The myopic ecomonist article

| January 10, 2013 | 29 Comments

I have a friend who I regularly disagree with on most economic issues.  He’s to the left of me on fiscal issues, as is most of the human race.  Although people say I am conservative (myself included at times) I’m more of a libertarian, except on foreign issues.  Which makes me a man without a kingdom, since I think the GOP is a bunch of flakes on the economy and social issues, think the libertarians are wrong on foreign issues, and like the Dems even less on the economy.  Nonetheless, the only magazine I ever read (excepting the one I write for) is the Economist, which I generally read on flights. 

And so when my friend linked to this article yesterday, I pulled my last three hairs out.

As a side note, though, one point Mr Sullivan makes isn’t really correct. Mr Sullivan writes that if Barack Obama “pretends that we can resolve this by revenues alone, he is part of the problem, not the solution.” David Brooks echoes that point in an op-ed today, saying “there are no conceivable tax increases that can keep up” with rising Medicare spending. This sounds very hard-headed, but it’s not really correct. America has one of the lowest tax burdens of any advanced country. We may not want to fix our debt problem solely by increasing revenues, but if we wanted to, we could….

In other words, by gradually increasing our total tax burden by 7% of GDP through 2023, we could balance the budget; we might eventually have to raise it by perhaps 10% of GDP. That would leave us with a much higher tax burden than we have now, but it would still be only 34% of GDP, as high as Britain’s is today. And that’s assuming we don’t change a penny of our wasteful spending habits on Medicare and defence.

Look, I’m no economist, but I can look at it from the micro point of view that I see in my house.  My wife has her own photography business.  She just started it, and last year it ran a meager loss, which is to be expected when one first starts out.  Also, we purchased a home.  I should note here that we bought one below what the mortgage people told us we should, because I don’t want to live on Kraft Macaroni and Cheese (wonderful product, but not for every meal) forever, I did that all through the 2000’s.  So let’s start there.

Despite a 2 percent COLA this year, my take home pay will be going down, thanks to the Social Security going back up to 6.2 (or whatever it is) and a higher cost for my health insurance.  So, my net pay goes down, but my mortgage won’t.  So, let’s assume that this happens for everyone.  I will have less money, which means I will have to curtail some of my expenses that are “frivolous.”  For me, that means Amazon.com.  (I buy 3 books a week, plus various videos, like “Arrow” that I am now hooked on.)  So, less Amazon purchases means that Amazon needs 1 less person to box and ship my stuff.  Amazon is here in Indiana.  So now the rolls of unemployed go up by 1, and I am spending less money, which means the tax revenue from me goes down.

Meanwhile, pictures of families is not exactly a mandatory staple of a financial diet.  So, less people will be spending money on their family pictures, and so my wife gets less business.  Which in turn lowers her revenues, and profits etc.  Which means the tax revenue for her business goes down.  So, I will be paying a higher percent of my income to the Gov’t, but will it be enough to offset not only my diminished sales taxes (less books purchased) but also cover the poor Amazon guy who is now unemployed?

Every time I see one of these static tax rate/revenues things it makes my cringe.  It’s just like the taxes on Cigarettes that would be the panacea for rising health care costs.  What happened?  People started quitting, which means that you have less revenue.  Or they buy their stuff illegally.

Sooner or later they’ll hit a point of taxation where I can’t keep my house.  I’d say right now it is about 5% more than what they are taking now.  And then I lose my house.  Which means less taxes for Marion County.

(For an interesting discussion of Reagenesque v. JFK tax cuts, Slate does a pretty good job.)

I guess in short my point is that I am uncertain that increased tax rates would lead to higher revenue.  For me at least it is entirely possible that higher rates would lead to diminished revenue, because despite the fact I bought a house well within my budget, to do as the Economist suggests would seem to price me right out of my home.

Your thoughts?

Category: Politics

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  1. H1 says:

    Concur.
    Was shocked when USAA provided our home loan range estimate when I got off active duty.
    Purchased a house less than 50% of their ceiling.
    No wonder the system crashed.

    I have to register Independent as I agree with different parts of each of the major parties.
    BLUF: They all Sierra.

