CEI Brings Out Its 2019 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State

The Competitive Enterprise Institute has issued its 2019 Edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State.  Because the government never provides the legally required accounting for the costs of regulation, CEI Vice President for Policy, the indomitable Wayne Crews, provides a conservative estimation of the costs of regulation every year.  That low-ball estimate for 2019 is $1.9 trillion.  Because the government has no desire that we know what its bewildering bureaucratic hurricane of mandates costs us, this task of making a realistic estimate of its costs is herculean.

Are you sure that a regulatory cost of $1.9 trillion can be justified by the benefits of regulation?  This is more than the entire GDP of Canada and nearly equal to the entire GDP of Brazil.  The federal government budget is $4.412 trillion.  This additional regulatory cost of $1.9 trillion makes the entire burden of the federal government at least $6.312 trillion.  Do you really think you received a reasonable value in government benefits from the $6.312 trillion?

Kent Lassman, President of CEI, in announcing the issuance of the 2019 Edition of Ten Thousand Commandments, says

.... we have recently seen some exciting progress on the regulatory front. In 1993, the Federal Register, where all new regulations are published, clocked in at 61,166 pages. Like the debt, it grew year after year, unchecked and seemingly uncontrollable. By the end of the Obama era, the year’s Federal Register took up 95,894 pages. The first year of the Trump administration, however, things changed. In 2017, the annual total was back down to 61,950 pages. In 2018, we saw only a slight increase to 63,645 pages. In other words, the annual mountain of new regulations was the smallest in a generation—and some of those pages actually contained de-regulatory actions.

While this is great progress, it is totally unreasonable to expect everyone, though mostly businessmen, to read 63,645 pages every year, to know and remember the entire sum of all prior regulations, to be aware of every court ruling on regulations of this magnitude, and to additionally know about every other memorandum issued by the regulatory agencies, of whose identities the federal government itself has no central account.  Most regulations are aimed at businessmen so this avalanche of mandates puts them at huge risk, even when one has the best of intentions with respect to the welfare of one's fellow man.  There being no cost-benefit analysis of any worth for almost any regulation, one cannot figure out how to be compliant simply by applying reason to the issue of what one can and cannot do.  Indeed, some of the best examples of completely irrational governmental requirements are to be found among our federal government's regulations.

Here are some further highlights of the report according to the CEI webpage:

• Each U.S. household’s estimated regulatory burden is at least $14,600 annually on average. That amounts to 20 percent of the average pre-tax household budget and exceeds every item in that budget, except housing.
• In 2018, the Trump administration issued 3,368 rules. That’s more than the 3,281 final rules in 2017, which was the lowest number of regulations coming out of federal agencies in a single year since the National Archives began publishing rule counts in 1976.
• In 2018, Washington bureaucrats issued regulations at a rate of 11 for every one law Congress enacted. The average for this “Unconstitutionality Index” for the past decade has been 28 to one. The five agencies issuing the most rules are the Departments of Commerce, Defense, Health and Human Services, Transportation, and the Treasury.
• President Trump should ignore his regulatory impulses on issues like antitrust, social media and technology, infrastructure, trade restrictions, telecommunications, food and drugs, subsidies, and more. Given divided government and the absence of Congressional action, the president should use executive orders to compel regulatory agencies to: put out an annual regulatory report card, implement a regulatory cost budget to keep his reform agenda on track, and address the misuse of agency guidance documents.

While writing this post, I discovered an error in the first bullet on the CEI web page which stated:

The estimated $1.9 trillion “hidden tax” of regulation is greater than the corporate and personal income taxes combined. If the cost of federal regulations were a country, it would be the 9th largest, behind India and just ahead of Canada. 

I have sent an e-mail message to Kent Lassman and Wayne Crews to alert them to this error.  I pointed out that:

It is true that $1.9 trillion is less than the GDP of India.  In order of 2019 projected GDPs, it is less than that of USA, China, Japan, Germany, India, France, United Kingdom, Italy, and Brazil and ahead of Canada.  Canada is number 10, so the burden of the $1.9 trillion of regulatory cost shoves Canada to the #11 rank as our regulatory burden takes the #10 ranking. 

So they need to change India to Brazil and #9 to #10.  I am sure they will.

Obama is Chicken Little

Veronique de Rugy of the Mercatus Center at George Mason University prepared the graphic above to allow us to see the catastrophe that Obama is warning us about due to the sequester he requested and refuses to prevent.  Now he is playing Chicken Little and telling us the sky is falling due to the decreased growth in federal spending from 2013 to 2021 from 55% growth to 51% growth.  Or a decrease in super-high growth to 2023 of 72% to super-high growth of 68% is sure to be our doom.

