Free Markets, Free People

fiscal cliff


Observations: The QandO Podcast for 06 Jan 13

The holiday hiatus is over! This week, Bruce, Michael, and Dale discuss the Fiscal Cliff, Debt, and gun control.

The direct link to the podcast can be found here.

Observations

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And now the “rich” will pay…

I hate to say “I told you so”, but it isn’t just the rich who will be paying increased taxes. And what should be clear to anyone with the I Q of a turnip, is that this will cost people their jobs.

The compromise called for taxes to rise to 39.6% from 35% on personal income above $400,000. In a 2011 study, the Treasury Department found that raising taxes on incomes over $500,000 would affect roughly 750,000 small businesses organized as S-Corps, partnerships and other small entities.

Of course, you remember the Democrats claiming that this wouldn’t affect small businesses. Well, that was a flat out lie. But then we live in an era of lies which, if there political apparently, we’re willing to overlook. While most of us are. I just had to be one of those who isn’t.   Not that Democrats are the only political liars, but they seem to be the most prolific and the most blatant. Especially when it comes to budget, deficit, and financial matters. They are the quintessential “snake oil” salesman.

And they have sold us are huge bottle of snake oil.

Couple these tax increases with the Obamacare taxes that kicked in on the 1st, and you have two reasons for 750,000 small businesses not to hire. And you can bet none of them will go over 50 employees, and some may even reduce staff to get under that number.

These are your “rich”. They happen to be the “rich” would generate jobs, or what have, if they hadn’t been hit by two new taxes this year.

Your government at work.

~McQ


“Fiscal cliff deal”: 41:1 tax increase to spending cuts. Great job! [update]

In case you’re looking for an “fiscal cliff” bottom line, here it is in one sentence.

According to the Congressional Budget Office, the last-minute fiscal cliff deal reached by congressional leaders and President Barack Obama cuts only $15 billion in spending while increasing tax revenues by $620 billion—a 41:1 ratio of tax increases to spending cuts.

If there’s any good news in this “compromise” bill, it is that the Democrats will get their tax on the rich, and it will make absolutely no difference in the debt.

As we’ve been saying for years, it’s not a revenue problem, it is a spending problem.

In  fact going over the fiscal cliff is not been avoided, the chasm has just been deepened. Or said another way, the can has been firmly kicked down the road.

The word of the day?

“Disgust”.

UPDATE: In case you were wondering what this means in nice round numbers in terms of debt:

The fiscal cliff deal approved by Congress will increase deficits over the next decade by close to $4 trillion, according to the Congressional Budget Office.

Like I said, in full sarcasm mode, “great job!”

~McQ


If we had just bought what the establishment GOP was selling, they would have thrown in undercoating for free

I don’t visit The Corner at National Review as often as I used to. Their pop-behind ads annoy me too much. But with good stuff from Jonah Goldberg, Mark Steyn, Andrew McCarthy, and a few others of that ilk, I still go by from time to time, despite the ads.

Almost as annoying as the ads are the Gentry GOP types who are constantly providing cover for establishment Republicans. Ramesh Ponnuru leads that crew. Ponnuru had a post yesterday, with a follow-on today, that both serve as a fine illustrations.

Both are about the intricate strategerizing (as another establishment Republican might put it) around the so-called fiscal cliff. I tried to understand what he was getting at. I really did. But it all just came out as complicated blather to promote some kind of go-along-get-along viewpoint. I never did understand his argument. I’m pretty sure that he wants the Republicans who blocked the last deal to get with the program and support the establishment cohort led by Boehner, but even after reading his posts through twice I still don’t get *why*.

He ends the first piece with this paragraph:

That some Republicans are willing to see higher taxes for the sake of anti-tax purity is topsy-turvy enough. Adding to the vertigo: The Republicans (inside and outside the House) who fret about blurring the party’s definition are the ones who are doing most to blur it. They are the ones who are, in most cases, accusing Republican leaders of seeking to raise taxes when they are actually trying to cut taxes as much as they think possible—cut them, that is, from the levels the law already has in place for 2013. They’re the ones who are accusing most House Republicans of  “caving” to the Democrats, even as some of them prefer that the Democrats get their way entirely. That’s where the convoluted politics of this moment have led us.

