When is a Tax Increase Not a Tax Increase

This is something I've mentioned around these parts before. Allowing a law to expire that will result in higher taxes means you are effecting a tax increase. At least, that's what the Democrats and Obama administration are now saying. If Republican intransigence is allowed to continue and they won't budge on increasing taxes on the wealthy (getting the "millionaires" to pay thier "fair share" of Obama's plan), then the payroll tax cut won't be extended. And the middle-class will be hit with a tax increase.

But they weren't saying that last year, when letting the "Bush Tax Cuts" expire was not a tax increase.

So whether status quo ante is a good thing or a bad thing depends on how much you make.

Are these millionaires really job creators? Would an increase in the highest marginal rates harm the economy?

Stay tuned.

Whose Money is it Anyway

The World's Greatest Thinker writes about a paper published by Peter Diamond of MIT and Emmanuel Saez of Berkeley discussing optimal tax rates on top earners.

The authors tip their hand right form the get-go stating that:

Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, taking into account that individuals respond to taxes and transfers. Social welfare is larger when resources are more equally distributed"

So the tax system is in place to maximize social welfare. A sentiment, no doubt, that our beloved Super Genius embraces whole-heartedly.

Krugman then goes on and does everyone a favor by constructing three straw men he foresees as objections to the maximum tax rates on "high earners" suggested by the authors. His focus is on his third straw man: "You'll kill job creation!"

But I want to focus on his first, or rather, his response. His first straw man is, "Theft! Tyranny! OK, I hear you. This can’t be argued on rational grounds; I think there are a lot more important moral issues in the world than defending the right of the rich to keep their money, but whatever."

The fact that one can 1) think that taxation is theft, and 2) argue the point rationally is incomprehensible to Krugman. But the point is that, especially considering his readership, anyone who thinks that taxation is theft is irrational, because he says so, QED. And even if it were rational, it doesn't matter because he can conjure up other injustices or immoralities. By this logic, we needn't address any injustice because there will always be other injustices.

But he makes the point himself, "The right of the rich to keep their money." It is their money, legally obtained. I'll grant that a certain amount of taxation is necessary for society to function. But the rate should be kept as low as possible and people should be encouraged to fight to keep every cent they earn, avoiding taxation, legally of course, whenever possible. This is not greedy or irrational, it is perfectly understandable.

Oh, and the rate the authors think will optimize utility and not disincentivize those greedy top-earners? 70%.

Creating Barriers, Not Jobs

In 1897 the State of New York passed what was known as the Bakeshop Act (more properly known as section 110, article 8, chapter 415 of the Laws of 1897, or the labor law of the State of New York). It said that "no employee shall be ... permitted to work in a biscuit, bread, or cake bakery or confectionery establishment more than sixty hours in any one week." So even if an employee were willing and able to work 61 or 65 hours in a given week and the employer was willing and able to pay the employee for said work on previously agreed upon terms, and both the employee and employer were to honor those terms, the employer could be held criminally liable.

Joseph Lochner owned a bakery in Utica, NY, Lochner's Home Bakery. In 1899 he was fined $25 for violating the act; in 1901 he drew a second fine for $50. He contested the fee in court as a denial of (substantive*) due process, the freedom to contract with anyone to do anything so long as the activity wasn't proscribed by the legitimate authority exercised under the state's "police power" (e.g., prostitution). He lost in appellate court and the New York Court of Appeals (the highest court in the state). He then appealed to the United States Supreme Court and in one of the greatest decisions ever handed down by that fine tribunal, good ole Mr. Lochner won and the Progressives of the time lost. See here and here for an overview of the case (overviews that do not share my enthusiasm for the decision, by the way) and here for a nice article by George Will about a new book regarding the decision. The full decision of the court, including a famous (and awful) dissent penned by Justice Oliver Wendell Holmes, is here. Holmes explicitly expresses hostility to the concept of laissez-faire (which certainly didn't exist at the time), to Herbert Spencer and to the notion that individuals and firms know what is better for themselves than the government does (it is important to note well that there was no allegation of coercion on the part of Mr. Lochner nor any claim that he did not remunerate his employees for their labor above and beyond the capricious and arbitrary limit of 60 hours).