Look, our doom is due the failure of the government to make the drastic cuts needed to bring spending down to the levels of tax income.  Our doom is due to having a government that has grown over the last 80 years to the point it is spending four times as much as it is constitutionally empowered to do while exercising powers appropriate for absolute monarchs and dictators.  We are in this financial fix because more fundamentally we have allowed government to become the chief violator of our sovereign individual rights to life, liberty, property, the ownership of our own bodies, minds, and labor, and to choose our values for us rather than to allow us to pursue our own happiness.  It is very expensive to give up the management of your life to government.  This lesson is perhaps the most repeated and obvious lesson of history.

Lowest Cost of Living States -- OK the Best

The great state of Oklahoma is the lowest cost of living state in the union.  It barely edged out Tennessee for that prime spot.  As of the 4th quarter of 2012, the cost of living by state is indicated in this map provided by the Missouri Economic Research and Information Center.

The ranking is based upon data provided on cities and metropolitan areas on the cost of groceries, housing, utilities, transportation, health care, and a miscellaneous category.  Thus, it may not reflect the cost of living in the more rural areas of a given state.

It is worth noticing that the lowest cost of living states are all contiguous, with the exception of Idaho and Utah.  The contiguous block stretches from Ohio west to Nebraska, skipping Illinois, from West Virginia and west of the Applachian Mountains to Georgia, the only state on the Atlantic seacoast, and then west to Texas, skipping Louisiana.  The southern Great Plains states, the lower Midwest, the interior Southeast states, and the interior Mountain states are the best.

The most variable of the cost factors is the cost of housing.  In the 16 lowest cost of living states, housing is the cost with the lowest index rating.  In the 13 most expensive states and the District of Columbia, housing is the highest index value, with the exception of Alaska for which it is 2nd highest.  In Alaska the utilities index is the highest.  Housing costs are affected by the availability of land in relationship to the population.  They are affected by real estate taxes, policies to limit development and other land use controls, building codes, rent controls, contractor licensing requirements, labor and wage laws, and other cost of doing business factors.  In some areas they are also affected the extent of local federal, state, and local government ownership of land.

Utility costs are the second most variable cost.  These are a function of distance from such inexpensive and reliable resources as coal and natural gas or a lack of sufficient natural gas pipeline capacity.  Some states discourage coal electric plants or nuclear power plants.  They are also very much a function of state mandates for wind generation, solar power use, and biomass use for electricity.  In addition, many states like to attach special taxes to utility bills, especially those states so dominated by Progressive Elitists that they believe energy use is a sin.  Meanwhile, they require the consumer to subsidize so-called green energy ii obeisance to Gaia, so long as it is not in their backyard.  The worst states for utility costs are:

Alaska, index 168.4
Hawaii, index 167.7
New Jersey, index 133.9
Vermont, index 129.0
Rhode Island, index 127.3
New Hampshire, index 125.7
Delaware, index 122.8
Connecticut, index 121.0
Massachusetts, index 120.7

The third biggest variable cost is health care.  States dictate the kind and coverage of health insurance policies, restrict the building of new hospitals, license physicians and control the medical schools in their states, license pharmacists, optometrists, and registered nurses, and they meddle with regulations on x-ray equipment and other medical equipment by requiring often wasteful calibration, maintenance, and safety procedures on equipment they know nothing about.  States also have great impact on medical malpractice costs, Workman's Compensation insurance, and other medical liability costs in their courts.  The most expensive states for health care are:

Alaska, index 140.2
Connecticut, index 119.4
Massachusetts, index 119.0, home of RomneyCare
Hawaii, index 116.5
Rhode Island, index 116.3
Oregon, index 114.8
New Hampshire, index 114.2
Maine, index 113.4
Washington, index 112.9

The least expensive, and closely competitive, states in the overall ratings are:

Oklahoma, #1, index 90.5
Tennessee, #2, index 90.6
Kentucky, #3, index 91.0
Arkansas, #4, index 91.5
Indiana, #5, index 91.7
Kansas, #6, index 91.9
Texas, #7, index 92.0
Nebraska, #8, index 92.0
Idaho, #9, index 92.1
Missouri, #10, index 93.0
Alabama, #11, index 93.2
Utah, #12, index 93.2
Mississippi, #13, index 93.2
West Virginia, #14, index 93.3
Georgia, #15, index 93.7
Ohio, #16, index 93.9

The ignominious last fifteen states are not just last, but have been entirely lapped in the race:

Oregon, #37, index 107.0
Delaware, #38, index 108.2
Maine, #39, index 110.9
New Hampshire, #40, index 119.7
Vermont, #41, index 119.9
Massachusetts, #42, index 122.9
Maryland, #43, index 123.1
Rhode Island, #44, index 123.5
California, #45, index 125.6
New Jersey, #46, index 129.8
New York, #47, index 130.4
Connecticut, #48, index 132.7
Alaska, #49, index 134.5
District of Columbia, #50, index 144.8
Hawaii, #51, index 167.1

All of the 15 most expensive states have long been Democrat Socialist Party controlled with the exception of New Hampshire and Alaska.  Much of Alaska costs come from remoteness and the extreme weather.  New Hampshire while neither strongly Republican or Democrat does have a strong environmentalist factor contributing to high housing and utilities costs.  Government controls come with a big price tag which goes well beyond high taxes alone.  They are a major factor in the cost of living in that they raise of cost of many goods and services.

