There is a revolution occurring in this country that is evident from the trends that we see in the current race for the White House. And, I don't mean Donald Trump. The revolution is taking place in the young, as evidenced by their support for Bernie Saunders. He is preaching what they want to hear.
I don't think he has much of a chance to unseat Hillary as the Democrats nominee for the Presidential race, but the trend is evident. The young want a security blanket wrapped around them and they're going to get it. Probably not this time, but just wait a few years.
The millenniums are growing older and they are starting to get involved in the political process. Where, before they didn't have a significant impact, their voice will be heard in the future. Some of the Socialist sentiment will wane with time, but not enough of it to sidetrack the basic thrust. They have been raised at home and educated in the liberal public schools and colleges to expect that some one should provide them with security and that the government should step in a solve all their problems.
One payer medical plans, heavily subsidized college admissions, high minimum wages, liberal work rules, such as extended maternity leave and other perks that this generation is demanding will happen. The trend is there now and I don't see any reversal coming. Think about what has happened since the great depression of the 30's. The nation has adopted more and more security blanket programs that resulted in greater and greater government involvement in the everyday lives of the people. Social Security, Medicare, Medicaid, food stamps, the involvement of the federal government in education and a host of other "entitlements" and regulations dreamed up by a mostly Democratic congress and President.
They will attempt to pay for all of this by "taxing the rich" and try to even the playing field for American workers by enacting high tariffs on imports. The problem is, they don't review history to see what those kind of policies have produced in the past. They should read about the counterproductive steps that were taken during the great depression to get an idea of history should be teaching us.
The trend might be, and probably will be, interrupted temporarily by the election of a conservative. But, that will only be a hitch in the general trend.
It is true that the economic picture is dire, to say the least, for the young people entering the job market today, even those who graduated from college. The global market has resulted in huge loss of the middle class jobs that are the backbone of the thriving economy. We are living in dynamic economic times. The industries and job skills that were pertinent one day might very well be obsolete the next. So, instead of our public schools and colleges teaching the skills that are marketable in this global economy, they are spouting a philosophy that encourages the growth of government and the increased involvement in the lives and businesses of the citizens.
I think the future of the American economy will look more and more like what we see in Europe. There are a host of academics who see that as a good thing. And, they have influenced a whole generation of students to think along the same lines. The future will see that social programs will consume more of the federal budget than ever. It is projected that in 15 to 20 years the social programs and interest on the federal debt will take over 85% of the budget, leaving the balance for all other programs such as defense and infrastructure development and maintenance.
The millenniums and their children will have to face the rising debt that is accumulating. The federal debt now stands at 19 trillion dollars, that's TRILLION. But, as Dr. Ben Carson points out, if you take into account unfunded obligations of the government such as government pensions and retirees health benefits, the actual national debt is closer the 200 trillion dollars. I don't know how the millenniums can have all, or even some, of the things they're demonstrating for without throwing the country into bankruptcy. In fact, it seems to me, we've already reached, if not passed, a critical point and have to cut back somehow. And, I'm not sure there is a way out of this spiral of ever growing debt. I don't think the folks in Washington have the desire or even the ability to really tackle it.
Thursday, February 25, 2016
Sunday, February 14, 2016
Flat Taxes and other Thoughts
Some thoughts on the flat tax:
It occurred to me, after reviewing some of the arguments for and against the true flat tax as espoused by most of the candidates that believe in it, is the idea that the gross income of individuals, as reported on W2 and/or 1099 forms, and corporations, as reported on their yearly financial reports, would pay a flat tax on income with no other deductions. One of the benefits of such a tax system would be the almost complete elimination of the IRS into the lives of individuals and simplify the preparation of taxes for everyone. Not much in the way of calculations are required for the IRS.