    I wonder if we are sliding towards a reset.

  2. Veritas Omnia Vincit says:

    That’s a huge problem with simplistic tax revenue equations, the actual process is a complex multi-variable equation. Which is why municipalities and now federal governments get it wrong.

    The small scale comparison of your own situation is a very good example of the long term reality. We have 120 people at our facility and 20 more at our secondary production location a few miles away. Most of our business is commercial print, but we do a lot of packaging as well. When folks like you buy less Kraft Macaroni and Cheese they order less boxes, so you losing your house also means me losing business and laying off employees here. Additionally when you stop being a home owner insurance companies need less brochures about home owner’s insurance so they order less from me as well, meaning that in addition to the loss of packaging employees I now lose a couple of commercial print employees as well…

    Suddenly we have a diminished workforce, surplus housing, greater strain on a diminished tax revenue because all of you need unemployment benefits, and none of you are now contributing. Meanwhile some j3rkoff behind a desk who has never had to meet a payroll or pay a tax that wasn’t from money already provided him by the taxpayers sends a recommendation to raise fees/taxes to accommodate this latest loss…and guess what happens next? You only have to look out your window to see this economics plan in action.

  3. Keith_Indy says:

    On a personal finance level, I’d recommend going the Dave Ramsey way, baby step. We’re very blessed now to only have our mortgage, which we are paying down by 1/2 and refinancing. It’s been a process but we paid off all our credit cards, and car loans in about 4 years. We are in our late 40’s, so our earning power is working to our benefit.

    Fiscal conservative, socially tolerant. No current electable party has liberty as its basis. The Libertarian Party not a very pragmatic organization. So, I’m with you, a voter without a good home. I’m sick of the Republican Party. Their actions don’t match what they’re platform says.

    Fix the budget, fix entitlements, and get the Federal government under control. Restore the Federal government to its primary purposes and scope.

  4. LL says:

    Basic Laffer Curve analysis

  5. NHSparky says:

    TSO, I would SLIGHTLY disagree with your taxation assessment. While true that PERSONAL INCOME taxation is very low for a developed nation, our corporate taxes are through the roof. Frankly, all corporate taxes are 1–taxes that politicians didn’t have the balls to put directly on the people and their income, 2–corporations don’t pay taxes, they merely collect them.

    Historically the federal budget has run 16-18 percent of GDP. Today it’s 25 percent, thanks to the “stimulus” which is now part of the baseline spending that isn’t being cut out thanks to no budget being passed for almost FOUR years now.

    So yeah, it’s a SPENDING problem as much as it is a revenue problem. Overly simplistic, and YMMV, but there it is.

  6. QMC says:

    Sort of like #3, in that I am fiscally conservative, and socially tolerant (within reason) until I am asked to fund the behavior I am expected to tolerate or to publicly praise it when I feel it to be not praiseworthy.

    However, given the alternatives, the GOP remains the closest thing to an organized political party which represents me.

  7. QMC says:

    What #6 said, and speaking of the GOP, the fact that the stimulus money is part of the baseline is virtually unknown amongst those who are not politically active, and it should be.

  8. NHSparky says:

    the GOP remains the closest thing to an organized political party which represents me.

    Sadly, that’s not saying much anymore. Might be why millions stayed home instead of voting for Mittens. Given the choice between Dem-lite (Romney) and a Dem (Obama), the public is going to choose the Dem every. Single. TIME.

    Now given the choice between a liberal and a conservative, the public is going to go with the conservative much more often than not.

  9. TSO says:

    @6, I think all the taxes are too damn high frankly. I was just reporting what Economist said. There’s a ton of Gov’t stuff that annoys me to no end that they shouldn’t be screwing with the free market over. Farm subsidies and such for instance.

  10. TSO says:

    @5, he taught a class one time at GMU Law that I attended. He also (somewhat oddly) came to our Barrister’s Ball one year.

    I didn’t know he had passed.

  11. NHSparky says:

    TSO–yes, taxes are too damn high, but the RENT, man! What about the rent???

