Recently in Taxes, Taxes, and More Taxes Category

As much as many have been using the financial difficulties in states like California, New Jersey, New York, and a few other states to illustrate the problems with profligate spending and over-the-top tax burdens, they are more like the extreme examples that not everyone can easily relate. So rather than repeating the same old same old, it would be better to use two other states. These two states are similar in population, demographics, and just happen to share a border. However it is the differences between these two states that may give us a better comparison for their different approaches to state spending and taxes policy.

Which two states are we talking about?

Maine and New Hampshire.

Amity Shlaes uses these two states to show how out of touch our President is when it comes to how tax policy and government spending can have an effect on the economy, positive and negative.

Even before Obama was born, some states were applying the Obama rule of "spend, even if it means higher taxes, and you will grow." Others operated on the philosophy that less government, even perhaps in times of trouble, served their residents better.

J. Scott Moody of Public Choice Analytics, a New Hampshire public policy consultant who specializes in cross-state analysis, ran his own experiment. Moody compared Maine, a state that more than 60 years ago embarked on one path, with New Hampshire, which went a different route. Like the president, Moody favors an emphasis on the household pocketbook. He therefore spends time looking at per capita personal income of individuals.

Amity goes on to explain how both states were at parity in regards to taxes, income, and government largess back in 1946, but took divergent paths from that point on. Maine ended up adopting both a sales and income tax while New Hampshire still has neither. (The point could be made that New Hampshire does actually have one in the form of an Interest & Dividends Tax, but most folks pay neither because they don't have enough income from either to trigger the tax.)

In the end the two different paths taken have illustrated quite handily how taxes and federal largess can have an overall negative effect on the state so afflicted.

Overall today, Maine residents shoulder a heavier tax burden than do those of New Hampshire. State and local taxes take 12.6 percent of personal income in Maine, the sixth-highest share among states. In New Hampshire state and local taxes take 8.7 percent, putting New Hampshire at 49th for tax burden.

The result? Decade in, decade out, New Hampshire's economy grew faster than Maine's, so that the Granite State surpassed the Pine Tree State in 1984 and today boasts an output that is 20 percent bigger. Maine's recessions and double dips were worse than New Hampshire's. Eventually New Hampshire also won the population contest, passing Maine, in part thanks to migration. Last month, joblessness was 8.1 percent in Maine, better than Ohio but still bad, and 5.8 percent in New Hampshire.

In general New Hampshire hasn't suffered nearly as much from this recession as the other states in New England and the rest of the northeast. Historically, New Hampshire has fared better during recessions and recovered from them more quickly since the 1970's. Such success can be attributed to the state's low tax burden and limited government.

Unfortunately over the past 4 years the state has been inflicted with a milder form of the Tax-And-Spend disease that has plagued so many other states. Fortunately the voters have managed to hold the line at the town/city level, reining in spending and keeping property taxes in check. They are also making known their displeasure with their spendthrift legislators, seeing them for the wastrels they have become. An example: the legislature made the mistake of trying to abscond with $110 million in private funds from a state chartered medical malpractice association to help fill a ~$250 million budget deficit of their own making. Fortunately the state Supreme Court saw through the maneuver and told the state government the money wasn't theirs and to keep their hands off. That hasn't stopped the legislature from trying an end run around the Court, but the voters are quite aware of what's been going on and will likely correct the problem this coming November.

How many other states would have had their Supreme Court slap down a money grab by their legislatures? How many other states would fire the legislators trying to spend and tax their citizens money to the point where the state would no longer be attractive to businesses? Not to many, from what I can see.

So what does any of this have to do with what's been going on in Washington? Simply this: If the tax, spend, and grow the government at any cost agenda doesn't work at the state level, what makes Obama, Pelosi, and Reid think it will work at the national level? The only difference will be the number of zeroes in the size of the deficits. Unfortunately I doubt any of them will take the hint.

As the various state primaries are held and incumbents from both parties are finding themselves being seriously challenged by newcomers, the question we must ask ourselves is will the voters back tough steps to reduce the deficits? So far the answer appears to be yes.

Despite the disdain that many in Congress feel for the American electorate, more of them are feeling the heat back home. Some have already lost their primary bids to run for re-election, becoming victims of hubris after they decided it was just a dandy idea to spend the nation into debt to a level never seen before with little hope of ever being able to pay it off. And should the Republicans manage to take back one or both houses of Congress, there's another question all of us have to ask them, that being do they "have the stones" to take the measures necessary to bring our government's fiscal house into order?