This is all a very long preface to address the notion that the government can "create jobs."

First there is the idea that the government can invest where private capital fears to tread, leading to new products and services that, for whatever reason, the market would not create of its own accord. The Solyndra Scandal show rather well how nonsensical this idea is (see previous post). But let's just imagine that solar energy panels are indeed the way to the future; that our dear leaders, shoveling money that they take great care in garnishing from the people who create and earn it to firms that had the vision to support the candidate who ended up winning, have some sort of prescience as to what will "work;" that the scam, er investment, pays off. "Success" will be cried from the hills. Yes, but, as the Great Bastiat pointed out all too well, that is what is seen. What of the investment that didn't or couldn't happen due to the fact that there was less capital in the private market to fund it? What invention or innovation was denied existence because money was taken away from those whose job it is is to fund exactly these sorts of things? The new technology will more than pay for itself, the true believer will claim. Now that we will have houses and cars and factories that will run from the power of sunlight and remove us from the yoke of "foreign" oil and "dirty" coal there will be more capital free to fund any investment that anyone can think of, right?

Maybe. But maybe not. Again, you have the wishes of the few pretending to know not only what is best for everyone else, but to know better than the market how to allocate scare resources most efficiently.

How about the argument that government generally creates jobs?

"Not exactly" would be putting it mildly. A "job" in its most basic form is simply an agreement entered into between two parties to accomplish a certain task. What can the government do to facilitate such agreements? Precious little. What can the government do to act as an obstacle to such agreements? A lot.

Think of stimulus funds to a community to build a prison. The community needs the new prison (for whatever reason). The federal government has the money (thanks to current and future taxpayers). Keynesian analysis says that the feds giving the money to the locals to contract the prison to be built will inject "liquidity" into the economy. The individuals put to work (who were presumably unemployed, but this is generally not the case) will spend the money that they earn and, through the magic of the multiplier effect, the net gain in GDP will more than offset the drain on GDP through less consumption due to taxes paid and less investment due to crowding out. Thus $100 million taken from federal coffers (our pockets) will lead to, say, $130 million in future spending meaning a net gain of $30 of GDP that didn't exist before (the negative effects of less investment and dead-weight loss of the current and future taxes is much tougher to quantify so economists, especially Keynesians, simply ignore these negative externalities or quip that in the long run we are all dead, so no worries...and I am not bullshitting about that).

For sake of argument, let's pretend that this is true. $100 million from the feds to the locals will lead to about $30 million in net gain in consumption, focused in a particular area. Now does the government create any new jobs?

No.

The local are not free to hire whomever they want to build the prison. Bids must be accepted by a certain number of firms, a fixed quantity of those bids must come from businesses owned and/or operated by "minorities." The materials must usually be obtained from specific firms or through certain bureaucratic channels. And the workers must be paid what the government deems "prevailing wages." Every step of the process must be reviewed and approved by overseers from the various federal agencies involved in the appropriations procedures.

So the locals cannot farm out the work to the firm that will build the prison in the least amount of time, for the least amount of money using materials that cost the least to procure. In fact, the prison, if it is ever completed, will be built in the exact way that no sensible person would ever go about having something built. Certainly not how somebody who is responsible for the cost of the project would act. It will take longer to build than originally projected. It will cost more than originally projected. It will not last as long or be as functional as originally projected. And the people responsible for the mess that is created will put this as exhibit "a" as to why they should be re-elected. The costs are that which is unseen.

Bear in mind that the president himself laughed at the notion that a "shovel-ready" job meant that the job was "shovel-ready" or that there was ever such an animal.

