Taxes

Quote of the Day

by

Chet Richards, in a comment on this thread at Belmont Club:

For an economics professor, Gregory Clark has a very poor grasp of U.S. economic history. The real question is: what have we lost through our current redistributionist (i.e. socialist) policies?
 
LBJ instituted the “Great Society” as a redistributionist scheme. I well remember that at the time critics were saying that LBJ’s program was grossly underfunded and that it would have a very negative impact on the US economy. LBJ not only publicly admitted that the critics were right, he even openly gloated that future generations would just have to live with the consequences. On top of LBJ’s ego we had to suffer from the adoption of the “Limits to Growth” policy that was enacted in the early 70’s by liberal neoluddites including Nelson Rockefeller’s gang (and Richard Nixon). This policy choked off growth during the 1970’s by doubling the Capital Gains Tax.
 
So what have we lost? The long term economic growth of the US from its founding to 1970 was 4.5% through thick and thin. Growth losses during recessions and depressions were compensated by growth overshoots during the recovery period. Since the population was also growing, the per capita growth rate works out to about 3.5%. In 1970 the long term per capita growth rate dropped to 1.5% and has remained at that level ever since. (These days an annual total GDP growth of 4% is regarded as phenomenally good!)
 
Working the numbers for the period from 1969 to 2009 we have a per capita GDP growth of 4x with a 3.5% per capita growth rate. With the true per capita growth rate of 1.5% the per capita growth during this period was actually 1.8x. If we had not had LBJ and “Limits to Growth” our per capita economy would now be about 2.2x larger than it currently is. Factoring in the population growth gives us about the same ratio.
 
Conclusions: 1) Almost all of us have suffered a profound loss of the prosperity that should have been ours. 2) Revenues to the Government would have been substantially larger than they currently are and taxes would have been much lower. 3) Inflation would have been much lower which means our savings would not have been eaten away (and taxed) by inflation. 4) Current policies to expand redistribution are going to create even more loss of wealth and increase in poverty.
 
Shed a tear, folks, for what might have been, and what we likely will still lose.

Government Incentives

by

When I review tax programs, whether they are for local, state, or federal governments, there are two critical 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?

I thought about the “incentives” element of the program as my parents rushed out to take advantage of the “cash for clunkers” program which provides a credit (on the spot, to the dealer) for turning in cars that basically get less than 18 mpg and purchasing a new car off the dealer lot. This program has their own website (where they unhelpfully refer to the program as “Cars” or “Car Allowance Rebate System” rather than the far more effective “cash for clunkers”). My father’s car barely made the cut because it was right around 18 mpg and they have been clarifying the program and making him sign form after form (to prove that he has owned it for several years, that he had it scrapped, etc…) but generally this program was a “shining star” of an incentive because 1) the government wanted him to go out and buy a new car off a dealer’s lot right now 2) they wanted to make sure that his old 18 mpg car was taken off the road 3) they wanted to make sure that he actually owned the car and didn’t just swap it with someone else to get the $4500 in trade in when the car was only worth maybe $1000. All of these criteria were met, in this case.

While the FDIC isn’t a tax program, the agency that guarantees deposits at insured banks (with your tax dollars) also provides incentives. I was involved in the early 1990’s when the Resolution Trust Corporation was created by our Federal government in order to take control of insolvent banks (basically banks that made dud loans, generally for property) and pay back depositors. I was on one of the teams that would go into banks right at the time they were being shut down and secure the cash and assets as a lowly auditor. We weren’t exactly the CIA – we sat in cars outside the bank and everyone knew it was coming and the staff were generally very polite – but that was where I frequently heard the phrase

Heads – I win, Tails – the FDIC loses

By this phrase they exactly summed up the banking game at the time – make a lot of big and risky loans with “guaranteed” customer deposits, and if it goes well and the loans are repaid, you make a bunch of money. If the loans go sour, oh well, you just walk away and leave the FDIC holding the bag.

