Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

24 June 2011

More Taxes to Pay the National Debt?

Do we need higher taxes and fewer tax deductions to pay the deficit of $1.597 trillion this year?  According to the Office of Management and Budget, the federal government will spend $3.771 trillion this year, which is an increase of $1.043 trillion of spending since 2007.  This is a 38.23% increase in spending in 2011 compared to 2007!   The spending increase since the 2008 Democrat Congress budget is 32.2%.

The deficit ballooned because of this spending increase coupled with a smaller $393 billion loss of tax revenue because Americans have been made much poorer now in comparison with 2007.  Many see that as the result of government shackling the private sector with higher taxes, many more regulations, the threat of still more draconian administrative regulations, the increasing requirements and expenses of ObamaCare, and the massive printing of money.  The result has been a massive transfer of wealth from the jobs-creating private sector to the jobs-devouring government sector.

If we were to start repaying this national debt today over a 30-year period in equal payments, our annual payment would be $900 billion.  Note that is almost all of the massive spending increase that has caused our present debt woes.  If we are to come up with an extra $900 billion per year to pay our debts, we already face a frightening task.  Perhaps it is so frightening that few people are willing to face the crisis at all.  If we ignore the debt until 2012, but then start to make repayments, the long-term interest rate of 5% is likely to have returned and the annual principal and interest payment will be about $2 trillion!  Imagine making debt payments equal to 73% of the total spending of 2007.  Can you imagine squeezing defense spending, medicare, medicaid, the administration of ObamaCare, and Social Security into 27% of the budget?

We must make a choice.  We must either increase taxes and slightly decrease spending as the Democrats want to do, or we must greatly decrease spending and allow the economy to grow with modest tax decreases as the Republicans mostly want to do. 

Tim Geithner, the Treasury Secretary, just told the House Small Business Committee on 22 June that the Obama administration wants to squeeze another $1 trillion out of people earning more than $250,000 a year over the next 10 years.  Most of these people are small business owners.  They are precisely those small business owners who are making enough money that they can hire more people.  Nonetheless, Geithner maintains that cutting spending by $1 trillion would have a more negative impact on the economy than will the tax increase on the "rich."  Like most people, he is ignorant of the effect this will have on company owners choosing to invest in new production-enhancing, and thus job-creating, equipment.  He does not think about the need to buy more building space to put more production capability and employees into.  Finally, he is not thinking about the fact that few employees are sufficiently productive soon after being hired to carry their own weight.  Money has to be set aside to pay them while they get enough on-the-job training to become profit centers.  Expanding a business is commonly a very expensive proposition.  Adding one person in a small business is a big incremental step in terms of the necessary addition to company income.  Rational businessmen do not expand a business without a strong sense that they will be able to make a decent profit for their risks and effort in doing so.

ObamaCare and the Dodd-Frank financial reform act raised taxes.  The inheritance tax was brought back by the Democrats as a special scourge of small businesses.  While most other developed countries have learned the advantages to reducing the corporate tax rate, the U.S. has not.  It now has the highest corporate taxes in the developed world, since Japan recently reduced its previously equally high corporate taxes. We are also one of the few countries that taxes earnings a company makes in another country.  This causes U.S. companies to invest those earnings in other countries rather than in the U.S.  Our tax policy encourages them to create more jobs abroad than at home.

As a result, more and more companies financed by Americans are being started in other countries.  Many American companies are re-incorporating in other countries with lower taxes.  Favorites for such purposes are Luxembourg, Bermuda, and the Cayman Islands.  In 2008, there were 3 U.S. initial public offerings (IPOs) by companies incorporated in tax-haven countries for every 10 that were incorporated in the U.S.  Ten years ago, only 1% of U.S. IPOs were incorporated in either the Cayman Islands or Bermuda.  In 2010, 26% of them were!  So far in 2011, 21% of new IPOs have been incorporated in these island tax-havens.

In 2004, Congress acted to limit incorporations in tax-haven countries.  Companies with a substantial change of ownership could re-incorporate in a tax-haven country, however.  This actually encouraged the sale of many companies.  The IRS changed the rule to require a complete buyout in 2009.

The venerable American company Samsonite was taken over by CVC Capital Partners and is now incorporated in Luxembourg, but headquartered in Hong Kong.  Asia is now its primary market.  The semiconductor spin-off of H-P, Avago Technologies Ltd., was bought out by Kohlberg Kravis Roberts & Co. and is now incorporated in Singapore, though its headquarters is in San Jose, CA.  It now has built extensive operations in Singapore.  Freescale Semiconductor Holdings I Ltd. went public in the U.S. last year after a buyout from Motorola Inc. which used to own it, but now it is incorporated in Bermuda.  It still has extensive operations in Austin, Texas.  U.S. investors in 2009 had so many securities holdings in Cayman Island companies that they are the fourth highest total for any country in the world!

Most other developed countries have learned either from the disasters of their own adoption of socialism and the anti-business mentality or from watching the deleterious effects of socialism in other countries, that economic growth will be stunted by soak-the-rich and squeeze businesses schemes to fund the welfare state.  Many of those countries are stuck with the welfare state, but have learned that it cannot be sustained at all without a growing economy.  The American Democrat Socialist Party has not learned this lesson.  RINOs in the Republican Party have not learned it very well either.  As a result, we are growing at a much slower rate than many countries around the world now.  We used to talk about the Old Men of Europe.  Well, we are becoming the Old Man of the World. 

