Tag Archives: Economics

IBD Editorial: Obama’s Big Lie On Taxes

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A large and ongoing problem with our public discourse is the dishonesty and disinformation foisted on an unsuspecting public. That’s certainly the case when it comes to taxes.

Sometimes, politicians claim things that just make you turn your head and say, “huh?” That’s what happened last Sunday when President Obama, in a pre-Super Bowl interview with Fox TV’s Bill O’Reilly, said the following:

“I didn’t raise taxes once. I lowered taxes over the last two years. I lowered taxes for the last two years.”

It was a great quote, very dramatic and emphatic. It was also quite wrong. Tax watchdog groups and think tanks have looked at the record and found just the opposite — that Obama has raised taxes numerous times, and that taxes did in fact rise during the first two years of his presidency.

Indeed, in 2009 one of the first things Obama did after entering office was to slap a 156% increase in the federal tax on tobacco — about 62 cents a pack — to pay for the children’s health insurance program.

Whether you think this is a good idea or not, it is a tax.

Please recall the president’s solemn promise in the 2008 campaign that families earning less than $250,000 a year wouldn’t see “any form of tax increase.” As Americans for Tax Reform (ATR) noted, the median income of smokers is “just over $36,000.”

But the granddaddy of them all was the health care bill that the president signed into law last March.

ObamaCare, the Heritage Foundation calculates, “contains 18 separate tax increases that will cost taxpayers $503 billion between 2010 and 2019.” And at least seven of those tax hikes are clear violations of the president’s vow not to raise taxes on the middle class.

So the president not only raised taxes more than once, he raised them massively to help fund his unpopular takeover of health care.

In further assessing Obama’s tax record, one also must look at intent. The White House and Democrats in Congress had explored the possibility of letting all the Bush tax cuts expire last year, which would have been a huge tax hike on all Americans.

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Reaganomics: What We Learned

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From today’s Wall Street Journal:

By ARTHUR B. LAFFER

For 16 years prior to Ronald Reagan’s presidency, the U.S. economy was in a tailspin—a result of bipartisan ignorance that resulted in tax increases, dollar devaluations, wage and price controls, minimum-wage hikes, misguided spending, pandering to unions, protectionist measures and other policy mistakes.

In the late 1970s and early ’80s, 10-year bond yields and inflation both were in the low double digits. The “misery index”—the sum of consumer price inflation plus the unemployment rate—peaked at well over 20%. The real value of the S&P 500 stock price index had declined at an average annual rate of 6% from early 1966 to August 1982.

For anyone old enough today, memories of the Arab oil embargo and price shocks—followed by price controls and rationing and long lines at gas stations—are traumatic. The U.S. share of world output was on a steady course downward.

Then Reagan entered center stage. His first tax bill was enacted in August 1981. It included a sweeping cut in marginal income tax rates, reducing the top rate to 50% from 70% and the lowest rate to 11% from 14%. The House vote was 238 to 195, with 48 Democrats on the winning side and only one Republican with the losers. The Senate vote was 89 to 11, with 37 Democrats voting aye and only one Republican voting nay. Reaganomics had officially begun.

President Reagan was not alone in changing America’s domestic economic agenda. Federal Reserve Chairman Paul Volcker, first appointed by Jimmy Carter, deserves enormous credit for bringing inflation down to 3.2% in 1983 from 13.5% in 1981 with a tight-money policy. There were other heroes of the tax-cutting movement, such as Wisconsin Republican Rep. Bill Steiger and Wyoming Republican Sen. Clifford Hansen, the two main sponsors of an important capital gains tax cut in 1978.
What the Reagan Revolution did was to move America toward lower, flatter tax rates, sound money, freer trade and less regulation. The key to Reaganomics was to change people’s behavior with respect to working, investing and producing. To do this, personal income tax rates not only decreased significantly, but they were also indexed for inflation in 1985. The highest tax rate on “unearned” (i.e., non-wage) income dropped to 28% from 70%. The corporate tax rate also fell to 34% from 46%. And tax brackets were pushed out, so that taxpayers wouldn’t cross the threshold until their incomes were far higher.

Changing tax rates changed behavior, and changed behavior affected tax revenues. Reagan understood that lowering tax rates led to static revenue losses. But he also understood that lowering tax rates also increased taxable income, whether by increasing output or by causing less use of tax shelters and less cheating on taxes.

