Category Archives: Taxes

Tax Fairness (Part 1): What is it?

I wish someone would explain the objective criteria used to define “fair share” as it pertains to taxation. This term is used indiscriminately by those that assume everyone else’s internal fairness meter must be the same as theirs. Unfortunately “fair share” is not an objective standard, nor is it a subjective standard either because it’s not even a standard at all. It is merely subjective whim masquerading as some golden absolute. The peg of “fair share” moves to whatever arbitrary point will bring in enough revenue to pay for whatever government largesse the proponents are seeking to fund. It is a completely backwards approach to budgeting that always leads to debt and/or higher taxes. It is based on the faulty premise of spending driving revenue requirements vs the economically sound approach of fixed revenue driving permissible spending.

The various tax systems (income, sales, property) today are a cesspool of unfairness from which we will never find a “fair share” lurking beneath their depths. The income tax system is based on a foundation of fostering wealth redistribution and behavior modification using the carrot/stick model. For example, every time someone gets a deduction or credit on their taxes it is because they are engaging in behavior the government wishes to promote (“there boy, good boy, you’ve been a good doggy”) and those that don’t get those deductions or in fact pay extra surtaxes are engaging in behavior the governments finds objectionable (“bad dog, bad dog!”). Deductions and incentives are one form of tax unfairness as they benefit one group at the expense of another. The other more sinister form of tax unfairness is progressive income taxation. There is no rational basis upon which one can argue that as one obtains more income they have progressively less right to keep that income.  Few today realize that the idea of a progressive income tax is one of the primary tenets of communism*, its sole purpose being to destroy all wealth so as to more rapidly bring about the utopian order of the perfectly “fair’ communist society where all are “equal”. Oh, and yes, I did say “rational basis” for an argument. I don’t include the irrational ones like the argument that society has a right to tax the wealthy more because the only reason they are wealthy is because they have had at their disposal all the wonderful manna that has fallen from government run heaven (e.g. roads, public education, court system, etc). So, if all these things are what made wealthy people wealthy, then why isn’t everyone wealthy? These things are available to everyone, right? Or more to the point, based on this twisted logic one could argue that any tax rate imposed on the wealthy is fair. The argument doesn’t tie the value of these government services to some specific tax % therefore this argument can be employed for any tax %. Reductio ad absurdum.

When it comes to taxation the question of fairness must be broken down into two components: (1) the method and (2) the measure. To be considered fair the method must be (a) universal and (b) inescapable. A universal method is non-discriminatory and applies to every single citizen or non-citizen resident. Every. Single. One. An inescapable system is sufficiently transparent that it is not possible to hide one’s tax obligation. There is one tax system that would be universal and inescapable (hint: it’s not a sales/consumption/VAT tax). But, you’ll just have to wait until next week for the exciting conclusion when I reveal the identity of this new system and how it dovetails perfectly with the second component of tax fairness: measure.

* Manifesto of the Communist Party, Marx K., Engels F., 1848, Chapter 2.

 

Social Security = Ponzi Scheme

Social Security is an inter-generational Ponzi scheme predicated on the assumption that population demographics would remain in a pyramid shape; a large base of workers supporting a tiny apex of retirees (diffuse costs and concentrated benefits). The “baby-boom” generation changed all that: the pyramid now looks like the Washington Monument. In 1950 sixteen workers supported one retiree, today that ratio is a mere 3 to 1. By 2030 it will only be 2 to 1.*

The argument that Social Security is a Ponzi scheme is so common that the Social Security Administration actually has a webpage devoted to debunking this question. Let’s analyze their arguments and see where they get it wrong.

1) A Ponzi scheme must offer extravagant returns. WRONG: Although extravagant returns are typical (otherwise why invest!) they are not necessary for it to be fraudulent. The fraud is that funds are stolen. It is a form of theft by deception, with the underlying deceit (hook) being that reported returns are entirely fictitious because no investment has occurred. The returns aren’t real so their magnitude is irrelevant. The “return” could be 5% and it would still be a Ponzi scheme.

