The Economist of August 20, 2011, p. 67 figures out which of the big rich countries have been hardest hit by the recession. Britain is worst. The US and Italy are next on the misery list, then Canada is slightly better, Japan better still, France even better and Germany has fared the best. All the countries have seen negative growth in GDP per person since 2004 excerpt Germany where GDP per person has grown slightly.
Factoids from a Robert Reich article in the Sep 4 San Francisco Chronicle Insight section, p.E5:
1. The last decade has been the worst in a century for American workers. Wage gains in the last 10 years have even lagged behind wage gains during the great depression.
2. Big American corporations make more money, and create more jobs, outside the US than in.
3. CEO pay has soared. The median value of CEO compensation at the 350 biggest Corporations was $9.3 million a year, not including stock options.
Tuesday, October 4, 2011
Saturday, October 1, 2011
Educating ourselves on the real tax issues
Preface - Few things the government does affects the average citizen more than taxes. When we are wage earners we are often a little oblivious to taxes since they are taken out of our paycheck before we ever see the money. When you are in business you have a little bit different experience - you are confronted with the amount of taxes you pay, and have to actually write a check, on at least a quarterly basis.
Politicians have little incentive to figure out what taxes actually make sense - that takes time, and is hard to explain to people - not to mention it takes a lot of time and thought to figure out what makes sense. So generally whatever lobbying group has a good theory will get their way eventually.
Putting aside the contentious issue of how much taxes to pay, it is in our interest as taxpayers to understand taxes and figure out what taxes make sense, and what taxes don't make sense. All taxes are first and foremost intended to raise revenue for government operations, but different types of taxes have different characteristics, justifications and impacts on our economic well being as a nation.
History - After the great depression and World War II we as a nation had a huge national debt. After nearly a decade of wrangling Congress in 1954 made huge revisions to the United States Tax Code. They built a tax code that balanced the needs of government against the needs of the public well enough that our economy took off and grew for 50 years. Over that 50 years life has been really good here in the United States, so we as voters haven't really paid a lot of attention to taxes, so Congress has gradually let the expediencies of the day (satisfying lobbyists) undermine the carefully negotiated balance that made the 1954 tax Code work.
We are now at a point in our history where we need to make major changes in the way we do government, including a major revision of our tax law, but we are stuck with a Congress still clinging to the self indulgent politics of self satisfied people. We need to go back to basics and remind ourselves that, while all taxes raise revenue, some taxes exacerbate problems in society while others lubricate the smooth functioning of society. Here are some things we need to keep in mind on the three most prominent types of taxes.
The Capital Gains tax - probably more than any other tax the nature of Capital Gains tax insures that it directly impacts economic development. A good Capital Gains tax should encourage people to make the investments in time and energy to build or expand enterprises. This type of investment contributes to building a stronger and more prosperous world for all of us. On the other hand it should not encourage market speculation that is essentially a zero sum game - where for every winner there is a loser and no long term benefit is provided to anyone other than the winner.
One of the big ongoing problems of the Capital Gains tax is we have never indexed the Capital Gains tax for inflation. So Joe, who bought a farm for $50,000 thirty years ago and now wants to retire, sells his farm for $250,000. In the view of the tax code Joe has a $200,000 in Capital Gain. In fact the $50,000 Joe paid 30 years ago may be the equivalent of $250,000 in current dollars, so in fact Joe has no real gain and is essentially being asked to pay tax on his initial investment. We should demand from Congress that any Capital Gain tax should be indexed for inflation.
Another problem of the Capital Gains tax has been many speculator's engaging in zero sum financial market speculation, who provide no real gain to society pay far less tax on their income than folks working 40 hours a week doing productive, necessary work. Speculative gains should be treated no differently than the income wage-earners take home as their way to make a living. This particular issue has become prominent thanks some very wealthy people stepping forward and pointing out the unfairness of this tax.
Income taxes - We want to structure the income tax law to encourage hard work - we don't want to discourage people from taking the time and making the effort to commit themselves to being as productive as possible. On the other had we don't want to income tax to be used in a manner that allows some to benefit more from while paying less tax.
