Busting Myths about US Taxes

We have some really bad tax policy here in the USA. I think one reason is that so many people believe myths told by both political parties to distort the truth toward their progressive or conservative agenda.

Here's my list of myths, half-truths and outright lies

1. Half the electorate pays no federal income tax at all
2. Contributions to Social Security and Medicare are held in an account for its beneficiaries
3. A flat tax will simplify the tax code
4. We need to broaden the tax base
5. Clinton's tax increases balanced the budget
6. Ending the Bush tax cuts will destroy the economy
7. Cutting or eliminating corporate taxes is the best way to stimulate growth

Half the electorate pays no federal income tax at all

True, but misleading. Everyone who works and reports their income is taxed around 6.5% (temporarily 4.5%) to pay for Social Security and another 1.5% to pay for Medicare (which is nowhere near enough to cover projected costs). Additionally employers pay another 6.5% on behalf of the employee, which either effectively comes out of their pay or in many cases costs them their job.

One big problem with this form of taxation is that people don't recognize it as taxation and feel entitled to the money they have contributed. The government doesn't treat your contributions this way; it decided long ago to account for this money as general revenues to fund the government.

Another huge problem with this form of taxation is that it only applies to wage income. People who make their money from investments don't contribute to these programs. People with huge salaries and bonuses stop contributing after a few paychecks (I had that experience one very good year.)  Just to be clear - payroll taxes are for the middle class and working poor. Is that right?

Contributions to Social Security and Medicare are held in an account for its beneficiaries

This is an outright lie.  The government makes it appear to be an account by tracking your contributions, but that money is actually spent to fund current beneficiaries.  Your only hope is that a future generation will still be willing and able to pay for you (if you live that long).

A flat tax will simplify the tax code

This is a less-than-half-truth. The number of tax brackets is not where complexity arises in the tax code. Complexity comes from deciding what taxable income is and what deductible expenses are. Don't believe for a minute that the lobbies in Washington will let their deductions and tax credits slip away. Any change to the tax code with the current crew of legislators and lobbyists will likely work in their favor and make the system more complex, not less. The flat tax is related to the next myth, which is broadening the tax base.

We need to broaden the tax base

Those who advocate this would like to raise more revenues from the middle class. Their argument is that most Americans do not participate in the income tax and therefore are not responsible for the basic services they consume. They also believe that you cannot raise significant revenues from the upper class because the diminishing numbers of very rich can't produce any meaningful increase in revenues without hurting the economy.

This is less than half-true because the very rich aren't really doing much for the economy now (in terms of hiring), and in many cases are doing things to hurt the US economy by offshoring manufacturing and information jobs.  Raising taxes on the middle class would likely hurt the economy as much or more than alternatives like letting the Bush tax cuts expire.

Clinton's tax increases balanced the budget

This is a half-truth.  The economy improved under Clinton because of two macro-economic factors largely outside his control, the end of the cold war, and the build-out of the internet.  Unless you believe Al Gore invented the Internet I have news for you, the Internet would have been developed and Y2K-related technology spending would have been about the same under a Republican president.  That had very little to do with politics.

The reduction of military spending allowed the entitlement state to grow without immediate budgetary consequences, and the Internet/technology bubble produced a wave of one-time stock market gains that created the illusion of a balanced budget.  The fact that tax rates were higher during that time amplified the income to the federal government and contributed to the surplus.

Actually that surplus contributed to the recession that started that year.  And it deceived our political leaders into believing that they had unlimited resources to increase entitlement spending and wage wars, while cutting taxes on investors.  So Clinton’s tax policy did increase tax revenues, but the net effect of the temporarily balanced budget was actually quite negative.

Ending the Bush tax cuts will destroy the economy
This is an outright lie.  Those tax cuts did little to help the economy and there are much better ways to use tax policy to produce economic growth today.  Capital gains tax breaks allow the investor class to pay much lower taxes while investing in companies like GE that use capital to create jobs in India and China.  Dividend tax cuts encourage companies to pay their shareholders, but this has the opposite effect on investment capital and doesn’t necessarily encourage companies or shareholders to create jobs or make other beneficial investments.

Who benefits from the Bush tax cuts?  The overwhelming majority of individual shareholders and mutual fund owners hold these investments in tax-deferred accounts.  Those who benefit from the tax breaks are wealthy investors who can’t participate or shelter their income in other ways.  Is it right that someone making their income from investments (like Warren Buffet) pays 15% while those making the same amount from working two or more jobs pay 28-35% of their income plus 15% to Social Security and Medicare?

Cutting or eliminating corporate taxes is the best way to stimulate growth

This is more than half true. Cutting corporate taxes would encourage offshore companies to locate headquarters here, and may encourage small business owners to incorporate and avoid double-taxation of their income.  But unless payroll taxes and regulatory burdens are lifted these companies may still employ offshore labor and manufacturing, thus missing the anticipated benefits and losing tax revenue.

