Andrew Sorkin's Revealing Limousine Liberal Moment On CNBC This Morning

If you doubted that CNBC co-anchor, and New York Times columnist Andrew Sorkin is a limousine liberal, consider this moment from this morning's Squawk Box program.

A guest who was a former CEO of Staples was discussing the effects on the average American household of increasing taxes. He explained how most Americans would react to threats of higher taxes by cutting spending elsewhere and treating the planned tax increases as a negative uncertainty.

Sorkin chimed in with this gem, as closely paraphrased as I can recall,

'Do you really think people do that? Do they really notice tax increases?'

I think Sorkin has finally marked himself as a liberal now completely out of touch with the average American, what with his three careers- columnist, CNBC anchor, and published writer with an HBO movie based on his book.

You can't make this stuff up, can you?

Taxing Wealth, High Income, or....What?

The Wall Street Journal published an interesting editorial recently discussing the tax consequences of someone who realizes a large gain in the last year of his moderately-high income working life. The writer's point was that a one-time, larger-than-$250K income makes an otherwise-middle income person look 'rich' by the standards of today's arguments over tax rates and income levels.

This caused me to think of the larger picture, i.e., income versus net asset wealth.

To hear politicians from both parties these days, there seems to be confusion over what constitutes 'wealthy' or 'rich' people. Is it a net asset value, or an AGI level?

It matters. And causes me to wonder if this confusion affects taxation policy.

Currently, one's wealth is taxed when it was income. If earned, it's taxed each year it has been earned. If inherited, it is the detritus of the rather sizable haircut given by a dead benefactor's death taxes.

The current tax code has many provisions which reduce notional rates. If a person who, in the past, earned a lot of money, and has become an owner of substantial assets, uses tax code provisions to reduce his/her current income tax liability and rate, s/he is viewed as doing something immoral, if not illegal.

You have people like Warren Buffett and Jim Chanos publicly declaring their willingness to pay more tax on their income. Chanos went even further, claiming that, contrary to what economists predict, he would change nothing about his work life, work just as hard, even if he knew that the federal government would take a larger share of each year's income.

I thought about those two very wealthy businessmen, and what would motivate them to so publicly endorse the idea that they should pay more in taxes.

Aside from purely political persuasion, one is pretty much forced to believe that only people who had amassed so much wealth that current income really doesn't matter anymore would say things like they say.

Particularly Chanos. I'm not intimately familiar with any large windfall income years from his hedge fund management, but I have the general sense that he's worth hundreds of millions of dollars, or more.

I've written in prior posts about GE's Jeff Immelt, who has, as a matter of public record, already earned in excess of $20MM in cash during the past decade that he has been that firm's CEO. I contended that, once someone has been paid that much money, and hasn't simply pissed the bulk of it away, they are no longer motivated by future earnings. So when Immelt makes it a point to publicly claim that his current or future incentive payments will be more difficult to earn, I pay no attention. At this point, it's unlikely his lifestyle would change much if he earned those bonuses, or became a dollar a year man, like the late Steve Jobs, the recently-deceased CEO of Apple.

How do you suppose people like Chanos and Buffett would react if Congress announced that it was considering amending the tax code to require payment of, say, 2% of net worth from any tax filer with a net worth over $1MM?

Perhaps the law would simply change the basis of tax once one amasses a net worth of $1MM, including real estate. That would certainly address the issue of "the rich" paying "their fair share," wouldn't it? In effect, for wealthy Americans, federal tax would become a property tax, not an income tax.

Perhaps it would be scaled, like the income tax, so that above certain net worth levels, one paid multiples of the 2% of net worth.

After all, if it's just simple class warfare that the masses want the tax code to address, isn't a federal property tax on the very wealthy simpler to understand and apply?

Isn't net worth what most people mean when they say someone is "rich?" I don't really think that someone who, for one or two years, earns a lot of money, is seen, per se, as "wealthy." Unless perhaps it's a trader whose compensation for a few years is in the tens of millions, like Howie Hubler at Morgan Stanley, or Wing Chau at Harding Advisory. But, in those cases, someone's one or two year income pushes them right into the very wealthy group that would be subject to the federal property tax.

I don't really have firm answers for these questions. Rather, it simply occurred to me that if people are really out to "soak the rich" with taxes, shouldn't they be more clear about what they mean by "rich?"

And if they mean high net worth, then why not just tax that directly, rather than the income of people with high net worth?

Of course, it's quite possible that many so-called limousine liberals might change their mind about endorsing higher taxes on the wealthy if it applied to their net worth, rather than their annual incomes, isn't it?

Sales vs. Income Taxes- Why The Panic?

I'm writing this post on this blog, rather than my companion political one, because it's a non-partisan, economic topic of interest to me.

Ever since Herman Cain announced his 9-9-9 tax plan, there have been objections from those who are also adamantly against an American VAT tax, as well.

The most commonly-heard criticism of Cain's plan is that the sales tax portion is set at 9%, but can be raised in the future. So therefore, it's a bad idea.

Why is the fact that our income tax, initiated by a Constitutional amendment, has been raised and radically modified many times, not relevant in this regard? Clearly, whatever federal tax is proposed and levied on individuals, Congress will seek to modify it, effectively, or not, when they spend more than they collect in taxes.

A sales tax, or a VAT, is no different in this respect than an income tax. Congress will attempt to raise any of them when it suits their purpose, and voters let them get away with it.

