Slothful IRS Reduces Consequences of Exceeding Debt Limit

Treasury Secretary Timothy Geithner has told us that the government has a few tricks it can use so that even though the government debt exceeds the debt limit, the government will not have to shut down until early August.  One major reason is not discussed.

The IRS is running late this year on refunding excess taxes paid.  Part of the reason for this is that Congress and Obama did not manage to work out an agreement and sign it into law to prevent a drastic raise in taxes until 17 December of 2010.  In addition to changes that affected future payroll withholdings, some changes required retroactive changes to 2010 tax forms, which delayed the start of filing for many people.  Among these,

• Taxpayers were allowed to continue choosing to either deduct state income taxes or the state sales tax.  This affected the 50 million filers who itemize deductions.
• A change was made in who was affected by the Alternative Minimum Tax or AMT, which also affected those who itemize deductions.
• Teachers who claim the $250 deduction for money spent on classroom supplies which had been scheduled to expire.
• Qualified college expenses could allow a deduction of up to $4,000 which had been scheduled to expire.

Consequently, the IRS was going to be jammed more than usual due to these late changes.  There is, however, another problem the IRS has on top of this one.

The first Democrat-controlled Congress of four years ago decided that the IRS should provide loans to first-time home buyers at no interest.  A million home buyers took advantage of this program, so that IRS computers are taking in monthly mortgage payments in addition to handling the usual business payroll tax deposits and trying to get the many refunds out to taxpayers.  The IRS is running seriously behind.  This is the normal problem of poor central planning that we have come to understand is central to big government.

But, government has also earned our cynicism.  Could it be that this is also a good excuse for getting refunds, which averaged $2,324 in 2007, back to taxpayers late?  During the period between now and August, the longer it takes for the IRS to refund excess tax payments, the easier it will be to avoid the consequences of having exceeded the debt limit.  The delays on many tax refunds are expected to be 4 months.  Four months from 18 April will be 18 August.  This is very convenient for our overspending government.  Is it possible the IRS and its tax-dodging leader, the Secretary of the Treasury Timothy Geithner, are taking advantage to the fullest of such excuses?  This would help to allow the administration to continue its free-spending ways unabated until August.

Our Unfair, Discriminatory, Growth-Inhibiting Income Tax

Obama wants to have a discussion about income inequality and increasing the discriminatory nature of the income tax rate structure to reduce income inequality.  He claims he will win that debate.  He clearly believes the American People are merry thieves and covet their neighbor's income if not his wife, his house, his manservant or maidservant, his ox or his donkey, or anything else that is his.  I hope he is wrong and that most Americans will resist the Obama lure for free government goodies and services paid for by soaking the rich.

An increasing number of Americans, especially Tea Party Americans, do seem to think there is nothing wrong with others becoming rich and they even wish them the best.  Many have dreams of becoming rich themselves.  Unfortunately, the young Americans coming out of our government-run school systems have generally been indoctrinated in the idea that income inequality is a great social injustice that transcends such trends as a generally improving lifestyle for all income groups.  They have been taught that those with high incomes have somehow deprived the poor or that they must give back what they have created because, well they somehow could not have created it but for the poor?  Or, in some cases, the rich are pictured as actually having taken more of their share of the dwindling resources of the planet and added more than their share of pollution, so therefore they must be made to pay back the poor whose share of resources and clean air and water they took!  This is nonsense that comes from static thinking and environmental misconceptions I have discussed elsewhere.

The Progressive Socialist Elitist likes to point at the fact that the very wealthy are becoming wealthier at a faster rate than most Americans have been becoming wealthier.  He commonly claims this growing wealth on the part of the very rich is due to the Bush II tax cuts.  He does not point out that the rate of the increased share of total income going to the wealthiest 10% of Americans grew just as fast from 1994 to 2000 under Bill Clinton.  He does not point out that the share of total wealth of the top 10% has risen since 1978, which was back in Jimmy Carter's administration!  Let us look at the historical data of Piketty and Saez (2003) and the update by Saez through 2007 for the share of total income held by the top 10% of tax filers including wages and salaries, pensions received, profits from business, dividends, interest, rents, and capital gains, but excluding Social Security retirement benefits, unemployment payments, and other government transfer payments:

In 2007, the bottom income for the top 10% in income was $109,630, so we are hardly talking about really wealthy or really high income families here.  Saez' 2007 update provides a further breakdown on how the shares of those between the 90th and 95th percentiles ($109,630 and $155,400 in 2007), those between the 95th and 99th percentiles ($155,400 and $398,900 in 2007), and the top 1 percentile with annual income above $398,900 fared historically:

We see that those with incomes in the 90th to 95th percentile range actually lost share in the total national income from 2003 to 2007 following the Bush tax cut and overall had no greater share than they did in about 1970, though they were better off than in the 1940s and 1950s.  So, if income inequality actually were a legitimate issue of social justice, there is no reason to increase tax rates on this group.  If we then examine the group from 95% to 99% of income, we see they increased their share somewhat from 1982 to 1995, but have been rock steady ever since at the same fraction of the national income.  There sure is no reason to increase taxes on this group based on some specious argument that the Bush tax cuts caused them to become proportionately wealthier.  This would argue that tax rates for those earning up to about $400,000 should not be increased based on the specious argument that that would serve social justice by eliminating an increasing wealth inequality!  We are left with only the top 1% of income earners as the sole group of the "rich" whose share of the national income has increased.  They are the sole group making the entire top 10% of earners look as though they have increased their share of the national income.  Their income share has generally increased since 1978, though recessions cause sharp reductions in their share.

So, what is Obama talking about when he diatribes on the social justice need to increase tax rates for those families with incomes greater than $250,000 a year or those single filers with incomes above $200,000 per year?  Apparently, he just wants more of their money so he can exercise the power that comes with distributing it as he pleases for maximal political payback.  We can understand this greed and power lust, but we need not label it as virtue.  The Obama and the Progressive Socialist Elitist game is one of simple power lust.  It is an effort to dangle government goodies before a majority of the population who do not pay their fair share for the goodies they are to receive.  Indeed, let us examine the share of taxes paid compared to the share of national income earned by income groups to evaluate fairness on a more meaningful scale.

Now we can see that the top 1% of income earners had a 22.8% share of total income in 2007, but paid a far larger share of total income taxes at 40.4%.  The 95% to 99% group of top earners had a 14.6% share of total income, but also paid a share of income taxes which was much larger than that at 20.2%.  Our tax code clearly discriminates against them, even though we saw above that their share of total income has not increased since 1995 when Bill Clinton was President and still in his first term of office.  The group of earners between 90% and 95% had equal shares of total income and of total income taxes at 10.6% of each.  All but the top 10% of earners paid less into income taxes than their share of the national income!  In effect, they all received a subsidy paid for by the top 5% of income earners.  This was especially true for the bottom 50% of earners who paid only 2.9% of the total income tax amount in 2007!  Basically, they can vote for just about any wasteful and illegitimate government program because it will be using someone else's money.  They have no stake in the game.  This is by design and exactly how the Progressive Socialist Elitist wants it.  They want this half of the electorate to believe in free lunches, which is what this tax system gives them, except insofar as any of them may realize that hurting the higher income groups actually does hurt the economy.

The unfairness we are actually dealing with in America is the unfairness of stealing the earnings of those who have worked hard and effectively to create wealth, which allows them to be paid well or to use a part of that created wealth as income from their businesses and investments.  These activities do contribute greatly to the growth of the economy and to the decreasing cost of many necessary, or at least desired, goods and services.  With high taxes, we force the higher income earners to move their investments from the highest yielding investments into those with tax protections such as municipal bonds or we force them to hold unto their investments longer so they will pay capital gains taxes more infrequently.  Higher tax rates have always slowed down growth rates by making investment less efficient and by taking more of the time of the high earners due to their having to find ways to minimize loses to taxes.  The net result in tax revenues is that whatever the marginal tax rates are set at, the actual federal government revenues do not rise above about 19% of GDP.  This limit is called Hauser's Law.

Increasing tax rates on the wealthy may make a Progressive Socialist Elitist feel good, but it does not actually increase tax revenues.  This, in a rational society, would keep them from claiming they are increasing rates on the wealthy in order to do more to help the poor and the needy with additional government programs.  Interestingly enough, Obama seems to understand this at times and is more inclined to use the argument that he simply hates the wealthy having so much income and he is eager to do anything he can to take more of it from them.  He covets their income and thinks most voters do also.

Simple fairness would have tax marginal rates the same for everyone with income above about the 20% level.  Most of us are fine with the idea that government should not take food and other necessities out of the mouths of the poorest among us to fund government programs.  Of course those who are rational also want a much, much smaller government exercising only constitutional powers and serving only to protect individual rights.  With a legitimate government being about one-quarter its present size, the tax burden on everyone would be much lighter.  It would be easy to have no deficits and to pay off the national debt, thereby eliminating the interest payments on that debt.  It would be easy to eliminate business taxes, so businesses could much more readily compete internationally and hire many more Americans.  With lower taxes, everyone, most especially the hardest and most efficient earners would be able to create more wealth and grow the economy.  This would make it easier by far for every segment of the population to improve its standard of living, just as has clearly occurred in America from its founding and especially since after the Civil War.