If we’re serious about cutting corporate taxes the place to start is payroll taxes.  This is a tax that is levied on the thing we need most – employment.  And it is only levied on companies that employ Americans.  That is ridiculous and wrong.  Quite the opposite, the US government should be doing anything it can to reward companies that hire and retain American employees.  If there is a need to replace the lost revenues to fund those entitlement programs, it can be raised from tariffs and surcharges on cheap foreign labor.  And that may not even be necessary since the jobs gained from this policy would reduce unemployment costs and increase tax revenues from the new employees.

Finally, let’s talk about simplification of regulations on employers.  It is SO 19^th-century to look on employers as the enemy of labor.  Employers provide benefits and salaries to attract and retain good employees.  They provide record-keeping services and safe work environments and many other benefits, many as required by existing regulations.  Adding to this regulatory burden costs not only money but critical time and focus from businesses.  Now is the time to reach a balance that stops the tide of uncertainty and fear that is holding back our economy.

Businesses need a clear vision, not of short-term targeted incentives for particular types of business, but a long-term clear road ahead that is not barricaded by government regulators and bureaucrats.  And the road ahead should lead back to America.  This is an environment our elected government can help to foster and restore.

A Christmas Story for Labor Day

To commemorate Labor Day, let me bring an old story about greed into a modern American context.

It’s Christmas Eve, and old Ebenezer Scrooge is counting the gold coins he has accumulated as a result of replacing his accounting department with an accounting service based in India.  He’s visited by three ghosts that night.

The first ghost takes him back to his middle class family that always had food on the table, to his first job where his employer was so kind and generous to him, then to his early days as a private entrepreneur who employed a few of his fellow townspeople.

The second ghost appears.  Time has passed, and greed has gotten the better of him.  He takes the company public, brings in new management.  Soon they’re looking for ways to reduce labor costs.  The offshore accounting services are lined up at the door.  Bob Cratchit is feverishly working into the night, training his Indian colleagues on the back office work while he is “positioned” for a sales job.

The third ghost appears and shows him the future.  Bob Cratchit didn’t make quota and was laid off.  Tiny Tim got depressed and died of a drug overdose.  Scrooge is now too old to stay up all night talking with his offshore management company.  He has cashed out his shares to pay for a miracle drug to cure his cancer, but in the end there is nothing left and he expires.  What a pity, but nobody misses him.

Christmas morning arrives and Scrooge awakens determined to change course.  He hires Cratchit back and gives him a raise, but exorbitant taxes and regulations make it unprofitable, and his competition is still boosting productivity with technology and cheap labor.  He goes out of business and dies penniless but at peace with God.

What? I could have ended with something sappy, but sometimes reality bites! The moral message is the same, and it doesn't have to end this way...

Stimulus by Another Name

Aha - we just discovered Wednesday how the Obama Administration plans to stimulate the economy, by using the Department of Justice to block mergers and the resulting consolidation of assets and inevitable layoffs.

Not that there is anything wrong with that (trust busting).  The lawsuit against AT&T to block the T-Mobile acquisition would forestall or prevent the elimination of 34,000 to 60,000 jobs due to the restructuring that would have taken place.


This is stimulus in two ways, preventing layoffs and encouraging companies to build rather than buy assets.  It will effectively force some money out of the clutches of cash-rich companies into either much smaller acquisitions or internal hiring and "organic growth".

If I'm right about this being a "hidden stimulus" measure, you can expect more of these kinds of lawsuits.  It's the kind of big-government idea that Democrats love, pro-consumer and all that.  Of course it will slow productivity growth and ultimately result in more inflation, but the principle of the Federal government enforcing anti-trust policies is not inherently unconsitutional, like so many other things this administration is attempting to do.

In the meantime it will keep lots of lawyers employed (oh joy).  That's another thing Democrats love to do.  Anyway, you gotta hate these phone company monopolies; they're almost as arrogant as government bureaucrats.  Keep them competing, that's fine with me.

FASB and its Effect on the World Economy

The Financial Crisis of 2007-2009 started and ended largely as a result of the actions of a small group of men known as the FASB (Financial Accounting Standards Board).  This is WAY under-reported by the media, but I learned about it from Bill Isaac on Fox News Channel during the financial crisis.

To be brief, in 2007 the FASB introduced accounting rule FAS 157 aka the "Mark to Market" accounting rule.  That required financial institutions to raise more and more capital to meet reserve and margin requirements as their illiquid asset values plummeted. In other words, they had to sell more and more assets as the value of those assets declined. This created a self-perpetuating and accelerating financial vortex for some very large institutions from which they could only be saved by the Federal Government.

