1% + 99% Should Be Greater Than 100%

We hear a lot about the 1% and fairness.  The chart below that was prepared by the Tax Foundation shows the share of income earned by the top 1% as well as the share of the income tax burden of the top 1%.  Progressivity is defined as the ratio of the top 1 percent's tax share divided by their income share.

A true fair share would have the tax share be the same as the income share.  A 2.00 ratio means that the tax share is double what the income share is.  Is that fair?  If not, what is?  2.50?  3.00?

What is interesting in the data is that the income tax system in 2009 placed a greater tax burden on the top 1% than at any time since 1986.  This is not something you hear in the press.  You also have to keep in mind that 1986 was the year in which there was the last big reform of the Internal Revenue Code.  Major changes were made in the definition of adjusted gross income which means that the data is not necessarily comparable for dates prior to 1986.

The other interesting perspective is how the share of the top 1% has changed over the years.  There is no question that a much greater share of income is concentrated in the top 1% today than it was 30 years ago.  You can see this trend beginning in the mid-1980's and continuing to the turn of the century.  It dropped for a few years and then picked up further momentum in 2004-2008 before dropping significantly in 2009.

Progressivity of the Federal Income Tax Code, Taking into Account Income Shares

Year	Top 1% Income Share (A)	Top 1% Tax Share (B)	Progressivity (B/A)
1980	8.46%	19.05%	2.25
1981	8.30%	17.58%	2.12
1982	8.91%	19.03%	2.14
1983	9.29%	20.32%	2.19
1984	9.66%	21.12%	2.19
1985	10.03%	21.81%	2.17
1986	11.30%	25.75%	2.28
1987	12.32%	24.81%	2.01
1988	15.16%	27.58%	1.82
1989	14.19%	25.24%	1.78
1990	14.00%	25.13%	1.80
1991	12.99%	24.82%	1.91
1992	14.23%	27.54%	1.94
1993	13.79%	29.01%	2.10
1994	13.80%	28.86%	2.09
1995	14.60%	30.26%	2.07
1996	16.04%	32.31%	2.01
1997	17.38%	33.17%	1.91
1998	18.47%	34.75%	1.88
1999	19.51%	36.18%	1.85
2000	20.81%	37.42%	1.80
2001	17.53%	33.89%	1.93
2002	16.12%	33.71%	2.09
2003	16.77%	34.27%	2.04
2004	19.00%	36.89%	1.94
2005	21.20%	39.38%	1.86
2006	22.06%	39.89%	1.81
2007	22.83%	40.41%	1.77
2008	20.00%	38.02%	1.90
2009	16.93%	36.73%	2.17

What caused this?  I believe there were two big drivers.  First, the technology industry began to take off in the mid-1980's.  We entered the information age from a manufacturing age.  Manufacturing spreads income in a much broader swath in an economy.  You need to pay a lot of workers to build an automobile.  You only need a couple of computer programmers to develop a video game that might sell millions.  For example, the Call of Duty: Modern Warfare 3 game that was released last year grossed $1 billion in the first 16 days it was for sale.

The second factor was the bull market in stocks that began in the 1980's and reached its zenith in 2000 with the internet stock boom (technology again).  When stocks fell in 2001-2003 so did the incomes of the  1%.  Incomes rebounded with the stock market and with the housing bubble in 2004-2008 but 2009 showed again how connected the income of the top 1% is connected to a healthy stock market.

The popular narrative seems to be that we are playing a zero sum game when it comes to the economy.   That is, if the 1% has it then the 99% does not have it.  However, the data does not seem to back this up.  In fact, the numbers suggest that the unemployment rate has dropped as the share of the top 1% has grown.  Unemployment also has tended to increase as the share of the top 1% has dropped.

Unemployment Rate and Share of Income of Top 1%
1980-2009

For example, in 1983 the unemployment rate was 9.6% and the top 1% share was 9.29%.

By 1989 the top 1% had a 14.2% share of income but unemployment had dropped to 5.3%. 

Between 1989 and 1993 the top 1% income dropped to 13.8% and unemployment increased to 6.9%. 

Between 1993 and 2000 (the internet boom), the top 1% went from 13.8% to 20.8% and unemployment dropped from 6.9% to 4%. 

Incomes from the rich dropped from 2000-2003 to 16.8% and unemployment increased to 6%. 

The rich did well again from 2004 to 2008 and unemployment dropped. 

I don't think I need to go through the numbers from 2008 forward. The chart clearly shows the correlation between the loss of income with the top 1% and the loss of jobs overall.

This data should put to rest all of the class warfare nonsense the President and others want to participate in. The bottom line is that we are in this together in this country.  President Kennedy said it best 50 years ago when he said, "A rising tide raises all boats".   

We should spend more time and effort working to make the economic pie bigger rather than worrying about how to slice it.  The reality is that when the rich do better it seems that everyone does better.  If the rich become poorer, we all become poorer.  We need to start recognizing that if the 1% and 99% work together we will get much more than 100% in the end.  If it is the 99% versus the 1% we will get much less than 100% out of this country.

I don't remember a lot of class warfare talk back in 2000 when the share of the top 1% was 20.81%.  Of course, the unemployment rate was only 4% then.  Why do we hear so much about it now when the most recent data indicates that the top 1% have much less income and are paying even more taxes on that income than they did then?

If You Are Content, You Have No Context

I am always looking for numbers that provide context to understand what is really going on.  Context is everything when assessing anything as I wrote last year.

Here is a good example of putting numbers in context courtesy of Charles Biderman of Trim Tabs.

Over the past year, take home pay for everyone who pays taxes is up something over $100 billion per year, or about 2% to 3% to $6.3 trillion and that $100 + billion gain does not even keep up with the current 3%+ inflation rate.

On the other hand US stocks are up over $3 trillion or 20% since the early October market low. That $3 trillion is an amount equal to all of the take home pay for all taxpayers over the past six months. Let me repeat that staggering number. The value of all stocks grew, which means an extra, $3 trillion since early October and the take home pay for everyone who pays taxes was about the same $3 trillion! Shareholders are racing ahead and getting rich and everyone else is sucking wind.

It does make you wonder where all the money is coming from.  Perhaps this is the answer.

