Taxes

An Important Qualifier

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Via Instapundit comes a major  (albeit British) media report that the Tea Party protest in Washington turnout could be as high as two million.

As impressive as that no doubt upper-limit estimate is, I think that the raw number leaves out an important qualifier.  To be    truly accurate, the report should say:

Two million people with jobs…

Getting hundreds of thousands of kids, the professionally unemployed  and government workers to show up isn’t that hard (especially if someone buys the bus tickets). Getting two million middle-class, middle-aged people with jobs, careers, children and businesses is way, way more impressive.

We can safely assume that for every individual who made it to the protest that there are dozens of people whose grown-up obligations prevented them from attending.

That thought should keep Obama and Pelosi up at night.

[update (2009-9-13 10:17pm): I should point out that I don’t think anyone really believes that two million people showed up in Washington. One percent of the entire U.S. population is 3 million people so two millions gets you two thirds of the way to one percent of the entire population. I don’t think there is a city in world that could handle that big an influx of people. Washington D.C. itself only has a population for 590,000 so having nearly four times the population of the city show up is really not credible no matter what the senior Democratic leadership thought. On the other hand, having hundreds of thousands of people, most who have never protested before, show up is significant and puts the tea party in the big leagues no matter how you cut it.]

[update (2009-9-13 6:53pm): For unknown reasons, all comments by Hippeprof were deleted from the thread below. This issue is being investigated and we will try to recover the comments. If anyone else saw their comments disappear please email me at the link to the upper right.]

[update (2009-9-13 8:02pm): 20 comments were found to have been removed by the spam filter. We have restored them and I will be cleaning up duplicates and removing the “hey, what happened to my comments?” post in order to keep the thread clean.]

[update (2009-9-12-10:16): The technical problems have resurfaced. Your posts may not show properly. We may have to freeze the comments. If you have an important point to make  you can email at the link to the upper right and I will add your comment to thread manually as time permits.]

The Coming Debt Repudiation

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In-Cog-Nito sent me a pair of links, to an article entitled Why Default on U.S. Treasuries is Likely, and a shorter summary of the article. Troubling reading indeed, but still, RTWT.

It is not literally impossible that the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly. But my guess is that, faced with the alternatives of seeing both the dollar and the debt become worthless or defaulting on the debt while saving the dollar, the U.S. government will choose the latter. Treasury securities are second-order claims to central-bank-issued dollars. Although both may be ultimately backed by the power of taxation, that in no way prevents government from discriminating between the priority of the claims. After the American Revolution, the United States repudiated its paper money and yet successfully honored its debt (in gold). It is true that fiat money, as opposed to a gold standard, makes it harder to separate the fate of a government’s money from that of its debt. But Russia in 1998 is just one recent example of a government choosing partial debt repudiation over a complete collapse of its fiat currency.

Zimbabwe option, anyone? Or the alternative of tax rates exceeding the peak from World War II — forever.

Have a nice day.

Advice for Charlie Rangel

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You.. can be a millionaire.. and never pay taxes! You can be a millionaire.. and never pay taxes! You say.. “Steve.. how can I be a millionaire.. and never pay taxes?” First.. get a million dollars. Now.. you say, “Steve.. what do I say to the tax man when he comes to my door and says, ‘You.. have never paid taxes’?” Two simple words. Two simple words in the English language: “I forgot!” How many times do we let ourselves get into terrible situations because we don’t say “I forgot”? Let’s say you’re on trial for armed robbery. You say to the judge, “I forgot armed robbery was illegal.” Let’s suppose he says back to you, “You have committed a foul crime. you have stolen hundreds and thousands of dollars from people at random, and you say, ‘I forgot’?” Two simple words: Excuuuuuse me!!”

Steve Martin

“Candy” Tax – or how not to raise taxes

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Recently I wrote about incentives and how to review tax programs on these two criteria

– Effectiveness – does the tax program raise the revenue in a manner that is cost-effective and have the lowest level of harm and distortion to the overall economy?
– Incentives – if the tax program is designed to promote a certain type of activity or “deter” a different type of activity, do the incentives actually drive the behavior that the law is intended to achieve?

The photo above is from an excellent Chicago Tribune article about a change in the Cook County (Chicago) sales tax rules which mean that “candy” is taxed at the highest rate (10.25%) rather than as “food” which is at a significantly lower rate (2%).

This tax shows the “down the rabbit hole” elements of tax complexity when incentives and effectiveness go haywire.

From a complexity standpoint, this makes no sense. Lots of items contain flour and are thus counted as “food”, but for the small shop owner, explaining this to staff and customers will be a difficult and time consuming process. For large retailers it likely won’t be as big a deal because this is all calculated by the register.

From an incentive standpoint, this makes even less sense. Since sales taxes are highly regressive, which means that they sock the poor harder than the rich (since the poor consume almost all of their income, and pay a high percentage on food), you could understand how the state might want to exempt food. But the line between candy and food is now blurry and complicated.

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Business Week Article on Stock Buybacks

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A recent Business Week article titled “The Buyback Boondoggle” discusses stock repurchases.

As the unemployment rate hovers near 10%, the economic debate is focused on how the government should aid recovery… but it’s business’ task to get the economy back on track – by investing in innovation and job creation. And if the recent past is any guide, corporations may stall the recovery by investing instead in something else – stock buybacks.

This article is an example of poor journalism and populist reasoning right from the start. You can see the writer’s view on business – that its purpose is somehow to create jobs – and that this should be the main goal of a business. Which, frankly, is a terrible assumption.

Businesses are created to make money. Businesses are (usually) run by smart people who want to invest their equity capital (raised from the stock market) in the place that will earn them the most money, and if they have a lot of equity capital outstanding (in the form of stock proceeds and retained earnings) they have to put this money to work on new projects that are at least as profitable as their current portfolio, or they are decreasing their company’s profitability, which is severely disliked by investors.

And the United States nowadays is a poor place for new investment. Want to know which country in the developed world has the least friendly tax outlook? The good ol’ USA. Per that highly recommended site “The Tax Foundation”

Currently, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among OECD countries to Japan’s combined rate of 39.5 percent… Many states impose state corporate income taxes at rates above the national average of 6.6 percent. Iowa, for example, imposes the highest corporate tax rate of 12 percent, followed by Pennsylvania’s 9.99 percent rate and Minnesota’s 9.8 percent rate. When added to the federal rate, these states tax their businesses at rates far in excess of all other OECD countries.

The US also has a surplus of lawyers and a highly litigious culture that requires businesses to spend an inordinate amount of time preparing for lawsuits of every sort. And if you want to build something, such as a manufacturing plant… you must be kidding, right? The environmentalists and regulators will tear you to shreds, with protests, forms, and a never-ending stream of bad publicity. And if you have unions, or are in a state loaded with unions (such as the Midwest, sadly enough) you have a militant work force demanding gold plated benefit plans and happy to walk out and crush your operations at a moment’s notice.

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