Under great political pressure, Congress passed the "Emergency Economic Stabilization Act of 2008", which authorized the SEC to review the FASB rules.  By March 16, 2009 FASB finally relented on the worst provisions of the rule and the market instantly turned positive.  This rule has also been attributed with increasing bank profits in the recovery (and thus executive bonuses) by exaggerating the increase in asset values after they were artificially depressed by the collapse.

I'm not really complaining about FAS 157 (as modified) since it brought the financial world back to reality from its euphoric bubble.  But as with any good regulatory body, they abused their power.  Thank God they finally came down off their pedestals before financial Armageddon, which was within days of becoming reality in 2009.  "Vogons" exist in the FASB...

I suppose the point of bringing this up now is this: the financial meltdown and its meteoric resurrection was a bunch of bureaucratic nonsense.  But the political reaction to it, and the resulting massive public debt are very real.  Unwinding that will be painful if even possible.

Economic Warfare on the High-Speed Battleground

Most US politicians and economists don't get it.  The economic problems faced by the USA today are not just related to economic boom-bust cycles and poor management of economies (though these are real problems).  This is Economic Warfare being fought on a new battleground called the High-Speed Internet.

In this war, the USA employs a strategy it calls "free trade", which equates to unilateral economic disarmament.  We fear threats from our economic foes so we constantly surrender favorable trade deals, off-shoring jobs, capital flight, etc.

The guerilla tactics of our economic foes are unrecognized and their targets are rarely defended by the US.  They appear at our electronic gates and negotiate deals with the captains of business, while the generals lay additional regulations and taxes on us, like useless equipment and rules of engagement that leave us powerless to fight.

Old ideas are hard to change.  Liberal colleges still teach economic theories developed centuries ago.  Politicians still use policies based on teachings of Karl Marx, John Maynard Keynes, Milton Friedman, etc.  The fact is, the battleground has changed, the tactics have changed, and the US needs to wake up and fight with 21st century tactics before the battle is lost and our sovereignty is lost with it.

Throwing more money at the problem (whether tax cuts for the rich or stimulus checks for the poor) won’t work anymore.  The money will be tucked under a mattress or put to work overseas.  Fixing the economy will require policies that change the direction, not the speed of business.

The first order of business is to find anything the government is doing now to make things worse, and stop doing it.  All the health care policies developed in this century need to be reversed, to start with.  We need to stop using taxes and regulations to make employers act like social services.  It is way too easy to get unregulated, cheap foreign labor on the Internet.

The only reason the jobs situation hasn’t gotten even worse is that many small business people still care for their employees.  Community organizers and career politicians don’t have a clue about how businesses work and won’t find the answer from people who run mega-cap corporations that routinely send US jobs overseas.

Small businesses won’t last in a weak economy, when they are competing against multi-nationals and cheap foreign labor.  They will be acquired or put out of business.  This trend will not only continue but accelerate if it is not addressed.

Changing the direction will require time and pain, but it’s better to start now before we go deeper in debt and further into the mud.  Probably the first step will be early 2012 when we can start to get fresh blood in the primary process.  The primary elections are our best chance to make a change in leadership; both parties need people who at least recognize the new economic battle we face.

World's Worst Investment

The US Dollar may be the worst investment in the World.  Think of a Dollar as a stock certificate (for those old enough to remember what they look like).  It signifies that you own a very small piece of the USA.

The problem is that the CFO (Ben Bernanke) can issue new shares any time he thinks the corporation needs extra cash.  For shareholders (you people with cash) that is DILUTION.  That means your shares are constantly declining.

The worst of the worst investments are those "Convertibles" (Treasuries) that pay a puny 2% taxable income and convert back to "USA Common Stock" in 10-30 years, when the stock is guaranteed to be worth 50-80% less than it is today.

Shareholders of the USA don't really appreciate their ownership, and they can't seem to make up their mind about management.  Management continues to add more and more people to the payroll, in spite of declining sales per employee.  And all the different divisions can do is talk about whether to lay off people (the Republican approach) or borrow more and give everybody a raise (the Democrat approach).  Thus the corporation and the value of its shares continues to decline.

The company needs new management, some visionaries that understand we need a better strategy to motivate employees and stimulate sales.  Until this happens, the shares are a SELL.

Did You Get Scared Into US Treasuries?

I hope you didn't buy US Treasuries in the last few weeks.  If you did, good luck getting out when you have Uncle Sam's protuberant posterior and Ben Bernanke's bulging bum jammed in the door in front of you.

Now there will be a host of bond index funds stuck with these guaranteed money-losers for the next 10-30 years.  The day the Fed-engineered bond bubble bursts will be the biggest "giant sucking sound" since Ross Perot invented the term to describe "free trade".

Oh, I forgot one other big player stuck in the room holding Treasuries - the Social Security trust fund.  That thing is going to have to start selling Treasuries too, just to keep the money flowing to all the baby boom geezers.  We're going to need a massive tube of Preparation-H to get all those Treasuries on the market at the same time; watch out!