Since October the Federal Reserve has printed about $600 billion of new money to pay the US government’s deficit. That is the only source of new money for the US economy. Does the Fed printing big bucks justify a $3 trillion increase in the market value of all US stocks? Not to me.

We keep hearing about the need for stimulus (translation-more borrowing and more debt).  How is that working?  Since 2008, global GDP has grown 4.7% or $2.9 trillion.  However, global debt has increased 14% or $25.7 trillion over that same period according to Money and Markets.  This means that almost 89% of this debt stimulus is no where to be found in an improved global economy.  How is it that this debt is going to be paid off in the future?

Source: Money and Markets

Debt can be helpful if it is used to improve productivity or efficiency.  It makes sense for the farmer to borrow to buy a tractor if he uses it to increase the crop acreage he can work.  More productivity should bring more profits and the increased profits can pay off the debt.  However, if you get nothing out of the purchase of the tractor in increased productivity or efficiency the debt will actually hurt the farmer much more than it will help.   The immense debt that has been taken on around the world portends even more trouble ahead unless global growth accelerates.  Right now, the debt stimulus is a large negative multiplier rather than a positive one.

Finally, a little context on Greece.  Last week saw violent protests in the streets in Athens. Greece was literally in flames as protestors objected to the need to cut another 150,000 public sector jobs over the next three years.  Let's put that in context.

Greece's population is 10.7 million.  The United States has a population of about 312 million.  Cutting 150,000 public sector jobs in Greece would be like eliminating 4.4 million public sector jobs in the United States.  There are about 2.3 million federal government civilian employees.  There are about 5 million state employees combined in all 50 states.   Therefore, if we would have to do something similar to what Greece is now faced with, we would have to eliminate over 50% of all federal and state government jobs.  And public sector employees in the United States are upset about losing collective bargaining involving their benefits?

We have not yet begun to see what is going to be necessary in this country to deal with our deficits.   If anyone is content with what is happening right now in this country, they have no context.

2.2.22 Budget Plan

There is a lot of talk of deficits and debt with the recent release of President Obama's budget for 2012 thru 2022.  We consistently hear about the need for drastic spending cuts to remedy our fiscal woes.  However, how much do you think we would need to cut the federal budget from current levels to balance the budget if we set a goal to do so by 2022?  How much would we have to raise taxes?

The answer is that we do not have to cut anything.   We also do not have to raise taxes. We could balance the budget by 2022 if we just limited spending increases to 2.2% per year along with the current Internal Revenue Code.  When I tell people this simple solution they are almost always dumbfounded.  They hear about spending cuts but in the perverted world of government budgets a cut is not a reduction in spending from one year to the next.  It is merely a reduction in the level of spending increases.  There is no spending cut that you or I would recognize in our business or personal experience.

My plan is simply called the 2.2.22 Budget Plan based on the fact that limiting overall spending increases in the federal budget to 2.2% per year between now and 2022 will produce a balanced budget. It is also simple enough that even a politician with a 2.2 GPA should be able to grasp it.

The 2.2.22 Budget Plan assumes that federal revenues will increase by 6.0% per year.  This is right in line with the projected increase in revenues based on the most recent CBO report without taking account of any tax increases.  The revenue increases are projected to occur only through increased economic activity, inflation and other normal effects over the next ten years.

This graph shows how the deficit gap could be gradually reduced in a a reasonable manner following the 2.2.22 Plan.  Do you see any reduction in the red spending line below?

2.2-22 Budget Plan
Federal Revenues & Spending (2012-2022)
($Billions)

There are no drastic or draconian cuts despite what the demagogues would like you to believe.  Spending would  actually increase by almost $1 trillion over the next ten years under the plan.  Will the 2.2.22 Budget Plan require some tough decisions?   There is no disputing that.  We have put ourselves in a deep hole and it will require some real trade-offs and setting real priorities to fix it.  We are going to have to take a hard look at what is most important to us.  There will be some real pain.  However, any pain will be far less if we set reasonable targets now and commit to them than be forced into big cuts later when we might not be able to control the agenda as well.

Contrast the 2.2.22 Budget Plan with President Obama's Budget projections for the 2012-2022 period.

Obama Budget Plan
Federal Revenues & Spending (2012-2022)
($Billions)

This is just not a serious proposal.  The spending that is contemplated is simply not sustainable.   The Obama Plan also assumes $4.5 trillion in additional taxes over the ten year period but it still does not come close to balancing the budget.  Nothing could better demonstrate that we have first and foremost a spending problem that must be brought under control before we consider any further tax increases.

Keep these simple numbers and this simple phrase in mind.  Two. Two. Twenty Two.

Tell your friends.  Tell your neighbors. Tell your co-workers.  It is simple math.  2.2.22.

Crossing the Creek

I am speaking to college students tomorrow on career planning.  It has caused me to reflect on some of my experiences and reading on the subject as I have prepared my remarks for the students.

One of the better books that I have read on the subject was written over 20 years ago - The Executive Odyssey by Frederick G. Harmon.   I recommend it for anyone who is interested in their personal and career growth.  It provides some good principles to apply to achieve your career goals and aspirations.  Harmon includes a number of real-life examples to demonstrate the key points.

I still remember two lessons from the book even though I read it more than two decades ago.

First, most careers paths are not vertical.  Advancement most often is much like crossing a creek by navigating from one rock to another.  You rarely will find the way across the water by making a straight beeline ( I couldn't resist using that word) from one bank to the other.  The rocks may be lined up for you but the distance between them may require you to make a leap you cannot make.  You may end up all wet, or worse, drown in making the attempt.

The best path is when you can always have one foot on the previous rock and can get the other foot on the next rock.  You always stay focused on the big goal (crossing the river) but you understand that the best path to success may mean you have to move laterally or obliquely to put yourself in a better position to advance to the ultimate objective.

The other lesson I remember from the book is the example about the career of Dwight Eisenhower.  Most know him as the Supreme Commander of Allied Forces in Europe in World War II or as the 34th President of the United States.  However, his career was anything but a straight shot to the top.  He spent a long time crossing the creek.

Eisenhower graduated from West Point barely in the top half of his class in 1915.  He never saw combat in World War I.  His career was considered undistinguished for the most part over the next 25 years.  He served as a major for 16 years.  He was still a colonel less than three months before Pearl Harbor.  However, two years after Pearl Harbor he was a 5-Star General.  How did that happen?

