Tax Policy

[Crafty_Dog]

"If im going to be forced to pay for their health care they should atleast do their part to lighten my load.  Same goes for smokers and alcoholics, dont ask me to pay for the health care of those who do not care enough about themselves to take care of themselves."

The logic of "if you are going to make me pay, then , , , the State and I own your *ss and get to tell you what to do" makes me really, really, really leery.



FWIW, IMHO the idea of the Canadian system prohibiting people seeking out private sector options is, in the deepest and truest sense of the word, a form of slavery.

[HUSS]

The logic of "if you are going to make me pay, then , , , the State and I own your *ss and get to tell you what to do" makes me really, really, really leery.
.

Know what makes me leery?? close to %40 income tax rate on 150k and above, 13% govt/provincial sales tax, oppressive property tax (some how even in this down turn my property value went up, it might of had soemthing to do with the appraiser not liking me calling her comrade and asking her why i should pay more in taxes because i chose to put the money into my home instead of a beer and pot like some of the others in my small town)..................... the list goes on.

[ccp]

Doug,
thanks for your thoughtful response.

I must think our founders are turning in their graves at the reality that Democrats are taxing certain groups of citizens in uneven ways and then doling out those founds to buy votes from their supporters, and THAT is precisely how they keep power.

And to boot they are expanding those on the dole to maintain this power - with conmfiscation of other people's wealth.

[DougMacG]

Huss, Just getting back to you...  Huss wrote: "Doug,  We do business in Brazil, India, The Republic of Georgia and Israel on a regular basis.  Right now we are quoting Aerospace work in Brazil and for the life of me, I can not get the Brazilians to commit to a long term agreement in U.S $.  The Indians just signed a contract with us in Canadian dollars and the Georgians will only take U.S $'s as a last resort..."

The dollars slide covers about the time that I have been out of exporting unfortunately.  A so-called strong dollar was a problem also.

Seems to me that if Brazilians do not want to commit to buy(?) longer term in US$ they are expressing lack of confidence in their own currency?

[Body-by-Guinness]

Interesting little nugget where an FDR insider takes Roosevelt's tax policies to task.

Robert Higgs
Regime Uncertainty in the 1930s: A New Deal Insider’s Account

In the mid-1990s, when I was engaged in the research that would eventually be published early in 1997 in an article titled “Regime Uncertainty” (a modestly revised version of which appears as chapter 1 of my Depression, War, and Cold War), I had not read Raymond Moley’s book After Seven Years, published in 1939. Mea culpa. I should have read it much earlier. I am embarrassed to admit that although I purchased a copy in a used-book store many years ago, it sat on my shelf unread until recently.

Not for nothing is this book a standard source for New Deal historians. Moley was the leading figure in the “Brains Trust” that guided Franklin D. Roosevelt’s policy thinking and speaking during the 1932 campaign and, to a lesser extent, during the interregnum between Roosevelt’s election and his inauguration as president and, to a still lesser extent, even later (but then not as an organized group). Although Moley’s association with FDR grew somewhat strained after the president’s first year in office, he continued to work as a close adviser and speechwriter for several years until, in 1936 and 1937, he could no longer countenance the direction in which Roosevelt was taking the New Deal.

Had I read the book before the mid-1990s, I would have recalled then that Moley gave one of the clearest, best informed accounts ever written of the problem of regime uncertainty in the 1930s, an account all the more valuable and weighty because he was the ultimate insider, a man who had worked at the heart of the New Deal from its inception (he even lays claim [p. 23, fn. 6] to having given this political program its name). As I noted in my own article (see Depression, War, and Cold War, p. , my “hypothesis is a variant of /an old idea: The willingness of business people to invest requires a sufficiently healthy state of ‘business confidence.’” Moley’s discussion proceeds under this well-worn rubric.

In the following long quotation, I present Moley’s most sustained and complete account, which appears on pp. 370-72 of the volume published in New York by Harper and Brothers in 1939. He begins this account by faulting the president for, among other things, “a failure to understand what is called, for lack of a better term, business confidence.” He then goes on to write (I omit here one small footnote giving publication details for a book cited):

Confidence consists, on the one side, of belief in the prospect of profits and, on the other, in the willingness to take risks, to venture money. In Harry Scherman’s brilliant essay on economic life, The Promises Men Live By, the term is, by implication, defined much as Gladstone defined credit. “Credit,” Gladstone said, “is suspicion asleep.” In that sense, confidence is the existence of that mutual faith and good will which encourage enterprises to expand and take risks, which encourage individual savings to flow into investments. And in an age of increasing governmental interposition in industrial operations and in the processes of capital accumulation and investment, the maintenance of confidence presupposes both a general understanding of the direction in which legislative and administrative changes tend and a general belief in government’s sympathetic desire to encourage the development of those investment opportunities whose successful exploitation is a sine qua non for a rising standard of living.
This, Roosevelt refused to recognize. In fact, the term “confidence” became, as time went on, the most irritating of all symbols to him. He had the habit of repelling the suggestion that he was impairing confidence by answering that he was restoring the confidence the public had lost in business leadership. No one could deny that, to a degree, this was true, The shortsightedness, selfishness, and downright dishonesty of some business leaders had seriously damaged confidence. Roosevelt’s assurances that he intended to cleanse and rehabilitate our economic system did act as a restorative.

But beyond that, what had been done? For one thing, the confusion of the administration’s utility, shipping, railroad, and housing policies had discouraged the small individual investor. For another, the administration’s taxes on corporate surpluses and capital gains, suggesting, as they did, the belief that a recovery based upon capital investment is unsound, discouraged the expansion of producers’ capital equipment. For another, the administration’s occasional suggestions that perhaps there was no hope for the reemployment of people except by a share-the-work program struck at a basic assumption in the enterpriser’s philosophy. For another, the administration’s failure to see the narrow margin of profit on which business success rests - a failure expressed in an emphasis upon prices while the effects of increases in operating costs were overlooked - laid a heavy hand upon business prospects. For another, the calling of names in political speeches and the vague, veiled threats of punitive action all tore the fragile texture of credit and confidence upon which the very existence of business depends.

The eternal problem of language obtruded itself at this point. To the businessman words have fairly exact descriptive meanings. The blithe announcement by a New Deal subordinate that perhaps we have a productive capacity in excess of our capacity to consume and that perhaps new fields for the employment of capital and labor no longer exist will terrify the businessman. To the politician, such an extravagant use of language is important only in terms of its appeal to the prejudices and preconceptions of a swirling, changeable, indeterminate audience. To the businessman two and two make four; to the politician two and two make four only if the public can be made to believe it. If the public decides to add it up to three, the politician adjusts his adding machine. In the businessman’s literal cosmos, green results from mixing yellow and blue. The politician is concerned with the light in which the mixture is to be seen, the condition of the eyes of those who look.

Mutual misunderstanding and mutual ill will were, of course, unavoidable in the circumstances, and the ultimate result was a wholly needless contraction of business [in 1937-38] - a contraction whose essential nature was so little understood that it was denounced in high governmental quarters as a “strike of capital” and explained as a deliberate attempt by business to “sabotage” recovery.

After Seven Years contains many more nuggets of valuable information for the student of the New Deal or of Franklin Roosevelt himself. If you are at an early stage of your learning, do not wait as long as I did to read it.

http://hnn.us/blogs/entries/95589.html

[Crafty_Dog]

By PETER FERRARA
The federal income tax code is now so mangled that we can probably increase federal revenues with a 0% income tax rate for a majority of Americans.

Long before President Barack Obama took office, the bottom 40% of income earners paid no federal income taxes. Because of refundable income tax credits like the Earned Income Tax Credit (EITC), in 2006 these bottom 40% as a group actually received net payments equal to 3.6% of total income tax revenues, according to the latest Congressional Budget Office data. The actual middle class, the middle 20% of income earners, pay only 4.4% of total federal income tax revenues. That means the bottom 60% together pay less than 1% of income tax revenues.

This actually resulted from Republican tax policy going all the way back to the EITC, which was first proposed by Ronald Reagan in his historic 1972 testimony before the Senate Finance Committee on the success of his welfare reforms as governor of California. Besides calling for workfare, Reagan proposed the EITC to offset the burden of Social Security payroll taxes on the poor. As president, Reagan cut and indexed income tax rates across the board and doubled the personal exemption. The Republican majority Congress, led by former House Speaker Newt Gingrich, adopted a child tax credit that President George W. Bush later expanded and made refundable, while also reducing the bottom tax rate by 33% to 10%.

President Bill Clinton expanded the EITC in 1993. But it was primarily Republicans who abolished federal income taxes for the working class and almost abolished them for the middle class. Now Mr. Obama has led enactment of a refundable $400 per worker income tax credit and other refundable credits, which probably leaves the bottom 60% paying nothing as a group on net.

Many conservatives are deeply troubled by this, arguing that everyone should be contributing something to the tax burden. They worry that, not paying for any of the tab, this majority will see no reason not to vote for limitless spending burdens. But are conservatives now going to campaign on increasing taxes on the bottom 60%, arguing that is good tax and social policy? Steve Lonegan recently demonstrated in the New Jersey gubernatorial primary that this is not a viable political position. He proposed a 3% state flat tax which, while very good tax policy, would increase taxes slightly for the bottom half of income earners. His victorious opponent Chris Christie pounded away in advertising on that point.

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners? With that explicit 0% tax rate framing the issue, abolishing the refundable tax credits that actually ship money to lower income earners through the tax code would become politically viable. Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue.

Such tax reform can and should be combined with overall welfare reform based on work that would ensure an adequate safety net for the poor. Considering the success of the 1996 reform to the Aid to Families with Dependent Children (AFDC) program, further reform could result in huge overall savings. Besides AFDC, there are 85 more federally administered welfare programs that could benefit from reform.

Moreover, we should then be free to adopt sound tax policy for the top 40% of earners who make 75% of total income. Suppose we tax all of the income of those top 40% once with a 15% flat tax? That would be close to revenue neutral on a dynamic basis (i.e. counting work incentive effects).

The usual distribution arguments against such a flat rate would not apply because the bottom 60% would bear a 0% rate. All flat tax proposals effectively try to do the same through generous personal exemptions that are tax neutral for low- and moderate-income workers. But the explicit 0% rate would make the reform more easily understood.

This -- rather than adopting still more refundable tax credits as some conservatives are advocating -- is also the way to eliminate the distorting tax preference for employer-provided health insurance. For the bottom 60%, there would no longer be any health insurance tax preference, and for the rest the favoritism would be reduced to a minimal 15%. Or the tax exclusion for employer provided health benefits could be eliminated altogether, affecting only the top 40%. The economic distortions caused by every other tax preference in the code would be minimized or eliminated entirely in this same way.

Contrary to the fears of conservatives, this tax system would sharply limit the size of government. No politician would dare suggest imposing income taxes anew on the bottom 60%. While the last two Democratic presidents won by running on a tax cut for the middle class, that game would be over. Instead conservatives can argue for middle-income and working-class votes to protect the 0% tax rate from big government liberals. As the Obama administration will soon learn, higher income earners have flexibility in their taxable income and increasing revenues by raising taxes on them is not easy.

Mr. Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation. He served in the White House Office of Policy Development under President Reagan.

[Body-by-Guinness]

Doubt these figure will much alter the redistributionist's desires:

How Much More Can We Redistribute: IRS Releases New Data

Posted July 30th, 2009 at 5.21pm in Entitlements.

The IRS released data today on the distribution of income taxes. It shows that the highest-earning taxpayers shoulder a considerable burden of the federal income tax.

According to the IRS, the top 1 percent of taxpayers paid over 40 percent of all federal income taxes in 2007. That is a higher share than the bottom 95 percent of taxpayers combined! They paid just over 39 percent.

The top 1 percent, those earning over $410,000, consists of 1.4 million taxpayers, while the bottom 95 percent contains 134 million.

In 2000, before the 2001 and 2003 tax cuts that some claim disproportionately benefited the rich, the top 1 percent paid less than 38 percent of income taxes while the bottom 95 paid almost 44 percent. Since the tax cuts, the top 1 percent’s share increased over 2 percentage points while the bottom 95 percent’s share decreased 5 percentage points. Those that argue the tax cuts solely benefited the rich are mistaken.

President Obama plans to raise the top 2 marginal tax rates on those making over $250,000 a year, and Chairman Charlie Rangel (D-NY) wants to slap a 6 percent surtax on top of that to partially pay for a government take over the health care system. These tax hikes, in addition to damaging the already badly weakened economy, will further shift the burden of the income tax to the highest earners.

In contrast, the bottom 40% of taxpayers pays no income taxes on average. In fact, they get money from the tax code well above anything they paid in because of refundable credits. And President Obama’s Make Work Pay credit, passed as part of the stimulus, will increase the money redistribute to these non-taxpayers.

It’s a dangerous situation when a majority of voters can get services and benefits from the government for no cost because there is no incentive for them to limit the growth of government. President Obama’s and Chairman Rangel’s redistributive tax policies will further push the burden of income tax to high earners while giving more benefits to non-taxpayers. But as the IRS data show, the economy cannot afford anymore spreading the wealth around.

http://blog.heritage.org/2009/07/30/how-much-more-can-we-redistribute-irs-releases-new-data/

[Body-by-Guinness]

Tax Tax Tax at the Washington Post

Posted by David Boaz

A banner headline at the top of the Washington Post Sunday Metro section reads

It’s Time for Deeds to Step Up to the Plate on a Tax Increase

Columnist Robert McCartney, for years the top editor of the Metro section, says that Virginia’s Democratic gubernatorial nominee should “Propose to raise taxes to fix the roads. Yes, you read that correctly. Raise taxes.”

No doubt a lot of Republicans are hoping that Deeds will take the Post’s advice.

McCartney goes on to say that taxes must go up because (in bold) “The public sector needs to expand.” Because, you see, the infrastructure is failing in Virginia and also in D.C., and “Virginia’s roads clearly require extra revenue.”

Well, let’s see. Virginia’s state budget doubled between 1996 and 2006, from $17 billion to $34 billion. And the governor’s office estimated last December that the state would spend $37 billion in 2009 and $37.6 billion in 2010. Thanks to the recession, and to the state’s habit of spending during good years as if the party would never end, those numbers may drop slightly. But even with the current shortfalls, the budget’s gone up by $20 billion in the past 14 years, and they can’t find enough to fix the roads? What have they spent that extra $20 billion on?

Do Mr. McCartney, Mr. Deeds, and other tax-hikers ever think about prioritizing state spending? The Virginians who call themselves the Tertium Quids do. They urge the legislators to review the recommendations of the Wilder Commission and the Virginia Piglet Book to find some opportunities for savings.

