Monday, January 30, 2012

With a Little Help from My Friends

What is your fair share?

We all know that a key to the President's success in the upcoming election is to convince the electorate that those on the upper end of the income ladder do not pay their "fair share" of federal taxes.  Further, the media has spent an amazing amount of time focusing on Mitt Romney's tax returns mainly to see if he paid a "fair share".  Beyond the fact that "fair share" conveniently has no quantifiable definition, I still think we can look at some key indicators to make a more informed decision as to which direction we think tax policy should head.  

1) Proportionality - I lifted this little nugget right out of the President's latest state of the union address: "Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense."

I do not know what the average billionaire's secretary earns, but lets call her middle class at $50k per year.  Even if she pays the full 25% (unlikely), she pays $12.5k in taxes.  Now, look at Mitt Romney's famous tax returns, he paid around 15% in personal income taxes on $20M and thus about $3M in taxes.  $3 MILLION vs. $12.5k.  If my math is right here, Romney paid at least as much as 200 secretaries combined.  Gasp, that bastard.  He paid for as much national defense, medicaid, and government warmth as 200 other Americans combined.  So, no Mr. President, I would not call your statement common sense, I would call it bad math.

We have come to a place where we equate the percentage of taxes to the absolute amount of taxes.  If we turn that concept around and equate the percentage of government spending to the absolute amount of taxes paid, then shouldn't Romney get 200 times the amount of national defense and medicaid and such.  Of course not.  Seems odd to me that someone who is footing the bill of 200 other people is accused of not paying their "fair share."

I have actually come to accept that proportional taxation is the best practical immediate solution to our problems.  However, even there, the amount paid by different income groups is extremely skewed.  Take a look at the graph in one of my favorite blogs that shows the share of federal taxes vs. the share of income:

The conclusion here is simple, In 2010, top earners made 30% of the income pie and paid 40% of the federal taxes.  Low end earners took home 25% of the income and pay 13% of federal taxes.  If your definition of 'fair' says people should pay proportionally to what they earn, then you should be advocating a flatter tax structure, NOT asking for a surtax on millionaires.

(So how does the rest of the world charge their top earners, no other country leans on the top 10% of tax payers like the U.S. does.)

2) Dividend Taxes & Capital Gains - So owners of corporations (stockholders) get taxed on the earning of the company at a top rate of 35% and then the same owners of those corporations get taxed AGAIN on the earnings when received as a dividend.  Would you say double taxation on the same income is fair?  Do you think raising this tax will increase or reduce business investment (a supposed common goal of all elected officials).  Again, use the Mitt Romney example here, his personal income taxes say he paid 15%, but he actually paid close to 50% on that money in taxes due to this double taxation.  

3) The Death Tax - Seriously, the most egregious overreach of government confiscation I can think of.  So two people: one invests, produces and saves enough money to be very wealthy at the time of his death.  His reward for such prudent activity, a 35% tax on his entire estate of which EVERY DOLLAR HAS ALREADY BEEN TAXED, with no option as to how he could choose to pass that on to his family, charities, and community.  The second person produced very little, spent every nickel the second it hit his hand, and passed on with just the clothes on his back.  The government says, kudos, you have achieved the American dream, you owe nothing, rest in peace.  Is it fair to tax this income yet again?   

4) Deductions - Mortgage Interest, Child Tax Credits, Child Care Deductions, Property / Sales / State Tax Deductions, and Making Work Pay Credits greatly raise the threshold before individuals actually start paying taxes.  Don't get me wrong, I benefit from these deductions as much as the next guy, but it greatly reduces the effective tax rates on a subset of individuals.  Somehow we are suggesting that people who make the personal choices to buy a house, have a baby, buy cars and boats, live in states with ridiculously high taxes, or work very little do not consume as much of the bloated government bureaucracy as those who don't make these choices.  Would you say it is fair to tax different groups of people based on their personal choices?   

(Side note: A lot of the argument I have seen for why lower income Americans pay more taxes do not hold much water.  Seriously, do not blame the federal government for how much your state and municipality charge in income, property, and sales taxes.  If you have issues with your state and local taxes, talk to your local representatives.  Its a different issue.)

In the end, I agree with the President, I believe the federal tax system is wholly "unfair."  I believe you should tax people based on the cost of protecting their rights and freedoms as Americans, and since all citizens have the same rights and freedoms, they should be taxed the same amount.

In lieu of that ever happening, I would just take a system where we all pay proportional rates to our earnings, do not get penalized by double taxation, and eliminate preferential treatment for individual choices.