One of the factors that has allowed Congress to undermine the 1954 tax code is folks have sold us on the notion that to be fair we all should pay the same amount on each dollar of tax we paid. That notion is predicated on the assumption we all benefit equally from each tax dollar. Yet many programs are of great value to some and no value to others. The income tax should, to the extent possible, match tax to benefit.
The lack of indexing for inflation has also been a big problem in the income tax, probably the single biggest reason for the taxpayer anger that has resulted from the current mess that is our tax code. Over the years people who's real incomes aren't really increasing get bumped into high tax brackets by inflation. It has been an effective hidden tax for decades. We should demand that Congress index tax brackets for inflation.
Property taxes on land and buildings - The primary reality of property taxes is that they represent the ultimate finite asset. There is only so much property. The free market generally does a good job of relative pricing on land, a house on the Beach at Malibu is always going to be more desirable and vastly more expensive than a house in suburban Riverside. If you want to live in Malibu it is going to cost you.
Inflation also impacts property taxes and has created many of the problems with property taxes in the public mind. People who buy an house and expect to pay a certain level of taxation find their taxes rising through inflation as their home values rise. If they are people on fixed incomes, or find themselves in some area that becomes popular so prices rise rapidly they may be forced out of their house. Not a situation that will create happy voters.
One way to deal with the problem of inflation on property taxes would be to allow people the option of not paying additional tax attributable to inflation and give the taxing authority a lien on the amount of the accumulated additional taxes at the time the house is sold.
Politicians have little incentive to figure out what taxes actually make sense - that takes time, and is hard to explain to people - not to mention it takes a lot of time and thought to figure out what makes sense. So generally whatever lobbying group has a good theory will get their way eventually.
Putting aside the contentious issue of how much taxes to pay, it is in our interest as taxpayers to understand taxes and figure out what taxes make sense, and what taxes don't make sense. All taxes are first and foremost intended to raise revenue for government operations, but different types of taxes have different characteristics, justifications and impacts on our economic well being as a nation.
History - After the great depression and World War II we as a nation had a huge national debt. After nearly a decade of wrangling Congress in 1954 made huge revisions to the United States Tax Code. They built a tax code that balanced the needs of government against the needs of the public well enough that our economy took off and grew for 50 years. Over that 50 years life has been really good here in the United States, so we as voters haven't really paid a lot of attention to taxes, so Congress has gradually let the expediencies of the day (satisfying lobbyists) undermine the carefully negotiated balance that made the 1954 tax Code work.
We are now at a point in our history where we need to make major changes in the way we do government, including a major revision of our tax law, but we are stuck with a Congress still clinging to the self indulgent politics of self satisfied people. We need to go back to basics and remind ourselves that, while all taxes raise revenue, some taxes exacerbate problems in society while others lubricate the smooth functioning of society. Here are some things we need to keep in mind on the three most prominent types of taxes.
The Capital Gains tax - probably more than any other tax the nature of Capital Gains tax insures that it directly impacts economic development. A good Capital Gains tax should encourage people to make the investments in time and energy to build or expand enterprises. This type of investment contributes to building a stronger and more prosperous world for all of us. On the other hand it should not encourage market speculation that is essentially a zero sum game - where for every winner there is a loser and no long term benefit is provided to anyone other than the winner.
One of the big ongoing problems of the Capital Gains tax is we have never indexed the Capital Gains tax for inflation. So Joe, who bought a farm for $50,000 thirty years ago and now wants to retire, sells his farm for $250,000. In the view of the tax code Joe has a $200,000 in Capital Gain. In fact the $50,000 Joe paid 30 years ago may be the equivalent of $250,000 in current dollars, so in fact Joe has no real gain and is essentially being asked to pay tax on his initial investment. We should demand from Congress that any Capital Gain tax should be indexed for inflation.
Another problem of the Capital Gains tax has been many speculator's engaging in zero sum financial market speculation, who provide no real gain to society pay far less tax on their income than folks working 40 hours a week doing productive, necessary work. Speculative gains should be treated no differently than the income wage-earners take home as their way to make a living. This particular issue has become prominent thanks some very wealthy people stepping forward and pointing out the unfairness of this tax.
Income taxes - We want to structure the income tax law to encourage hard work - we don't want to discourage people from taking the time and making the effort to commit themselves to being as productive as possible. On the other had we don't want to income tax to be used in a manner that allows some to benefit more from while paying less tax.