His ultimate success was built on a decision he made soon after graduating from West Point.  That decision was to perform every duty given to him by the Army to the best of his ability no matter what the nature of the duty.  He carried out his duties in a manner designed to make every boss sorry to see him leave.  He carried out all the details of the job but also combined it with a wide and sweeping knowledge of his chosen field.  At each post he increased his depth and breadth of experience-armor, organization, planning, logistics, strategy and building alliances.  Each position may not have meant much in isolation.  However, he was building a perfect combination of skills that were needed in an undertaking like leading the Allies in defeating Nazi Germany.

When Eisenhower moved to the top of the chain of command so quickly after the outbreak of WWII many said he was lucky.  They said he was just in the right place at the right time.  However, as my old high school basketball coach used to say, luck is when preparation meets opportunity.  Eisenhower spent years preparing by channeling his energy through a complete act in everything he did.   His path across the creek was anything but direct.  However, there were 40 other Generals in WWII from the West Point Class of 1915 and they all ended up are serving under Eisenhower.

Some other principles from The Executive Odyssey.

• Aspiration releases energy; the more deeply felt the aspiration, the higher the energy.
• Success expands through psychological effort; the more dedicated that effort, the more significant the success.
• While survival depends on strengths, success is built on overcoming weaknesses.
• Mastery of any environment begins with concentrating on essentials and applying appropriate rules.
• Values determine the direction of all success.

Mandates, Morals and Money

If there were any doubts about what Obamacare was all about it should now be clear.  The actions of the Obama Administration in mandating that religious organizations, in violation of their moral beliefs, must provide contraceptives at no cost to their employees speaks volumes.   Not only does it yet again call into question the constitutionality of Obamacare but it provides a glimpse of the significant governmental intrusion this law will have on every health decision going forward.

Since many of the provisions of the law are being phased in, the full effects of the law are not fully known.  However, federal mandates are at the core of almost everything involved with Obamacare.  Individuals are mandated to purchase insurance coverage.  Employers are mandated to provide health coverage.  Specific health coverage is mandated under health plans.  Federally mandated health insurance exchanges are required in each state.  It does not take much imagination to see where this is headed.

If the federal government believes they can violate the First Amendment of the Constitution to require a religious organization to provide coverage for something that runs counter to their moral principles what will stop the federal government from mandating who gets care and who does not?   Who is born and not born?  Who lives and who dies?

After the howls of outrage over President Obama's mandate that religious organizations violate their moral principles, he has backtracked.  However, now he wants to mandate that health insurance companies provide free contraceptives to the employees of those organizations and do it for free.  I know President Obama thinks that money grows on trees.  You only have to look at his budget proposals to see evidence of that.  We all know that it does not.  We also know that money is fungible and it is unlikely that the costs of this mandate will not end up being paid by the religious organization in increased costs.  Therefore, the reality is that this entire "compromise" is a fraud.

It is further disconcerting that many of the large religious institutions, such as hospitals and universities, do not buy health insurance.  Their employees, like 60% of all Americans,  get their health coverage through self-insured plans run by their employers.  Therefore, there is no health insurance company involved other than as an administrator of the plan.  All of the claims costs are paid by the employer.  How does the Obama compromise propose to solve the problem for these religious employers?

Underlying all of these arguments is the false premise that women need this provision to have access to contraceptive services.  It is portrayed as a case of basic women's rights.  However, no one is denied access to these services right now.  Any woman can get what she needs at a Planned Parenthood Clinic or  the local drugstore.  Of course, that does require money, but most contraceptives are relatively inexpensive compared to most medical costs.

My suggestion to President Obama is that if he really thinks that this is fundamental right that he should ask Congress to pass a bill to have these services paid by the federal government for every woman that wants it.  He should also propose a way to pay for it rather than to mandate that employers and insurance companies do it.  This is the way this country is supposed to work.  It is not supposed to be about mandates that are dreamed up in back rooms by bureaucrats with social agendas.  Put the issue right out there before our elected representatives, have a full and open debate, and vote on it.

I even have a suggestion for him.  Fund contraceptive services with a tax on abortions.  It is said that if you want less of something you should tax it.  I can't think of a better resolution where two objectives are better aligned together.  It is a balanced and logical solution which means it will never be considered.

The Guttmacher Institute estimates that there were 1.2 million abortions in 2008 (the most recent data I could find).   A $250 tax on each abortion would raise $300 million per year.  Not enough money?  Increase the tax even more.  President Obama knows how that works.

Postscript:

One of the more interesting statistics I come across is related to the subject above.  Before 1960, there was no birth control pill (the most prevalent form of contraception) and abortion was illegal.  The percentage of children born to unwed mothers in this country was approximately 5%.  It is about 41% today.

In 1960, I am certain people were saying that if we had a birth control pill and if abortion was legal we could reduce the level of children born to unwed mothers.  The federal government also thought that it could help these unwed mothers by providing additional financial assistance in the mid-1960's.

All of this seems to support this general principle of economics that Steven Landsburg of the University of Rochester has articulated so well.

Things tend to work out best when people have to live with consequences of their own behavior.

Or stated another way.

Things tend to work out poorly when the consequences of our actions spill over onto other people.

Before the pill, before abortions and before the federal government started providing more generous benefits to unwed mothers, there was a large price to pay for an unwed pregnancy.  The cost was just not financial.  It affected the entire family of the unwed mother in bearing the responsibility to raise the child as well as their standing and reputation in the community.  These were powerful incentives because it was well known what the consequences were and the effects it would have on other family members.   The moral dimension and personal responsibility far outweighed any other factor in getting to the best result for society.  Perhaps there are lessons here that we should keep in mind as we look at this and other issues.

Is It Fair?

We are likely to see President Obama keep talking about "fairness" over the course of this election year.   I have written about this issue more than once.  What is fair?  Who decides if it is fair or not?  Where do we go to find the objective standard that determines what is fair?

Stephen Moore puts together "A Fairness Quiz for the President" in today's Wall Street Journal that I could not improve on.   The list of fairness issues below have all been mentioned at one time or another in BeeLine.  Read the entire article for even more "fairness" issues that I have never even mentioned in BeeLine.  After all, it would be unfair of me to keep talking about fairness all of the time.  President Obama does not feel so constrained.  Fortunately, neither does Stephen Moore.