Favorite retirement states of Florida and Arizona fall in the undistinguished middle, but in the lower half of the states. Florida is #28 with an index of 99.0.  Arizona is a rather poor #35 with an index of 102.5.

The Oklahoma branch of my family is happily enjoying their lowest in the nation cost of living.  I, on the other hand, am most distressed by the cost of living in statist Maryland, ranked #43, with a skyhigh index of 123.1.  Earlier in life, I lived in 5 of the 16 best states and in 3 of the ignominious most expensive 8 states.

The Cost of Living in the United States

The Composite Cost of Living results for the states across the United States for the 4th Quarter of 2010 are now available:

The cost of living is influenced by the cost of doing business, the cost of land, the cost of housing, and the cost of government, among many other factors.  Crowded areas or those in which the federal and state governments own too much of the land will tend to have high land costs.  Housing costs are a function of land costs, building codes which may be designed to force the hiring of local labor or to use expensive materials, zoning restrictions limiting home development, and building permit restrictions designed to slow growth.  The cost of doing business varies greatly due to differing government policies on taxes and regulations, as well as Workmen's Compensation costs.  Then government spending varies greatly and the more the government's spend, the higher the taxes.

Examining the map above, we find the Northeast and the Pacific Coast to be the highest cost of living areas.  The lowest cost of living states tend to be between the Appalachian Mountains and the Rocky Mountains minus the northern tier of states.  Illinois and Louisiana are also excluded.  The heroically inexpensive states with their composite cost of living indices are:

Kentucky, 89.2
Tennessee, 89.5
Oklahoma, 90.1
Arkansas, 90.6
Texas, 91.0
Nebraska, 91.1
Kansas, 91.3
Missouri, 91.7
Georgia, 92.2
Mississippi, 92.3

The worst states are:

Hawaii, 165.6
DC, 139.9
California, 132.6
Alaska, 132.6
Connecticut, 130.2
New Jersey, 128.5
New York, 128.3
Maryland, 124.8
Rhode Island, 123.2
Vermont, 120.4

My state of Maryland is expensive, but then what do you expect of a Democrat state.  On the other hand, I have family members living in Oklahoma and Kansas and they really do live much better on much less there than one can in Maryland.  If you want Nanny State, all intrusive government, you must pay through the nose for it.

Good Times for Federal Workers.... Employees

From an editorial by Mark Tapscott in the Washington Examiner:

This recession has been such a boom time for the tax-supported bureaucracy that "federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months -- and that's before overtime pay and bonuses are counted." USA Today was especially struck by the fact that there was only one career federal worker making an annual salary of $170,000 or more at the U.S. Department of Transportation when the current recession began. Today, 18 months later, there are more than 1,600 career employees making that much at Transportation. We can only hope that none of those additional 1,600-plus high-paid workers was responsible for the $2 billion Cash for Clunkers debacle run by the Transportation Department.

The U.S. Debt Clock

Stop in now and then for some great entertainment at US Debt Clock.org and watch the U.S. federal debt increase along with other liabilities such as Social Security and Medicare.  You can also watch how each citizen's portion of the debts and liabilities mount ever higher.  You can also see the annual figures on the GDP grow and check out the assets of small businesses, big businesses, and households as they change.  You can monitor the assets per citizen and the government liability per citizen.  You can also monitor such things as mortgage debt, personal debt, credit card debt, and debt per citizen.  You can watch the state and local government debt sums also.  You can watch the population estimate and the number of illegal aliens as they change.

A Government-Troubled Economy

Government is the problem, it is not the solution.

For some time the housing industry has been in trouble. What caused those problems? The cost of lumber has been high for a long time due to heavy world-wide demand for lumber as much of the world has latched onto America's coattails and been carried along into relative prosperity and development. This has led to great increases in the price of steel, concrete, and copper, among many other things. Nonetheless, the housing industry has not been in trouble in much of the U.S., despite these cost factors being universal. Why not? Because the principal reason for the housing crunch has been that many communities have limited housing development in the name of planned growth and in order to maintain undeveloped, green areas. In these areas, and a few areas where the federal government owns all of the available land and makes it unavailable, the cost of housing has simply become prohibitive for people to buy homes. When it is recommended that people commit to a purchase price for a home of no more than 2.5 times their annual family income, but the average home costs 8 times their family income as it does in California, one has a recipe for disaster for the housing industry and those who stretch reality to try to acquire a home anyway.

