Archive for the ‘taxes’ Tag

Think about It   3 comments

Taxes Discourage Production   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

Remember, there is no such thing as a free lunch. Tax dollars come from people and businesses who would otherwise have used to those dollars to do something.

Henry Hazlitt doubted greatly that the wealth created by government spending would fully compensate for the wealth destroyed by the taxes imposed to pay for that spending.

It is not a simple question … of taking something out of the nation’s right-hand pocket to put into its left-hand pocket.

While the government spenders want us to believe that if they only take, say, 25% of the national income from private purposes to spend on public purposes, they neglect to mention that they are taking money from A in order to pay it to B. It’s not simply moving data around in a bookkeeping ledger. Yes, B is helped by the transfer of wealth, but A is harmed by that loss of income.

In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds.

Image result for image of an essential government serviceThis affects business policies. Businesses that have less money to invest don’t expand their operations — or only expand into areas with minimal risk because they lack a savings cushion. This deters other observant people from starting new enterprises. Old employers do not provide more employment or better wages and others decide not to become employers at all.

There’s a similar effect on personal incomes taxed at 50-90 percent. People question whether they should work six, eight or 10 months a year for the government when they only take home six, four or two months of income to their families.

Additionally, the capital available for risk-taking itself shrinks enormously because it is being taxed away before it can be accumulated.

[C]apital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

Hazlitt recognized that some taxes are necessary to provide government functions that safeguard private production.

When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.

In other words, government should only spend on a very few needed services … roads might come into that … because if it takes too much from the private sector, eventually it destroys the private sector.

Posted January 16, 2017 by aurorawatcherak in economics

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Tax Effect in One Image   3 comments

Here’s an interesting graphic I ran across recently. Pink/magenta is negative (loss) while green is positive (gain). You can assume that Alaska and Hawaii are outliers because our migration rates are affected by not being attached to the contiguous 48, but take a good look at the states that are losing the most population and related income. Mostly high tax states. And then look at which states are gaining the most population and related income. Yeah ….

Illustrative!

Posted December 30, 2016 by aurorawatcherak in economics

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Why Socialists Must Raise Taxes on the Middle Class   Leave a comment

This was originally written about Bernie Sanders, but it applies to Hillary … and probably, Donald Trump. Lela

Daniel Bier

Willie Sutton was one of the most infamous bank robbers in American history. Over three decades, the dashing criminal robbed a hundred banks, escaped three prisons, and made off with millions. Today, he is best known for Sutton’s Law: Asked by a reporter why he robbed banks, Sutton allegedly quipped, “Because that’s where the money is.”

Sutton’s Law explains something unusual about Bernie Sander’s tax plan: it calls for massive tax hikes across the board. Why raise taxes on the middle class? Because that’s where the money is.

Found on Foundation for Economic Freedom (FEE)

The problem all politicians face is that voters love to get stuff, but they hate to pay for it. The traditional solution that center-left politicians pitch is the idea that the poor and middle class will get the benefits, and the rich will pay for it.

This is approximately how things work in the United States. The top 1 percent of taxpayers earn 19 percent of total income and pay 38 percent of federal income taxes. The bottom 50 percent earn 12 percent and pay 3 percent. This chart from the Heritage Foundation shows net taxes paid and benefits received, per person, by household income group:

But Sanders’ proposals (free college, free health care, jobs programs, more Social Security, etc.) are way too heavy for the rich alone to carry, and he knows it. To his credit, his campaign has released a plan to pay for each of these myriad handouts. Vox’s Dylan Matthews has totaled up all the tax increases Sanders has proposed so far, and the picture is simply staggering.

Every household earning below $250,000 will face a tax hike of nearly 9 percent. Past that, rates explode, up to a top rate of 77 percent on incomes over $10 million.

Paying for Free

Sanders argues that most people’s average income tax rate won’t change, but this is only true if you exclude the two major taxes meant to pay for his health care program: a 2.2 percent “premium” tax and 6.2 percent payroll tax, imposed on incomes across the board. These taxes account for majority of the new revenue Sanders is counting on.

But it gets worse: his single-payer health care plan will cost 80 percent more than he claims. Analysis by the left-leaning scholar Kenneth Thorpe (who supports single payer) concludes that Sanders’ proposal will cost $1.1 trillion more each year than he claims. The trillion dollar discrepancy results from some questionable assumptions in Sanders’ numbers. For instance:

Sanders assumes $324 billion more per year in prescription drug savings than Thorpe does. Thorpe argues that this is wildly implausible.