Is it fair that the richest 1% of Americans pay nearly 40% of all federal income taxes, and the richest 10% pay two-thirds of the tax? 

Is it fair that the richest 10% of Americans shoulder a higher share of their country's income-tax burden than do the richest 10% in every other industrialized nation, including socialist Sweden?

Is it fair that American corporations pay the highest statutory corporate tax rate of all other industrialized nations but Japan, which cuts its rate on April 1?

Is it fair that after the first three years of Obamanomics, the poor are poorer, the poverty rate is rising, the middle class is losing income, and some 5.5 million fewer Americans have jobs today than in 2007?

Is it fair that the three counties with America's highest median family income just happen to be located in the Washington, D.C., metro area?

Is it fair that wind, solar and ethanol producers get billions of dollars of subsidies each year and pay virtually no taxes, while the oil and gas industry—which provides at least 10 times as much energy—pays tens of billions of dollars of taxes while the president complains that it is "subsidized"?

Is it fair that those who work full-time jobs (and sometimes more) to make ends meet have to pay taxes to support up to 99 weeks of unemployment benefits for those who don't work?

Is it fair that those who took out responsible mortgages and pay them each month have to see their tax dollars used to subsidize those who acted recklessly, greedily and sometimes deceitfully in taking out mortgages they now can't afford to repay?

Is it fair that thousands of workers won't have jobs because the president sided with environmentalists and blocked the shovel-ready Keystone XL oil pipeline?

Is it fair that federal employees receive benefits that are nearly 50% higher than those of private-sector workers whose taxes pay their salaries, according to the Congressional Budget Office?

Is it fair that soon almost half the federal budget will take income from young working people and redistribute it to old non-working people, even though those over age 65 are already among the wealthiest Americans?

Is it fair that in 27 states workers can be compelled to join a union in order to keep their jobs?

Is it fair that nearly four out of 10 American households now pay no federal income tax at all—a number that has risen every year under Mr. Obama?

Is it fair that Boeing, a private company, was threatened by a federal agency when it sought to add jobs in a right-to-work state rather than in a forced-union state?

Is it fair that our kids and grandkids and great-grandkids—who never voted for Mr. Obama—will have to pay off the $5 trillion of debt accumulated over the past four years, without any benefits to them?

 While we are talking about fairness, here are a few of my favorite quotes on the subject.

"I know the world isn't fair, but why isn't it ever unfair in my favor".

  Bill Watterson

"Life is never fair, and perhaps it is a good thing for most of us that it is not."

  Oscar Wilde

"It is not fair to ask others what are unwilling to do yourself." 

  Eleanor Roosevelt 

"Life is not fair, get used to it."

   Bill Gates 

"All some folks want is their fair share and yours."

  Arnold H. Glasgow 

 

Sense About Cents

There is currently a great deal of debate about the "fairness" of providing a preferential rate for capital gain and dividend income in the Internal Revenue Code.  I have written previously about the tax policy rationale and implications for the lower rate in "A Tax Policy Primer".

I also suggested a few common sense thoughts on dealing with the preferential rates if President Obama and the Democrats were really serious about dealing with the issue rather than demagoguing it.

• If the ordinary income tax rate is reduced there is less need for a preferential capital gains rate.  History has shown that as the top ordinary rate goes up it becomes necessary to establish a lower capital gains rate.  In fact, when the top tax rate was 28% under President Reagan the capital gains rate was eliminated.  It was re-established when ordinary rates went up under President Bush (41) and President Clinton.
• President Obama is going in the wrong direction on both counts.  He wants to raise both the ordinary income and capital gains rates at the same time.
• Allow an inflation deduction for capital assets and you have a stronger argument for treating capital gains the same as ordinary income.
• If the corporate income tax rate is reduced there is not as strong an argument for the preferential dividend rate.  It is the total tax of the combined total that should be considered.  If the corporate income tax was eliminated there would be no argument at all for a lower dividend rate.

Let's put aside the tax policy discussion and look at just the revenue side of the equation.   To hear the Democrats talk about the issue, you would assume that doing something in this area could really make an impact on the deficit.  I have already pointed in an earlier post that the 30% minimum tax on millionaires (the so-called Buffett Rule) that President Obama wants to impose would only generate enough revenue to reduce the budget deficit by less than 4% annually.

What if the preferential rate on both capital gains and dividends was eliminated for all taxpayers? The recent CBO report provides needed context.  Taxing all investment income at ordinary rates would increase revenues by about .5% of GDP.  This is equal to an estimated $77 billion in 2012.  This would reduce the deficit by only 7%.  It hardly would make a dent in the deficit.  At the same time, what adverse effect would this have on investing and job creation? This is the real issue that needs to be carefully considered.

Compare this to other tax preferences in the Internal Revenue Code.  The deduction for home mortgage interest reduces tax revenues by $125 billion-almost 60% more than the preferences for all investment income. The big daddy of tax preferences is the exclusion of employer contributions for employee health care premiums.  This reduces revenues by $280 billion!  This is almost 4 times more costly than the investment income preferences.

The reality is that big revenue gains are generally only achievable by taxing those things that most people are taking advantage of.  Many more are taking advantage of mortgage interest and health care than capital gains and dividend income.  This is where the big revenue increases are.

If we really need more tax revenue so badly why are we dealing with pennies on the dollar?  Tom Hutchinson in Money News does a pretty good job of making sense out of the cents that are on the table in the "Buffett Rule".

But why is this tax such a big deal when it does so little? Given the severity of the nation's fiscal problems, the solution of simply sending the government a little bit more money is weak to say the least.

Obviously this is politics. It feels good to tax the rich. Also, many people are unaware that the new tax will do so little to help the deficit. The administration understands the pervasiveness of the false perception and intends to exploit it.

But, I believe there is something else — what I call the "beachhead" theory.

President Obama ultimately wants to raise taxes much higher, expand government much more, and redistribute wealth to an extent never before seen in this country. But, he won't dare lay his vision out for the American people. That would be political suicide. He might speak in platitudes like "fairness" or a "balanced" approach. But, he wouldn't dare tip his hand on the specific policy measures he will propose in support of these lofty platitudes.

His intention is to incrementally transform the country, one falsely disguised step at a time.