For the individual, because the are no deductions, taxes could be withheld from their pay, or other types of income reported on the 1099 forms and they would have no paperwork to file at all. Corporations could pay their taxes each quarter based on their quarterly financial statements as reported publicly for the SEC. Capitol gains would not be taxed nor need to be reported. Of course that will be a tax break for the upper 1% as they derive a great portion of their income from capital gains and dividends as shown in Figure 1. The chart doesn't differentiate between capital gains and dividends, but I would guess that most of the income is from dividends. Eliminating the capital Gains tax would have some impact on federal revenue, depending on the year. Capital Gains generate an average of 5.2 percent of the governments income, though that can swing wildly, as it has in the past, where it varied from 2 percent in 1957 to 12.8 percent in 1986.
Figure 1
The holes in such a system, of course, are a lot like the problems facing the tax man today. Quite a bit of earnings are "off the books" and not reported. That's especially true for one man businesses ran by an individual whose income is not reported on any form the government can get their hands on. Having no employees, or only day workers paid off in cash with no reporting, they will continue to fall through the cracks. I'm not sure what can be done about that with any system. A larger problem for the tax man has not changed. Privately held businesses, not matter how big, don't have to submit financial reports for the public and have no motivation to show good earnings. If fact, just the opposite - they have to pay taxes on the net income. They have every reason to hide income. The owners of such businesses routinely purchase items for their personal use and charge them to the business. Cars, major household appliances, vacations masking as business trips, etc. are some of the common dodges that are used to enrich the owner(s) and avoid paying personal income tax on profits. In some type of businesses the owner is paid in cash and does not report the income. Such practices allow them to take less in reported salaries, also avoiding the tax man. Any one who thinks the IRS is going away because of the flat tax is sadly mistaken.
For publicly held incorporated businesses, the SEC on one hand and the stock holders on the other, would not look kindly to corporations hiding their income. It's not to their advantage to report low earnings for a period of time.
To try to envision what that means in terms of what the true flat tax should be in this case is kind of iffy. I suppose the best measure of what the tax base for such a system would be is the Gross Domestic Income, which is in the neighborhood of 18 trillion dollars. I'm not sure, but it seems that GDI does not include income from capital gains. The Figure 2 shows how GDI and GDP are calculated. They end up being virtually the same.
Figure 2
I'm assuming that the flat tax applies only to corporate and personal incomes, with the other taxes remaining roughly the same.
The distribution of revenue to the federal government from all sources for 2014 is shown in Figure 3.
.
Figure 3
It is clear that the largest contributors to the federal coffers are the income tax and the payroll tax, which is mainly Medicare and Social Security, and is likely to remain about the same. Income taxes, corporate and individual, make up 57% percent of the total federal income in 2014
Considering that the budget is somewhere around 4 trillion dollars, a tax would have to produce about 2.8 trillion dollars in revenue. Payroll taxes, which include Medicaid and Social Security, have their own withholding rates separate from income tax rates. The flat tax rate then would have to be set at about 16%. That would constitute a decrease in taxes for all the large corporations and highly paid individuals. The maximum tax rate for corporations today is 35%.
So what is the tradeoffs of the flat tax?
On the plus side, the filing of income taxes for both individuals and corporations would become much simpler. Indeed, for the individual, they could be completed on a post card.
The much lower tax rate on dividends and highly paid individuals, the argument goes, would liberate funds for investing in new products and industries as well expansion of current businesses, thus creating many new jobs. Something we desperately need. However, just how valid is that argument. Just how much of the additional wealth will be plowed back into the economy in such a way as to create the kind of jobs we need. Will it induce them to buy more stuff, which creates demand for products? Considering that the tax break would only benefit the top 20% of taxpayers, in fact a little over 80% goes to the top 1%, that's not too likely. After all, they're already wealthy enough to afford pretty much everything they want. I suspect a lot of it will go back into stocks and bonds which have no effect on the desirable outcome. For instance, if stock in Apple is bought with that extra cash, the effect might be to drive up Apple's share price. That will not create a single job at Apple. The things that will create jobs at Apple are selling more IPads or other Apple products. Same can be said for any other manufacturing company. Only investment in start-up companies or expansion of present companies will have the desired effect. I suspect that the immediate effect of a lower tax rate on the wealthy would be for the Rich to get Richer---which doesn't mean that the poor get poorer. Of course, you have the counter argument that money is mobile. A lower tax rate among the wealthy will encourage the money to stay home and not flee to a foreign country. That is an important consideration. It would encourage investment in industrial expansion and new enterprises because the lower tax rate wouldn't punish success.