But as usual, state governments spend with abandon while the money rolls in, and then when the lean years hit, they declare that they’ll need more money to teach math and fix the roads. It’s called the Washington Monument Syndrome — never cut the waste, the fat, the golf courses, the layers of bureaucracy, the fringes, the frills; threaten to cut the most basic or traditional or popular functions of government in order to pressure the voters to go along with a tax increase. Journalists shouldn’t play along.

Meanwhile, the Post’s Outlook section fronts a column by economist Gregory Clark declaring that we need to

Tax and Spend, or Face the Consequences

Specifically, he says, there will be no jobs for the stupid people in the new dynamic economy, so those of us with jobs are going to have to be taxed to the bone to support a huge class of nonworkers — or face revolution, I suppose. Which is even worse than congested highways.

Other Post writers have joined the tax-hike chorus recently: Steven Pearlstein, “Health Reform Threatened by Conservatives’ Anti-Tax Fantasy“; constant editorials on “the transportation funding problem”; Ruth Marcus on Obama’s need to display “political courage” by raising taxes so he can keep on spending; etc.

Alas, it is a constant frustration to the Post that, as Gregory Clark puts it, “The United States was founded, essentially, on resistance to taxes, and to this day, an aversion to the grasping hand of the state seems fundamental to the American psyche.”

http://www.cato-at-liberty.org/2009/08/10/tax-tax-tax-at-the-washington-post/

[Crafty_Dog]

By CHARLES MURRAY
America is supposed to be a democracy in which we're all in it together. Part of that ethos, which has been so essential to the country in times of crisis, is a common understanding that we all pay a share of the costs. Taxes are an essential ingredient in the civic glue that binds us together.

Our democracy is corrupted when some voters think that they won't have to pay for the benefits their representatives offer them. It is corrupted when some voters see themselves as victims of exploitation by their fellow citizens.

By both standards, American democracy is in trouble. We have the worst of both worlds. The rhetoric of the president tells the public that the rich are not paying their fair share, undermining the common understanding from the bottom up. Meanwhile, the IRS recently released new numbers on who pays how much taxes, and those numbers tell the people at the top that they're being exploited.

Let's start with the rich, whom I define as families in the top 1% of income among those who filed tax returns. In 2007, the year with the most recent tax data, they had family incomes of $410,000 or more. They paid 40% of all the personal income taxes collected.

View Full Image

David Klein
 .Yes, you read it right: 1% of American families paid 40% of America's personal taxes.

The families in the rest of the top 5% had family incomes of $160,000 to $410,000. They paid another 20% of total personal income taxes. Now we're up to three out of every five dollars in personal taxes paid by just five out of every 100 American families.

Turn to the bottom three-quarters of the families who filed income tax returns in 2007—not just low-income families, but everybody with family incomes below $66,500. That 75% of families paid just 13% of all personal income taxes. Scott Hodge of the Tax Foundation has recast these numbers in terms of a single, stunning statistic: The top 1% of American households pay more in federal taxes than the bottom 95% combined.

My point is not that the rich are being bled dry. The taxes paid by families in the top 1% amounted to 22% of their adjusted gross income, not a confiscatory rate. The issue is that it is inherently problematic to have a democracy in which a third of filers pay no personal income tax at all (another datum from the IRS), and the entire bottom half of filers, meaning those with adjusted gross incomes below $33,000, have an average tax rate of just 3%.

This deforms the behavior of everyone—the voters who think they aren't paying for Congress's latest bright idea, the politicians who know that promising new programs will always be a winning political strategy with the majority of taxpayers who don't think they have to pay for them, and the wealthy who know that the only way to get politicians to refrain from that strategy is to buy them off.

For once, we face a problem with a solution that costs nothing. Most families who pay little or no personal income taxes are paying Social Security and Medicare taxes. All we need to do is make an accounting change, no longer pretending that payroll taxes are sequestered in trust funds.

Fold payroll taxes into the personal tax code, adjusting the rules so that everyone still pays the same total, but the tax bill shows up on the 1040. Doing so will tell everyone the truth: Their payroll taxes are being used to pay whatever bills the federal government brings upon itself, among which are the costs of Social Security and Medicare.

The finishing touch is to make sure that people understand how much they are paying, which is presently obscured by withholding at the workplace. End withholding, and require everybody to do what millions of Americans already do: write checks for estimated taxes four times a year.

Both of those simple changes scare politicians. Payroll taxes are politically useful because low-income and middle-income taxpayers don't complain about what they believe are contributions to their retirement and they think, wrongly, that they aren't paying much for anything else. Tax withholding has a wonderfully anesthetizing effect on people whose only income is a paycheck, leaving many of them actually feeling grateful for their tax refund check every year, not noticing how much the government has taken from them.

But the politicians' fear of being honest about taxes doesn't change the urgent need to be honest. The average taxpayer is wrong if he believes the affluent aren't paying their fair share—the top income earners carry an extraordinary proportion of the tax burden. High-income earners are wrong, too, about being exploited: Take account of payroll taxes, and low-income people also bear a heavy tax load.

End the payroll tax, end withholding, and these corrosive misapprehensions go way. We will once again be a democracy in which we're all in it together, we all know that we're all paying a share, and we are all aware how much that share is.

Mr. Murray is a resident scholar at the American Enterprise Institute. His most recent book, "Real Education: Four Simple Truths for Bringing America's Schools Back to Reality," will be out in paperback later this month (Three Rivers).

[DougMacG]

Thank you Crafty and thank you Charles Murray for important points very clearly and constructively: "Our democracy is corrupted when some voters think that they won't have to pay for the benefits their representatives offer them."

Pres. Reagan unfortunately needed to make the following point to help fend off the charge that across-the-board rate cuts were really just tax cuts for the rich: he showed how 6 million or so of lower income working people would become free of the federal income tax altogether.  This was a winning point politically and worth it at the time to rescue our collapsing economy and win the cold war, but also a critical mistake for the future. 

Flat tax and the Fair tax proposals make the same mistake.  To compare favorably with the current tax system, these proposals typically exclude the first 50k or so of income.

The current spending 'discussion' is a farce.  Start all kinds of new entitlements with no mechanisms to ever control costs and then demagogue about someone else needing to pay for it.

If we had a rational tax code and at least a goal of a balanced budget then we could begin a national dialog about spending.

Getting everyone to pay their share of the tax on EVERY dollar earned is an illustration of what they mean by the expression of putting the toothpaste back in the tube.  Once these people become total non-contributors, any change is a tax increase on the poor.

On the expense side, remember the story about 10 people going into a restaurant.  1 is going to pay 40% of the bill and maybe 4, 5 or 6 of them will pay nothing at all no matter what is ordered and consumed.  Now have a rational discussion about costs and take a majority-rules vote... As Murray points out so well, our system is corrupted.

If we had a true flat-rate tax on all income, no matter who earned it or how, then the proverbial restaurant table could have a rational discussion about ordering hors d'oeuvres and desserts.  The rich would still pay far more than their share but everyone would have a stake in the outcome.

Murray's solution is more politically palatable, which I will re-quote.  I was going to add to his that we should end withholding too so people see what they pay but as I read deeper into his proposal, but it is already in there!  Some politician should take his idea verbatim and run with it.

Quoting Murray:

"Fold payroll taxes into the personal tax code, adjusting the rules so that everyone still pays the same total, but the tax bill shows up on the 1040... End withholding, and require everybody to do what millions of Americans already do: write checks for estimated taxes four times a year."

[DougMacG]

George Stephanopolous pointed out what he considered the obvious, that a $9 trillion dollar gap will need made up with new revenues and the obvious one is a federal Value Added Tax, not instead of, but on top of all of our other federal taxes.

The sales tax is a government revenue source that currently belongs to the states and localities if they choose to use it.  We won't have power and control at the state level when the revenues are controlled by the feds.

The problem is and always has been the spending. 

[Crafty_Dog]

By PETE DU PONT
Congress is in recess and many Americans are on vacation, but all that will end when Labor Day has passed and the House and Senate are back at work.

And that means the Europeanization of America will again be in full gear, from expanding government control and regulation of as many things as possible, to raising taxes, expanding the size of government, and reducing the choices individuals are allowed.

The Treasury reports that our country's federal debt has doubled in nine years, rising steadily, year by year, to $10.72 trillion from $5.67 trillion in 2000. Our deficit for the current year fiscal year, which ends Sept. 30, is expected to total $1.8 trillion, four times last year's figure, leaving us with a federal debt of $38,500 for every U.S. resident. Our economy is doing poorly; it will shrink about 2.6% this year. Unemployment in July reached 9.4% and will likely further increase, and tax revenues are down $353 billion over the first 10 months of this fiscal year.

So we can easily see what is just around the corner. Earlier this month Treasury Secretary Tim Geithner and Larry Summers, director of the National Economic Council, opened the door, suggesting that taxes on all taxpayers will have to go up. As Stephen Moore noted in The Wall Street Journal, "it would take almost $16,000 more from every household in America to balance the budget this year." We certainly won't get to balanced budgets for decades, but substantially higher taxation seems inevitable.

All of which leads to the essential economic question: Which tax increases do the current administration and Congress intend to enact? There are more than a dozen, all of which would negatively affect our economy.

One has already been signed into law by President Obama: an increase in the tax on tobacco, to $1.01 a pack of cigarettes from 39 cents, and to as much as 40 cents a cigar from a nickel--increases of 159% and 700%, respectively. This is expected to bring in $8 billion a year. Next up is a possible increase in alcohol, beer and wine taxes, raising about another $6 billion annually, and perhaps another $5 billion a year on sugary drinks will be enacted.

Then come a series of substantial tax increases that are on the Washington agenda that, if enacted, will create real problems for our country's economy.

First, allowing the expiration of the previous Bush administration tax cuts at the end of 2010. These reductions increased government tax receipts by $785 billion (just as the Kennedy and Reagan tax cuts increased tax revenues) and gave us eight million new jobs over a 52-month period. The cuts go away if Congress does nothing, raising tax rates on the top earners will to 39.6% from 35%, and on the next-highest bracket to 36% from 33%. The Joint Committee on Taxation estimates that 55% of these tax increases will come from small-business income.

Next comes Rep. Charles Rangel's additional tax increases, a part of the House health-care bill. The House Ways and Means chairman calls for a 1% surtax on couples with more than $350,000 in income, 1.5% on incomes more than $500,000, and 5.4% on incomes more than $1 million. The extra tax would kick in at lower levels for unmarried taxpayers. And if promised health-care cost savings don't materialize, the surtaxes would automatically double.

The House health-care bill contains several tax increases that would hit couples earning under $250,000 a year, contrary to President Obama's promises: $8.2 billion of tax increases for people using health savings accounts or other tax-free savings to purchase over-the-counter drugs; a "Comparative Effectiveness Research Tax" of $2 billion on all private and "public option" insurance, plus up to 8% paid by employers--mostly small businesses--that don't offer health insurance. There is even a proposed tax on individuals who do not have health insurance.

Then come some other tax increases the administration has favored:

• An increased tax on American companies doing business in other countries.

• Raising or abolishing the wage cap on Social Security taxes, which would effectively convert Social Security into a welfare program.

• Reducing the tax benefit for itemized deductions like charitable contributions, which would reduce philanthropy.

And then there's the Waxman-Markey "cap and trade" bill that has passed the House and will be taken up in the Senate this fall. It would give the government total control of the production, prices, availability and use of energy and add a global energy tax to imported goods--serious American protectionism. It would shrink America's economy by $400 billion each year and cause the loss of some 2.5 million jobs. For a household of four it would cost an average of about $3,000 a year. By 2035 the total family annual increased cost would be $4,600 for power, food, supplies, gasoline and transportation.

All told, the administration and Congress are pushing massive tax increases. Without a specific proposal we don't know how much taxes would go up if the Social Security ceiling is raised, but add the others up and we see up to $200 billion--and it could well be much more--in annual tax increases on businesses, individuals and the overall economy, which is already in recession.

The Wall Street Journal's Daniel Henninger observes that "to an independent voter or moderate Democrat, President Everyman is starting to look like a salesman for the superstate." These many proposed tax increases reinforce the point. They not only would be economically damaging, but chart a very scary course for our country.

[Crafty_Dog]

The Left Is Right -- Taxes Are a Moral Issue
Tuesday, September 15, 2009

One principle that all those on the left hold is that taxes constitute more than an economic issue; they are, first and foremost, a moral one. Economists on the left may argue for higher taxes on economic grounds but they and we know that at bottom, higher taxes, especially "taxing the rich," is what they believe morality demands.



For example, there are obviously only two possible ways to reduce government deficits: reduce spending or increase taxes (or some combination of both). The left advocates the later; the right advocates the former. Left-wing spokesmen, such as New York Times economics columnist and Princeton University professor of economics Paul Krugman, may offer economic arguments for raising taxes in order to lower government deficits, but their real motivations are moral: reducing economic inequality (by redistributing income) and expanding government (because government is the most effective way to help all citizens).

Now, as it happens, not only is there is nothing wrong with being animated by moral concerns -- we should all be. The problem with the left's advocacy of higher taxes is not that it is rooted in moral concerns. The problem -- actually the two problems -- are these:

First, higher taxes are rarely morally defensible. In fact, on purely moral grounds -- in other words, even if they did effectively reduce the deficit without paying an economic price for doing so -- they are usually not moral. More on this below.

Second, higher taxes are usually economically counterproductive. This does not matter to the left, however, because economic growth is not what most interests the left. Since Karl Marx, the left has always been far more interested in economic equality than in economic growth. It is true that liberals such as John F. Kennedy were more concerned with economic growth than with economic equality -- which is why he advocated lowering taxes -- but for much of the last century, unlike today, there was a major difference between liberal and left.

Now to return to the moral arguments, my difference with the left is not that I oppose morality dictating economic policy. I believe, in fact, that virtually all social policies should be rooted in moral concerns. My difference with the left is that I am convinced that moral considerations dictate lower, not higher, taxes.

It is too bad that libertarians and conservatives rarely take on the left on moral grounds because the left's moral foundations are as weak as their economic foundations.

The very notion of an income tax is morally debatable. On what moral grounds can the state force a citizen essentially at gunpoint to give away his legally and morally earned money? Why isn't taxation a form of legalized stealing? The obvious answer is that common sense dictates that citizens have the moral right, even the moral obligation, to vote to give money to, at the very least, enable a government to fund a police force, sustain a national defense, and help those incapable of helping themselves or of being helped by others.