Politically, he can't just raise taxes across the board. He needs to start with something much more sellable.

It's analogous to America's World War II strategy in the Pacific. Right after Pearl Harbor, we couldn't just go barreling into Tokyo. It was too well defended. We would have gotten ripped apart. Instead, we started by invading the most far flung, poorly defended territories the Japanese empire controlled. Once we seized the farthest outlying territory, we used it as a launch pad to go after the next weakest held territory, and so on.

In this case, the farthest outlier and most poorly defended in terms of tax policy is taxes on millionaires and billionaires. After all, these people only account for a tiny portion of the electorate. And, who cares if they pay more? They're rich already. But, make no mistake about it. A higher tax on millionaires won't be the end of anything, it will be just the beginning. It Congress passes this tax it will serve as a political base from which to launch more taxes.

After most people see a tax hike implemented with no detrimental effect to their finances, they will be more willing to accept new taxes. The next target will likely be the $200,000 and higher earners. Then, within a short period of time, the administration will be perfectly comfortable suggesting new taxes that it wouldn't dare suggest at this point. Eventually, all tax payers will pay more, either by a higher rate or some other backdoor method.

This new millionaires' tax may be just people who can easily afford it paying more taxes. But, it is also something much more ominous. It is the crucial first step, or launch pad, for much higher taxes for all taxpayers and wealth redistribution on a scale most have not imagined.

Those that read BeeLine regularly know that I am a strong fiscal conservative.  At the same time, I am also a pragmatist.  I have stated that I am not adverse to some tax increases if it would truly result in balancing our budget.  However, I was not born yesterday.  Any tax increases need to come only after spending cuts come first and are in the bank (not on some list for future adoption).  Taxpayers in this country (all 53% of us) need to stick together and insist that there will not be one red cent ( and almost all the cents are now red) more of taxes until we see spending cuts first.

It is much too easy to think that a tax increase is ok if it is not on you or me.  Someday soon after they get their first few cents out of the millionaires they will be coming after more...from you and me.  The nature of government is that it is never enough.  You need air to breathe and food to live.  Government needs taxes to live and to feed itself.  It is time to cut off the oxygen until government goes on a diet.  

Pulling The Wagon

The markets reacted to what appeared to be good news last week with the announcement that the unemployment rate had dropped to 8.3%.  However, as I have written before, I am more focused on the number of people working as a more reliable indicator of how the economy is doing.  January's data is also more challenging to interpret than other months because there is typically a drop in employment in January as a lot of seasonal hiring for the holiday season is not longer necessary.  Therefore, the Bureau of Labor Statistics data used for the unemployment rate is "seasonally adjusted" with its best guess of what the real story is taking into account these seasonal variances.

You can see the difference between actual employment and seasonally adjusted employment in the chart below that Lee Adler of the Wall Street Examiner used to explain the differences between actual and BLS with the unemployment rate (the seasonally adjusted numbers).   The trend has definitely improved since the beginning of 2010.  However, we still have about 6 million fewer Americans working today than we did four years ago using either data series.

You get a better view of the deviation between actual employment and seasonally adjusted employment as reported by the BLS in this chart by Adler that just looks at the last 13 months.  The reported number states that 243,000 jobs were created in January.  The actual survey number showed a decrease of 2.7 million jobs!  What is real and what is not?  I think it is going to take a few months to see how this sorts out.

A further complication in the numbers this month is the fact that adjustments to the workforce and the overall population are always done in the month of January.  This is the one month they adjust the numbers for population changes rather than distribute these revisions throughout the year.  The adjustments were even bigger this year since the latest 2010 census data was incorporated into the data series in January.   This means that a decade of changes went into January's numbers.  

These adjustments increased the civilian population by 1.5 million but BLS is assuming that over 80% of these people are "retired" or ages 16-24 and were not seeking employment.  As I have stated before, the unemployment rate only takes into account those actively seeking employment. Therefore, if the BLS assumes that you are retired, a student or are not actively looking for employment, you are not considered unemployed.

These are big assumptions and it will also take time to see if it is correct.  However, as Tyler Durden at Zero Hedge points out, it is the largest absolute jump in "Persons Not in the Labor Force" on record.  It does raise questions as to whether the BLS is trying a bit too hard to produce some good news on the employment front.  It does not seem to follow that an increase in population of 1.5 million would produce only 256,000 that wanted to work.   Of course, that also may be part of the problem.

This chart shows what happened.

This means that the labor force participation rate is now at a new 30 year low of 63.7%.  This is the percentage of all Americans working who are age 16+.  I continue to believe that this is the number to keep our eyes on as I wrote about in last month's report..  It is less subject to the need for assumptions (whether people are looking for jobs or not or retired or not) and adjustments (seasonality).

It also is the best indicator of our true fiscal health as it shows how many people are actually working and paying taxes to support everybody else.   These are the people pulling the wagon.  We need as many people pulling the wagon as we can right now.  If we can't get more people out of the wagon and to start pulling the wagon, we will continue to struggle. We will also inevitably reach the day that those in the wagon who have no other choices at this stage of their lives, will be hurt most of all.

Update:  Bruce Krasting has the same concerns that I do about the implications of a declining labor participation rate.  He also provides a warning about dishonest economists!

If the current labor force participation rate (LFPR ) is, in fact, the new normal (I think it is), it has profound implications on the macro economic outlook for the USA. Virtually all of the economic models used by CBO, OMB, SSA and private economists are assuming that the long-term LFPR will be in the mid-to upper 60s. The consensus is 2-3% higher than where it is today. 

If you plug in a rate of 63% versus 67% over the next ten-years, it makes a huge difference on the size of the deficit and the public debt. It would cause the deficits at Social Security and Medicare to explode. The percentage of GDP attributable to the government would inevitably rise. The economy, and society in general, would be socialized. 

I don’t think there is a macro economist or economic policy deep-thinker out there that does not recognize the significance of the LFPR, or that it’s hitting new lows.

Update:  I had to laugh when I came across this explanation from Betsey Stevenson, the former Chief Economist at the Department of Labor and now an Academic Economist at Princeton, about the finding that the civilian population had increased by 1.5 million in this month's but the assumption that only 256,000 wanted to work.  Ms. Stevenson posted this statement on her Twitter account on Friday.

