The tax battle rages
Editor's note: We begin today's Digest with a note from the day after OBAMA! took office... Since then, the Democrats have proposed cripplingly large new taxes and entitlement programs (think cap and trade and health care). Of course, we wouldn't expect any better from a Republican administration. Both parties support bigger government, more taxes, and a narrower tax base. That's what makes good political sense: Promise the voters they can live at the expense of their neighbors – and the next five generations.
And in the mailbag, the tax battle raged. For a selection of Porter's best anti-tax rants and a few choice replies from readers, read on...
"The time has come to affirm our enduring spirit, to choose our better history..." said OBAMA! yesterday at the high point of his inaugural address. Choose our better history? What does that mean? I'd like to choose a better history every time my wife asks me where I've been.
The consensus opinion seems to be that things can't get any worse in Washington. I'd take the over on that bet... Our president seems to honestly believe the problems in our country can be solved by the government. Forget about choosing our history, he hasn't learned anything from it! It seems to have never occurred to OBAMA! that the government doesn't produce anything; it can only deliver to Peter what it has previously stolen from Paul. – January 21, 2009
"Boo-hoo the rich can't evade taxes anymore and the American overseas corporations will finally have to pony up... I'm tired of you rich guys whining about having to pay what the rest of us already are paying – you guys always want a free ride! You don't like it – MOVE!" – Paid-up subscriber Markus
Porter comment: Be careful what you wish for. Right now, about 50% of the income tax receipts come from only 10% of the population. The top 1% of earners contributes about 25% of the tax receipts. If they left... America would be in serious trouble. Again, you've got it completely backward about who gets a free ride. Roughly 50% of the population pays zero income tax, after tax credits. So who is getting the free ride?
Oh... one more thing. The idea that the truly rich pay income taxes is preposterous. People with $50 million (or more) in assets don't work – at least not to earn a paycheck. The truly rich have many different (and totally legal) ways of sheltering these assets from taxation – municipal bonds, for example. And the government imposes a completely different (and flat) tax structure for income derived from investments dividends. – May 6, 2009
"You keep saying this over & over again – 'The top 1% of earners contributes about 25% of the tax receipts.' Income tax is taxed on income. If the top 1% earn close to 25% of the income, they should pay close to 25% of the taxes. I am sure this proportion will look much more rational when you look at the percentage of total income the top 1% make. My guess is that it's close to 20%. I wish you'd stop repeating this bogus comparison over & over again." – Paid-up subscriber Mukund
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Porter comment: You are either really bad at math or just a terrible guesser. In any case, rather than guessing, let's use real data, OK? I prefer the IRS data from 2006, which was the last normal year for our economy. According to the federales themselves, the top 1% of wage earners in the United States earned more than $388,806 in 2006. There were 1.65 million citizens in this category. As a group, they paid $488 billion in income taxes. That was 40% of all income taxes. But they only earned 22% of all wages. In short, the marginal tax rates on America's top earners were almost 100% more than average. OBAMA! will increase the top rate these people pay – because paying 100% more than average just isn't quite "fair" enough.
We might argue about whether or not we ought to charge some citizens different rates of income tax. But if you'll take the time to read the U.S. Constitution, it's clear that progressive taxation is unconstitutional. Just read the 14th Amendment. It says the government "may not deny to any person within its jurisdiction the equal protection of the laws." That means the law can't treat one citizen differently from another – white or black, rich or poor.
If our Constitution weren't merely a dead letter, the equal protection clause – which was designed to prevent black people from being discriminated against by southern states following the Civil War – would now effectively prevent a black president from "spreading the wealth around" as much as he sees fit. History is nothing if not ironic.
Even if you think progressive taxation is a good idea and redistributing income ought to be the government's prerogative, I can tell you judging from history and the recent experiences of several different countries, when society expects 40% of the tax burden to be carried by only 1% of the population, bad things happen. The masses always demand too many services from the government – because they're not paying for them. And, eventually, the 1% that's paying leaves, quits working, or hides their income.