It is important to remember that if you are truly interested in raising the general standard of living in the United States, that growth rates make a huge cumulative difference.  When governments do not interfere with the individual's effort to make his life better, the growth rate of the economy can be increased substantially.  Let us examine the effect on the size of the economy relative to its start size at the end of 20 years for the following growth rates:

2.0% growth yields an economy 1.49 times its initial size.

2.5% growth yields an economy 1.64 times its initial size.

3.0% growth yields an economy 1.81 times its initial size.

3.5% growth yields an economy 1.99 times its initial size.

4.0% growth yields an economy 2.19 times its initial size.

4.5% growth yields an economy 2.41 times its initial size.

5.0% growth yields an economy 2.65 times its initial size.

The only thing keeping the American economy from averaging 5% growth rates is the excessive size and interference of our local, state, and federal governments.  The excessive services and waste is a sad substitute for the robust economy we would otherwise have.  That economy would offer us many more choices tuned to our uniquely individual characters than does the retarded economy of a mixed socialist and capitalist system.  Free capital and entrepreneurial talent and we will prosper in ways that governments cannot compete with the private sector to provide.  What is more, we would then have a moral system allowing every individual to exercise the freedom of his own choices of values and exercising the personal control to manage his own life responsibly and in accordance with his personal values.

Substituting government coercion and threats of brutal force for the free individual choices of the free market and private sector is both immoral and impractical.  Wise men find that moral behavior is favorably linked to practical flourishing in life!  Some rational morality with respect to income tax fairness will yield a robustly growing economy and a better life for almost everyone.  The few left out by the economy will easily be handled by a more robust charitable concern by free men and women.

Eliminating the Deficit Is Not Hard

Daniel Mitchell of the Cato Institute has a prescription for a simple way to balance the federal budget without higher taxes.  He would freeze the budget where it is or allow either a 1% or 2% increase per year to achieve budget balance in a few years.  Freezing the budget where it is, projected tax revenues will slightly exceed the spending in 2016.  With 1% spending increases, a micro surplus would occur in 2017.  A 2% spending increase allows a surplus in 2020.  His is a simple response to the absurd claims by John Podesta of the Center for American Progress that the Bush tax cuts cannot be extended or made permanent because there is no reasonable way to downsize the government.

Let us look at this a bit further.  I have plotted the actual federal spending in 2005 dollars from 2000 through 2009 below, with the corresponding actual federal tax revenues.  Beginning in 2002, the tax revenues have been consistently lower than the spending, so we have become habitual deficit spenders.  The Obama government's expected spending and tax revenues for 2010 through 2015 are also plotted.  The Obama government intends to continue huge deficits through the 2015 fiscal year.  I have also plotted what government spending would have been if it had increased each year since 2000 at the same rate as the growth of our population.

For many decades, federal government spending has been excessive.  It was certainly excessive in fiscal 2000.  At least $2 of spending was unconstitutional even then for each $1 that might have made a reasonable claim for being constitutional.  If the federal government had increased its spending at the rate of population growth since then with a constant per capita spending rate, the tax revenue income would have been a match for spending except in the dip of revenue corresponding to the aftermath of the dot.com bubble bust and the present Great Socialist Recession in 2009 and 2010.  This would have been government we sorta, coulda have afforded.  Instead, we have had an insistence that at no time should the government feel any constraints on its spending.  In 2009 and 2010, the years whose spending Obama and the Democrats have completely controlled, the spending has been more than two-thirds higher than tax revenues.  I see no reason for the ridiculous spending of the years 2009 and 2010 to be continued, even without growth.  The new Republican House should insist that 2011 spending return to at least the absurdly high spending level of 2008.  The federal budget could then be allowed to grow at the population growth rate of 0.986% a year from 2000 to 2010.  The rate of spending from 2011 through 2015 is the curve I have called Spending Rationalized.

Under the Spending Rationalized plan, spending would be barely in excess of tax revenues with the extended Bush tax cuts in 2013 and there would be a small surplus in 2014.  There is no reason for government to grow faster than the population does.  In fact, while one might argue that the kind of protective services of local and state governments might justify growth at the population rate, there is no reason for the federal government to grow as fast as that.  At least there is no constitutional reason.  A constitutional government's main expense, by far, would be defense.  The threats to us defensively tend to be what they are, whether we have some more people or some fewer people.  Actually, with more people, enemies may be more reluctant to tangle with us, so the defense needs per capita may drop.