Such situations brought pressure to bear on Congress to make homes more affordable. Congress was largely of a mind to support local community and state restrictions on home building, but needed to appear to care about the desire of middle class and upper lower class families for a home of their own. After all, this is a very real part of the American Dream. So, Congress used the Community Reinvestment Act to force banks to make mortgage loans to people who would not otherwise qualify for a loan. They used Fanny Mae and Freddy Mac to make it so the original mortgage loaners could unload their risky loans to others. They encouraged the Federal Reserve to keep interest rates down to help make home mortgages more affordable as well and what else was the Fed to do if it was to keep the housing industry afloat anyway? So, in consequence, we had not only a housing industry in trouble in those areas of the country with highly restrictive new housing development, but also many mortgage lenders, banks, government-sponsored corporations (Fanny and Freddy), and securities and investment firms in major trouble.

The auto industry has been sick for a very long time. For a long time, that industry has been under a huge burden laid on it by the United Auto Workers, which government rules for unionization and company actions when it has been unionized very much helped bring about. Of course, some other industries are also badly hurt by labor unions. Then the auto industry was further burdened with CAFE, which requires each auto company to make a set of vehicles whose average fuel efficiency is below a limit set by Congress. Basically, American companies really began losing out to the Japanese and other foreign car makers when this became the law of the land. We were used to cheap gasoline, and in comparative terms we still are. So, American companies never had as much incentive to make cars that were as highly fuel efficient as the foreign car makers. This was really what opened the door for the foreign car makers into the American market. For decades, American car makers have been forced to make money-losing small cars to meet the CAFE mandate. The tens of billions of dollars lost in this way had a multiplying effect upon the car makers to minimize innovation and the development new technology and quality manufacturing methods. Government destroyed the auto industry, with some help from bad management. Of course, when it is clear to good managers that government has it in for an industry, they steer clear of that industry. After all, the best managers are no dummies.

In addition, we have the highest corporate income taxes in the world, save those of Japan where they are equally high. This discourages American companies from bringing profits made abroad home. It encourages them to build more plants abroad and fewer at home. Most countries throughout the world have been reducing their corporate income taxes, but we have not and BO says that he will not do so in his administration. So, we raise the costs for American corporations and make it harder for them to export goods. Our policy is that they should export jobs and capital instead. Except the government pretends otherwise. The government lives in LA LA land. No, I am wrong. The government largely knows what it is doing. It thinks we life in LA LA land and will never catch on to the fraud they are putting over on us.

Then, as I have recently discussed, the government has monopolized a huge fraction of the land, especially in the West. As our population has grown and as we have used more of the resources available in our privately owned lands, these Western federally owned lands have become more and more valuable. Still, the government holds on to these lands and is constantly trying to remove more and more land from private ownership and productive use. This crimps the economy.

The government mandates for ethanol production have resulted in the misuse of much of our privately held and potentially productive farmland. There is no net energy produced by ethanol production and it simply causes less food to be produced and thereby raises our food prices. As more of our income goes to meeting our food needs, less goes to other industries and they start to hurt. American agriculture is the most productive in the world and will do well without ethanol subsidies. With these subsidies, we raise taxes for everyone, including the other industries who will only be hurt by diverting money to farmers and ethanol distillers.

The government has made it exceedingly difficult for companies to drill for oil in the U. S. and in our off-shore areas. They have made it hard to produce natural gas in many areas. They also make it hard to mine coal, use nuclear power, and frequently to deliver electric power, especially from coal-fired power plants.

Government has given over the education of our children to the teachers labor unions. These most socialist unions now pound American youth with socialist propaganda and teach them to hate making money (creating wealth) and industry. They also fail to teach them the skills they will need as productive employees, such as rational thinking skills.

So, governments have done great damage to our economy by damaging the housing industry, lenders and bankers, investors, the auto industry, other industries saddled with blood-sucking labor unions, the electric power companies, all corporations competing on a global basis, the oil and natural gas industries, the nuclear power industry, coal mines, and all companies who wish to hire young employees with critical thinking skills.

But, this does not yet give us the full scope of how government is the source of the troubles in our economy. Not yet even close!

Companies and industries must look to the future and plan how to use their employee's time, invest their capital, figure out what new products are needed, train employees to do the work they will need to do in the future, find ways to improve present products and to transport them efficiently, and figure out where to build facilities and how to heat, air-condition, and light them. Companies and industries must plan to survive. But, governments are insidious in popping surprises upon companies and industries that wreck their planning and development processes. Companies no sooner make an investment than Congress, state legislatures, and local politicians change the rules and turn their investments into losses.

The Federal government is doing just this on all sorts of fronts. With the Bush tax cuts scheduled to come to an end in 2010, the Democrat Congress is surely going to raise many taxes, especially on the wealthy who invest much of their money and on corporations. But, no one knows what the new taxes will be. Consequently, if they invest money, will the new taxes insure that they will have a bad investment? Under such conditions, people sit on their money, which is exactly what the politicians are presently complaining that they are doing. I sure am sitting on my lab's income at this time.