The lower tax rate on corporations would make the American made products more competitive in the global market. That would create jobs as companies ramped up production to meet larger world demand for American products.
The proponents also state that not taxing capitol gains would provide a stimulus for investing and the creation of jobs with the growth of industry. This also would also have the effect of making American industry more competitive on the global market. That's not clear.
Figure 4 depicts the change in the GDP as correlated to the maximum capital gains tax
Figure 4
There really doesn't seem to be a hard correlation of the growth in the GDP and the maximum capital gains tax. But, what the chart does indicate is that a high capital gains tax is not good for the economy as shown in the mid seventies and then again in the late 80's to mid 90's. It can be noted that through the 50's until 1970 a maximum rate of 25% was matched by a wildly fluctuating changes in the growth of the GDP, but on average remained roughly the same. The subsequent lowering of the capital gains taxes starting in 2000 did not result in any noticeable growth in the GDP, in fact it followed the tax rate down where it bottomed out during the recent recession at virtually zero growth.
Privately owned businesses would not get that benefit of a simpler tax return, as they still would have to file their returns pretty much the same as they do now. The only change is the tax rate would be that same for all levels of income.
However, there is a lot of reasons for incorporating a business, even if all the "stock" is held by one individual, family or investment firm. Have you noticed that your dentist is probably incorporated.
The biggest argument advanced against such a system is the fact that the lower and even middle classes will have to pay more taxes than they do now and the upper classes would pay less. In fact, the lower 50% of earners would now have to pay taxes, where before they paid none or very little. This also applies to smaller corporations that make less in profits than the big guys. Also, the congress would not be able to encourage individuals and corporations to invest in their pet projects, such an investment in solar energy, ethanol or climate change initiatives, by offering a tax break or tax incentives to participants. Not so sure that isn't a plus. Of course a mountain of tax breaks and incentives is one of the reasons there is such a large tax code. It's also why large corporations with million of dollars in net income have avoided, at times, paying any taxes at all. The hard part would be to keep congress from doing that anyway, flat tax or not. Congress seems to always find ways to fund their pet projects.
To even the playing field for the lower wage earners a modified flat tax has been forwarded where a small number of deductions are allowed for the individual. Perhaps mortgage interest rates, charity, and dependents. None for corporations. That would help the lower earning taxpayers but, result in some increase in the tax rate for higher income brackets. Not much, I would think. After all, the bottom 50% pay very little of the governments revenue anyway in our present system. This keeps the taxes on the lower earning individual at zero or near it but, keeps the corporate taxes, which now range from 15% to 35%, at around 16%. Good and bad for corporations, depending on their earning.
Another thought not directly related to the flat tax:
The Federal spending in 2014 is shown in Figure 5. If you refer to the distribution of tax revenue in Figure 3, to no ones surprise we spent more than we took in. And it's only got worse since.
Figure 5
What is striking is that the expenses that are nominally covered by the payroll taxes make up 48% of the total budget while the taxes to support these programs only make up a about than 34%. The rest is funded from the income and corporate taxes.
To give an idea of how the distribution of tax revenue has progressed over the last few years, the following is offered in Figure 6. It is disturbing to look at how payroll tax revenue have grown with respect to all other tax sources.
Figure 6
Income tax revenue has remained rather steady for the period shown, while corporate taxes have fallen and payroll taxes have continued to rise. Spending in 2014 devoured 48% of the total federal revenue and it's still climbing. The baby boomers are entering the door for receiving Social Security and Medicare benefits in great numbers. And, their life span is much longer than their predecessors. The Ponzi scheme called Social Security is in trouble. The pyramid that is basis for the Social Security program is becoming inverted.
If that isn't a clear message that congress had better attack the problem presented by the currently entitled social programs, I don't know what will.