Reading comments to the two posts linked above it appears that a substantial number of people on the left cannot conceive of the actual size of the deficit or what it will take to fix it. More than one of those commenting wrote something along the lines of "All we need to do is slash defense spending and we'll have enough to pay for everything." All that phrase did was prove to me and others commenting that they really have no idea how much money we're talking about. As one commenter put it in response to the clueless:

If we cut defense spending to zero, we'd still have almost a trillion dollar deficit to deal with every year. Better to cut things that really do nothing more than suck up tax dollars with little, if anything to show for it.

This same commenter also brought up the point that defense is one of the duties of our federal government as defined in the Constitution. ObamaCare, Cap and Trade, corporate bailouts, union bribery, and government departments like the Department of Education, the Department of Energy, and a number of others are not. Yet we waste billions on them with little return for that 'investment' of our tax dollars except more needless regulation, more costs associated with complying with those needless regulations, and tighter restrictions on our economy's ability to function. How does any of this help anyone...except those in Washington wishing to exercise more power over our lives?

I have a feeling those in power are in for a rude awakening come this November and November 2012. A lot of them will be hitting the unemployment lines.

This is a concept that needs to be repeated again and again and again until it sinks in to the minds of the Progressives: You cannot tax our way into prosperity.

Again and again it's been tried, even here in this country, and it's failed EVERY. SINGLE. TIME. Yet the Progressives are incapable of realizing a very simple and easily proven truth, that being you cannot enrich the poor by impoverishing the rich. Yet again and again they insist that in order to be "fair" they need to spread the wealth. Unfortunately they will quickly do away with what wealth there is (except theirs, of course) and make sure everyone is poor. As if that were somehow fair.

The argument they use is that the wealthy can afford confiscatory taxes. But for every means the Progressives come up with stealing what isn't theirs through taxation, the wealth producers find ways around them. And as the tax rates climb, they collect less revenue from the wealthy. Should it become bad enough, the wealthy will leave, taking their wealth with them. That's a lesson the UK learned during the 1970's, when their 'wealth' taxes caused a mass migration of wealth to more tax-friendly locations, with the end result being the collapse of the British economy.

Could the same thing happen here? Absolutely. We've already seen some elements of that occurring, with US corporations moving their 'headquarters' to tax-friendly nations like Bermuda, allowing them to greatly reduce the amount of corporate taxes they pay. Why? Because the US has some of the highest corporate taxes in the world. Only a sucker or an idiot wouldn't make moves to lessen their tax burdens if at all possible.

Now that Obama, Pelosi, Reid, Frank, and Dodd have decided the rich are the problem, they've been wasting no time trying to figure out even more ways of extracting money they did nothing to earn to give to their 'core' constituents, meaning not the average working man or woman. One commenter to the piece linked above has some of it figured out.

[They] are not really interested in raising revenue - but to continue punishing those that have money - ... It is as simple as that.

They are so envious of those that can create wealth, that the only thing Obama and his ilk can do is grab onto as much as they can, spread the misery and distribute anything they can grab - The fact that they may have less to distribute is also irrelevant - As long as those that have money feel the sting, Obama is happy - and when those that have money do whatever it takes to try and escape the taxman, the misery creators, Obama will keep turning the screws ...

The Progressive mindset does not allow them to think anything other than wealth is a 'zero sum' game. That means they believe that if someone became wealthy it was because they stole it from someone else and made them poor. It appears it is hard for many of them to believe the wealthy became that way through hard work, long hours, and taking risks others were not willing to take. That many Progressives in government have managed to become wealthy through their government connections and not through the traditional American system of hard work again leads far too many of them to think their way is the only true way to become wealthy. It is true in a kleptocracy, something it seems a lot of Progressives are working very hard to create. One thing they have overlooked though is that most kleptocracies are Third World nations, with a vast majority of their populace living in poverty because that's exactly the way the kleptocrats in power want it. The Progressives in this nation are no different, though they'll try to pretty up their attempts in mind-numbing governmentalese and politically correct speech, trying to make it seem as if it's a good idea.

In the end, though, it all comes down to envy. Democrats, and particularly the Progressives within the party, envy the successful. It's all they have that might reach others of the same bent of mind. They'll work hard to take away what the successful have made, but won't work that hard to make themselves successful. They are, as Ayn Rand described them, looters.

But all of that aside (I do go off on tangents, don't I?), what Laffer describes, what most Americans understand, and what the nation needs can be broken down into two simple sentences, provided by yet another savvy commenter:

Who cares if tax breaks don't fill the pockets of lower wage earners (like myself)? If raising taxes doesn't help the economy, then don't do it. (Emphasis added)

Indeed!

