Trying to Understand “Fair Share”

There is a lot of talk on both sides of the Atlantic Ocean these days about so called “fairness”. Here in the United States the fairness frenzy comes from liberals, clustered around president Obama, who demand higher taxes on higher incomes. By international comparison their demand is relatively modest, with a return to the top tax rates that were in place under President Clinton. That means 39.6 percent on incomes higher than either $250,000, $400,000 or one million dollars, whatever finally comes out of the “fiscal cliff” talks.

In France, fairness is defined as a 75-percent top income tax on earnings above one million euros. There is no doubt that many liberals in America would like to raise federal income taxes to that level; one of them is Paul Krugman whose “twinkie manifesto” proposes a 91-percent top income tax rate.

I doubt that Krugman, when he got the Nobel Memorial Prize in Economics, was willing to give Uncle Sam $910,000 of the $1,000,000 he received. If he truly believed his own rhetoric he would have written a check to the U.S. Treasury for his preferred top tax rate. The fact that he did not, and instead spent the money on a condo on Manhattan, shows that Krugman is just blowing hot air out of his left nostril, like so many other high-income liberals.

But beyond the obvious fact that most of the leftist propaganda for higher taxes is little more than verbal vanity, there is a more serious question that none of the tax hikers have yet answered: What is fairness?

We can focus the answer on tax rates, which of course is important. But the real question that drives the tax-rate debate has to do with what share of a government’s total tax revenues are paid by whom.

Put bluntly: how much of each $100 of tax revenue should high-income earners pay before they have paid their fair share?

To answer these questions you have to start somewhat differently depending on where you are. It is well established that here in America the higher-half of income earners pay almost all federal taxes, a fact that justifiably makes many people question the fairness argument for higher taxes.

This article is not an exercise in numbers. I will have an article next week that analyzes tax rates, tax income data and income shares. Today we are taking a look at the fairness concept per se, which actually drives the entire debate.

Since no liberal has provided a systematic definition of their “fair share” that they demand from high-income earners, we will have to find that definition here. There are three candidates:

1. The fair share is a percentage of a person’s income. If this is what liberals mean, they simply say that when a person earns above a certain amount of dollars it is unfair of him to keep the same share as he did when he made less money. The problem they run into is that they will have to motivate why dollar amount X should serve as this income threshold, and not dollar amount Y or Z. It is of course impossible to pull such a number out of a hat and still make a coherent tax-policy argument based on it. Since we want our tax rates to be determined by rational analysis rather than what comes out of an oracle, we can dismiss this candidate for the “fair share” definition and move on to the next.

2. The fair share is a percentage of government tax revenues. Here, the liberal would say that some people have the obligation to pay a large share of tax revenues while others have the right to escape with paying a small share. The tax rate on those with the obligation would be determined by whatever their “fair share” of government revenues would be.

Suppose the liberal fairness doctrine says that Jack should pay, say, three quarters of government tax revenues, and that Jill should pay one quarter. Suppose Jack and Jill together make $10,000, of which Jack makes $6,500 and Jill makes $3,500. Government wants $1,000 in tax revenues, obligating Jack to pay $750 and leaving $250 to Jill. Jack’s tax rate is now 11.54 percent while Jill ends up paying 7.14 percent of her income in taxes.

In other words, government has obligated Jack with paying a larger share of its tax revenues than he makes of total income. When liberals define “fair share” in terms of who pay how much of the tax revenues, they do not consider how large a share of total income the high-taxed taxpayers make. As a result, the tax revenues that liberals advocate under this definition will be more or less arbitrary. We cannot have a tax policy that is ultimately determined by arbitrary, irrational definitions.

Which leaves us with only one remaining candidate for what the “fair share” is.

3. A person’s contribution to government tax revenues should be in parity with his share of total earnings. This is actually a rationalization of the previous candidate. The basic idea is that the more a person earns, the bigger a responsibility he can take on for any given package of spending programs that government needs money for.

However, by tying the tax obligations to income shares we end up with a different result than in the previous example. Suppose Jack and Jill together make $10,000, of which Jack makes $6,500 and Jill makes $3,500. Government wants $1,000 in tax revenues, which it splits between Jack and Jill based on their income shares. By asking them both to pay a share of tax revenues that equals their share of total income, government ends up imposing a tax rate of ten percent on each of them.

This is the only consistent, logically functional definition of “fair share” that can come out of the liberal rhetoric. But its outcome also happens to be equal to the flat-tax argument proposed by many conservatives.

Liberals need to make up their mind about what they really mean by “fair share”. Hopefully, when they do they will come down on the logical, rational side of their own term. If they do, there is a fair amount of hope that Democrats and Republicans can screw together a workable, sustainable tax policy to the benefit of the American economy and the prosperity of all Americans.

Next Friday, we will discuss the numbers behind tax revenues and income shares. You’ll be surprised to learn that under the “fair” and “sophisticated” European welfare states that liberals want to import to America, low-income earners are actually punished with higher taxes than high income earners.

Yet Another Greek Warning for California

While Europe is sinking under the pressure of an unsustainable welfare state, unforgiving austerity and social unrest, America is fumbling its way back to economic sanity. Last night’s presidential candidate debate was a refreshing reminder that we have a bright future ahead of us if Mitt Romney wins. But we should also not forget that our own fiscal problems are enormous, and that refers not just to the federally funded part of our welfare state .  As this blog has chronicled, many states are in such bad shape that they are actually comparable to the worst-performing European welfare states.

Cali-Greece-ia is a good example. Despite decades of reckless over-spending, and random efforts by some adults in Sacramento to rein in the madly bloated budget, the Golden State is still spending taxpayers’ money like there was no tomorrow. (Maybe the state legislators out there actually believe some of the disaster movies where California is obliterated?) This is putting California on a track straight into Greek-style austerity, something that is entirely unnecessary and avoidable.

Unfortunately, there is very little going on in Sacramento that gives us hope that the Golden State will change course. On the contrary, the budget for fiscal year 2012-13 is an excellent example of how the state lawmakers, and the governor, are sticking their heads in the sand. General fund spending is up seven percent, or $6 billion.