One of the factors that has allowed Congress to undermine the 1954 tax code is folks have sold us on the notion that to be fair we all should pay the same amount on each dollar of tax we paid. That notion is predicated on the assumption we all benefit equally from each tax dollar. Yet many programs are of great value to some and no value to others. The income tax should, to the extent possible, match tax to benefit.
The lack of indexing for inflation has also been a big problem in the income tax, probably the single biggest reason for the taxpayer anger that has resulted from the current mess that is our tax code. Over the years people who's real incomes aren't really increasing get bumped into high tax brackets by inflation. It has been an effective hidden tax for decades. We should demand that Congress index tax brackets for inflation.
Property taxes on land and buildings - The primary reality of property taxes is that they represent the ultimate finite asset. There is only so much property. The free market generally does a good job of relative pricing on land, a house on the Beach at Malibu is always going to be more desirable and vastly more expensive than a house in suburban Riverside. If you want to live in Malibu it is going to cost you.
Inflation also impacts property taxes and has created many of the problems with property taxes in the public mind. People who buy an house and expect to pay a certain level of taxation find their taxes rising through inflation as their home values rise. If they are people on fixed incomes, or find themselves in some area that becomes popular so prices rise rapidly they may be forced out of their house. Not a situation that will create happy voters.
One way to deal with the problem of inflation on property taxes would be to allow people the option of not paying additional tax attributable to inflation and give the taxing authority a lien on the amount of the accumulated additional taxes at the time the house is sold.
Monday, September 26, 2011
The Common sense economics test
Here is a simple question that I find useful in evaluating the political rhetoric coming out of Washington.
What is the root of our current economic problems:
1. Are there not enough products or services for people to buy?
Or
2. Is there not enough money in peoples pockets to buy products?
Each time some politician floats some notion about how to "create jobs and get our economy going" you should ask which (if either) of these two problems that solution will address.
For example -
1. Cutting Corporate taxes - Relevant data - American Corporations have been making record profits the last couple years and are sitting on big piles of money. Will giving them another tax cut cause them to suddenly start hiring? Is it possible the reason they aren't hiring is because they know there aren't enough consumers to buy more products?
2. Cutting the deficit by cutting the size of Government - The same data as above that suggests companies aren't hiring because there aren't enough consumers with money to spend also seems to undermine any claim cutting government is going to somehow boost the economy. Common sense says what this will do for sure is take more money out of the pockets of more potential buyers - from private company employees who get laid off because the company lost a Government contract, to Government workers laid off because their agencies budget got axed. A balanced budget is a goal we should strive for, but doing it right now would be like tearing out an "extra" wall in your house in the middle of an earthquake.
What is the root of our current economic problems:
1. Are there not enough products or services for people to buy?
Or
2. Is there not enough money in peoples pockets to buy products?
Each time some politician floats some notion about how to "create jobs and get our economy going" you should ask which (if either) of these two problems that solution will address.
For example -
1. Cutting Corporate taxes - Relevant data - American Corporations have been making record profits the last couple years and are sitting on big piles of money. Will giving them another tax cut cause them to suddenly start hiring? Is it possible the reason they aren't hiring is because they know there aren't enough consumers to buy more products?
2. Cutting the deficit by cutting the size of Government - The same data as above that suggests companies aren't hiring because there aren't enough consumers with money to spend also seems to undermine any claim cutting government is going to somehow boost the economy. Common sense says what this will do for sure is take more money out of the pockets of more potential buyers - from private company employees who get laid off because the company lost a Government contract, to Government workers laid off because their agencies budget got axed. A balanced budget is a goal we should strive for, but doing it right now would be like tearing out an "extra" wall in your house in the middle of an earthquake.
Sunday, September 25, 2011
Rush Limbaugh is Amazing
He was disdainful of those who objected to the 1997 changes to the Capital Gains tax that turned the housing market in a casino for speculators and helped bring down the economy within a decade.
He dismissed those who opposed the repeal of Garn-St Germain, the banking law enacted after the 1929 stock market crash to keep banks from mixing their banking functions with their investing function. Within a decade taxpayers were laying out hundreds of billions of dollars to bail out banks whose stupid investments had undermined their ability to function as banks.