BO has said that he is going to bankrupt the coal-fired power plants. As I have noted several times, coal-fired power plants produce 50% of the U.S. electric power. Does this mean that we are about to lose 50% of all American electric power? If so, the coal mines, the trains that carry coal, the coal-fired power plants, the electric utilities, and all companies that use electricity are going to be hurting. Every blackout at my lab creates havoc. Vacuum pumps stop and air is sucked into some vacuum systems. All data collection stops and some long experimental runs are ruined and may take days of work to reproduce. Many industries have to undergo long processes to restart production when power is lost. At the moment of power shutdown some products are ruined. Power outages are much more serious for many businesses than they are for households. Of course long power outages at home cause concern for our two freezers and about loss of food in them. Frequently power outages and power fluctuations also increase the failures of electronics at home or in the workplace.

What will future energy costs mean for business? The imposition of cap and trade restrictions on the use of fossil fuels will have huge, unknown implications for the cost of making goods, transporting them, will in many cases determine which goods should be made, and will perhaps keep some employees from coming to work. Trained, critical employees will be lost if they live too far from the workplace. Plants may have to be moved to reduce transportation costs or to have more reliable electric power. Of course, many jobs will be exported to India and China where cap and trade does not exist.

As BO induces much of American youth to go to work on road and bridge-building, they will not be available to other industries. BO's service leagues will take still more young people out of the workforce. Labor costs will go up. Industry cannot yet know how much they will go up. Uncertainty again.

BO and Congress are determined to make it easy for labor unions to coerce workers into signing union election cards. Many more businesses will be saddled with unions. How badly will this cost the business in higher wages, less labor force flexibility, and less labor productivity?

What will BO and the Congress impose as costs for a nationalized health insurance and health system upon companies and wealthy individuals? Will this force companies to let employees go? Will this force them to export jobs aboard? Or to build new plants that use more robots and fewer people? Or redesign product to be made by more machines and fewer people?

Many privately held companies will be ruined when the death tax is reinstituted by BO and the Democrat Congress. Many companies will have to be sold to pay taxes. Many will have to be shutdown, since no buyer will be available. Many businesses will either be sold before 2010 or will be shutdown before then to take advantage of the higher threshold for the death tax that will be available before then.

Many capital investments will be cashed out before BO and the Democrat Congress raise the capital gains tax. Many investments will not be made because it is not yet certain what the capital gains tax will be.

Many individual taxpayers do not know what their tax burden will soon be. They think it will go up and will go up considerably. They know that someone has to pay for the bailout, the youth leagues, the welfare checks posing as tax rebates, the building of roads and bridges in accelerated rates, the payouts to the teachers unions, the bailout of the United Auto Workers Union, the subsidies for inefficient alternative fuels, and the nationalized health care and health insurance system coming. So, they are sitting on cash and are unwilling to invest it.

The trillion dollar bailout has failed to save the lenders, the banks, and Fanny and Freddy, and the investment firms. New winners and new losers are being picked by the politicians and bureaucrats daily. No one can figure out if they will be a winner or a loser, but most understand that there will be many more losers than winners. With this uncertainty, who wants to make an aggressive and forward-looking business decision. With no decisions, less and less money will be made, fewer goods will be delivered, and fewer services will be offered and fewer purchased. The economy slows down more due to uncertainty than due to any other cause, because uncertainty stops everyone in their tracks. Everyone feels as though they are in a minefield, so no one wants to make a step for fear of stepping on a mine. This is exactly the response to be expected.

Yes, the economy is hurting. Governments sure have worked overtime to put it in that world of hurt. Government is the problem, not the solution. We need a determined return to the concept of limited government, of Constitutional government.

The Cost of Government

Doug Bandow's commentary in today's Washington Times compiled many measures of the cost of government. He points out that Tax Freedom Day this year was on 23 April, but that this is a poor measure of the cost of government. First of all, local, state, and federal government may all be running deficits. Secondly, they all have regulations with costs which they do not pay. What was not mentioned and may not be included at all are the requirements to contribute time and effort without charge to keeping tax and employment records and being an unpaid tax and information collector.

Americans for Tax Reform calculates the cost of government based on what they spend and on the cost of regulations. They calculated that 16 July was the day the average American stopped working for the governments. This was 4 days later than last year! Individuals worked 83.7 days this year for the federal government and 50.5 days for state and local governments. Government regulation costs each of us 62.6 days this year! If we nationalize health care or add a cap and trade bill to combat the mythical man-made global warming, these costs will go up dramatically. They are going to go up dramatically in any case because Baby Boomers are about to start retiring in large numbers, which will at once remove many high income earners from higher tax brackets and increase Social Security and Medicare costs.

Federal spending is up 11.4% more than the size of the economy since 2000. So despite the economy growing well over that period and federal taxes rising even faster than the economy did, Congress spent more money than the bonanza they were given in increased tax revenues. If the rate of government spending had been held to the rate of the growth of the economy, the federal deficit would have disappeared in 2006.

