Taxes, Debt, Wealth Disparity and Demunist Piffle

Today there are multiple articles out about tax policy and the “President” is out talking about millionaires and billionaires again. This must be part of a coordinated effort to change public opinion in the wake of the Debt Ceiling battle and S&P downgrade. So lets tackle the biggest issue head-on. Maobama insisted during the debt impasse that we take a “balanced” approach to solving our deficit problem. This is code for “we must raise taxes on somebody”. Sounds reasonable until you review the history that got us to this point.

A budget has two components – revenues and outlays. In the past three years revenues have fallen as a result of economic activity dropping in the wake of the housing implosion and resultant economic malaise, a malaise perpetuated of course by the country deciding that it would be good to put an economic idiot and his minions in charge of the executive function of our government, but that’s a story for another day. Such a reduction in revenues can be expected to recover along with economic activity to the 18 percent or so it has averaged over the last 70 years.

Outlays on the other hand have ballooned from 20% of GDP to 25% of GDP as a result of having the two worst presidents in modern history in a row and Nancy Pelosi, who is in fact insane, and Harry Reid, who is in fact a scumbag who thinks congress can take whatever it likes, in charge of the Legislative function from 2006-2010. The Wall Street Journal warned at the time that Congress was ratcheting baseline spending up 3 times as fast as growth in the economy that later on they would say “Well, there is nothing for it but to raise taxes”. That was the plan all along.

The economist has a piece in their most recent weekly edition which is basically a head-scratching piece wondering why Americans hate taxes so much.  They attribute this to people near the bottom of the economic pile not wanting to see those just below them helped so that they are now equal with the bottom of the pile.  I find this pretty cynical.  In light of the blowout in spending in recent years it is more that people are a little miffed at the mismanagement of the budget.  So let us be plain. The idiots in charge need to come up with something like $1 Trillion in ANNUAL spending cuts first. Then and only then will people be willing to say “OK, now that REAL spending cuts are on the board, we can talk about making up the difference with some revenue.” The recent compromise that got us past the debt ceiling problem cuts a few tens of billions in the first two years. It is NOTHING like what is necessary. Spending cuts first, then taxes to fill any gap. Say it again: Spending cuts first, then revenue to fill any gap.

The Simon Johnson piece on Bloomberg recognizes that growth is the problem on the revenue side but then posits essentially that we just need new taxes and all will be well, otherwise we are giving succor to millionaires and billionaires and sticking it to the poor. To paraphrase Al Gore, b*llsh*t. Bring the troops home from Europe. Untangle ourselves from Afghanistan, where we have been for more than 10 years(!!!) and Iraq where we have been for 8 years (!!!), cut the Department of Energy in half, cut the Education Department in half, fire the czars and one could go on. This does not stick it to the poor.

Another article was written by Warren Buffett somewhere pleading for higher taxes on rich people. The guy who used to be known as the Oracle of Omaha, but is now known as the old guy who got bailed out by taxpayers and screwed his children out of their inheritance, has become a soft peddler of collectivist ideas in his support of the Great Lefty we elected in 2008 as noted above. On the other hand, to address Warren’s points, I would see nothing wrong with making capital gains taxable at ordinary rates. Why does income from capital get taxed a preferential rate compared to income produced from labor anyway? Maybe have a threshold taxed at lower rates, like $100k or something so you do not stick it to pensioners. If you do that though, the tradeoff is that losses need to be able to be taken against income as well. And dividends should not be taxed at all.

Finally, we would all do well to realize that there has been a widening disparity in the percentage of national income going to capital rather than labor, and that this is unhealthy. Largely this has resulted from the globalization of labor and goods markets which tilted the playing field in favor of capital. Labor has had very little leverage to press for wage increases in the face of the Chinese export juggernaut. A couple of thoughts on this. First, a new equilibrium is forming as the cheap labor abroad is becoming less cheap. So the problem is not going to get much worse. Labor in China has actually been increasing demands for higher wages.  As a result capital has been looking for other labor pools, like Viet Nam, but honestly, China was the big deep pool and it has been tapped.  Of course the other big bottleneck for growth which is causing stagnation in the US is the high and rising cost of regulation at both the federal and local level.  At the federal level we could relieve a great burden by having a top to bottom review of regulation by all departments with the goal of thinning the federal register by half.  At the local level, well heeled interests have succeeded in greasing enough palms in the state legislatures that more and more activities that were once open for people to pursue as sources of income are now behind walls of licensing requirements and fees.  I am not sure how we can attack this but until it is attacked, the wage disparity and general malaise will continue.  But there ARE ways to ameliorate the problem without resorting to the expedient of raising taxes to confiscatory levels.  I would really like Republicans to ask when pressed on the revenue issue “After all Mr. Demunist, how much is enough for the government to take? 30%, 40% 50%, more?”

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