Not only is this spending binge entirely reckless from a budgetary viewpoint, but it is also based on some outright ludicrous expectations of where the California economy is heading. For one, it is a rather trivial observation that every dollar the government spends must come from somewhere. In California, as in almost every other state, there is even a law in place that forces the state government to make appropriations based on this trivial fact. So when the lawmakers in Sacramento, and Governor Brown, decide that the state should spend seven percent more in this fiscal year than it did in the last one, you have to assume that they have good reasons to expect a seven percent increase in tax revenues.

Well, that is probably not going to happen. In a recent report on California state tax revenues the Census Bureau explained that the revenue outlook for California is rather pessimistic. That is noteworthy in and of itself, but the most remarkable part of the report is that it really is not relieving anything we did not already know. In May this year I explained that California indeed has a long tradition of overspending:

Total state spending grew at 4.4 percent per year from 2000 to 2010, while state GDP in current prices – the broadest possible tax base – grew at only 3.8 percent per year; in other words, for every dollar the state was increasing spending, 14 cents exceeded what the tax base was able to keep up with;

Even when they have cut spending, it has only been temporary reductions in in-state funded outlays. While we still don’t have final numbers on 2012 spending, the following figures are illustrative of how California lawmakers approach state spending:

  • Between 2008 and 2011 the General Fund was reduced by 11.2 percent;
  • During the same period, California increased its federal funds by 62.7 percent;
  • Other (Special) funds increased by 17 percent;
  • Total in-state sourced spending contracted by 5.4 percent; but
  • Grand total state spending grew by 17 percent.

In other words, the state compensated for cuts in in-state funded spending by taking more federal funds. Some would say that these extra federal funds were stimulus money and therefore do not represent a permanent change in the way states pay for their outlays. However, the stimulus money was not at all meant to “stimulate” economic activity – it was a bailout bill for the states. As such it allowed states to bridge over a supposedly temporary decline in in-state revenues and the following mandatory cuts in in-state funded spending.

Therefore, what the stimulus bill really did was to put out an expectation for the future of rising in-state funded spending. That is what is happening now in California:  after two years of cuts in General Fund spending, Golden State lawmakers are now replacing “stimulus bill” funds with in-state funds.

In order to do so they have to assume that revenues will grow enough to replace the stimulus funds. Otherwise they would not be able to do the spending replacement. To pull that off they expect a $6.7 billion rise in state tax revenues over the next year, an expectation that all sound economic analysis will shoot down as the pie in the sky it is.

For one, who is going to pay those taxes? Only private-sector jobs genuinely create tax revenues (government employees who pay taxes do so with someone else’s tax dollars) so in order to safely predict a rise in state revenues, the forecasters at the state legislature in Sacramento must assume that the state’s economic performance will now be back to where it was before the deep recession began.

There are no economic indicators that make this an even remotely reasonable expectation. In order to have the same income tax base as before the recession, California would have to return to the heydays of 2008. That would require at least five percent inflation-adjusted growth in the state’s GDP for 2012, and a 4.6 percent increase in total compensation of private employees.

Neither number is likely to materialize, partly because of the way the national economy is going, and partly because government is still getting in the way of the private sector in California. In fact, the odds of such strong growth are increasingly unfavorable after the increase in the top state income-tax bracket to 12.3 percent. More and more high-earning entrepreneurs and professionals will go to neighboring states, all of which have lower taxes.

The lawmakers in Sacramento just can’t get their act together. If they really wanted to they could easily start doing away with the welfare state, but they don’t want to. They want to preserve their big government as far as they possibly can. That is why they continue to spend without any concern for the health of the state’s economy; that is also why they are pushing taxes up every chance they get; and that is why the future looks Greek for California.

Once they run out of options to raise taxes, it will only be a matter of time before they turn to European-style austerity instead. And that won’t be pretty.

The Next Tax Base: Criminal Activity

We all know that welfare states are insatiable when it comes to tax revenue. Most of them will go to moral excesses just to get their hands on more money. One way they do that is by taxing addictive products, such as tobacco, alcohol, gaming and marijuana. Addiction taxes are very popular, and their popularity will only continue to grow until we do something structural about the relentless growth in government spending.

Government over-spending is indeed a serious issue, as are addiction taxes. But sometimes the political hunt for more revenue gets almost comical. Or how about a tax on illegal activities?

On the one hand, our elected officials do not want to recognize marijuana as a legal product – to some degree for the right reasons – but on the other hand they desperately want their hands on the taxes that legal pot-smoking could generate. Some states have legalized so called medical marijuana in order to tax it, while the federal government maintains that marijuana is always an illegal product. This tension between state and federal law puts dispensers of medical marijuana – the latest to join the big crowd of taxpayers – in quite a conundrum.

The Sacramento Bee reports:

A once-thriving San Francisco pot shop forced to close this week is also on the hook for a serious IRS bill, following a new U.S. Tax Court decision that could complicate life for others in the medical marijuana business. Call it a precedential bummer; or, perhaps, a rational application of tax law.

The trick here is that marijuana is illegal under federal law but legal under California law:

For businesses and consumers in the 17 states that permit medical marijuana use, the ruling quietly issued Thursday certainly goes well beyond the facility formally called the Vapor Room Herbal Center. In particular, the Vapor Room ruling could squeeze pot operations that claim deductions for caregiving services. “The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law,” Tax Court Judge Diane L. Kroupa noted. “Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business.

Now… if the federal government considers the very product that the Vapor Room provides to be illegal, then how can they…

This is true even if the business is legal under state law.” The ruling means Vapor Room owner Martin Olive owes Uncle Sam a lot of money

…tax his business?

The owner of the Vapor Room sought to make tax deductions for expenses related to his business. But the business is illegal by definition under federal law. Since it is illegal by definition under federal law, how can federal law mandate that he pay taxes on any money earned from the business?

