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Wednesday, October 10, 2012

Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare


Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare

Revised Originally  published 3.27. 2010

Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare

Governments cannot seem to balance tax revenues and spending. A reading of two new books: Ascent of Money[1] by Niall Ferguson’ and the newer book This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff show, very clearly, that the vast majority of governments cannot manage finances with any competence. An inspection of the actions of various government agencies starting in the 1890s and leading up to August 1914 where most stock markets suddenly shut down for months is enlightening. By 1916 most governments had spent all they had and were wildly printing money to fund the Great War. We see more and more of this, for instance, as Portugal’s deficits soars and now Fitch has downgraded their credit rating.[2] Why? Why because massive deficits of the sort that can trigger defaults and financial crises are the singular reason. We have witnessed several massive financial crises and dozens of sovereign defaults in the last 120 years and it is clear that these events are not going to stop. It is also clear that the financial operations of governments are not transparent given, for instance,  the recent news that Greece’s military spending is ‘state secret’ and that they lied about their debts to gain entrance into the now failing EU.[3] China’s reserves are also a state secret. A collection of EU members known appropriately as the PIGS [Portugal, Italy or Ireland—pick one or two--, Greece and Spain] have massive and unsustainable deficit problems all rooted in the inability of their leaders to control spending  and exacerbated by the greedy and Marxist-based unions who hold the political power and refuse to cut anything.  This is the kind of climate that produces depressions and wars.

Now, we could sift through the wreckage and pick out particulars to dwell upon but, using a popular leftist nostrum, the holistic view[4] is more enlightening. This approach is facile as the holistic theory leads to utter nonsense and a thickening of the crusted drool upon the shoes and slippers of the left so we can apply that to the operations of government, financial, social and military.  We find only mumbling and excuses as we expect. As long as some ‘government’ has the power to tax then the ‘reasons’ or methods of that government are  always self-defined, self-serving and lead eventually to social and financial disasters. We saw that in the debt-driven deflationary spiral[5] and Depression of 2007-2008 now only half way finished. That was stalled half way down by such interesting measures as a 10 trillion spending spree by the Fed and other governments by simply printing money, a process known as quantitative easing.

The basis of the deficit, if I could be politically obtuse or stubbornly blunt in the algebraic sense, is that governments spend more than they take in thus taxation and debt are the two vectors that will eventually bankrupt a country such as ours. After this, the path to reason is lost and the quest for OPM [other people’s money] becomes the prime mover of any government. Revolution and nationalization of business and land are the next obvious step. What else can they do? Let the capitalists get control? Our government had ‘problems’ yesterday with bond sales and many experts, like Bill Gross of PIMCO, recommend “advising that investors buy the debt of countries such as Germany and Canada that have low deficits and higher-yielding corporate securities.”[6]

What should be expected to be a reasonable consideration of government is the accurate forecast of tax revenues so that spending might be adjusted for some moderate growth for the economy so that debts might be managed for the good of the society. Spending is the only financial attribute known up front for any government entity posturing to set up a “budget.” They can get that much right until ‘emergencies’ occur and then, usually in a panic, they instinctively spend more to fix the problem.  Tax policies are frequently a lower form of insanity: Here is an example where reality flies off into the swamps for a rendezvous with illogic. The following is an example of illogicality that illuminates the financial swamps infested by politicians who make the laws:

Example: Differential revenues from tax rates:

“The absurdity of this approach became clear in 1988 when Senator Robert Packwood (R-OR), then ranking Republican on the Finance Committee, asked the JCT [Congress's Joint Committee on Taxation[7]]  to estimate the revenue impact if the government confiscated all income over $200,000 annually. The revenue estimators at JCT responded that such a tax would raise $104 billion the first year, $204 billion the second year, $232 billion the third year, and $263 billion and $299 billion in the fourth and fifth years, respectively. Needless to say, this was a nonsensical estimate. As Senator Packwood noted, the JCT's calculation "assumes people will work if they have to pay all their money to the Government. They will work forever and pay all of the money to the Government when clearly anyone in their right mind will not.”[8]--The Correct Way to Measure the Revenue Impact of Changes in Tax Rates Published on May 3, 2002 by Daniel Mitchell, Ph.D. 2010 [Emphasis is mine in all quotes.]