Cain's sales tax is simpler to understand and operate than a VAT. Or that other odd tax that Huckabee was pushing in 2008 when he ran for president. And it does two valuable things which many critics miss.

First, it is actually less regressive, as Cain maintains, because a 9% sales tax is less onerous to the poor than a 15% payroll tax. Second, it hits the 50% of Americans who currently pay no federal income tax.

Taken in the context of eliminating all other taxes, a 9% sales tax isn't such a bad idea. It taxes spending, not savings. It is imposed as the double-taxation of dividends is eliminated, as is the separate taxation of capital gains.

Though many criticize Cain's tax plan as too simplistic, I don't really think it is. It is, instead, an Alexandrian type of solution to a tax code which is the equivalent of the famous Gordian knot.

Taxing Billionaires To Fund The US Government- More Liberal CNBC Bias

In this recent post I discussed comments on Europe's troubles by Kyle Bass from his Barefoot Economic Summit 3 in Texas.

Bass was interviewed as part of David Faber's noontime CNBC program. Faber proclaims that he and Bass are 'old friends.' Probably from Faber's days as a regular morning SquawkBox co-anchor, when he cultivated sources like Bass, then a debt trader at Bear Stearns.

However, it's clear the two part company on politics. Consider the exchange between Bass and Faber when the latter asked the former for his take on US sovereign debt and the economy.

Bass pointedly noted that the fortunes of Bill Gates and Warren Buffett would only fund a month's federal government spending.

"So who pays for November," Bass challenged Faber?

Then Bass observed that confiscating all of the wealth of the Forbes 400 only funds the US government through the end of the year.

'So who will pay for 2012,' asked Bass rhetorically?

Faber grew increasingly uncomfortable with Bass' aggressive challenges on 'tax the rich' policies, replying rather meekly,

'But nobody's actually suggesting that the government do anything like that.'

It was a weasel-like comment for Faber to make, because he, like every viewer, knew that Bass was not suggesting that any Congressman or the president wanted this. Bass' point, which even Faber understood, is that you can confiscate all the wealth from the so-called wealthiest 400, probably even 2,000 Americans and you still can't fund the US government for a full year.

Thus the emptiness of calls to 'tax the rich,' or claim that they 'don't pay their fair share.'

Faber's dumbfounded reaction and, then, silence, once more illustrated CNBC's latent liberal bias. The liberal on-air reporters and anchors can never back up their liberal bias with facts. When confronted with facts they don't like, they just sort of stare at the offending guest, then change the subject.

In this case, Faber couldn't think of a comeback to refute the obvious point that no amount of 'more' and 'their fair share' of taxes from the wealthy which are designed to be above-average will ever actually close any federal funding gap.

It's an appeal to class warfare, pure and simple.

The obvious conclusion to be drawn from Bass' anecdotal statistics is that only by allowing the wealthy to invest their capital to allow business creation and expansion can new jobs be created in the US, thus aiding economic growth, from which the government can collect taxes on new economic activity.

Merely soaking the rich for more of their current wealth will do nothing serious nor sustainable to make a dent in America's horrific debt levels.

How Not To Create Jobs

I returned from some time away just before Labor Day to read and hear that the administration is now really focused on jobs!

Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.

Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.

As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.

It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.

He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.

The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.

Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.

He quickly offered a comparison that went something like this,

'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'

So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.

It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.

Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.

So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.

The Truth About Who Pays Corporate Taxes

Are you as sick as I am of hearing, courtesy of the recent federal debt limit debates, that 'big/rich corporations should pay more/higher taxes?'

I don't think I could watch CNBC or Bloomberg for the past month without hearing some Democratic Congress member, the president, or a liberal pundit repeat some variant of that old saw.

Trouble is, it demonstrates complete economic illiteracy by those who mouth those sentiments.

Harvard economics professor Greg Mankiw wrote in his blog, borrowing from his textbook,

"But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.



Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.


The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters."
 
While I have grown weary of federal elected officials of both parties displaying their economic ignorance, even as they dangerously legislate tax policy, I fault even more the business network pundits who continue to spout this nonsense without correcting the fallacy that corporations really pay any tax at all.
 
Ultimately, as Mankiw explained, it's taxpayers, either as company owners, consumers, or employees.

Taxes, Economics, Rawls & Nozick

In the current fight between Democrats and Republicans concerning the debt limit increase, one hears the former primarily focus on the notion of 'fairness' of taxation.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.

Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.

It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.

Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.

Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.

This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.

Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.

But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.

But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."

Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.

Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.

However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.

In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.

Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.

By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"

On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.

At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.

This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.

Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.

Isn't that "fair?"

The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.

How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.

I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.

At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.

In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.

I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.

It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.

Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.

And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.

Anatomy of a State's Ill-Considered Tax Policy

Last week the Wall Street Journal featured Illinois' recent tax hikes in its lead staff editorial. Normally, a topic like this would be more appropriate on my companion political blog. But I think this merits treatment here, instead.

For several years now, as I've written in prior posts, more of my business blog writing has been devoted to government actions, primarily because, since 2008, so much of the so-called private sector has been either infringed upon, taken over by or otherwise heavily influenced and affected by government activity to overwhelming extents.

In the case of this topic, the situation was set up by years of profligate state spending and giveaways to unions in the form of pensions and compensation for government employees. As an attempt to fill state budget gaps, Illinois' Democratically-controlled legislature and its Democratic governor enacted tax increases which effectively raised personal rates 67% and corporate rates to a 9.5% level, which the Journal reports as "fourth highest in the nation."