But at some point beyond that, taxation becomes nothing more than legalized stealing. Obviously, people will differ over where exactly that point is, but no rational person disputes that such a point exists. No one could argue that a 100 percent tax -- even if it paid for every need every member of the society had -- was moral and not simply a form of theft.

So moral problem No.1 with taxation is the morality of forcing other people -- under threat of violence -- to give their money away.

A second moral problem is having some people give at a greater percentage rate than others. The biblical notion of tithing, for example, is entirely universal -- everyone gave a tenth what he had. No one was forced to give half while others gave a tenth.

A third moral problem is allowing those who pay no tax (such as the federal income tax) to vote on how much others will be forced to pay. It is quite difficult to morally defend the fact that about half of Americans pay no federal income tax, yet they determine how much the other half will be forced to pay.

A fourth moral problem is that the higher the taxes, the more decent people become cheaters. One of the leading religious ethicists of our time, Rabbi Joseph Telushkin, author of two volumes of Jewish ethical law, told me years ago when he lived in Israel during the height of its socialism with its correspondingly high taxes that he witnessed the finest citizens, religious and secular alike, having to cheat on taxes or be rendered impoverished. I have never forgotten that.

I know no one in America today -- and I know extraordinarily honest and generous people, liberal and conservative -- who does not in some way "cheat" on taxes -- as, for example, reporting expenses as business expenses that are not really so. I place the word cheat within quotation marks because not all cheating is illegal. Some people figure out how to avoid paying what the law demands through completely legal, but ethically questionable, means.

At a certain level of taxation, virtually every honest person is reduced to cheating either legally or illegally.

A fifth moral problem is that the higher the tax rate, the lower the charity rate. This is universally true. The more people give to the state, the less they give to their neighbor -- and even to members of their family -- in need.

And sixth and only finally because of the limitations in size of a single column, the higher the taxes, the less people are inclined to work hard. Why should they? At a given point, people just conclude that work is for suckers.

And I haven't even begun to discuss the economic failings of higher taxes.

So, next time someone on the left advocates higher taxes, remember two things: He or she is coming from a moral, not an economic, position. And the moral case against higher taxes is far more powerful than the moral case for them.

[Body-by-Guinness]

Tables show better in the original, linked below.

Liberals and Taxes: The Big Question

By Gene Schwimmer
Like many Americans who watched their savings nosedive in the market crash of '08, I've had to retrench, rethink and re-strategize my retirement plans.  One course I've considered is to spend less and save more.  The second is, somehow, to get a nickel for every time some Liberal said or wrote something like this:

The last time the top income tax rate was 39%, the United States enjoyed a booming economy, rising incomes, low unemployment and expanding budget surpluses.

Unfortunately, that simple truth has been ignored by Republican propagandists and mainstream media alike during the debate over President Obama's stimulus plan and budget proposal.

Well, there's certainly a lesson here for Obama and the Democrats, and for Republicans, too.  Surprisingly, it's the same lesson, and a lesson neither expects.

But first, a brief digression to dispel the Liberal claim that only "the rich" benefited from the Bush tax cuts:


Individual Income Tax Due in 2008,
Bush Law versus Clinton Law

For taxpayers who take the standard deduction and have no children

Taxpayer

Tax That Would Have Been Owed under Clinton-Era Tax Law

Tax Owed under Current Law, with Bush Tax Cuts

Single, income of 30,000

$3,157.50

$2,756.25

Single, income of 50,000

$7,262.50

$6,606.25

Married, income of $50,000

$5,085.00

$4,012.50

Married, income of $60,000

$6,585.00

$5,512.50

Single, income of $75,000

$14,262.50

$12,856.25

Married, income of $75,000

$9,426.50

$7,762.50

Single, income of $125,000*

$29,378.50

$26,472.25

Married, income of $125,000*

$23,426.50

$19,462.50

*This chart does not take into account the Alternative Minimum Tax

                       

Source:  The Tax Foundation


As the table shows, taxpayers in all income brackets paid less in taxes under Bush than under Clinton.  Now about those budget surpluses.  Here, courtesy of the Commerce Department's Bureau of Economic Analysis, is the record of annual federal tax receipts for the "Clinton surplus" years, 1998-2000, and for the years following, up to 2008.

Year

Receipts
(in billions of dollars)

1998

1,777.9

1999

1,895.0

2000

2,057.1

2001

2,020.3

2002

1,859.3

2003

1,885.1

2004

2,013.9

2005

2,290.1

2006

2,524.5

2007

2,660.8

2008

2,475.0


Note the amounts (in billions) for 1998, 1999 and 2000:  $1,777.9, $1,895.0 and $2,057.0, respectively.  But look, too, at the number for 2001:  $2,021.  What's so special about 2001?  That's the year in which the "Bush tax cuts" became law, when Bush signed the bill, on June 7, 2001.  But the bill did not become effective until the next year, 2002.  In 2001, when Bush was signing the new rates into law, America was still under the then-current Clinton rates -- and so, the $2.021 trillion the federal government collected in 2001, was collected under the old Clinton tax rates, not the new Bush rates.

Now compare 2001's receipts to 2000 and what do you see?  From 2000 to 2001, federal tax receipts declined under the Clinton tax rates.

Any Democrat who wants to blame the "Bush tax cuts" for the drops in tax receipts in 2002 and 2003, must first explain the drop that occurred in 2001 under the Clinton rates.

And then, when they've done that (if they can), they can explain the increases, in every year from 2004 through 2007, under the lower Bush tax rates.

Ah, but I digress, because we were talking about the "Clinton surpluses" or, to be more specific, the "Bush tax cuts'" supposed responsibility.  And here's where it where it really gets interesting, because, for the Democrats' argument that the "Bush tax cuts" caused the deficit to make sense, tax receipts during the Bush years would have to have been less than they were under Clinton's tax rates.  And indeed, tax receipts were less in some years, but not in others.  And beginning in 2004, under the lower Bush tax rates, receipts rose, for four years running, and in 2008, even after a decrease from 2007, stood at $2.475 trillion -- 22.5% higher than the highest year under the Clinton tax rates.

So tell us, Democrats, how could the Bush "tax cuts," under which total tax receipts increased, have erased the surplus and caused a deficit?

(By the way, I put "tax cuts" in quotes because, as we just saw, taxes, i.e., total receipts actually went up, so it actually was a Bush tax raise.  Bush did not cut taxes, he cut tax rates.)

Note also that three of the four budget-surplus years come after 1997, the year Clinton signed the bill Democrats seem to have forgotten, the Tax Relief Act of 1997, which lowered the capital gains tax rate, from 28% to 20%..

But if tax cuts did not cause the deficit, what did?  Do you really need to ask?  As always, the true culprit is spending.  Here are the amounts for 2001-2007 (the latest year for which I could find a hard number):

Fiscal Year

Total Government Expenditures
(in billions of dollars)

2001

2,986.9

2002

3,209.9

2003

3,415.0

2004

3,594.8

2005

3,854.1

2006

4,135.8

2007

4,321.3

                             

Source:  The Budget for Fiscal Year 2009, Historical Tables, Table 15.2, pg. 319.


This one's a no-brainer.  Note, first, that in every year, including 2001, 2002 and 2004, when federal receipts went down, federal expenditures went up.  Bad enough, but look also at the percentages.  In the period 2001-2007, federal receipts rose 31.7% ($2.0203 trillion to $2.6608 trillion), but federal expenditures rose 44.7% ($2.9869 trillion to $4.3213 trillion).  As I said, I don't have hard figures beyond 2007, but for both years, undoubtedly, spending will be up and tax receipts will be down.

The 53% of us who pay federal taxes are doing our part, sending Congress more of the fruits of our labors every year.  But for our representatives and senators (of both parties, sadly), what we send them is not enough.  It's the spending, stupid -- or, as I like to say, it's the stupid spending.  And for that, Congress, both Democrats and Republicans, get the blame.  Why did the Founding Fathers create three branches of government and a system of checks and balances if not for Congress to prevent the executive from spending unlimited amounts of money on whatever he wants?  Congress is supposed to put checks on the president, not write checks to the president, at least not blank ones.  Or so I thought.

But there's a bigger point, here, one that both parties miss, but more to the detriment of Republicans than Democrats.  Currently, the argument over taxes and surpluses revolves around the effects of changes in tax rates.  Republicans argue that tax rate increases "kill jobs," Democrats argue that they do not.  Democrats argue that raising taxes raises revenue, Republicans argue that it does not.  Conversely, Democrats argue that cutting tax rates reduces revenue and turns surpluses into deficits; Republicans argue that doing so does neither.

Both parties are right -- and wrong, for the actual numbers, including those in the tables above, taken in aggregate, demonstrate no relation between tax rates on the one hand, and tax receipts, jobs, economic growth, surpluses or deficits.  Indeed, a look at the entire history of U.S. tax receipts and federal expenditures, show deficits in years where tax rates were much higher than today, and surpluses in years before we had any income tax at all.

Now, the big question.  Armed with these facts, what should be the Republicans' strategy going forward?

First, Republicans should acknowledge the numbers and concede that we can have growth and prosperity, and the higher tax revenues that result therefrom, under tax rates higher, even significantly higher, than today's.  But, in the very next breath, Republicans should challenge Democrats to admit that we can have growth -- and increasing tax revenues -- with lower tax rates, including the Bush tax rates, too.  If Democrats balk, then Republicans should make sure that the American public sees the numbers.

Then, challenge the Democrats to acknowledge that tax receipts -- even after 9/11, even in the midst of "the worst economic downturn since the Great Depression--were higher at the end of the Bush Administration (and under the Bush tax rates) than at the end of the Clinton Administration (under the higher Clinton tax rates) and thus, as a matter of simple logic, the Bush tax cuts could not possibly be responsible for the deficit.  Indeed, had Congress acted responsibly and controlled spending, had Congress still increased spending, but increased it below the rate at which tax revenues were increasing, the budget surplus would still be very much with us.  And again, if Democrats balk, then Republicans should show the American people the numbers.

Then, based on the record and the numbers, Republicans should point out the obvious:  Though Congress can decide to raise tax rates, and determine what those rates will be, Congress cannot predict how much revenue will be raised or even whether any revenues will be raised at all.  But we do know, and can see in the current revenue numbers, the economy's strength is very much a key factor in determining tax revenues.  In other words, Republicans should argue, if Democrats want more tax revenues to spend, the only sure way to do so is to work with Republicans to enact and promote pro-growth fiscal policies.  Simply raising tax rates will not do the trick, and imposing new, costly mandates, such as Cap and Trade, national health care and environmental regulations up the wazoo, will make things even worse.

And finally,  Republicans should do what they've never done:  raise the moral issue.  In calling for higher taxes, Democrats cite two reasons.  One is their desire to raise revenues to do all the things Democrats want to do.  But as we've seen, we can get higher tax revenues under lower tax rates just as well as (and, some would say, better than) we can under higher tax rates.

The other reason Democrats cite is to "make the wealthy rich pay their fair share."  But numerous studies have shown that as tax rates have gone down, the percentage of taxes paid by "the wealthy" goes up.

Clearly the federal government can increase its tax revenue with either lower, or higher, rates and, thus, as far as the goal or raising revenue is concerned, the choice of tax rates, within reason (obviously, with a tax rate of zero, we get zero revenues), is totally arbitrary.  That being the case, Republicans can ask the Big Moral Question:  If we can increase revenues with both lower and higher rates, why is it not better to increase them with lower rates?  And if our goal is to "make the wealthy pay their fair share" and the share of taxes paid by the wealthy increases under lower rates, why do Democrats continually advocate higher rates?

The answer is so obvious, I need not state it.  But the Democratic Party and every Democrat who advocates higher tax rates should be made to do so, and publicly.

 ####


Page Printed from: http://www.americanthinker.com/2009/10/liberals_and_taxes_the_big_que.html at October 11, 2009 - 01:47:04 PM EDT

[DougMacG]

Obama and the left machine is actually proposing a TEMPORARY program to boost employment?  Is that what we want?  Temporary hiring? A government program to boost private sector employment?  They are also proposing the largest tax ever (cap and tax) on heavy manufacturing and a takeover of health care, housing, banking, energy and auto manufacturing...

http://online.wsj.com/article/SB10001424052748703298004574459341050610398.html

Job Creation 101
A hiring tax credit returns from the dead.

The White House is finally coming to realize that taxes affect job creation. Terrific. Its solution seems to be to bribe employers for hiring new workers, albeit only for a couple of years. Less than terrific.

Alarmed by the rising jobless rate, Democrats are scrambling to "do something" to create jobs. You may have thought that was supposed to be the point of February's $780 billion stimulus plan, and indeed it was. White House economists Christina Romer and Jared Bernstein estimated at the time that the spending blowout would keep the jobless rate below 8%.

The nearby chart compares the job estimates the two economists used to help sell the stimulus to the American public to the actual jobless rate so far this year. The current rate is 9.8% and is expected to rise or stay high well into the election year of 2010. Rarely in politics do we get such a clear and rapid illustration of a policy failure.

This explains why political panic is beginning to set in, and various panicky ideas to create more jobs are suddenly in play. The New York Times reports that one plan would grant a $3,000 tax credit to employers for each new hire in 2010. Under another, two-year plan, employers would receive a credit in the first year equal to 15.3% of the cost of adding a new worker, an amount that would be reduced to 10.2% in the second year and then phased out entirely. Why 15.3%? Presumably because that's roughly the cost of the payroll tax burden to hire a new worker.

The irony of this is remarkable, considering the costs that Democrats are busy imposing on job creation. Congress raised the minimum wage again in July, a direct slam at low-skilled and young workers. The black teen jobless rate has since climbed to 50.4% from 39.2% in two months. Congress is also moving ahead with a mountain of new mandates, from mandatory paid leave to the House's health-care payroll surtax of 5.4%. All of these policy changes give pause to employers as they contemplate the cost of new hires—a reality that Democrats are tacitly admitting as they now plot to find ways to offset those higher costs.

Alas, their new ideas are little more than political gimmicks that aren't likely to result in many new jobs. Congress doesn't want to give up revenue for very long, so it would make the tax credits temporary. Thus anyone who is hired would have to be productive enough to justify the wage or salary after the tax-credit expires—or else the job is likely to end. An employer would be better off hiring a temp worker and saving on the benefits for the same couple of years.

The tax credit would also inevitably go to some employers already planning to hire, or reward companies that lay off some workers only to hire others to take advantage of the tax credit. And it would reward parts of the country that are growing, such as Texas, at the expense of those that aren't, such as Michigan. In other words, it is a very inefficient business subsidy.