It occurred to me, after reviewing some of the arguments for and against the true flat tax as espoused by most of the candidates that believe in it, is the idea that the gross income of individuals, as reported on W2 and/or 1099 forms, and corporations, as reported on their yearly financial reports, would pay a flat tax on income with no other deductions. One of the benefits of such a tax system would be the almost complete elimination of the IRS into the lives of individuals and simplify the preparation of taxes for everyone. Not much in the way of calculations are required for the IRS.
For the individual, because the are no deductions, taxes could be withheld from their pay, or other types of income reported on the 1099 forms and they would have no paperwork to file at all. Corporations could pay their taxes each quarter based on their quarterly financial statements as reported publicly for the SEC. Capitol gains would not be taxed nor need to be reported. Of course that will be a tax break for the upper 1% as they derive a great portion of their income from capital gains and dividends as shown in Figure 1. The chart doesn't differentiate between capital gains and dividends, but I would guess that most of the income is from dividends. Eliminating the capital Gains tax would have some impact on federal revenue, depending on the year. Capital Gains generate an average of 5.2 percent of the governments income, though that can swing wildly, as it has in the past, where it varied from 2 percent in 1957 to 12.8 percent in 1986.
The holes in such a system, of course, are a lot like the problems facing the tax man today. Quite a bit of earnings are "off the books" and not reported. That's especially true for one man businesses ran by an individual whose income is not reported on any form the government can get their hands on. Having no employees, or only day workers paid off in cash with no reporting, they will continue to fall through the cracks. I'm not sure what can be done about that with any system. A larger problem for the tax man has not changed. Privately held businesses, not matter how big, don't have to submit financial reports for the public and have no motivation to show good earnings. If fact, just the opposite - they have to pay taxes on the net income. They have every reason to hide income. The owners of such businesses routinely purchase items for their personal use and charge them to the business. Cars, major household appliances, vacations masking as business trips, etc. are some of the common dodges that are used to enrich the owner(s) and avoid paying personal income tax on profits. In some type of businesses the owner is paid in cash and does not report the income. Such practices allow them to take less in reported salaries, also avoiding the tax man. Any one who thinks the IRS is going away because of the flat tax is sadly mistaken.
For publicly held incorporated businesses, the SEC on one hand and the stock holders on the other, would not look kindly to corporations hiding their income. It's not to their advantage to report low earnings for a period of time.
To try to envision what that means in terms of what the true flat tax should be in this case is kind of iffy. I suppose the best measure of what the tax base for such a system would be is the Gross Domestic Income, which is in the neighborhood of 18 trillion dollars. I'm not sure, but it seems that GDI does not include income from capital gains. The Figure 2 shows how GDI and GDP are calculated. They end up being virtually the same.
I'm assuming that the flat tax applies only to corporate and personal incomes, with the other taxes remaining roughly the same.
The distribution of revenue to the federal government from all sources for 2014 is shown in Figure 3.
.
Figure 3
It is clear that the largest contributors to the federal coffers are the income tax and the payroll tax, which is mainly Medicare and Social Security, and is likely to remain about the same. Income taxes, corporate and individual, make up 57% percent of the total federal income in 2014
Considering that the budget is somewhere around 4 trillion dollars, a tax would have to produce about 2.8 trillion dollars in revenue. Payroll taxes, which include Medicaid and Social Security, have their own withholding rates separate from income tax rates. The flat tax rate then would have to be set at about 16%. That would constitute a decrease in taxes for all the large corporations and highly paid individuals. The maximum tax rate for corporations today is 35%.
So what is the tradeoffs of the flat tax?
On the plus side, the filing of income taxes for both individuals and corporations would become much simpler. Indeed, for the individual, they could be completed on a post card.
