Friday, September 12, 2008


Gordy Ringoen - Tax Politics

In a few weeks, we will be voting in the most important election in our lifetime. There is much discussion about the relatively inconsequential personal issues of race, gender, and social status. In spite of the noise and spin, there are major issues, including:

Whether we should have an energy policy that includes consumption as well as non petroleum based energy sources or just drill, drill, drill.
Whether we should advance our interests in the world primarily through negotiation or through the threat and actual use of force.
Whether we should expeditiously end the wars in which we are engaged, or should they be continued indefinitely until some sort of victory is defined and accomplished.
Whether we should engage in other pre-emptive wars.
Whether we should have a policy and actions to limit greenhouse gasses.
Whether we support or deny equal pay for equal work and whether women should have the right to choose abortion.
Whether we should teach religious based doctrines such as “creationism” and “abstinence only” in our public schools.
Whether spying on citizens without warrant or probable cause is acceptable.
Whether we accept torture as an interrogation tool.
Whether we support Habeas Corpus for all people under our control.
Whether the Federal Government should contravene state and local government’s laws regarding environmental and social issues such as marijuana restrictions, gay unions, and gun control.
Whether we should support stem-cell research.
Who we wish to fill the vacancies of likely two and, possibly three, of the more liberal Supreme Court judges. A shift to the right would undoubtedly reverse Roe vs. Wade and would likely have impact on Freedom of Speech, Separation of Powers, and Habeas Corpus.
Whether tax cuts and free markets alone will reverse our economic and financial woes.
Whether the solution to immigration is higher fences, more border patrol, and incarcerations or developing polices which take into account our benefits vs. our costs of immigration and addressing the root causes.
Whether we should adopt policies and programs to provide health care for the nearly 50 million that have no medical insurance.

This is not an exhaustive list but does highlight some of the more important issues. They are reasonably easy to understand and everyone can make up their own minds where they stand on these issues.

The one important issue that there seems to be a great deal of misinformation about is taxes. Many of my peers claim that taxes are their number one issue. Obama would raise them while McCain wants to lower them. I suspect some of the people that take that position are really using it as an excuse to justify their vote for McCain while the real reasons lie elsewhere. It would be similar to the Palin nomination which may be an excuse to vote against Obama, but is not a rational reason to vote for Mc Cain.

None-the-less, there are many whose primary issue is taxes which I will discuss.

First, much of the campaign rhetoric can be ignored. McCain says that Obama will raise taxes while he will lower them. Obama says his tax proposal would lower taxes for 95% of the people. The New York Times last week said, after analyzing both positions, that there is little material difference.

McCain infers that tax cuts can be funded by eliminating earmarks. Earmarks are special projects authorized by Congress and approved by the president. They allow Congressmen to show their constituents that they are looking out for their interests in Washington. Some are worthwhile projects, while others, like the “bridge to nowhere,” are not so good. In any event, the people in the receiving districts love them as do the politicians who fight for them. They help them get re-elected. Sarah Palin needn’t apologize for trying to get plums for her constituents, but it is ingenious to claim that she is opposed to earmarks because she switched her support for the “bridge to nowhere” after it was dead in Congress. And, even though she said “no thanks” to the bridge after it was dead, she did not return the money, but rather, used it for other pork barrel projects.

Let’s put earmarks into perspective, they amount to about $18 billion per year or a little more than ½ % of Federal expenditures. They are relatively inconsequential and are not going away. The president has little influence over them and it is not a rational presidential campaign issue. Presidential, “line item veto,” which will not happen, would only further politicize the process.

So let’s finally get down to the meat of the issue, income taxes, higher or lower?

Let’s first look at a macro-economic view. It is forecast that our total goods and services to be produced in the U. S. over the next year will be approximately $15 trillion. Government expenditures, not including wars, will be about 21% of that amount. As you can see, from an economic standpoint, government expenditures are coming out of the economy on a current basis. It doesn’t matter whether it is surgery for a Medicare patient or a bomb that explodes in Iraq. The economic cost is the year in which it is spent or used. The economic cost of a war is the year in which it is fought. That which is spent on a war is production of goods and services that could have presumably been channeled to some other useful purpose either by government or the private sector.

Notice, from an economic standpoint, there is no consideration as to how the Government gets the money to pay for its expenditures.

So, how does the government pay for its expenditures?