We know all this because a new jobs tax credit has already been tried—in the Carter Administration. In 1977 as he entered the White House, Jimmy Carter proposed a jobs credit and a Democratic Congress passed it. Its unfortunate history was recounted in 1980 by then-Treasury official Emil Sunley in a chapter of "The Economics of Taxation," a book edited by Henry Aaron and Michael Boskin for the Brookings Institution.

As Mr. Sunley summarized: "The impact of the credit on jobs was slight. In many firms those who make hiring decisions did not understand the firm's tax status." He added that, "Because the capital stock is fixed in the short run, to increase employment significantly, demand for output must increase. An incremental tax cut tied to employment will not by itself generate that increase in demand. Moreover, a temporary incremental credit is unlikely to affect significantly the long-run substitution of labor for capital." Call this Job Creation 101.

President Obama first floated the hiring credit in January, but it died after opposition from Democrats who seemed to get the joke. "If you have a company and you're selling fewer shingles, $3,000 isn't going to get you to hire somebody when your sales are shrinking," said Senator Chuck Schumer. Yet now even some Republicans, such as House GOP whip Eric Cantor, are saying they're receptive to the idea. Mr. Cantor ought to know better.

The lack of U.S. job creation is a big problem, but the quickest way Washington could help would be to stop imposing more financial burdens on hiring. And if Democrats really want to reduce taxes on labor, the cleanest way would be to reduce the payroll tax rate. They could finance a permanent payroll cut by using the $300-$400 billion or more in unspent stimulus money, rather than continuing with the transfer payments and pork barrel spending that have failed so miserably to create jobs.

[Crafty_Dog]

Thinking Hard About Retirement and Death

 
By PAUL SULLIVAN
Published: December 25, 2009
WITH 2010 a few days away, there are several tax matters that wealthy investors need to consider next year. The two at the top of the list are whether they should convert their taxable retirement account to a tax-free Roth individual retirement account and how to deal with the uncertainty over the estate tax.


Janine Racanelli, managing director of the Advice Lab, says there are ways to give money to grandchildren other than through an estate.


Jere Doyle, wealth strategist at Bank of New York Mellon, said the wealthy should not get their hopes up for an end to the estate tax.

“There is frustration due to the legislative uncertainty,” said Daniel Kesten, partner in the private client services group at Davis & Gilbert, a tax firm. “Congress had eight years to address this, but they waited until the last year when two wars and health care interrupted their thinking.”

That leaves the wealthy with decisions to make about two of the biggest financial events of their life: retirement and death.

ROTH CONVERSION Starting in 2010, there will no longer be an income limit for Roth I.R.A.’s, which allow people to contribute post-tax money that can appreciate tax-free. The income limit has been $100,000 a year for individuals. The question is whether converting an existing I.R.A., the proceeds of which are taxed when distributed, into a tax-free Roth I.R.A. makes sense.

While Congress approved the change in 2006, the opportunity to convert seems to come at an enticing time. Those whose pretax retirement accounts lost a lot of their value in the last two years might want to withdraw the money, pay tax on the amount and then put it into a Roth. For wealthy investors who do not see themselves falling into a lower income tax bracket at retirement or who believe tax rates will rise significantly, this could be a shrewd move.

But this requires a degree of omniscience that few showed with the recession that began in December 2007. “Why bother?” asked Tony Guernsey, head of national wealth management at Wilmington Trust. “Is it that much money?” He used the example of buying a Treasury bill with a week to maturity: you know the government will pay you back. But the same cannot be said for what the tax landscape — or your wealth — will look like when you retire.

The bigger benefit may come to people who plan to pass their Roth on to heirs. Unlike regular retirement accounts, there is no minimum distribution requirement with a Roth, and the tax-free treatment of its assets can be passed to an heir. “The real benefit is coming in the estate planning aspects,” said Mitch Drossman, national wealth strategist for Bank of America private wealth management. “The beneficiary must take minimum distributions. But it will be growing tax-free and distributed tax-free.”

ESTATE TAX The elephant in the room is the estate tax. Congress has adjourned for the year without making any changes in that tax law. So as of now, that means the tax will disappear in 2010 before reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million.

Jere Doyle, wealth strategist at Bank of New York Mellon, said the wealthy should not get their hopes up for an end to the estate tax. He pointed out that an estate did not have to submit its first tax bill until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year. This would wreak havoc on estate planning. Even if the Senate acted early in the coming year, it could still lead to a flurry of legal challenges on the constitutionality of reinstating a tax that had disappeared.

But there is a broader issue for moderately wealthy people. When a person dies now, the value of his or her assets gets a “step-up in basis,” which means for tax purposes the assets are valued on the day of death. Without an estate tax, this provision disappears, and the appreciated value is subject to capital gains tax.

The Internal Revenue Service will grant a $1.3 million “artificial basis” on assets of a single person and $3 million for couples if the estate tax disappears. But on the rest of the assets, the heirs will have to determine what the original cost was and pay the capital gains on the appreciated amount. For long-held stock that has split many times, this could be extremely difficult.

“If there is no estate tax in 2010, we have an income tax problem for a larger group of the population,” Mr. Kesten said. He estimated that the number of people affected would go from 6,000 to 60,000.

Still, most advisers and accountants expect that an estate tax will be reinstated, and this has pushed the wealthiest to find new ways to reduce its impact. “If we’re resigned to an estate tax existing, it’s not a call on where rates will go but an acknowledgment we won’t have a repeal,” said Janine Racanelli, managing director and head of the Advice Lab at J. P. Morgan Private Bank.

One way is through giving money to heirs above the $1 million lifetime exemption level and paying the 45 percent gift tax now. This may seem odd at first, since the estate tax is currently the same rate. But the benefit comes from how the taxes are applied: the gift tax is added like sales tax, while the estate tax is deducted like income tax. Mr. Kesten noted that a person with a $30 million estate could give roughly $20 million to his heirs during his lifetime and pay $10 million in gift taxes, or he could leave the $30 million to them and they would receive $15 million, after estate taxes.

Ms. Racanelli points out that giving money to grandchildren above the exemption rate is also better than leaving it to them through the estate. She said a person could save more than $500,000 in taxes on $1 million by giving the money now.

An option to avoid gift and estate taxes is to lend money to heirs. The Internal Revenue Service rate for such intrafamily loans in December is 0.69 percent for up to three years. The money the child makes investing above the I.R.S. rate is not subject to the higher 45 percent gift tax, but instead the lower 15 percent capital gains tax, Mr. Doyle said. If you die before the loan is repaid, however, the outstanding balance could be subject to income tax.

GIFT TAX EXCLUSION One of the most basic but highly effective estate tax strategies is the annual gift tax exclusion. The I.R.S. in 2009 allowed people to give up to $13,000 a year to anyone they wanted, tax-free. (This exclusion is separate from the $1 million lifetime exemption.)

But this is something that many wealthier people overlook, said Phyllis Silverman, vice president and senior trust adviser at PNC Wealth Management. “They’re all very busy and the idea of $13,000 per individual may not make an impact on their minds,” she said. “But when they sit down with their financial adviser, they can see how it will lower their estate costs.”

For those with an estate subject to a 45 percent estate tax, each $13,000 gift will save them at least $5,520 in estate tax, Ms Silverman said. Or consider this example: A married couple with a $10 million estate gives $13,000 a year each to six people for a decade. At the end of that time, they will have given $1.56 million tax-free. Based on the current estate tax rate, they will have also saved $702,000 in taxes by moving that money out of their estate before they die.

[Crafty_Dog]

By PETE DU PONT
Weather-wise it has been a very cold January, and politically the Scott Brown Senate victory has chilled Washington even further for Democrats. But if the Democratic economic policies continue nevertheless, this year will be nothing like the bitter economic January we will be living in a year from now.

Government spending has already hugely increased, and so has the size and scope of government, but next year there will also be substantial tax increases for a great many Americans. The first reason will be the expiration of the Bush tax cuts . The top personal income tax rate will rise next Jan. 1 to 39.6% from 35%, a hike of nearly one-eighth. The dividend tax rate will rise to 39.6%, more than 2½ times the current 15%. And the capital gains tax rate will rise by a third, to 20% from 15%. If the House health care bill had passed, all three of these rates would have risen to 45%.

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it. Another likely tax increase will be on the income of private equity and hedge-fund managers, from the capital gains rate of 15% to the new higher income tax rates. It has already been passed by the House and is supported by the Obama administration, as is an additional 10-year, $90 billion tax on banks aimed at "rolling back bonuses for top earners." It would affect some 50 banks, insurance companies, and large broker-dealers.

Meanwhile a number of last year's tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one; the deduction for college tuition and fees is another; and the 50% write-off for small businesses for capital purchases--equipment, machinery or building a new plant--has disappeared as well, which will have a negative effect upon the construction of new business operation facilities.

Add on to all of these increases the biggest government deficits and spending increases (to 26.5% of gross domestic product from 21%) in half a century, the protectionism of free trade downsizing through the "buy American" requirements, China import restrictions, and the administration limitations of Columbia, South Korea, and Panama free trade agreements, and we have a very different, and not very prosperous, America ahead of us.

Or as economist Arthur Laffer wrote in his January Economic Outlook, we "cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries." We are, in his words, simply "moving in the wrong direction."

***
But what Mr. Laffer sees as most important is a substantial American economic collapse coming to us in 2011. His reasoning is simple and sensible: the impending 2011 tax increases will lead Americans to get their incomes into this year and pay the current lower tax rates. That will mean a 2010 GDP growth 3% to 4% higher than it otherwise would have been, and that will look very good.

But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes.

He also points out that there is a four- to eight-month gap between market performance and economic performance. Indeed, the market has often reflected good or bad tax news four to eight months ahead of their impact on the economy. We historically saw that after the Harding tax cuts (1922), the Smoot-Hawley tariff bill (1929), the Kennedy tax cuts (1963) and the Reagan tax cuts of 1983. If this pattern repeats, we could see the market begin to deteriorate sometime in the summer or fall of this year.

In modern times the Kennedy, Reagan and George W. Bush tax rate reductions helped spur economic growth. the Obama tax rate increases will have the opposite effect. Americans headed to the polls this fall, worried about the increasing size and spending of the federal government, possibly a falling market, and next year's looming tax increases, may reproduce next November the voter revolt we saw in the 1994 congressional elections. That led to a Democratic presidency and a Republican Congress, which together were better for the American people than the full-scale liberalism we see in the current administration.

[Crafty_Dog]

Backdoor taxes to hit middle class
By Terri Cullen Terri Cullen
Mon Feb 1, 4:09 pm ET
 
NEW YORK (Reuters.com) --The Obama administration's plan to cut more
than $1 trillion from the deficit over the next decade relies heavily on
so-called backdoor tax increases that will result in a bigger tax bill
for middle-class families.

In the 2010 budget tabled by President Barack Obama on Monday, the White
House wants to let billions of dollars in tax breaks expire by the end
of the year -- effectively a tax hike by stealth.

While the administration is focusing its proposal on eliminating tax
breaks for individuals who earn $250,000 a year or more, middle-class
families will face a slew of these backdoor increases.

The targeted tax provisions were enacted under the Bush administration's
Economic Growth and Tax Relief Reconciliation Act of 2001. Among other
things, the law lowered individual tax rates, slashed taxes on capital
gains and dividends, and steadily scaled back the estate tax to zero in
2010.

If the provisions are allowed to expire on December 31, the top-tier
personal income tax rate will rise to 39.6 percent from 35 percent. But
lower-income families will pay more as well: the 25 percent tax bracket
will revert back to 28 percent; the 28 percent bracket will increase to
31 percent; and the 33 percent bracket will increase to 36 percent. The
special 10 percent bracket is eliminated.

Investors will pay more on their earnings next year as well, with the
tax on dividends jumping to 39.6 percent from 15 percent and the
capital-gains tax increasing to 20 percent from 15 percent. The estate
tax is eliminated this year, but it will return in 2011 -- though there
has been talk about reinstating the death tax sooner.

Millions of middle-class households already may be facing higher taxes
in 2010 because Congress has failed to extend tax breaks that expired on
January 1, most notably a "patch" that limited the impact of the
alternative minimum tax. The AMT, initially designed to prevent the very
rich from avoiding income taxes, was never indexed for inflation. Now
the tax is affecting millions of middle-income households, but lawmakers
have been reluctant to repeal it because it has become a key source of
revenue.

Without annual legislation to renew the patch this year, the AMT could
affect an estimated 25 million taxpayers with incomes as low as $33,750
(or $45,000 for joint filers). Even if the patch is extended to last
year's levels, the tax will hit American families that can hardly be
considered wealthy -- the AMT exemption for 2009 was $46,700 for singles
and $70,950 for married couples filing jointly.

Middle-class families also will find fewer tax breaks available to them
in 2010 if other popular tax provisions are allowed to expire. Among
them:

* Taxpayers who itemize will lose the option to deduct state sales-tax
payments instead of state and local income taxes;

* The $250 teacher tax credit for classroom supplies;

* The tax deduction for up to $4,000 of college tuition and expenses;

* Individuals who don't itemize will no longer be able to increase their
standard deduction by up to $1,000 for property taxes paid;

* The first $2,400 of unemployment benefits are taxable, in 2009 that
amount was tax-free.

[ccp]

What is interesting Drudge headline notes this story was literally *pulled* from Reuters about four hours after it was aired.

How is this from the 'objective' MSM?

http://news.yahoo.com/s/nm/20100202/bs_nm/us_budget_backdoortaxes

[Rarick]

yahoo has pulled the article- is that the point?

[Crafty_Dog]

This bears watching!!!  CCP, will you be the one to keep an eye on this for us?

[SkinnyDevil]

Liberal or conservative, republican, democrat, indie, etc......if you are fed up with our current tax system and advocate some system of reform (FairTax, Flat Tax, no tax, etc.), join the 66,000 and growing on-line revolt. Free, fast, & easy:

http://www.onlinetaxrevolt.com/

[Body-by-Guinness]

U.S. Sales Tax Rates Hit Record High
William P. Barrett, 03.08.10, 6:00 AM ET
While President Obama's push to raise federal income taxes for the wealthy gets lots of attention, the continuing upward creep in the sales tax rates imposed by state and local governments has gotten less notice.

But Vertex Inc., which calculates sales tax for Internet sellers, reports that the average general sales tax rate nationwide reached 8.629% at the end of 2009, the highest since the Berwyn, Pa., company started tracking data in 1982. That was up a nickel on a taxable $100 purchase from a year earlier and up nearly 40 cents for the decade. The highest sales tax rate in the country now stands at 12%.