He riduculed the people who suggested that invading Iraq might not be a good idea.
He was a big cheerleader for the Bush era tax cuts that played a big part in our current deficit and continued the ongoing process of lining rich peoples pockets with money that otherwise would have reduced the government debt.
Rush has consistently been on the wrong side of every major policy decision in the last twenty years, and he still has millions of devoted followers. He is an amazing entertainer.
He dismissed those who opposed the repeal of Garn-St Germain, the banking law enacted after the 1929 stock market crash to keep banks from mixing their banking functions with their investing function. Within a decade taxpayers were laying out hundreds of billions of dollars to bail out banks whose stupid investments had undermined their ability to function as banks.
He riduculed the people who suggested that invading Iraq might not be a good idea.
He was a big cheerleader for the Bush era tax cuts that played a big part in our current deficit and continued the ongoing process of lining rich peoples pockets with money that otherwise would have reduced the government debt.
Rush has consistently been on the wrong side of every major policy decision in the last twenty years, and he still has millions of devoted followers. He is an amazing entertainer.
Thursday, September 22, 2011
Nature v. Nurture
My entire adult life all of social and biological science has been engaged in the dispute that either DNA or Socialization can explain everything about human behavior. The biologists can explain a lot at one end of the spectrum with DNA. The Social Sciences can explain a lot at the other end of the spectrum with learned experience. But for all of my life it has been equally apparent that neither, nor both, explanations can begin to account for the richness and diversity of humanity.
It drives me crazy. The data is out there to fill in the gap between nature and nurture, and, to me, has been for years, decades in some cases.
When I was in college nearly 40 years ago I learned that our brain has lots of different systems for processing data that all overlap in the mass of wiring in our head. Different systems use different chemicals (nuerotransmitters) to differentiate their communications from the overlapping systems communications. At that time people had known for decades the many of these neurotransmitters were cyclical. Some would be more prevalent in the spring or fall, whereas others might be more prevalent in the summer and the winter. Some of the cycles were complementary, other of the cycles seem unconnected to other cycles. For some neurotransmitters there are daily and yearly cycles, for others there are monthly and yearly cycles.
Being a non-scientist I was free to leap to the conclusion this sounded like astrology to me. The fluctuations of these chemicals in the first year of developing life would be different for every person, as we would all start from a slightly different mix than anyone else. I wasn't the only one to see this intriguing connection. In the early 1980's a researcher reporting on a study at the National Institute of Health on nuerotransmitter cycles was quoted as saying something like ...this sort of sounds like astrology - isn't that amusing, we aren't of course taking that seriously - I knew at the time he couldn't say there might actually be some core truth to astrology because that would have ended his career.
40 years later DNA or learned experience are still the only options on the table for explaining personality for the social and hard sciences. This despite the fact biologists have discovered that women born in the spring reach menopause well before women born in the fall. Recent studies have found humans exhibit three different mixes of bacteria that live in our gut, the variation between people doesn't seem to be related to DNA, upbringing or life style. Your blood type can't really be explained with DNA, upbringing or lifestyle.
Business has not been so timid. Auto insurers have done studies and discovered that Gemini's are the worst drivers, Capricorns the best. A fact that was floated out into the media land then disappeared.
I'ts unfortunate that science has ceded astrology to commerce. Astrology predated modern science by hundreds, if not thousands, of years. Commerce in astrology by folks quite willing to go far beyond what traditional astrology is capable of doing was established long before science came on the scene. The folks willing to say whatever you need to say to make the sale are still profiting in the little books in the supermarket checkout line, the blurbs about your daily horoscope in the newspaper, even the charts done by professional astrologers. If science could get beyond its disdain for rampant commercial hucksterism the underlying body of observational data could be a road map toward research delineating how variations in nuerotransmitter cycles impact our development and personality.
It drives me crazy. The data is out there to fill in the gap between nature and nurture, and, to me, has been for years, decades in some cases.
When I was in college nearly 40 years ago I learned that our brain has lots of different systems for processing data that all overlap in the mass of wiring in our head. Different systems use different chemicals (nuerotransmitters) to differentiate their communications from the overlapping systems communications. At that time people had known for decades the many of these neurotransmitters were cyclical. Some would be more prevalent in the spring or fall, whereas others might be more prevalent in the summer and the winter. Some of the cycles were complementary, other of the cycles seem unconnected to other cycles. For some neurotransmitters there are daily and yearly cycles, for others there are monthly and yearly cycles.