Regulation costs this year are 17.2% of the national income. These regulations hurt the economy and its growth in ways whose costs are not included in that figure. Reductions in output, jobs, lower wages, and slowed economic growth are estimated to cost as much as another $1.5 trillion per year.

State and local government expenditures have increased by 19.1% more than the national income since 1999. In Connecticut, the people will work until 31 July before they come even with the cost of government, while in New Jersey the date was 30 July, and in New York it was 29 July. On the other hand, if you lived in Alaska, you were free on 21 June, if in Mississippi on 30 June, and if in Montana and West Virginia on 1 July.

Bandow asks, "What kind of a supposedly free society forces its people to work well more than half the year for the government?"

I join him in that question and ask if the loss of your control over that huge part of your life was worth it in terms of the benefits government provided? For me, the answer is a clear and strong NO!

What is a Rational Tax Policy?

The last few posts have been for the purpose of establishing a foundation for a discussion of what a rational tax policy would be and then to proceed with such criteria to examine the tax policies of the Presidential candidates McCain and Obama. It is not possible to evaluate the soundness of their policies without thinking about the proper purpose for taxes and the least harmful ways to impose them upon the people.

First, the amount of tax money needed to operate a government should generally be determined by which derivative functions it can legitimately pursue as compatible with its fundamental function of protecting the right to life, liberty, and the pursuit of happiness of the individual. If our federal government carried out its work consistent with this constraint, the total federal budget would certainly be less than 40% of what it is now. This would allow huge tax reductions. Both state and local government functions are probably just about as bloated with respect to this purpose.

Second, all government budgets should generally be balanced, with tax income equaling government expenditures. Under severe depressions and during a life-threatening war, the last of which was WWII, government deficits are reasonable.

Third, taxes are not to be used to punish people who are either making high incomes, or who do not wish to buy a home, or who do not wish to install a photovoltaic panel on their rooftop, or who smoke or drink alcoholic beverages. Taxes are not to be used for social engineering purposes, since there is no way to do this which will not derive some people of their right to life, liberty, and the pursuit of their happiness.

Fourth, having satisfied the above conditions, taxes should be levied such that the economy as a whole will be able to sustain a maximal growth rate. The fundamental reason for this is based on the observation several posts ago that personal compensation income, including benefits, has been approximately fixed at 70% of national income for about the last 40 years. People across all income levels see their income grow as the national income grows. Thus, if you hold the best interests of anyone, poor or wealthy, at heart, the way to best improve their lives without doing actual harm to anyone else, is to establish policies which allow everyone the freedom to contribute to the growth of the economy. Putting excessively high marginal tax rates on the wealthy simply discourages them from working an additional hour they would otherwise have chosen to work. Or, it causes them to invest their income in a bigger home instead of more efficient machinery for their factory. With less efficient machinery, they cannot hire more employees or they have to fire employees, because a factory in China is making similar items for less. Or similarly, they invest their money in municipal bonds for the tax deduction, but what municipal activity grows the economy as well as their equipment investment would or as their hiring a new worker and providing him training so he can become productive?

Fifth, taxes should be simple and so straightforward that every voter knows very well how much he is paying in taxes each year. From this standpoint, pretending that an employer is paying half of the total Social Security and Medicare taxes is wrong. It is also wrong to tax corporations, because all of the taxes they pay are passed on to individuals in ways much too complicated for anyone to figure out. Ultimately only individuals pay taxes, so the tax should be levied on them directly so they can be aware of what the cost of government is to them. They must be in a position to determine whether the value of government programs equals their cost. Taxes are the equivalent to prices in the free market for government. In the free market each consumer decides which products and services and how much of each product or service he will buy based on his needs, desires, and prices. The voter should be doing the same with respect to government, albeit government limited by the principle of protecting individual rights, and the cost of government, which is given by taxes.

Personal exemptions on income taxes should be based on the cost of a person having sufficient, but just sufficient, means to feed, clothe, and house themself. No other tax exemptions should exist except qualifying medical expenses, which would not include certain types of cosmetic surgery, for example. This deduction should include the cost of medical insurance. This keeps income taxes fair and simple. The tax rate applied to taxable income should be the same for everyone. Programs such as Social Security and Medicare should be phased out since they are not a proper function of government and their functions should be handled by private industries, such as investments and insurance.

Unfortunately, governments have caused many incredible distortions of the free market with their tax policies of the past and present. People have bought homes eagerly of a size more than adequate to their needs in order to have some tax relief. Ending the home mortgage interest deduction would cause a collapse of the housing market. This is admittedly not an easy problem to solve. But, a drastic cut in the cost of governments as they retract to the size they should be, will allow those with homes to at least not be hit with a tax increase due to losing their deduction for the mortgage interest paid. Over time, a great reduction in the size of government and of taxes, will allow the economy to grow so much faster that people will want larger homes due to their greatly increased wealth. So, how do we get to no mortgage interest deduction from here without collapsing the value of homes on the market? Clearly, the deduction will have to be phased out slowly as the size of government is decreased. In year 1, 97% of the mortgage interest could be deducted, then in year 2 the deduction would be 94% of it, until 33 years down the road, there would be no such deduction. This schedule should be viewed as unchangeable by Congress so that everyone can calculate out the consequences of buying a home with a given size mortgage and not have to worry about arbitrary Congressional tampering with their biggest investment decision. Probably the same should be done with the deduction for state and local income taxes. This gives people a fairly long period to re-adjust their decisions on which states and local areas they will live in. These are long-term commitments that need to be made as a sacred covenant on the part of the government toward the people.

