Monthly Archives: August 2011

It is often assumed that those who defend corporations and the free market while opposing taxation are “coddling the super-rich,” and therefore, must be super-rich themselves.  This is false:  True free-marketeers are often not super-rich, as the free market produces both success and failure.  On occasion, those that succeed try to guarantee their future success in market, not by their own merit, but by their connections to government.  This system is no longer capitalism.  It is crony capitalism, or corporatism, or lemon socialism.

Before the peasants decide to destroy the engine of the economy, let’s set some things straight.  The American economy became the world leader through free market principles, but there is a clear distinction between the free market and what the American economy is now.  Let’s go after the source of our malaise: our 65,000-page tax code.  Generally speaking, and sans sweetheart deals, corporations pay a 35% tax on their profits; corporate taxes, however, comprise only 15% of federal tax revenues.  This disparity shows the absolute inefficacy of the corporate tax.

I support full-scale repeal of the corporate tax.  I know I’m mostly alone on that.  Abolishing the corporate tax would provide the proverbial “shot in the arm” this country needs.  To accomplish this, I believe the burden should eventually be shifted to a flat sales tax; on that point I know I’m not alone.  In the meantime, I believe America is ready for an overhaul of our tax system; I also believe, on this point, both Left and Right can find points to philosophically coalesce.  First, let’s establish some maxims.

Corporations ARE People

Last week on the campaign trail, Mitt Romney got himself into a bit of trouble by proclaiming, “Corporations are people.”  Text of the encounter is below, with video here:

ROMNEY: We have to make sure that the promises we make — and Social Security, Medicaid, and Medicare — are promises we can keep. And there are various ways of doing that. One is, we could raise taxes on people.

AUDIENCE MEMBER: Corporations!

ROMNEY: Corporations are people, my friend. We can raise taxes on—

AUDIENCE MEMBER: No, they’re not!

ROMNEY: Of course they are. Everything corporations earn also goes to people.

AUDIENCE: [LAUGHTER]

ROMNEY: Where do you think it goes?

AUDIENCE MEMBER: It goes into their pockets!

ROMNEY: Whose pockets? Whose pockets? People’s pockets! Human beings, my friend. So number one, you can raise taxes. That’s not the approach that I would take.

I’m no Romney fan, for various and unrelated reasons.  On this issue, however, Romney is spot-on.  According to the 1819 Supreme Court case Dartmouth College vs. Woodward, and upheld in the 1886 case Santa Clara County v. Southern Pacific Railroad, corporations have the same rights as people and are protected equally by the Fourteenth Amendment.  There should be no other way here; otherwise, the government could run over the rights of corporations by fiat, letting some businesses fall while supporting some arbitrarily, nationalizing them as they see fit.  Oh, wait.

Essentially, Romney channeled the economist Milton Friedman, who famously asked:   ”Can you tax business?  What’s business?  There’s no business to be taxed.  There are people; only people can pay taxes… So when you talk about a tax on business, it has to be paid by somebody.  Either it’s paid by the stockholder, or it’s paid by the customer, or it’s paid by the worker.”  Due to this “hand-me-down” economic effect, it has been found that “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

Efforts to squash both corporate free speech (1st Amt.) and equal protection under the law (14th Amt.) have ramped up in recent years, culminating famously with the Citizens United case, in which freedom won.  Class warfare of this kind is typical in a recessionary period, but let’s be equal in our judgement:  If corporations aren’t people, then neither are unions.  Furthermore, it is counterintuitive for pro-labor protestors rally in favor of corporate taxes, when corporate taxes punish labor the most; economists Kevin Hassett and Aparna Mathur compute, “A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

Just as corporations have the same rights as people, corporations are subject to the same laws as people.  They should be treated freely and equally; their rights should be respected, but when they break the law, they should be punished.  On this, both Left and Right can agree.  It is important to remember that, under a free society, the outcomes are not going to be equal, or freedom does not exist.  Channeling Benjamin Franklin, Milton Friedman once said, “The society that puts equality before freedom will have neither.  The society that puts freedom before equality will have a great measure of both.”