Mr. Olive, the owner of the Vapor Room…

…had gone to court to challenge the IRS’ determination that he owed more than $1.8 million in taxes, plus about $378,000 in penalties, for 2004 and 2005. Olive had reported the Vapor Room had gross receipts of $1 million in 2004 and $3.1 million in 2005. Tax investigators subsequently concluded that Olive had underreported his income, and that the Vapor Room really collected $1.9 million in 2004 and $3.3 million in 2005. Olive sought to deduct his various business expenses, ranging from rolling papers to zip-close bags. He also wanted to subtract the price he paid for the marijuana, as a cost of goods sold, from his total income.

But he can’t do that, because the federal government, which considers his entire operation illegal by definition, wants as much tax revenues as it can out of him.

So who is Uncle Sam going to squeeze next? Will they demand that your neighborhood brothel own up on its taxes for providing an illegal service?  What about customs duties on illegally imported firearms?

It is bad enough that government tells us how bad alcohol and tobacco are and still tax us every time we use those products. But it is outright absurd that government can benefit from activities that it itself has defined as illegal. The fact that the federal government does this is yet another sign of how big government erodes the ethical foundations of not just our government, but our society as a whole. If government can benefit from something that it considers illegal, then what moral barriers prevent private citizens from doing the same?

Another Leftist Hate-the-Rich Tirade

It’s Friday and time for a time warp. Hamilton Nolan, editor at Gawker.com is going to take us back to an era when a wall still divided Berlin:

Rich people across the Western world are anxiously watching France, where president Francois Hollande is vowing to raise the top tax rate—on earnings over $1.2 million a year—to 75 percent. Tres bien, Mr. Hollande. The problem with this otherwise fine idea is that the very rich can simply pack up and move to a more accommodating Western nation with lower taxes and less concern for income inequality, like America.

How about that. It’s a problem in Hamilton Nolan’s world that people can move between countries. Back where I grew up we cherished the ability to travel across national borders, because when we went just a wee bit to the east, we ran into an Iron Curtain. Hamilton Nolan is happy enough to never have had to encounter such a physical boundary in his own life. If he had, he would be a bit more humble about making people’s free mobility a “problem”.

There is, though, a more elegant solution to this: a maximum income. Let’s have a maximum annual income of, oh, $5 million, pegged to inflation. All income above that would be taxed at 99 percent.

So if we put that cap in place in America, how would that stop people from moving to Canada to escape that tax? What would stop, say, a business that needs top-notch executives from moving their company from Detroit, Michigan to Windsor, Ontario?

Our precious national sports stars, celebrities, and corporate executives could still be fabulously wealthy. The daydreaming poor could still have a nice big number about which to hopelessly dream.

It’s not far fetched to guess that Hamilton Nolan belongs in that last category. See, the problem is this. If you are a corporate executive, you don’t just sit on your behind and cash paychecks. You actually work. And you work a lot. I once had the privilege of meeting the chief executive officer of an international manufacturing corporation with a quarter of a million employees worldwide. He had 2.5 days off from work – per year. Christmas Day, New Year’s Eve, and half of his and his wife’s anniversary day. Every weekday he worked 7AM-7PM and 9PM-midnight and 7-5 on weekends. In other words, he put in half a work week over the weekend when most people are sleeping, watching ball games, going to barbecues and writing status updates on Facebook.

He missed almost everything his kids were involved in, and his wife had given up her career to serve as the “ground crew” for their family. Every decision he made in his capacity as CEO could affect the livelihood of 250,000 people. And their families.

I’m sure Hamilton Nolan would gladly make those sacrifices for $5 million per year as the CEO of Global Gadget, Inc., but I am also pretty dang sure that the people who have invested their retirement savings in the stock of Global Gadget, Inc. would like someone at the helm who actually knows what he is doing. They would want their company to pay a CEO enough to get top-notch talent. If they cap out at $5 million, then it is not far-fetched that some German, Canadian, Australian, Swiss or British company is going to offer another couple of million and lure the skilled, competent guy over to them.

And Global Gadget, Inc. will be stuck with Hamilton Nolan as their CEO.

Five million dollars a year. Five million! Anyone with $5 million can invest it conservatively enough to earn 5 percent a year and still be making $250K per year without lifting a finger. In other words, $5 million provides you with the means to live as a member of the one percent without ever touching the principal.

Apparently, Hamilton Nolan has been listening too much to Harry Reid. He appears to believe that the rich don’t pay a dime in taxes. Unfortunately for Mr. Nolan, the rich do pay taxes. A lot. At $5 million per year you pay 35 percent in federal income taxes on 92 percent of your income. The average tax rate you will see is 34.7 percent, which reduces your five million to $3,263,509. Then you pay state and local income taxes – let’s assume seven percent for simplicity. You are now down to $3,035,063.

Hamilton Nolan assumes that CEOs can deposit every cent of what they make into the bank and then get a five-percent return on it. Even if we assume that his return figure is reasonable (which it is not) the CEO still has to pay for his family’s food and clothes, his utility bills… he has to put money aside for retirement and the kids’ college, and he most certainly donates money to charity. (Who knows – maybe he even gives to the college Hamilton Nolan went to?) So the $3 million net-tax income that Mr. Nolan thinks he could deposit straight into the bank if he were the CEO of Global Gadget, Inc., is not really going to be $3 million.

Then, of course, there is Mr. Nolan’s attitude that CEOs should be payed a fixed, annual amount. most CEOs get paid based on the performance of their company, giving them an incentive to work harder. I realize that the concept of performance-based reward is totally alien to a liberal like Mr. Nolan, but believe me – it actually works. And it works the other way, too. If Global Gadgets, Inc. pays Mr. Nolan $5million per year regardless of what good or disastrous decisions he makes, how long does Mr. Nolan think that his company will stay in business?