In Pictures: America's Highest Sales Taxes

During 2009 seven states and the District of Columbia raised sales tax rates, with one jurisdiction--North Carolina--actually doing it twice. Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases aren't surprising. States have also been raising income tax rates on the wealthyand on corporations and boosting excise taxes on alcohol and tobacco. With states now facing record budget shortfalls, more tax increases seem likely.

State level sales tax generally accounts for only about two-thirds of the total sales tax bill. The rest comes from levies assessed by counties, municipalities, Indian tribes and special-purpose taxing districts funding mass transit, urban renewal and even stadiums. Among lower level jurisdictions such as counties and towns, Vertex counted 649 new or increased sales tax rates during 2009 and just 192 reductions.

The result is a wide range of combined sales tax rates across the country. At the bottom: 0%, found in all of Delaware and New Hampshire, and most of Montana, Oregon and Alaska. The country's highest rate now is 12%, in the tiny portion of tiny Arab, Ala., (population 7,500) sticking into Cullman County. The rest of the northern Alabama town, in no-sales-tax Marshall County, pays just 8%.

Right now Chicago has the highest big-city rate, 10.25%. But in a move forced by Cook County lawmakers, the rate is scheduled to drop on July 1 to 9.75%, matching that of Los Angeles. In New York City the total bite is 8.875%. Other high big-city rates include San FranciscoandSeattle(9.5%), New Orleans (9%), Houston, Dallas and Charlotte (8.25%), Las Vegas (8.1%) and Philadelphia and Atlanta (8%).

In Arizona, voters will go to the polls May 18 to pass judgment on a 1% rise in the state's 5.6% rate for three years. If approved, the rate in Phoenix would jump from 8.3% to 9.3%.

Some of the highest sales taxes in the nation are designed to grab dollars from tourists. The New Orleans International Airport has a special 10.75% rate, while Snowmass Village, the ski resort in Colorado, levies a 10.4% sales tax. (Many locales also impose special higher taxes on services purchased by tourists, such as rental cars and hotel rooms.)

Nationally, sales taxes in 2008 generated more revenue for state and local governments--about $450 billion, a recent Government Accountability Office report suggests--than did either property taxes ($411 billion) or personal income taxes ($310 billion).

At the federal level and in some states, the income tax is progressive, with higher rates imposed on upper-income taxpayers. But rich and poor pay the same sales tax rate. In many states, however, there's no sales tax on food or medical prescriptions.

The combined local sales rate is what local merchants charge for in-person customers. Through a parallel system called the use tax, it's also what residents in a given jurisdiction are supposed to pay on purchases over the Internet from out-of-state sellers, but such payments are widely flouted. Congress has declined to pass legislation that would require large Internet only sellers like Amazon.com and Overstock.com to collect sales taxes for all states. (Currently, they only have to do so for states in which they have some physical presence.)

Many big online merchants, including Wal-Mart, Dell, Office Depot Inc. and Staples Inc., collect sales taxes from Internet buyers. Some states, with New York in the lead, have adopted new "Amazon" laws designed to force the Web giant and others to collect their taxes. More such laws are likely this year.

West Virginia adopted the country's first sales tax in 1921. Periodically, the federal government has considered a national sales tax, but such proposals have never gotten traction.

In Canada, which has a national 5% sales tax, all but two of the provinces (Alberta and Saskatchewan) have combined sales taxes of 12% or higher. The highest is the 15.5% hit on Prince Edward Island.

http://www.forbes.com/2010/03/05/sales-tax-rates-record-high-personal-finance-shopping-tax.html?boxes=Homepagechannels

[Crafty_Dog]

I don’t understand.  If Obamacare is going to save us all this money, why do we need another tax?  I’m confused.  Someone please explain it to me without using Obamaspeak.

http://www.foxnews.com/politics/2010/04/07/obama-economic-adviser-says-consider-value-added-tax/

Updated April 07, 2010

Obama Economic Adviser Says U.S. Should Consider 'Value Added Tax'
NYPost.com

Acknowledging it would be a highly unpopular move, White House economic adviser Paul Volcker said yesterday the United States should consider imposing a "value added tax" similar to those charged in Europe to help get the deficit under control.  A VAT is a national sales tax that, like state and city sales taxes, would be collected by retailers.

Volcker, at the New-York Historical Society, told a panel on the global financial crisis that Congress might also have to consider new taxes on carbon and energy.

The VAT suggestion was immediately met with outrage by Republicans.

"It shouldn't surprise anyone that the Obama White House would advocate a European-style tax to help finance their European-style government health-care plan," said Brian Walsh, a spokesman for the National Republican Senatorial Campaign Committee.

Click here for more on this story from the New York Post.

[Crafty_Dog]

JACOB LAKSIN
Hope in Jersey
In the state’s latest tax war, Governor Christie is standing firm.
11 April 2010
New Jersey governor Chris Christie’s recently unveiled budget has been alternately hailed and condemned for imposing spending cuts on the economically ailing state, but one item that’s not actually in the proposed budget has proved the biggest flashpoint: the so-called “millionaire’s tax” surcharge on incomes of $400,000 or more. Former governor Jon Corzine enacted the tax on a one-year timeline to replenish the state’s chronically empty coffers and bolster depleted revenues. By allowing it to expire, Christie has touched off a charged but vital debate about the kind of state New Jersey is—and the kind it should be.

The death of the millionaire’s tax has provoked howls of outrage from New Jersey Democrats. State Senate president Stephen Sweeney complained that while Christie’s budget forces lean times on the state, “the only people that got a break are the higher-income people.” Sweeney has threatened that the Democrat-controlled state legislature would block the budget unless the tax is reinstated. The New Jersey Star Ledger was equally incensed, raging that “the governor can’t possibly justify deep tax cuts for the state’s wealthiest families while he’s imposing these spending cuts.” The paper charged that by refusing to tax the rich more, the governor was engaging in “class warfare.” With the goading of politicians and the media, New Jersey residents have also warmed to the idea that the rich are not sharing in the sacrifice that tough times demand. Despite having a broadly favorable view of their new governor and little appetite for additional tax hikes, they oppose eliminating the tax on high earners.

Christie’s critics would seem to have a strong case: Why should the rich get a tax break, especially when the governor is asking the state to tighten its collective belt? The fiscal reality is more complicated. For one thing, many of those hit by the millionaire tax aren’t really millionaires, but small businesses. Of the 63,480 income tax returns filed for incomes of $400,000 and more in 2008, over half had some small-business income, according to the New Jersey Division of Taxation. Moreover, New Jersey’s wealthy already face one of the heaviest tax burdens in the country. According to the latest figures, the top 1 percent of income earners pays 45 percent of state income taxes, the consequence of a highly progressive tax structure that will put New Jersey into a sixth-place tie this year with New York for the nation’s highest top marginal income-tax rate. With the sunset of the millionaire’s tax surcharge, New Jersey returns to the still-high rate established in the original “millionaire’s tax”: passed in 2004 by then governor Jim McGreevey, it considers individuals making $500,000 or more as millionaires, raising their tax rate to 8.97 percent. New Jersey also has the second-highest sales tax rate; the sixth-highest corporate tax rate; and the highest property taxes in the nation. Overall, as Christie points out, New Jersey collects more state and local taxes as a percentage of income than any other state. Affluent residents, of course, pay the largest share.

And their tax burden is likely to increase even without the millionaire’s tax. With President Obama set to let the Bush tax cuts expire this year, Tax Foundation staff economist Mark Robyn points out that New Jerseyans earning over $500,000 annually could face a 50 percent marginal tax rate—that is, each dollar earned past the $500,000 threshold will be taxed at nearly 50 percent. As Robyn suggests, that “increases the likelihood that high-income New Jersey residents will seek out states with a lower tax rate.”

Evidence suggests this tax-driven exodus is already underway. Several studies have documented that New Jersey’s tax burden is driving wealth—as well as the jobs, job opportunities, and revenues it creates—from the state. The most recent is a February study conducted by the Center on Wealth and Philanthropy at Boston College, which found that New Jersey lost more than $70 billion in wealth between 2004 and 2008 as wealthy households departed for lower-tax states like Pennsylvania and Florida. An October 2007 Rutgers University study on income by public policy professors James Hughes and John Seneca made similar findings. Examining Census Bureau and Internal Revenue Service data, they found that by 2005 New Jersey had lost nearly $8 billion in gross income since the start of the decade. As a result of the income loss and the associated drop in consumer spending, the authors estimate, the state lost nearly 39,000 jobs, $2.76 billion in gross domestic product, and $85.4 million in state sales- and income-tax revenues. Their study didn’t offer a sole explanation for the vanished income, but Professor Seneca says that high taxes are one probable cause. “Certainly, if you talk to tax accountants and estate advisors, the anecdotes are numerous that the general tax structure is a factor,” he says.

In fleeing for more tax-friendly locales, high-income earners have left New Jersey with some unwelcome distinctions. The state now ranks fifth-highest in the country in outward migration, with 450,000 residents moving out since the beginning of the decade and 400,000 moving in—a net loss of 50,000. Even that doesn’t convey the full impact of capital flight, because those who leave tend to be wealthier—and pay more in income taxes—than the new residents, who are often immigrants. Rutgers’ James Hughes, dean of the school’s Edward J. Bloustein School of Planning and Public Policy, points to a telling economic indicator. New Jersey ranks in the top three states in the nation in providing business for leading moving companies like Van Lines and Mayflower, but those companies don’t do nearly as much business with those moving into the state. “That suggests that the people who are leaving are wealthier while those moving in have nothing to move in,” Hughes observes. Combine the outflow of wealth with the spending of the state’s perennially profligate legislature, and it’s not hard to see why New Jersey is facing a $10.7 billion budget deficit this year.

That bleak economic outlook may explain why Democrats have not moved to reinstate the millionaire’s tax, even as they’ve decried the Christie administration for failing to do so. “When Democrats criticize Christie for not renewing the millionaire’s tax, they are in essence blaming themselves,” says Joseph Malone, the Republican budget officer in the state assembly. “Democrats have the majority in the state assembly and the state senate, so if they want to raise this tax somebody should step up and move forward with the legislation. They are blaming Christie for something they and the Corzine administration wouldn’t do.”

Republicans have mostly cheered Christie’s refusal to raise taxes, but some object to various aspects of his budget and what they might mean for the state’s financial future. The biggest concern: the budget eliminates $848 million in property tax rebates while cutting aid to schools and municipalities. That could force districts to make up for the lost revenue by raising property taxes. Paul Mulshine, the lone conservative columnist at the Star Ledger, warns that “local property taxes will skyrocket under the Christie budget.” Democrats could also capitalize on the aid cuts to offer voters a stark choice: pay more in taxes or raise them on the rich.

That is not necessarily a winning argument, however. As City Journal’s Steven Malanga points out, even in the absence of state aid, New Jersey school districts are already flush with cash. New Jersey’s education spending per pupil is 60 percent above the national average, and state schools have been on a costly spending spree since 2001, hiring thousands of new teachers even as enrollment has grown by a modest 3 percent. Amid the ongoing fiscal crisis, taxpayers are unlikely to be receptive to suggestions that they bankroll the schools’ already-bloated budgets by paying more in property taxes. Meanwhile, Governor Christie has tried to prevent the possibility of a property tax hike. To that end, he has called for a constitutional amendment to limit property-tax rate increases to 2.5 percent per year and promised to back municipalities in contract negotiations with unions.

Others worry that Christie’s budget could lay the groundwork for a tax hike on the rich because it doesn’t do enough to shrink the size of government. The most vocal conservative critic in this regard has been Steve Lonegan, the fiery former mayor of Bogota, New Jersey, who lost out to Christie in last year’s gubernatorial primary. “New Jersey already has an enormously progressive tax code in the country and the Democrats want to make it worse,” says Lonegan, now head of the New Jersey chapter of the free-market grassroots group Americans for Prosperity. “That said, I’m very concerned that Christie’s budget is creating a political environment in which Democrats will offer taxes on the wealthy as the only solution.” As an example, Lonegan notes that, despite promises to cut spending, Christie’s budget actually increases several government welfare programs. The governor supports expanding Medicaid enrollment for children up to 350 percent of the federal poverty level, and he has proposed expanding food stamps to 185 percent of the poverty level. “We can’t be putting more people on the dole when we should be putting them to work,” Lonegan protests. More broadly, he worries that the failure to cut government entitlements “gives Democrats the leverage they need to raise taxes on the high income earners we desperately need to build this state.”

Republicans in the state legislature seem confident that it won’t come to that. Assemblyman Malone dismisses the Democrats’ carping about the millionaire’s tax as little more than “political rhetoric.” In private discussions, he says, his Democratic colleagues admit that another tax on the rich will jeopardize the revenues the state needs to regain its financial footing. “Unless there’s a 100 percent reversal in revenues, the starting point for the budget is that there is no additional money,” says Malone, who notes that the past year alone saw a 12 percent decline in revenues—the worst in state history. “Democrats don’t want this turmoil, and I don’t think there’s anybody who doesn’t understand the depth of the financial crisis we face in the state.” Matt Rooney, founder of the conservative New Jersey politics blog Save Jersey, agrees. No matter what they may say in public, Democrats are unlikely to oppose the budget because it doesn’t contain a tax increase. “Dire circumstances and public opinion have Democrats over a barrel,” Rooney says. “The uncomfortable truth is that many Democrats do know better.”

If that’s indeed the truth, then the squabbling over the millionaire’s tax and the amped-up charges of “class warfare” are nothing more than a noisy political sideshow. After years of financial mismanagement, this is a hopeful sign that the state is not condemned to repeat the past.

[Rarick]

I understand that when you want a service, there is a cost.  How someone can ever get a service by not paying for it is just beyond me.  Making someone else pay for it is theft.  It does not matter how rich the guy is that a thief steals from, scaling on either side of the equation does not affect the operation.  ( nice copyright notice by the way).   Taxes are a legalized theft, the "Voluntary" is a fiction that is like the voluntary contribution to the bosses birthday fund, or attendance at the office Xmas party..........The latter two have become more so in recent years, mainly because the bosses use of the "your fired" gun has become limited.........

If everyone is paying a flat percentage, or a pay as you go fee, then everyone is paying a fair share.  Otherwise we are talking about a redistribution system, which is patently unfair.  Many people with money are perfectly willing to share some out to charity, and that is only right.  It is perfectly right to be a scrooge too, it is their property, but there is a certain negativity attached to these types of folks.........

Living in most cities has a pay as you go sales tax, if you don't like it you can move.  Fees are the same way, if you do not like it then live without the service.  When the government majkes a service/fee mandatory is when they are limiting life, liberty and happiness.  Tjhat is what authoeitarion states do, and I will always have and issue with those types of laws/ means of earning revenue.