This is political reality--sick as it is. The tax base is considered to be an unending wellspring of wealth that can be taxed at rates up to and probably exceeding 100% with the confidence that the money will flow like honey forever.  This becomes a financial reality when you add in the propensity to borrow for incalculable reasons and the last-resort mechanism of getting money: the printing press. This is not a joke—this is political reasoning as the world practices it today. This is a prime example of liberal thinking as taught at Harvard.

We can choose the simple arithmetic view and ask what happens under a few scenarios whereby we think we can reduce the deficit to zero from growth alone. This is a multivariate system so simple examples like this only lead to objections that there are other possibilities. Here goes anyway:

[1] We currently have a 14 trillion dollar debt level and essentially a 10% deficit of about 1.4 trillion dollars. We also have a 14 trillion dollar GDP.

[2] IF we stopped the increase in spending and allowed growth alone to reduce these deficits how long with it take at a 2% growth rate in the economy to zero out the deficit? The assumption here is that a 2% growth rate leads to a 2% increase in tax revenues that would subtract from the deficit because there would be no increase in spending. We can then try 4% and higher variants and see what happens.

[3] The Results:
Year
GDP @ 2% growth
Tax Rev. [2% GDP growth] [trillions]
Budget Deficit [@2%]
GDP @ 4% growth
Tax Rev. [4% GDP growth] [trillions]
Budget Deficit [@4%]
0
14.00
0.00
1.40
14.00
0.00
1.40
1
14.28
0.29
1.11
14.56
0.58
0.82
2
14.57
0.29
0.82
15.14
0.61
0.21
3
14.86
0.30
0.53
15.75
0.63
-0.42
4
15.15
0.30
0.22
16.38
0.66
-1.07
5
15.46
0.31
-0.09
17.03
0.68
-1.75

So, fixing spending for 5 years would cut the deficit to zero at a 2% growth rate. At a 4% growth rate it would vanish in 3 years. This kind of deal works because when Congress submits fairy tales to the CBO [Congressional Budget Office] they must take the Congressional numbers on faith. Thus, when planning for the future the higher the growth rates the better. This is the way our government works or, better, fails miserably to manage our finances. Of course, there is no way our government could hold spending at zero for even a year. We can dream up all sorts of spending and revenue streams to our fancy and the CBO must conclude that these numbers are reasonable and sanction them by law.

The interest rate on our national debt, for many reasons is [today] 0.191 trillion/12.649 trillion or only 1.51%. That looks great. But, what happens if Moody’s cuts our AAA rating? Greece is now paying about 7% or so if they can get it. Look what happens if our interest rates rise to 7.5%:

Year
GDP @ 2% growth
National Debt Service [current rate 1.5%]
Budget Deficit [@2%]
Budget Deficit [@2%]-debt service
Budget Deficit [@2%]-2Xdebt service or 3%
Budget Deficit [@2%]-3Xdebt service or 4.5%
Budget Deficit [@2%]-4Xdebt service or 6%
Budget Deficit [@2%]-5Xdebt service or 7.5%
0
14.00
0.19
1.40
1.59
1.78
1.97
2.36
2.55
1
14.28
0.19
1.11
1.31
1.50
1.69
2.07
2.26
2
14.57
0.19
0.82
1.01
1.21
1.40
1.78
1.97
3
14.86
0.19
0.53
0.72
0.91
1.10
1.48
1.67
4
15.15
0.19
0.22
0.41
0.60
0.80
1.18
1.37
5
15.46
0.19
-0.09
0.10
0.30
0.49
0.87
1.06
6
15.77
0.19
-0.40
-0.21
-0.02
0.17
0.55
0.74
7
16.08
0.19
-0.72
-0.53
-0.34
-0.15
0.23
0.42
8
16.40
0.19
-1.05
-0.86
-0.67
-0.48
-0.10
0.09
9
16.73
0.19
-1.39
-1.19
-1.00
-0.81
-0.43
-0.24
10
17.07
0.19
-1.73
-1.54
-1.35
-1.15
-0.77
-0.58
11
17.41
0.19
-2.08
-1.88
-1.69
-1.50
-1.12
-0.93
12
17.76
0.19
-2.43
-2.24
-2.05
-1.86
-1.48
-1.28

If we halt spending and our interest rates rise because we have to raise money to pay off the debt and that interest rate rises to .5% then it will take 9 years to cut the deficit to zero and we still have the national debt fixed at 12.1 trillion to service.