Being a non-scientist I was free to leap to the conclusion this sounded like astrology to me. The fluctuations of these chemicals in the first year of developing life would be different for every person, as we would all start from a slightly different mix than anyone else. I wasn't the only one to see this intriguing connection. In the early 1980's a researcher reporting on a study at the National Institute of Health on nuerotransmitter cycles was quoted as saying something like ...this sort of sounds like astrology - isn't that amusing, we aren't of course taking that seriously - I knew at the time he couldn't say there might actually be some core truth to astrology because that would have ended his career.
40 years later DNA or learned experience are still the only options on the table for explaining personality for the social and hard sciences. This despite the fact biologists have discovered that women born in the spring reach menopause well before women born in the fall. Recent studies have found humans exhibit three different mixes of bacteria that live in our gut, the variation between people doesn't seem to be related to DNA, upbringing or life style. Your blood type can't really be explained with DNA, upbringing or lifestyle.
Business has not been so timid. Auto insurers have done studies and discovered that Gemini's are the worst drivers, Capricorns the best. A fact that was floated out into the media land then disappeared.
I'ts unfortunate that science has ceded astrology to commerce. Astrology predated modern science by hundreds, if not thousands, of years. Commerce in astrology by folks quite willing to go far beyond what traditional astrology is capable of doing was established long before science came on the scene. The folks willing to say whatever you need to say to make the sale are still profiting in the little books in the supermarket checkout line, the blurbs about your daily horoscope in the newspaper, even the charts done by professional astrologers. If science could get beyond its disdain for rampant commercial hucksterism the underlying body of observational data could be a road map toward research delineating how variations in nuerotransmitter cycles impact our development and personality.
Sunday, September 18, 2011
Red State / Blue State - The odd case of biting the hand that feeds you
I have previously alluded to the curious fact that Republicans, who are seeking to cut government spending get their greatest support in States who actually receive more money back from the Federal Government than they pay in taxes, while the Democrats who defend government spending generally represent the states that pay more than the get back.
A September 11 opinion piece by Robert Reich broke it down into detail, using statistics from the Tax Foundation. Mr. Reich did not specify which figures from the Tax Foundation he used but it appears he used the figures from 2005, the most recent data they have (see link to the study itself below).
Kentucky, Alabama, Louisiana, Alaska and Mississippi all get more than $1.50 back from the Government for every dollar they pay in taxes. The top beneficiary is Mississippi at $2.02 back for every dollar of taxes spent, followed closely by Alaska at $1.84 back per $1 paid. Pretty good return on investment I would say.
Arizona, Oklahoma, Arkansas, Montana, Nebraska, Wyoming and Kansas all get back between $1.10 and $1.50 per $1 paid.
The Red State exception is Texas who get only $.94 back for every dollar paid.
The largest Blue States on the other hand, are footing most of the bill. Californians get back 78 cents for every $1 paid. New York 79 cents, Massachusetts 82 cents and Oregon 92 cents.
Here is the link to the actual compiled data by State for the period from 1961 to 2005 (they say they are compiling more current data) http://www.taxfoundation.org/research/show/22685.html
A September 11 opinion piece by Robert Reich broke it down into detail, using statistics from the Tax Foundation. Mr. Reich did not specify which figures from the Tax Foundation he used but it appears he used the figures from 2005, the most recent data they have (see link to the study itself below).
Kentucky, Alabama, Louisiana, Alaska and Mississippi all get more than $1.50 back from the Government for every dollar they pay in taxes. The top beneficiary is Mississippi at $2.02 back for every dollar of taxes spent, followed closely by Alaska at $1.84 back per $1 paid. Pretty good return on investment I would say.
Arizona, Oklahoma, Arkansas, Montana, Nebraska, Wyoming and Kansas all get back between $1.10 and $1.50 per $1 paid.
The Red State exception is Texas who get only $.94 back for every dollar paid.
The largest Blue States on the other hand, are footing most of the bill. Californians get back 78 cents for every $1 paid. New York 79 cents, Massachusetts 82 cents and Oregon 92 cents.
