What is the purpose of income taxes?

Let's look at the options:

1. Raise revenue
2. Reduce the disparity of income
3. Social engineering (targeted taxes and subsidies)
4. Limit the power of the rich
5. Reward political supporters
6. Punish political opponents

Which ones do you think are currently being used?

Which ones do you think are legitimate use of the tax code?

Each purpose supports a very different income tax rate and special provisions.

The current income tax is used for ALL the above. As a result it is complex and its many missions are in conflict.

If you believe that the purpose is to raise revenue, then you want a growing economy that broadens the tax base. You will want a tax rate that balances a growing economy with maximizing revenues. It is my guess that this tax rate is around a flat 10%. Could be a bit higher, could be a bit lower. But a low flat rate would spur investments and jobs and set the stage for a long term growing economy that would maximize revenues.

It is also my guess that even the poorest segment of our society would have improved lives. However, the disparity between the productive wealthy and the poor would also widen.

If the goal is to reduce the disparity of income, you will want a sharply progressive tax. This will reduce investment and job creation. It will reduce the tax base. There will be fewer rich people for sure. Perhaps it may make a statistical difference in the gap between the rich and poor.

If you believe that the purpose of the tax code is social engineering, (i.e. tax breaks for green energy) then you can reward the industries and companies you like (yes the current tax code describes breaks for companies where only one company is eligible) and punish companies you don't like (investment banks).

If you are afraid that "unfettered" capitalism will move the locus of power to uncaring business interests, then taking their money and moving it to the public sector will move the capitalists from serving their customers to serving Washington. In the last year, we have seen a sharp growth in CEO activity in Washington and growth of lobbying.

And of course, politicians always have and always will reward and punish us citizens to keep us voting for them.

Just keep in mind, if you believe the tax code is for anything but number 1, raising revenue, then you are reducing the power of the economy, moving power to Washington and creating an unfair and uncertain playing field for entrepreneurs, investors and businesses.

Your choice.

The Truth About the Deficit is Half Right

"The Truth About the Deficit" NY Times February 6, 2010

I just looked at a chart of total income tax revenues. And what a surprise! Income tax revenues went UP, not down.

http://www.usgovernmentrevenue.com/

Not only that, but after a lag, (as you would expect) the economy grew.

Entitlements are going to dwarf the GDP of the planet. If we look at the unfunded liabilities and off balance sheet obligations on every level of government, from cities to municipalities, to counties, states and the federal government...the amount of the obligations are going to dwarf our economy. And there "ain't" any reserves anywhere.

Its not taxes, it is

Raising taxes does little to raise revenue. What raises revenue is economic growth and a larger tax base. Raising taxes, reduces economic growth.

Do this thought experiment. Imagine that the federal government raised the income tax rate for everyone to 100%. That's right. Took every penny from everyone. Period. What would happen to economic growth? It would stop. The market would go in a free fall, all investments would stop. Now imagine that it reduced the taxes to 90%. Well...we might see some economic activity...and keep imagining they bring the rates down to say 10%.

At what point will we have the most economic growth? You make your guess. Mine is about the 10% number. AND, the bonus is that the total income tax REVENUE would be at it highest at this rate.

Capital gains tax revenues, for example doubled following the 2003 tax cuts.

The deficits didn't come from decreased revenues, (which dropped 2001-2004) and then exploded in 2005-2008, but from increased spending.

Year GDP-US Income Taxes %GDP
2000 9749.1 $1,211.75 12%
2001 10286.2 $1,145.41 11%
2002 10398.4 $1,006.39 10%
2003 11142.1 $925.48 8%
2004 11867.8 $998.33 8%
2005 12638.4 $1,205.50 10%
2006 13090.8 $1,397.83 11%
2007 13715.7 $1,533.71 11%
2008 14441.4 $1,450.10 10%


The Times editorial states, "The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse."

Let's correct that to read, "spending without ECONOMIC GROWTH...."

Its not about tax rates, it is about economic growth. You can't tax you way to revenues. Growth is achieved with productivity. The person who can spend their own money most productively is YOU.

Cut taxes, watch the economy grow and increase revenues. And most importantly, the entitlements will have to be cut. They are sustainable. If we tax our way into a depression, and then cut entitlements we will have a revolution. Not good.

The process will be painful enough...let's make it happen during the sunny days of economic expansion.

in reference to:

"The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse."
- Editorial - The Truth About the Deficit - NYTimes.com (view on Google Sidewiki)

A Sustainable Economy

We understand the concept of a sustainable environment.