If our budget deficit grows by 5% per year and it goes into debt then here is what our national debt will be:
Year
Budget Deficit @ 5% increase per year
National Debt
Debt Service  1.5%
Debt Service  7.5%
0
1.40
12.10
0.18
0.91
1
1.47
13.57
0.20
1.02
2
1.54
15.11
0.23
1.13
3
1.62
16.73
0.25
1.26
4
1.70
18.44
0.28
1.38
5
1.79
20.22
0.30
1.52
6
1.88
22.10
0.33
1.66
7
1.97
24.07
0.36
1.81
8
2.07
26.14
0.39
1.96
9
2.17
28.31
0.42
2.12
10
2.28
30.59
0.46
2.29
11
2.39
32.98
0.49
2.47
12
2.51
35.50
0.53
2.66


Now, there is a theory to describe the optimal tax rate for maximizing revenues and that is the Laffer Curve.[9] Here is a video on the process.[10][11] This is not accepted by liberals and an alternative scheme known as ‘dynamic scoring’ is preferred by the left. [12]  They assume that tax levels have no effect on the revenues. Thus GNP may remain constant with various tax levels. This is nonsense, of course, but that is what the left is all about. The curve clearly shows that maximum growth occurs at much lower tax rates than does maximum tax revenues and growth is the engine of the economy.

The Reagan Tax Cuts brought the following:

HOW DID THE REAGAN TAX CUTS AFFECT THE U.S. TREASURY?

Many critics of reducing taxes claim that the Reagan tax cuts drained the U.S. Treasury. The reality is that federal revenues increased significantly between 1980 and 1990:

Total federal revenues doubled from just over $517 billion in 1980 to more than $1 trillion in 1990. In constant inflation-adjusted dollars, this was a 28 percent increase in revenue.

As a percentage of the gross domestic product (GDP), federal revenues declined only slightly from 18.9 percent in 1980 to 18 percent in 1990.

Revenues from individual income taxes climbed from just over $244 billion in 1980 to nearly $467 billion in 1990.

In inflation-adjusted dollars, this amounts to a 25 percent increase.

The rabid left point to the percentage decline in federal taxes as a fraction of the new higher GDP as ‘proof’ that there was a ‘cost’ to the Regan Era. Reagan doubled revenues and there was some ‘cost??’ Krugman rejects the Laffer Curve and gives his own nostrums of how the projected 9 trillion dollar deficit envisioned by Obama will fit into the growth:

“What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.”[13]--How big is $9 trillion? By Paul Krugman The Conscience of a Liberal, August 23, 2009, 5:54 PM

Notice that there are two fixed numbers in this estimate: 2.5% growth and 2% inflation. The inflation-adjusted growth rate for 2007 was 2% and 2008 was only 1.1%.[14] There are lots of numbers to choose from including World Bank estimates but the choice has to be reasonable.[15] We are still stuck with a 9.7% unemployment rate and much of our current GDP comes from temporary stimuli like the recent ‘jobs’ program spent $92,000 per job[16] and, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam[17] And, none of these had a lasting effect. All of the money to propel this was either borrowed or printed up quickie fashion by our government.

Krugman and other dynamic scoring types seem to ignore the fact that Social Security is going broke and lugs along a 34 trillion dollar legacy while Medicare carries a similar burden of about 14 trillions. This 54 trillion dollar lump sum is almost as big as the entire household assets of our country at 57 trillions and total national assets at 72.3 trillions.[18] Ignoring the Laffer Curve is politically expedient as they can claim that their tax revenues will be on target despite tax hikes, Social Security debt service, new health care taxes for business and more. In other words, growth will continue onward and upward no how they tax business. The CBO thus must act as parrots and squawk out the good news on command.

The Reagan System could restore much growth to the economy with tax cuts especially for small businesses but that is not to be. The left wants to increase taxes on every level for political power reasons. This is proof that they care more about power and long terms in office with their powers influence and attract bribes and sweetheart deals [Chris Dodd, Barack Obama, Hillary Clinton, Charlie Rangel, Cold Cash Jefferson and others].