Predictably, many large Illinois corporations promptly let it be publicly known that they were considering relocating out of the state, due to the sudden rise in tax bills.

Caterpillar, Motorola Mobility, Sears, Navistar Continental Tire, U.S. Cellular, Chrysler and even Groupon all used the ploy to extract tax givebacks of varying sizes from the state. The governor, Pat Quinn, used these occasions to claim he was working hard to keep business in the state.

The irony, of course, is priceless. The state raises tax rates, then trumpets its efforts to offset the loss of economic activity as businesses respond to the higher rates. But the underlying process of funding the state government has been corrupted, as the Journal editorial describes,

"The victims are the thousands of businesses that don't get the favors, and an overall state economy that is less attractive for employers. That's one reason Illinois has ranked 47th of the 50 states in job creation in the last decade, and has lost more private jobs (360,000) than the entire private work force of Delaware...

Illinois is proving what bookshelves full of studies have found: Handing out special favors one business at a time is politically corrupting and an ineffective economic development strategy. A sounder way to create jobs is to provide a welcome tax and regulatory climate for all businesses. Some states, such as Arizona, constitutionally prohibit politicians from granting special favors to a business or citizen."

Today's Journal has a second part to the editorial, reporting that financial market giant CME Group is now threatening to leave the state if it, too, does not receive some special tax relief.

According to the Journal, Illinois' increased tax rate is expected to capture around $6B, of which something like a quarter of a billion dollars is now being forgiven as political favors from the governor.

Is this any way to run a state? Or a country? Because we all know that Congress does exactly the same thing with the federal tax code. Special exemptions are created by Senators and Representatives for businesses which fit suspiciously complicated descriptions which- surprise surprise- result in a company in their state or district enjoying some tax break.

When are citizens, at taxpayers and voters, going to catch on to this bi-partisan scam which saps national economic activity while fostering tens of millions of dollars in economically unproductive lobbying for tax relief?

The net result is to transform what could be simpler, lower-rate tax systems for state and federal governments alike into complicated traps, partial escapes from which are granted by elected politicians in return for various favors- campaign donations, jobs for friends, or public relations events showcasing how the official 'saved' jobs by giving a company a special tax break.

If the tax break was a good economic move, why was the tax rate raised in the first place?

By the way, since it's topical in a political sense this week, Rick Perry's Texas has created more jobs in the past decade than any other state.

It has no state income tax- and, thus, no tax rates from which companies need to spend money to escape. And less political corruption.

Continuning Ignorance of Tax Rates & Their Effects On CNBC

House Minority Leader Eric Cantor appeared on CNBC on Tuesday morning. He was at the NYSE, apparently having accompanied John Boehner to the city the previous evening for the Speaker's address to the Economic Club of New York.

Cantor was interpreting and defending Boehner's pointed remark to the effect that a debt limit rise will necessarily include spending cuts of equal or more size, or there won't be a limit increase.

As usual when he appears on SquawkBox, Cantor was subjected to some economic idiocy, but this time, to my regret and shock, it was from Becky Quick.

Quick is a veteran Wall Street Journal reporter of many years, before joining CNBC. But, as are most other CNBC anchors, she is a journalist by training, not an economist.

Still, I know from watching the network's 6-9AM program fairly often that Quick still reads the Journal regularly.

Thus, it is inconceivable that she would have missed the editorials featured in prior posts here, here and here.

Never the less, she assailed Cantor in what may only be called an exasperated tone why the Republicans just refuse to raise taxes, pass bills to enact more taxes, in order to reduce the deficit. She then disingenuously compared that to a family under financial pressure not only cutting its spending, but having the adults take extra jobs to provide more income.

Well, consider those three Journal editorials.

In the first, from last May, David Ranson updated Hauser's Law, reminding readers that, regardless of tax rates, over time, only about 19% of GDP will be paid in taxes. Period.

In the second post, a recent Journal editorial by and Alan Reynolds reiterated Hauser's Law, then added that the non-business component of that 19% is just less than half, or about 8%. He wrote,

"Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP- 8% and 18%, respectively- regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP."


Finally, John B. Taylor provided a simple but powerful graph in a recent Journal editorial displaying the differing percentages of GDP that federal spending would require under various alternative budgets recently proposed by the president and House Budget Committee chairman Paul Ryan.

As a responsible media anchor and occasional reporter, one would think Quick is abreast of current, mainstream, published economic findings such as those written in the Journal by Ranson, Reynolds and Taylor. We're not talking an economics journal, but the very mainstream business newspaper The Wall Street Journal.

So, assuming Quick read these pieces, why was she bludgeoning Cantor about raising taxes to collect more revenue, when the first two editorials presented clear evidence that (top) tax rates are irrelevant. It's total tax revenue that matters, which is maximized by lower rates to foster a growing GDP. The tax/GDP ratio is going to max out at 18%, so the only sensible way to raise more government tax revenue is to lower rates in order to induce more economic activity that will raise the denominator, GDP.

Why won't Quick acknowledge the empirical findings which make this so clear? Why does she continue to badger Republicans to raise taxes when she must be reading the same editorials I do which contain empirical evidence that such strategies are pointless?

Subtle Political Bias On CNBC Yesterday Morning

Sometimes political bias seeps into business coverage so subtly that you don't really notice it at first.

This morning, on CNBC, this was on display front and center.

David Faber was co-anchoring with Becky Quick and Joe Kernen. Faber projects serious analytical credentials, which served to further blur what was about to take place. The guy he replaced for the morning has no such credentials, having apparently been selected to provide ethnic balance on the morning program.