It was while reading the comments to this Brian Riedl piece about the myth of the Bush tax cuts and the deficit that a suspicion of mine was confirmed, that being that far too many otherwise educated and experienced people still have little understanding of the relationship between taxes, government spending, and economic growth.

First, the three myths.

The Bush tax cuts wiped out last decade's budget surpluses.

The next decade's deficits are the result of the previous administration's profligacy.

Declining revenues are driving future deficits.

I won't delve into the rebuttal Riedl provides as you are more than capable of reading it for yourself. However I can boil it down to a simple, easily understood phrase: It's the spending, Stupid!"

Tax cuts didn't cause the deficits during the Bush Administration. They didn't cause the unprecedented deficits during the first 19 months of the Obama Administration. The shortfall in revenue was not the problem then, and it's not the problem now. It's the spending by our government that exceeds what it takes in that is causing the deficits, period. Raising taxes won't solve the revenue shortfall because they won't generate the revenues Congress expects. Instead, revenues will fall off as the higher taxes discourage the very economic activity the government needs in order to expand the tax base.

Now comes the fun part.

Reading the 200+ comments to Riedl's op-ed piece, it is quite obvious who gets it and who doesn't.

Probably one of the most disturbing set of comments came from someone who is purportedly an experienced CPA, yet doesn't understand the Laffer Curve for what it is: a graphic representation of the relationship between tax rates and tax revenues. More than one comment showed her lack of understanding that the relationship between tax rates and tax revenues is not linear, meaning that if tax rates are doubled on some economic activity the revenue collected does not automatically double. It will be less than that because the higher taxes discourage the activity being taxed, hence less money changes hands, in turn decreasing the amount of money available to be taxed.

She also likes to make claims she doesn't back up or is unwilling to admit she was wrong when confronted with facts from the very sources she (sometimes) quotes. An example:

Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to.

She then goes on the quote economist Greg Mankiw, saying he wrote that the Bush tax cuts didn't raise revenues, in effect debunking the claim. But what Mankiw wrote was that they didn't raise revenues as much as had been expected, but they still rose. There was also a lag between when taxes were cut and the economy reflected the boost in available capital. It also depended upon which taxes were cut and by how much. That's not quite the same thing.

On the other hand, another commenter appeared to have a better understanding of the effects of the tax cuts on the average taxpayer and even provides some numbers generated using "some great tax preparation software" to debunk claims by others that the tax cuts actually placed a greater tax burden on them.

In the end what it all boils down to is that the only way to reduce deficits in a manner that won't take decades or generations to accomplish is for the government to spend a lot less money, not tax the bejeezus out of everyone that has an income. Or to put it more simply, again: It's the spending, Stupid!"

You know it's bad when even CNN is dumping on ObamaCare.

The CNN report linked above covers the growing problems with Massachusetts health insurance program upon which ObamaCare has been modeled. None of the goals stated in the Massachusetts version have been met. The system is failing financially, with no control over costs, mandated coverage adding to health insurance premiums, subsidies for low/medium-income earners heading ever upwards, disincentives for people to work (higher income means paying a lot more for health insurance), and unintended incentives for businesses to drop their employees health insurance plans entirely.

The Massachusetts system is a preview of what we can expect as ObamaCare kicks in.

Already the the side effects of ObamaCare can be seen as the costs of it become more apparent. If most of the details of this bill had been made known to all of Congress before the vote it never would have passed. Anyone in Congress with a modicum of knowledge about business would have been able to see the negatives of ObamaCare far outweighed any perceived benefits.

With the unintended incentives ObamaCare gives businesses to drop employee health care, or worse, have all future hires brought on as temporary or contract employees, Obama's promise that we'd "be able to keep our present health insurance if we want to" rings hollow and shows he either doesn't truly understand the ramifications of health care reform, or doesn't care. The fact that he needs to spend $125 million of taxpayer funds to sell the idea that ObamaCare will be wonderful proves how bad it will be. If it was truly all that great it would sell itself. But the more he tries to push it on the American people the more they resist letting him destroy the imperfect but world class health care system we have.

Anyone with even a little math ability can figure out that the numbers don't add up, that they don't take into account real world conditions, and totally ignore the effects of the fiscal disincentives that will cause companies to drop health insurance for their employees and induce health care professionals to leave the medical field.

It was 80 years ago yesterday, June 17th, that President Herbert Hoover signed the Smoot-Hawley Tariff Act into law, which instantly turned the Great Recession into the Great Depression. It was an act of trade protectionism that had exactly the opposite effect from the one intended. Call it an example of the Law of Unintended Consequences writ large.