Of course, Mr. Nolan’s concerns are not with the survival of the businesses that build our prosperity. His concern is that someone in Ougadougou is poor when Mitt Romney is rich. He goes on to let us all know that $5 million per year is far more…

…than anyone should be earning, in a world with so much poverty and want, but not so much that someone could consider themselves set for life. It’s a number at which the go-getting rich person is still aspirational. They hope to double or triple that salary before their earning days are done. So a hefty 75 percent tax, though completely just, will not only spook them enough to flee, but allow them to retain a modicum of dignity while doing so, at least among the more affluent segments of their peer group.

Apparently, Mr. Nolan now wants a 75-percent income tax bracket already at $1.2 million per year, just like they want in France. But he just based his entire argument for a salary cap on keeping the current tax brackets up to $5 million, and then have the IRS take 99 percent of everything above that. So now Mr. Nolan wants an effective compensation cap at 75 percent at an earnings level that includes a lot of small business owners.

Which, of course, gives those same business owners an excellent incentive not to expand their businesses, not to hire more people – and not to make enough to donate to any of the good causes that liberals always talk about.

And then it gets really fun:

I defy the slickest PR firm in America to explain to a nation of struggling, underemployed working class people with a median household income of just over $50,000 why an already-wealthy person felt the need to leave the country—taking money out of the taxpayers’ pockets in a very literal sense—rather than donate, to the common good, earnings over one hundred times the nation’s median household income.

1. See my argument about the CEO above.

2. A company that pays its CEO well will create jobs for a lot of people. It will also grow the retirement savings of those who invest in the company. The better the CEO performs, the more he gets paid; the more he strives for the millions, the more of America’s unemployed get jobs.

3. Apparently Mr. Nolan believes that everything we earn belongs to the government unless the government decides to not take it all in taxes. Unlike Mr. Nolan, I have visited countries where the economy was run according to that principle. I saw poverty, deprivation and despair at levels most Americans – Mr. Nolan presumably included – could never imagine.

Mr. Nolan needs to graduate high school – or at least spend some time as a tourist in reality.

Then he goes on to once again pretend that the wealthy don’t pay any taxes in this country:

America has provided all of the opportunity necessary for these people to earn their fortunes. That opportunity is paid for with tax dollars. The wealthy could still earn as much as they want.

No, you dim-witted sophomore. They couldn’t. You just capped their earnings at $5 million. Some people want to earn more than that. And by the way, Mr. Nolan needs to comb through some IRS income tax data and find out who is really paying the taxes in this country. About half of all income earners make no net contribution to government – and it’s not the upper half we are talking about.

It’s not that they don’t get anything for their earnings above $5 million; they get the distinct privilege of making a huge and helpful contribution to their fellow countrymen. Give them awards. Lavish them with praise. Publish the names of the highest taxpayers in laudatory newspaper columns. Allow them to bask in civic pride. But take their money. They have plenty.

Mr. Nolan evidently thinks that Global Gadgets would pay him $10 million a year as a CEO when government takes 99 cents of every dollar above $5 million. But if Global Gadgets capped out Mr. Nolan’s salary at $5 million they would save the company, well, $5 million. The federal government would not get a dime’s worth of taxes above the $1.7 million Mr. Nolan would be paying in income taxes. Government would be sitting there with less tax revenue and Global Gadgets would go bust with Mr. Nolan at the helm. All its employees would lose their jobs, have to go on welfare and stop being taxpayers.

The federal deficit would grow and Mr. Nolan would be out there, living on his $250K per year demanding even higher taxes on even lower incomes.

A maximum income … provides a very clear (and high) line at which the average American can gaze up, and contemplate just how far away someone is who might exceed it. And it puts into stark relief the fact that there is no good argument as to why anyone needs more than that, while others are suffering in poverty.

Mr. Nolan still has not explained how some poor dude living on welfare  in a trailer park outside Cheyenne, Wyo., benefits from this income cap. Mr. Nolan still has not explained how colleges are more able to provide scholarships for poor kids when high-income earners cut their donations in proportion to Mr. Nolan’s reduction of their earnings. Does he seriously believe that employers are going to pay anyone a dime’s worth of salary above his income cap, just to donate the money to government?? A person who pays more in taxes in one year than Mr. Nolan will earn in a lifetime is already paying more than his fair share in taxes – and Mr. Nolan, who is presumably nowhere near the higher income brackets, is not.

In the end, Mr. Nolan flags up for what he really is. He is not misguidedly concerned about income redistribution. All he cares about is to impose his warped, totalitarian ideology on the rest of us. Not only does he want to impose an income cap, but he wants to lower it over time. Then he goes on to declare that:

This is not primarily about raising our total national tax revenue. That’s a far broader issue. This is about inequality. It’s about what type of nation we want to be—what level of inequality we are willing to tolerate in order to protect a vague and twisted notion of “freedom” that most people cannot even fully articulate, and that was created by the rich to serve themselves. This is a baby step. But it’s one that would make us, fundamentally, a better and more just country.

Mr. Nolan actually has a point. This is very much about what kind of country we want to be. Do we want to be a country that shows utter disdain for freedom and opportunity – a country where no one is allowed to perform better than anyone else; a country where government, not you and me, decide how we can live our lives? Or do we want to be a country where we let people live their lives the way they want to; where we let people succeed in building entrepreneurship; in creating jobs, putting new inventions to work; in pursuing a successful professional career?

Do we want to be a country where mediocrity is the norm – or a country where excellence is the norm?

If Mr. Nolan is so concerned about income equality, I’ll be happy to help him move to a country where it is illegal to build any sort of wealth. If he gets the residence visa done, I’ll pay for his one-way ticket to Pyongyang.

In Maryland 24 Tax Hikes Is Not Enough

You have got to love those statists. It does not matter what reality throws at them – they just never give up.

Take Martin O’Malley, for example. This guy has been the governor of Maryland since 2007. During that time he has raised taxes 24 times. Yet for some reason he still can’t find enough money to pay for all his spending. For some pesky reason his tax base keeps moving out of state: in the 2009 Census Bureau state-to-state migration study, four of the top five states to which Maryland suffered the biggest net loss of residents had lower taxes than Maryland. Pennsylvania (second largest net loss) has a low, flat income tax and Virginia has a flat rate, one percentage point below Maryland, above $17,000.