2) A geometric increase of new investors is needed to sustain a Ponzi scheme. WRONG: Or rather only correct if ALL the “returns” are paid in cash. But not all returns are paid in cash. If statements show satisfactory returns then a majority of investors leave their money alone. To cover withdrawal requests it is necessary to procure new investors at a rate proportionate to the ratio of investors withdrawing funds to investors leaving funds alone. That rate is not geometric if the ratio is < 1.

3) Social Security is described as a “pay-as-you-go” program wherein “money from later participants goes to pay the benefits of earlier participants” and that such programs have an inherent vulnerability to “demographic ups and down.” RIGHT: These statements describe attributes that are true for both systems, so I’m not sure how this is supposed to support their argument. Mathematically there is no difference between the two systems: to be sustainable money going out must equal money coming in. It would be more accurate to say the cash flow of a Ponzi scheme functions by employing a pay-as-you-go system. So, if both systems’ sustainability depends on an identical cash flow model then the two systems are functionally equivalent. In other words, a distinction without a difference is no difference.

These are the common characteristics of both systems:

1) Funds are not invested, merely collected by the perpetrator (government)

2) Excess deposited funds (trust fund) are stolen (“borrowed” by government)

3) Required new funds = (excess funds) – (stolen funds) – (funds paid out)

New funds must equal the funds paid out because any excess is pilfered. As long as those values are equivalent both systems are “sustainable.” The problem arises when one of those values changes and equilibrium cannot be restored. A Ponzi scheme could last for forever if the perpetrator had the ability to compel new investors to join. Social Security has endured for so long only because of the government’s ability to legally force more people to participate and extract ever-increasing sums from the participants. At least in a Ponzi scheme the “investors” are not coerced with violence. With Social Security we have no choice. This is very odd indeed. If Social Security is such a wonderful, successful and loved program why is it not optional? Why is participation forced on us at gunpoint?

Economic Slavery

I have a proposal. Since we as a society permit children to inherit the accumulated wealth of their parents (unless you are “too” wealthy, then we take half of it!) then isn’t it reasonable that children should also inherit the liabilities as well as the assets of their parents? Currently if assets exceed liabilities then there is a positive inheritance. If liabilities exceed assets then there is nothing to inherit and the creditors and thus society end up paying (by passing those losses onto everyone else). Surely the children should be the ones to carry the burden of those liabilities since they must have benefited to some degree while under their parents’ guardianship. After all the parents made a life long investment in their children, so it’s only fair that that investment pay off. It would not have to be overly burdensome; it could be paid back over decades. And if those children happen to pass on then they would simply pass those debts onto their children, and so on until eventually all debts are repaid.

Anybody think this is a reasonable and sound idea? I’m hoping not. I’m hoping everyone views it as completely unreasonable, unfair and immoral. For a child to be born into this world saddled with the obligation of repaying debt that they had no part in incurring is the a most insidious kind of indentured servitude.

So if we all (I hope) agree this is unreasonable, then why is it considered reasonable when a group of individuals (society) through their proxy (government) borrows and thus incurs liabilities that are then simply passed on to their collective progeny in perpetuity? We frequently hear about how terrible it is that we are passing onto our children our debts of today. Well, we’ve been doing this for a long time, and as one of those children from 40 years ago, I have to say I really don’t appreciate being asked to pay higher taxes now to pay off the debts incurred by our government during the Nixon – Reagan administrations. As a child I had no vote, I could not give consent either legally or mentally, and yet I and everyone else my age are now asked to pony up a whole lot more in taxes. The left pontificates that that is the “responsible” thing to do. Hogwash. I have no moral obligation in repaying debts that I did not even have a voice in. The “responsible” thing to do is to simply cut spending in non-critical areas. Surely EVERYTHING government does can’t be critical.

If something is morally wrong at the individual level then simple logic dictates that it is still wrong when a group of individuals does the same thing. Right now we have a nearly $15 trillion IOU that will have to be repaid at some point, but not by those that enjoyed the benefits of those debts, but rather by those that will have to greatly sacrifice their present benefits (lower standard of living) in order to repay that debt. That is simply another form of slavery: economic slavery. It must be abolished.