"There was not a big increase in discouraged workers. What happened, was Census found a bunch of old people we had assumed died."

It just goes to show you the depth of thought and analysis of a liberal economist.

CBO Facts and Figures

The Congressional Budget Office (CBO) released its Budget and Economic Outlook for 2012-2022 last week.   In its 165 pages I found a few interesting facts and figures.

• The federal budget deficit for the year ending September 30, 2012 is projected at $1.1 trillion.
• This will be the fourth consecutive budget deficit in excess of $1 trillion.  $5.4 trillion in debt will have been added in the last 4 years.  To put this in perspective, federal debt held by the public was only $5 trillion in 2007 meaning that overall debt held by the public has doubled in 5 years.
• Social Security will be running an annual cash flow deficit between taxes collected and benefits paid over each of the next 10 years.  The projected deficit is $60 billion in 2012 but it is expected to increase to $168 billion in 2022.
• We hear a lot about the need for spending cuts but the reality is that the federal budget could be balanced by 2022 based on CBO projections if we just held overall spending to around 2% per year with no increase in taxes.  When do you ever hear that?  This chart prepared by Daniel Mitchell of the Cato Institute paints the picture.  Bear in mind, these are the CBO numbers assuming the Bush tax cuts remain in place.  Revenues will continue to increase due to inflation, a growing population and economic expansion.

• If the Bush tax cuts are not extended, American taxpayers will be paying an additional $2 trillion in taxes over the next ten years on top of what is shown in the chart above.

This chart from the CBO Report shows how dramatic this tax increase would be on individual taxpayers.

• If you want to see how big the problem is with the housing depression this chart from the CBO shows it graphically.  Vacant housing units comprise about 14% of all total units.   This amounts to roughly 2.1 million excess housing units based on CBO estimates.  It will be difficult to make real progress on the economy until this problem resolves itself.

Vacant Housing Units
(Percentage of total units)

The Longevity Project

In The Longevity Project, researchers Howard Friedman and Leslie Martin take the results of an eight-decade study to provide the lessons to living a long, productive life.   The research study began in 1921 by Dr. Lewis Termin of Stanford University who started following 1,548 individuals born in the early part of the 20th century.  Friedman and Martin, among others, carried on the work after the death of Termin.

I have not read the book but saw an interview with the authors in OnInvesting, the Charles Schwab publication for investors, and thought some of their findings on longevity were interesting.

• The old adages on what promotes longevity-getting married, exercising regularly, being happy, not working too hard- are overrated.  In certain groups of people they can actually have the opposite effect.
• One of the best predictors of longevity is conscientiousness.  The authors define this as being prudent, persistent and well-organized.
• The best careers were enjoyed by those people who were the most persistent.  They stuck to the things that they started and were willing to hang in there and avoided being impulsive along the way.
• Some people are naturally conscientious or well-organized.  However, some people improved these traits over time by tackling small pieces one by one.  As that happened, their health habits and social relations also improved over time one step at a time.  
• The people you spend time with tend to inform the person you become.  People who wanted to improve their health associated with healthy people.  People who wanted to be successful in business associated with successful business people at work.  Resilience and perseverance are not natural talents.  However, if you have the right social network, your friends can help you get back on the path if you get off track.
• People who stay active and engage in things they are passionate about throughout their lives tend to live longer and be happier.  It was the responsible hard worker who tended to thrive.
• Achieving financial and career success were often part of a healthy life path but money itself wasn't a primary factor for creating happiness.  People who led a successful life stayed productive and generally didn't have a lot of financial problems because of the life they led.
• As you create a life plan remember that each good step leads to another in life.  Having a sense of what's meaningful to you and then conscientiously pursuing that path can help you succeed in every aspect of your life.

I hope you can find the time to check it out.  A well-organized, conscientious person surely will find the time.  

Does Warren Buffett Read BeeLine?

Warren Buffett has argued that he does not feel right about paying too little in taxes.  He claims he pays a lower effective tax rate than his secretary ( I would like to see what he pays her).  I explained the likely facts and distortions behind this assertion in previous blogs, "Playing the Secretary Card" and "Pants on Fire"

In response to Buffett, Senator Mitch McConnell said that if Buffett were feeling "guilty" about paying too little in taxes, he should "send in a check".  There is nothing to prevent a a taxpayer from making a voluntary payment to the U.S. Treasury.  Buffett responded that he would gladly match any contribution made by a Republican member of Congress to pay down the national debt.

I turns out that 841 Americans actually did donate a little under $1 million to do just that last year.  Warren Buffett was not among them but Rep. Scott Rigell (R-Va) was.  He actually donated $23,103.33 in 2011 and plans to donate $26,000 in 2012 (about 15% of his salary).   Buffett, being a stand up guy, has stated he will match the Congressman's debt contribution as described in the letter below.

However, what I found most interesting was the statement at the bottom of Buffet's letter.  It sounded awfully familiar.

"We also very likely agree that spending must drop to 20-21% of GDP along with revenue increasing to 18-19%."

This is from the blog post that I wrote on April 12, 2011, "My Mother Solves The Budget Deficit".  I wrote this to lay out what I thought the strategy of the Republicans should be in the debt ceiling debate that was going to occur over the summer.  Has Warren Buffett been reading BeeLine????

I think the Republicans would be well served to agree to a tax increase in the upcoming debt ceiling discussions, if and only if, federal outlays are first reduced to no more than 20% of GDP (we are now over 24% of GDP).   Tax increases would be in play but would only be triggered if the spending cuts come first. If a tax increase was required, taxes as a % of revenues could not exceed 18% in total (which is the long term historical average over the last 30 years). 

Warren Buffett is now saying the same thing that BeeLine has been saying for almost a year. The same Warren Buffett that the White House loves to trot out with his statements on increasing taxes on the rich and other economic topics. It doesn't get much better than that.

The Republicans have been given a huge opportunity with this statement from Buffett to push hard for a budget deal that would force spending down to the 20% range.  They should seize on this opening immediately.  They could put the Democrats on the defensive with the words of their own oracle-Mr. Buffett.   It would also put us on a path toward a balanced budget.  Those are both worthy objectives if you are a Republican in Congress.