Thus, when House GOP Majority Leader Eric Cantor appeared for an extensive discussion regarding the upcoming action on the nation's debt limit, the biased stage was set.

I won't give a blow by blow account of the discussion. You can probably correctly guess that Cantor defended the need to cut spending while raising the debt limit.

Faber, who leans politically fairly far left, judging by his on-air comments over a decade, chided Cantor for potentially creating a monetary disaster by causing the federal government to default on its debt.

For the record, despite what so many pundits, and Tim Geithner, allege, that's not the only outcome of a failure to raise the debt limit. The House can easily pass a bill to direct the Treasury to prioritize spending in order to pay interest, retire maturing debt, etc., so that internal spending is left unfunded.

What was so subtle, however, was how the network employed Faber to give a patina of credible analysis to what is largely a political topic.

Cantor gave as good as he got, being the intelligent and poised guy that he is. But what struck me as I listened was how, given Faber's line of attack, was his clear desire to put Cantor on the defensive, and completely ignore the excessive spending in Washington.

How differently another network could have handled the same appearance. Imagine a co-anchor asking Cantor if it were wise to pass the debt limit increase without any corresponding spending cuts to at least try to rein in federal fiscal excess?

The debate ran to issues like tax reform, on which Faber used the magic liberal phrase about wealthy people and corporations paying "their fair share." In this instance, Faber's analytical credibility was perhaps most misused, because his comments displayed a total misunderstanding of the difference between tax rates for and total taxes paid by various income strata. But, to hear Faber tell it, right along Democratic party lines, Cantor was espousing cutting spending on the poor, giving tax relief to the wealthy, while flirting with US government default.

Later, Texas Congressman Ron Paul made a guest appearance to discuss his announcement of an exploratory committee for a presidential candidacy, as well as his views on Bernanke's afternoon press conference.

In Paul's case, the subtle bias was to play a sort of video rope-a-dope. Paul is very serious and well-informed, being the current chair of the sub-committee of the House overseeing the Fed. When Paul lit into the Fed's opaqueness, failure to maintain the dollar's value, and a host of other mistakes, the co-anchors were largely mute. Nobody tried to debate Paul's allegations, nor make him out to be a wing nut. Instead, it was like Paul was declaiming into an empty room.

Sometimes I think CNBC is the anti-business network. This morning was a good example of it.

More Warren Buffett Cornpone on CNBC This Morning

This morning was a good one to skip watching CNBC. I don't know how often they do this each year, but it's one of those marathon Buffett chuckle-manias from Omaha. Becky Quick sits there with him and he pontificates on lots of subjects about which he knows little more than anyone else. Given the setting and someone's recent reference to Buffett's annual shareholders' letter, I assume Berkshire Hathaway's annual meeting is the occasion.

Much of the time is wasted by Buffett saying things which are patently obvious, e.g., Steve Jobs is a uniquely-talented and successsful entrepreneur with a gift for "knowing what we want before we know we wanted it."

That's when he's not contradicting actual experts in a field, such as mortgage banking. Last week, on David Faber's noontime program, industry veteran and CMO pioneer, one-time Salomon Brother's Vice-Chairman Lew Ranieri cited a market overhang of unsold homes which, I believe, was far larger than the one year cited by Buffett as the date by which said inventory will be gone.

And, of course, it's all done with that annoying aw shucks guffaw. I don't know which would drive me insane faster, constantly being subjected to Buffett's trademark country guffaw or Maria Bartiromo's lisp.

But on one subject, Buffett is positively misleading.

Only about 15 minutes ago, he railed against perceived income inequality in the US. His evidence?

Buffett pulled out some apparently IRS-sourced document, and had Becky Quick read off some numbers. Buffett alleged that in the past few years, the 400th largest AGI on a tax return soared from about $43MM to $340MM or so. Buffett then contended that the associated tax rate on that 400th return fell over time, too.

Unfortunately, as you may read here, the subject is much more complex than Buffett either understands or acknowledges. Add to Reynolds' arguments the fact that many private enterprises show up for tax purposes as schedules on an individual 1040 return, and you blow Buffett's contention out of the water.

But this is CNBC, so Buffett's every aside or chuckle must be fawned over. No matter how misinformed or misguided it may be.

Scott Adams On Taxing The Rich

Scott Adams, a one-time Pacific Bell engineer, now famous semi-autobiographical cartoonist (Dilbert), wrote a hilarious piece in last weekend's edition of the Wall Street Journal. He's evidently entered into some sort of contributor relationship, because this is the second piece he's done in the last few months.

Adams begins by suggesting that by writing a 'bad version,' in Hollywood parlance, of how to tax the rich, millions of Americans can read it and invent better ideas for solving our fiscal mess. He then offers some ideas. Humorous, yes. But in the kernel of some of his wacky ones seem to me to be real opportunities.

For example, he wrote,

"Incentives. Another approach, also a bad idea, might be to treat the rich more like venture capitalists than sources of free money. Suppose the tax code is redesigned so that the rich only pay taxes to fund social services, such as health care and social security. This gives the rich an incentive to find ways to reduce the need for those services, which would in turn keep their taxes under control. Perhaps you'd see an explosion of private investment in technologies that make it less expensive to provide health care. You might see rapid advances in bringing down the cost of housing for seniors.



Meanwhile, the middle class would be in charge of funding the military. That feels right. The country generally doesn't go to war unless the middle-class majority is on board."