Stimulus: Bread and Circuses, Part II

Government bread (stimulus) attempts to misdirect the citizenry into believing “something” is being done. Tragically, the bread is hollow. Inherent self-interest problems with government spending ensure that such spending is less efficient in terms of goods received per unit of money. In other words if government spends $1 they get 10 apples. If I spend the dollar I’ll get 15 apples. But there is another inherent problem with government stimulus – sustainability.

Government projects are always short term in nature (e.g. roads, bridges, etc) and when the project is done, that’s it. Those workers are out of work again… until we need some more bridges. Are we supposed to build bridges forever to keep the economy moving? Government spending is akin to a circus coming to town. Money is drawn into a community temporarily, and for awhile everything is great for local merchants. But clearly the circus is a bubble, it can’t stay in town forever. So it is a foolish business that expands based on the sales receipts generated while the circus is in town. When the circus leaves such a business collapses. It pleads for support from the government – the only thing they can do is bring the circus back. As long as the circus is there all is good. But clearly the circus is an unsustainable event, it was never meant to sustain an economy forever.

When people ask for government stimulus they are asking for “circuses” to maintain the status quo. Stimulus is supposed to spark some new more permanent venture, but exactly how can it do that? It simply reinflates the old bubble industries at their unsustainable bubble levels. Those industries can only be sustainable at their new post-bubble levels. Stimulus prevents this equilibrium from being achieved. Sustainable economic growth comes from industries responding to the direct desires of CONSUMERS. If consumers want it then a market will grow and that’s where the jobs will be. Consumer demand will not disappear overnight as can government spending. Consumer desires can change over time but it takes years for these changes to occur which is sufficient time for an economy to absorb the slowly shifting moods of consumer demands.

So this begs the question of why we had such a rapid change in the economy recently. If you’re astute you will have a good idea why. That’s right, it was a government-stimulated bubble inflated by loose fiscal and monetary policy and then popped by a reversal of that policy. It is these policies combined with the moral hazard of “too big to fail” that encouraged the RISKY behavior that is blamed for the crash. We must look beyond the risky behavior itself and ask what encouraged that behavior if we’re serious about preventing such things in the future. The solution is not to add more 20-20 hindsight regulation that attempts to prevent risky behavior but rather to remove the root cause that encouraged said behavior, namely the “too big to fail” policies of our crony-capitalist-big-government state. These polices are the manifestation of what government busybodies thought was the “right” thing (“home ownership for all!”) but sadly unintended consequences always come home to roost in a tragic mess. Treat the disease, not the symptoms.

Stimulus: Bread and Circuses, Part I

The “cuts” in the recent budget deal have renewed mutterings of the “dangers” of decreasing government spending in a down economy. Somehow this “government spending as the path to prosperity” myth will just not die. The idea is that when government spends money it magically reaps greater economic benefits than when private parties spend money. Not only is this wrong, it is completely backwards! We’ve spent trillions in stimulus and it hasn’t “fixed” the down economy. No consideration is given as to why that might be, it is simply assumed that (a) we didn’t spend enough or that (b) it would have been worse absent stimulus. Argument A simply dumps us in an infinite loop from which there is no escape, akin to an old computer program like

10 RUN STIMULUS

20 IF STIMULUS FAILS, GOTO 10

Argument B is a sign of intellectual laziness as it relieves the arguer of a duty to supply any data to support their claim – just speculate on what might have been and call it a day.

Well, I’ll call that bluff. Using logic we can rationally discern a reasonable outcome of a lack of government spending.  Let’s address the “multiplier effect” part of this myth first. In short no such effect exists. This “effect” is simply the relabeling of a normal function in the economy and claiming it is an inherently unique attribute of government spending. It has a more common name – trade.  If I buy something then that enables the person I spent the money with to go buy something, and that person to do the same and so on. This happens everyday – if government rather than individuals spend the money it doesn’t magically transform the process into something else. When government stimulates by purchasing, the theoretically BEST possible outcome is no better than if the government did nothing.

All government spending by definition must come from the citizens. So in other words we are simply moving money from the left pocket to the right pocket of society. Citizen A had $1 and can spend it on X OR now government has taken the $1 of Citizen A and given it to Citizen B to spend it on Y. Citizen A does not have his $1 anymore so does nothing. Citizen B has the $1 and spends it. As Frédéric Bastiat explained, the “seen” benefit is what Citizen B bought; the “unseen” harm is what Citizen A did not buy. All we have done is shift the preference of goods that are being purchased in the economy. No net economic change has occurred.