It is also very much to the advantage of the Republicans (and the country) to deal with the impending expiration of the Bush (and Obama) tax cuts that expire at the end of this year.  President Obama and the Democrats have little motivation to do anything about the expiration.  Taxes will go up dramatically on January 1, 2013 under current law if nothing is done in the interim.  Most Democrats will be very happy with this result. From their perspective, it just gives them more money to spend and spread around.  The Republicans need to get ahead of this issue and take the high ground.  The Buffett letter provides them the opportunity to do so.

The Republican proposal should be as follows:


1) We agree with Warren Buffett on the "necessity to dramatically reduce the deficit soon."

2) We agree with Warren Buffett that spending must drop to 20% of GDP.

3) We agree with Warren Buffett that revenue needs to increase to 18%.

4) We are sure Mr. Buffett agrees with us that fundamental tax reform must be enacted to remove many of the exclusions, preferences and deductions in the Internal Revenue Code that otherwise keep marginal rates too high (including his secretary) for individuals and harms the competitiveness of U.S. corporations since we currently have the second highest corporate tax rate in the industrialized world.

5) We are sure he also agrees that if the current U.S. tax system was fundamentally reformed that it would increase revenues as a % of GDP. The tax reform program we are suggesting would be initially drafted to be revenue neutral to current law with the expectation that the effects of the new system would actually increase revenues as a % of GDP to 18% as the economy improved.

6) However, if this does not occur, tax rates would be automatically adjusted upwards to account for any shortfall below the 18% target at such time that spending was reduced to the 20% spending target. The taxpayers deserve the same sort of assurance that Mr. Buffett wanted before he committed his money to pay down the national debt on his "challenge".  Once spending targets are reached the revenue targets will be met by automatic tax rate increases if they are necessary.

7) We look forward to Warren Buffett's encouragement of the Democrats to identify areas of spending that can be reduced to get us to the 20% target to match the Republican commitment to reach the 18% revenue target.

8) We agree with Warren Buffet that there is a way to deal with the budget deficit program. We appreciate his guidance and look forward to working with Democrats to deal with this issue during the coming year. Electoral politics should not be an obstacle. We simply cannot wait another year. It is time to get this done for the American people and our future in 2012.

Thank you very much, Mr. Buffett.  BeeLine appreciates the endorsement.  We now only have to convince 535 members of Congress and the President it is time to start spending time on issues that mean something.

President Obama seems to be making a 30% minimum tax on millionaires the centerpiece of his 2012 legislative agenda that he calls the "Buffett Rule".  What would that do help solve our budget problems?  Almost nothing.  He is playing "small ball", to use a baseball term, when we need to be playing "long ball". The non-partisan Tax Foundation estimates that the millionaire's minimum tax would only generate $36.7 billion in revenue per year.  That is almost not noticeable compared to the $1 trillion budget deficit that is projected for the year.  It would reduce the deficit by less than 4%.  More troubling is the time and effort that will be put into arguments for and against the provision when the focus of the President and Congress should be on the real issue-an unsustainable path of federal spending.

If President Obama wants to follow the Buffett Rule then the Republicans would be well advised to move the discussions to the BeeLine/Buffett Rule.  It is time to start swinging for the fences and for the future of the United States of America.  We don't have the time to waste on dividing the country on gambits and gimmicks from the President and Congress.  We need greatness and we need it soon.

Playing the Secretary Card

Warren Buffett continues to play the "secretary" card and Debbie Bosanek (Buffett's assistant) dealt herself into the game when she appeared at President Obama's State of the Union speech.  They doubled down when Buffett and Bosanek appeared on a least one morning news program and submitted to press interviews.

Buffett argues that it is unfair for high-income people to pay low taxes and says he paid an effective tax rate of 17.4 percent in 2010.  He says Bosanek paid an effective rate of 35.8 percent for all federal taxes-income taxes as well as payroll taxes for Social Security and Medicare.

I wrote previously about how his math could work.  Let's take a closer look now that we know exactly what Ms. Bosanek's tax rate is according to Buffett.  You never know exactly what is in a tax return unless you review it, but knowing the effective rate and a few other facts, it is possible to make some educated guesses about how much income Bosanek has on her return.  Why is this important?  Buffett (and Obama) clearly are trying to make political points on the boss/secretary angle.  The impression is left that Debbie Bosanek is a hard-working middle class taxpayer and it just shows how "unfair" it is that she is paying a higher tax rate than her boss.

I have no doubt that Ms. Bosanek is incredibly hard working.  However, the tax rates that are being attributed to her are not those of a middle income taxpayer.  In fact, she is probably reporting income on her return that would put her household within the top 3% of income earners in the United States as shown below.

The first thing to recognize is that Buffett seems to be taking both the employer and employee share of Social Security and Medicare taxes and considering those "paid" by Bosanek.  Many economists argue this is the correct way to look at the burden of these taxes from an economic standpoint.  However, I doubt that most employees think of it that way.  The law is also not written this way either.  The tax is considered to levied on both the employee and the employer.  If the employer tax was repealed that money would not end up in the employee's pocket unless the employer decided to give the employee a raise.  Therefore, Buffett is stretching the truth here if he added the employer FICA tax into her effective tax rate.

However, let's give him the benefit of the doubt.  The FICA rate in 2010 was 7.65% on both the employee and employer on the first $106,800 of wages.  Wages above that level are subject to a 1.45% tax on both the employee and employer (2.9% total).

Therefore, we know that Bosanek would have a 15.3% tax rate of $106,800 of income using Buffett's assumed methodology.  That means to get to the 35.8% effective rate that Buffett says she paid she would have to have an effective rate of 20.5% on the rest of her income.

We know Ms. Bosanek is married and we also know that she owns two houses.  That means that she is undoubtedly paying interest expense and property taxes on the houses.  She is also paying Nebraska income taxes, and if she is like most taxpayers, has some amount of charitable contributions.  This all means that she is probably filing a joint return and itemizing deductions.  The story on Omaha.com linked above indicates she also has a son in college but I will not assume she is claiming him as a dependent.  Again, a very conservative assumption.

The combination of personal exemptions for her husband and herself would have reduced her gross income by $7,300 and her deductions would have to have been at least $11,400 (the amount of the standard deduction) for the year.  Let's be very conservative in this analysis and just use $20,000 for the combination of these two items.  This amount must be added to the taxable income we arrive at that equals a 20.5% effective tax rate.