[DougMacG]

"If everyone is paying a flat percentage, or a pay as you go fee, then everyone is paying a fair share."

I am with Rarick on this one (unfortunately that only makes two of us).  Every dollar earned should be taxed the same.  Then we all have the same stake in our nation when we vote for or against programs, taxes and expenditures.  That is the way public spending gets scrutinized and contained. Necessary assistance should be addressed only on the spending side and better yet on the private charitable side. 

Since this is politically impossible, then the compromise has to be to move only in the direction of flatter, wider and simpler taxes that reach further into the electorate, not to target or isolate any group as the party of free lunch and class warfare proposes.

[ccp]

I guess this could go under spending, education or another topic.
Yet since we are talking about NJ there is a titanic fight between newly elected Gov. Christie and teachers unions.
I keep seeing commercials telling us how Christie is hurting our children by trying to cap pay increases for teachers and asking them to contribute into their own pensions.

http://www.dailyrecord.com/apps/pbcs.dll/article?AID=2010100411013

Private unions and unions of public officials are in my opinion not the same.

No one is against teachers per se but teachers in NJ are some of the highest paid in the country, our porperty taxes ARE the highest in the country.

If I recall the unions in California destroyed Schwarzenegger.  Christie seems to be winning here.

[Body-by-Guinness]

Some facts in this video will set your teeth grinding:

[youtube]http://www.youtube.com/watch?v=XX8EswfGKQw&feature=player_embedded[/youtube]

[Crafty_Dog]

On the Glen Beck show on Monday night Art Laffer proposed the following:

1) 11% corporate tax
2) 11% income tax for everyone
3) Abolish all other taxes.

THIS IS BRILLIANT!!!

[Rarick]

Tjhe other alternative I have seen is a national sales tax.  everything but food.  There would be a certain guaranteed income from clothes and other necessary items, and people would be paying in scale to income too.  That would satisfy both side of the political equation, if everyone was working to their principles and not their agenda, eh?

[Crafty_Dog]

"An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation." --Justice John Marshall, McCullough v. Maryland, 1819

[G M]

Thus far, I like the fair tax concept the best.

www.fairtax.org

[DougMacG]

Rarick, GM, all
(please see discussion in this thread from around March 2009 on this topic)
In the hypothetical, I like the 'fair tax' as well. Closer to the theme of the founders who had only import duties then which I do not like now.  I like the Laffer proposal with 11% flat income tax plus 11% corporate income tax MUCH better, but is also not possible politically.

The transition to consumption-only taxes from where we are now is impossible at this time.  It requires FIRST a repeal of the federal government's power to tax income.  Otherwise you are creating an additional layer of taxation.  Our opponents are talking about a VAT right now as an ADDITIONAL layer of taxation.  Repeal of the 16th amendment is not going to happen in this political environment, you won't win support from independents, moderates Dems or moderate Republicans, and you need roughly 75% support to end all income taxation when we are more than a trillion a year in the red already. 

This is no time politically for long range hypotheticals.  We need to oppose new tax increases, repeal the most recent 25 new taxes signed by Obama (http://republicans.waysandmeans.house.gov/UploadedFiles/DemTaxIncreases1.pdf), make 'permanent' the expiring cuts, and then CUT SPENDING FIRST! (IMHO!)

[Crafty_Dog]

Laffer's 11 & 11 proposal seems to me both profound and politically brilliant.   The amount of growth it would unleash I think would be staggering.

[Crafty_Dog]