A Free Economy Benefits Us All

This is painfully obvious to anyone who has observed the history of nations.  A consequentialist view of the economic systems of the world’s most successful nations will find they were rooted in freedom.  All socialist nations eventually end at the same place.  Few American politicians would call themselves socialists, although many policies they support are exactly that.

A transaction-based view also proves the virtue of the free market:  The free market is not a zero-sum game.  People exchange money for goods and services freely, both believing they got the better deal at the end of the day.  As much as I hate paying $4 for a gallon of milk, I’d be hard-pressed to find a cow, milk it, pasteurize the milk, and bottle it for less than $4.  Nobody forced me to buy the milk, and nobody forced the farmer to sell it.  Transactions taking place within the free market benefit us all.  Interventions in the free market, however, do not.

Common Ground

Which brings us back to corporate taxation.  It may seem there is no common ground to be reached between the Left, who forever want to raise taxes, and the Right, who never do.  I even wrote about the importance of not compromising over tax increases, particularly during an economic recession, in my last post.  Let me highlight some points the Right could concede over to lower or abolish the corporate tax:

1.  Close loopholes and end subsidies. This is not for revenues, but for principle.  Equal protection under the law means equal treatment under the law.  We have no kings, neither in government nor in corporate management.  Corporate favoritism swings Left and Right depending on who’s in charge.  That’s how Obama’s Czar-CEO buddy Jeff Immelt’s GE paid $0 in taxes in 2010; he helped write the 2009 Stimulus Bill.  Both Left and Right ignore corruption when their issues are at stake; to be consistent, the Right must simultaneously stand up against subsidizing the oil industry and green energy initiatives.  These benefits create distortions and false incentives for shell firms that contribute little to the actual economy.

2.  Normalize the income tax rates. Again, this is not for revenues, but for principle.  Raising taxes is unnecessary:  According to IRS figures, a 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion.  That is roughly 10% of  the current annual budget deficit.  A higher income tax will not solve our budgetary problems.

Furthermore, taxing productivity, and punishing investments in American business, will not get our economy moving again nor bring jobs back to America.  The income tax, to be discussed in my next post, must be addressed.  The income tax is separate from the corporate tax, capital gains tax, tax on charitable donations, and the carried interest tax.  These additional taxes are in fact “double taxation,” as income has already been taxed once; therefore, these earnings (and donations) should not be taxed at or above the same rate as income, if at all.  A net-zero income tax, without loopholes and benefits, would provide a predictable – and equitable – playing field for all wage-earners.

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First, let me apologize for being delinquent posting on this website.  It’s not that I don’t have a lot to say or that I haven’t been paying attention, it’s just difficult to convey my full thoughts and feelings properly on this forum.  I also believe my time spent typing and your time spent reading could probably be spent more effectively to other ends, particularly when I repeat myself.  I don’t pretend to have all the answers, but I do want to voice some of my concerns and apprehensions in this post, and promise more analysis as time ticks on.

I watched the debt ceiling debate that ended last week and was, in the end, disappointed with all parties involved: the President, the Republicans, the Democrats, the pundits, and the American people.  Everyone believes that certain stalwarts of America are “guaranteed,” and we collectively are “too big to fail,” when indeed, we are not.

We continue to be duped by optical games in Washington; I believe the debt ceiling debacle and “negotiations” were merely a well-choreographed sequence of events, designed to ingratiate both parties.  Suffice it to say, their efforts failed, considering our recent downgrade from AAA to AA+ by Standard&Poor’s for the first time in our nation’s history, and our continuing descent into a Double Dip Recession, which may someday be referred to as a Depression.

Looking Back

Since 1950, revenues have averaged 18% of the annual Gross Domestic Product, while spending has been 20%.  This 2% gap is the annual deficit, which, through the years, has added to a $14.6 trillion debt, the largest in the history of mankind.  This week, our public debt grew to equal 100% of annual GDP, something we have not seen since 1947.  Also this week, our government increase our debt limit by $2.2 trillion, a larger amount than the entire public debt in 1982.  While it is true both President Obama and George W. Bush are to blame, keep in mind that Obama’s monthly deficits are exceeding Dubya’s annual deficits, and that Obama’s annual deficits are exceeding Bill Clinton’s annual budgets.

