The National Debt

The Dismal Science

I have long maintained that one way to promote long term health for our national economy is to mandate the teaching of economics in school to kids as young as 12. If Americans learned from an early age that wages, jobs, taxes and the value of a dollar are all interrelated they'd be less inclined to support politicians and parties that take the easy way out of raising your  taxes without doing the hard work of cutting spending. Case in point: the formerly wealthy state of Connecticut.

The ruling class in Connecticut is trying to confiscate a whopping $1 billion plus from its citizens through yet another hike in the the state's income tax. Better yet, this one would be retroactive to January 1. If you live in Connecticut your rulers want to go back and re-tax your earnings on which you've already paid taxes.

What is even more breathtaking to realize is that until 1992, the year the state income tax went into effect, Connecticut was one of the wealthiest states in the country. Here's what happened when they started wringing the neck of the golden goose:

• Since the income tax went into effect, Connecticut has created zero new jobs. Zero. In 17 years. This according to this morning's Wall Street Journal
• As the tax rate has continued to climb, Connecticut, once a magnet for the rich, the powerful and those who wanted to be both, has had a net outflow of people to other states. If you live in Connecticut, the only thing that could be worse would be living in New York or New Jersey--the two states with the highest per capita tax burdens. 
• Since the income tax was created, government spending has exploded. Pre-tax the state was middle-of-the-road in per capita spending. Now it's in the top (or bottom?) ten.

The reason people keep electing politicians like Connecticut's governor Jody Rell or New Jersey's Jon Corzine is that they fail to see the connection between high taxes, low growth, and diminished personal opportunity. Taxes and growth are proportionately inverse. As taxes go up, economic opportunity goes down. And those on the lowest rung of the ladder hit bottom first.

On the other hand, as tax burden goes down, opportunity for all citizens rises as everyone has more money to spend, creating jobs for others so that they too can prosper. The states where voters fail to learn this lesson are places like New York, New Jersey, California, and Connecticut. On the other hand, states like Texas, which has no income tax, have weathered the recession better, putting them in a position to grow and attract new business and create new jobs as profligate states like Connecticut lose theirs.

If kids were taught this from an early age, spendthrift politicians would be a lot less likely to get their hands on your wallet. But unfortunately the schools are controlled by the teachers unions, whose members are among the biggest beneficiaries of this unrestrained spending. 

Economics may be the dismal science, but nothing's more dismal than being chased out of your home because you can no longer afford to live there. 

Just thought you might like to know.

The Class War Has Begun

The problem with the new administration is that there is just too much good material to chose from in writing these posts. So today I'll pick on their healthcare reform funding proposal.

After a number of dodges and feints, the class warfare has begun. Pres. Obama has proposed a nearly three-quarters of a trillion dollars tax increase to fund his plan for healthcare reform. There is no argument that our healthcare system needs reforming. But the President’s solution is the old leftist bromide, “soak the rich.” Pres. Obama proposes to fund this massive restructuring of healthcare by “ending tax breaks for the wealthiest 2% of Americans,” pledging along the way that taxpayers earning less than $250,000 won’t see “one single dime” of tax hikes.”

Nice try, but the numbers don’t work. Do the math:

About 4 million taxpayers have incomes above $200,000 (forget about $250,000). That’s less than 10% of all returns, and only yielded little over a half-trillion dollars in taxation in 2006. And those taxpayers account for nearly two-thirds of all taxes paid in 2006. So the President would still have a sizeable hole to fill, and not many taxpayers left to fill it with.

So, in order to fund his massive spending plan, he would have to raise taxes—again. Right now the President is proposing to raise the highest marginal tax rate to nearly 40%. Add on another two percent for the net effect of reducing the mortgage and charitable contribution deductions, for an effective top rate of 42%. That still wouldn’t yield enough taxation to fund his social programs. So, in for a penny, in for a pound. Let’s assume the President confiscates all the taxable income of everyone in the U.S. making over a half-million dollars. The result: about an extra $1 billion in taxes. That not even half of the federal budget when the Democrats took over Congress in 2006 and less than a down payment on the $4 trillion this Congress will spend in the next federal budget.

The President’s math relies heavily on the financial assumption that the economy will improve in 2009. How many of you think that’s going to happen? In fact, history shows us the opposite: that taxation is regressive. That is, the more you tax, the less taxation the government collects, because you destroy the productivity incentive (less overtime worked, fewer employees hired, less money spent on development of new products). The less you tax, the higher tax receivables go (companies and workers keep more of their own money, spend in on durable goods, growing businesses and hiring workers).

Finally the unintended consequence of reducing deductions on charitable contributions and mortgage payments for the wealthiest Americans will also have a negative impact. Americans are the most generous people on earth, contributing billions of dollars of personal wealth each year to worthy causes around the world. Mr. Obama’s plan will reduce these contributions by destroying the incentive to make them. His plan will also delay the housing recovery that he is banking on by making it less attractive for wealthy taxpayers to buy homes on a grand scale—the ones that require the most building materials, most shipping, most skilled construction workers and the most support.

The problem with leftist plans like “soak the rich” is that they sound so good. So easy. But the problems are usually a lot more complicated than simplistic solutions like the President is proposing. In this particular case, the numbers just don’t stack up. Simply put: two percent of the American taxpayers that Mr. Obama is hitching this wagon to can’t pull the load he’s piling on them.

Bottom line: if you make $200,000, or $175,000, or even $150,000, get ready. They’re coming for you next.