Whether you agree with each point above is irrelevant, your "fair share" is not a quantity that can be readily calculated, but the more we let the government decide how society should spend its money, the less freedom society will have.

Monday, January 23, 2012

Back in the U.S.S.R.

Does Income Inequality Matter?

With the '99 percent' crowd along the president working the class warfare agenda hard, I believe many (including me) do not understand why they are actually upset.  Income inequality does and has always existed, but does it really create a form of oppression championed by the left.  Lets have a look at a few places where income inequality would actually matter, IF THEY WERE TRUE....

1) Do the poor have to get poorer for the rich to get richer?

I really like the chart below because it illustrates from 1950 to 1980 (typically considered the time of the great middle class society) middle class income roughly doubled, and the super rich income roughly doubled.  Then from 1980 to 2007 (the age of Reagan and big banks) the middle class saw the income increase ~33% and the super rich saw their income increase ~40%.   All in all, incomes increased at about the same rates; of course income inequality grew from 1980-2007, but it also grew from 1950-1980. 

Data: U.S. Census Bureau

But while all of the info is great, the key point is this: ALL INCOMES IN ALL CLASSES WENT UP.  The income pie got bigger and all groups can buy more.  Even if you are near the bottom of the income ladder, you are better off than those in the same income range 30 years ago.   Maintaining the lower income levels is pretty impressive considering that explosive immigration and globalization have pressured labor prices over the last 30 years much more than they did in the 50s and 60s.

So, to answer the question, the poor do NOT get poorer so the rich can get richer, and while you may look at the chart and say "but the spread is getting bigger", I say, "so what?", you are making more than you would have 30 years ago.

2) Are laws and policies being manipulated by the rich?

I will just propose this question to you,  the top 5% of earners pay ~40% of all of the federal income taxes.  Do you believe that group receives 40% of all government services?

Check out this blog that shows the extent that wealth already gets redistributed to the under-employed:

Don't get me wrong, I don't like special interest lobbies and corporate bailouts anymore than the next guy.  However, with frequent elections I don't think the top 1% can impose their will in the long run, unless the electorate chooses to stay very uninformed.

3) Does income inequality prevent mobility up the income ladder?

On the contrary, income inequality creates incentive for workers to move up the income ladder.  If incomes were relatively equal, then workers would have very little incentive to increase their productivity. Here is a nice blog with further proof that income mobility is alive and well.

Based on the above, I would conclude that income inequality is hardly a source of problems for society.  In the last 30 years, all incomes groups have seen income go up, the proportion of government services vs. taxes paid is still extremely slanted towards lower income individuals, and people have incentive to move up the income ladder.

Moreover, I get the sense that income inequality is brought up to make people think they are being treated unfairly, without of course giving any universal standard for fairness (because one does not and will never exist).  I am all ears to listen to arguments to the contrary, but I have not found one yet that is backed up with persuasive evidence showing how society benefits from more income equality.

I encourage you do more than just accept the talking points not just on income equality, but other issues as well.  Ask what is the impact of income inequality, what is the environmental impact of having a pipeline from Canada, what is the fair share of taxes people should pay.  You will be very surprised how short these arguments are on facts, and how long they are on playing on your fears, jealousies, and insecurities.

And for the second time in five blogs, Milton Friedman speaks:

"A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."

Monday, January 16, 2012

Sgt. Pepper's Lonely Hearts Club Band

As we begin to get into the critical part of primary season and one more debate tonight in South Carolina, I thought giving my slant on the Republican field would be in order.  

Mitt Romney:

I absolutely love this guy's resume.  Governor, Private Equity CEO, Olympics President and CEO.  A history of balancing budgets and creating jobs.  More specifically, he has experience balancing budgets without raising taxes in a left leaning state.  When you compare that to Obama (Community Organizer, Lawyer, State-Senator, Senator) you can see that Romney is dripping with leadership credentials not found in our current President, and in my mind is way less likely to just punt and blame Congress for his ineffectiveness. 

He is a touch moderate.  He is not going to bring about radical change in tax policy or entitlement spending.  But I do feel he would push in the right direction on both issues.      

Ron Paul:

His ideals and policies are PERFECT.  He truly sticks to the principles of freedom.

He can't win.

Newt Gingrich:

Huge ideas man, very strong communicator, would like to see him tee up Obama in a debate.

He is oozing with Washington insider.  I am not convinced he is for as much small government as he claims to be. 

Rick Santorum:

Seems to be a pretty genuine guy.