But this assumes 100% efficient spending. Government has no inherent self-interest to efficiently spend money it distributes ($1000 hammer anyone?). Although the same AMOUNT of money is spent the goods and services received in return will always be fewer than had it been spent by someone with a vested interest in maximizing what they get for their money (i.e. the original owner). This net decrease in goods received per unit of “government” money spent lowers the overall standard of living and productivity of the economy over time.  This obfuscation of the citizenry by government “bread” (i.e. handing out things that appear to be beneficial and good to some) is a vain attempt to do “something”. Next week we’ll continue with the “Circus” part of the stimulus equation.

Equalization?

Equal. This simple word conceptualizes our most basic and noble sentiments: all men are created equal…equal protection under the law, etc. But, it has a sinister sibling that it is often confused with: “equalization”. This concept is the dubious notion that we should forcefully create a state of “equality” among all citizens, at least on an economic level.

But why this notion that equalization is necessary? The usual answer is that it is “bad” when some make “too much” money. However, this response betrays a childish and simplistic view of the economy, one wherein it is likened to a board game (one player wins and all others lose). This view is based on the fallacy that money itself is wealth. But, it is production, not money, that is the basis for wealth. If money were wealth then the government could just print up a billion dollars for each of us and our troubles would be over!

To illustrate the true nature of wealth let us consider two hypothetical peach farmers, let’s call them Hayek and Keynes (google the names to get the joke here). They each start with one peach tree. Each year they produce a crop sufficient to sustain themselves. After a few years of this Farmer Hayek decides to not sell all his peaches, rather he plants a few to grow new trees. [Economics lesson: the act of not consuming is called “saving”, anything saved is called “profit” and accumulated profits are called “capital”. Capital is that which is produced not for consumption but for further production.] Farmer K sells all his peaches each year and lives it up relative to Farmer H (i.e. he consumes all that he produces and does not save anything). After a few years Farmer H’s new trees start to bear fruit. After several years Farmer H has a large orchard that out produces Farmer K’s single tree. Farmer H now has many options: he can purchase any number of goods that Farmer K could never afford, or perhaps he may hire someone to manage his farm thus allowing him to retire early. His deferment of present consumption (unsold peaches) is accumulated and thus becomes capital (new trees), which makes possible greater future production.

After several years Farmer H makes a hundred times what Farmer K does. Is that bad? Should we “equalize” them by taking the “excess” profit from Farmer H and giving it to Farmer K? Is Farmer K worse off than before? No. Farmer H did not take anything from Farmer K, he simply produced more by employing the simple concepts of capitalism.

The economy is not a zero sum game. Farmer K is not worse off because Farmer H produced more. If a CEO or Wallstreet mogul makes millions or billions it doesn’t negatively affect me (or anyone else) in the slightest. They did not forcefully take anything from me (only the government is allowed to do that!) All “equalization” does is punish those that efficiently produce what other people want. So let’s keep our tax policy focused on funding the government, not on correcting ill-conceived notions of equality.

Math 101

Let’s do some simple math.

2011 Federal Budget: $3.8 Trillion

2011 Federal Revenue (est): $2.6 Trillion

so

$3.8 – $2.6 = $1.2 Trillion Deficit

100% of all personal income above $200,000 per year = $1.2 Trillion.

So there you go, I guess the President is right after all. The solution to our deficit problem is so simple: take ALL of the income of the “wealthy” above $200,000 per year (in addition to the taxes they already pay on the amount below $200,000 which would effectively be an 83% total (not marginal) tax rate).  I guess “fair share” or “shared burden” is code for “no one should make more than $200,000 per year”.

And just to disabuse anyone of the notion that corporations are where the real money is: the combined income of everyone making more than $200,000 per year exceeds the combined income of EVERY corporation in the country ($2 Trillion vs $1.2 Trillion – and no I’m not double counting, these are C-Corporations only). Indeed, the combined AGI of every US Citizen is $7.5 Trillion vs only $1.2 Trillion for every corporation. Why is individual income so much more than corporate income? Payroll is the single biggest expense for corporations. Median profit is only 5% of revenue whereas Payroll is 18%. That’s right, companies pay more to their workers in salaries than the company itself retains as profits.