Hoover and his congressional allies thought that reducing imports would strengthen the economy. Instead, it contributed to a collapse in world trade and the spread of protectionism around the globe. The lessons from this policy mistake are unfortunately all too relevant today.

The Smoot-Hawley tariff, conceived as a Republican ploy to gain the farm vote in the 1928 election, was a bad idea from the start.

It was one of the biggest mistakes the Republican Party ever got involved with.

It seems modern day Democrats are now looking to make the same mistake as the Republicans did in Hoover's day and for the same reasons. Should they pull it off, the unintended consequences won't be the same as those back in 1930. Instead, they'll be far worse.

Perhaps it's time for Congress and the President to stop punishing American businesses for succeeding here. Who knows, maybe new jobs will be created here as a result.

Since it appears that Cap-And-Tax is moribund (for now), the Democrats are trying a different piece of legislation to achieve the same thing, only a bit more piecemeal this time around.

The so-called American Power Act seeks to tax carbon emissions from "coal-fired power plants and other large polluters."

A climate and energy bill being pushed in the Senate would cost American households 22 to 40 cents a day -- less than the cost of a first-class postage stamp, the Obama administration said Tuesday.

An analysis by the Environmental Protection Agency concluded that the Senate bill, sponsored by Sens. John Kerry, D-Mass., and Joe Lieberman, I-Conn., would cost households an average of $79 to $146 per year. A first-class postage stamp costs 44 cents.

Sounds great, doesn't it? But knowing government as we all do, we must ask about the hidden costs and the how the numbers were derived. As history has shown us again and again, government (and particularly Congress) have a tendency to underestimate the costs of new mandates and programs and overestimate the revenues or benefits derived from them. The fact that the cost estimates come from the EPA makes me skeptical the numbers are even close to being realistic. One must keep in mind that it will be the EPA regulating CO₂ emissions since it has now been erroneously classified a pollutant.

It would not surprise me to see all kinds of amendments to this bill, most of them intended to turn it into a stealth Cap-And-Tax law.

It doesn't help that the White House is using the oil spill in the Gulf as a rallying cry to choke off the supply of oil and other fossil fuels "for our own good." Not that this bill will have any effect on the oil spill or its side effects. All it's designed to do is make energy more expensive all in the name of saving the planet even though no one can rightfully prove it needs saving. But that's never stopped the Left from doing it anyway.

Just when I think Obama and/or Congress couldn't come up with any more ways to delay or destroy economic recovery, he proves me wrong.

First, there was the stimulus. Then Cash for Clunkers, followed by ObamaCare. Cap and Trade still lurks, waiting to make energy cost skyrocket. (Like that will help the economy). Then there was the first time home buyers tax credit, followed by a modified version that covered anyone buying a home. Now, to kill off the housing market entirely, they're looking to do away with the mortgage interest tax deduction, which will add thousands of dollars per year to the taxpayer's tax burden.

Do they really think this will help anything? Estimates predict elimination of the tax deduction will bring in $208 billion over the next ten years, but at what cost? What will the actual revenues be when all factors are taken into consideration?

Frankly, I doubt they'll collect anywhere near what they expect to because a lot of people that might have otherwise bought homes will decide it's no longer financially attractive to do so. What will that do to the housing values and the housing market? Two things that I can see.

First, housing values will drop, making an already shaky housing market even more so as an increasing number of homeowners will see their equity disappear. Some of those will find themselves upside down on their mortgages. This in turn means we'll probably see an increase in foreclosures and 'walk-aways', where people abandon their homes because they can no longer justify paying the mortgages even if they do have the money to pay them. Why should they when they'll end up with far less than they started with when they first bought their home? It will make more sense to let the home go into foreclosure rather than to keep paying for housing guaranteed to depreciate greatly in value. (In effect, it's like having your mortgage rate increase from 5.5% to 20%. Even if you can afford to pay it, you're really getting little in return for tall he money you spend.)

Second, the housing market will shrink even more than it has since the home buyer tax credits ended this past April. The only difference will be that the effect on the market will be semi-permanent. It could take decades for the market to recover and even when it does, there will a large stock of homes looking for buyers that don't exist.

In turn, all of this could affect the financial industry as people won't be taking out mortgages or equity loans. The banks won't be making any money because of the dearth of loans (and likely a large supply of foreclosed homes they can't sell at any price).