The Week /Congress's Carried Interest Tax Folly
~~~~~~
JOHN RUTLEDGE, The Wall Street Journal (05/22/10): Nero fiddled while Rome
burned, but at least he didn't strike the match. Members of Congress are
doing Nero one better. In the middle of the second global financial crisis
in two years, Congress is preparing to dramatically raise a key tax rate
on long-term investment. This is sure to discourage capital investment,
increase the cost of money to start and grow businesses, and depress
real-estate and stock prices, all at the worst possible time.

Last week, Senate Finance Committee Chairman Max Baucus (D., Mont.) and
House Ways and Means Chairman Sander Levin (D., Mich.) released joint
legislation that would among other measures significantly raise the tax on
"carried interest." Now the tax rate on these long-term capital gains
earned by the general (managing) partners of investment partnerships is
15%. The new law would raise the rate to as high as 38.5% (three-fourths
of the gain would be taxed at ordinary income tax rates and one-fourth at
capital gains rates, both of which will be increasing as well).

Tax rates matter. And what matters about them is what activities get
taxed, not who gets taxed. When you increase the tax rate on an activity,
you get less of it. The only question is how much less of it you will get.

Nero fiddled while Rome burned, but at least he didn't strike the match.
Members of Congress are doing Nero one better. In the middle of the second
global financial crisis in two years, Congress is preparing to
dramatically raise a key tax rate on long-term investment. This is sure to
discourage capital investment, increase the cost of money to start and
grow businesses, and depress real-estate and stock prices, all at the
worst possible time.

Last week, Senate Finance Committee Chairman Max Baucus (D., Mont.) and
House Ways and Means Chairman Sander Levin (D., Mich.) released joint
legislation that would among other measures significantly raise the tax on
"carried interest." Now the tax rate on these long-term capital gains
earned by the general (managing) partners of investment partnerships is
15%. The new law would raise the rate to as high as 38.5% (three-fourths
of the gain would be taxed at ordinary income tax rates and one-fourth at
capital gains rates, both of which will be increasing as well).

Tax rates matter. And what matters about them is what activities get
taxed, not who gets taxed. When you increase the tax rate on an activity,
you get less of it. The only question is how much less of it you will get.

Congress should be asking one question: "Is long-term investment something
we really want less of, especially now?" Unfortunately, in today's
political climate, tax policy discussions focus almost exclusively upon
who, not what, gets taxed. This means singling out specific groups of
people-bankers, Wall Street, "the rich," the owners and executives of
insurance, oil and drug companies-to punish for our economic difficulties.
This may be politically popular but will have bad consequences for the
economy.

Carried interest refers to the share of the capital gains (typically 20%)
earned on long-term investments in real estate, venture capital, private
equity and other investments organized as partnerships that is allocated
to the general (managing) partner. Limited partners (i.e., passive
investors) pay this share to align their interests with those of the
general partner and to provide incentives for him to increase capital
gains.

Both general partners and limited partners pay taxes based on the
character of the income earned by the partnership: ordinary income rates
on dividends and short-term capital gains, and the long-term capital gains
rate on the long-term capital gains. Some partnerships, such as hedge
funds, earn mostly short-term gains, and pay ordinary income tax rates.
Other partnerships, such as real estate, venture capital and private
equity, make long-term investments. Their profits are mostly made up of
long-term capital gains and are taxed at lower long-term capital gains tax
rates as a way to encourage long-term investment.

The economic impact of the proposed tax rate hike is unequivocally
negative for long-term investment. It will lead to changes in the terms of
investment partnerships that will reduce after-tax returns for all
investors, including the limited partners.

Before partnerships are formed, the fees, carried interest, governance and
other provisions are heavily negotiated. The proposed tax increase reduces
the after-tax value of carried interest compensation. A material change in
the after-tax economics of something as critical as general partner
compensation will result in an entirely different set of terms in which
both general partners and limited partners share the pain.

The resulting drop in after-tax returns for all investors will reduce
capital committed to long-term investments in partnerships of all sorts.
This means less capital formation, less construction activity, less
manufacturing activity for capital goods makers and their suppliers, fewer
start-ups, fewer jobs, lower productivity growth, and lower wages. The
direction of these changes is not in question. The only question is how
much less of these things we are going to get....

Read On or Post a Comment:
http://online.wsj.com/article/SB10001424052748704852004575258401601217646.html

[Crafty_Dog]

By ARTHUR LAFFER
People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, "high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994."

Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

 .Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

View Full Image

Associated Press
 .In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what's going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

Mr. Laffer is the chairman of Laffer Associates and co-author of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).

[DougMacG]

Crafty, Arthur Laffer is exactly right - thanks for finding and posting that.  The automatic tax increase at the end of the year are the elephants in the room that no one wants to talk about.  Only Democrats can stop that from happening.  Even if Republicans win one or both chambers, they take office after the first of the year and anything they pass will require Obama's signature.

By 2012 it will be very difficult to keep calling this country "Bush's mess".
-----
Quoting Laffer: "...Jan. 1, 2011...the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero...  Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.
-----
I would argue that like Sept 2008, when investors and markets begin to see an impending implosion of values they won't sit around and wait to be the last person to sell off.

The big opportunity now is for Democrats to take some wind out of Republican sails by passing new budgets with new spending reforms coupled with comprehensive tax reforms now.  Unfortunately for the republic, that isn't likely to happen.

[Crafty_Dog]

How the New Wealth Taxes Will Hit You
By LAURA SAUNDERS
The health-care bill that Congress passed in March contained two surprising new taxes to help pay for the changes: an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people (technically, people with "adjusted gross incomes" above those amounts).



Each tax signals a radical change in policy. For workers, the extra 0.9% levy puts a progressive element in what used to be a totally flat tax. The 3.8% tax on investment income also knocks down a longstanding wall by applying a "payroll" tax to unearned income. Until now, FICA taxes for Social Security and Medicare have applied only to wages, not investment income.

While many details remain unclear and the Internal Revenue Service hasn't issued any guidance, here are preliminary answers to the most important questions taxpayers are asking.

These taxes take effect in 2013, two elections away. Might they be repealed first?

Not likely. "Congress would have to undo the health reform, and budget constraints would still be there," says Clint Stretch of Deloitte Tax. "Even if Republicans take control of Congress, President Obama holds the veto pen until Jan. 20, 2013."

How does the 0.9% tax work?

If Joe and Mary each earn $175,000, their total employment income is $350,000. Currently they owe 1.45%—$5,075—of regular Medicare tax, and their employers owe a matching amount. In 2013, the couple will owe an extra 0.9%—$900—on their wages above $250,000, which is $100,000. Their employers pay nothing extra.

What about the 3.8% tax on net investment income?

This levy is keyed to "modified adjusted gross income," with a threshold of $250,000 for couples and $200,000 for singles. (This is simply adjusted gross income for nearly everybody except expatriates, who must add back certain exclusions.) The tax is a flat 3.8% on investment income above the threshold.

How would this work?

Example 1: John and Jane, a married couple, have $400,000 of AGI—$200,000 of wages plus $200,000 of investment income. Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra $5,700.

Example 2: Anne, a single filer, earns $40,000 but has an investment windfall of $190,000, for total income of $230,000. Because she has investment income of $30,000 above her $200,000 threshold, she would owe $1,140 of additional tax.

Example 3: Retirees Mary and Bill have no wages but they do have a taxable IRA payout of $90,000, plus investment income of $150,000, for a total of $240,000. They don't owe the new tax, because they have no investment income above the $250,000 threshold.

What is investment income?

Interest, except municipal-bond interest; dividends; rents; royalties; and capital gains on the sales of financial instruments like stocks and bonds. The taxable portion of insurance annuity payouts also counts, unless it is from a company pension. So do gains from financial trading, as well as passive income from rents and businesses you don't participate in. All are subject to the 3.8% tax on amounts above the $250,000 or $200,000 threshold, as described above.

Not taxed: Distributions from regular and Roth IRAs and other retirement accounts, including pensions and Social Security, and annuities that are part of a retirement plan. Life-insurance proceeds, muni-bond interest and veterans' benefits don't count, nor does income from a business you participate in, such as a Subchapter S or partnership.

Could the 3.8% tax apply to gains on the sale of a home?

Yes, if there is a taxable gain above the $500,000 ($250,000, single) exclusion for gains on the sale of your residence.

Example: Fred and Fran, who bought their home in a New York suburb for $50,000 in 1972, sell it in 2013 for $1 million. After subtracting the $50,000 cost and $500,000 exclusion, they have investment income of $450,000. If they also have a taxable IRA payout of $70,000 and a pension of $30,000, they would owe the tax of $11,400 on $300,000.

What happens if a taxpayer who owes the new tax on investments also has a large itemized deduction—say, medical expenses or a theft loss?

Even if taxable income is zero because of deductions, he or she could still owe the 3.8% tax. Example: Myra is a single filer with investment income of $100,000 and wages of $200,000. But during the same year she loses $300,000 in a Ponzi scheme. She pays no income tax, but she still owes the new Medicare tax of $3,800 on her net investment income, says Sharon Kreider, a tax expert in Sunnyvale, Calif.

Does the 3.8% tax affect trusts and estates?

Yes, and it can hit them hard. The tax is levied on investment income as low as $12,000 that isn't paid out to beneficiaries. Some believe the tax may also hit children's unearned income subject to the "kiddie tax" if the parents owe it themselves.

What professions are able to avoid this tax?

Ms. Kreider and others see a sweet spot for real-estate professionals. The law deems their rents to be "active" income, so they wouldn't be subject to the investment tax. Often they don't owe self-employment taxes on that rental income, either.

What steps do experts recommend to minimize these taxes, other than taking capital gains before 2013 or buying municipal bonds?

• Examine both your regular and investment income: the higher your regular AGI, the more likely that your investment income will be subject to the new tax. So while Social Security and pensions don't count as investment income, they raise AGI. This makes Roth IRA conversions even more attractive for many. "Roth withdrawals don't raise AGI and aren't investment income," says Vern Hoven, a tax expert in Gig Harbor, Wash.

• Reconsider a defined-benefit pension if you're eligible—say, you're in a small business or have consulting income, says Mark Nash of PricewaterhouseCoopers. Pension payouts don't count as investment income, and the older a taxpayer is, the more he can contribute.

• Taxpayers selling assets should consider installment sales, says Ms. Kreider, if spreading out the income would minimize the new tax.

• For some, life insurance may become more attractive. Because life-insurance proceeds at death aren't subject to this tax, a taxpayer could buy a policy, borrow from it and settle up at death, avoiding income tax on investment gains within the policy. But Mr. Nash cautions that the savings must outweigh the fees and other disadvantages such policies may have.

[Crafty_Dog]

"'Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I'm calling their bluff."

That was President Barack Obama, the heretofore unknown deficit hawk, all but announcing the other day the tax trap that he's been laying for Republicans. From what we hear about intra-GOP debates, more than a few will be happy to walk right into it.

You don't need a Mensa IQ to figure this one out. Mr. Obama's plan has been to increase spending to new, and what he hopes will be permanent, heights. Then as the public and financial markets begin to fret about deficits and debt, he'll claim that the debt is "unsustainable" and that the only "responsible" policy is to raise taxes.

White House officials even talk privately about the galvanizing political benefit of a bond market crisis, which would force panicked Members of Congress to accept a big new value-added tax. The President's two looming tax reports—one from his deficit commission and the other from Paul Volcker's economic advisory group—are intended to propose a VAT and other tax options. Whatever their initial reception, the proposals will be there to be pulled from the shelf when the political moment is right.

View Full Image

Associated Press
 .Voila, Mr. Obama will have established a new spend-and-tax policy architecture that has the feds taking from 25% to 30% of GDP, up from the roughly 21% modern average.

***
This strategy explains why Mr. Obama is now starting to fret in public about deficits and debt. This week he even said reducing the debt will be "our project." Funny how debt seemed a lower priority when he was urging Congress to pass $862 billion in stimulus and $1 trillion in new health-care subsidies.

The Congressional Budget Office is contributing to this political drama by declaring this week that the "federal budget is on an unsustainable path." Of course, but why? The biggest reason is that Medicare and Medicaid keep rising at two to three times the rate of everything else in the economy and, as CBO explains, will eventually take up every dollar of tax revenues raised, leaving no money for anything else, including national defense.

"Slowing the growth rate of outlays for Medicare and Medicaid," advises CBO, "is the central long term challenge for federal fiscal policy." This is the same CBO that blessed ObamaCare's Medicaid expansion to 16 million more recipients.

What CBO's latest apocalyptic report doesn't stress is what we'd call the more important deficit in its forecast: the growth deficit. CBO predicts an annual rate of GDP growth of 2.2%. Yet since 1959 the U.S. economy has grown at an average rate of 3%, and during the 1980s and 1990s it was closer to 3.5%. The compounding effect of restoring this faster pace of growth would mean far more net national wealth and would certainly make debt repayment easier.

Even Mr. Obama's current spending level of 25% of GDP would be more manageable if the slow economic recovery weren't keeping tax revenue at unusual lows. In 2007, the economy threw off revenue of 18.5% of GDP. That fell to 14.8% in 2009 and may not be too much higher this year. The point is that there is no hope of balancing the federal budget without a return to higher levels of economic growth.

This is where Republicans need to maneuver around Mr. Obama's tax trap. He and his White House economists believe that taxes have little effect on growth so they can get revenues to 20% or 25% of GDP simply by raising tax rates or imposing a VAT. But if they're wrong about the impact of those taxes on a still-fragile economy recovery, they could keep the economy on a subpar growth path for years to come. We think the last thing the U.S. economy needs at the moment—and the worst policy for the deficit—is the big tax increase that will hit on January 1 with the expiration of the Bush tax cuts.

Yet we hear that even many Republicans are privately insisting that any extension of those Bush tax cuts must be "paid for" with other tax increases. Under Congress's perverse budget rules, extending those tax cuts will "cost" the Treasury revenue, even though extending those tax rates would only prevent a tax increase.

And because Congress still uses static revenue scoring—meaning no change in economic behavior from tax changes—the Joint Tax Committee thinks it will raise nearly $1 trillion over 10 years from the higher tax rates on incomes, dividends and capital gains. That's highly improbable. After those tax rates were cut in 2003, total federal tax revenue increased by 44%, or $743 billion, from 2003-2007.

In other words, Democrats have rigged the rules so that merely stopping a tax increase will be scored to increase the deficit. These are the same Democrats who haven't "paid for" trillions of spending in the last four years, but watch them soon denounce Republicans as fiscally irresponsible merely for trying to stop a tax increase. Orwell would love modern Washington.

If Republicans go along with this perverse pay-as-you-go logic, they will play into Mr. Obama's hands. He'll gladly offer to raise taxes on the wealthy in order to "pay for" extending the lower Bush rates on the middle class. Never mind that the tax increases on capital gains, dividends and income tax rates will do the most economic harm.

***
Republicans need to break out of their rhetorical preoccupation with debt and deficits, focusing their political aim instead on spending and above all on reviving economic growth. They should hold the line against all tax increases and begin to consider a menu of tax cuts to make the U.S. more competitive, especially if the economy continues to underperform.

Mr. Obama's strategy of spending our way to prosperity clearly hasn't worked, as the voters are coming to understand. But if the GOP policy response is merely to bemoan deficits, they will soon find themselves back at their historic stand as tax collectors for the welfare state. To avoid Mr. Obama's tax trap, Republicans also need a growth agenda.

[Crafty_Dog]

By ARTHUR B. LAFFER
The current debate over extending and increasing federal unemployment benefits encapsulates the disagreement between the Democrats in power in Washington and their Republican opponents. What the consequences will be of raising unemployment benefits in today's depressed economy is at issue.

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.

The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics. With five job seekers for every job opening, the unemployed are desperate for work and increasing unemployment benefits will have very little if any disincentive effect. This view hinges on a total change in employee behavior from "normal" times to the current period of "the Great Recession."

On the face of it, the idea that higher unemployment benefits won't lead to more unemployment doesn't make much sense. Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year. My guess is we'd have a heck of a lot more unemployment. Common sense and personal experience indicate higher unemployment benefits will make unemployment less unattractive and thereby increase unemployment even in the Great Recession. As the chart nearby clearly shows, since the 1970s there's been a close correlation between increased unemployment benefits and an increase in the unemployment rate. Those who argue that things are different today don't have the data to back up their claims.

. ..The Democratic argument also ignores the impact of unemployment benefits on employer costs. Employers don't usually hire people to assuage their consciences. They hire people to make after-tax profits. And if workers require more pay because of higher unemployment benefits, employers will hire fewer employees. Whether increased unemployment benefits incentivize workers to work less or disincentivize employers from hiring more workers, the effect will be the same—higher unemployment.

The second point made by the Obama administration is that unemployment benefits are a great way to stimulate demand. Increased unemployment benefits operate quickly and the recipients spend what they get, which makes these stimulus funds the best bang for the buck.

Here again the facts are in dispute. Studies have shown that previous stimulus spending—much of which was also targeted for the poor and unemployed—was to a large extent saved and not spent. But I'm not going to rest my case on the obvious failure of Washington's prior stimulus packages. Based upon the above logic (as described in the January 2009 white paper co-authored by White House economists Christina Romer and Jared Bernstein) the administration forecast that the unemployment rate would be a little above 7.3% in the third quarter of this year. That isn't going to happen.

View Full Image

Associated Press
 .The flaw in their logic is that when it comes to higher unemployment benefits or any other stimulus spending, the resources given to the unemployed have to be taken from someone else. There isn't a "tooth fairy," or as my former colleague Milton Friedman repeated time and again, "there ain't no such thing as a free lunch." The government doesn't create resources. It redistributes them. For everyone who is given something there is someone who has that something taken away.

While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.

To see this, imagine an economy that produces 100 apples. If 10 of those apples are given to the unemployed, then people who otherwise would have had those 10 apples now won't. The stimulus of 10 apples for the unemployed is exactly offset by the destimulus of 10 apples for those people from whom the 10 apples were taken.

Given the massive inefficiencies the government creates in securing resources from the private sector, there may also be a large negative income effect over wide ranges of stimulus spending. This is the proverbial "toll for the troll." These massive inefficiencies could lead to lower output.

To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.

But it doesn't stop there. While the income effects sum to zero, the substitution effects aggregate. The person from whom the unemployment funds are taken will find work less rewarding and will work less. The person who is given the unemployment benefits will also find work relatively less rewarding and will therefore work less. Both people in this two-person economy will be incentivized to work less. There will be less work and more unemployment.


Not only will increased unemployment benefits not stimulate the economy, they will at the same time lower the incentives for people to work by reducing the amount people are paid for working and increasing the amount people are paid for not working. It's pretty basic economics.

No one opposes unemployment benefits as a transition aid for people to get back on their feet and find a new job. Unemployment benefits are a safeguard for individuals down on their luck. But to argue that unemployment benefits actually reduce unemployment is disingenuous at best, and could induce our government to enact policies that have the effect of destroying our nation's production base from whence all benefits ultimately flow.


More
Obama Shifts to Export-Led Jobs Push
Long Recession Ignites Debate on Jobless Benefits

.Any government program that would reduce unemployment has to make working more attractive for both employer and employee. Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen" (Threshold, 2008).

[DougMacG]

I risk posting this before Lebron James decision is announced.  I think they pay state taxes around the country for every away game.  Where would you want to play your home games?

Top state income tax

Ohio:  6%

New York:  9%

Florida: "No state income tax"

You do the math.

("LeBron James expected to join Miami Heat, league executive says")

[Body-by-Guinness]

Representation Without Taxation
Published on July 8, 2010 by Edwin Feulner, Ph.D.

Professional sports leagues have ways of ensuring that “the last shall be first.” Teams with bad regular-season records get the top draft choices, theoretically allowing them to bring in the best young talent. Teams with excellent records draft later.
 
It’s supposedly a way to “level the playing field,” but as any fan knows, it doesn’t work perfectly. Some teams seem to be good season after season, while others usually struggle. In the NFL, for example, the Pittsburgh Steelers have captured six Super Bowls, while the Detroit Lions have never been to one.
 
Billionaire owners can afford to run their leagues however they wish. But in the real world it makes little sense to punish success or reward failure. Yet that’s exactly what the federal government’s tax policy does.
 