It strikes me that there's some rationale for dedicated spending of exorbitant tax rates. Such money has to go to a specific use, and no other. Adams' idea for the rich figuring out how to minimize the costs of what their (higher) taxes are spent on, so to reduce those taxes. But, generally, what if we simply designated some social services as being paid for by certain income classes or other source. When that source is exhausted, so is the spending.

It could be a backwards way of forcing Congress to cut spending by allocations. If they won't stop promising benefits, we'll just have them allocate tax sources, which are limited, so that the spending can't be unlimited anymore.

I also thought Adams was not too far off base in considering giving the rich, higher-taxed benefits such as preferred government service, a la concierge-level attention, use of HOV lanes, handicapped parking, or an extra political vote. There are, after all, some benefits that are better than the money that buys them.

Then there's his solution for cost cutting,


"Pull a random yet round number out of your ear, let's say a 10% cut, just for argument's sake, and apply it across the board. No exceptions. Everything from the military to welfare to federal pensions to government salaries would take the same hit. Managers in the private sector have been handling budget cuts this way for years. They know that their subordinates are all professional liars, so there is no reliable information for making cuts in a more reasoned way. They also know that any project can get by with 10% less money if there is no alternative."



Having just struggled through ex-IBM and RJRNabisco CEO Lou Gerstner's detailed steps for re-engineering government, I have to say, I'm actually more inclined toward Adams' jocular version.

Why? Because, although Gerstner wrote in the vein of classic, thorough process re-engineering, it's actually unlikely that such a process will occur as written. At least in the federal government.

Truth is, Adams is right. Anything can generally sustain a 10% cut in expenses. And doing so will, according to Gerstner, avoid allowing special dispensations.

Adams closes his piece with these astute observations,

"The way our political system is designed, politicians are not free to float bad ideas. Doing so is a sure way to lose an election. Politicians aren't even free to support good ideas if they are too far from the norm. But as citizens, we're free to speculate all we want. And if some new and better idea gains popularity at the grassroots level, our elected leaders would then be able to embrace it. In other words, it's literally your job to fix the budget problem because your government isn't equipped to handle it. The ideas I've mentioned here are bad by design. But if a few million people start brainstorming their own ideas for solving the debt problem, someone might come up with a winner. And if that idea gains popular support on the Internet, it frees politicians to consider it. I have no problem imagining that something along those lines can happen, and the thought feels delightful."



Sadly, I think he's right. Politicians are rarely able to speak the unspeakable. Consider Paul Ryan's Roadmap. He's taken incredible flack for that.

It probably is the case, for now, that our spineless politicians can't really fix our spending mess, or tax more intelligently, without being led from the rear, by ordinary citizens.

Scepticism On Tax Data

Yesterday I wrote this post concerning how sceptical one must be when listening to private sector supporters of administration alternative-energy policies.

Thanks to an excellent Wall Street Journal editorial last Thursday, 23 December, by Alan Reynolds, entitled Taxes and the Top Percentile Myth, we now know that similar scepticism must be exercised concerning taxpayer data, as well.

Specifically, Reynolds debunks an oft-cited study purporting to reveal that the wealthiest US taxpayers also earn a disproportionate share of "income." The term "income," Reynolds notes, is the Achilles Heel of the study.

Reynolds begins,

"Despite the deficit commission's call for tax reform with fewer tax credits and lower marginal tax rates, the left wing of the Democratic Party remains passionate about making the U.S. tax system more and more progressive. They claim this is all about payback—that raising the highest tax rates is the fair thing to do because top income groups supposedly received huge windfalls from the Bush tax cuts. As the headline of a Robert Creamer column in the Huffington Post put it: "The Crowd that Had the Party Should Pick up the Tab."



Arguments for these retaliatory tax penalties invariably begin with estimates by economists Thomas Piketty of the Paris School of Economics and Emmanuel Saez of U.C. Berkeley that the wealthiest 1% of U.S. households now take home more than 20% of all household income.


This estimate suffers two obvious and fatal flaws. The first is that the "more than 20%" figure does not refer to "take home" income at all. It refers to income before taxes (including capital gains) as a share of income before transfers. Such figures tell us nothing about whether the top percentile pays too much or too little in income taxes.



In The Journal of Economic Perspectives (Winter 2007), Messrs. Piketty and Saez estimated that "the upper 1% of the income distribution earned 19.6% of total income before tax [in 2004], and paid 41% of the individual federal income tax." No other major country is so dependent on so few taxpayers."


Reynolds has pointed out a critical problem with the Piketty and Saez study, i.e., they don't use appropriate measures. Instead, they use inflated, pre-tax income for the wealthy, while using pre-transfer payments income for those at the other income extreme. He continues,
"A second fatal flaw is that the large share of income reported by the upper 1% is largely a consequence of lower tax rates. In a 2010 paper on top incomes co-authored with Anthony Atkinson of Nuffield College, Messrs. Piketty and Saez note that "higher top marginal tax rates can reduce top reported earnings." They say "all studies" agree that higher "top marginal tax rates do seem to negatively affect top income shares."


What appears to be an increase in top incomes reported on individual tax returns is often just a predictable taxpayer reaction to lower tax rates. That should be readily apparent from the nearby table, which uses data from Messrs. Piketty and Saez to break down the real incomes of the top 1% by source (excluding interest income and rent).