To arrive at an effective tax rate on joint return of 20.5% you would need taxable income of about $157,000.  You can do the calculation using this template on www.moneychimp.com.  Since we know that she also has at least $20,000 of exemptions and deductions, this would suggest that the adjusted gross income on her return is approaching $180,000 using these very conservative assumptions.  This also assumes that none of the income is investment income such as dividends or capital gains that would only have been taxed at a maximum marginal rate of 15% (what Mr. Buffett is paying on his dividends and capital gains).  This would mean her gross income was even higher.

Only 2.8% of all individual tax returns filed in 2009 (the most recent year available) had adjusted gross income in excess of $200,000 according to IRS data. Therefore,  Ms. Bosanek and her husband most likely have income in excess of 97% of the households filing tax returns in this country.

Quite frankly, all the talk about tax rates and "fairness" is further evidence as to why fundamental tax reform is necessary.  The fairest system is to clean out all of the exclusions, exemptions, deductions on the individual side and get rid of all of the so-called "corporate tax welfare" on the corporate side.  Broaden the tax base, flatten the rate and simplify the system as I have argued for before.

Let's use the tax system to raise needed government revenue and forget about using the tax code for social and economic engineering.  Embracing that philosophy would mean that there would not be so much mistrust, distrust and disgust about the tax system.  A broad, flat and simple tax system should appeal to most reasonable people as everyone would be treated the same after a flat exemption.  It would also dramatically reduce the ability of the federal government to serve special interests and pick winner and losers.

In the same SOTU address that President Obama was calling out Ms. Bosanek he was also saying,

It’s time to apply the same rules from top to bottom.  No bailouts, no handouts, and no copouts.  An America built to last insists on responsibility from everybody."

That sounds like a call for a broad, flat and simple tax system.   The Republicans ought to tell President Obama they are ready to get started on Monday using those principles.

No Bailouts, No Handouts, No Copouts (And No Hope)

"Let’s never forget:  Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same.  It’s time to apply the same rules from top to bottom.  No bailouts, no handouts, and no copouts.  An America built to last insists on responsibility from everybody."

This is one of my favorite quotes of the year so far.  Who said it?  It sounds a lot like Ron Paul in its emphasis on individual responsibility.  Rick Santorum was an opponent of the TARP bailouts so it could very well be his quote.  On the other hand, Newt Gingrich has talked about all that he did to reform welfare so the "no handouts" sounds like him.  Mitt Romney, now that I think about it, has really emphasized the hard work of the private sector and the fact that we need the federal government to get out of the way.  It must be him.

WRONG ON ALL COUNTS!

This is an exact quote from President Barack Obama in last night's State of the Union address.

It reminds me of a something that Andrew Carnegie once said,

As I grow older, I pay less attention to what men say. I just watch what they do. 

How does what President Obama has done compare to what he said last night? A few glaring comparisons of what he said and what has been done.

"Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same"

• Most hard working Americans have to live within their means and on a fixed budget.  The federal government is borrowing 40 cents of every dollar it is spending.
• Hard working Americans do not have the ability to print money as the Federal Reserve has done to fund the federal deficit and to bail out large financial institutions.
• Retirees who saved their whole life and played by the rules are not receiving any interest on their savings accounts, CD's and treasury bonds to bail out the federal government and the financial system.
• The rights of secured creditors in the auto bailouts were summarily ignored and their property rights were stripped away and given to the auto workers union.

"It's time to apply the same rules from top to bottom."

• 47% of Americans pay no income taxes.  How is this applying the same rules top to bottom?
• The top 10% of earners are currently paying 70% of the total federal income taxes.
• The United States already has the most progressive tax system in the industrialized world and President Obama wants to raise tax rates even higher on higher incomes.  Of the entire tax burden in the country, the top 10% of income earners pay almost half of all taxes but their share of income is 33.5%.
• Public sector income and benefits substantially exceeds those of the private sector.
• He consistently has supported unions in opposing right to work laws at the expense of workers who want to work without joining a union.

"No bailouts."

• President Obama supported the bank bailouts, auto industry bailouts, auto union bailouts and substantial funding in his stimulus package to bail out state and local governments.

"No handouts."

• There are more people on food stamps that at any time in history.
• Unemployment benefits have been extended to 99 weeks which is longer than any period in history.
• Tax credits have become "refundable" tax credits for those who don't have any federal taxes to offset to make it a direct handout rather than a tax credit.

"No copouts."

• Of course, everyone now knows that every problem President Obama has was created by President Bush.  He has told us at every opportunity.
• All problems the last year have been due to the House Republicans according to the President.
  ( He can only use that copout over the last year because Democrats controlled all of Washington for the first 2 years.)
• The rise in the price of gasoline this year was due to the Arab Spring.
• The failure of the economy to get on track last year was due to the Japanese Tsunami.

"An America built to last insists on responsibility from everybody."

• Last year, 72% of all black children in this country were born out of wedlock.  Until the 1950's, black children were more likely to live with two parents than were white children. What has President Obama done to try to address this problem?
• We know that if an individual does just two things--graduates from high school and marries before they have children they will almost certainly not end up in property.  In fact, a Brookings study in 2009 showed that if an individual does these two things along with having a full time job they had only a 2% chance of winding up in poverty and a 74% chance of ending up in the middle class.  Young people who did not follow those norms had a 76% chance of ending up in poverty.  However, we provide welfare benefits to able bodied men who made their own decision to drop out of high school and we provide this and a host of other benefits to single mothers (we actually provide more money for every additional child the mother has) who have children out of wedlock.  How is this insisting on responsibility from everyone?
• We have over 10 million illegal immigrants in the country who broke our laws to come here, who have broken the law again to work here and yet are not considered to have responsibility for being here.
• When it comes to voting, President Obama will not support requiring voters to have the responsibility to produce a photo to prevent voting fraud.

It is almost beyond my ability to comprehend the disconnect between President Obama's rhetoric and the results.  It is almost as if he is running against his own record with that statement.  


He wrote a book, "The Audacity of Hope", before he ran for President.  I will give him this...he has the audacity part covered.  He still needs to work on the hope part.

This is a very important election year for our country and our future.  I can only hope that H.L. Mencken was not correct when he observed,

"The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth".