Free Markets, Free People

spending


US average marginal effective tax rate about 40%?

So tell me again why the government can’t seem to get along with what it already gets?

Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

And yet the prevailing political attitude seems to be that of France’s “leadership”, i.e. government, has first claim on all your earnings and if you protest you’re “greedy”.

Who’s greedy?

Speaking of France, California seems bound to duplicate its latest tax scheme:

Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.

Yet they wonder why people are fleeing the state.

Impact and implications?

Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.

Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.

Yet we continue to try to recreate Europe’s debacle here.

The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.

If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.

These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.

But your political and financial lords and masters know best, don’t they?  Just ask them.  They continue down this road despite the fact the destination is in plain sight in Europe and it isn’t pretty.

Occam’s Razor states “entities should not be multiplied unnecessarily.” Said another way, the simplest explanation is usually the most likely explanation. In this case the simplest explanation is incompetence.  But is it really incompetence?  With the European example staring them right in the face it’s hard to believe anyone is that incompetent.  The conclusion to their policies have already been proven to be a disaster.

So one has to being to consider other possibilities when those who are pushing the policies seem oblivious to the obvious.

You have to begin to wonder if it is a problem of hubris.  I.e. “the only reason it hasn’t worked before is we weren’t in charge”.  We’ve seen that in any number of instances throughout history where discredited or obviously illogical ideological ideas were tried and they again failed.

Or you have to consider the words “by design”.  But then you’re stuck with trying to come up with a valid reason “why”.  Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.

But here we are.

Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.

And yet, we see a government bent on erecting even more impediments via increased taxation, costly new laws and onerous regulation.

Isn’t it about time we demanded to know “why?”  More importantly, maybe we should ask whose side they’re on.

~McQ


“Fiscal Cliff” negotiations with Democrats? Gimme the usual please …

When is the GOP (and the public) going to learn?

How many times have we heard that the only thing standing in the way of a grand bargain to reduce our growing national debt is Republican intransigence on taxes? If Republicans would only agree to dump Grover Norquist, Democrats will agree to cut spending and reform entitlements. Then, we can all join hands and sing Kumbaya as we usher in a new era of compromise and fiscal responsibility.

Except that now that Republicans have agreed to raise taxes, er, revenue, as part of an agreement to avoid the looming fiscal cliff, liberals appear to have decided that there really isn’t a need to cut spending after all.

Yup, in fact they’ve taken entitlement reform “off the table”.

Senate Democratic leaders signaled Tuesday they would not agree to any entitlement reforms before the end of the year that cut spending on Medicare and Medicaid beneficiaries.

They also said that any year-end deal to avoid the expiration of tax cuts and implementation of spending cuts — known as the fiscal cliff — must include a provision to raise the debt ceiling, which would otherwise have to be addressed early next year.

The White House and Reid have indicated they will not consider cuts to Social Security, a notable change from 2011, when President Obama said “everything is on the table,” including entitlement programs dear to his party’s base.

In other words, we’re back to “tax the rich”, raise the debt ceiling and spend, spend spend.  Meanwhile, it is left up to the GOP to “compromise” by breaking the tax pledge (led by the Judas goats, Saxby Chambliss and Lindsey Graham) or be forever branded as the intransigent “bad guys” in this.

Meanwhile, low information Americans who, by over 60% approve of taxing the rich, will buy the spin by the press painting the GOP as the cause/reason for the calamity while Democrats “lament” the problem (“but, hey, that’s now the law thanks to Republicans”) and gleefully rub their hands in delight at all the new revenue they’ll have to “redistribute”.

Some things never change, do they?

~McQ


Entitlements: The Siren’s song

The cultural corruption of entitlements should, by now, be well known. But it also is just as well known that our current system incentivizes the “Santa Claus” form of government vs. that of the night watchman. The end state is inevitable. It isn’t a matter of “if” but “when”.

“The more government takes in taxes, the less incentive people have to work. What coal miner or assembly-line worker jumps at the offer of overtime when he knows Uncle Sam is going to take sixty percent or more of his extra pay? Any system that penalizes success and accomplishment is wrong. Any system that discourages work, discourages productivity, discourages economic progress, is wrong.” – Ronald Reagan

You’d think that would be self-evident. Apparently it’s not. And if you doubt that, watch what happens next year as our “leaders” try to figure out how to get us to pay their way out of the mess they’ve made (and for which we’ve never, ever held them accountable).

~McQ


Why the Right Should Embrace “Fairness” in Entitlement Reform

This is a departure from my previous two posts; it’s not about a particular group that has pulled away from the GOP.  Romney pulled a slightly larger share of older voters than McCain did, even if fewer total turned out than in previous years.  That the Romney-Ryan ticket did this while proposing entitlement reform is a substantial feat, but it did involve watering down the reforms a great deal.  For example, Republicans now make a habit of promising that nobody under age 55 will be affected by their reforms.

Why make this concession when the lion’s share of the fiscal problem is current retirees and the many, many Baby Boomers who will retire soon?  Boomers vote, of course, but what motivates them?  I don’t think most seniors could bring themselves to act on straightforward greed; I think they’re voting based on a particular concept of fairness.

Specifically, they paid into the system over a long career, and they believe they should be able to get back what they paid in.  And even though current Medicare beneficiaries get two to six times as much in benefits as they paid in (if this is right), only about a third of Americans think Medicare beneficiaries get any more than they paid in.  As long as they think that way, they’ll continue to oppose means testing and raising the retirement age by wide margins.

You might be tempted to say that our task is to educate them, but it’s much easier to persuade people based on their current beliefs than to convince them of inconvenient facts first.  Republicans basically conceded that cutting benefits to older voters at all would be unfair, and pushed complicated plans that few people aside from Paul Ryan can competently defend.

But we might be even bolder if we just hugged that core fairness principle tighter.

September’s Reason-Rupe poll (PDF – fixed link) asked Americans if they’d support cuts to their own Medicare benefits “if you were guaranteed to receive benefits at least equal to the amount of money that you and your employer contribute into the system.”  It was a blowout: 68% yes, 25% no.  Three quarters of Tea Partiers said yes.

At a stroke, you could slash Medicare in half with a reform based on that principle.  (Their August 2011 poll suggested similar support for applying the principle to Social Security, but the cuts would be much more modest.)

Centering a reform on that principle achieves steeper cuts and seems easier to defend than what Paul Ryan is trying.  Because if Democrats fought us on it, they’d have to make the wildly unpopular case for entitlements as redistribution programs rather than as “insurance” or “savings.”

The kind of coalition the Right needs for sustainable entitlement reform has to include people who highly value fairness (or, as Jonathan Haidt would call it, proportionality).  If we want the project of liberty to be successful, we have to pluck on other heartstrings.


Charts from hell (for Obama)

It’s worse than you thought and, of course, worse than they projected.  Here’s the updated deficit spending chart:

Check out the gray “actual” numbers for the last two years.  There is nothing trending down.  Reminds one of the promises about unemployment and the “stimulus”, doesn’t it?

As for your part, well, nothing unexpected there – you’re and your kids and their kids are on the hook for a lot more than projected as well:

Yup, let’s give him 4 more years, shall we?  I’m sure his administration could change the direction of this chart as well.  We could “unexpectedly” owe $40,000 each by the time that term finished up.

Obviously it must be me, because I cannot figure out why anyone would contemplate giving such an abject failure another 4 yearshot at making their lives even worse.  It’s time for a little accountability.

Seriously – I believe in second chances, however I don’t believe everyone deserves one.  Barack Obama is one of those who doesn’t deserve a second chance.

~McQ
Twitter: @McQandO
Facebook: QandO


When the beast starves

I tend to be more optimistic than Dale about the near-to-intermediate future for the economy and for the culture. This may be unusual for a libertarian, but I’m heartened by many of the ways in which our opponents’ system is unsustainable.

Let me start by saying that, given a certain size of central government, libertarians could do worse than spending almost two-thirds of the budget on a few wealth transfer programs (Social Security and Medicare, both mostly funded by flat taxes, plus Medicaid, which gets much of its funding from the states) and a military like ours.  Imagine if that money was spent employing domestic police and busybodies.

But even that government is fiscally unsustainable, so we expect our government to eventually be forced to give up some of its “responsibilities.”  Assuming the country avoids a sovereign debt crisis, that adjustment might not be so bad for libertarians. Continue reading


Taxes, energy, health care and spending–what we should be talking about

Pete DuPont does a little analysis of what should be major issues in the upcoming  election.  They don’t bode well for the current administration if, in fact, Republicans can get the media to actually pay attention and address them:

Taxes. Big tax hikes coming in January will serve as dampers on economic growth.ObamaCare imposes a new 3.8% tax on investment income. On top of that, if the Bush tax [rates] aren’t extended, the top income tax rates will rise to 23.8% from 15% on capital gains and to 43.4% from 15% on dividends.

But beyond the economic impact, the Obama administration’s focus on class warfare fuels the nation’s dissatisfaction and plays on an unwise resentment towards successful businesspeople. Mr. Obama continues to push for higher taxes and does so in a way that is an attack on those who are successful–demanding that higher-income taxpayers pay their "fair share," when they already pay more than that.

The economic impact shouldn’t be waved off.  When and if both capital gains and dividend incomes are taxed at a higher rate, they will effect both investment and retirement incomes.  Don’t forget those” rich folks” whose retirement income is structured to depend on dividends from blue chip stocks they’ve methodically bought in small quantities over their working years.  It obviously doesn’t matter that their incomes really don’t reach the “rich” threshold that the Democrats want you to envy, their retirement incomes will take an almost 200% tax increase hit regardless if the current rates aren’t extended.  Apparently to collect less than a trillion dollars over 10 years taxing the “rich” (so they’ll pay their “fair share”) vs. spending $46 trillion Democrats are happy to sacrifice those folks.

As for investments, there’ll be a recalculation given the increase on capital gains and it will dampen investments, thus business expansion and finally job growth.

Energy. The American people hear Mr. Obama talk about a broad energy strategy, but they see an administration that has attacked the coal industry with onerous regulations, done little or nothing to assist the natural gas boom, done what it can to slow down oil production, and wasted money on other initiatives that please green supporters but don’t lower the cost of energy.

This administration’s energy policy is a joke, but unfortunately it’s a very expensive joke.  Its priorities are completely backward, but purposefully so.  To call what they are doing a “policy” is simply absurd.  This is agenda fulfillment with the people’s money on pie-in-the-sky projects that have yet to yield (nor do they even promise to yield) the energy required to make them viable.  Meanwhile they’ve done everything humanly possible to retard the fossil fuel industry’s growth at a critical time for our economy.  On the issue of energy, this administration gets an F-.

Health care. Although ObamaCare remains unpopular, the Supreme Court ruling upholding it means that a 17% transfer of our economy from the marketplace to the control of the federal government is coming unless Congress and a President Romney can stop it. At a time when our nation needs lower taxes and more flexibility in health-care decisions, ObamaCare has increased taxes by hundreds of billions of dollars and allowed government to regulate most of our health care decisions.

The secretary of health and human services can now set rules that constrain doctors and hospitals and mandate prices. Mr. Obama once promised us all that if you were happy with your current health plan, you’d be able to keep it. The more we learn about ObamaCare, the unlikelier that looks–and the more the government will intrude in the relationship between doctor and patient.

Despite the disapproval of a majority of Americans, Democrats and this President rammed the legislation through anyway.  That should tell most Americans what they really think of their opinion.  It is a classic “we know what’s best for you” elitist move.

The second paragraph gives a hint though to the powers this legislation has given an unaccountable government bureaucrat.  The Secretary of HHS now has tremendous power to make unilateral decisions that will effect everyone’s health care.  Of course, that’s been discussed by some on the right, but for the most part the level of intrusion these powers will confer won’t really begin to be felt until, conveniently, after the election.

Finally:

Spending. Federal expenditures under Mr. Obama is both unparalleled and unsustainable. As National Review’s Jonah Goldberg notes, from the end of World War II until the end of the George W. Bush administration, federal spending never exceeded 23.5% of GDP, and the Bush years’ average was around 20%. The Obama spending rates have stayed above 23.5% in every year of his presidency. In the past four years, America has added $5 trillion in federal debt, and around $4 trillion of that was from Obama policies, according to The Wall Street Journal. Federal debt held by the public was 40.5% of gross domestic product in 2008. It’s now 74.2% and rising.