Read more

It’s Worse Than Mere Corruption

by

At USA Today via Instapundit:

Counties that supported Obama last year have reaped twice as much money per person from the administration’s $787 billion economic stimulus package as those that voted for his Republican rival, Sen.  John McCain, a USA TODAY analysis of government disclosure and accounting records shows. That money includes aid to repair military bases, improve public housing and help students pay for college.

 

The reports show the 872 counties that supported Obama received about $69 per person, on average. The 2,234 that supported  McCain  received about $34.

The article spends a lot of time explaining that there is no  evidence  that the distribution of the “stimulus” money occurred owing to  favoritism  or political corruption. I think that is true. If nothing else, the stimulus was rammed through so quickly I don’t there was time for corrupt allocation on such a scale.  

The real  explanation  is much, much worse.

This pattern reveals that the Democrats have created a hardwired system that automatically takes from Republican-leaning areas and gives to Democrat-leaning areas. This means that people in those areas don’t have to be convinced with intellectual arguments to vote for Democrats, because they will do so automatically out of economic self-interest.  People vote for Obama because they expect themselves and their immediate communities to  receive  money taken from areas that didn’t vote for Obama.  

Corruption can be fought by bringing down corrupt individuals. A legal, hardwired distribution system that creates an incentive for one group of citizens to loot other citizens is a much more serious and intractable problem.

[edit (2009-06-09 3:18pm) expanded quote to show per capita spending.]

Paying for it

by

On the one hand, we have the Obama administration’s grand plans for universal health care, investment in our infrastructure, reducing our atmospheric carbon output, and world-wide reduction in sea levels. On the other, we have the requirement to pay for it, assuming the Chinese would like to have some significant portion of their money returned to them. Currently, the administration seems to favor increased taxes (sorry, “contributions”) on those with the highest incomes. The problem is that there are not enough rich people to go around. Even at a tax rate of 100%, there is still not enough money to pay for all the urgently needed good stuff. What to do, what to do…

A possible remedy comes from the Internal Revenue Code, which starts with this:

§ 61. Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.

The definition is broad enough to encompass just about anything that could be construed as income; that is, anything that would result in the improvement in the economic situation of a person or entity. Cash need not be involved. Income can be recognized, and taxes must be paid, on the unrealized gains of certain derivatives (§ 1256, § 988), on bonds that do not pay anything at all until they mature (§ 1272), and even in some situations where you pay too little for something (§ 1274). This is a marvelously flexible idea, and suggests that we can close our budget deficits not by raising the tax rates, but by discovering and taxing previously undiscovered sources of income.

Read more

Health Care and Static Analysis

by

PANAMA AND ESCAPING HIGH US COSTS

One element that is generally not well considered in our health care debate is the fact that individuals will react (over time) to market signals and attempt to make rational financial decisions. A recent article from Business Week called “Panama – It’s the New Florida” with the tag line

Quality health care and low costs are luring lots of U.S. professionals

is useful to provide some background on this issue.

This article uses hyperbole – the total population of Panama is a bit over 3 million and U.S. residents are a small fraction of that total, while Florida has a population of 18 million – but the thinking is spot on, long term.

They mention a US citizen who has Parkinson’s disease and says

Researching rates in Seattle, she found that nurses run $25 an hour. In Panama City, where she has lived since 2007, they cost $25 a day.

Going overseas for medical work has a long tradition; generally it was the wealthy from Middle Eastern countries who came to Europe or the USA to receive advanced treatments. In recent years citizens of many nations featuring socialized medicine such as Canada travel overseas or to the United States to bypass waiting lists for critical procedures.

COST OF HEALTH INSURANCE

The most likely individuals to leave based on economics are those who retire early (like those in the article) and are ineligible for Medicare, which starts at 65. According to this survey (which is quite interesting, I recommend you click through and read it) – here are some numbers based on 2006 premiums and the survey was published in December, 2007:

Read more