Wikipedia defines Sustainability as "...the capacity to endure. In ecology the word describes how biological systems remain diverse and productive over time. For humans it is the potential for long-term maintenance of well being, which in turn depends on the well being of the natural world and the responsible use of natural resources.

We can use this same concept to define economic sustainability in terms of jobs.

What jobs have the capacity to endure? In the environment, a predator that eats all of its prey will die. A logging firm that clear cuts a forest will run out of timber (plus destroy other ecosystems). Jobs need to have the capacity to endure and add value to the economic ecosystems. This means that when I create a product or service it adds MORE value to your life than the money you give me for it. The money that you gave me came from a job where you created more value for someone else. This is an amazing process. Everyone is adding value to everyone else.

A sustainable job can be defined as work that produces goods or services that add more value to the customer than it extracts from the economy.

OK, the government wants to create more jobs. How does it do this? A jobs program? A program requires funding. So first, it must either tax and remove money from the economy or borrow it and remove capital from the economy. Both of these activities destroy jobs. (Well the third option is to print money, and destroy jobs in the future.)

Now, we have destroyed jobs to create jobs. Jobs in the private sector must add value or they go out of business. Jobs in the public sector have no such feedback loop. They can keep taking resources out of the economic ecosystem and give nothing back.

The other idea is to create public service jobs. This is like importing non-native plants. They can soon overwhelm an ecosystem and destroy it because the natural feedback loops in a local economy can't destroy them. They soon develop a constituency in Washington that lobbies for additional resources and funds. These jobs do not need to add value to your life or my life because they are funded with taxpayer dollars with the taxpayer having no control over how they are spent.

The other way to have a jobs program is to give tax breaks to businesses. Now, this leaves more capital in the economy and can create jobs. Good idea! However, the plan is to "target" certain businesses and jobs. The problem here is that these targets may or may not match the shifting preferences of the the American people. A good idea, but let's extend it.

What if we were to cut taxes on ALL business activity?

Public service jobs and jobs programs increase taxes and reduce the sustainable jobs that add value to our lives.

I would like to see a healthy sustainable economic ecosystem. A jobs bill will destroy sustainability. Reduced government spending, borrowing, taxing and targeting will allow sustainable jobs to grow that have to meet your needs.
in reference to:

"But right now there is no way to sustain a recovery unless millions of jobs are created soon — and the private sector alone cannot do that."
- Editorial - No Jobs, No Recovery - NYTimes.com (view on Google Sidewiki)

Spend Less by Spending More

"March of the Peacocks" by Paul Krugman - NY Times January 28, 2010

I am soooo confused. The problem with the deficit is that we are spending not enough stimulus money to create more jobs and that we haven't expanded health care to save money.

I have mentioned before, and will say it again, the government cannot create sustainable jobs. It can only transfer money from one group to another.

A job is when I add value to your life directly or through my employer. YOU have to be the one that determines if I am adding value to your life by the purchases and choices that you make.

A government created job does not have this feedback because you have no choice to pay your money to the government...and what they choose to subsidize may or may not be of value to you.

If it isn't of value, it is only sustained through the force of taxation.

And...no government program has ever, EVER, saved money. It just creates new entitlements.

So, Paul...explain this to me...we need to reduce the deficit by spending more?

in reference to: Op-Ed Columnist - March of the Peacocks - NYTimes.com (view on Google Sidewiki)

President Obama....you ARE the President!

In his state of the Union speech yesterday, President Obama said, “Washington has been telling us to wait for decades...”

This struck me as just plain weird. For all my disagreements with the President's policies, I do want him to be PRESIDENT. This means a confident man dealing with REALITY.

President Obama, you ARE the President. You not only ARE Washington, you are THE President. Take the role. Which means you have to deal with reality.

In a speech at Lorain County Community College on January 23rd, the President said he was....

"...not going to stop fighting for (fill in the blank)" thirteen times. He sounds like a community activist standing outside the gates of the statehouse trying to pump up 15 supporters. Its like he is unable to grow past his community organizer roots.

You ARE Washington...you are the PRESIDENT... grow a pair and grow up.

Incredible Idea!

"A Payroll Tax Break for Jobs" NY Times January 25, 2010 by Charles Schumer and Orrin Hatch.

Are they actually suggesting that the payroll tax inhibits employment? That reducing the tax will encourage employment?

Wow, this is powerful stuff. Let's extend the power of this idea.

What if we were to eliminate other taxes? Now imagine, what if we eliminated the capital gains and dividend taxes completely. Additionally, what if we dropped the income tax to a flat rate of 10% for incomes over $40,000 a year?