Again, Congress is getting ready to shoot itself (and the economy) in the foot by proposing legislation that will have the unintended consequence of killing off yet another part of the economy and ending up with even less revenue than they started with. If they really want to help reduce the deficit, then perhaps they should stop spending money we don't have.

If Congress were really interested in generating a little more revenue, then perhaps they could do away with the interest deduction for second homes. It's been done before and had little overall effect on the housing market as most activity on the market is for primary homes.

But they won't do that because, after all, it makes sense.

On a number of occasions I have mentioned the Laffer Curve, an illustration of the relationship between tax rates and tax revenues and how once tax rates fall above or below a certain point tax revenues fall off. It is a simplistic illustration but no less correct for its simplicity. Simply stated, if the tax rate for a given tax is either 0% or 100%, the amount of revenue collected will be zero. As the tax rate moves away from either extreme the amount of revenue increases. The trick is to figure out the magic tax rate that maximizes the revenue collected. And that magic number will be different depending on what kind of tax is being imposed, meaning the tax rate on income that maximizes revenue will be entirely different from the tax rate on sales of goods and services, and so on.

It can be argued that the taxes we pay to the federal government are well above the sweet spot, meaning that when the government increases taxes the expected revenues will not meet projections. Others seem to believe no tax rate is too high and that the rich, meaning those of us with jobs that actually pay taxes, should have even more of our money taken from us to fund things we neither need or want.

Now comes what is being called Hauser's Law, which states that regardless of the total tax burden of the American taxpayers (this includes all taxes imposed, and not just on individuals), the revenues collected will be less than 20% of Gross Domestic Product. The chart below, created by using the National Income Accounting method rather than the CBO or OMB methods, shows that since 1929 the revenues collected have always been below 20% of the GDP. (The chart isn't all that clear, but it is readable...sort of.)


Click on image to enlarge

As tax rates increase economic activity slows when billions are siphoned out of the economy and used for non-wealth producing activities. The more money siphoned out of the economy, the more economic growth declines and the less revenue is collected by the government. Hauser's Law implies the Laffer Curve, showing revenues fall as taxes rise or fall above a certain point.

What's the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. [W. Kurt] Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue.

Far too often those projections fall victim to the Law of Unintended Consequences, where higher taxes on some economic activity discourages that activity, in turn lessening the activity being taxed and reducing the revenues expected. (Ayn Rand wrote about that over 50 years ago in Atlas Shrugged, though she's not the first to do so.)

But we know that won't stop our tax and spend Congress from taxing the hell out of everything that moves in an effort to pay for all the 'free' programs they and the President are trying to shove down our throats. Too bad they'll be limited by Hauser's Law, meaning they'll keep spending far more than they will ever be capable of collecting in taxes.

Thursday I attended one of the hundreds of TEA party protests held around the nation. Turnout was around 1000, which was similar to last year's Tax Day TEA Party protest.

Of the myriad of speakers at the protest, only one was a sitting member of the House of Representatives and he was visiting from Michigan. A number of Congressional hopefuls were there, but none spoke, preferring to press the flesh and speak one-on-one with TEA party supporters. Not surprisingly, only GOP candidates showed up even though invitations were extended to candidates from all parties.

Three of the more inspiring speakers included former US Senator Gordon Humphrey (R-NH), Thom Thomson - son of the late New Hampshire governor Meldrim Thomson, and former New Hampshire Senator George Lovejoy.

Senator Humphrey related his experiences of serving in the Senate for two terms. (He promised when he was elected that he'd only serve two terms, then come home. He kept his promise.) The one thing he said that stuck in my mind was his comparison of Congress to "a pit of vipers." He also warned that even those with the best of intentions when they arrive in Washington are eventually seduced by the power their office confers. It doesn't happen quickly, but it does happen, which is why he has supported term limits. He also led the call to "Throw the bums OUT!", something the crowd quickly picked up and chanted with increasing volume. Humphrey said we shouldn't discriminate as there were plenty of Republican bums deserving to be thrown out as much as their Democrat colleagues.

Both Thom Thomson and Senator Lovejoy spoke about the fiscal problems visited upon the people of New Hampshire by both the legislature and the governor, with legislative Democrats willing to spend money the state doesn't have, implementing tax hikes that hit the people most affected by the recession, and attempting to 'appropriate' private funds from a medical malpractice fund in an effort to fund the runaway budget. The governor also failed to protect the taxpayers in the state by refusing to use his veto pen to stop the 30% increase in state spending over the past 2 budgets.

While other TEA party protests drew some number of infiltrators/agitators, the Manchester protest drew only one 'visitor' from the New Hampshire Democrat Party, and he pretty much just watched the activities.

