Wednesday, August 29, 2012

On Taxation And The Economy

Be forewarned:

As part of the global push to tax the rich, America is now debating an "emergency" wealth tax. But the idea has hit fierce opposition from conservatives, who say the "politics of envy" hasn't made the country rich.

An unnamed Senator has proposed a one-time tax on the wealth (rather than the incomes) of high-net-worth Americans. The details aren't clear, but he says the country is facing an economic war caused by a prolonged recession, and needs to tax the rich in order to avoid social unrest.

He told the Guardian that unless the country "hardwired fairness" into the budget, "I don't think the process will be either socially or politically sustainable or acceptable."

The leading conservative opponent shot back, saying the plan would chase out the rich and make the odds of full recovery even worse.  The chair of the House public administration committee told the press that the tax could strangle the golden geese of America. "If the politics of envy made a country rich, we'd be very rich … Most rich people are contributing far more in tax than other people."

There's no doubt about that, but we'll come back to the details in just a moment.  First, it's time for full disclosure: this article is actually about Great Britain.  I changed the references to make it appear as though it was happening here, just to prove a point.  And admit it, your first inclination was that yes, this could be something Obama and the liberals in Congress might try, especially with all that talk of 'fairness' and taxing the rich.

We've gone over the real 'unfairness' of our current tax system and how Obama's economic policies have failed over and over and over and over and over and over and over before.  But I saw a great article at Investor's Business Daily that takes a bit of a different perspective on it that I thought was worth adding to the collection: taxpayers are a minority.

Hey, great!  Democrats and liberals looooove minorities, right?  So, this should be a slam dunk.  Well, let's take a look.

Forty percent of U.S. households paid 86.2% of all federal taxes — personal, corporate, Social Security and excise — in 2009, according to the Congressional Budget Office. That leaves 60% of the nearly 118 million U.S. households — the majority of the country — paying only 13.8%. ...

Under the current federal tax code (Bush tax code) and entitlement structure, the proportion of all federal taxes paid by the 40% will rise in the years ahead. President Obama wants the proportion of all federal taxes paid by the 40% to increase at a faster pace by implementing higher marginal tax rates on higher-income households and new taxes to help pay for ObamaCare.

Should Obama's vision of higher tax rates be implemented, it may turn out that 40% of U.S. households will be paying 90% to 95% or more of all federal taxes. That, of course, will not close the federal deficit as the higher federal tax burden on the 40% acts as a tax on economic growth and capital formation. Obama's vision has already had the effect of slowing trend economic growth and job creation. ...

So, this is a reiteration of the fact that fewer and fewer Americans are being productive (and paying taxes on that productivity) as more and more Americans are being unproductive (and sucking government services and benefits out of the system without putting anything in).  The key here is that Obama and Dems/libs have most of their biggest and most consistent constituencies in that chunk of 60% who aren't contributing.  To borrow a phrase, they have little to no skin in the game.  Unfortunately, this is one minority that Obama and other Democrats and liberals don't seem to care about.  In fact, they seem to have a particular venom for this particular minority.

The bottom line is that our tax system penalizes those who perform the best, forcibly taking bigger and bigger chunks of their earnings and giving them to those who perform the worst.  For the three bottom segments that make up that 60%, the average benefits received came to $10,000, $15,000, and $23,000 a year in the form of government services that are paid for by the productive 40%.  The less productive those three segments are, the more they get, which encourages people to be as unproductive as possible.  For obvious reasons, this doesn't help America in any economic circumstance, especially not the one we find ourselves in today.

The system has been in place for a very long time, entrenched and built upon by both parties.  There's nothing to be done about that.  But, we face a decision in November that presents two starkly different paths:

Mitt Romney's proposal to lower marginal income-tax rates encourages more: (1) capital formation, (2) hours worked and (3) higher labor force participation so that trend economic growth and income could increase. Faster trend economic growth means more households with higher income to pay more federal taxes to help close the deficit.

Romney's proposal of eliminating or reducing the value of deductions also shifts more of the federal tax burden onto higher-income households. But his proposal to lower tax rates and broaden the tax base acknowledges that the U.S. is part of a global economy and that the U.S. economy needs a competitive tax system.

Obama's vision, in contrast, appears to assume the U.S. economy is an island — with no global economy — as his regulatory and proposed tax policies would work to create a slower-growing, less competitive U.S. economy.

If you have any question about Obama's intentions, I suggest you look at this link.  There is nothing about Obama's economic vision that includes fewer people depending on government services.

And remember, this isn't just income tax we're talking about here.  I often see that the hugely disproportionate percentages of income taxes being paid by tiny fractions of the country (as in, 40% of all income taxes being paid by the top 1% while 47% of Americans pay $0 in income taxes) is somehow irrelevant because it's only income taxes and not the big picture.  I personally fail to make that connection, but many people do, and to them that somehow alleviates the need for applying any standard of what's 'fair' to our tax situation.  This is different.  This isn't just income taxes.  This includes corporate taxes, excise taxes, and payroll taxes, all of which are paid by pretty much anyone with any job and productivity level.  This is the big picture.

Obama may have inherited a mess as he is so fond of claiming.  No one denies things were ugly, but by the numbers they weren't historically exceptional.  What is historically exceptional is the recovery...or rather the distinct lack of one.  By the numbers, the closest recessionary scenario since WWII to what Obama inherited was when Reagan took office in 1980.  Here's how the Reagan recover compares with the Obama recovery:

And as long as Obama's policies -- like taxing the rich -- remain in effect, it's not going to get better.

So now we know what needs to change if we want genuine improvement.

Circle November 6 on your calendar.

I wanted to include this chart when I posted this, but couldn't find it at the time...

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