Despite the attempts by Democrats using fudged numbers and trying to spin it so Bush gets the blame, the spending by this administration is, as DuPont points out, “both unparalleled and unsustainable”.   And, don’t forget, the President hasn’t signed a budget in over 1,000 days because the Democratic Senate has refused to pass one, despite the Constitutional requirement it do so. 

Those are the things we ought to be talking about.  Not whether or not Romney pissed off the Palestinians (who doesn’t piss off the Palestinians when they take a principled stand on Israel?  How is this even news?).

These are where Obama’s skeleton’s are to be found.  He’d prefer to keep this closet door firmly closed.  The media, for the most part, seems content to help in that endeavor.

This election isn’t about anything but his administration’s abysmal record.  Spending time talking anything else is simply a distraction.  Unfortunately, given its unprecedented level of economic intrusion, we’re going to live or die economically with the policies that government applies.  Talking about whether a candidate may or may not have insulted the London Olympics isn’t going to change that fact one iota.  But it sure does distract from examining the previous administration’s record, doesn’t it?

~McQ

Twitter: @McQandO


Obama tries to use the middle class to spin increasing taxes on the “wealthy”

Oh, my … the White House is on the offensive trying to save the middle class, or something:

The White House has launched a new offensive in its fight with congressional Republicans over taxes, arguing 114 million middle-class families will see their taxes rise without action by Congress.

A report from President Obama’s National Economic Council released Monday contends the families would see their taxes rise by an average of $1,600 if the George W. Bush-era tax cuts expire as scheduled at the end of the year.

A) they’re not tax cuts, they’ve been the tax rate for years.

B) Republicans have already made an offer.  They said they are willing to extend the rates for all so it is obviously not a tax increase the middle class must suffer.

Of course, that’s where the rub is, because the Democratic Senate and the White House want to raise taxes on a certain level of income earner.  They’ve staked their class warfare gig on it.

Because, you see, they’re trying to convince everyone that’s only “fair” and to further imply it will solve the insolvency problem.  Well they’re wrong, as usual, on both counts.

Here, take a look at this.  Even those who don’t count economics as their strong suit should be able to figure out what this means:

Bush-Tax-Cuts-Extension-Chart-580

That’s right, the problem isn’t revenue.  The problem has nothing to do with high income earners and their “fair share”.  It has to do with out of control spending which has accelerated dramatically under this president.  And, oh by the way, the increase in taxes on the wealthy would be a mere drop in the bucket of red ink Obama has charted out for the next 10 years.

So while he whines about a $1,600 tax per family if no action is taken, ask him what he’s adding in debt per family with a 10 year plan to spend $46.9 trillion dollars we don’t have, okay?

~McQ

Twitter: @McQandO


5th year of $1 trillion plus government debt

How will this be spun?

By the end of the third quarter of fiscal 2012, the new debt accumulated in this fiscal year by the federal government had already exceeded $1 trillion, making this fiscal year the fifth straight in which the federal government has increased its debt by more than a trillion dollars, according to official debt numbers published by the U.S. Treasury.

Prior to fiscal 2008, the federal government had never increased its debt by as much as $1 trillion in a single fiscal year. From fiscal 2008 onward, however, the federal government has increased its debt by at least $1 trillion each and every fiscal year.

Bu … bu … but he has spent less money and created less debt than any president since Eisenhower. 

Right?

Forward.

~McQ

Twitter: @McQandO


Spinning Obama’s record

E. J. Dionne, naturally, makes an effort today in the WaPo to do exactly that.  Speaking of Obama and Democrats in Ohio and Colorado, he talks indirectly about the auto bailout:

None of this surprises Sen. Brown, a proud pro-union liberal who campaigned with Obama in Ohio last week. Brown notes that Obama has gained ground in his state both by being tough in enforcing trade rules on behalf of American companies and by pursuing a “high-end manufacturing strategy” that appeals to the nation’s “historical pride in manufacturing, and in making things.”