The first column ("salaries") shows average labor income among the top 1% reported on W2 forms—from salaries, bonuses and exercised stock options. A Dec. 13 New York Times article, citing Messrs. Piketty and Saez, claims, "A big reason for the huge gains at the top is the outsize pay of executives, bankers and traders." On the contrary, the table shows that average real pay among the top 1% was no higher at the 2007 peak than it had been in 1999.


In a January 2008 New York Times article, Austan Goolsbee (now chairman of the President's Council of Economic Advisers) claimed that "average real salaries (subtracting inflation) for the top 1% of earners . . . have been growing rapidly regardless of what happened to tax rates." On the contrary, the top 1% did report higher salaries after the mid-2003 reduction in top tax rates, but not by enough to offset losses of the previous three years. By examining the sources of income Mr. Goolsbee chose to ignore—dividends, capital gains and business income—a powerful taxpayer response to changing tax rates becomes quite clear.

The second column, for example, shows real capital gains reported in taxable accounts. President Obama proposes raising the capital gains tax to 20% on top incomes after the two-year reprieve is over. Yet the chart shows that the top 1% reported fewer capital gains in the tech-stock euphoria of 1999-2000 (when the tax rate was 20%) than during the middling market of 2006-2007. It is doubtful so many gains would have been reported in 2006-2007 if the tax rate had been 20%. Lower tax rates on capital gains increase the frequency of asset sales and thus result in more taxable capital gains on tax returns.


The third column shows a near tripling of average dividend income from 2002 to 2007. That can only be explained as a behavioral response to the sharp reduction in top tax rates on dividends, to 15% from 38.6%. Raising the dividend tax to 20% could easily yield no additional revenue if it resulted in high-income investors holding fewer dividend- paying stocks and more corporations using stock buybacks rather than dividends to reward stockholders.


The last column of the table shows average business income reported on the top 1% of individual tax returns by subchapter S corporations, partnerships, proprietorships and many limited liability companies. After the individual tax rate was brought down to the level of the corporate tax rate in 2003, business income reported on individual tax returns became quite large. For the Obama team to argue that higher taxes on individual incomes would have little impact on business denies these facts.


The overall points Reynolds so clearly makes are that the declared incomes of the wealthy are responsive to tax rates, and much corporate income flows through individual returns for many businesses. Thus it's neither fair nor correct to classify all 1040 form income as 'personal.'

Reynolds concludes his instructive piece by noting,

"The Piketty and Saez estimates are irrelevant to questions about income distribution because they exclude taxes and transfers. What those figures do show, however, is that if tax rates on high incomes, capital gains and dividends were increased in 2013, the top 1%'s reported share of before-tax income would indeed go way down. That would be partly because of reduced effort, investment and entrepreneurship. Yet simpler ways of reducing reported income can leave the after-tax income about the same (switching from dividend-paying stocks to tax-exempt bonds, or holding stocks for years).


Once higher tax rates cause the top 1% to report less income, then top taxpayers would likely pay a much smaller share of taxes, just as they do in, say, France or Sweden. That would be an ironic consequence of listening to economists and journalists who form strong opinions about tax policy on the basis of an essentially irrelevant statistic about what the top 1%'s share might be if there were not taxes or transfers."

It's almost comical how simple is Reynolds' identification of this major flaw in Piketty's and Saez' work. Yet many in the current administration apparently swear by the study. Even the president's own chief economist seems to have fallen prey to similar measurement mistakes.

It goes to show how important it is to, as a grad school professor taught me, critically read such articles to ascertain the quality of the research before giving it credibility. In the case of Piketty's and Saez' taxation-related work, it's clear that many have come to rely on the study's incorrect conclusions without even understanding how it measured the rather nebulous concept of 'income.'

Fortunately, Alan Reynolds was up to the task of deconstructing the earlier, flawed study and providing instructive guidance on how to actually interpret the phenomenon under examination.

Art Laffer On Washington State's Personal Income Tax Initiative

Art Laffer took on the Bill Gates, Sr. and Jr., of Washington state, in one of yesterday's Wall Street Journal editorials. The Gates' are pushing hard for the state to institute a new personal income tax.

Here's how Laffer described it,

"Mr. Gates Sr. has personally contributed $500,000 to promote a statewide proposition on Washington's November ballot that would impose a brand new 5% tax on individuals earning over $200,000 per year and couples earning over $400,000 per year. An additional 4% surcharge would be levied on individuals and couples earning more than $500,000 and $1 million, respectively.

Along with creating a new income tax on high-income earners, Initiative 1098 would also reduce property, business and occupation taxes. But raising the income tax is the real issue. Doing so would put the state's economy at risk.


To imagine what such a large soak-the-rich income tax would do to Washington, we need only examine how states with the highest income-tax rates perform relative to their zero-income tax counterparts. Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance."

Laffer's a good, empirical economist. He immediately took ends of the distributional spectrum of US states with respect to tax rates, and found,
"In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.
 
Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.
 
Over the past decade, the nine states with the highest tax rates have experienced tax revenue growth of 74%—a full 22% less than the states with no income tax. Washington state has done better than the average of the nine no-tax states. Why on earth would it want to introduce a state income tax when it means less money for state coffers?


What's true for those states with the highest tax rates is doubly true for the 11 states that have instituted state income taxes over the past half-century. They too have lost huge sums of tax revenue."

Here's the revealing table from his editorial.

As a sort of coup de grace, Laffer offered this,
 
"A final thought for those who want to punish the rich for their success: As the nearby chart shows, those states with the highest tax rates, and those states that have introduced state income taxes, have seen standards of living (personal income per capita) substantially underperform compared to their no-tax counterparts."
 