If this surprise announcement were to happen tomorrow what do you think would happen to the stock market in one day? What do you think would happen corporate planning? What would happen with venture capital? What would happen to new business start-ups? What would happen to the value of the dollar? Where would international money flow? How much capital would be released into growing businesses?

Orrin, Chuckie...I never thought I would say anything like this, but I love you guys. You are really on to something here...just keep the ball rolling and expand the concept. (Oh, sit down with the president and explain this idea...he still thinks that raising taxes will spur job growth.)

in reference to: Op-Ed Contributors - A Payroll Tax Break for Jobs - NYTimes.com (view on Google Sidewiki)

Should changes in politics change investing strategies?

What if you were to chart how much time you spend thinking and or talking about politics over the last 20 years. (OK, this is a question just for baby boomers. The rest of you can relax and enjoy the ride.)

The reason I ask is because I have caught myself thinking more and more about political issues. It used to be that political news was very limited to the evening news shows on the major channels with occasional special features. Now you can watch politics almost continually. The amount of politics watched on television may be a sufficient proxy for how much time is captured by politics in our mind.

If I were to chart how much I think about politics in the last 20 years, I would guess is that the time has increase by multiple times. Of course it is impossible to know for sure, but this seems right.

I now ask the question why?

Because in our personal lives, we have moved from researching the best health care alternatives to worrying about the decisions the government will make that may radically change how our health care is administered. And, rightly so, that concerns us. So we spend more time thinking and talking about politics of health care.

But what about our investing strategies? Should the increases in government debt, ownership of private industry, changing regulations of the financial industry, demonization of Wall Street change how we invest?

Will price patterns continue as they have been? Will large amounts of cash wash in and out of the market driven by changes in the Feds interest rates? Has fear replaced PE ratios? Are the wheels coming off of the cart or has the pendulum swung so far and we are coming back to historical patterns of investor behaviors?

I assert that increasing federal power over the markets and companies will be matched by increasing volatility of optimism and fear in the market place. As the source for producing value shifts from millions of individuals and companies who create employment to the federal government (who is taking responsibility for creating jobs) the market place will move in response to the trillion dollar gorilla. Industries can be created and destroyed, tax changes can shift billions of investing dollars, regulations can hobble growth and subsidies can create wealth that isn’t sustainable.

Whew…

I am staying optimistic and looking for opportunities created by our changing governmental responsibilities. So start thinking…what if…and then think, what are the consequences…what are the unintended consequences…and who benefits?

Blame it on the overgrown banks....

"Restarting Financial Reform" NY Times January 24, 2001.

Let me get this straight...our financial problems were caused by banks. Were these the same banks that were given billions in bailouts? Are these the same banks that gave the top donations to the Obama campaign? Are these the same banks that have their executives in the Obama administration?

"...an overgrown banking sector diverts resources from more productive uses and, in the process, amasses riches at the expense of everyone else. The entire country can see the evidence of that in stagnating wages, disappearing retirement savings, vanishing home equity and taxpayer-supported bonuses.

If you replace the word "banker" with "government" this paragraph now makes a lot of sense.

Remember, at the epicenter of the financial meltdown was the Fannie and Freddie institutions that were an extension of the federal government. Talk about being overgrown!

The banking industry is the most regulated industry in the United States. And the regulators failed.

One of the reasons the banking sector is overgrown is the implicit and explicit guarantees by the Federal Government. What if there were no deposit insurance? Or it was applied only to local banks? All of a sudden, we as depositors would be a lot more careful about where we parked our money. And I'll bet that the average investor would be a lot more smarter about this then the regulators.

With their anti-banking rhetoric, the administration should have let the banks fail.

Capitalism only works when it is disciplined by reality. The feds have removed that discipline years ago. And now the NY Times complains.

in reference to:

"an overgrown banking sector diverts resources from more productive uses and, in the process, amasses riches at the expense of everyone else. The entire country can see the evidence of that in stagnating wages, disappearing retirement savings, vanishing home equity and taxpayer-supported bonuses."
- Editorial - Restarting Financial Reform - NYTimes.com (view on Google Sidewiki)

Charles Blow thinks you are a mob....

"Mobs Rule" by Charles Blow NY Times January 22, 2010

Hear these words about people in our country....

gladiator
easily manipulated
shaped a mob
mob is fickle
feted the fearful
people are angry
they are frustrated
underestimated the mob

The picture that Mr. Blow paints is disdain for the intelligence and core values of the American people. They are so easily manipulated he believes.

President Obama "underestimated the mob."

What, he should have created more "bread and circuses" to keep them entertained?