So both the rich, the high-income earners, the shoppers and the jobs all refuse to stay in Maryland. But instead of considering the possibility that it might be a bad idea to raise a tax every ten weeks for five years, Governor O’Malley forges ahead with yet another tax grab. This time, though, he wants to make sure the tax base does not leave the state.

What better constituency to target then than addicts?

The neat thing (from a liberal viewpoint) about addiction taxes is that the people you tax are far less inclined to move. Governor Martin O’Malley knows this. But just to be on the safe side, this time Governor O’Malley is including some perks for those members of his new tax base that stay where they are and don’t move. The Baltimore Sun reports:

Gov. Martin O’Malley unveiled legislation Tuesday night that would expand gambling in Maryland, limit the influence of gambling interests in state politics and extend tax breaks to casino operators who would face increased competition if the plan is approved. The legislation would allow a sixth casino in Maryland, to be located in Prince George’s County, and authorize table games such as blackjack and poker at all of the state’s gambling sites. The bill would also allow all of the state’s casinos to operate 24 hours a day, seven days a week. … Maryland’s General Assembly is set to return to Annapolis for a short special session to debate the bill, beginning Thursday. Should the legislation pass, voters would still have to ratify major portions of it during the November election.

The entire reason for this expansion of gambling is of course to allow the state to rake in more taxes as gambling addicts waste away their paychecks, savings and pensions. But as we know from the state’s move to raise the beer tax a year ago, a statist like Governor O’Malley has no moral problems funding his big state government on the backs of addicted citizens.

The Baltimore Sun continues, revealing how anxious the governor is to not drive his beloved tax base out of state:

The 55-page legislation could be heavily amended during the special session, which is expected to be a whirlwind event that’s heavily lobbied. Sticking points between the legislature’s two chambers have stalled past gambling proposals. House Speaker Michael E. Busch, who had been cool to expanding gambling in years past, put out a statement Tuesday saying that the governor’s bill “reflects our principles.” “The work of the House is not done,” Busch said. “We will continue to provide input throughout the special session in order to put the best product possible before the voters in November.” Sen. Rich Madaleno, a Montgomery County Democrat who has taken a leading role on the issue, called the bill a “fair proposal” that is “very much” like the bill the Senate passed earlier this year and also tracks a proposal from a work group convened by the governor to study the issue this June. “It balances our opportunity to increase revenues with safeguards for the current license holders,” Madaleno said.

Here is where it gets really interesting:

The state’s fledgling gambling program is still getting off the ground. Only three of the five casinos authorized in 2007 have opened. One in Cecil County, Hollywood Casino Perryville, has asked to return up to 500 slot machines to the state after business fell off following the opening in June of the Maryland Live Casino at Arundel Mills. A planned casino at the Rocky Gap resort in Western Maryland has also scaled back the size of its gambling floor.

The free market speaks, telling both casino companies and the governor – who won’t listen – that there aren’t enough gambling addicts in Maryland to sustain all the casinos that the governor wants tax revenues from:

It was still unclear Tuesday exactly how much new revenue the proposed gambling expansion would generate for the state. [The governor’s legislative director] Bryce said that when fully implemented, the changes would bring in an additional $200 million. But for next year’s budget, the revenue figure is closer to $60 million.

Apparently, someone has told the governor that there is not enough of a market for casinos in Maryland, regardless of how much the governor craves more gambling addicts to tax. So what does the governor do?

The bill would reduce the effective tax rate for the state’s two largest casinos from 67 percent to 56 percent — though strings would be attached. The Maryland Live casino in Anne Arundel County and the planned casino in Baltimore to be run by Caesars Entertainment Corp. would have to use about half of the tax savings for capital investments and marketing. Those two facilities would also have to buy their own slot machines under the bill. The state currently owns or leases the slot machines used by casinos. Administration officials stressed Tuesday that the state will achieve significant savings by partially unloading the responsibility of buying slot machines.

In other words, the governor admits that tax cuts are good for businesses. He gives them to businesses that are about to get more competition in a tight market – not because other entrepreneurs think there is money to be made in that tight market, but because the Governor of Maryland is warping economic reality in his desperate hunt for more tax revenues. The small tax break obviously is insignificant compared to what the governor thinks he can rake in from a new casino.

With emphasis, of course on “thinks”. Given O’Malley’s record as a tax hiker, and given the fact that his state is still struggling with its budget, it is a safe bet that his new gambling tax initiative will be equally unsuccessful.

The only question that remains is: who will O’Malley go after next?


Saving the Welfare State: Record-High Taxes in California

While Europe’s welfare states are fighting for their lives, here at home our states are in a fiscal fight of their own. Among the ones with the worst budget problems, California edges out the competition with having used IOUs to pay bills for several years now (including tax refunds…). As if that was not enough, Governor Brown is now trying to save America’s largest welfare state with the highest state income taxes in the country. He needs the money to fund a seven-percent General Fund spending increase.

This spells doom for the formerly Golden State. The bitter taste of higher taxes is aggravated by the fact that when Governor Brown ran for office in 2010, and during his first six months in office, he had a genuine ambition to clean up the state’s fiscal mess. But apparently the battle for a moderately acceptable budget in 2011 was too much for Governor Moonbeam: since then he has slowly but steadily given up on trying to tame the spending beast in Sacramento. Now he’s back to the same old tax-and-spend policies that continue to push California deeper into the debt ditch.

While it was true a year ago that he looked like he was his Democrat party in a new, fiscally more conservative direction, he is now back in the fiscal liquor store with his fellow statists from the legislature. Ironically, California media still portray him as a spending cutter. A good example is this article in the Sacramento Bee:

California’s ongoing state budget crisis has claimed another victim: student state workers. In a few weeks the state will ax hundreds of their jobs – just as the school year gets under way. Meanwhile, the state’s university systems have hiked tuition and will probably do it again if voters reject Gov. Jerry Brown’s tax proposal on November’s ballot. … 1,600 state student assistants will soon be the collateral damage of a labor deal struck last month to help close a $15.7 billion budget deficit. Brown and the state’s largest public employees union, Service Employees International Union Local 1000, agreed the 95,000 state workers it represents would take 12 unpaid days off through next June 30 in exchange for, among other things, purging the state payroll of student assistants as of Sept. 1.