Some suggest revenues are the problem.  Indeed, Obama’s only solution throughout the debt crisis was a tax hike on the wealthiest Americans.  So let’s explore that.  According to IRS figures, a 45% rate on incomes of more than $1 million would generate $31 billion, while an even more progressive tax, with rates of 50%, 60%, 70% on incomes of $500,000, $5 million, $10 million respectively would generate an added $133 billion.  That is roughly 10% of  the current annual budget deficit.  Revenues are, therefore, not the problem; our addiction to spending is.

If none of the above makes any sense to you, let me put it to you in layman’s terms:  assume you have a $15,000 debt. You go to the bank and get a $2,200 extension by promising to cut a mere $20 bucks a month from your planned spending spree, and promising to find $20 more a month six months down the road.  You promise to cut $3,500 from your spending over the next ten years.  The problem is, you plan to increase your spending by 7% annually for the next ten years, which means you’ll come back, begging for more in 18 short months.

This lifestyle was determined to be unsustainable by Standard&Poor’s, who wanted to see a $4,000 (or $4T in real terms) decrease in debt, by any means necessary.  We could not deliver it.  We, therefore, deserve what we are getting.

Points of Contention

The buzz word during the debate was “compromise,” a lovely idea.  On certain issues, however, there is no room for compromise.  The Left has a pro-growth agenda for government.  They regard the American economy as the supplier of government revenue, not as the supplier of American prosperity, and therefore want the economy to grow, but not more than enough to fund their government programs.  This is echoed among the Left in their calls for “shared sacrifice.”  They ask not for contributions to society – not for innovation and investment in the marketplace – but for sacrifice, for government revenue.

The Left points out repeatedly that the top 1% of wage earners control 21% of wealth.  The top 1% of wage earners also pay 40% of our nation’s taxes.  For the Left, this 2-to-1 ratio is not enough.  Class warfare is the fallback answer for the Left, who are rooted in the politics of greed and envy.  They insist on a “corporate jet tax,” rolling back the tax break that was part of Obama’s stimulus plan, to raise revenues.  Of note, it would take 5,000 years for the corporate jet tax to pay off one year of current deficit.

The psyche of the Left believes every problem this nation faces requires a government solution, which requires more spending, which requires more revenue.  In search for more revenue, they insist on ignoring facts.  There is a direct inverse correlation between federal spending and federal revenues, relative to GDP:

When spending increases, revenues decrease, due to government action in the middle of a poor economy.  This doubles down on our debt problem.  So what levels of each are prudent in cutting deficits?  A 2009 Harvard case study shows the best way to slash deficits, according to the 107 instances studied, is to CUT both spending AND taxes. What’s more, their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus.  The Left still refuses to believe this, insisting the government did not do enough, and is now calling for a federal “infrastructure bank,” a la Latin America, to fund the creation of jobs.

Which brings us to yet another fallacy: the Left believes the government can create jobs, truly the a product of a creative imagination.  In answering the question, “What can government do to create jobs?” the Left give one of two answers:  1) create federally funded stimulus projects; or 2) give companies incentives to invest in Research & Development.  According to a recent White House report, every 2009 Stimulus job cost taxpayers $278,000 a piece.  This added cost is actually causing the private sector to shed jobs.  So stimulus is rendered a useless waste of taxpayer funds.

Secondly, giving companies “incentives” to create jobs is often achieved with “loopholes,” that often go to promising “millionaires and billionaires,” something Obama and the Left just spent the better part of our Summer crying about.  The Left, therefore, proposes closing loopholes in order to open others, to reward their friends.  It should be noted the Right is guilty of this as well.

In the past, I have supported incentive-based infrastructure spending, albeit on a smaller scale, for natural gas development and the like.  At this point, we simply cannot afford anything of the sort.  The culmination of these types of demand-side programs have distorted the marketplace long enough, and have created a crisis of confidence in the American economy, which is precisely why our federal government was downgraded.

The solutions are two-fold.  First, and most obviously, we need to slash spending: Medicare/Medicaid comprise the largest portion of federal spending, at 23%; Social Security and Defense spending are tied for second at 20% of federal spending a piece.  Among these programs, nothing is safe.

