Fundmastery Blog

Kurt Brouwer August 20th, 2008

Politicians and government bureaucrats seem to have missed out on Economics 101.  First, when the economy is hurting, raising taxes is a bad idea.  It did not work well just prior to the Great Depression when President Hoover raised income tax rates and it won’t work well now.

Now, at a time of economic contraction in California, the state, various counties and municipalities all want to raise taxes.  Californians already struggle under one of the highest tax burdens in the nation, but that load is likely to get heavier in light of the many tax increases being proposed.  In this LA Daily News piece [emphasis added], we see some of what is coming from the state and other taxing authorities:

California Tax Bites Get Hard To Digest (Los Angeles Daily News, August 17, 2008, Troy Anderson)

Stung by one of the highest state tax rates in the nation, Californians soon could be paying even more if officials and voters approve an array of new bond measures and taxes now under consideration.

Already on the November ballot are nearly $17 billion in statewide bonds, ranging from $9.95 billion for a high-speed passenger train system linking Southern California to the Bay Area, to $5 billion that would give motorists cash rebates for buying fuel-efficient vehicles.

Do we really need a $10 billion high speed train?  And, if so, does anyone believe it will cost $10 billion? Do we need to spend $5 billion to give motorists cash rebates to buy a Toyota Prius?  People who want a fuel efficient car will get one anyway, with or without the rebate. And, does anyone think car dealers won’t game the system by raising prices on the most popular models that qualify for the rebate?

The Los Angeles Unified School District is asking voters to approve a $7 billion bond measure for school construction and charters. The city of Los Angeles is seeking a $36-a-year parcel tax on all properties to fund anti-gang programs.

Los Angeles County’s Board of Supervisors is trying to place the Metropolitan Transportation Authority’s proposed half-percent sales-tax increase on the ballot.

The Los Angeles Community College District is seeking $3.5 billion in bonds for construction projects.

Meanwhile, Gov. Arnold Schwarzenegger has proposed raising the statewide sales tax by 1 percent for three years.

“What’s happening is the taxpayers are under assault like we’ve never seen before,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “We have not seen an assault on taxpayers of this magnitude since the tax revolt leading up to Proposition 13 three decades ago.

“Our elected leadership, at both the state and local levels, is pushing California into the `coveted’ position of the highest-tax state in America. If that happens, it will be economic suicide for the Golden State.” Last week, the Washington, D.C.-based Tax Foundation released a report that found California’s state-local tax burden currently is the sixth-highest in the nation at 10.5 percent of per-capita incomes - costing Golden State taxpayers an average of $4,752 a year.

…But Paul McIntosh, executive director of the California State Association of Counties, said he doesn’t think the state’s tax burden is so high.

And with the economic downturn, a $15 billion state budget deficit and declines in anticipated revenue from property and sales taxes, McIntosh said elected officials statewide have no choice but to propose tax increases and bond measures to continue providing government services.

“The fact is the state has not invested in its infrastructure in the last 25 or 30 years, so California counties have stepped forward and proposed tax increases to fund specific transportation and flood-control projects,” McIntosh said.

It is indicative of the bureaucratic mindset that the only solution offered is always to raise taxes.  Do they ever consider cutting expenditures?  No.  Do they put money aside during good times — such as the 2003 - 2007?  No.

And, get this.  This gentleman claims we have not spent anything on infrastructure in the past 25-30 years.  Is that accurate?  I seem to recall all kinds of measures to improve highways, bridges, airports.  Don’t those count as infrastructure.  This piece from the Oakland Tribune in March, 2007, lists just some of the billions that have been spent in the name of infrastructure:

VOTERS back in November made it clear that California’s infrastructure needs fixing. In fact, voters backed $42.7 billion worth of public works bonds in the election.

Plans are under way to assign how these bonds should be used. Yet how many times in the past has public works money been wasted? The San Francisco-Oakland Bay Bridge reconstruction — a project with $5 billion in cost overruns — is an example…

I think it is fair to say Californians have spent plenty on infrastructure and on government in general.  But, whether we have gotten our money’s worth is a different question.  And, as this enlightened LA Supervisor pointed out in the LA Daily News piece, when we are having hard times, it just makes no sense to raise taxes:

“You cannot tax yourself into prosperity,” said Supervisor Michael D. Antonovich… “Taxes don’t create jobs. It’s not right to rob the working people of their hard-earned money they need to support themselves and their families.

“Instead of the government providing better services in giving taxpayers a fair return for their taxes, they want to tax people more. They should utilize the dollars they currently have for government services and programs.”

Since 1989, Los Angeles County voters and elected officials have approved more than 300 city, county, school district and special district bonds, assessments and parcel taxes.

In the last two decades, Los Angeles has received voter approval for bonds totaling $2.5 billion. Voters have approved $11.2 billion in LAUSD bonds and an additional $2.25 billion in Los Angeles Community College District bonds.

In the past six years, voters statewide have approved more than $42 billion in bonds for schools, water systems, the environment, stem-cell research and facilities.