The much lower tax rate on dividends and highly paid individuals, the argument goes, would liberate funds for investing in new products and industries as well expansion of current businesses, thus creating many new jobs. Something we desperately need. However, just how valid is that argument. Just how much of the additional wealth will be plowed back into the economy in such a way as to create the kind of jobs we need. Will it induce them to buy more stuff, which creates demand for products? Considering that the tax break would only benefit the top 20% of taxpayers, in fact a little over 80% goes to the top 1%, that's not too likely. After all, they're already wealthy enough to afford pretty much everything they want. I suspect a lot of it will go back into stocks and bonds which have no effect on the desirable outcome. For instance, if stock in Apple is bought with that extra cash, the effect might be to drive up Apple's share price. That will not create a single job at Apple. The things that will create jobs at Apple are selling more IPads or other Apple products. Same can be said for any other manufacturing company. Only investment in start-up companies or expansion of present companies will have the desired effect. I suspect that the immediate effect of a lower tax rate on the wealthy would be for the Rich to get Richer---which doesn't mean that the poor get poorer. Of course, you have the counter argument that money is mobile. A lower tax rate among the wealthy will encourage the money to stay home and not flee to a foreign country. That is an important consideration. It would encourage investment in industrial expansion and new enterprises because the lower tax rate wouldn't punish success.
The lower tax rate on corporations would make the American made products more competitive in the global market. That would create jobs as companies ramped up production to meet larger world demand for American products.
The proponents also state that not taxing capitol gains would provide a stimulus for investing and the creation of jobs with the growth of industry. This also would also have the effect of making American industry more competitive on the global market. That's not clear.
Figure 4 depicts the change in the GDP as correlated to the maximum capital gains tax
Figure 4
There really doesn't seem to be a hard correlation of the growth in the GDP and the maximum capital gains tax. But, what the chart does indicate is that a high capital gains tax is not good for the economy as shown in the mid seventies and then again in the late 80's to mid 90's. It can be noted that through the 50's until 1970 a maximum rate of 25% was matched by a wildly fluctuating changes in the growth of the GDP, but on average remained roughly the same. The subsequent lowering of the capital gains taxes starting in 2000 did not result in any noticeable growth in the GDP, in fact it followed the tax rate down where it bottomed out during the recent recession at virtually zero growth.
Privately owned businesses would not get that benefit of a simpler tax return, as they still would have to file their returns pretty much the same as they do now. The only change is the tax rate would be that same for all levels of income.
However, there is a lot of reasons for incorporating a business, even if all the "stock" is held by one individual, family or investment firm. Have you noticed that your dentist is probably incorporated.
The biggest argument advanced against such a system is the fact that the lower and even middle classes will have to pay more taxes than they do now and the upper classes would pay less. In fact, the lower 50% of earners would now have to pay taxes, where before they paid none or very little. This also applies to smaller corporations that make less in profits than the big guys. Also, the congress would not be able to encourage individuals and corporations to invest in their pet projects, such an investment in solar energy, ethanol or climate change initiatives, by offering a tax break or tax incentives to participants. Not so sure that isn't a plus. Of course a mountain of tax breaks and incentives is one of the reasons there is such a large tax code. It's also why large corporations with million of dollars in net income have avoided, at times, paying any taxes at all. The hard part would be to keep congress from doing that anyway, flat tax or not. Congress seems to always find ways to fund their pet projects.
To even the playing field for the lower wage earners a modified flat tax has been forwarded where a small number of deductions are allowed for the individual. Perhaps mortgage interest rates, charity, and dependents. None for corporations. That would help the lower earning taxpayers but, result in some increase in the tax rate for higher income brackets. Not much, I would think. After all, the bottom 50% pay very little of the governments revenue anyway in our present system. This keeps the taxes on the lower earning individual at zero or near it but, keeps the corporate taxes, which now range from 15% to 35%, at around 16%. Good and bad for corporations, depending on their earning.
Another thought not directly related to the flat tax:
The Federal spending in 2014 is shown in Figure 5. If you refer to the distribution of tax revenue in Figure 3, to no ones surprise we spent more than we took in. And it's only got worse since.
Figure 5
What is striking is that the expenses that are nominally covered by the payroll taxes make up 48% of the total budget while the taxes to support these programs only make up a about than 34%. The rest is funded from the income and corporate taxes.