“In 2014 private health plans paid a TOTAL of $132 billion on prescription drugs and nationally we spent $305 billion,” he writes in an email. “With their savings drug spending nationally would be negative.”

So unless pharmaceutical companies start paying you to take their drugs, the Sanders administration will need to increase taxes even more.

Analysis by the Tax Foundation finds that his proposed tax hikes already total $13.6 trillion over the next ten years. However, “the plan would [only] end up collecting $9.8 trillion over the next decade when accounting for decreased economic output.”

And the consequences will be truly devastating. Because of the taxes on labor and capital, GDP will be reduced 9.5 percent. Six million jobs will be lost. On average, after-tax incomes will be reduced by more than 18 percent.

Incomes for the bottom 50 percent will be reduced by more than 14 percent, and incomes for the top 1 percent will be reduced nearly 25 percent. Inequality warriors might cheer, but if you want to actually raise revenue, crushing the incomes of the people who pay almost 40 percent of all taxes isn’t the way to go.

These are just the effects of the $1 trillion tax hike he has planned — and he probably needs to double that to pay for single payer. Where will he find it? He’ll go where European welfare states go.

Being Like Scandinavia

Sanders is a great admirer of Scandinavian countries, such as Denmark, Sweden, and Norway, and many of his proposals are modeled on their systems. But to pay for their generous welfare benefits, they tax, and tax, and tax.

Denmark, Norway, and Sweden all capture between 20-26 percent of GDP from income and payroll taxes. By contrast, the United States collects only 15 percent.

Scandinavia’s tax rates themselves are not that much higher than the United States’. Denmark’s top rate is 30 percent higher, Sweden’s is 18 percent higher, and Norway’s is actually 16 percent lower — and yet Norway’s income tax raises 30 percent more revenue than the United States.

The answer lies in how progressive the US tax system is, in the thresholds at which people are hit by the top tax rates. The Tax Foundation explains,

Scandinavian income taxes raise a lot of revenue because they are actually rather flat. In other words, they tax most people at these high rates, not just high-income taxpayers.

The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. From the American perspective, this means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent. …

Compare this to the United States. The top marginal tax rate of 46.8 percent (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000). Comparatively, few taxpayers in the United States face the top marginal rate.

The reason European states can pay for giant welfare programs is not because they just tax the rich more — it’s because they also scoop up a ton of middle class income. The reason why the United States can’t right now is its long-standing political arrangement to keep taxes high on the rich so they can be low on the poor and middle.

Where the Money Is – And Isn’t

As shown by the Laffer Curve, there is a point at which increasing tax rates actually reduces tax revenue, by discouraging work, hurting the economy, and encouraging tax avoidance.

Bernie’s plan already hammers the rich: households earning over $250,000 (the top 3 percent) would face marginal rates of 62-77 percent — meaning the IRS would take two-thirds to three-quarters of each additional dollar earned. His proposed capital gains taxes are so high that they are likely well past the point of positive returns. The US corporate tax rate of 40 percent is already the highest in the world, and even Sanders hasn’t proposed increasing it.

The only way to solve his revenue problem is to raise rates on the middle and upper-middle classes, or flatten the structure to make the top rates start kicking in much lower. You can see why a “progressive” isn’t keen on making more regressive taxes part of his platform, but the money has to come from somewhere.

The bottom fifty percent don’t pay much income tax now (only $34 billion), but they also don’t earn enough to fill the gap. Making their taxes proportionate to income would only raise $107 billion, without even considering how the higher rates would reduce employment and income.

The top 5 percent are pretty well wrung dry by Sanders’ plan, and their incomes are going to be reduced by 20-25 percent anyway. It’s hard to imagine that there’s much more blood to be had from that stone.

But households between the 50th and the 95th percentile (incomes between $37,000 to $180,000 a year) earn about 54 percent of total income — a share would likely go up, given the larger income reductions expected for top earners. Currently, this group pays only 38 percent of total income taxes, and, despite the 9 percent tax hike, they’re comparatively spared by the original tax plan. Their incomes are now the lowest hanging fruit on the tax tree.

As they go to the polls this year, the middle class should remember Sutton’s Law.