May I suggest an alternative picture?

The mob isn't fickle. The mob isn't composed of zombies that are easily manipulated by right wing media. The mob isn't driven by emotions.

The vast majority of people in the United States simple want a government that isn't beholden to special interests (i.e. Unions) that is transparent (i.e. closed door health plan) that moves slowly and carefully with all parties participating when making major moves and that lives within its budget.

It isn't that the "mob" is fickle, the mob hasn't moved. It is simply disappointed that the Obama administration didn't live up to its promises.

I find this theme an undercurrent from most Washington politicians from both major parties. That is a disdain for the American people. They want to re-label common sense beliefs as extremist and mob activated.

It is the politicians that are disappointing. The American people haven't moved.

in reference to: Op-Ed Columnist - Mobs Rule - NYTimes.com (view on Google Sidewiki)

Gail Collins thinks Massachusetts voters are....

"The 10 Percent Rules" NY Times January 14, 2010

As the liberal democrats see the potential for a loss in the special election for Massachusetts' "Ted Kennedy" seat, it is fascinating to watch their thinking process.

Here we have a state has the highest percentage of voters who identify themselves as Democrats, a seat that has been reverentially dubbed as the "Ted Kennedy" seat, and a sweeping victory for the Democrats in the previous election.

It is unthinkable that this seat is in "Code Orange" for the dems.

But what do they do? Do they ask themselves what the voters are concerned about to make such a shift in their political alignment? Do they want to understand the fears, pains or hopes of these voters? Do they want to address concerns about the health care bill?

No.

They blame Martha Coakley's style. They make snippy comments about Brown's daughter. They blame the fact that Obama isn't getting anything done (which isn't his fault). It isn't that the democratic voters are unhappy with what he IS doing they assert, they are unhappy because he isn't doing ENOUGH!

The power of the pen is greatest when it gives us a view of reality, when it exposes us to a view of reality that we have missed.

Ms. Collins could increase her power by giving us insights into what is really going on with the voters. But hey, they may not square with myth they need so badly.

Oh...and the 10% statistics is a manufactured percentage that doesn't exist in reality.

in reference to: Op-Ed Columnist - The 10 Percent Rules - NYTimes.com (view on Google Sidewiki)

A government that uses its women productively

"The Happiest People" NY Times January 6, 2010

I am happy that the people in Costa Rica are happy. I am delighted that they don't have big military expenses. And, what could be better than creating educational opportunities?

It doesn't get much better than that.

But here is where a red flag went up. Most liberals see people as mere vassals that are there to contribute to the goals of government. But rarely do I see this expressed so directly.

"This allows Costa Rica to use its female population more productively than is true in most of the region."

Use its female population more productively?

Ouch. The arrogance.

Women in Costa Rica aren't there to be used more productively. By providing a peaceful country and opportunities, the individual women are able to make choices that make them happier. I love it when people can make choices that make them happy.

But the happiness does not stem from being productive for the state.

The underlying belief it takes to make this statement is chilling. Mr. Kristof...is this what you really meant?

in reference to:

"This allows Costa Rica to use its female population more productively than is true in most of the region."
- Op-Ed Columnist - The Happiest People - NYTimes.com (view on Google Sidewiki)

I actually agree with the NY Times on job creation

"This Year's Housing Crisis" NY Times January 4, 2010

I love the way this editorial throws out the phrase that "job creation should also be a priority..."

How do you create jobs?

Uh...the article fails to mention that, but I think we can assume it means a "jobs program."

What is a job? It is a productive endeavor that adds value to someone's life. If a job or business or entrepreneur does NOT add value to someone's life, that job, business or service cannot be sustained.

So the real question is, how do we as people add value to others? This means we need to create a product or service that is worth more than the money they pay for it. In other words, adding value.

To do this we have to understand was is of value to others, create a product or service that meets a need, communicate the value we have to offer to our target audience, deliver the product or service and then maintain the customer relationship. Sounds like standard business practice? Yes.

But how does the government create jobs?

It really isn't very good at any of the above. It is very good at taxing, creating permanent programs, spending and carving out political favors for its supporters.

So, how can the feds best create jobs? By getting out of the way of the above business process. Give us a stable low tax rate, reduce the byzantine regulatory structure that helps no one, stop sucking up all the capital for expansion with deficit spending and stop bailing out the ineffective businesses that deserve to go out of business. This is a good start.,

But somehow I don't think that this is what the NY Times means when it talks about job creation.

in reference to:

"Job creation should also be a priority so that rising unemployment does not cause more defaults."
- Editorial - This Year’s Housing Crisis - NYTimes.com (view on Google Sidewiki)

More oversight has solved our problems in the past...