So what is my point? Obviously I’m not actually advocating 83% absolute tax rates on the “wealthy” (hopefully I haven’t given the Democrats any ideas!) My point is that spending is the problem, not revenue. Even returning to the much-touted “Clinton era” tax rates would not even begin to make a dent in the federal deficit. The rate of increase in the federal budget from 1980-2000 was a consistent $60 billion/year, but starting in 2001 the rate of increase jumped to $150 billion/year and in 2009 jumped even further to $240 billion/year. Clearly Bush got us off course spending wise and Obama has made it that much worse.

If we were to return Federal spending to the 20 year trajectory it was on when we got off course in 2001 the Federal Budget for 2011 would be a “mere” $2.4 Trillion. That’s right, we’d actually be in surplus EVEN with the Bush tax cuts. For a detailed outline of how this could be achieved please see this Reason article. The Cliff notes version is this: no sacred cows, EVERYTHING (defense, social security, Medicare, entitlements, etc) must be cut.

All values obtained at: www.irs.gov/taxstats/ and are for the latest years with available data.

Carrots vs Sticks

In a previous article I distinguished “requirements” for life from “rights”. Requirements are things that we are to provide for ourselves which allow us to continue the biological process we call life (e.g. food, water, healthcare, shelter). Since we are to provide these for ourselves either directly (e.g. grow our own food, etc) or indirectly (via work which is exchanged for money which is then exchanged for these things), this then begs the question: What of those that are incapable of providing for themselves? Shouldn’t the government provide this social “safety net”? Well, actually no. Why? There are three principal reasons although I could simply point to the nightmare of a Ponzi scheme that is Social Security and Medicare as prime examples of how well government is able to manage such systems.

1)    Theft. Theft for a noble cause is still wrong. Merely renaming “theft” by a group (government) from the individual (taxpayer) as “taxation” does not suddenly change its moral character. If I rob my neighbor and then donate all that I have stolen to the local food bank, is that ok? Clearly not. In the same way if the government robs from my neighbor (taxation) and gives to someone else, it is still wrong.
2)    Inefficiency. Government is inherently incapable of utilizing resources (tax money) efficiently because it does not employ the profit/loss feedback system. Profit says “you’re providing something people want” whereas Loss says “you’re not providing something people want.” The funds doled out by governments are not theirs; thus there is no inherent motivation to efficiently allocate such funds. In fact government budgeting rationale is the opposite of that in a profit/loss system: using all money and NOT accomplishing your goal is justification to get even more money. Without a profit/loss test governments are doomed to be throwing darts at a budgetary efficiency target whilst blindfolded… every now and then they’ll get lucky, but most of the time they don’t even hit the board.
3)    Forced Charity. Every major world religion holds acts of charity in inestimably high regard. Such acts must come from within, not without. If we are forced by the government into giving (through taxation or the proposed “Universal National Service Act” continually reintroduced by Rep. Rangel (D)) then two thefts have occurred. First our money or time. But secondly we are robbed of the positive spiritual feedback we could have received when we willingly extend assistance to someone who truly needs it.  
Independent, free market and unregulated charitable organizations are the most efficient tool to help those that need assistance. They offer the exact counterbalance to the above three problems with government based charity. Theft is transformed into Giving. Money that was stolen is now given to those charities the citizen (not the government) deems worthy. Inefficiency is transformed into Efficiency. Charities are described as “non-profit” organizations however that is merely a tax descriptor. Charities do profit, but non-profit tax regulations prohibit distributing said profit to the owners of the charity. All money is reinvested. So the profit test exists – inefficient or bad charities go out of business and those that “profit” will grow bigger and more able to accomplish their mission. And finally, Forced Charity is transformed into Charity. When we give to someone willingly we get back much more in a spiritual sense. The positive feedback from giving compels the giver to continue giving. What could be better then a system that encourages giving through carrots rather than sticks?