The socialists of the Obama government may argue that the recession will require on-going higher spending levels.  But, the many Obama attempts at stimulating the economy with massive spending bills have not worked.  It is clear that what is needed is a restoration of business confidence, both for large corporations and for medium and small businesses.  They need a known and not too expensive regulatory climate coupled with a reasonable tax policy that recognizes that many American companies are in direct or indirect competition in the world markets.  They need the government to get out of the way and let them produce. 

The only way to get out of the looming cost of government problems such as the Medicare, Medicaid, and Social Security underfunding problems is to cut back on those programs somewhat and foster real growth of the private sector.  The Obama idea of transferring wealth in larger and larger amounts from the private sector to the governments is a recipe for the collapse of the American economy, not just on the temporary scale he has forced in 2009 and 2010, but on a permanent basis.  Indeed, I have little confidence that Obama and the Democrats would even hold spending down to the very high levels they are projecting.  I am even more confident that under their management, the growth in tax revenues they are projecting for 2011 onward is unrealistically high.

Those increases in revenue are not too high if there is a sufficient change of philosophy in Washington that results from the Republicans gaining control of the House, which has to originate all spending bills.  If the Republicans manage to defund ObamaCare and to prevent the EPA from driving up the cost of energy due to their ridiculous declaration that CO2 is a pollutant, then there is hope the U.S. economy might become healthy enough to be able to generate the tax revenues projected.  If Obama takes over the many union pension funds that are underfunded and in critical condition and pushes through union card check so that many more businesses will be forced into a death spiral by being unionized during the lame duck session of Congress just after the election, then growth will be slowed for several years and things may be less rosy than the Democrat projection of tax revenues assumes.  Or, the Republican leadership may think it can ignore the Tea Party and its demands for smaller government and start making compromise after compromise with the socialists to grow government more and the business recovery will be impeded.  Many ifs remain and we will have to be aggressive in making demands of the Republicans once they are in office if the economy is to be set upright again.

The Bailouts and the Stimulus Bills provided gifts to many financial and large companies, but they hurt almost all other companies except for those in the green energy and global warming fraud business.  Obama's much touted small business loans came late and were not at all what small business needs.  Few small businessmen want Obama to become their partner.  Come to think of it, most large businesses belatedly learned that he is not usually a good business partner.  Most American businessmen, and especially small businessmen, agree that they just want government to stop constantly writing more laws and regulations to micromanage their businesses.  There are more laws and regulations than they can comprehend, which is not surprising given that the law makers themselves do not have the time to read the laws for which they vote.  Businessmen have to earn a living and then they are either supposed to read the voluminous laws themselves or have the surplus piles of cash to hire someone else to do it and constantly advise them.  This is a huge drain on small businesses and an unnecessary drain on any business of any size.

So, if government wants to have the tax revenues to spend for all the programs it is already committed to, then it had better change its tune and start recognizing that it is business that generates the income the government taxes or distributes money as wages and salaries, which the government taxes.  You could say that the business of America is business.  I think I have heard that before.  It is often held up to ridicule, but business is the way we all lead productive lives and generate the wealth that sustains the government and for that matter the charities of America.  It is high time we see the validity of that saying that the business of America is business.  So, in the name of the business of America, we need a federal government which knows to avoid being constantly in the way of those who are producing America's wealth.

Federal Spending and Revenue

Brian M. Riedl of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation has put out a very useful report called Federal Spending by the Numbers 2010.  It is chock full of graphs of the spending and revenues of the recent past and projections to 2020.  For example:

It is interesting to note that the long term rate of federal revenues has been about 18.0% of GDP, but the federal spending rate has exceeded that level by 2.3% of GDP on average year after year.  It is clear we have long been politically unwilling to live within our means and that if we allow the Obama plan to stay in place, we will either have to tax ourselves at a much higher rate than we have historically or we will be spending at rates of about 8.3% of GDP higher than federal revenues.  Such rates of spending are unsustainable.  If taxes are increased that much, the economy will stumble and future growth in the economy and standard of living will suffer terribly.  If taxes are not increased drastically, the accumulated deficits will leave America bankrupt.  It is impossible not to see the critical necessity of drastically reigning in the Obama spending plans.

Here are two more fascinating plots from this Heritage Foundation report showing the effects of future spending on the three major entitlements:

Medicare in particular is an overwhelming spending problem.  By 2050, Medicare, Medicaid, and Social Security will require the complete historical average of federal revenues just to fund them.  Medicare was already going to be a major problem before ObamaCare was passed to make it an even worse problem.  Note that in today's dollars, the average extra tax burden of these three entitlement programs alone will be $12,636 per household!  Do you have that much money available to give to the federal government?  Think about it.

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!