Moreover, Reagan knew from personal experience in making movies that once he was in the highest tax bracket, he’d stop making movies for the rest of the year. In other words, a lower tax rate could increase revenues. And so it was with his tax cuts. The highest 1% of income earners paid more in taxes as a share of GDP in 1988 at lower tax rates than they had in 1980 at higher tax rates. To Reagan, what’s been called the “Laffer Curve” (a concept that originated centuries ago and which I had been using without the name in my classes at the University of Chicago) was pure common sense.

There was also, in Reagan’s first year, his response to an illegal strike by federal air traffic controllers. The president fired and replaced them with military personnel until permanent replacements could be found. Given union power in the economy, this was a dramatic act—especially considering the well-known fact that the air traffic controllers union, Patco, had backed Reagan in the 1980 presidential election.

On the regulatory front, the number of pages in the Federal Register dropped to less than 48,000 in 1986 from over 80,000 in 1980. With no increase in the minimum wage over his full eight years in office, the negative impact of this price floor on employment was lessened.

And, of course, there was the decontrol of oil markets. Price controls at gas stations were lifted in January 1981, as were well-head price controls for domestic oil producers. Domestic output increased and prices fell. President Carter’s excess profits tax on oil companies was repealed in 1988.

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Social Security is Broke

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In his soporific State of Union address, President Obama refused to address any serious entitlement reforms. No talk of eliminating deficits can be serious if the fast growing segment of the budget, which already represents over half of the overall budget, entitlements, is not addressed.

Social Security is the entitlement most in need of immediate reconstruction. The program was created by Franklin Roosevelt in an effort to secure votes for the Democrats. Roosevelt believed that his party would be able to scare seniors by claiming that Republicans intended to cut their benefits. Roosevelt was right, and Democrats have run on that message for over eighty years.

However, reality is finally catching up with the government’s mandatory Ponzi scheme. The Associated Press reports:

The Congressional Budget Office said Wednesday that Social Security will pay out $45 billion more in benefits this year than it will collect in payroll taxes, further straining the nation’s finances. The deficits will continue until the Social Security trust funds are eventually drained, in about 2037.

First, there is no trust fund. In Helvering v. Davis, the Supreme Court affirmed that Social Security was constitutional because the funds were not specially earmarked. Therefore, Social Security taxes were, and still are, part of the government’s general revenue, like income tax receipts.

Second, take a look at the definition of a Ponzi scheme:

A form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

Social Security is the world’s largest Ponzi scheme. Future generations are treated as ‘investors,’ who are really just paying off older investors. Ponzi schemes fail when the schemer cannot find new investors. Social Secrity is in the red because the economy tanked and there is not enough new money coming in to pay old ‘investors.’

There are solutions to this problem. The most effective answer is to privatize Social Security. However, using the Roosevelt playbook, Democrats have demonized this option.

In reality, Social Security has been privatized in the United States before, and it works:

The original Social Security Act allowed for counties to opt out of the government program. Seeing the writing on the wall, Galveston County, Texas opted out of the program in 1981. Galveston voters passed the opt-out provision by a 3-1 margin. Their solution should be the model that Social Security is remodeled after.

The system goes as follows:

Our plan, put together by financial experts, was a “banking model” rather than an “investment model.” To eliminate the risks of the up-and-down stock market, workers’ contributions were put into conservative fixed-rate guaranteed annuities, rather than fluctuating stocks, bonds or mutual funds. Our results have been impressive: We’ve averaged an annual rate of return of about 6.5 percent over 24 years. And we’ve provided substantially better benefits in all three Social Security categories: retirement, survivorship and disability.

The results:

Upon retirement after 30 years, and assuming a 5 percent rate of return – more conservative than Galveston workers have earned – all workers would do better for the same contribution as Social Security:

  • Workers making $17,000 a year are expected to receive about 50 percent more per month on our alternative plan than on Social Security – $1,036 instead of $683. [See the Figure.]
  • Workers making $26,000 a year will make almost double Social Security’s return – $1,500 instead of $853.
  • Workers making $51,000 a year will get $3,103 instead of $1,368.
  • Workers making $75,000 or more will nearly triple Social Security – $4,540 instead of $1,645.
  • Galveston County’s survivorship benefits pay four times a worker’s annual salary – a minimum of $75,000 to a maximum $215,000 – versus Social Security, which forces widows to wait until age 60 to qualify for benefits, or provides 75 percent of a worker’s salary for school-age children.