Posted July 1, 2016 by aurorawatcherak in economics, Uncategorized

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Arguing with the Indoctrinated 5 (What the Rich Owe Me)   2 comments

There are generally two types of workers in this world.

There are people who are risk-adverse who work for someone else, who move on to other jobs when the company is struggling or going bankrupt. Chances are good they’ll find a better job with the competitor who just ran their former boss out of business.

Then there are entrepreneurs who leverage everything to build a company that employs the risk-adverse. These entrepreneurs risk losing everything in order to build their businesses. When the company tanks, they lose their homes, their cars, their savings, their retirements, their everything. With great risk comes the potential for great profit or crushing failure.

I’m risk adverse. I make a modest income by working 40 hours a week and I invest in “safe” things like my mortgage and retirement account. Maybe if I have a little extra, I buy some stock, but that’s as risky as I’ll ever get because I like my current life too much to risk losing everything on a huge gamble.

My father-in-law was a gambler. Instead of bellying up to the Blackjack table in Vegas, he bet everything on a company. And it paid off in millions of dollars of income … for a while. At least three times in the 33 years I’ve known him, he’s lost everything and had to start all over. This time, he’s 74 years old and he can’t do it. He’ll live the rest of his life on $1600 in Social Security income while the people he employed will find other jobs with the competitors who ran him out of business by being more competitive.

Brad and I agree that we owe Leo nothing except the offer of a bedroom if he’d like to come live with us. We don’t have a lot of money, but we have a house and we are willing to share. He made millions and he didn’t save any of it for his retirement. That’s the choice he made and the consequences he should assume.

We also agreed — back when Leo was rolling in dough — that he owed us nothing. His income was his income and he didn’t have to share with us because we didn’t earn his wealth. There were some really expensive (but not useful in Alaska) Christmas gifts that came our way at times, but we have gotten what we own currently by the sweat of our own brows through the jobs that we worked.

If we owe anyone anything (besides the bank — note to self, the mortgage is due again), it’s our employers for employing us. They could have hired other people. They didn’t have to employ us.

There are a lot of people who think that “the rich” owe them something because they are not as wealthy as “the rich”. I disagree. My husband is a construction worker who has become a small business owner. Every employer he’s ever had was “rich” compared to him. They were “rich” because they owned a company that made enough money to support themselves and some employees. Now, when you divided all that “wealth” up among the employees and the overhead, it might actually be that the “rich” boss took home less money than the inividual employees. In fact, Brad has actually worked for that guy a couple of times. The company was “rich”, but the owner wasn’t … not yet, anyway.

Several of those companies are gone now because their owners got tired of being risk-takers and decided to join the ranks of the risk-adverse. In fact, I work with that guy now. Others of those guys have since become “rich”. They own nice houses and drive nice cars while also owning a successful business.

And what is wrong with that? They earned it by working for it.
Most “rich” Americans did not start out in the wealth-class nor did they get there by lucking into being the CEO of a Wall Street investment firm. https://www.gsb.stanford.edu/insights/joshua-rauh-what-forbes-400-list-says-about-american-wealth. Most US “millionnaires” are folks like my sister-in-law.

Amy grew up in a middle-middle-class family. Her father was a road engineer. She gained the benefit of his income in that he paid for her college education. She took that education and got a job as an accountant. When her first husband dragged her into an investment scheme that took the house she’d paid for,and all of their savings and created a debt crater the size of Detroit, she dumped him, kept her full-time job, moved into an apartment in a scary neighborhood, borrowed some money from her parents to pay for schooling so she could get her CPA and started killing her half of that debt. Within five years and at the age of 32, she was working for a nice salary (because she has highly sought after skills), had paid off the debt, repaid her parents for the loan, closed on a small home and begun saving for retirement because Ronald Reagan had let all of us know that there was no actual money in the Social Security Trust Fund. Until this decade, she never made more than $60,000 in annual income. She has made judicial investments in the stock market and mutual funds and she’s participated in her employers’ 401K programs. She’s got a good BS meter and she’s guessed the market a couple of times to avoid a huge crash.

She now has about $1.7 million in her combined retirement accounts. She got that by being debt free except for her mortgage for the last 40 years (she’s been mortgage free for almost 20 years now, but that was my brother’s contribution to the marriage). She has relentlessly saved 15% of her income for retirement. Careful investment strategy and the law of compounding interest did the rest.