Social Security should also be phased out. The proposals to allow young people to invest a part of the present 12.4% in private investments is the way to go here. The part they are allowed to invest will increase over the years. On the other side, people are living much longer now and are much more healthy and generally can more easily find jobs which are not backbreaking than was the case when the Social Security system was begun. This means that people should be expected to work longer before drawing Social Security benefits. They have no right to draw more in benefits than younger people can afford to pay out in taxes. They voted over and over again for this Ponzi scheme, knowing full well that private investments would have provided them a much better retirement. So, benefits given out should not be extravagant. There should be consequences for choosing to do stupid things!

Similarly, Medicare should be phased out. This can also be handled in a very similar manner as with Social Security.

Corporate taxes as mentioned are simply passed on to individuals in many complex ways. If they were eliminated, then American corporations would be much better able to compete in the world economy. Prices for many goods and services would drop, corporations could make wise business decisions without having to worry about disrupting tax issues, they would export more goods abroad, they would hire more people and pay them better salaries, and they would invest more in equipment modernization and personnel training. There would be a serious resulting boost to the economy as a whole. At the least, corporate taxes should be as low as capital gains taxes, since the role of a corporation is largely one of making capital gains.

Capital gains are taxed without regard to the effects of inflation and without regard for the fact that defering the use of money for a period of time has an interest rate associated with it which should not be taxed for sure. So, what part should be taxed? This becomes complicated. Frankly, it is too complicated, so it is best to set this rate low and just be happy that with a low rate on capital gains, the economy is going to grow at a higher rate and in the end everyone benefits from getting their 70% share of the bigger economy. The capital gains rate should be considerably lower than the tax rates paid by the middle class on income at least. This gives the middle class incentive to invest and recognizes that capital gains are not corrected for deferred use of the money and for inflation. Of course inflation is supposed to vanish as governments learn to live within the much smaller budgets needed to fulfill their legitimate functions.

The Death Tax, which causes governments to dance upon the grave of the recently deceased, while they rip what remains out of the heart of grieving relatives and destroy businesses, whether farms or small manufacturing, retail, and services companies. This allows government to deprive employees, who may already have a struggle to keep the business going without the guidance of the owner, of a job. What sound government tax policy this is! This death tax is clearly all about punishing people who spent a lifetime building wealth and commonly providing many others with jobs. This is envy of the worst kind run amok. Sometimes it is claimed that relatives have not earned the income of an inheritance, therefore the government should keep them from getting it. This is not always true. Often family members have played a major role in helping to build a family business. Besides, if they are undeserving, they will commonly lose the inheritance soon enough. In any case, the on-going business and the wealth assets will be taxed into the future in the normal ways, so governments will get their income. Such businesses as do survive the death of the owner will often generate far more taxes over time than will a business sold in a fire-sale in order to pay inheritance taxes. The death tax is a clear example of political tom-foolery. We citizens who accept this disgrace are the Toms made fools of.

Now, I am not unrealistic enough to believe that this entire goal of returning government to its legitimate functions and thereby reducing its size is going to be accomplished in this upcoming election cycle. First, the people have to become committed to the essential principle of government limited to the purpose of protecting individual life, liberty, and the pursuit of happiness. Given that this will not happen soon, it is still advisable to judge the tax policies of politicians on your rational goals, rather than as a cost-free promise of Christmas gifts all year long, as many voters do.

Politicians will always skew their tax plans in a direction designed to win enough votes to be elected to public office. Some count on the electorate being absolutely uninformed about the economy, business, and of course the function of government. Some are in love with class warfare and play on people's envy for those who might have more worldly goods and income than they do. They know that few voters have even read the Constitution. They know that few voters have read much history and tried to learn its lessons over the ages. They count on voters only seeing the first and most obvious effect of any law, including any tax law. They describe the economy as a pie of fixed size, simply to be cut up in different ways. They count on being able to fool most of the people most of the time. And, they have a long track record of showing that they are masters at doing so! They almost never get voted out of Congressional office until they wish to leave. Yet, most of them vote for bills which are clearly not in the best interest of the people and are certainly not limited to functions necessary to protect individual life, liberty, and the pursuit of happiness. They are masters at using the tax code to manipulate one group of people against other groups of people and give out favors to those they want campaign donations from and whose vote they want.

