Tuesday, September 25, 2012

Tax Burden

Great charts enclosed showing the federal tax burden by income groups. 

Bottom line:  Federal income taxes are very progressive and taxing millionaires has no chance of solving debt problem:


Friday, September 21, 2012

How Did We Get Here?

As we draw ever closer to the election, people have a clear choice to make on the direction of the country, and a glimpse at history can help illuminate our future.  What are the clear issues that face us today:

23 Million Americans under-employed and $16 Trillion in debt. 

No other issues really matter when these numbers are so high, and these numbers are even more frightening when you look at them in the context of history, as the last time unemployment maintained these epidemic levels this long was during the Great Depression.  So what went wrong?

The conventional wisdom from the left suggests that George W. Bush was the singular cause of this mess as somehow war and tax cuts caused all the past and current deficits AND plunged us into a financial meltdown.  Of course, these arguments breakdown when pressed to explain their logic as Bush's policy changes were more leftist Keynesian than free market.

But I'm not here to defend or bash W., I am here to offer deeper reasons for why we are currently stuck at high unemployment and debt, and remind you that history will repeat itself if we do not take action in this election.  The reasons for our inability to kick start the economy and gain control over our debt are seeded in actions taken long before now, they actually start during our last great depression...

Entitlement Spending:

The die was cast when we passed the Social Security Act in the 1930s that we were going to take the responsibility of saving for retirement away from individuals and shift it to Government.  The program claims success for keeping millions of Americans from poverty (of course, it also assumes that Americans were not capable of that responsibility on their own).  However, our population has dramatically changed over 80 years, and we have not adjusted the program accordingly.  The payouts continue to be more and more generous, while the payroll funding diminishes, creating larger and larger obligations and debt for our nation.

Medicare was established in the 1960s with the same goal, take care of seniors who cannot do for themselves.  However, the same issue is being played out here.  Higher and higher medical costs, high fraud and inefficiency driving up our debt, while elected officials expand benefits and ignore the effects of the aging population.

Remember both of these programs were easily paid for at their start, but now both are threatening to cripple our fiscal future.  And now here comes Obamacare.  Can you really believe this program will remain solvent?  Can you believe that we would ever adjust the program to cut benefits if it gets too expensive.  History says that we do not have the political will to reduce handouts once we start giving them.  Further employers realize these programs will continue to drive up their taxes and thus discourage investment in new markets and new jobs.

Minimum Wage:

In the 1940s, the United States passed a national minimum wage.  The intent of course sounds nice as it forces employers to give a decent wage to workers.  However, in practice a minimum wage is higher than the market wage and therefore increases supply of labor while decreasing the demand for labor (Econ 101).  The result of course is higher than necessary unemployment.  Ask the 14% of young adults unemployed who could be gaining skills on a job to advance their career if they would like to see employers hire more people at lower wages.

Government Unions:

In the late 1950s and early 1960s, government employees were granted the power to collectively bargain.  As you can see from recent history in Wisconsin and Chicago, teachers unions have taken a large role in bankrupting states and municipalities.  How many less state and local government employees would have been laid-off if government bodies could have reduced pay or benefits like so many other companies did to survive after the financial crisis?  Of course, these unions want you to believe they are there to protect the teachers, but in reality they greatly reduce the number of teachers hired (not to mention suck up huge chunks of the education money that could be going to your children).

During our great recession, when people across the board have taken pay cuts, lost benefits, and significantly reduced personal wealth, these government unions continue to hold tax payers liable for promised benefits from government officials that the unions got elected.

Auto Unions:
In the 1970s, the global economy started to quickly mobilize as Japan and Germany finally recovered from WWII.  They were able to break into the auto industry and make higher quality cars at better prices than the U.S. automakers.  Why?  Automakers were hamstrung by laws that forced them to work with unions and thus gave inordinate power to unions to demand higher than market pay and pensions.  Of course, these guaranteed benefits were nooses for the auto companies and when they hit a tough recession, those nooses snapped their necks.  They were powerless to cut costs or raise money.

Of course, in response the taxpayer stands to lose up to $85 Billion dollars to bail them out, investors took a huge haircut, and they did little to cut union members benefits.  So any job Obama claims to have saved, may never have been lost if GM was able to pay market compensation to their employees when required to be competitive.  Maybe we should be asking if Obama supported the unions positions for the last 40 years that caused the problem instead of praising him for taking money from taxpayers to try to fix it.

All in all, I do not care so much that people want to collectively bargain, but people should not be forced to collectively bargain.  This forced unionization has led to reduced competitiveness and size of some of the flagship industries in this country.  

I could continue and focus on how other programs like welfare, unemployment insurance, mortgage interest deductions, and student loan subsidies increase our debt without providing incentive to be productive, but I think I have made my point. 

The critical point here, is that all of these policies have two glaring effects.  1) They reduce the amount of jobs available because they make hiring new employees too expensive and 2) The resulting lower employment is a drag on government spending due to the existing welfare state.  

23 Million Americans under-employed and $16 Trillion in debt.

Amazingly, the majority of the programs/special interests above had little effect on deficits when they were first enacted but over time they grow into unmanageable nightmares and create structural damage to our economy.

I don't blame Obama for the mess he inherited, it started many decades ago.  What I do blame him for is his philosophy that all of the above policies are great or did not go far enough to include government in our lives, and his insistence on adding new ones to the list so Americans have to jump ever higher hurdles to find jobs and pay increasing taxes.   

We must be smarter.  We must realize that increasing the role of government and special treatment for individuals has led to sustained lower employment and higher debt.  There is no free lunch, so even if you like the idea you will collect an unemployment check if you get laid-off, remember it comes with a side of reduced likelihood of finding your next job.

Many of the problems we face today started with policies built over many decades.  What do you want our country to look like 10, 20, 30 years from now.  Now is the time.  Change directions.  Pay attention to history and understand that any short-term gain imposed by government edict comes at a permanently higher cost to all of us.  Our financial future is in great jeopardy, but worse we are slowly and systematically being stripped of our freedom.  That should be unacceptable to all Americans.