These tax-paid student assistants are essentially a supplementary work force that perform duties other workers could easily do for, say, a minimum wage. A typical example of a student job is answering phones, a job that certainly should not be paid for by taxpayers. Any office how needs a full time or part time person to answer their phones should of course pony up the minimum-wage pay needed to hire someone for that job. There are a lot of people who, frankly, don’t mind working a low-paying job: many retirees like to get out of the house for a few hours every day; housewives transitioning from caring for children to getting back to work; students who look for part-time work on their own, without being hand-held by government…

If this is the best sob story that the Sacramento Bee can come up with, then they have failed even at biased journalism.

Before we move on to the California state budget and its non-existent fiscal conservatism, let’s just note that this story gets even more amusing from the fact that unions are the main force behind eliminating the student jobs. This has not escaped the Bee:

SEIU Local 1000 leaders didn’t respond to several requests for comments for this story. However, the union has said it is unreasonable to ask workers to take a pay cut while keeping students in jobs that union members can perform. The SEIU deal has soured 22-year-old CalSTRS student assistant Jordan Adams on state service.

“State service”… He’s on “state service”… Awww… Government takes care of us all

He said he had planned to graduate from California State University, Sacramento, with a degree in finance, go to law school and apply with the state after graduating. Not now. “To be frank, the politics are poisonous,” Adams said. “It feels so spiteful. I really don’t want to be a part of that.” Dmetri Black, a student assistant who will lose her Department of Industrial Relations job, said she still intends to apply for a full-time state position when she finishes school at Laney College in Oakland.”But I have to tell you that after this,” Black said, “I’m not looking forward to paying union dues to SEIU.”

Welcome to reality, my young padawans. Speaking of reality, all this talk about cutting state spending looks slightly different when seen through the prism of the latest California state budget. While there were indeed some cuts last year, this time around General Fund spending is going up by $6 billion, or a rather hefty seven percent.

Governor Brown plans to pay for this in large part with a $5.4 billion increase in personal income tax revenues, thanks to a “temporary” increase in tax rates on incomes above $250,000 for singles and $500K for joint filers. This will push the top marginal income tax rate in California from 10.3 percent to 12.3 percent, the highest state income tax rate in the nation. It will surpass Oregon and Hawaii (11 percent). Neighboring Arizona offers a rate of 4.54 percent. If  a couple that runs a business together and earn $1 million per year were to move there from California, they would save $77,600 per year.

Of course, if they moved to Nevada, Texas, Washington state or Wyoming they would not have to pay any state income tax.

California is already on the losing end when it comes to taxpayers. According to U.S. Census state-to-state migration data for the period 2007-2009, California lost 87,000 more residents than it gained. And that was before the full force of the recession struck; once we entered the recession, every dollar saved on lower taxes matters even more to taxpayers, especially those with small businesses and those whose high-earning profession gives them some choice as to where to live. Of the five states to which California suffered the biggest net migration loss, three have no state income tax: Texas, Nevada and Washington state. The other two in the top-five are Oregon, which has had a major growth in computer-tech jobs over the past decade, and Arizona which, as mentioned, offers substantial state income tax savings over California.

It is troubling that Governor Brown wants to increase government spending by such bulky proportions as proposed in his latest budget. It is even more troubling that he wants to increase spending on permanent items such as health care and education, items that can be transferred to the private sector with the right kind of reform. To top it off, Governor Brown wants to fund his spending spree with the highest state marginal income tax rates in the country.

If ten percent of the tax filers making more than $500,000 per year decide to leave California due to this higher tax the state will, by a rough estimate, lose more than a quarter of a billion dollars of the expected extra tax revenues that these filers are supposed to pay under Governor Brown’s “temporary” higher rates. If we add filers in the $250-$500K bracket the loss could easily top $500 million – and that is, again, just losses out of the extra revenues that Brown is expecting to get from his higher rates.

The total loss of state personal income tax revenues from such an outbound migration could easily top $1.5 billion. That loss would wipe out 30 cents of every extra dollar Brown is banking on. And then we have not even considered the loss of sales tax revenues as these taxpayers take their spending out of state – or the loss of jobs as these small businesses either lay off their California workers or offer them to get onboard the outbound U-Haul.

Brown’s feeble attempts at saving the welfare state are not going to work. He is running his state into the ground, doing exactly what he promised not to do when he ran in 2010.

America: Born Free, Taxed to Death

While the president is out there practicing Marxism, a friend, David, sent me this note:

So Sven, it has finally happened. With my taxes set to go up 5% and another 1% going to Obamacare I now put aside more money in taxes than I take home. All the while still having to save for my kids tuition for which others get gov support. So I have achieved the American Dream. I came to this country with parents and nothing else but some clothing. My whole family and I busted our asses to now support those that are not as smart, motivated, or hard working. The US got a great deal granting my parents citizenship! Maybe Darwin was wrong after all.

David is a very skilled and experienced surgeon. One of those guys who has worked extremely hard for his financial success. He does not have to do what he does here. He does not have to work for The Man if he does not want to. He could move anywhere in the world. Private, and privately funded, hospitals in Switzerland would receive him with open arms. Germany still has a niche of privately paid health care that can attract talent like his. Even the Netherlands, who has wisely moved in the opposite direction of health reform than we have, away from government incursions, could now emerge as a talent magnet for professionals like him.

Let’s keep people like David in mind come November.

Will Democrats Choose Welfare State over America?