Mind also that the work performed will usually be required to be done by union employees. Unions maintain wages higher than the market price by political (& coercive) manipulation and restricting membership. If the supply is held below what is required for demand to be met, the cost is increased; the market is not allowed to function properly by allowing the supply of the labor (for example, the unemployed) and the demand for the labor (the local government) to figure out what the locals are willing and able to pay to get the job done and what the workers are willing and able to accept to do the work. Everyone's freedom is curtailed and the taxpayer loses more money to boot: lose, lose, lose. Oh, and nary a single job was either created or saved.

This is a hypothetical based loosely on an actual event that happened in Montgomery County, PA. I can't find the links, but think seriously about what I wrote and think seriously about what is more plausible: my account of what happened or the Obama/Krugman/Keynes version of "reality?"

Government does not create jobs. It gets in the way of the processes that create jobs. And even when a job is created by the government, like making a new position for a bureaucrat, the gain created by that "new job" is more than offset by the loss in productivity in the economy and the dead-weight loss of the current and future taxes necessary to pay for that job.

*As a matter of course, I find the notion of the judicially created notion of "substantive" due process troublesome. It doesn't exist in the constitution and has no antecedent in the common law. It means, basically, whatever the judge(s) want it to mean at any particular time. As a libertarian, I like it when it is used to expand the notion of individual liberty and curb the power and authority of any level of government and I dislike it when it is used to expand the power and authority of any state actor or agency at the expense of individual liberty.

On Tax & Circumstance

I was listening to a show called Radio Times that is produced by my local public radio station and they were discussing President Obama's job's/deficit reduction/recovery program, specifically whether "millionaires" should pay more in taxes.

The discussion is an extrapolation of the "Buffett Rule," because Warren Buffett recently stated that his effective tax rate is almost half of what his secretary's is. Greg Mankiw does a fine job of parsing the numbers and basically calling shenanigans on Buffett's populist nonsense here. What is important to note is that almost 46% of households filing a tax return under the current system pay no federal income tax at all (this does not include the payroll tax collected for Social Security, Medicare or Medicaid, but then, as Professor Krugman (and Professor Samuelson before him) notes so well, that is on account of the "Ponzi game aspect," despite the fact that he now claims not to have meant what he so clearly wrote. Please see Robert Murphy here and Alex Tabarrok here).

Anyway, back to the radio show. The host is interviewing a gentleman named Seth Hanlon who works for the Center for American Progress ("Progressive Ideas for a Strong, Just, and Free America" serial commas included, no doubt). So you just know we're going to get a really objective look at the proposal.

At one point the host asks, "Would higher taxes lead to job growth?"

Almost a challenging question. And the answer, of course, is no. There is not much debate about this among anyone really. And presumably, Mr. Hanlon knows this. So he doesn't answer the question. He says that the plan is for taxes to increase only on the "wealthy," and that they are going to go back to the level they were before the "Bush tax cuts." He then makes the point that there was robust economic growth in the 90s, when these tax rates were in effect....therefore, ipso facto, correlation is now causation. Higher taxes mean more robust economic growth.

This is, obviously, asinine.

Now you can (try to) make the point that the rich should pay more in taxes in order to reduce the deficit. My answer to that would be that congress has shown an uncanny knack for spending all of the revenue it it receives and then then spending more, so even if revenues were to increase, so would spending (mind you, that if money collected under the FICA "contributions" were kept in trust for the purposes for which they were collected, there would be no problem with Social Security for decades. As it is, the money was spent on "other shit" (technical phrase) and replaced with Treasury notes that we have the happy benefit of owing, plus interest).

You can make the point that the rich don't need as much money as they have. However, this is morally repugnant and indefensible. The easiest thing in the world to do is spend someone else's money and any income, legally obtained, is the property of the person who earned it. Government has no right or claim on anyone else's property, regardless of how much any one person may have. As another aside, Mr. Buffett is free to send as much of his personal fortune as he chooses in to the United States Treasury. He is also free not to set up a charitable trust to shield his considerable estate from federal inheritance tax. He has chosen to do neither.

