fair share", but what he found isn't what you might expect. 

His chart (see right) shows the varying amounts of additional income that can be collected from our nation's millionaires.  The red line near the top is our current year budget deficit. 

(Invidiglio uses the actual reported incomes and makes no assumptions as to how increased rates may change behavior.  In reality, the actual amount of income reported would decrease were rates increased.)

As the chart shows, raising the baseline 29.1% to a flat 35% only brings in an additional $37 billion.  In fact, even if you confiscated 100% of the yearly income for all millionaires, we would still be a trillion dollars short of closing the deficit under Obama.  We might think that the wealthy have all the money, but they don't.  They have a lot, but there just aren't enought of them.  We must remember the top 1% is outnumbered 99-1.

Indiviglio's conclusion is this -

So this Buffett Rule is a great populist proposal if the president wants to score some political points, but it has little practical value. It might provide the government a little bit of additional revenue, but unless extremely aggressive, it wouldn't make a dent in the nation's deficit problem. To do that, you'll need to cut entitlements and/or raise taxes much more broadly.

One reason this seems contrary is because of how often it is said that the wealthy are not paying their fair share.  But in truth, not only are they paying their fair share, they're paying well above it.  The top 1% earn 19% of total income but pay 37% of all taxes. 

If that is not a fair share, then I need someone to explain to me what would be.  What share of the tax burden would one consider to be a "fair share"?

Isn't it time we stopped placing blame and pointing fingers at each other?  Instead of tearing each other down, can we just get back to finding a way to grow the economy rather than government?  After all, no one ever complains about a "fair share" when there is plenty to go around.

This is not Math; it's Class Warfare

President Obama has been woefully misinformed.  That is putting yesterday's speech in the best light.  Others, and I don't blame them for saying such, accept that the president is pushing an outright lie in order to aid his re-election.  I prefer to believe that Obama is not attempting to purposefully sabotage our nation, but it is becoming more difficult to do so.

In 2009, the president said that raising taxes during a recession would be bad.  Our economy is currently on the verge of another recession.  Apparently, someone needs to mention this to the president because yesterday, Obama proposed a $1.5 trillion tax increase.  If passed, that would be detrimental to a recovery by his own admission.

This year households earning more than $1 million will pay an average of 29.1% of their income in taxes.  Households earning $50,000 - $75,000 will pay 15% of their income in taxes.  The Associated Press fact check states,

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

Despite the obvious data, President Obama continued to argue that the wealthy shouldn't get a better deal on taxes than "ordinary families".  He added, "This is not class warfare, it’s math."  Maybe he needs to grab a calculator.

The Jobs Conundrum

All across America, the cry is, "We  need more jobs!".  But in truth, a better cry is, "We need more Jobs!".  Don't look at me like I'm messing with you.  I promise that what I just said will make sense in the end.

At one of the recent Republican primary debates, the question was asked how much out of every dollar that one earns do they deserve to keep.  I can't remember what the answer at the debate was, but the correct answer is this - a person deserves to keep every bit of what they earn*.  That such a question even needs to be asked is a testament to how far removed we are from our nation's founding.

(I will avoid the issue of church tithing as a matter affecting this issue.  As my Pastor likes to say, it's all His anyway, but he lets you keep 90%.  Even with the Almighty, he offers Free Will to allow us to make that choice.)

The problem with the question is that it confuses a level of taxation with the issue of who should the money belong to.  The idea that individuals deserve the entirety of what they earn has no implication on taxes anymore than what one might spend on electricity or gasoline.  Just as a person chooses how much of their "earnings" to allocate toward electricity or gasoline, they choose how much will be allocated toward taxation. 

Obviously, the manner we go about choosing how much to pay in taxes is different on a certain level.  As voters, we collectively determine the rates of taxation, whether property, sales, payroll or income taxes, we will choose to abide.  But even once rates are determined, we still have a tremendous amount of discretion in how much we will choose to pay.