If you were a Senator, would you be willing to plunge the American economy into a depression just to try to save the welfare state? The Democrats in U.S. Congress are apparently willing to do just that. From the Washington Post:

Democrats are making increasingly explicit threats about their willingness to let nearly $600 billion worth of tax hikes and spending cuts take effect in January unless Republicans drop their opposition to higher taxes for the nation’s wealthiest households. Emboldened by signs that GOP resistance to new taxes may be weakening, senior Democrats say they are prepared to weather a fiscal event that could plunge the nation back into recession if the new year arrives without an acceptable compromise.

So the Democrats want $494 billion in tax increases and $100 billion in cuts to our national defense. Taking $600 billion out of the economy at this point is of course complete madness: the tax hikes alone are big enough to send us spiraling into a depression. (See this article for an analysis of its effects on just one state, Oregon.) Apparently, as the Washington Post reports, the Democrats are willing to let that happen unless they get to raise taxes on America’s small business owners:

In a speech Monday, Sen. Patty Murray (Wash.), the Senate’s No. 4 Democrat and the leader of the caucus’s campaign arm, plans to make the clearest case yet for going over what some have called the “fiscal cliff.” “If we can’t get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013,” Murray plans to say, according to excerpts of the speech provided to The Washington Post. If the tax cuts from the George W. Bush era expire and taxes go up for everyone, the debate will be reset, Murray is expected to say.

All of this, and a severely crippled military, just to protect – what? Well, let’s go back to the Democrat counter-proposal to the Paul Ryan budget earlier this year. Back then the Democrats in the House had this to say:

This budget firmly rejects the Republican budget’s proposal to end the Medicare guarantee and strengthens the program instead of dismantling it. It also ensures that the social safety net remains intact. The growing costs of health care and retirement programs pose long-term challenges that need to be  addressed in a way that puts the budget on a sustainable path, reduces the cost of health care for  families, and improves our competitiveness. This budget supports the goal of making Medicare sustainable by making the health care system more efficient overall.

Medicare is just one of a myriad of entitlement programs that Congress has created over the decades. The Democrat attitude toward it – save at all cost – is telling of how they approach all parts of the welfare state. There is not a single entitlement program that the Democrats would like to dismantle: on the contrary, they want to go in the opposite direction. In their budget they adamantly defend the Affordable Care Act which obviously is the latest pile-on to the already fiscally obese stack of government-run schemes to redistribute income and wealth between Americans.

Back to the Washington Post story:

[Senator Murray’s] speech comes less than a week after Obama assured Hill Democrats during a White House meeting that he would veto any attempt to maintain the Bush tax cuts on income over $250,000 a year, according to several people present. It also echoes the dismissive response by Senate Majority Leader Harry M. Reid (D-Nev.) to Republicans seeking to undo scheduled reductions in Pentagon spending that even Defense Secretary Leon E. Panetta has said would be “devastating” to national security.

In other words, the Democrats would rather devastate our military and our economy than give up a single entitlement program.

But even if they get their tax increases on higher incomes, this would only add $96.8 billion per year to the federal coffers. And that is from a generously slanted estimate. That would barely pay for the extra funds to the states that the National Governors Association called for when they began to see the end of the Stimulus Bill gravy train. Since Democrats only know how to create and grow entitlement programs, and nothing about shrinking, let alone terminating them, they would dispose of this extra revenue in a heartbeat.

The budget deficit would still be at least as big as it is today – and that is if the Democrats “only” get to raise taxes on high income earners.

But far more ominous is the Democrats’ determination to plunge the economy into the dungeon dug out for us by Taxmageddon and the Pentagon spending cuts. If they do this, it will make every aspect of our already urgent fiscal crisis far more urgent and a far bigger crisis. Consumer spending would tailspin, business investments – already disturbingly low – would plummet, unemployment would rise dramatically, and tax revenues for the federal budget would fall significantly. As a direct consequence, the budget deficit would explode to fiscally cataclysmic proportions.

The only thing that could emerge from such a disaster would be a new America, reduced to nothing more than a bleak version of austerity-ridden Europe, stuck in permanent industrial poverty.

It is unconscionable that anyone elected to U.S. Congress would ever consider doing this to our country. Most of the Democrats who would cast votes or otherwise act to make Taxmageddon happen probably would do so only because their leadership tells them to. But that does not liberate them of their legislative responsibility.

As a direct consequence of what Congressional Democrats are willing to do to the American economy, I would like them and their supporters across the country to answer two questions:

1. Is the welfare state more important to you than America?

2. When is government big enough for you?

The ACA Mandate and Single Payer Health Care

Yesterday when the Supreme Court upheld the individual mandate in Obamacare, the three top search results for this blog were all about the link between the Affordable Care Act and single-payer health care. This is not surprising: unlike a lot of news commentators who shared their view on the ACA ruling on Thursday, the American people realize that the end goal of Obama’s health reform efforts is indeed a single-payer health care system.

They are right. The path to single-payer health care is as open as ever. And the measures that friends of freedom can use to turn the country around have narrowed notably. The silver lining in that, though, is that it now makes sense to concentrate the fight against ever growing government to fewer, more focused efforts.

Before we look at the options to protect and restore individual and economic freedom, let us take another look at how the Supreme Court ruling promotes the march to single-payer land.

Here is what I wrote on Wednesday, the day before the ruling:

[There] is no doubt that the ACA was only a half-baked measure in terms of statist health care reform. The real goal has always been to create a single-payer system in America, modeled after the European systems that are currently struggling to keep their patients alive and themselves afloat financially. Every Democrat presidential candidate since at least Michael Dukakis has explicitly supported one form or another of a single-payer system. Therefore, we can expect that the Obama administration will respond to the Supreme Court ruling by moving in the same direction. How they go about it depends, of course, on how the Court rules on the ACA.

And with the mandate upheld, Obama and his fellow Congressional Democrats have passed one major obstacle on the route to single-payer: they now have the tax they need to fund it.