“With all the budgetary problems going on and the increased pressures on local governments and school districts, debt is going to be an important issue to look at in the future,” said Glenn Byers, the county’s assistant treasurer and tax collector.

And taxpayer advocates warn of the potential toll.

“We pay taxes on our phone bills. We pay taxes on our electric bill. Parcel taxes, hotel taxes - just about everything you do seems to be taxed,” said California Taxpayers Association spokesman David Kline.

“Many of these taxes, taken individually, seem to be for good causes, but the cumulative effect is they have made California a very expensive state in which to live and do business. Voters have to take that into account when they have a chance to vote on some of these taxes and bonds.

“Something might be marketed as a great idea to fight gangs, expand public transportation or improve local schools, but they have to weigh the benefits against the long-term costs of paying all these additional taxes.”

I think we all know that many of these programs are created with good intentions and run by people of good will — generally.  But, no matter how good the cause, all these programs have to be paid for by taxpayers.  And, they raise the level of taxation permanently because government programs almost never go away.  State tax revenues have gone up very nicely over the past several years, unfortunately state spending has gone up much more.

And, the billions in bonds that have been floated for projects — no doubt worthwhile too — all have to be paid back.  Principal and interest.  In some cases the investment will be worth it, but in many cases, it will not.  Or, even if the project is a good one — such as the SF - Oakland Bay Bridge — cost overruns of $5 billion really add up.  As the late Illinois Senator, Everett Dirksen, quipped, “A billion here and a billion there.  After a while, it adds up to real money.”

I believe our political leaders are busily — again with good intentions in many cases — taking us down the line to a fiscal train wreck that will derail, if not destroy, the California Dream.

• Business , Economy , Geopolitics , Money , Personal Finance , income taxes
• Comments(2)

Kurt Brouwer August 18th, 2008

Source: American

The Path to Prosperity (The American Magazine, August 7, 2008, Amela Karabegovic and Alan W. Dowd)

A new report confirms that low taxes, limited government, and flexible labor markets help to spur economic growth.

There are times when common sense is not so common. We may be in one of those times, which is why a new report on the power of economic freedom is so important.

Common sense tells us that low taxes, limited government, and flexible labor markets will help to spur economic growth. The Fraser Institute’s 2008 Economic Freedom of North America (EFNA) report offers a striking, yet unsurprising, picture of the benefits that flow from such policies.

In 2005, the most recent year for which data are available, Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas-states with consistently strong records of promoting economic freedom-had an average per capita GDP that was more than $4,300 above the U.S. average. Their total growth from 1981 to 2005 was nearly 20 percentage points higher than the U.S. average.

In the latest EFNA index, Delaware is the top-ranked state or province in all of North America while Texas is tied for second with the Canadian province of Alberta. And for good reason: Delaware has the smallest size of government at the subnational level and ranks first among U.S. states on key taxation measures; Texas ranks first in labor-market freedom at the all-government level and has a state top marginal income tax rate of zero. Delaware and Texas also rank high in the categories of government transfers and subsidies as a percentage of GDP at the all-government level.

By comparison, West Virginia, Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island-states with low levels of economic freedom-had an average per capita GDP that was more than $4,300 below the U.S. average. Their total growth from 1981 to 2005 was 10 percentage points below the U.S. average.

Again, this is predictable: all of these states rank in the bottom half of the nation on taxation at the all-government level, labor-market freedom at the state/local level, and size of government at the all-government level.

The benefits of policies that promote economic freedom extend far beyond good scores and bragging rights. For instance, a one-point increase in economic freedom results in an increase of $32.13 in venture capital investment per capita; an increase in the number of patents by 8.2 per 100,000 population; and an increase of 4.2 percent in the growth of sole proprietorships.

The encouraging news is that most states have maintained a high degree of economic freedom and embraced polices that nurture economic freedom. In fact, the 2008 EFNA report found that 20 states have improved their level of economic freedom since the last report, with Louisiana experiencing the greatest increase…

This is a case where putting in a blogging acronym, RTWT [that is, read the whole thing] is not a cliche.  This article is important and well worth reading.  The principles outlined in the article work at the national level, the state level and the local level.

If you improve and enhance economic freedom, more prosperity ensues.  If you restrict economic freedom by increasing taxes or laying on more bureaucratic red tape, you inevitably reduce prosperity.  Our economy is resilient, yet it should also be clear that people gain prosperity faster in areas with more economic freedom.

I hope to return to this in more depth soon, but for now, RTWT.