According to a recent report by the non-partisan Congressional Budget Office, in 2007 (the most recent year for which figures are available) the top 20 percent of earners paid 70 percent of all federal taxes. The bottom 40 percent of earners paid no income tax.
 
In fact, the CBO reports that during the Bush presidency the tax burden for the bottom 80 percent of taxpayers plunged, even as their income grew. For those in the bottom 20 percent, for example, income increased 4.6 percent, while the tax share paid dropped by 27 percent. The same held true for the next four quintiles—they earned more, yet paid a smaller percentage of taxes.
 
It’s only the highest earners (the top 20 percent) who saw their share of the tax burden increase. It jumped by 3.4 percent, while they enjoyed a 12 percent increase in their income.
 
Lawmakers aren’t just talking about taxing the rich; they’re doing it. And political rhetoric, aside, the already disproportionate burden on the highest earners has been growing. Except for “the rich,” Americans tend to be getting more for less.
 
This matters, because paying taxes should be a civic duty. It gives Americans a stake in our country, and gives us a reason to keep a skeptical eye on Washington. It seems only fair that, while the wealthy will always pay more, everyone should pay something. Everyone, after all, benefits from our unparalleled military might, and we all ought to contribute something, no matter how small an amount, to keep it strong.
 
Yet the Tax Policy Center reports that 47 percent of households owed no income tax in 2009. In fact, many actually make money through the Earned Income Tax Credit.
 
It’s time to heed an age-old warning. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy.
 
It’s unclear who first spoke these wise words. Some attribute them to French-born writer Alexis de Tocqueville. Others cite British writer Alexander Fraser Tytler. Or it may have been an unheralded op-ed writer in the Midwest. The origin doesn’t matter. It’s the insight that counts. When people can vote themselves something for nothing, they will, and they’ll keep squeezing the rich until they have nothing left to give.
 
Governments have always used higher tax rates to discourage certain behaviors. A recent example is tobacco taxes, which often double or triple the price of a package of cigarettes. Lawmakers don’t want people to smoke, but they don’t want to ban smoking outright. Instead they just keep dialing up the taxes, and fewer people light up.
 
But the government doesn’t want to discourage economic success. Politicians on both sides of the aisle speak every day about creating jobs and growing our economy. So why do they also implement policies that punish success by over-taxing “the rich”?

We’d better figure that out—and stop it—before we kill the goose that lays the golden eggs.
Ed Feulner is the president of The Heritage Foundation.

http://www.heritage.org/Research/Commentary/2010/07/Representation-Without-Taxation

[Crafty_Dog]

It has come to this: Congress, quite by accident, is incentivizing death.

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit.  Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011.

Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.

The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

Of course, there is a "death incentive" whenever Congress raises the estate tax. But it hasn't happened in decades; the top rate has held steady or fallen since 1942, according to tax historian Joseph Thorndike of Tax Analysts, a nonprofit group. In fact, the jump from zero to 55% would be "the largest increase in a major tax that we've ever seen," Mr. Thorndike says.

Death or Taxes
That possibility presents a bizarre menu of options for wealthy older people—and their heirs. Estate planning was never cheerful, but now it is getting downright macabre, at least for the tax averse.

"You don't know whether to commit suicide or just go on living and working," says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year.

Advisers say the estate-tax dilemma is especially awkward for heirs. "At least in December 2009, people wanted to keep their relatives alive," says Ronald Aucutt, an estate-tax attorney with McGuire Woods in the Washington area. Now he and others are worried that heirs may be tempted to pull plugs on Dec. 31. Economists might call the taking of a life to reap a tax advantage a "perverse incentive." District attorneys might call it homicide.

Taxpayers trying to cope with such surreal situations need to understand how they came to be. The roots go back to 2001, when Congress cut the estate tax rate to 45% from 55% and increased the exemption gradually over a decade. From its 2001 level of $675,000, the exemption rose to $3.5 million per individual by 2009.

Thanks to legislative sausage making, the rules got extreme after that: The tax disappeared altogether in 2010, but was programmed to revert in 2011 to a $1 million exemption with a top 55% rate.

Few Washington insiders expected Congress to allow the tax to snap back so sharply next year. So why, with nine years to act, didn't it fix the problem? Political wisdom holds that estate tax changes can't happen in election years for fear of angering voters, and Hurricane Katrina derailed a 2005 opportunity. Late last year, the House of Representatives passed an extension of the 2009 estate tax, but the Senate didn't act.

Compounding the problem, lawmakers didn't hammer out a fix early this year, as many had expected. Extending the 2009 law retroactive to the beginning of 2010 would have made a seamless transition and resolved issues taxpayers are now facing. Instead, the estate tax has been in limbo all year.

Senators are divided among three possible solutions. Some favor the pre-Bush rate of 55%, while others advocate a 35% rate (with a more generous exemption). A third group prefers the old 45% rate.

Many Washington insiders are betting Congress won't act this year because of an overflowing to-do list, the fall election and fewer than 40 working days left in 2010. At least one near-deal has failed the Senate this year.

Pressure to act will likely grow following the November elections, when Congress is expected to address many other expiring Bush-era tax breaks, including income taxes and capital-gains rates.

Meanwhile, the living and their relatives face a complex calculus with unknown variables. The Internal Revenue Service has yet to issue guidance explaining current estate-tax law, and no one knows if Congress will include retroactive elements when members deal with the tax.

"Not only is the future uncertain, but the past is also. We have no idea what the law is," Mr. Aucutt says.

So far in 2010, an estimated 25,000 taxpayers have died whose estates are affected by current law, according to the nonpartisan Tax Policy Center. That group includes least two billionaires, real-estate magnate Walter Shorenstein and energy titan Dan Duncan.

Another unknown is whether—assuming lawmakers act—changes will be retroactive to the beginning of 2010, and if they will be mandatory. Experts say a pure retroactive extension might be constitutional, but they doubt one is feasible at this late date.

"Enough very wealthy people have died whose estates have the means to challenge a retroactive tax, and that could tie the issue up in the courts for years," says tax-law professor Michael Graetz of Columbia University.

Whatever the outcome, few see the zero-tax regime persisting for very long because of the nation's stratospheric debt and deficits. "I don't see how Congress can get out of this without creating winners and losers," says Beth Kaufman, an attorney at Caplin & Drysdale in Washington.

Estate planners and doctors caution against making life-and-death decisions based on money. Yet many people ignore that advice. Robert Teague, a pulmonologist who ran a chronic ventilator facility at a Houston hospital for two decades, found that money regularly figured in end-of-life decisions. "In about 10% of the cases I handled at any one time, financial considerations came into play," he says.

Struggling to Live
In 2009, more than a few dying people struggled to live into 2010 in hopes of preserving assets for their heirs. Clara Laub, a widow who helped her husband build a Fresno, Calif., grape farm from 20 acres into more than 900 acres worth several million dollars, was diagnosed with advanced cancer in October, 2009. Her daughter Debbie Jacobsen, who helps run the farm, says her mother struggled to live past December and died on New Year's morning: "She made my son promise to tell her the date and time every day, even if we wouldn't," Mrs. Jacobsen says.

In New York the lapsing tax spawned a major family conflict, according to one attorney. As a wealthy patriarch lay dying at the end of the year, it became clear that under the terms of the will his children would receive more if he died in 2010, while his wife (not the children's mother) stood to benefit if he died in 2009. The wife then filed a "do not resuscitate" order and the children challenged it. The patriarch lived a few days into 2010, but his estate, like Mrs. Laub's, remains unsettled given the legislative uncertainty.
Mr. Aucutt, who has practiced estate-tax law for 35 years, expects to see "truly gruesome" cases toward the end of the year, given the huge difference between 2010 and 2011 rates.

Without knowing what the estate tax is, has been or will be, advisers say it is difficult to offer counsel that applies broadly, as techniques that work under one version of the law backfire in others.

Entrepreneur Eugene Sukup: 'You don't know whether to commit suicide or keep on living and working.'

Whatever happens, advisers say people who might be affected should take a careful look at their power-of-attorney documents. Under last year's law, large gifts before death sometimes made sense, depending on the state of residence. This year they could be a terrible move.

Advisers also suggest paying attention to health-care proxies. Who will be making choices, using what factors? Anne L. Stone, an attorney in McLean, Va., has an elderly female client who recently instructed her to write a provision into a health proxy directing her children to take estate taxes into account when making end-of-life decisions.

What about the options for taxpayers who are so eager to reduce their heirs' tax burden that they are considering ending their lives? Three states—Oregon, Washington and Montana—allow versions of the practice. Oregon's law took effect in 1997 and Washington enacted a similar one in 2009. Montana's Supreme Court recently ruled that nothing in the state constitution prohibited doctors aiding patients with dying, but voters haven't yet specifically authorized it.

'Suicide Tourism'
Still, states strongly discourage what's becoming known as "suicide tourism" with elaborate residency and documentation requirements.

Similarly, some countries, such as Switzerland and the Netherlands, have long allowed physicians to aid patients in dying. But only Switzerland extends this benefit to foreigners.

Doctors and hospice professionals, meanwhile, say moving terminally ill patients to places with so-called aid-in-dying laws is usually a bad idea because it adds stress at an already difficult time. "Many people are thinking about [the estate tax], but the truth is that committing suicide is not a normal way of ending your life," says Porter Storey, vice president of the American Academy of Hospice and Palliative Medicine.

The uncertainty of the legislation is causing stress even for relatively healthy taxpayers like Art Nickel, who is 78 and lives in the Denver area. He owns a substantial sum in low-cost stock accumulated during a 35-year career as an IBM systems engineer. Like Mr. Sukup, he started with nothing and worked his way up, putting himself through the University of Wisconsin and serving in the Air Force.

"I plan to keep living," Mr. Nickel says, "but I don't know how to plan until Congress straightens this mess out."

—John D. McKinnon contributed to this article.
Write to Laura Saunders at laura.saunders@wsj.com and Mary Pilon at mary.pilon@wsj.com

[Crafty_Dog]

If it seems as if the tax code was conceived by graphic artist M.C. Escher, wait until you meet the new and not improved Internal Revenue Service created by ObamaCare. What, you're not already on a first-name basis with your local IRS agent?

National Taxpayer Advocate Nina Olson, who operates inside the IRS, highlighted the agency's new mission in her annual report to Congress last week. Look out below. She notes that the IRS is already "greatly taxed"—pun intended?—"by the additional role it is playing in delivering social benefits and programs to the American public," like tax credits for first-time homebuyers or purchasing electric cars. Yet with ObamaCare, the agency is now responsible for "the most extensive social benefit program the IRS has been asked to implement in recent history." And without "sufficient funding" it won't be able to discharge these new duties.

That wouldn't be tragic, given that those new duties include audits to determine who has the insurance "as required by law" and collecting penalties from Americans who don't. Companies that don't sponsor health plans will also be punished. This crackdown will "involve nearly every division and function of the IRS," Ms. Olson reports.

Well, well. Republicans argued during the health debate that the IRS would have to hire hundreds of new agents and staff to enforce ObamaCare. They were brushed off by Democrats and the press corps as if they believed the President was born on the moon. The IRS says it hasn't figured out how much extra money and manpower it will need but admits that both numbers are greater than zero.

Ms. Olson also exposed a damaging provision that she estimates will hit some 30 million sole proprietorships and subchapter S corporations, two million farms and one million charities and other tax-exempt organizations. Prior to ObamaCare, businesses only had to tell the IRS the value of services they purchase. But starting in 2013 they will also have to report the value of goods they buy from a single vendor that total more than $600 annually—including office supplies and the like.

Democrats snuck in this obligation to narrow the mythical "tax gap" of unreported business income, but Ms. Olson says that the tracking costs for small businesses will be "disproportionate as compared with any resulting improvement in tax compliance." Job creation, here we come . . . at least for the accountants who will attempt to comply with a vast new 1099 reporting burden.

Meanwhile, the IRS will be inundated with useless information, because without a huge upgrade its information systems won't be able to manage and track the nanodetails.

In a Monday letter, even Democratic Senators Mark Begich (Alaska), Ben Nelson (Nebraska), Jeanne Shaheen (New Hampshire) and Evan Bayh (Indiana) denounce this new "burden" on small businesses and insist that the IRS use its discretion to find "better ways to structure this reporting requirement." In other words, they want regulators to fix one problem among many that all four Senators created by voting for ObamaCare.

We never thought anyone would be nostalgic for the tax system of a few months ago, but post-ObamaCare, here we are.

[Crafty_Dog]

And here is a less technical explanation of last night's post:

THE TAX SYSTEM EXPLAINED IN BEER

 

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100...

If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7..
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers? How could they divide the $20 windfall so that everyone would get his fair share?

They realised that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a dollar out of the $20 saving," declared the sixth man. He pointed to the tenth man,"but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"
The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible   

[Body-by-Guinness]

Americans Voting with their Feet

Posted by Daniel J. Mitchell

The Financial Times reports that the number of Americans giving up their citizenship to protect their families from America’s onerous worldwide tax system has jumped rapidly. Even relatively high-tax nations such as the United Kingdom are attractive compared to the class-warfare system that President Obama is creating in the United States.

I run into people like this quite often as part of my travels. They are intensely patriotic to America as a nation, but they have lots of scorn for the federal government.

Statists are perfectly willing to forgive terrorists like William Ayres, but they heap scorn on these “Benedict Arnold” taxpayers. But the tax exiles get the last laugh since the bureaucrats and politicians now get zero percent of their foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and envy.

From the FT article:

The number of wealthy Americans living in the UK who are renouncing their US citizenship is rising rapidly as more expatriates seek to escape paying tax to the US on their worldwide income and gains and shed their “non-dom” status, accountants say. As many as 743 American expatriates made the irreversible decision to discard their passports last year, according to the US government – three times as many as in 2008. …There is a waiting list at the embassy in London for people looking to give up citizenship, with the earliest appointments in February, lawyers and accountants say. …“The big disadvantage with American citizens is they catch you on tax wherever you are in the world. If you are taxed only in the UK, you have the opportunity of keeping your money offshore tax free.”

To grasp the extent of this problem, here are blurbs from two other recent stories. Time magazine discusses the unfriendly rules that make life a hassle for overseas Americans:

For U.S. citizens, cutting ties with their native land is a drastic and irrevocable step. …t’s one that an increasing number of American expats are willing to take. According to government records, 502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don’t include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. …[T]he new surge in permanent expatriations is mainly because of taxes. …[E]xpatriate organizations say the recent increase reflects a growing dissatisfaction with the way the U.S. government treats its expats and their money: the U.S. is the only industrialized nation that taxes its overseas citizens, subjecting them to taxation in both their country of citizenship and country of residence. …Additionally, the U.S. government has implemented tougher rules requiring expatriates to report any foreign bank accounts exceeding $10,000, with stiff financial penalties for noncompliance. “This system is widely perceived as overly complex with multiple opportunities for accidental mistakes, and life-altering penalties for inadvertent failures,” Hodgen says. These stringent measures were put into place to prevent Americans from stashing undeclared assets in offshore banks, but they also make life increasingly difficult for millions of law-abiding expatriates. “The U.S. government creates conflict and abuses me,” says business owner John. “I feel under duress to understand and comply with laws that have nothing to do with me and are constantly changing — almost never in my favor.” …Many U.S. expats report being turned away by banks and other institutions in their countries of residence only because they are American, according to American Citizens Abroad (ACA), a Geneva-based worldwide advocacy group for expatriate U.S. citizens. “We have become toxic citizens,” says ACA founder Andy Sundberg. Paradoxically, by relinquishing their U.S. citizenship, expats can not only escape the financial burden of double taxation, but also strengthen the U.S. economy, he says, adding, “It will become much easier for these people to get a job abroad, and to set up, own and operate private companies that can promote American exports.”

The New York Times, meanwhile, delves into the misguided policies that are driving Americans to renounce their citizenship.

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship. …[F]rustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete. American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income. One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps. Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said. …Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad. Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

http://www.cato-at-liberty.org/2010/07/18/americans-voting-with-their-feet/

[DougMacG]

(Sounds like cognitive dissonance to me but I will put this under tax policy)
Bill Krystol mentioned this on Fox News Sunday today.

“Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.  Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5 percent.  In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.”

Chistina D. Romer and David H. Romer, ‘The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks’, American Economic Review, June 2010
---------------------------
http://www.independent.org/blog/?p=6958

Romer’s Research: Expiration of Bush Tax Cuts Will Be Highly Contractionary

By Randall Holcombe on Jul 15, 2010 in Budget and Tax Policy, Economics, Politics, Science, Taxation

Christina Romer, Chair of the President’s Council of Economic Advisers and economics professor at the University of California at Berkeley, has published an article (co-authored with David Romer) in the June 2010 issue of the American Economic Review titled “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.”  Unlike her statements in her role as an Obama adviser, this article is serious academic research, published in what is generally recognized as the world’s leading academic economics journal.

In the article, the Romers divide legislated tax changes into those undertaken in response to economic conditions and those that are “exogenous,” by which they mean changes made for other reasons.  The expiration of the Bush tax cuts clearly falls into the “exogenous” category, because it is the result of legislation passed years ago, before anybody could have anticipated the economic conditions under which they would expire.

What the Romers found is that exogenous tax increases, such as will occur with the expiration of the Bush tax cuts, “… are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.”

Here is a strong argument, based on solid academic research, for extending the Bush tax cuts, and not letting them expire, made by one of President Obama’s top economic advisers.  It will be interesting to see to what extent the insights of Christina Romer, economics professor, have an impact on what that same Christina Romer, adviser to the president, has to say in public about the impending tax rate increases.

Romer, the economics professor, says raising rates now will be “highly contractionary.”  Will Romer, the president’s adviser, speak up and tell the public that letting the Bush tax cuts expire will hamper the recovery?  Or will she toe the party line and not tell Americans the public policy implications of  her own academic research?

Another interesting sidelight here is that the opening footnote in the article says it was written with financial support from the National Science Foundation.  Here is a big opportunity for NSF-funded research to have a direct policy impact, because (1) the research has direct policy relevance to current economic conditions, and (2) because it was undertaken by somebody who actually has policy influence.

We shall see if that opportunity for an impact actually results in any policy impact.  My guess is, it won’t, and that any policy statements Romer makes on the subject will be based more on politics than on her knowledge of economics.

[Crafty_Dog]

Isn't C. Romer that chunky bureaucratic drone female who is BO's chief economist?  Fascinating that she would think this AND publish it!

[DougMacG]

"Isn't C. Romer that chunky bureaucratic drone female who is BO's chief economist?"
I recall that Clinton's chief adviser on incremental Marxism, Laura Tyson, was quite a bit cuter. 

"Fascinating that she would think this AND publish it!"
Could be that a sham-husband / co-author would not withhold the work, just speculating.  All researching economists know that excessive taxation chokes off incentives and economic activity; they only argue about the magnitude. Robert Mundell used to use the word "asphyxiating" when he designed the Reagan program.  Some economists sell their souls and go to work for the 'progressive' politicians while most of the others stay mostly silent about it while they write abstractions with complexity in obscurity for public grants, a little like the climategate system.

The question remains: why does this not either cause her to leave the administration or persuade them to change course?  I recall that Paul Volcker was quietly pushed aside for his own independent thinking.  His willingness to stand by the candidate during the meltdown was of enormous political value.  His real opinions were not.

Jumping to Geithner who was on all the shows Sunday.  We are going to extend the tax cuts for the 95% for reasons that apply better to the 5% who actually might spur investment and hire.  First the percentages are a G*d D*amned Lie by deception.  We are not taxing people; we are taxing income - and those are not the percentages.  By their own hysterical disparity percentages, the punishing tax increases will apply to the 40% of the income that would otherwise be most available for job creation.  The purpose of the punishing tax hikes on the rich is "to prove to the world" we are serious about dealing with our debt, by implementing tax policies that are known to be"highly contractionary"!

I would rather see us prove to the world that we are serious about creating optimal conditions for robust private growth and prosperity, but that is NOT their objective.