This word salad sounds like an old Dilbert cartoon to me. In it, Dilbert is asked to sign a document stating "Employee election to not rescind the opposite action of declining the reverse inclination to not discontinue employment with the company."

The Gentry GOP’s equivalent seems to be "Voting for the bill to raise taxes in order to not raise taxes while electing to stand firm on not doing anything on spending while ensuring the previous action of claiming to reduce spending." Or something like that. I’m not really sure.

On stuff like this, I am a firm believer in the Asimov principle. In an introduction to one of his books, he said (approximately) "When I read something I don’t understand, I don’t assume I’m stupid." There are plenty of reasons for something to be incomprehensible that don’t have anything to do with me:

- The author might not know what he’s talking about

- The author might be a very bad communicator, and so just can’t explain himself very well

- As in the Dilbert example, the author might be trying to obfuscate the issue

For the entire discussion over the fiscal cliff, from Democrats, the media, or establishment Republicans, I’m going with the last explanation. It’s pretty clear at this point that the whole thing simply does not matter that much in the long term. No proposal being taken seriously will do anything to alter our long term trajectory. So the entire episode is just for political maneuvering.

That’s the part Ponnuru doesn’t seem to get, or at least he doesn’t assign any real weight to it. He doesn’t understand why twenty or so Republicans just won’t go along with the gag.

I get it completely. They have the intuition that they are being gamed.

Analyzing the details doesn’t help, because those details are intentionally confusing, and leave entirely too much room for statists to make things come out the way they want later.

If you’ve ever been subjected to the car salesmen who insists that this wonderful deal he’s offering you won’t be good tomorrow, you know the dynamic here. Those in the GOP who won’t go along with the game sense that the ruling class is using the same technique, with the fiscal cliff deadline as the nominal justification.

In general, I’m sick of any argument by an establishment GOP type that it’s necessary to do X to avoid being blamed for Y. Much of this fiscal cliff discussion seems to be in that vein. I’m sick of it because it pre-supposes that there is a path where the GOP won’t be blamed for the bad things that happen. That’s ridiculous.


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


Taxes, Spending, and the Fate of the Republic

The direction the country is taking bothers me. Increasingly, I see little hope for a bright prosperous future. Frankly, things cannot continue going in the direction they’re heading without a disastrous result.

Mark Steyn wrote earlier this week:

Generally speaking, functioning societies make good-faith efforts to raise what they spend, subject to fluctuations in economic fortune: Government spending in Australia is 33.1 percent of GDP, and tax revenues are 27.1 percent. Likewise, government spending in Norway is 46.4 percent, and revenues are 41 percent – a shortfall but in the ballpark. Government spending in the United States is 42.2 percent, but revenues are 24 percent – the widest spending/taxing gulf in any major economy.

This is unsupportable, by any measure, and should be seen to be so by anyone with common sense, irrespective of political party, but apparently is not. And it’s important to recognize that the reason revenues are at a historically high 24% of GDP—the historical average is around 18%—is that GDP growth for the last 4 years has been atrociously bad, and well below the 3% historical trend rate of growth.

In a rational world, we would make a decision to settle on a continuum somewhere between cutting government spending to 24% of GDP, and raising taxes to 42.2% of GDP, which would necessarily imply massive tax increases on the middle and, yes, even the lower class.

At the moment, however, it is impossible to cut spending to 24% of GDP. Not just politically impossible, though that appears to be true also, but I mean impossible impossible. The reason it is impossible is that 24% of current GDP will not cover the cost of mandatory entitlement spending and service on the national debt. More than 62% of government spending is mandatory spending on essentially social security and Medicare. Another 6% is interest on the national debt, and it’s only that low because 1) the Fed has been buying massive amounts of US treasury bonds, and 2) interest rates are historically low.