• Business , Economy , Geopolitics , Investing , Money , Personal Finance , income taxes
• Comments(0)

Kurt Brouwer August 1st, 2008

Source:  Carpe Diem

• Business , Economy , Geopolitics , Money , income taxes
• Comments(0)

Kurt Brouwer July 22nd, 2008

Raising taxes on the rich or trying to ’soak’ the rich seems to be a popular idea now. There have been proposals to add surtaxes to high income earners, to raise taxes back to the rates prevalent in the 1990s and so on.In a previous post (see Does Soaking The Rich Actually Work?), we pointed out that it is difficult to ’soak’ the rich by raising income taxes because they have ways to defer or delay the receipt of income. It should be no surprise to readers of this blog, that when you raise tax rates, investors change their behavior accordingly. For example, when capital gains tax rates go up, investors slow down realization of gains. When capital gains tax rates go down, investors speed up realization of gains. Hmmm. Is there a correlation? Yes, there is.

It’s important to remember that, as opposed to ordinary income from salaries and bonuses, investors have far more control of when and if they will realize a gain on a sale of stocks, mutual funds, real estate or a business. And, this is not just an issue for the ‘rich.’ In recent years, most of the households reporting capital gains have been under $100,000 in annual income. For more on this see What Happens When You Raise Capital Gains Tax Rates?.

And, when the government tries more aggressive tax laws as a means of soaking the rich, we find that there are unintended consequences. A perfect example of this is the Alternative Minimum Tax (see Congress Patches Alternative Minimum Tax), which was enacted in 1969 to tax the very rich.

Unfortunately, it was never indexed for inflation so now it soaks millions of taxpayers who are definitely not rich by any reasonable standard.

In this fascinating presidential election, we again find the rich targeted as a source of income tax revenues to cure whatever fiscal ills the Federal government has.  Essentially, this type of political rhetoric has to do with using the tax code to redistribute wealth from the so-called rich into the hands of government. This piece from the Wall Street Journal [registration may be required; emphasis added] starts off the discussion as to why these terms such as ‘fair’ share or the ‘rich’ are misleading:

Source: Wall Street Journal

Their Fair Share (Wall Street Journal, July 21, 2008)

Washington is teeing up “the rich” for a big tax hike next year, as a way to make them “pay their fair share.” Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it’s going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.The nearby chart [see above] shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.

…The way to soak the rich is with low tax rates, and last week’s IRS data provide more powerful validation of that proposition…

 

Fortunately, Americans seem to be quite immune to rhetoric that appeals to class and income envy.  And, they also understand that using the tax code to redistribute income is not the way to improve the economy.  These charts from a recent Gallup survey bear out this point:

For the full results of the Gallup Poll, go here.

The Largest Tax Increase in 60 Years

When you hear politicians discuss letting the ‘Bush’ tax cuts expire, you may not realize exactly that doing so would result in the largest income tax increase we have seen in 60 years. The genesis of this huge tax increase would be the termination of the tax cuts of 2001 and 2003. If those tax cuts fade into history, then income tax rates will skyrocket. And, estate taxes will hit millions more Americans when they die. Here is a taste of what’s to come if the tax cuts expire:

• A huge boost in tax rates on dividends
• A large jump in capital gains rates
• The marriage tax penalty would be back
• The child tax credit would be reduced
• Estate tax exemptions would be cut drastically to $600,000

This piece from the Wall Street Journal (registration may be required; emphasis added) spells out what will happen if the tax cuts expire [emphasis added]:

Source: Wall Street Journal

The Coming Tax Bomb (Wall Street Journal, April 8, 2008, John F. Cogan & R. Glenn Hubbard)

…This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson’s surcharge to finance the war in Vietnam and the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. The increase would push total federal government revenues relative to GDP to 20%.

Why this large tax increase? The tax code changes enacted in 2001 and 2003 are scheduled to expire at the end of 2010. If they do, statutory marginal tax rates will rise across the board; ranging from a 13% increase for the highest income households to a 50% increase in tax rates faced by lower-income households. The marriage penalty will be reimposed and the child credit cut by $500 per child. The long-term capital gains tax rate will rise by one-third (to 20% from 15%) and the top tax rate on dividends will nearly triple (to 39.6% from 15%). The estate tax will roar back from extinction at the same time, with a top rate of 55% and an exempt amount of only $600,000. Finally, the Alternative Minimum Tax will reach far deeper into the middle class, ensnaring 25 million tax filers in its web…

This tax increase is being touted as the fiscally responsible thing to do because government needs the money. First, when it comes to spending our money, I do not see much in the way of fiscal responsibility from our political leaders in Washington — on either side of the aisle. In fact, they seem to know about as much about fiscal responsibility as my eight-year-old does. Maybe less.

Second, if obtaining higher tax revenues is the goal, then let’s figure out the best way to get them.  Unfortunately, as we have seen, raising tax rates is not the best way to raise tax revenues because taxpayers find many creative ways to avoid taxes when they feel they are too high.  Instead, the best and the most painless way to boost tax revenues is to boost economic activity.  As economic activity grows, income tax revenues grow commensurately without any increase in rates.  Most politicians seem to find this concept hard to understand, yet the key activity politicians should focus on is how to get the economy going, not how to get government growing.

Via: Steve Janachowski

• Economy , Geopolitics , Money , Personal Finance , income taxes
• Comments(8)