I won't quote his parting shot to the Gates, but you can guess the nature of it.
 
Just focusing on Laffer's statistics and chart, it's a stunning picture that he paints. With the publication of this piece, why would any state be mad enough to initiate a personal income tax? Or raise the rate of one it already has?
 
Laffer doesn't mention it, but, surely, the same relationships must hold between countries, as well.
 
He has done a wonderful job providing clear, unmistakable evidence that higher tax rates depress standards of living and output. Period.

WSJ vs. The Joint Committee On Taxation

The issue of federal and, for that matter, state and local tax policy is one as old as the income tax amendment. Ronald Reagan was excoriated for wanting to cut taxes, yet his tax cuts spurred a 20-year US economic expansion.

Thus, a recent battle in the editorial pages of the Wall Street Journal is noteworthy. In answer to an earlier staff editorial, director of the Congressional Joint Committee on Taxation, Thomas Barthold, fired back in a letter published in Wednesday's edition of the paper. The Journal responded with its lead staff editorial that day, in which these passages appeared,

The director of the Joint Committee on Taxation, Thomas Barthold, takes us to task in a nearby letter for exaggerating the revenue impact and economic benefits of the investment tax cuts of 2003. (See "The Obama Tax Trap," July 2.) This is a debate we're delighted to have, and Members of Congress should want to have it too if they ever want to cut taxes again.


In a 2005 paper "Dynamic Scoring: A Back-of-the-Envelope Guide," Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered "the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes." We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003.

So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. (See the nearby table.)


In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. We readily admit that some of this extra revenue flowed from the housing bubble. When that mania turned to panic and the economy went into recession, revenues collapsed. But the 2003-07 growth spurt wasn't all housing related, any more than the late-1990s stock boom was all phony merely because the dot.com bubble later burst. The last decade saw growth in technology (Google, the iPod), energy, professional services, biotech and even manufacturing.

As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. (See the second table.) Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted.

Mr. Barthold also claims it is a "non sequitur" to say that the $786 billion, or 44%, rise in federal revenues from 2003-07 was at least partially a result of the tax rate reductions. Why? Because, he says, "in normal economic times, general economic growth and inflation will lead to an increase in revenues from one year to the next with no changes in tax policy."

True enough, but the revenue growth from 2003-07 was anything but "normal." The 44% increase in revenues compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.


Joint Tax now says that rescinding the Bush investment tax cuts will raise about $500 billion in revenue over the next five years. So on January 1 we will enact one of the largest tax increases in history, coming out of one of the deepest recessions in a century, because computer models that we know are wrong are telling Congress that this will raise far more revenue than the increases will raise in reality.


That last statement from the committee regarding the effects of letting the Bush tax cuts lapse is troubling, isn't it? Does anyone believe economic growth will be enhanced through higher taxes?

As it is, the committee has made horrendous estimation errors, in the wrong direction, on prior tax policy effect on tax revenues.

Further, Barthold's letter of reply was a qualitative, shoot-from-the-hip sort of thing, with none of the sensible basic analysis which appeared in the Journal's staff editorial reply. For example, comparing growth in tax revenues in a certain year or period with the long-run average, to assess whether it was really inevitable, or an extraordinary growth rate.

From the exchange, Barthold appears to be both naive and sloppy. Not to mention simply wrong in his and his staff's lack of understanding of the need for dynamic modeling of consumer and investor reactions to tax rate changes.

Art Laffer In Today's WSJ

You can't say Art Laffer is ambivalent about his opinions. His editorial in today's Wall Street Journal, entitled Tax Hikes and the 2011 Economic Collapse, holds nothing back.

Despite having been Reagan's economic adviser, Laffer didn't write a partisan piece. While parenthetically noting which administration has chosen to raise taxes, he concentrates almost exclusively on empirical evidence of tax rate increases and decreases, and associated economic activity.

On the strength of just this evidence, Laffer projects the coming rise in existing tax rates, and new taxes, at the dawn of 2011, into a renewed recession. Thus the article's title.

The details of next year's tax rate hikes are chilling. Did you realize that the top personal federal income tax rate rises to 39.6% from 35%, a 13% increase? Or that the highest dividend tax rate rises to the same 39.6% rate from 15%? How about the capital gains tax rate rising by 33%, from 15% to 20%?

These are stunning marginal increases which, as Laffer illustrates, are sure to have compressed economic activity into this year, in order to escape these coming higher rates.

This quote from Laffer's piece puts his opinion right out in the open,

"Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market."

Laffer's observations seem so simple and intuitive, yet don't seem to be generally acknowledged. He writes,

"It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet."

Nobody can say Laffer hasn't placed a rather large stake in the ground with his prediction of the US economy returning to recession next year, absent relief from the coming tax rate increases.

Liesman's Economic Folly This Morning On CNBC

George W. Bush's economic adviser, Ed Lazar, was a guest host on CNBC this morning. As part of the discussion, he was forced to tolerate CNBC's resident economic idiot, Steve Liesman.

Liesman resembles nothing so much as the young child allowed, for the first time, to join the adult table at a holiday dinner. Because he was on the set with a real economist, Lazar, Liesman got to pretend he is one, as well.

Thus, the hapless CNBC reporter earnestly challenged Lazar on the subject of taxes. Liesman, being the typical liberal, equipped to think incorrectly and ignore empirical evidence, insisted that our current federal debt obligations will just have to require more and higher taxes. How else can we ever pay those debts?