Seems like a guy who would try to legislate the economy on course instead of just getting the hell out of the way.  Way too socially conservative for me.  If I don't want to be told how to spend my money, I certainly don't want to be told how to live my life (I already have a wife and mom).

Rick Perry:

Governor with an excellent jobs record in an enormous state with a balanced budget.  Has a great flat tax and energy plan, believes in massive reduction in federal government.  On paper he is a giant.

Presidents are required to speak.  (Still, probably the closest an Aggie will ever get to being President)

John Huntsman:

His daughters are hot.

Liberals seem to love him.  And he spoke Mandarin in a response to a debate question.  Yeah, he's in touch with the Republican electorate.

So, there is my rundown, who am I voting for?  I'd prefer to wait to see who wins then claim I backed that guy.  Everybody loves a wise ass.

In all seriousness, I am looking at a combination of policy alignment and leadership ability.  I do NOT believe that anyone that can give a rousing speech and make big promises is up for the job.  You have to be effective at getting things accomplished.  I think right now Romney is that guy.

Wednesday, January 11, 2012

Please Please Me

Are jobs really what we care about?

The number one, two, and three issues facing our country today is jobs, jobs, and jobs, right?   I have heard Obama say it, I have heard endless chatter from Congress about it and all the Republican candidates running for President have varying plans to address it. 

I understand the grand divide in the theories of how to stimulate the economy.  The left wants to pump up government spending until there is enough consumption that new jobs are required which sparks more demand creating more jobs, etc... The right wants to reduce the burden on job creators allowing them to risk more of their capital igniting new investment, creating jobs.  Demand Side vs Supply Side.  And while I am a heavy supply-sider, I at least respect this philosophical disagreement.

However, beyond my comprehension is the way the President's Administration actually treats cases where jobs are at stake.  Here are a few very popular examples:

Boeing (NLRB)
The National Labor Relations Board blocking Boeing from building a plant in South Carolina because it is a right to work state and will reduce union labor.  Estimated 1000 jobs at risk.

AT&T - T-Mobile (DOJ)
The Department of Justice preventing AT&T from buying T-Mobile from the Germans citing Anti-Trust laws.  AT&T cited 5000 jobs were to be created from the deal.

Keystone Pipeline (EPA)
Pressure from the EPA has prevented the building of the pipeline.  Estimates anywhere from 8000-20,000 constructions jobs at risk.  Administration wants to wait until after the election to decide.

USEC Loan Block (DOE)
Delaying of $2B loan for a Uranium Enrichment project.  Not the type of energy wanted by the administration.  Potential of 400 jobs at risk.  Also, missing out on about 2000 construction jobs to build the new plant.   

Solyndra failure (DOE)
Losing $500 million in taxpayer money to make a poor investment in a solar company.  The impact on jobs here is that the government or taxpayers don't have that money to invest in something else.

Gulf Drilling Moratorium (DOI)
Since the BP oil spill, the Department of the Interior granting of permits to drill in the Gulf of Mexico have been virtually non-existent.  Obviously reducing potential job activity in energy sector.

Obama Care & Dodd-Frank
Two bills that are expected to have big negative impacts on job creators.  The first raising costs to start and maintain a small business and the second increasing hurdles for financial institutions to extend credit.

For each and every one above, the administration made a decision that pleased some constituency.  However, what is unmistakable in each case is that ANOTHER PRIORITY WAS CHOSEN OVER JOBS.  Whether it was environmental concerns, union rights, clean energy, health coverage or consumer protection, they were chosen over jobs.  No matter what your political view on these issues, if employment is really THE top issue, why would all of these other priorities keep trumping it? 

In fact, the only things I have seen the administration do that would be an effort to directly impact jobs is to implement a massive government spending bill, extend the Bush tax cuts, and go for this payroll tax holiday. All three just add to our massive unsustainable debt burden, or better put, pushes the problems down the road to the next guy.  Hopefully, the next guy is sooner rather than later.    

Friday, January 6, 2012

Can't Buy Me Love

How Do We Reduce The Deficit?

Whether you listen to right or left leaning media, you tend to get a fairly skewed idea as to how to balance the budget.  The left would have you believe the rich could bail us out if only they would pony up all that money they are using lighting cigars, buying gold-plated private jets, and plotting how to steal candy from babies.  The right would tell you that if we cut taxes the economic growth rates will be so tremendous that the government will be overrun with funds.

History has shown us that if you raise or cut tax rates you do NOT have a significant effect on the revenue stream to the government.  I will refer you to my favorite blog on the subject if you want more proof:

Therefore, the real trick to avoid becoming the next Greece is simple, where to cut... 