The most logical way forward, from the view of the Obama administration, is to activate the public option, i.e., to offer a federal health insurance plan to the general public. The major obstacle for doing so has been how to fund it: whenever there has been a debate over the public option among friends of health care freedom, the argument has been that Congress can always stop the public option by not funding it. That strategy is now dead: the Supreme Court has defined the individual mandate as a tax, and as such it can be used to buy any authorized insurance plan. That includes a public option plan.

I would like to see Congress pass a bill that says “you can buy health insurance plans A, B and C with this tax, but you cannot buy health insurance plan D.” In theory, of course, anything is possible, but since the public option is already embedded in the Affordable Care Act – it is just not active right now – Congress has already created it. Therefore, it is up to the executive branch to activate it, and since they no longer have to worry about asking Congress for funds for it, the activation basically becomes an administrative matter for the Secretary of Health and Human Services.

Whether or not Obama will do it before the election is a matter of political strategy.

An active public option will have far-reaching consequences, eventually as far-reaching as wiping out private health insurance. It will happen in two steps.

The first step has to do with pricing. The individual-mandate tax that the Supreme Court has now declared constitutional is technically supposed to only pay for the premiums that buy an insurance plan. But the ACA also comes with a system of subsidies for insurance purchases. These subsidies are supposed to help low-to-middle income families buy health insurance by reducing or eliminating market pricing of health plan premiums. It would be an easy matter to design the public option so that it gets a maximum of subsidy-supported enrollment: the smaller out-of-pocket cost people have to cough up for their health insurance premium every month, the more inclined they will be to buy that plan. As enrollment grows, the public option will nibble away at enrollment in private plans and slowly but steadily grow to become “the” health plan for the bulk of Americans.

The second step is to convert the public option into a single plan for all Americans. Again, this is done through the income tax we have hitherto known as the individual mandate. Today the ACA does not strictly regulate what tax rate you should pay for your health insurance: you shop around and find the plan and premium you like, of course within parameters dictated by the ACA. With the mandate defined as a tax and a public option active, it is easy to take the next step and streamline the tax as a defined percentage, much like Social Security or Medicare. That streamlining would define your health insurance premium as a percentage of your income. In President Clinton’s Health Security Act the health insurance tax was capped at 7.4 percent of personal income.

With a defined percentage the plan choices narrow further. Reasonably we can expect the streamlining to be tailored to fit the public option, making it hard for remaining, competing plans to stay in business. If not before, this measure will assure that only the public option remains. It is entirely possible that the streamlining will come with an explicit elimination of competing plans (roughly the way the health insurance markets were socialized in Canada and several European countries) in which case the “end game”, socialized health care, will be brought about rather swiftly.

The question, then, is how friends of freedom can fight this welfare-state onslaught. I will address this issue in detail in another article – it is a long topic; for now, let me suggest that America’s freedom fighters need to look beyond the constitution for a solution. This does not mean that the constitution is irrelevant – quite the contrary – but the Supreme Court has just said that the constitution does not preclude any expansion of government so long as that expansion is paid for with taxes.

The Founders and Framers never envisioned the modern welfare state. Therefore, the constitution was not written to be a firewall against the kind of big government that the welfare state represents. In essence, the statists found a constitutional loophole through which they could push their welfare state onto the American people.

Herein lies the key to how to fight back against the welfare state. More on that in another article. Stay tuned.

Obese Bureaucracies Drive Up New Jersey Taxes

As I reported in my latest column in the Conservative Daily News, taxes are on the rise all across America. The cost of both state and local governments is going up from sea to shining sea. Even liberals are beginning to worry about this, as shown by this editorial in the notoriously liberal Star Ledger out of Newark, NJ:

Everyone knows that New Jersey municipalities are strapped for cash. Many officials feel they have no choice but to raise fees for permits and fines. Those fees are one-time and fair game to reflect rising costs. But charging taxpayers twice for delivering a public service? That’s just wrong, and especially insulting in a state with high property taxes. But that’s exactly what’s happening in New Jersey and 26 other states that allow municipalities to charge for emergency services that taxpayers thought were already covered in their tax bill. Last week, the Passaic city council approved an ordinance that will allow the city to collect additional fees for responding to car accidents, hazardous spills and other emergencies. The Jaws of Life that extract you from a bad wreck will now extract extra cash from your pocket — or more likely your auto insurance policy. There’s no way around it: Towns are double-dipping for revenue.

The Star Ledger is right, of course. New Jersey cannot afford higher taxes. The Garden State’s GDP growth rate over the past ten years, adjusted for inflation, is rather embarrassing:

One of the reasons why the New Jersey economy performs so poorly is that its state and local governments have grown significantly over the past ten years. In 2001 there were 156 state and local government employees per 1,000 private sector employees in the Garden State. In 2011 the rate was 167. It is only thanks to restraints in government hiring the last couple of years that the ratio is not still at it 2009 peak of 178:

As if a growing bureaucracy was not enough, New Jersey is also home to an above-national-average government employee compensation disparity. The disparity is calculated as government per-employee compensation vs. private employee compensation. It is broken down on a per-dollar basis so that, e.g.,, in 1990 a state or local government employee in New Jersey earned $1.24 for every $1.00 a private employee earned, a 24-cent disparity. The U.S. average compensation disparity for 1990 was $1.26 per $1.00, in other words slightly higher than in New Jersey.

In 2000 the New Jersey disparity had fallen to $1.17 per private dollar earned, in good part thanks to the strong growth in the private sector that both the Garden State and America as a whole experienced during the ’90s. During the 2000s, however, the compensation disparity started increasing on a steady basis.  Already in 2003 the disparity was back to 1990 levels, both in the Garden State and in the United States as a whole. By 2010 the disparity had grown to $1.36 per private $1.00 nationally, and a stunning $1.44 per private dollar in New Jersey:

In a nutshell, these charts explain a large part of why New Jersey’s local governments are craving for more revenue: they have more employees, and pay them more, than their taxpayers can handle.

Until they do something about their over-bloated bureaucracies there will be no lasting relief for Garden State taxpayers. Governor Christie has put the state on the right track; now it is time for other elected officials in New Jersey to step up to the plate and do their fair share.