Here is the link to the actual compiled data by State for the period from 1961 to 2005 (they say they are compiling more current data) http://www.taxfoundation.org/research/show/22685.html
Monday, September 12, 2011
A balanced budget amendment
Republicans in the House have been arguing for a balanced budget amendment. I believe this is a good idea and merits serious attention.
It is a simple truth about democracy that it is politically difficult to impose taxes and politically easy to spend money. We the voters pretty much all dislike paying taxes and we all like getting things from the government. History demonstrates the universality of the result from that basic truth. Democratic Governments around the world are saddled with pension and debt obligations they can no longer hide behind accounting tricks and rosy economic forecasts.
This is not a good time for the US to start trying to immediately balance its budget. In our current economic condition it would cause further economic weakness and higher unemployment. But it is an opportunity to begin the long process of having States adopt a balanced budget amendment that would take effect in the future. For example the amendment could be worded so it would not take effect until the US economy hit some specified targets in unemployment and GDP growth.
What else might we want in a balanced budget amendment package?
How about requiring Congress to index tax rates so they can't use inflation and the subsequent bracket creep to impose stealth taxes? In the same way benefits should be indexed to whatever assumptions they are based on. For example the life expectancy data that Social Security is based on should adjust automatically as our data about life expectancy changes.
How about we require Congress enact any appropriation, tax credit or other monetary benefit be enacted in a separate bill from substantive law provisions, and provide an item veto for the President to give voters one person to hold accountable for nonsensical earmarks? Congress currently passes thousands of little perks and tax cuts every year that almost nobody knows about until after the fact because they are buried in huge bills that are hundreds, or thousands of pages long.
I know that some argue a balanced budget amendment is unnecessary, that Congress could/should create rules to impose the necessary discipline on the process. But the historical reality is Congress won't. In the last thirty years the only time having a balanced budget became an important political issue is when Republicans are out of power and have used the issue to bully the Democrats into paying attention to the deficit. But the biggest deficits have been generated by the Republicans when they have taken over the Congressional agenda. All the rules the Republicans and Democrats imposed in the early 1990's that led to balanced budgets in the late 1990's have been repealed, sidestepped or ignored from 2002 to the present.
A balanced budget amendment would remove the issue from political football status. It would limit the ability of both Republicans and Democrats to buy votes ( - ooops, I mean "serve their constituents") by spending government money now and forcing voters of the future to deal with the paying the bill.
It is a simple truth about democracy that it is politically difficult to impose taxes and politically easy to spend money. We the voters pretty much all dislike paying taxes and we all like getting things from the government. History demonstrates the universality of the result from that basic truth. Democratic Governments around the world are saddled with pension and debt obligations they can no longer hide behind accounting tricks and rosy economic forecasts.
What else might we want in a balanced budget amendment package?
How about requiring Congress to index tax rates so they can't use inflation and the subsequent bracket creep to impose stealth taxes? In the same way benefits should be indexed to whatever assumptions they are based on. For example the life expectancy data that Social Security is based on should adjust automatically as our data about life expectancy changes.
How about we require Congress enact any appropriation, tax credit or other monetary benefit be enacted in a separate bill from substantive law provisions, and provide an item veto for the President to give voters one person to hold accountable for nonsensical earmarks? Congress currently passes thousands of little perks and tax cuts every year that almost nobody knows about until after the fact because they are buried in huge bills that are hundreds, or thousands of pages long.
I know that some argue a balanced budget amendment is unnecessary, that Congress could/should create rules to impose the necessary discipline on the process. But the historical reality is Congress won't. In the last thirty years the only time having a balanced budget became an important political issue is when Republicans are out of power and have used the issue to bully the Democrats into paying attention to the deficit. But the biggest deficits have been generated by the Republicans when they have taken over the Congressional agenda. All the rules the Republicans and Democrats imposed in the early 1990's that led to balanced budgets in the late 1990's have been repealed, sidestepped or ignored from 2002 to the present.
A balanced budget amendment would remove the issue from political football status. It would limit the ability of both Republicans and Democrats to buy votes ( - ooops, I mean "serve their constituents") by spending government money now and forcing voters of the future to deal with the paying the bill.
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