The 90s also benefitted from something we have come to call the "Tech Bubble," which may have had more to do with the economic growth of the decade rather than the marginal tax rates.

Parsing Time

President Obama is engaging the Republicans in a game of chicken over the debt ceiling, insisting that tax increases be part of any deal. Regardless of the fact that back in 2009 he said, “the last thing you want to do is raise taxes in the middle of a recession because that would just suck up – take more demand out of the economy and put business further in a hole.” Which is similar in reasoning to something I posted right before he said it.

Now, just to clarify where I stand on a few things: restoring the marginal tax rates to pre-W levels is, in fact, a tax increase (even if it is only on those rates paid by those bastards who just have too much damn money). Whether you wrap it in the language of "letting them expire" or whatever else. If the government takes 35% of the money you earn over $379,150 in 2011 and then the next year the government takes 39% of that money, you are paying higher taxes. The government has effected a tax increase. Period. Full stop.

But the Republicans are playing a little fast and loose with the definition of "tax increase" themselves. Some Republicans, apparently under the sway of a little gnome named Grover Norquist, have said that eliminating tax subsidies, specifically those enjoyed by oil and gas companies, is the same thing as a tax increase. No, it isn't. Any special cut away for any firm or industry for whatever reason creates market distortions and inefficiencies. Yes, it is more efficient for a firm to spend its own money the best way it sees fit, but it is inefficient (along with unfair and immoral and it rightly gives the impression of bribery) for any firm or industry to be given any special favors regarding taxation by the legislature. Even if everyone thinks it's a good idea. This goes for oil companies, agribusiness, sugar producers, colleges and universities, mortgage holders. Everyone.

Now these are not "loopholes," they are intentional favors enacted by congressmen of both parties. For a fuller, and better, exposition on this matter please see this post by Kevin Williamson.

I really don't care how this is settled, because it will be a deal between and among politicians and the only ones who will end up getting screwed will be the rest of us.

This post was to be a lot longer, but I'm tired.

And Joe Biden is still an ass.

More Funny Math

I'll skip the humorous tut-tutting Professor Krugman does in this post about another person's lack of civility. I'll disregard his almost pathological need to misrepresent facts and insult the intelligence and good faith of those not smart enough to agree with him. Par for the course.

I'll focus on one tidbit, Krugman writing: "He repeats the idea that nobody collected benefits in the beginning because life expectancy at birth was only 63 (life expectancy at age 65, which is what matters, was almost 80 for women and 78 for men)." emphasis added.

Retirement was set at 65 when Social Security was started because you were expected to die by then. Yes, it was well known that if you lived to 65, which you weren't expected to do, then the actuaries did account for the fact that you would live a few years longer. Good genes, non-risky behavior, diet and, again, good genes all played a roll in deciding how long after 65 you would live had you made it. But, and here's a very important point that Professor Super Genius* not only knows but purposely and maliciously misrepresents, you were not expected to live to see the age of 65. A majority of people would live (to 63), working usually 2/3 of that time and having a percentage of their wages taken from them and given to those lucky enough to keep going past the median mortality rate. This number has gone up significantly over the decades since it was instituted while we have only nibbled around the "retirement" age.

Why? Because it is politically risky to mess with a program where you take a little bit of money from a whole lot of people (via the payroll tax) and give it to others, but under the guise of the federal government "saving" it for you. An idea that was known all to well by the man we have to thank for this poorly run Ponzi scheme, Franklin Delano Roosevelt:

"I guess you’re right on the economics, but those taxes were never a problem of economics. They were politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program."**

Krugman knows he is full of blarney (trying to keep it clean). And FDR knew he was creating a system that would be impossible, politically, to fix. It was established to create a political class of citizens who would then be beholden to and dependent upon, the federal government. The workers will feel trapped into continued support because of the money already taken from them and "invested" into the system.