With a straight face appropriate for a simpleton, Liesman declared that debts this massive require action on 'both sides,' meaning spending restraint and higher taxes. Never mind the evidence that higher taxes depress the economic activity and risk-taking so crucial to job and GDP growth, or that those higher taxes never actually collect the higher revenues anticipated.

Liesman wouldn't understand these things because he's not an economist- he's an economic reporter who gets to sit with degreed professional economists and talk as if his comments have equal merit.

When will CNBC wake up and fire this dunce?

Taxes & GDP

David Ranson, the head of research for H.C. Wainright & Co. Economics, wrote in Monday's Wall Street Journal on the relationship between US GDP and tax revenues.

The graph from his article appears nearby. It shows real US tax receipts (Y axis) plotted against US GDP (X axis), with the dotted red line representing Y-values equal to 20% of the X-values at each point.

Ranson observes, in his editorial,

"The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

The nearby chart shows how tax revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution's W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. "Hauser's Law," as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP."

I confess to being completely surprised at the incredible consistency of this chart. There aren't the kind of significant swings above and below a regressed curve fitted through the actual data.

Rather, it's clear, assuming Ranson's numbers, as sources in his chart footer, are correct, that this relationship is very tight and dependable.

Why is this so? Ranson opines,

"What's the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue."

You can guess what the contemporary application of Ranson's version of "Hauser's Law" would be. Ranson considers current federal tax revenue and GDP projections,

"In this form, Hauser's Law provides a simple basis for testing the validity of any government's revenue projections. Today, since the economy already suffers from a large output gap that is expected to take many years to close, 18.3% must be a realistic upper limit on the ratio of budget revenues to GDP for years to come. Any major tax increase will reduce GDP and therefore revenues too.

But CBO projections based on the current budget show this ratio reaching 18.3% as early as 2013 and rising to 19.6% in 2020. Such numbers implicitly assume that the U.S. labor market will get back to sustainable "full employment" by 2013 and that GDP will exceed its potential thereafter. Not likely. When the projections are tempered by the constraints of Hauser's Law, it's clear that deficit spending will grow faster than the official estimates show."

What provides me with some odd comfort is that, no matter how heavily the government taxes us, jointly, we only pay up to about 18-19% of GDP. Thus, recent deficit-financed spending is not going to be repaid out of near-term taxes which rise precipitously.

Rather, it's pretty clear that the only way it will be repaid is through economic growth. And that's going to take a much different economic climate than our current federal government seems to be capable of delivering.

Meredith Whitney On Financial "Reform," Small Businesses & State&Local Governments

Meredith Whitney wrote a simple, elegant editorial yesterday in the Wall Street Journal entitled The Small Business Credit Crunch.

In it, she drew a fairly short, straight line from the current Senate financial sector regulation bill to higher-cost or even unavailable consumer credit for use by small businesses. Added to that, Whitney noted how lower housing values have wiped out their use as a traditional small business financing source.

Thus, in her opinion, small business-based job creation, a traditional source of US economic expansion, will be crippled, as the small businesses face financing difficulties, as and should they desire to expand or be created.

To this already dark picture, Whitney added her prior views on municipal and state government budget shortfalls and, eventually, job cuts.

Whitney and former Merrill economist David Rosenberg each shared these views last winter on CNBC, from which I wrote the two linked posts.

Now, it seems that at least Whitney sees evidence of her predictions coming true and having meaningful consequences.

The punchline of her article is that the government job cuts will result in up to two million newly-unemployed at a time when Congressional legislative action will help dampen small business formation and/or growth.

Whitney believes it unlikely that large US businesses will turn around and hire nearly the same number of workers- three million- they just got finished laying off in the past three years.

Missing from the picture will be small businesses growing to take up the five million jobs they have cut in the recent recession.

Putting the pieces of the picture together, Whitney sees continuing jobless 'recovery,' with large businesses continuing to enjoy jobless productivity gains, small businesses crippled by consumer credit contraction, while municipal and state governments finally shed workers larded on in earlier expansions.

Hardly cause for optimism for a robust, high-employment recovery, is it?

Volcker On The VAT

Taxes are surely an important element of business.

It's well-known that the famed Bush tax cuts of 2001 expire at the end of this year. We have already seen new tax increases passed into law as part of the recent health care bill. For example, for the first time ever, investment income is now subject to FICA taxes.

It's a conceptual step of significance, since it breaks the original link between wages and social security contributions and payments.

Now, the current administration is widely signaling a move that makes the FICA-taxing of investment income look like a baby step.

I'm referring, of course, to the VAT tax.

Personally, I have great respect for Paul Volcker's opinions on monetary policy and, to some extent, his basic ideas of financial sector regulation. However, I don't recall his being Treasury Secretary. Nor his particular expertise on fiscal matters, such as tax policy.

In fact, Volcker has been a lifelong Democrat. And he consorts with the most explicitly socialist American administration in history.

Thus, it's disappointing, but not surprising, that Volcker announced last week that new taxes will be necessary and, what the heck, a VAT isn't as "toxic" anymore as it used to be.

Huh?

Volcker essentially admitted a VAT is toxic. But, according to Paul, if taxes are needed....because we can't possibly cut spending......well, maybe the time has finally come to succumb to the silent theft of the VAT.

Want to really put any US economic recovery on hold? Make a big push to raise prices on everything by 20%. Because tax incidence always moves to the consumer.

Too bad Volcker didn't stick to monetary affairs and declare himself unqualified on this matter.