The result is always catastrophic, not only for the state but for the culture. Once people get used to living off the bounty of their neighbors, they're reluctant to go back to work. And they're angry about it. There's not much that's more dangerous to society than lots of poor, angry, and desperate people who have become addicted to entitlements. Think unionized employees at Chrysler and GM. Welcome to Amerika.
At the present time, America's income taxes are the most progressive of any major industrialized nation. That's not a contest we should seek to win. – May 8, 2009
"Over the years as I have become more successful (as measured by my annual taxable income) it does seem to me that the higher my income gets, the less of the extra money I actually see... Having been in the $100K to $150K range for a few years, and having broken the $150K mark in the last year or so, I must say taxes have become a greater burden on me than they have been in the past.
"I understand equality and all that but WTF should someone else benefit from my hard work?! I had to bust my ass to get to where I am... The equality of gain should be directly proportional to the equality of effort. A flat tax would seem to better facilitate that than the current system of tax. X% always remains X% of any income amount and scales a hell of a lot more equally across the board than the current system of tax." – Paid-up subscriber Jerry Young
Porter comment: There's no room in Amerika for anyone as greedy as you are, Jerry. You don't need $150,000 to live well here – not when the average income is $40,000. Yes, you've been lucky to do so well in your life... and that's why you should be happy to give back to your community. After all, wasn't it Amerika that provided you with all of the opportunity you've taken advantage of? It's the country that's really responsible for your success, Jerry. Hard work wouldn't have gotten you very far in Russia.
I'm tired of hearing all of you "rich" people moaning about taxes... OBAMA!'s new top 39.5% rate – even if it applied to your entire $150,000 wage – would still only be $58,500 in taxes. That leaves you with $91,500 – that's A LOT OF MONEY! Of course, there's state income tax in most places. Even after you've paid those (5%), you've got $86,925 left – more than twice the average wage. Of course, you also have to pay 12% of your gross compensation for Medicare and Social Security. Yes, it's a lot of money ($18,000) – but surely you wouldn't want to see anyone go without medical care in a society that's as rich as ours. Besides, that leaves you with $68,925 – which is more than enough to live on...
With a gross income over six figures, you've probably got a $1 million house. States usually charge about 2% of the current value for real estate taxes. (Someone has to pay for the roads and the schools you know.) Now you've got $48,925 after tax. Assuming your wife doesn't work – 'cause you're so rich – that leaves each of you with about $25,000 per year. Assuming you both have medical insurance, you're probably spending about $800 per month in premiums... so you've still got more than $15,000 each – just to spend on yourselves. That's $296 per week... before sales taxes, gas taxes, your grocery bill, your mortgage bill, your car payments, your electricity bill, phone, water, cable... and investment newsletter subscriptions.
I'm sure you have plenty left over for charity and retirement savings. You're doing great Jerry. You lucky bastard. You've got no right to complain about taxes. – May 11, 2009
"I hope that your response is a joke to get us rich jerks enraged enough to do something to eliminate redistribution of our wealth to the folks that won't work hard enough to take advantage of the opportunities in this country. I'd like a direct and personal response from you on your real thoughts on this topic. If your comments are not a joke, you may consider me among the missing from your subscriber list. If you comments are a joke and you have a plan to overcome this insanity, I'd like to hear it. If it's worthwhile, I will become a active player in implementing the plan." – Paid-up subscriber Bob Synder
Porter comment: I think the size of our government is both absurd and obscene. It's idiocy to believe allowing the government to make up 30% of your economy will lead to anything besides a debacle. No country in the world can afford that much government. The government grew so large because the mob gained control over the Treasury – meaning more people collect from the government than pay for the government. That's what always destroys democracies historically. And it usually isn't pretty when they collapse.
As for what to do about it, I've already published my prescription, but I'll repeat it here... We only need to do three things. First, pass an amendment to the Constitution that requires a balanced budget. Second, enforce the equal protection clause of the 14th Amendment so that every adult pays the same amount of taxes, as a percentage of their total annual income (don't allow anyone to pay nothing).