    My idea for balancing the budget and paying off the debt would involve one major issue: entitlements, and several smaller ones, like the subsidies you speak of (farm, energy, etc.)

    Privatize Social Security. Give people their own “accounts” and put them into funds which are secure, low-risk, but have a decent (2-3 percent, more than what SS provides now.)

    Get rid of the BS limits on HCRA/DCRA, and let people carry over from one year to the next. Allowing portability of health care plans across state lines and between jobs along with tort reform would dramatically reduce costs.

    Now that goverment is out of the human resources business, spending is dramatically reduced. Keep taxes around 16-18 percent of GDP until the debt is paid, then drop the rates to where revenue year-to-year 1–creates a balanced budget (including Constitutional amendment to that effect), 2–spending does not increase year over year more than the percentage of population increase plus inflation.

  12. ron hill says:

    the idea that we can be taxed right out of our homes is what drove california to pass prop 13 years ago. with no constraints in place, property taxes were constantly being raised by every entity that could do so, until we got to the point that retirees who owned their homes outright could no longer afford to stay in them. prop 13 altered that significantly, and various levels of gov’t have been complaining about it ever since, and trying to find ways around it, so they can continue their profligate waste of taxpayer dollars. gov’t on the whole has never seen a spending program they did not like, and the very idea they would curb themselves, is anathema. i will move away at some point in the near future, as there is no one in calif gov’t who represents my interests, and very few in federal gov’t either.

  13. Green Thumb says:

    After reading this, I am going out into my backyard (secret location, of course) and burying my piggy bank.

  14. NHSparky says:

    and various levels of gov’t have been complaining about it ever since,

    But not the people. Funny, that. Frankly, one of the major reasons CA is in the shitstorm it’s in today is because of Prop 13, but because the “expected” revenues in an economic downturn are taking a worse hit than other states.

    Case in point–the state expects a certain turnover of homes, new construction, etc. Most of the CA towns I lived in/around had a tax rate of about 1.1 percent. So using me as an example, I bought my house in 2001 for (about) $300K, meaning I’m paying about $3300/year in property taxes.

    Prop 13 limited the increase in APPRAISED value to 2 percent per year, meaning that even if a house increases 15 percent in value (as they did in the early/mid-2000’s) they only get 2 percent. But when the market takes a shit and real value goes down, taxes still go up because the appraised value doesn’t necessarily match actual value.

    The exception to that is when a house is sold. So let’s say someone buys a house in 1980 for $40,000, but by 2006 it’s worth $500,000 (not out of line in SoCal)…so instead of getting $600-700/year in property taxes, the new owner is on the hook for the “new” assessed value of $500K. And when the house values took a dump, taxes only rarely went down, because challenging the assessor was almost impossible.

    But when there’s no turnover, there’s no “jump” in property tax revenues, meaning Sacramento gets diddly, the towns get even less, etc….

  15. ron hill says:

    i wanted to add a last small note, since this is an article about economics, and many readers here are former military. this should give some of my younger brothers here a chuckle. when i got my E-5 years ago, the monthly pay was $279. yes, you read right—that’s not a typo. $279!

  16. Hondo says:

    If anyone is interested, the historical DoD pay scales can be found here:

    http://www.dfas.mil/militarymembers/payentitlements/militarypaytables.html

    They go back to 1949. The older ones are quite interesting. And according to my best friend’s dad (he joined up in the early 1950s), the 1949 pay chart represented a “big raise”, especially for new privates. New recruits were getting $50/month before the 1949 pay raises took effect, and he caught some grief about that from older troops.

    Of course, as my best friend’s dad once told me: money went a whole lot farther in those days when he was a young private – cigarettes were $2/carton and beer was cheap (either a nickle or a dime, if I recall correctly). And until 1957, you didn’t pay Social Security taxes.

  17. SIGO says:

    Is it just me or does the Dave Ramsey thing really only work once you reach your forties? I am 30 and I find myself having to buy so much baby stuff and kids stuff that I am maxed every month. I don’t buy anything for myself and neither does my wife. We life modestly. It seems once your kids are grown, you have more money but that startup cost to the American Dream is what kills alot of people in the beginning. Oh, you need this tool to fix a plumbing problem or you need to enroll in this to solve this life problem, etc.