For Brown, who faces reelection this year, one of the voters he keeps in mind is the “guy in Zanesville who made big things with his hands and now has gone from $17 an hour to $11 an hour.”

The candidate who speaks to voters like Brown’s Zanesville worker — and to his white-collar equivalent in Colorado — is likely to win the election. Mitt Romney hopes the national unemployment rate will get them to vote Republican. Obama’s challenge is to offer an economics of national pride and renewal that answers the sense of betrayal these voters began feeling long before he took office.

That outlines some of the problem the Obama record has.  Of course, unspoken here is the auto bailout and how that effected workers.  The implication is the bailout was a net positive.  Of course Obama, et al, think that workers will reward him for that move.

But the entire record of the auto bailout on the left has been one of spin.  And most of that spin has been about as disingenuous as one can imagine.   Even Dionne creeps around it by mentioning that the workers took a haircut in average salary (well, at least for new workers).

However, the assumption is that’s the worst that happened (hey, at least they still have a job) and workers will be grateful.  Or, business as usual, a politician used taxpayer money and debt to buy votes, you have a problem with that?

Well yes, I do.

In fact, the auto bailout is a case study in crony capitalism.  It is a situation where government interfered and overruled normal bankruptcy procedures, reorganized the payback priorities so debt holders were stiffed, bought up the majority of the stock in the new company (GM) and handed much of the control to a favored constituency (labor).

Then they told an absolute lie (GM has paid back its debt) and have consistently pretended that all is well with the company when it is not.  This is the real result of the bailout:

General Motors (GM) shares fell to a fresh 2012 closing low of 19.57 on Monday. The stock hit 19 in mid-December, the lowest since the auto giant came public at $33 in November 2010 following its June 2009 bankruptcy.

Normally you might say, tough luck investors. But this is Government Motors. The Treasury still owns 26.5% of GM, or 500 million shares. Taxpayers are still out $26.4 billion in direct aid. Shares would have to hit $53 for the government to break even.

Those shares were worth about $9.8 billion as of Monday. That would leave taxpayers with a loss of $16.6 billion.

But that’s not the full tally. Obama let GM keep $45 billion in past losses to offset future profits. Those are usually wiped out or slashed, along with debts, in bankruptcy. But the administration essentially gifted $45 billion in write-offs (book value $18 billion) to GM. So when GM earned a $7.6 billion profit in 2011 (more on that below), it paid no taxes.

Include that $18 billion gift, and taxpayers’ true loss climbs to nearly $35 billion.

So that’s ground truth on where GM stands today.  But that’s not helpful to Obama, is it?  So how can Obama and company make this picture seem a little brighter?  Well good old crony capitalism, that’s how.  We have the end of the 2nd quarter nearing and it is critical to the  spin of how well GM is doing to see good 2nd quarter results, no?

The upcoming earnings announcement by GM is, politically, the most important to date. The pressure is on Government Motors to appear financially strong as this may be the last earnings report before November elections and sets the stage for how "successful" GM is.

Well guess who is buying GM vehicles in huge quantities (HT: Steve)?

We now learn that government purchases of GM vehicles rose a whopping 79% in June.

The discovery of the pick-up in government fleet purchases at the taxpayers’ expense comes just weeks before GM announces its second quarter earnings. Overall fleet sales (which are typically less profitable than retail sales) at Government Motors rose a full 36% for the month, helping to drive decent sales improvements year over year.

Wow.  What a surprise.  Add a few accounting gimmicks:

One of GM’s past tricks to help fudge earnings numbers has been to stuff truck inventory channels. Old habits die hard at GM. According to a Bloomberg report, "GM said inventory of its full-size pickups, which will be refreshed next year, climbed to 238,194 at the end of June, a 135 days supply, up from 116 days at the end of May." 135 days supply is huge, the accepted norm is a 60 day supply. The trick here is that GM records revenue when vehicles go into dealership inventories, not when actually sold to consumers.

And you’re likely to see a “good” earnings report even when the stock is at an all time low, inventories are huge and crony capitalism instead of real sales is the means of spinning the news in a positive direction.

Remember that when you hear the GM “success story”.

Forward.

~McQ

Twitter: @McQandO