All in all it was a great gathering with appreciative crowd all sharing the same message: "We're mad as hell and we're not going to take it any more!"

I attended the Tea Party in Manchester, New Hampshire this afternoon/early evening and got back just before 9PM.

I'll have an honest to goodness post about it tomorrow Saturday.

It is quite obvious the one course University of California students protesting against tuition hikes have not taken but desperately need is Economics 101. The UC system-wide protests highlight the financial crisis facing California, a state verging on being forced into federal receivership because every effort to resolve the its financial problems has failed.

Taxes are sky high and getting higher. Revenues are falling off. Unemployment is over 12%. Taxpayers and businesses are leaving in growing numbers. Union compensation and pensions have reached unsustainable levels and are still climbing. Is it any wonder California has become a financial basket case? How can the students of the UC system expect the state to be able to fund the system when they don't have the money to do so? Do they really believe that just by making demands and throwing mass temper tantrums the state will somehow find a source of funding they haven't already taxed to death? Obviously they do. And by doing so they have displayed their economic ignorance. They don't understand: Their politicians have sold them a bill of goods and the time to 'settle up' has finally come.

We need you for the tax base in order to provide services that disproportionately go to people "of color." Whites are good for one color it seems, though. The same as Michigan State. I like the new darker green.

The story is here, about a community outside Philadelphia trying to stem "white flight."

HT: Am Ren

I have to admit to feeling frustration with the "tax-'em-'til-they-bleed/leave" bunch. It has become quite apparent they lack two things: an understanding of economics and history.

It is this lack that drives the Obama Administration and a good portion of Congress. With history making budget deficits and plans to raise taxes to economy draining levels, it's quite clear they have unrealistic expectations of the revenues they'll collect, which in turn will drive them to raise taxes even higher, causing a further drop in revenues.

Whether it is a revolt of the kulaks, or mere tax avoidance, there is economic distortion from high rates of taxation.

The British are seeing this effect in their current budget, as wealthy Brits engage in tax avoidance (structuring their financial lives so as to legally avoid taxes) in anticipation of a rise from a 40% to a 50% rate.

Obviously the Brits are on a path to return to the bad old days of their 1970's economic malaise, when confiscatory tax rates drove the wealthy (and their wealth) out of the UK. The result was a moribund economy, high unemployment, falling tax revenues, and the failure of a number of long-standing British corporate icons (British Leyland, MG, and British Steel, just to name a few).

Two things to remember when it comes to taxes and government (from the comments):

The raising of T(axes) has the effect of decreasing I(nvestment) which in turn has the effect of decreasing Employment (N).

The larger the share of G(overnment) as a part of GDP, the worse off..the economy in the long run.

Turning this into an equation, we get the following: T=1/Ix → G=1/GPDy
(x and y are multipliers used to generate the correct ratio between the left and right side of the equation.)

But as we've already seen, those pushing for the ever higher taxes don't really understand math.

I have to say the opening statements of the President's State of the Union address were on target, talking about the problems that we, as a nation and as individuals, are facing. But once he started addressing the main issue we face - the economy - he lost me.

He talked about tax cuts, but only the temporary tax cuts. The somewhat more long term cuts, the Bush tax cuts, expire next year, meaning everyone will see a tax increase once they're gone.

On the stimulus bill - blah blah blah blah blah blah. (At least that's what I heard.)

As much as I agree that jobs are an issue, I have to disagree with the president that somehow it's up to the government to stimulate them with our money. Better that government get the heck out of the way. We don't need it to take $30 billion of the repaid TARP funds and spend it again.

I agree with Obama that we need to upgrade our infrastructure to help American businesses compete in the global marketplace. But what do high-speed trains have to do with that? Better that electrical systems and broadband communications networks be built, which will do far more to support American businesses than trains.

And while the president says he "won't accept second place for America", he's been doing what he can to make sure that's where we'll end up, if not third or fourth place.

After that I started nodding off as he started mouthing the same old platitudes but in different wrappers. (Make energy less expensive by taxing the hell out of it. Punish all the banks for the actions of a few. Spend billions more on education even though study after study after study shows more money doesn't equate to better education. Destroy our health care system in order to save it. And so on and so on.)

I. GOT. BORED.

ZZZZZZZzzzzzzzzzzz........