In Galveston, if the worker dies before retirement, the survivors receive not only the full survivorship but get generous accidental death benefits, too. Galveston County’s disability benefit also pays more: 60 percent of an individual’s salary, better than Social Security’s.

Two government studies of the Galveston Plan – by the Government Accountability Office and the Social Security Administration – claim that low-wage workers do better under Social Security. However, these studies assumed a low 4 percent return, which is the minimum rate of return on annuities guaranteed by the insurance companies. The actual returns have been substantially higher.

Even in 2010, after the stock-market meltdown of 2008, the Galveston plan is light years ahead of Social Security.

With this record of success, the government did the only logical thing. In 1983 Congress passed a law making it illegal to opt-out of Social Security. Instead, Democrats offer serious solutions, like Rep. Anthony Weiner, who said, “[Obama] was then followed by a guy who was bumming us out, I felt like I just needed a drink when I was done with Paul Ryan,” of Rep. Ryan’s response to the State of the Union.

Democrats have demagogued entitlement reform for two generations. The Left builds scores of dependent constituency groups, then accuses conservatives proposing “reckless budget cuts.” The underlying belief supporting this tactic is that the Left can turn artificial groups of citizens against each other, with over half of the electorate on the receiving end of government largess. Driven by a lust for power, Democrats have erected a monstrous federal state that is simply unsustainable. As Paul Ryan said last night the United States is at a “tipping point,” from which there can be no turning back.

Paul Ryan Tells the Truth About Obamacare

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Rep. Paul Ryan is a full-fledged star in the GOP. As one of the so-called ‘young guns‘ in the party, he has made a name for himself as a champion of individual liberty. Through his Road Map, Paul Ryan has put together a well though out plan to lead the United States back to fiscal sanity.

In the following video, Ryan examines the absurd claim that Obamacare will save the country money, and begins the case to repeal the Left’s monstrosity:

Strictly Right Radio episode 77

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On this Strictly Right, Ari examines the Alinskyite tactics of the Left, the failure of socialized medicine in the UK, why people lie about Ronald Reagan, and much more.

Listen Online:

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Moral Hazard

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Last Sunday’s New York Times featured an article by David Segal entitled “Is Law School a Losing Game?“. In the piece, Segal profiles a number of law school graduates whom have been burred in debt, with little to no chance of paying back their debtors. The article is meant to be an exposé on the true value, or lack their of it, of a law school degree.

One recent graduate interviewed was Michael Wallerstein. Wallerstein graduated from Thomas Jefferson law school with a $250,000 debt, and few job prospects. His account of the time he spent at law school is strewn with stories of studies abroad, in Prague and France, and renting of a spacious apartment, all paid for with borrowed money.

However, Wallerstein had no desire to accept a true entry level position, and instead prefers to work temporary jobs and spend time with his fiancée. In fact, Wallerstein’s fiancée does not want to see her husband-to-be accept a “time-gobbling corporate law job.” Why? Because they “like hanging out together” she says.

When confronted with the fact that he could be earning more money if he had kept his job as a research assistant, not to mention be without any outstanding debts, Wallerstein says he’s still happy he went to law school:

It’s a prestige thing. I’m an attorney. All of my friends see me as a person they look up to. They understand I’m in a lot of debt, but I’ve done something they feel they could never do and the respect and admiration is important.

Wallerstein, a perfect example of the over educated NINJA generation (No Income, No Job, No Assets), says he doesn’t worry about his debt. He ignores creditors, threats of law suits, and updates on his credit score. How does he plan on getting above water? A bailout:

Bank bailouts, company bailouts — I don’t know, we’re the generation of bailouts. And like, this debt of mine is just sort of, it’s a little illusory. I feel like at some point, I’ll negotiate it away, or they won’t collect it.

The complete abrogation of any personal responsibility. Who could have seen this coming? And who could blame Wallerstein? The government has been bailing out companies that are “too big to fail,” why not assume that law school graduates are too big to fail?