She is a millionaire and, by extension, so is my brother. At least I shouldn’t have to worry about him needing to move in with me. She plans to live off the interest of her accounts and she may well need all of it because her mother is pushing 100 and still lively and living on her own.

And yet, in this world today, there are many people who would like to take 50% of that savings account to “give to the poor” because it’s just “not fair” that Amy has so much money and others do not.

She EARNED it by working for it, so why should she be forced to share it with others?

She doesn’t owe me a thing and she knows me, so why is there an assumption that she owes strangers anything?

Posted November 16, 2015 by aurorawatcherak in cultural divide

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Arguing with the Indoctrinated 4 (Robin Hood)   1 comment

We all know the story of Robin Hood. During a time of great income inequality, he robbed from the rich to give to the poor.

You see, that’s justice!

No, not really. Our interpretation of the legend of Robin Hood (which is likely based on some real persons) has been thoroughly warped by the propagandists. Go and read an older version of the story (mine dates from the 1880s). The story my grandparents learned had all the same essential elements but the interpretation was completely different.

Young English lord, Robert of Loxley, is pushed off his land by a greedy king. He takes to the forest, where he finds lots of other men of more modest means who have been forced out from under the law for various acts of living. They start attacking caravans and giving the money to villagers. Eventually, they cause the downfall of the sheriff who is working for the king.

My grandparents lived before the United States IRS existed, when the federal government made due with excise taxes on imports and whatever the states felt like sharing from their revenue.

So the real historical story goes like this —

Michael Praed is Robin of Loxley, the first oif the two Robins from the Robin of Sherwood TV seriesUnder Prince John, England had instituted a slate of crushing taxes to pay for the wars King Richard loved so much, but also, a sizeable stream of that money went into the coffers of the Roman Catholic Church to assure they would open the door of heaven for the crusaders (Richard being a crusader). The government of England was taxing a prosperous people into poverty. In the earlier tales, Robin was a yeoman — one of the rising middle class — who was taxed into outlawry. In later tales, he’s a lord who was made ignoble because he made the mistake of disagreeing with the greedy Sheriff of Nottingham, who was the area tax collector. As one of the victims of this heavy taxation, he took his revenge by robbing the tax caravan.

If one believes that Robin Hood had previously been a minor noble, then Robin of Loxley had been one of the “rich” prior to his becoming an outlaw, a title the government placed on you that had nothng to do with whether you committed crimes or not. Robin’s robbery had nothing to do with who was rich and who was poor. That whole “robbed from the rich to give to the poor” is a later addition. He robbed the tax caravan. Taxes were gathered by the government (represented by Prince John and his Sheriff). The taxes came from the villagers — some of whom were poor and some of whom had been a great deal more prosperous before Prince John’s tax collectors had shown up. The taxes were coerced from them by a combination of the government (Prince John) and the Catholic Church (many priests at the time acted as tax collectors) and the Church took a large stipend from the crown. The Roman Catholic Church acted as the “charitable” arm of the government. Consider it the Medieval equivalent of the Department of Health and Human Services. Of course, the RCC gave its “charity” to those they felt deserved it.

Robin stopped the tax caravan, took the taxes back and returned it to the people they had been stolen from. The original Robin Hood tales of the Middle Ages celebrated a renegade who rose up against property-rights violations and taxation abuses. His archenemies were not private traders or bankers, but the local government tax collector, the Sheriff of Nottingham, and the power-grabbing ruler, Prince John. The Roman Catholic Church objected because they weren’t getting their stipend either. How were they going to help the poor if the taxes didn’t get to them?

The people who had had their taxes returned to them no longer needed the Church’s “charity”. They were no longer “poor” because their income was no longer being stolen.

It really wasn’t until the modern era that people foolishly came to believe that government was the answer to our problems. It used to be understood that the tax collector was coming to take money from you that would enrich him or his employer while impoverishing you. Nothing has changed about that reality except your perception.

Posted November 7, 2015 by aurorawatcherak in cultural divide

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My Turn: Too much risk with house minority positions as Medicaid expansion questions loom | Juneau Empire – Alaska’s Capital City Online Newspaper   Leave a comment

My Turn: Too much risk with house minority positions as Medicaid expansion questions loom | Juneau Empire – Alaska’s Capital City Online Newspaper.

The battle in the Alaska Legislature explained.

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