UPDATE 1/28/10: Going back and watching the address again, I saw that as time passed he shifted more and more blame for all our troubles on to others. He laid all the blame for the failure of health care reform and cap-and-tax squarely on the Republicans, saying they now owned the blame. Senator John Kyl rebutted that allegation today on NPR, stating the Senate Republicans were following the will of their constituents, blocking bad legislation that would do little more than cost the American people untold hundreds of billions of dollars with nothing to show for it.

I have to agree with Eric the Viking on this one: Who's writing Nancy Pelosi's material these days?

"The American people have an anger about the growth of the deficit because they're not getting anything for it. ... If somebody has the idea that the percentage of GDP of what our national debt is will go up a bit, but they will now -- and their neighbors and their children -- will have jobs, I think they could absorb that, and then we ride it out and bring money in," she said.

She's kidding, right? (Unfortunately, she's not.)

This statement and the others in Eric's post and link shows me three things about our Speaker of the House:

a) She really has little understanding of economics.

b) She really has no idea what motivates average Americans, particularly when it comes to matters economic.

c) She really doesn't care because she knows better than everyone else in the nation, including the very folks she claims she wants to 'help'.

The angry American taxpayers don't want Congress to spend even more money we don't have on more stimulus, health care reform that will reform nothing, or any other dubious and expensive government programs.

Sucking over $1.4 trillion out of the economy (the present budget deficit figure) is not helping the economy in any way, shape, or form. Pulling even more out of the economy with higher deficits and higher taxes in a second effort to 'stimulate' the economy will only make the recession worse. This is something Pelosi, as well as Reid and Obama, do not understand. I find that difficult to believe considering there's plenty of history to show previous attempts to do just that have failed miserably and, in fact, made things worse.

Watching what's happening to our economy today it's easy to forget that this isn't the first time we've been through this, with government trying to spend its way out of a recession. The effort back in the 1930's failed miserably, extending the Great Depression for years, as did the 'stimulus' of 1962, which prompted Ayn Rand to comment on the error on the part of government in thinking such spending would do anything but have negative effect, that our economic IQ was sadly deficient. From her column in the L.A Times back in 1962:

Since "economic growth" is today's great problem, and our present Administration is promising to "stimulate" it--to achieve general prosperity by ever wider government controls, while spending an unproduced wealth--I wonder how many people know the origin of the term laissez-faire?

France, in the seventeenth century, was an absolute monarchy. Her system has been described as "absolutism limited by chaos." The king held total power over everyone's life, work, and property--and only the corruption of government officials gave people an unofficial margin of freedom.

Louis XIV was an archetypical despot: a pretentious mediocrity with grandiose ambitions. His reign is regarded as one of the brilliant periods of French history: he provided the country with a "national goal," in the form of long and successful wars; he established France as the leading power and the cultural center of Europe. But "national goals" cost money. The fiscal policies of his government led to a chronic state of crisis, solved by the immemorial expedient of draining the country through ever-increasing taxation.

Colbert, chief adviser of Louis XIV, was one of the early modern statists. He believed that government regulations can create national prosperity and that higher tax revenues can be obtained only from the country's "economic growth"; so he devoted himself to seeking "a general increase in wealth by the encouragement of industry." The encouragement consisted of imposing countless government controls and minute regulations that choked business activity; the result was dismal failure.

Colbert was not an enemy of business; no more than is our present Administration. Colbert was eager to help fatten the sacrificial victims--and on one historic occasion, he asked a group of manufacturers what he could do for industry. A manufacturer named Legendre answered: "Laissez-nous faire!" ("Let us alone!")

Apparently, the French businessmen of the seventeenth century had more courage than their American counterparts of the twentieth, and a better understanding of economics. They knew that government "help" to business is just as disastrous as government persecution, and that the only way a government can be of service to national prosperity is by keeping its hands off.

Regardless of the purpose for which one intends to use it, wealth must first be produced. As far as economics is concerned, there is no difference between the motives of Colbert and of President Johnson. Both wanted to achieve national prosperity. Whether the wealth extorted by taxation is drained for the unearned benefit of Louis XIV or for the unearned benefit of the "underprivileged" makes no difference to the economic productivity of a nation. Whether one is chained for a "noble" purpose or an ignoble one, for the benefit of the poor or the rich, for the sake of somebody's "need" or somebody's "greed"--when one is chained, one cannot produce.

There is no difference in the ultimate fate of all chained economies, regardless of any alleged justifications for the chains.

It seems that we still haven't learned that lesson four decades or four centuries later. As the late Ronald Reagan said more than once, "Government isn't the answer. Government is the problem." It was true back during Louis XIV's reign and it's true today. Our government is bent on controlling more businesses, either through direct take over like GM, Chrysler, the banks, and health care, or through onerous regulation and taxation, all in the name of 'stimulus' and 'fairness'.