*

**Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Boston: Houghton Mifflin, 1958), p. 308-309

Funny Math

Glutton for punishment that I am, I was looking over The Universe's Smartest Man's blog and stumbled upon this little gem, titled Zombie Tax Lies (the idea being that the concept should be dead, but it keeps coming back, get it?).

His ire was gotten up, or rekindled anyway, by this post by someone named Jonathan Chait and this little ditty put out by an organization known as Citizens for Tax Justice.

Here's the re-cap: usually about tax time every year, people point out that the "wealthy" pay more in taxes; other people point out that, 1) that's only fair, because the wealthy steal their wealth from the surplus value of the laborers that they exploit and, 2) the wealthy really don't pay any taxes and really should be paying much much more, and the lying cheating bastards really should feel honored to do so.

The Smartest Man in the Universe, Mr. Chait and the Citizens for Tax Justice all fall into the "other people" category, and all throw out the same tortured logic to prove their point.

They do not contest that the top 1% of earners pay 38% of the take on federal income taxes, though none of them repeat the exact statistic because it would rightly disgust anyone of sound mind that 1% of the population would pay more than a third of the income tax collected. They all use the dodge that the federal income tax isn't the only tax paid. That state taxes and the "contributions" made to social security and medicare are regressive and therefore spread the tax burden more equitably...which of course justifies their belief that the rich aren't paying enough and should pay more.

On this, two points. First, the way progressives, liberal, communists, socialists, Marxists and Leninists use the word "regressive" when it come to taxation is fatuous. The thinking that someone making $20,000/year and pays 12.5% in social security taxes pays a higher burden than someone making $100,000/year and pays 12.5% in social security tax is regressive completely disregards what regressive taxes are: a decreasing rate as the base increases. Flat taxes are not regressive. Now, if in the above example the person making $20,000/year pays a $1,000 tax and the person making $100,000 pays a $1,000 tax, that would be regressive. People making more than $109,000 don't have to pay social security and medicare taxes, er, sorry, contributions because the benefits paid out are also capped.

Second, the federal budget is bigger than state and local budgets. Paying 38% of $1,366,241,000,000, which is $519,171,580,000*, is a whole lot more than whatever is paid in state taxes by the two lowest quintiles of income distribution. In the chart (above) that accompanies the three articles by the three "make them pay more" group, the top three quintiles still pay more as a percentage of all tax collected than they collect in total income, even with them gerrymandering the numbers in favor of their own argument.

No kidding. This is the evidence used to rebut the argument that the rich don't pay too much in taxes. This is the zombie that the Smartest Man in the Universe, for all of his intelligence, just can't slay. Why? Because you, you dolt, just aren't as smart as he and his friends are.

*numbers are from 2007, via wikipedia here.

Bonus Time

The federal government is about to get generous, again. Not happy that there won't be a cost of living increase in the transfer payments administered by the Social Security Administration--because the cost of living hasn't increased--Congress is about to give $250 dollars to each recipient of Social Security transfer payments. 58,000,000 people at $250 each comes to $14,500,000,000 (or $1.45 * 10^10).
It's like a christmas bonus, except the "employees" (transfer payment recipients) haven't produced anything, and the "employer" (Feds) also hasn't produced anything, especially profits, to disburse. They are taking more money from productive citizens (or future productive citizens) to give more money to millions of voters for doing nothing and whose costs haven't gone up.

Taxes, Spending and Deficits

The "Bush Tax Cuts" are set to expire at the end of this year. If allowed, is this a bad thing?

Generally yes. Because congress handled the tax law ham-handedly, it was passed with a "sunset." So the wording gets tricky. Is allowing the law to expire a tax increase? Yes, it is.

Is raising taxes during a recession a bad idea? Yes, it is a certifiably terrible idea. It should go without saying that I think any tax increase ever is a bad idea, but there is positive economics out there that backs the original point, the latter being a matter of personal norms.