In other words, 68% of the federal budget is taken up by entitlements and debt service, alone. We could eliminate the entirety of the rest of the federal government and, at current rates of taxation, would still run a deficit.

At the current rate of spending, we can expect to add over $12 trillion dollars in debt over the next decade. To combat this, the president has requested an additional 1.6 trillion in new revenue, which he expects to gain by increasing tax rates on only the upper class. Even assuming, arguendo, that such a taxation plan would actually result in that much additional revenue—which it likely would not—we would still add an additional $10 trillion in debt.

And that, of course, assumes interest rates would not rise from their current low levels. A rise to the historical rates of interest would increase debt service costs from $250 billion per year to $650 billion per year, or approximately 15% of the budget.

Neither Congress nor the President are proposing a serious plan to balance the budget, which would require a politically impossible mix of massive budget/entitlement cuts, and/or massive tax increases on the middle and lower classes.

Absent such a plan, we will inevitably default on our debt, or hyperinflate our way out of it, both of which are merely two sides of the same coin. In either case, the dollar will lose its status as the world’s reserve currency, and the life savings of every single person in the country—except, perhaps, those embodied in some classes of hard asset—will be rendered worthless. There will be massive unemployment, and a high possibility of civil strife. Imported goods will essentially be unobtainable, and I’m not just talking about BMWs and Land Rovers, but everyday things we never even think about, like fresh fruit from Chile in the winter, or clothes from Singapore and Taiwan at any time.

The least damaging course of action would be a massive reduction in government spending. A more damaging course would be a massive increase in taxation. The most damaging course would be to do nothing but nibble at the edges of spending and taxation until we default, either formally, or de facto through hyperinflation. So far, we are set on the third course.

We are set on a path to completely destroy the currency and economic life of the Republic, and we will inevitably do so without massive tax increases, massive spending cuts, or some mixture of the two.

Meanwhile, in Washington, DC, the Fiscal Cliff negotiations—by which I mean "farce"—continue. Personally, I’m a charter member of the Let It Burn club. The Democrats have set up a narrative in which, no matter what happens, Republicans will get the blame. And yet, 18 months ago, what we’re now calling the Fiscal Cliff was unilaterally hailed as a wise, bipartisan, and far-seeing compromise that would set the country on the road to financial rectitude. And quite frankly, the president is giving every indication that he wants to go over the Fiscal Cliff, and that he can weather the political and economic fallout from it.

OK. Then let’s test that theory.

This is not a risk-free strategy. As Ace of Spades points out:

The Walk Away/Let It Burn option is growing on people. One cautionary note, though: This will provoke a serious constitutional crisis and may undo the Republic. So a soft Let it Burn could turn into a genuine collapse of the Republic.

Obama is a tyrant. If Republicans do not lift the debt ceiling, it is perfectly obvious what he will do, as he’s argued for it before: Like Putin, he will begin unilaterally asserting power he doesn’t have.

And what will be the recourse? Court, I suppose. Impeachment, sure, but Democrats will block conviction. So whether or not the President can suddenly assert sweeping power over the purse — sweeping aside the last real check on his power granted to the House of Representatives — will depend on the vote of Justice Go Along to Get Along Roberts.

President Obama has already asked for it. It’s that one exception I mentioned before: He is asking for unilateral power to raise the debt ceiling and no president should ever have that power.

Our constitution is clear that the money bills must originate in the house. Equally clear is the principle of Congressional supremacy, in that Congress may pass laws even over a presidential veto.  The debt ceiling is clearly a Congressional, not a presidential prerogative.

Congress, of course, has already amended the Constitution’s strictures in practice. For instance, the Senate takes House bills, say, for building a dam, and strips the original language, then loads it up with budgetary items. The House accepts them in conference. Additionally, we have operated without a federal budget—though one is required annually by law—since 2009. This is a…constitutional novelty.