Secondly, we need to normalize the tax code to restore economic reality to the marketplace.  Call it corporatism, crony capitalism, or a social market: the stock market should not depend on public policy nearly as much as it does.  We need to roll back Leviathan’s tentacles by closing the loopholes, lowering the corporate tax, and setting a flat income tax rate.  Such actions would restore confidence in the marketplace by instilling some predictability in the public environment, and inevitably, raise revenues.

Looking Ahead

I feel at this moment I am living life in slow-motion, reading the news like I’m sifting through a history book.  What does the end of our fiscal illusion mean for the future of our country?  I want to see the next page; I want to see what happens next, and I can’t turn the page fast enough.

I have this sickening feeling that I’m watching my country that, not long ago, faced a crossroads, and decided to start down a road it no longer has the capacity to turn away from.  Instead of dealing with our simultaneous economic, fiscal, and leadership crises, our nation diverts attention.  That is why I am disappointed with the American people; we are collectively ruining this country’s global standing, and, eventually, our heightened standard of living.

I believe, at best, we may be entering our own “Lost Decade.”  Obama and I agree on that point, although we disagree on solutions.  For the immediate future, our AAA credit rating is gone; based on the five countries that have faced the same fate, it will take anywhere from 9 to 18 years to gain the AAA rating back.  What generations before us have enjoyed, generations to come may not.  The prospect that our nation’s best years are behind us, that our arrow has crested, is frightening to say the least.  The poor choices we make now leave our children picking up the pieces of a broken economy.

Our cultural outlook is equally bleak.  Like Greece, a statist, entitlement mindset has settled over our sardonic nation, and while this is easily associated with the Left and their party, the Right has stood idly by, allowing it to happen. I therefore associate myself less with a political party now that I ever have, and instead associate with ideas and philosophies.  You can call it libertarianism, or austerity, or whatever:  it’s time to starve the beast.  Although that would directly impact my current income, I’d rather protect my country and my children from inevitable collapse.  Cutting government to its rightful size will take immense courage; sitting by and watching a train run off the tracks does not.

I believe, ultimately, our nation’s individual rights are at stake.  As Ronald Reagan said in his 1961 gubernatorial inauguration, “Freedom is a fragile thing and is never more than one generation away from extinction. It is not ours by inheritance; it must be fought for and defended constantly by each generation, for it comes only once to a people. Those who have known freedom and then lost it have never known it again.”  To quote the philosopher Jim Morrison, “The future’s uncertain and the end is always near.”

It doesn’t matter anymore if I agree with what people do with their liberty.  As long as freedoms do not infringe on the freedoms of another, in accordance with the oft-cited-herein Harm Principle, a positive step for individual rights of any sort is one I will celebrate.

Our debt problem infringes upon these rights in ways other than economic.  Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, stated that, despite the debt ceiling deal, the greatest threat to our long term national security is still our public debt, the majority owner of which is China.  Their purchase of U.S. Treasury bonds enabled our reckless spending, and the illusion of a strong economy, which we no longer have.

Facing down a dire situation, individual rights are the only thing our government should protect.  Any programs not protected by Article 1, Section 8 should be immediately voted on by the Congress, and any offices in the Executive Branch outside the parameters of Article 2 should be immediately challenged by the Congress.

Albeit drastic, the numbers don’t lie.  There is no middle ground to be reached between facts and otherwise, between sanity and the alternative.  As far as I’m concerned, there is no negotiation over America’s future, and there are no guarantees.  The most likely scenario we face is a two-fold rise in interest rates, as the Federal Reserve has been the majority purchaser of America’s bad financial debts, which we gleefully passed onto China.  We therefore face a period of inflation unseen in decades.  The worst case scenario we face is China calling our debt, followed by our subsequent default, whereby America undergoes an involuntary return to anarcho-libertarianism, without capitalism, with the American people too ignorant and hubristic to believe it’s happening to us.

I hope I’m wrong, because we are better than this.  I hope we have received the wake up call necessary to change direction.  I’ll be watching to see what happens, of course.  Regarding freedom and finance, we are still the greatest country in the world.  We have faced down worse perils, and the words of Abe Lincoln in 1861 ring true today:  ”We shall nobly save, or meanly lose, the last best hope of earth.”  My optimism is couched in Benjamin Franklin’s earlier warning, in 1787: that we have a Republic, “If we can keep it.”

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