If you did these two things, the size of government would shrink dramatically. No one who actually has to pay for government wants any more government than absolutely necessary. Finally, get rid of the Federal Reserve, which is wholly unconstitutional. The constitution gives the Congress the right to coin money – not to print it.
While these three things – a balanced budget, a flat universal tax, and sound money – wouldn't solve all of the problems, they would be an important first step toward controlling the leviathan. These things would give us (citizens who pay taxes) a decent chance at limiting the power of government. – May 13, 2009
"I may be one of your 'poorer' subscribers meaning I'm not over the 6 figure income mark but hope to get there. As far as the untaxed masses folks like me with a few kids (6) get most of our payroll deductions back in a tax refund and that is just with standard deductions. The people out there saying the vast majority are paying taxes are fooling themselves. Most married couples with a couple kids under $60K a year are most likely getting everything they paid in on payroll taxes back and sometimes they make a net profit in that they get back more than they paid in. So if you decrease the tax rate for these people what does it do other then increase the federal deficit?" – Paid-up subscriber Trevor Hansen
Porter comment: In a truly free society, where citizens were actually treated equally under the law, everyone would pay the same tax. Not the same rate – the same tax. Limiting taxes to what everyone could afford to pay would accomplish two important things. First, it would force the government to focus only on its legitimate functions, which are to provide for the national defense and enforce contracts.
And second, limiting taxes to a paltry sum would castrate any attempt by special interest groups to use the power of the government to take through force what they cannot win in the marketplace. I understand this is a radical view that's wholly unlikely to ever be implemented. A reasonable compromise is to at least insist on citizens paying the same rate of tax. While this wouldn't strictly limit the size of government, it would at least pass along the burden of paying for the government in equal measure.
I've always been fascinated by the legal basis for progressive income tax. The idea that one citizen has a bigger (or smaller) obligation to the state than another citizen flies completely in the face of the ethos of our country. When our founding fathers broke away from the King of England, they did so saying: "We hold these truths to be self-evident, that all men are created equal," which meant the sovereign should treat all men equally.
Later, after the Civil War, we framed that idea into our highest law – by adding the 14th Amendment, which says: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States... nor deny to any person within its jurisdiction the equal protection of the laws."
The language couldn't be clearer: The states, at least, are required to treat their citizens equally. And yet, most states have steeply progressive income taxes. And even worse, we've seen a flurry of new so-called "millionaire" taxes from states like Maryland and New York. How can they get away with it?
In 1973, the U.S. Supreme Court ruled that the 14th Amendment simply doesn't apply to taxes. The case is Lehnhausen v. Lake Shore Auto Parts Co. Here's the relevant passage of the 9-0 decision:
Of course, the States, in the exercise of their taxing power, are subject to the requirements of the Equal Protection Clause of the Fourteenth Amendment. But that clause imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation. The State may impose different specific taxes upon different trades and professions and may vary the rate of excise upon various products. It is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value.
The Constitution is a dead letter my friends. It was written to protect us from the government. But unfortunately, the government decides whether or not to enforce it. – June 26, 2009
Why not? There are lots of reasons, but the most basic is because we abhor violence, whether in foreign lands or in the collection of taxes at home. That's all the government really is: the barrel of a gun. You can dress it up anyway you like, but government relies on coercion. Nobody pays taxes because he wants to.
The free market, on the other hand, relies on persuasion. You pay for this newsletter because you choose to. That's a critical difference, one most people never consider. Systems built on free association and persuasion are vastly more efficient and productive than systems built on coercion. That's why Hong Kong became rich and the Soviet Union went broke.
That's why as the government gets bigger in America our standard of living will decline. These ideas, by the way, aren't new at all. They're the ideas America was founded on. It's the idea that government should interfere in our lives that's new and radical. – August 21, 2009
I'd like to make you a business offer. Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...
Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal. But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.
Now in return for my rules, I'm going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits. You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."
Now... after you've put your hard-earned savings at risk to start this business and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.
Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.
I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh... and one more thing...
Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth. After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage.
But if you buy enough life insurance, you can finance this expense for your children. All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.
I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That's how civil society is supposed to work, right? This is Amerika, isn't it?
That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs. – November 20, 2009