And on we go. It turns out that the left are only propelled by the hatred they see for those in the capitalist markets. They tend to form sticky cabals and drug-infested societies where their hatred is celebrated. Here is an example from James Cameron the director of Avatar as he flies into a rage:

“Cameron said at a news conference that he would like to shoot "those boneheads," referring to skeptics of anthropogenic global warming. "Anybody that is a global warming denier at this point in time has got their head so deeply up their a** I'm not sure they could hear me," Cameron added.”[19]-- James Cameron: Shoot Climate 'Deniers,' Glenn Beck a 'F------ A--hole' By Lachlan Markay (Bio | Archive) Wed, 03/24/2010 - 18:45 ET

It is easy to characterize the attitude of the left with a new word: Cryptomisoxeny [20]
Cryptomisoxeny is a mental condition in which a person is compelled to enlist in a valiant crusade to ferret out and squash such human notions such as bigotry, racism and hypocritism. The person with this disease is completely unaware of its presence and control of his actions and is deluded with the false or reverse notion that his or her conduct is actually the exact opposite from the unacceptable targeted conduct in others. Hence, those who rail and rant and search for bigots frequently use overt bigotry in their sanctimonious quest for the offenders and employ bigotry in its strictest definition to condemn other persons or groups. All this proceeds unconsciously as the bigots, in this case, believes that they are far above such a social defect and are some form of cleansing device for our society. Sanctamonicity is the ultimate internal psychosomatic reward as it draws rave reviews and wild applause from peers and others also burdened with this affliction and offers comfort and camaraderie.  The same argument holds for those who chase and attempt to correct racists using overt racism and, of course, this is hypocrisy, but a form hypocrisy that is buried deeply in the id.[21]
We hear of cutting deficits by Obama and his minions:
“In his speech, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised "very disciplined" future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.

"We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

"We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence," he said.”[22]-- Geithner Monday June 1, 2009

Can we believe this tax cheat or Nancy Pelosi [a.k.a. Spartacus[23]][24] and her rush to spend trillions on bigger and farther-left government?? Didn’t Obama just chop off the secured bond holders in the Chrysler bankruptcy fiasco? Were these also risk-free assets? It is hard to believe that Nancy has not been excommunicated by the Pope. She has the gall to instruct the Pope on abortion?[25]

Here is the Obama promise to cut the deficit in half:

“This budget actually is going to assume that there will be a hurricane, tornado, earthquake, flood or manmade disaster in the United States in fiscal year 2010, and each year going forward 10 years,” the official said. “The Bush budget never assumed that.”

Under White House projections, this year’s inherited budget deficit of $1.3 trillion will be cut to $533 billion by fiscal year 2013, the end of the first term.

“So we’ll cut it at least in half,” the official said.”[26]-- Obama vows to cut huge deficit in half By Mike Allen  2/22/09 6:58 AM EST

That is such a lie!

Our federal elected officials parasites must have learned politics from California[27] as the once Golden State is turning brown in a storm of bad debt and default. Sloth, sodomy and drugs—the old liberal recipe for success.[28]

And so it goes. The only process we see is the frantic quest for the wealth of others using racism and a political corruption of the Constitution as vehicles. The liberals have no regard for anything that would really stimulate the economy as they think that bloating government ‘provides jobs’ and that they can print money ad infinitum to finance their social justice projects. Their projects, however destructive to the American people are always enthusiastically endorsed by the New York Times—aka the Walter Duranty Papers[29][30]--a turn-of-the-crank Marxian puppet stage where intermezzos and grand opera ring.

We need to be prepared for some revolts, some tax protests [perhaps we can call it ‘civil disobedience!’], bunker mentalities[31]and much more from a group of some 175 million Americans as they realize that the rabid left are destroying our society from the currency down to the courts. We might expect visits to our homes from some ‘community organizers.’ We can also expect that our ‘government’ will backlash against some of us like Clinton did at Waco as the lefties cannot tolerate criticism.
Hard Times Ahead.
rycK

Comments: ryckki@gmail.com



[1] The Ascent of Money: A Financial History of the World (Hardcover) by Niall Ferguson (Author) http://www.amazon.com/Ascent-Money-Financial-History-World/dp/1594201927

Review:

 “The number one lesson from this book is this: financial systems collapse all the time. It happens in every era in every geography — which highlights why it shouldn’t be such a surprise that our own system is under serious strain right now.” http://john.jubjubs.net/2009/04/03/the-ascent-of-money-by-niall-ferguson/