But if the tax rate is kept where it is, won't deficits increase*? Yes. Yes, they will. But Democrats seemingly don't mind deficits and, well, neither do Republicans. But Democrats seem to enjoy taxing the "wealthy," however defined, so at least rhetorically, they want to balance things a bit. Republicans talk a good game about cutting spending, but whenever given the opportunity to do so, don't. They don't want the political fallout of having to tell people "no, the government will not do that for you or give that to you." Democrats, to their disgrace, whenever Republicans do actually rattle their sabers and threaten some sop or giveaway, bring in the people who may be "harmed" and get them to testify that were it not for the generosity of the state taking something from one person to give it to them, well their life would be difficult.

But do deficits matter? This question, posed to any sensible person, will get you a puzzled look and an answer approximating "of course, you dolt." But thankfully for Democrats (& Republicans) we have people like Ezra Klein and James Galbraith (son of John Kenneth Galbraith) who say that there is "zero" danger with long-term deficit spending. I won't get into all the minutiae (Robert Murphy at the Ludwig von Mises Institute gets into some here), but spending beyond means is not good, and our sensible person is right and Ezra Kelin and Galbraith and Keynes and Krugman and Romer** are wrong.

So, should the tax increase go into effect? No. Because deficits don't matter. And "progressive" tax rates are un-egalitarian, unfair and immoral. It is morally repugnant that income over $x should be taxed at a higher amount. This punishes that which we should want to foster in society, namely success. The tax code is used as a "levelling down" device. It is used as a tool to affect "social change." It is used to punish. It should be used to care of that which the state has a legitimate interest in; paying for that which the government was granted the authority to do, not whatever a majority of elected officials want to do at any one time. That is why we have a constitution.

Further, progressive taxation increases incentives to hide compensation and hinders productivity.

The federal government shouldn't be funding schools, meals, churches, museums, parks, military bases in dozens of countries, housing, drug wars, hot wars (except in certain extreme instances and then only briefly), cold wars, dictators, democracies, policemen, firemen, hospitals, sugar growers, corn growers, wheat growers, communications commissions, agriculture commissions, election commissions, equal employment commissions, blue ribbon panels, retirement funds, disability funds or medical care. Get rid of this nonsense and then you won't need a commission on how to reduce the deficit.


*Currently $14,000,000,000,000 (that's $14 trillion or 14 x 10^12-another generation or so and we'll be approaching Avogadro's Number). Not including future liabilities. N.b-there are no future assets to offset those future liabilities, only future taxes.

**Romer's argument: "Extending the high-income tax cuts would provide very little job creation in 2011." This is fatuous. Look at this from a moral perspective: the more successful you are, the more you are to be penalized because you keeping more of what you earn won't create jobs for someone else next year. First, Romer was one of the twits behind the notion that if the "stimulus" package didn't pass, unemployment might go as high as 9%. Well, they passed and pissed away almost $1,000,000,000,000 and unemployment went even higher than that, so, as always, consider the source. The government is not an employment agency and people shouldn't pay taxes to affect job creation (which, we've seen, it doesn't).

Taxes

I'll probably get more into this later, but for now another great article by Jonah Goldberg on taxes.

Due to some welcome changes at work, a side nuisance is that I now have to make quarterly tax payments. So instead of relatively smaller portions of my money being taken from my paycheck to fund our government (partially anyway) and be given to other people and countries, I get to write four larger checks per year. So I get to see and keep (briefly) what I actually earn and then personally send it off to Washington in order for it to get pissed away on things the government has no right, authority or ability govern.

And Joe Biden can still kiss my ass.

Words to Live By

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays thetreasury. There is not even a patriotic duty to increase one's taxes.Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
--Judge Learned Hand

This was first presented to me by an attorney who was explaining the difference between tax avoidance (legal) and tax evasion (not).

This is, of course, contra to Joe Biden saying the it is the patriotic duty of wealthy people to pay more in taxes. Feh.