But giving unilateral budgetary power to the president goes far beyond novelty. In my view, granting this power to any president will mark the end of the Republic, just as surely as the creation of the First Triumvirate marked the death knell of the Roman Republic.

The American people elected President Obama. It is only right that they should reap the full measure of the consequences of that decision. Ace is right. Going over the Fiscal Cliff may undo the Republic. But if that is true, then I’m entirely unconvinced that the Republic should be saved.

~
Dale Franks
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Fiscal cliff: Politicians play “chicken” with your lives and livelyhood

Because we’re served by the worst political class ever:

President Obama’slead negotiator in the “fiscal cliff” talks said the administration is “absolutely” willing to allow the package of deep automatic spending cuts and across-the-board tax hikes to take effect Jan. 1, unless Republicans drop their opposition to higher income tax rates on the wealthy.

Treasury Secretary Timothy Geithner said in an interview with CNBC that both sides are “making a little bit of progress” toward a deal to avert the “cliff” but remain stuck on Obama’s desired rate increase for the top U.S. income-earners.

“There’s no prospect for an agreement that doesn’t involve those rates going up on the top two percent of the wealthiest,” Geithner said.

Apparently there is no way to raise the desired revenue, at least according to Obama/Geithner, that “doesn’t involve those rates going up on the top 2%”.  No way.

Oh, wait …

What we said was give us $1.2 trillion in additional revenues, which could be accomplished without hiking taxes — tax rates, but could simply be accomplished by eliminating loopholes, eliminating some deductions and engaging in a tax reform process that could have lowered rates generally while broadening the base.

Say, wasn’t that President Obama in July of 2011 at a press conference?  Why yes it was.  So there is a way, but he and apparently his “negotiator” refuse to pursue it (btw, no I”m not fooled by the illusion that this isn’t just as much a tax hike as what they’re proposing)?  It that what is happening?

Why yes, yes it is.  So there is another way to do this, apparently.  Unless our President was telling a tall one about what he’d be willing to do in July?  Yeah, I know, perish the thought.  Lie to us?  Unthinkable.

Instead according to Turbo Tax Timmy, they’d “absolutely” take us over the cliff, because, you know, raising taxes on the “rich” is now the only acceptable position.  You and your life?  You’re a mere pawn for these poppinjays.  They’re fine with playing with your life and livelihood to score a political win.   They have no problem holding your life and property ransom and using your future to force their desired resolution.  But if we go over the cliff, screw you.

Meanwhile, in the House, Speaker Boehner continues to look for a comfortable place to lie down and surrender.

In the Senate the GOP actually tried to bring the President’s proposal to a vote and Majority Leader Reid denied it.  Because it was, per Reid, a “stunt”.

This is all a “stunt”.    A miserable stunt perpetrated by a miserable group of people who have no concept of leadership or service to their country but are long on ego and party.

It is the price of always voting for the “lesser of two evils”.

Screw ‘em.

~McQ


Observations: The QandO Podcast for 02 Dec 12

This week, Bruce, Michael, and Dale discuss the Fiscal Cliff.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


“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


If tax revenue is up 19% since 2009, tell me again why taxes need to go up?

Rob Port throws up a couple of graphs that show that, as most of us have been saying for quite some time, it’s not a revenue issue causing the Federal Government’s deficit problem – it’s a spending issue.

Per Port, since 2009, tax revenues are up 19%.

So how does one get the message across to government that it must live within it’s means if it gets a tax increase without spending cuts?

You don’t.   You just encourage it to push for more.  Already “millionaires” are defined as those making $250,000 a year.

But let’s make excuses for the GOP’s capitulation, shall we (the hapless GOP, which will get blamed if we go over the fiscal cliff or if we avoid it and everything crashes anyway)?

Apparently the new conventional wisdom, “spend till your wallet bleeds and then break out the credit cards” has repealed the laws of economics once again.  Ask Paul Krugman if you don’t believe it.

~McQ

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