Interestingly, the Times piece singles out federally backed student loans as “the gasoline that fuels the system” of massively increasing tuition fees. When consumers, students, are removed from the cost, they borrow with impunity, never stopping to ponder the consequences. Or, students expect their enormous debts to just disappear, courtesy of the tax payer.

How about an article extolling the virtues of a prudent individual, who works hard and saves his money, all to have it stolen by the government to bailout the person who went to law school without the means to pay?

Neatly tucked away in the 2,000 page Obamacare bill was a provision expanding student loans. With the government funding an ever increasing number of students, how long will it be before the government does decide to bailout underwater students?

If people have no “skin in the game,” they have no incentive to chose what would appear to be the common sense solution. If you can go to law school for half a decade, and be bailedout by the poor schlub who chose to go to work, why say no?

When the government bailsout companies that engaged in risky behavior because they are “too big to fail,” they encourage more bad behavior, evidently not just from corporations that are “too big to fail.”

Canada: Another Tax Cut Success Story

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According to Neil Reynolds of the Globe & Mail “when it comes to setting corporate tax rates, you get to choose between expansive revenue with lower rates or restrained revenue with higher rates.”

Canada’s Conservative Finance Minister, Jim Flaherty, has brought his country’s corporate tax rate down from 21% to 16.5% over the past six years, with a final cut scheduled, bringing the rate down to 15%. With the rhetoric on the Left about “corporate giveaways,” you would not be blamed for thinking that Minister Flahrety’s rate reductions were an irresponsible reduction of government revenues, especially during a recession.

The facts paint a very different story. Corporate tax revenues are higher today than when Minister Flaherty began slashing rates. In 2002, with the old rates intact, revenue from corporate taxes was $24.2 billion; 2003, $22.2 billion; 2004, $27.4 billion; 2005, $29.9 billion. In 2010 corporate tax revenues were $30.3 billion, equaling the average of the past nine years. Additionally, corporate tax revenues provided 13.9% of government income in 2010, compared to the past decade’s average of 12.6%.

This should not come as a surprise. The argument over tax rates and tax revenues has been settled. To a point, lower tax rates result in higher revenues, whereas higher rates result in lower revenues. The static modeling used by many economists is premised upon “ceteris paribus” – with all other things being equal. Static modeling is constantly used to justify claims that tax rate reductions will result in lower government revenues. In reality, all other things are never equal.

In a dynamic economy, all events are interrelated, and changes in one secotr can, and usually do, effect all other sectors. Therefore, when tax rates are raised the government consumes capital that could have been invested in a business that could create more jobs. A more profitable business, with higher earnings and more employees results in larger tax revenues. Additionally, lower tax rates act as a disincentive to sheltering capital. When tax rates are lower, people conclude that it is more sensible to invest in a thriving economy, increase their capital, and thus pay more in taxes. Conversely, when tax rates are increased, less money is spent in the private sector, money becomes idle, and tax revenues decrease.

The evidence of the success of tax cuts is overwhelming. The numbers on income taxes are irrefutable. From a research paper I wrote on the flat tax:

In 1921, before the Harding-Coolidge tax cuts the top income tax rate was over 70% , while government revenue was $700million and the federal government’s real revenue growth rate was -9.2%. Following the tax cuts, the top marginal rate was reduced to 25% , resulting in the government revenue growth rate rising to 0.1% and government revenue to $1.2 billion . In 1961 the top marginal income tax rate was over 90%, while government revenue was $90billion with a revenue growth rate of 2.1%. Following the Kennedy tax cuts, the top marginal rate was reduced to 35%, government revenue boosted to $155 billion and the growth rate had gone up to 9% . In 1980 the top marginal rate was 70%, government revenue was $550 billion with a growth rate of -2.8%. President Reagan cut the top marginal rate to 28%. The result was an increase in government revenue to $1.4 trillion , with the growth of government revenue rate rising 6.4%, up to 3.6%.

Results were similar under President Clinton when capital gains tax rates were reduced. Revenues and the rate of revenue growth increase dramatically when tax rates are cut.

Canada’s reduction of corporate tax rates will attract more business to Canada, which can now boast of having the lowest corporate tax rate in the G7. The corporate tax rate reduction in Canada is yet another tax cut success story.