To give an idea of how the distribution of tax revenue has progressed over the last few years, the following is offered in Figure 6. It is disturbing to look at how payroll tax revenue have grown with respect to all other tax sources.
Income tax revenue has remained rather steady for the period shown, while corporate taxes have fallen and payroll taxes have continued to rise. Spending in 2014 devoured 48% of the total federal revenue and it's still climbing. The baby boomers are entering the door for receiving Social Security and Medicare benefits in great numbers. And, their life span is much longer than their predecessors. The Ponzi scheme called Social Security is in trouble. The pyramid that is basis for the Social Security program is becoming inverted.
If that isn't a clear message that congress had better attack the problem presented by the currently entitled social programs, I don't know what will.
Friday, February 12, 2016
The Democrats Debate in Wisconsin
I watched the Democrats debate in Wisconsin between Hillary and Bernie. I came to several conclusions.
The very fact of the debate shows that the DNC is now concerned with the Bernie Saunders rise in the poles and his crushing win in NH. Originally the Clinton forces wanted few debates. She had an overwhelming lead in the poles and there was no reason for her to confront her rivals for the nomination. Hillary is their choice and they will do everything they can to get her elected. Now we have four more debates scheduled.
It is clear that the Clinton machine was in full swing. The audience for the debate, which was held at the University, was heavily populated with Hillary supporters. Considering that the debate was held on a college campus, where Bernie has his greatest support, you would expect a different setting. But the Clinton organization marshaled their forces and the faithful were there in spades.
Hillary is a good debater. She has her facts and figures at her finger tips and can recall them at will. Her experience on that type of platform serves her well.
She clearly out shown Bernie on foreign affairs. She quoted all the agreements she negotiated for Obama and was well aware of the world situation, especially in the middle east. Her term as Secretary of State served her well in this arena.
Bernie seems to have the better of her on the domestic front, especially on those economic issues so close to the left wing of the party. Free health care, free college, forgiving student debt were all received well with the audience.
The moderators avoided asking the really tough questions that are at the heart of the opposition against Hillary. But, the format, because there were only two on the stage, allowed a much deeper and expansive description of the candidates position on their policies in response to the questions that were asked.
It is clear the Hillary has tied herself to the Obama legacy. She is proud of the nuclear agreement she negotiated with Iran, will defend the Affordable Care Act even against Bernie's universal , one payer system. She is in agreement with Obama's actions in the middle east and would likely do more of the same.
The very fact of the debate shows that the DNC is now concerned with the Bernie Saunders rise in the poles and his crushing win in NH. Originally the Clinton forces wanted few debates. She had an overwhelming lead in the poles and there was no reason for her to confront her rivals for the nomination. Hillary is their choice and they will do everything they can to get her elected. Now we have four more debates scheduled.
It is clear that the Clinton machine was in full swing. The audience for the debate, which was held at the University, was heavily populated with Hillary supporters. Considering that the debate was held on a college campus, where Bernie has his greatest support, you would expect a different setting. But the Clinton organization marshaled their forces and the faithful were there in spades.
Hillary is a good debater. She has her facts and figures at her finger tips and can recall them at will. Her experience on that type of platform serves her well.
She clearly out shown Bernie on foreign affairs. She quoted all the agreements she negotiated for Obama and was well aware of the world situation, especially in the middle east. Her term as Secretary of State served her well in this arena.
Bernie seems to have the better of her on the domestic front, especially on those economic issues so close to the left wing of the party. Free health care, free college, forgiving student debt were all received well with the audience.
The moderators avoided asking the really tough questions that are at the heart of the opposition against Hillary. But, the format, because there were only two on the stage, allowed a much deeper and expansive description of the candidates position on their policies in response to the questions that were asked.
It is clear the Hillary has tied herself to the Obama legacy. She is proud of the nuclear agreement she negotiated with Iran, will defend the Affordable Care Act even against Bernie's universal , one payer system. She is in agreement with Obama's actions in the middle east and would likely do more of the same.
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