If you have never read (or heard of) the Bowles-Simpson Deficit Reduction plan (link below), I think it is worthwhile to give it a read and spend some time to understand it. This plan was created by a bi-partisan commission requested by President Obama (who then has widely ignored its findings).  I know this plan is old news as it came out in 2010, but if you are anything like me, it takes hearing about something 10 or 20 times before I actually go look into it myself (just ask the old lady).  This plan is the best resource I am aware of to get an idea of real tangible actions that can be taken to curb debt across the spectrum.

Even if you don’t give a wink about politics, you (and your kids) pay for this government and you should have some understanding of where the opportunities lie to improve the massive debt burden that, if left unchecked, will certainly leave us crippled in the not so distant future (exploding borrowing costs, massive austerity measures, crushing depression).  I urge you to think about it when you are deciding how to vote and when you are talking to others.

The focuses on 5 major things to reduce the debt burden:
1) Cut Discretionary Spending / Gov’t Revenues
- Cap both as % of GDP over long term
2) Reduce Individual Tax Rates / Eliminates loopholes
- Makes tax system MORE progressive
- Capital Gains / Div taxed as ordinary income
3) Reduce Corp Tax Rates / Eliminates Loopholes
4) Reform Healthcare
- Increase individual deductibles
5) Reform Soc Sec
- Increase max taxable income
- Raise the retirement age to 70 System

My personal views would be well right of those proposed in this plan:
- Spending/revenue levels should both be lower than proposed in the long term
- Taxing dividends is double taxation, should be eliminated
- Corporate rates should be far lower, if not zero
- Flatter tax rates
- I like Paul Ryan’s Medicare plan better (Private solution, premium support)
- Soc Sec should go to price indexing instead of wage indexing

While obviously I don’t endorse the whole thing, I compare it to current policy and would take it in a heartbeat. Why didn’t it pass? Simple, it raises taxes and reduces benefits, that is a born loser for politicians.  But it gives a very good ideas on changes that could be made (even in pieces) to help the deficit and spur growth. Enjoy.

While we gear up for a very important election in 2012, I urge you to think about government spending that actually benefits you and you family, and decide what you can sacrifice to reduce the burden on society.  Any middle class guy with a job can call for higher taxes on the rich and less benefits for the poor, but get real, you know the choices that are going to save this country are going to rely on people who figure out how to lean on themselves more and the government less. 

For example, I am happy to work until I am 70 take a lower benefit and pay higher medicare premiums if it means me and my kids have the chance to create, invest, and produce while alieviating the burden of crushing debt dangling over our heads. 

Thursday, January 5, 2012

Let It Be

I think I decided to start writing a blog when I was on my third cup of coffee driving my family home from our holiday journey to Ohio.  When I drink a large amount of caffeine, I talk a lot.  On a particularly long trip like this one, my wife and I exhausted the gossip about friends and family, the kids, and what we would like to accomplish next year.  Thus, the conversation inevitably turns to politics and economics.  This is where I spend a vast majority of the time talking, while my wife pretends to listen while warding off the sandman.  I can't really blame her, she has heard most of it before and either already shares my point of view or has agreed to disagree with me.  But I do believe my ramblings have increased our household awareness of the impact our political and economic choices have on our lives, and, more importantly to me, my children's lives.

So I am starting a blog mainly to keep from annoying my wife (as much).  But more importantly, I think people don't like to discuss these topics because its easy to offend others and/or the information is so politicized, no one really knows what to believe and get turned off out of frustration.  However, even with these difficulties, these topics have too much impact on our lives to be ignored and should be discussed well beyond your comfort level to insure people are actually making informed decisions.

I am not going to pretend I have taken on the noble task of providing you with non-partisan information.  If you can't tell from the blog title, I am more Friedman than Keynes.  I believe in a few things with all of my heart:

1) Free Markets - goods & people are worth their market values
2) Limited Government - Just enough to keep us safe and secure
3) Fiscal Responsibility - spend less than you collect, governments and households

I will spend the vast majority of my blog posts trying to persuade you on why these things are good for the whole of society and the steps we can take to move in that direction.  I am an engineer by trade and therefore look for more practical solutions to problems. i.e. I think you will hear me talk more about raising the retirement age on social security, though its a given I think we would be better off phasing it out entirely.  I believe it is important we make steps toward fixing issues and not just debate ideology ad nauseam.  Understanding whats possible to do gives you a better idea of what to look for in a presidential debate or on your local congressman's website.

So with that, I'll leave you with one of my favorite Milton Friedman quotes: 

"A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."