"Lax Oversight Caused Crises, Bernanke Says" NY Times January 3, 2010

I would like to support Mr. Bernanke's contention that the problem for our economic woes was a lack of oversight. First let's define oversight.

Oversight: Management by overseeing the performance or operation of a person or group.

Ok, now let's look at examples of how oversight has been so very successful to help support Mr. Bernanke's assertion.

Hmmmm.....

Oh...yeah...Fannie Mae and Freddie Mac! Yes, they had direct oversight from Congress. In fact, they are quasi government agencies. And we all know that even though the private sector crashed, these agencies, with the most oversight of any other financial institution survived just fine.

What? Oh...you mean they didn't? Oh, my mistake. What was that? Congress had to bail out of these fine institutions with the most oversight and they caused the biggest problem? That the US taxpayer is responsible for unlimited losses? Now Congress is pushing Fannie Mae to make more sub-prime loans?

Ok, one example does not disprove Mr. Bernanke's example.

Let's move on...Medicare is actually run BY the government. Now that is as regulated as it gets and it is one of the most efficient organizations there is. You can't get more oversight than that!

What? No, that can't be. 25% of payments are fraudulent? Impossible! Inconceivable! But Congress has complete oversight! That can't be.

OK...let's go the other way. Let's look at an industry that is totally unregulated, run by greedy business people run amok. For example, the computer industry has hardly any regulation. What a failure!

What? The cost of computing power has shrunk by 1000s of times? Computers are as cheap as TVs? Your iPhone has 100s of times more computing power than put the man on the moon?

Ok, that may not be a good example either.

But that doesn't mean that he is wrong. Just because the most regulated industries tend to create the most problems, and the least regulated cause the least problems, doesn't mean Bernanke is wrong. It simply means that we don't have ENOUGH regulation. We have just taken half measures. We need to go all the way.

How about nationalizing the banks as suggested by Congressperson Maxine Waters?

in reference to: Bernanke Blames Weak Regulation for Financial Crisis - NYTimes.com (view on Google Sidewiki)

Just like "Cash for Clunkers" created more environmental damage...

"U.S. Loan Effort is Seen as Adding to Housing Woes"

No kidding! What a surprise. Anyone with any game theory could have predicted this.

But the Obama administration will continue with programs that do more harm than good. Why?

Because they suffer from a fundamental fallacy. They believe they can create legislation and programs that solve problems. Programs simply create artificial structures that creative people then have to work around. The unintended consequences tend to be worse than the original problem.

Just like the Bermuda Triangle that is said to swallow ships. The Washington Beltway appears to swallow respect for the individual decisions and creativity. They must believe that there is are problems that exists because of the lack of a program or legislation. That there are vacuums of economic efficiency that the market never fills. These vacuums can only be filled by a government program. They must believe that they can define the programs that solve problems and "poof" the problems go away.

We will always have problems.

The solutions will come from our individual and collective intelligence and creativity...our courage and optimism. There are no economic vacuums just waiting for a government program.

The whole housing crises is itself the results of unintended consequences of the Feds low interest rates, the Community Reinvestment Act, Fannie Mae and Freddie Mac's loan guarantees.

As I have said before (and will undoubtedly will say again it is arrogant to believe that I can sit in Washington DC, review economic data, create a program that takes money from Peter, gives it to Paul and people will act like pawns and fulfill their expectations. It is really an elitist view of the world that sees us as victims just waiting for salvation.

Please, just stop with the programs. Give us a stable rule of law and let us solve our own problems creatively.

in reference to: Mortgage Modifications Are Seen as Adding to Housing Woes - NYTimes.com (view on Google Sidewiki)

Another Failure of Public Schools

"The Replacements" NY Times January 2, 2010

The NY Times editorials has consistently supported more money for public schools and teacher's unions demands.

At the same time, the NY Times editorials point out failure after failure of the public schools, in this case, unprepared substitute teachers.

Maybe they should ask themselves about their political assumptions. Take a fresh look at education and maybe they would come up with different solutions.

Ya think?

in reference to: Op-Ed Contributor - The Replacements - NYTimes.com (view on Google Sidewiki)

Japanese lost decade was because....

Not that the Japanese government didn't go far enough...it didn't let the market clean up the balance sheets which hung over the economy for a decade.

What this article asks is that we do MORE of what the Japanese did that created their lost decade.

Does this make sense to you?

in reference to: Editorial - Avoiding a Japanese Decade - NYTimes.com (view on Google Sidewiki)