[2] Portugal's debt downgraded by Fitch By PAN PYLAS (AP) – 2 hours ago “"A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," said Douglas Renwick, Associate Director in Fitch's Sovereign team.
In 2009, Portugal had a deficit representing 9.3 percent of its national income. That was higher than the 6.5 percent forecast by Fitch as recently as September and underlines why the ratings agency lowered its rating on the country by one notch to AA-. “http://www.google.com/hostednews/ap/article/ALeqM5goSQ5xWnCRQQPEvA-6sRLbJ1gPgQD9EKV38O0
[5] Krugman Menaces the Fear of Phantoms and Questions Obama with his Menacing Quips.  Tax and Spend and Damn the Inflation.
http://rycksrationalizations.blogtownhall.com/2009/11/23/krugman_menaces_the_fear_of_phantoms_and_questions_obama_with_his_menacing_quips__tax_and_spend_and_damn_the_inflation.thtml

[13] How big is $9 trillion? By Paul Krugman The Conscience of a Liberal, August 23, 2009, 5:54 PM http://krugman.blogs.nytimes.com/2009/08/23/how-big-is-9-trillion/

[19] James Cameron: Shoot Climate 'Deniers,' Glenn Beck a 'F------ A--hole'
By Lachlan Markay (Bio | Archive) Wed, 03/24/2010 - 18:45 ET
http://newsbusters.org/blogs/lachlan-markay/2010/03/24/james-cameron-shoot-climate-deniers-glenn-beck-f-hole-0

[20] Cryptomisoxeny Explained by Theory and Examples IIPosted by rycK on Sunday, December 06, 2009 8:48:28 http://rycksrationalizations.blogtownhall.com/2009/12/06/cryptomisoxeny_explained_by_theory_and__examples_ii.thtml
[23] Pelosi: The New Red Flag Rules of Spartacus.
Thursday, November 09, 2006 10:37 AM

[24] Coat Hanger Nancy the Queen of the Asian massage parlors in San Francisco. The Terminal Financial Psychosis of California as Seen Through a Green Lens
http://rycksrationalizations.blogtownhall.com/2008/12/14/the_terminal_financial_psychosis_of_california_as_seen_through_a_green_lens.thtml
[26] Obama vows to cut huge deficit in half  By Mike Allen | 2/22/09 6:58 AM EST
http://www.politico.com/news/stories/0209/19124.html


[27] Arnold Makes a Noble Stand. We will See if He Can Fight Off the Hoards of Barbarians at the Gates.
http://rycksrationalizations.blogtownhall.com/2009/06/30/arnold_makes_a_noble_stand_we_will_see_if_he_can_fight_off_the_hoards_of_barbarians_at_the_gates.thtml

Copulating with Coprolites: The Unveiled Mechanism of Governance by Progressive Liberalism in California
http://rycksrationalizations.blogtownhall.com/2009/06/23/copulating_with_coprolites_the_unveiled_mechanism_of_governance_by_progressive_liberalism_in_california.thtml

The Benefits of a Depression to the Tax Payers: Some States Will Have to Cut Away Many of their Phony Jobs. Illegal Aliens will Leave.
http://rycksrationalizations.blogtownhall.com/2008/10/21/the_benefits_of_a_depression_to_the_tax_payers_some_states_will_have_to_cut_away_many_of_their_phony_jobs_illegal_aliens_will_le.thtml

[30] In honor of that celebrated Communist stooge and liar and winner of the Pulitzer Prize for the NYT. The color RED is used in my essays in honor of Walter Duranty, a saint, if there could be one, in the Marxist Archives of Honor.

“He said that these people had to be "liquidated or melted in the hot fire of exile and labor into the proletarian mass". Duranty claimed that the Siberian labor camps were a means of giving individuals a chance to rejoin Soviet society but also said that for those who could not accept the system, "the final fate of such enemies is death." Duranty, though describing the system as cruel, says he has "no brief for or against it, nor any purpose save to try to tell the truth". He ends the article with the claim that the brutal collectivization campaign which led to the famine was motivated by the "hope or promise of a subsequent raising up" of Asian-minded masses in the Soviet Union which only history could judge.” http://en.wikipedia.org/wiki/Walter_Duranty


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