It can tax it citizens and corporations.
It can issue IOU’s (Treasuries) to its citizens.
It can issue IOU’s to the Federal Reserve which, in effect, prints money to pay for them.
It can borrow from foreigners.

Those are essentially the only material choices.

The question is what is the best mix of these choices for the long term economic benefit of our country and, for us as and our families individually?

In looking at the list above, there are really two fundamental choices, taxing or deficit financing, as items 2-4 are all related to borrowing. The projected Budget for 2009 is a historic high Federal deficit of $480 billion, not including the cost of our wars which will add another $180 billion or more, plus, the likely elimination of the alternative minimum tax at $60 billion, and the cost of financial bailouts. It amounts to more than $2,000 per person in the U.S.

The projected taxes for the 2009 Budget includes $1,259 billion income taxes, $949 billion in Social Security taxes, and $339 billion in corporate taxes. You will note that Social Security taxes are just government revenues, like any other, and are not set aside for Social Security benefits.

It is fundamental to our tax system that it be equitable and just. Everyone can decide whether, a 13.5% Social Security sur-tax, beyond normal income tax, which falls almost exclusively on workers, is appropriate. Or, that a maximum of 15% capital gains tax which overwhelmingly favors the rich, meets those criteria. An early issue for the next president will be decision to continue the Bush tax cuts beyond their scheduled expiration in 2010. Continuation of the tax cuts will add $1 trillion to our Federal deficits over the ensuing four years. Fifty-two per cent of the tax cuts will go to the top 1% of incomes.

So, if the economic costs of government expenditures are the same, regardless of how they are paid, why not just tax and be done with it? Well, the problem with taxes is that you know specifically who, when, and how the bill is being paid. That is both its advantage and disadvantage.

Paying for Government expenditures with debt gives the immediate impression that no one will have to pay, but the reality is someone will pay, you just don’t know who, how, or when. Most economists complain that future generations are going to have to pay off our debts. Why would we expect that the next generations will become our economic slaves by taxing themselves of their production to pay for Treasuries that we issued to ourselves and foreigners? In other words, they think that our generation can consume everything we produce and then consume what the next generation produces. Not likely. How do our progeny walk away from these obligations? They simply deficit spend and inflate just as we have done. They will do exactly as we have taught them to do. Unfortunately, for the holders of those Treasuries, their purchasing power will fall. Future generations will diminish the value of the Treasuries we have issued through continued inflationary policies.

But, the more urgent problem with the deficits is that it destroys our economy. As the Government increases its share of the economy, individuals increase their debt to maintain their standard of living. The increase in debt in both the private and public sectors without corresponding increases in the real economy causes inflation in asset prices. The increase in prices of securities and real estate gives confidence to borrow and consume even more. This has incredibly spiraled without restrictions to the point where we have a negative economic savings rate and hence negative investment. With negative investment in education, infrastructure, and capital equipment there is continued economic gloom as far as the eye can see.

Further, the asset appreciation we have enjoyed in real estate and securities prices is nothing more than fool’s gold as we have not built the foundation for a strong economy. It is relatively easy to fool ourselves for a while, but it is impossible to change the basic economics of bad policy. Either through inflation or deflation the value of the asset claims on our economy will be diminished in value to the level that the real economy can support them. Sorry, there is no free lunch.

The deficits also lead to the unsustainable and equally dangerous balance of trade deficits which can be visited at another time as well as whether more deficits in the future will stimulate the economy or will be a further drag.

In summary, Federal deficits are destroying our economy for following generations and may not even spare us from the collapse of the prices we use to measure our personal wealth.

In short, we should not succumb to the siren song of lower taxes but, rather, that we need to equitably increase taxes to shrink our disastrous deficits. And, that those expenditures which are made are done judiciously, in the best interest of the country, today, and in the future. Only when this happens will we be on the road to true economic recovery.

For those, who still take a “me first” approach and think that lower taxes are in their personal best interest, they should look at their portfolios and compare their recent debt induced performance compared to the tax savings they hope to gain in the future.

Finally, for my generation, who inherited a healthy and robust economy which we have dissipated through profligate use of resources, over consumption, and insufficient investment, while allowing a grotesque, bloated, and distended financial system to evolve, we need to use our remaining time and energy to force the economic, financial, and fiscal changes necessary for the economic wellbeing of our children and grandchildren. And, it starts with our choices in the coming election.

gordy ringoen


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