Still, there are sometimes politicians whose tax plans are more fair and more likely to encourage the growth of the economy than are the plans of the completely committed socialists and demagogues. There are politicians who are counting a bit less on the ignorance of the mass of voters. There are some politicians whose time-horizon is a bit further out than that of others. I will try to judge the plans, as best they are known, of the candidates for the presidency. I will also try to assess the commitment of each based on his prior commitments and his prior votes.

Taxes in Montgomery County, Maryland - An Example

The median family income in Montgomery County, Maryland was $103,476 in 2006. Half of the families in the county made more and half made less. This means that such a median family is making much more than the median income in most of the United States. But, it is also true that the cost of living is much higher in Montgomery County and taxes make no adjustment whatsoever for that fact. By the way, median household income in Montgomery County is considerably less, so do not confuse those two sets of numbers, as many commentators do.

Let us assume that this median income family has all of its income from being self-employed. We will discuss the case of income from a separate employer later. This family has approximately the following taxes applied to their income, assuming they are married and filing jointly, have one child younger than 17, and have $15,000 of itemized deductions:

Federal Income Tax Average Rate = 12.00%
Social Security Average Tax Rate = 12.22%
Medicare Average Tax Rate = 2.86%
Maryland Income Tax Average Rate Estimate = 3.73%
Montgomery County Tax Average Rate Estimate = 2.54%

The sum of these average rates on this family's income is 33.35%. More than one-third of their income is going to income taxes! In this calculation, I calculated the social security payment and then found the percent of that relative to the total income of $103,476, which is slightly above the cut-off upper income on which the 12.4% social security tax is levied. For the Medicare tax I did the same thing. The state and county taxes depend further on what part of the itemized deductions are due to state and local taxes, so I made a reasonable typical estimate of that.

Let us look at the case of family income for those not self-employed. The first thing to realize is that the employer figures up the total cost of employing an employee including all taxes paid on the employee, benefits for the employee, facility space for the employee on the job, added insurance costs, added equipment costs, etc. If he did not have to pay 6.2% social security tax and 1.45% Medicare tax on the employee, he would be absolutely as willing to give that money to the employee as to give it to the government. As a result, it is really a fiction that the employer is paying that money rather than the employee. Politicians love this little fraud because it hides, as so many other taxes are hidden, the true cost of taxes from the employee and most voters. This fraud does give the employee one little benefit however. Since the 6.2% + 1.45% = 7.65% of his income never appears in his salary, he does not have to pay federal, state, and local income taxes on that amount, while the self-employed person does. Ain't it a crock. Everyone hates the self-employed!

Suppose the family income earners above are considering whether it is worth their while to work an additional hour or not. If they do, what fraction of the income earned in that hour will go to government instead of to them? This is the same as asking what is the marginal income tax rate for each of the above taxes? Let's assume however that they are still a wee bit below the social security and medicare tax cut-off levels, as very many families will be. Then we have:

Federal Income Tax Marginal Rate = 24.00%
Social Security Tax = 12.40%
Medicare Tax = 2.90%
Maryland Income Tax Marginal Rate = 4.75%
Montgomery County Income Tax Marginal Rate = 3.20%

Thus, the total marginal income tax rate is 47.25%! Just in income taxes alone, $0.4727 out of each additional dollar earned is lost! Or, 28.35 minutes out of each hour worked is stolen! This is a situation a great many productive people are in. They have to really love their work or be really dedicated to achieving a goal requiring additional money to justify working this additional hour. If you wish to increase taxes on such people, are you really sure that you want to so discourage them from working as hard as they do? How many baby boomers might you induce to take early retirement, with the added strain that will put on the social security system and the loss of so much experience? Of course, at such tax rates, it makes a lot of sense for such people to work very hard on trying to earn additional money in ways that will not require them to pay so much in taxes. This tendency for people to work fewer hours as the taxes go up and to work harder to find tax loopholes or even to cheat on taxes, is why increasing tax rates does not always allow the government to collect more in taxes. The economy will grow less and over the years after a tax increase, this results in a large decrease in the taxable income compared to the taxable income which would materialize in those years at lower tax rates.

Of course, these income taxes are not the only taxes paid. You will also pay property taxes on your home and the land it sits on, sales taxes, taxes on utility bills, gasoline taxes, liquor and tobacco product taxes, motel and airport use taxes, fishing license, car registration, car pollution test taxes, dog licenses, marriage licenses, home title registration taxes, and higher costs for all products and services to cover the taxes paid by businesses, and many, many more taxes. So the income you have left after you pay the income taxes, is still going toward paying taxes in many ways. Taking these other taxes into account, the family earning just less than $102,000 will in fact pay out far more than half of each additional dollar of income on average in taxes. How discouraging!

So, stop and think. Are our governments really doing enough for us that we should be willing to give them more than half of all the value we create by working hard? I for one do not think this is anything but a slam dunk question. NO!!!! NO!!!!!!! NO!!!!!!!!!!!!!!!!