Friday, November 07, 2008

Re: The Obama Market Slump

While we have made the economic mistake of having progressive income tax rates (a flat rate consumption tax would create an unheralded economic boom), we have at least kept the social security program in the ball park of a retirement program. Once it becomes purely a welfare program, it will have lost its purpose for being and should be canceled. Taxing the successful to refund Joe's retirement savings is bad "medicine" for the successful and for Joe.

The situation reminds me of our "highway trust funds". Taxes on gasoline were deposited to these trusts as "user fees"; those who bought gas paid for the roads; fair enough. Later, politicians misappropriated these funds and used them for more and more "other things". In NC transfers gasoline tax revenues were by hook and crook used to pay for preschools.

I support government funding for every child to attend preschool but I do not support taking the money out of the highway trust fund. Doing so is a breech of public trust. In all things we need honesty. History well demonstrates that governments typically fail due to corruption. Having the votes to misappropriate funds does not make the act moral.

As a result of the theft of funds from the NC highway trust fund, this state that accesses high gasoline taxes can no longer maintain good roads; indeed, this state is now in a scramble, trying to keep new promises made to parents of preschool kids. Had the money not been misappropriated, the sharp decline in road tax revenue would have had little effect on the rest of the state budget. If the trust fund was still low, the problem would be easy to fix as the public would understand that increasing the gasoline tax is necessary for good roads.

Across the US, local and state governments are begging for an infrastructure bail out bill to rebuild decrepit bridges. The reason is that the misappropriation of highway funds has become a common occurrence.

The facts are clear, republican and democrat administrations and legislatures have fallen into the routine practice of purposely spending more money than is available. Most of the time, these politicians are bailed out by revenue growth. When tough times hit, we all pay a steep price.

The current tax structure is an abomination. It subsidizes wasteful spending on monster homes, monster cars, polluted air, stupid investments, .... (add a few dozen more items to the list if you like). Cliches become cliches because there is truth therein. The conservative mantra that the problem is not too little taxes but too much spending is true.

As far as Joe Six Pack is concerned, the worst thing the government can do to him is to teach him that he can leave work early to have a six pack because the government will pick up the tab. It is vitally important that he or at least his children learn that higher paying jobs are available to those who seek them earnestly.

Yes, in America, people do wish they could earn $350,000 per year and, yes, in America they can. However, the combination of higher income tax rates, higher social security tax limits, higher capital gains taxes and higher estate taxes will literally cause millions of Americans to cut their education short, to work fewer hours or both.

The data are clear, in the years after the Bush tax cuts, the revenues to the government went up substantially. The sharp increase happened even though low income earners got the bigger percentage breaks. Despite the constant false telling by liberal politicians and their media friends, the Bush tax cuts cut taxes to the working class more than to the upper income class. It is also true that total revenues went up because total earnings went up sharply. The Laffer curve is fundamental, until the maximum is reached, lower taxes increase incomes enough to increase total tax revenues even at the lower rates.

One of many fundamental truths ignored by liberals is that if we tax $350,000 incomes more, we will have fewer $350,000 incomes (in real dollars) and if we subsidize Joe Six Pack income levels we will have more people earning at Joe Six Pack levels (again in inflation adjusted dollars). Is that really what you want for your children and grand children?

My last point is that my purpose for getting into the numbers was to show that in many cases it makes sense for individuals to withdraw funds from 401-K plans before their tax rates go up. Your response reminded me of something that I left out, which is that the tax increases will prove to be much higher than the bounce from 25% to 28%, from 28% to 31% or even from 35% to 39.6%. As I mentioned the tax code is an abomination. Many of us support getting rid of thousands of loopholes. Obama supports getting ride of some of these loopholes. The combination of raising rates and eliminating tax deductions or credits will be a bitter pill for high income earners to swallow. Believe it or not, in today's mobile society, some folk who make their $350,000 off Internet pursuits will choose to move elsewhere.

Instead of shrinking the economic pie and making the pieces more equal, we should grow the economic pie so that everyone gets a larger piece. We should eliminate the interest deduction on massive homes. We should not even consider bailing out GM or Ford. (The pundits keep talking about the massive job losses if GM goes bankrupt when the exact opposite is true.) We should stop subsidizing scores of government solutions. We should stop telling lies (such as energy supplies are running out) just to advance our political agenda. We should stop taking money from highway trust funds to start preschools. We should not tax the creation of wealth but we should encourage it.

Cast all your anxiety on him because he cares for you. I Peter 5:7

Jack Miller
1825 Curraghmore Road
Clemmons, NC 27012

On Fri, Nov 7, 2008 at 1:16 PM, Al wrote:

Income tax has, from its first inception, been a way to spread the wealth. It has always been progressive, only the rates have changed in its nearly 100 year existence and these changes have been to make it include more and more income.See for a brief history on all types of taxes the federal has used.

Let's look at someone who pays the 35% rate. It starts at $357,700 This is almost six times the median male wages of $45,113. The first man currently pays $125,195 in income taxes and $6,324 in SS for a total of $131,519. With a tax rate increase to 39.6% and no SS cap, he now pays $141, 649 in income tax and $22177.40 for a total of $163,826. This is a reduction in his net income of $22177 or 6.2%.

Now let's look at Joe Six Pack, who at the median male 2007 US income of $45,113 is paying a 25% income tax rate ($11,278) and SS of $2,797 for a total of 31.1% or $14,065. Under the new rate Joe would get a $1,024 tax reduction and his rate would drop to 28.9%.
Tax brackets are based on IRS tables for net income and Joe Six Packs salary is really a gross number from census estimates. I can't speak for anyone else, but if I were Joe, I'd be happy to trade places with the person making a $357,700 annual income.