  18. Hondo says:

    A bit of quick research indicates that the OpEd writer TSO quotes above simply didn’t do his homework.

    This source gives an estimate for the US GDP in 2012 at $15.094 trillion: http://www.tradingeconomics.com/united-states/gdp

    This source gives the estimated total tax “take” by all levels of government (Federal/state/local) at $5.1325 trillion – remember, per the SCOTUS, government “fees” and “charges” are simply an exercise of the government’s power to tax: http://www.usgovernmentrevenue.com/yearrev2012_0.html

    The last time I checked, ( 5.1325 / 15.094) = .322717, or 32.272%. That means the total revenues collected by government in this nation is already equal to nearly 32.3% of the US GDP.

    Since the left insists on calling Reagan’s economics “voodoo economics”, then I think I’ll just call this OpEd writer the father of “bonehead economics”.

  19. NHSparky says:

    To be fair though, Hondo–of that revenue figure, how much was from SS taxes, Medicare, and Federal witholdings, versus corporate taxes and foreign tariffs?

  20. Hondo says:

    NHSparky: doesn’t matter. What type of tax it happens to be doesn’t affect the fact that it’s taxes going to the government. The guy was talking about how “low” the US “tax burden” was, and going on about there being “plenty of room” to reach European tax burden levels – citing specifically the UK’s 34% tax burden. The problem is that, when you total it all up, as a country WE ARE ALMOST THERE ALREADY. Government already “eats” almost 32.3% of the GDP.

    I’m not going to let the fool get away with that BS. He wants to compare tax burdens – fine. But total up the whole damn thing, not just part of it.

    Money coming out of the economy in taxes is money that cannot be spent for other purposes. It doesn’t matter whether those taxes are local “permit fees”, corporate income taxes, personal income taxes, FICA, or any other damn type of tax. All of those both feed the beast and place a drag on the economy.

  21. NHSparky says:

    Oh, trust me, when you consider my employer’s “contribution” to Social Security on top of mine, my federal/state/local tax burden is nearly 45 percent.

    I was just wondering if he used only part of the actual bill to make his point, because if he was including corporate taxes, he couldn’t be more wrong.

  22. Hondo says:

    NHSparky: obviously, the tool excluded a whole load of current taxes in writing his bogus OpEd piece. Whether he was just an idiot or was being deceptive I neither know nor care.

  23. NHSparky says:

    Considering the Economist is heavily left from what I’ve read, it doesn’t surprise me.

  24. DefendUSA says:

    TSO…Take heart that the AMT has finally changed and some deductions are up slightly. I could give you a whole list but in the end…

    You are right. More for health care, and in my state, I will be paying more for the unemployed.
    My question is why does the government have to be running WHO gets that employers money? Why can’t the corporation or small business calculate a percentage based on employee salaries and should they be unemployed, Let the employer sort out how long it will be paid. The only thing that the gov’t should be doing on that is making sure the money is there and not being used, like say on those nice trips to pay for Hookers and Helly Hansen shit?

  25. FatCircles0311 says:

    Honestly at this point I’m surprised our government doesn’t simply send checks out giving the citizens what it thinks they deserve.

  26. Hondo says:

    DefendUSA: you wanna know why? “Look for the union label . . . . ” As I recall, organized labor pushed hard for UC during the 1920s and 1930s. That’s one reason it was included as part of the Social Security Act of 1935.

  27. Casey says:

    Here’s one empirical point: when the Bush tax cuts took effect, revenue went up, not down.

    And -frankly- anyone who considered Romney the same as Obama didn’t look very hard.

  28. SFC Holland says:

    Really loved this thread and the comments. So nice to read other people voicing lots of the same thoughts I have been having. I guess I am not alone in this ever increasing sea of insanity. I can barely watch the news or listen to the radio anymore as it causes rage. How can so many people be so stupid? Then I have to remember who is guiding the discussions and guiding the programming. Just because we see it on every channel does not mean it reflects every household.

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