This is totally unnecessary.  We have only to unshackle business and stop penalizing the so-called wealthy or the small businessman to completely change this around.  The Democrats have made it perfectly clear through Obama, Biden, Geithner, Reid and Pelosi that they have learned nothing.  Chris Van Hollen, a particularly wrongheaded Democrat from wrongheaded Maryland, is a Democrat negotiator in the Biden deficit-reduction talks and has said that Democrat principles require a tax increase on the wealthy and business owners.  He is accompanied on the Democrat side by the radical James Clyburn of South Carolina.  It is no wonder that Eric Cantor, the Republican House Majority Leader, and Senate Minority Whip Jon Kyl were compelled to leave the Biden talks.  It had become too ridiculous to work toward a compromise with these ignorant job-killers and company-killers from the Obama administration and the Democrat sides of Congress.  Earlier, Tom Coburn, Senator of Oklahoma, had similarly given up hope of a rational outcome from talks in another set of negotiators known as the Group of Six.  I have to applaud these sensible Republicans.

When the lemmings swarm over the cliff edge, sensible men refuse to follow them.  Actually, I have heard that lemmings are more sensible than Democrats.  They really do not rush over the cliff.  That is just a fable for them, but it is the everyday purpose of our Democrat political leadership.


MCPlanck said...

"They are precisely those small business owners who are making enough money that they can hire more people. "

Have you ever run a business? I have. And I noticed something. The decision to hire or fire had nothing to do with taxes or profits; and had everything to do with customers.

When I had more customers, I hired. When I had less, I fired. Turns out that I could always afford to pay my taxes and make money when people were buying; but when nobody bought, then there was no point in expanding my business.

Creating demand creates supply. Creating supply does not create demand. This is obvious to anyone who has ever stocked a store shelf. You run the advertisements first, then you buy the stock. If just buy stock, you go out of business.

Given that every two-bit shopkeeper in the world knows this, how is it so many high-paid economists don't? Is the ground really that far away from up there in that ivory tower?

Charles R. Anderson, Ph.D. said...

Yes, I own and run a business.

One needs customers, either already coming to you or likely to come to you in your judgment if you have the goods and services to attract them. Yes, there must be a demand for what you propose to supply.

Of course, I might have myriad customers by greatly undercharging for my services. Customers can be easy to get, provided you overlook the cost of providing those services. I must pay my employees, pay for insurance, advertising, equipment, utilities, pay taxes, do government paperwork for free, pay for repairs, rent, and supplies. If I cannot cover these costs, I cannot provide my services for long.

How many customers will I have when I cover these costs and give myself some reason to work so hard? Generally more when the economy is healthy, which it has not been for 3 years. When it is sick, companies ask themselves more carefully whether they can afford to characterize the materials they are using from their vendor and fire John who has skills they appreciate or whether to keep John and hope for the best in the materials from their Chinese vendor. In such times, a great service may still see a drop in demand.

Why is the economy in such awful shape? It is because the government has been massively stealing from the private sector and now is gobbling up 25% of GDP. My almost completely commercial customers have less to spend for my laboratory services and besides, they are scared by the great uncertainty that our governments have created by making it clear that they want to steal more and more from business. They are holding their income as much as possible for a rainy day, which they fear the governments are sure to cause.

When government puts up a false argument to justify taking still more from the private sector, it is very often that if only it spends more on shrimp activities on treadmills, more demand will be created in the private sector and the economy will improve. Well, no, it will not. The recent stimulus bills have demonstrated this, as have many other stimulus bills of the past.

You said that "Creating demand creates supply. Creating supply does not create demand." This is an oversimplification. When the first affordable cars were built, the demand came about and grew. When people had only horsepower, they did not even know that affordable cars were possible. There was no demand for them. Invention and affordable production methods are essential components of supplying something that is worthy of demand. Demand grows for supply which offers good value for its cost.

Societies burdened with huge obstacles to creating supply such as a lack of property rights, a refusal to allow businesses to operate without paying bribes, and crushing taxes are never able to produce the demand for the goods and services which cannot be made available to them affordably.

Michael E. Marotta said...

I accepted MCPlanck's comments generally, even as I recognized some of the wider contexts that Dr. Anderson pointed out.

It might be pointed out that if you can advertise something no one wants in the first place, it does not matter what the supply is. Unable now to live without iPads (though I do), millions were happy to forego the Newton. Where is the Palm Pilot? And what happened to the Studebaker? Drug stores used to have tube testers so that you could replace radio components. Can't find one anywhere these days.

I think that overall, we can agree that business, commerce, trade, enterprise and entrepreneurship are more complicated than the politicians can appreciate. And yet simpler. "Capitalism is what people do when you leave them alone."

As for the debt, it is not our problem. As the largest single economic entity, the government does affect us all with its decisions. But, ultimately, the government is just another enterprise. The value of the dollar relative to gold is an indication of their balance sheet and P&L statement.