Apparently our leaders have learned nothing from past attempts to tighten control over economies and businesses that their attempts won't work, won't create the results they want, and won't lead to anything but more poverty, less business, and a weaker economy than if they'd just left everything alone. But government is incapable of not fiddling about with things they really don't understand. And that's our biggest problem today.

As John Stossel writes, it's not the taxes that are the problem, it's the spending.

Last week on "The O'Reilly Factor", we talked about California's and New York's enormous budget deficits and planned tax increases. Those states would have big surpluses had they just grown their governments in pace with inflation. But of course they didn't. Now the politicians act like their current deficits are something imposed on them by the recession.

But that's nonsense. They created the problem with their reckless spending.

--snip--

O'Reilly told me that America is ready for a tax revolt. I hope he's right. But I don't think it will happen until more people see the ruling elite for what it is: a gang of arrogant bullies that has the audacity to believe that they know how to direct our lives better than we do.

That's why, bad as the taxes are, I'm more upset about ObamaCare, Medicare, the "stimulus," the auto bailout, the bank bailouts, the Fannie/Freddie bailouts, the trillions in guarantees, and on and on.

The need for all those extra taxes would be reduced if government at state and federal level could get their spending under control. For the most part that's not going to happen because far too many of those in power like to "bring home the bacon" regardless of the actual costs to their constituents. Only those states forced to address their spending issues, like California, New York, New Jersey, and Michigan, to name a few, will actually have the opportunity to trim spending by billions of dollars. They won't have a choice because if they don't cut spending higher taxes won't fill the empty coffers and the states will face bankruptcy. They simply don't have the money to pay for all those really 'neat things' everyone thought they could afford during the good times. But the good times are gone and with them, the revenues the states had gotten used to having.

To paraphrase James Carville, "It's the spending, stupid!"

It appears the budget deficit is going to be bigger than either the White House or the Congressional Budget Office had predicted.

That's not surprising considering federal revenues were 18% below projections. At least it didn't surprise me considering Congress and the White House ignored the Law of Diminishing Returns: Once you raise taxes and fees above a certain point the amount of revenue you collect will fall. It's a perfect example of the Laffer Curve in action.

On the other hand government spending hasn't dropped off nearly enough (only about 3%) to make up for the revenue shortfall. I have no doubt Congress will act to correct the problem...by raising more taxes and fees. This will have the effect of causing an even greater falloff in revenue. Congress shouldn't be raising taxes during a deep recession. They also shouldn't be spending money we don't have, either. But I don't expect Congress or the White House to do the necessary things to stem this flood of red ink.

Here in New Hampshire the state is seeing a similar falloff in revenues, being short about $38 million so far. A number of people within the New Hampshire legislature warned that revenue projections were unrealistic, particularly in light of the hefty increase in taxes and fees. This is the second budget cycle where the Democrat dominated legislature overestimated revenues and used those projected revenue figures to increase state spending by amounts that far exceeded the inflation rate. Over four years state spending has increased by 30%, but revenues haven't come anywhere near to covering the larger expenditures.

The state ended it's last budget cycle (New Hampshire has a two-year budget) over $100 million in the red. The legislature still has that budget gap to fill and has been trying to do so by raiding $110 million in surplus insurance premiums being held by the state chartered Joint Underwriting Association, a private organization created by the state to ensure doctors, medical practices, hospitals, and other medical facilities and personnel could get malpractice insurance. So far the state has failed in its attempts to confiscate those funds. A Belknap County judge ruled in a suit filed by the JUA that the state had no rights to those funds because the law that set up the Association states surplus funds must be returned to the policy holders, past and present. The judge also ruled the state had no other claims to the funds because the JUA is a private entity, particularly in light of the fact that no state funds or state personnel are used to administer the Association. The state disagreed and has taken the case to the New Hampshire Supreme Court.

You know it's getting bad when the state legislature figures it can raid private funds to plug a budget gap. I believe that's called theft. Of course the Democrats in the legislature see it as monies being withheld from them by greedy doctors when the state can make far better use of that money. Never mind that state law says otherwise. Never mind that the money isn't theirs to begin with.

It's going to be interesting (in the old Chinese curse definition) to see how the financial situation at the federal and state level will play out.

Update: A number of states are looking at growing revenue shortfalls, with some heading towards bankruptcy because of pension funding obligations and state union contracts that leave them with little wiggle room.

Something to remember come the 2010 elections.



From Bruce.