The Impact Of The Trump Tax Cuts

The Gateway Pundit is reporting today that corporate first quarter earnings are the best in twenty-five years.

The article reports:

We predicted that this would be one of the greatest quarters ever in the history of corporate earnings and we were right. 

We reported on April 12th that “because of President Trump’s economic measures, the ‘bottom line’ or net profits for these companies will be the best 1st Quarter results ever!”  We also said –

As a result of these tax cuts, most US Corporation will deliver a net income in their financial results that is 14% greater than prior year. This starts in the 1st Quarter of 2018 and the results for many major companies will begin being reported in the next few weeks.  This means that for every large corporation reporting financial results in the US, the net income after taxes will be increased by 14% – an unheard of increase!

With many companies reporting their best year’s results ever in 2017, and the economy on fire, and taxes being cut by 14% – expectations are that the net income for these companies in the 1st Quarter of 2018 will be the best ever and this will continue from this point forward!

The article quotes a Marketwatch report:

According to Thomson Reuters I/B/E/S, of the 343 companies, or about 70%, of S&P 500 members that have reported earnings to date, 79.9% have reported earnings per share that were above analysts’ expectations, putting the season on track for the highest earnings beat rate on record, going back to 1994.

So far, the first-quarter growth rate for EPS is 22%, compared with consensus earnings growth of 16.3% as of April 12, according to Lindsey Bell, investment strategist at CFRA. That outperformance is underpinned by some of the most highly valued companies, including JPMorgan Chase & Co. JPM, -0.50% Apple Inc. AAPL, -0.44% Facebook Inc. FB, -0.32% and Amazon.com Inc. AMZN, -0.36%

Bell said recent quarterly results have seen outperformance of about 3 to 4 percentage points better than analysts’ consensus estimates on average, compared with the 5.7 percentage points earnings are currently running ahead.

Bell said what’s really impressive is that expectations were already lofty and this quarter represented the first in which the bar was raised to factor in fiscal stimulus measures such as corporate tax cuts, which took effect in late 2017.

“It’s significant because we haven’t seen a change like this from the very beginning to (the) start of reporting season,” Bell said.

The Marketwatch article is focused on why the stock market has not yet responded positively to good news in corporate earnings, but it includes a lot of interesting information about the current state of the economy. The biggest financial challenge we face as a nation is our continued overspending. Until that is brought under control, we will not have a truly healthy economy. Tax revenues are up since the tax cuts (that always happens–see the Laffer Curve for further information), but spending has also increased. We are a nation that based on our income should be driving a Ford but has gone out and purchased a Rolls Royce. At some point there will be a reckoning, and it will not be fun. We need to elect people who will shrink government and cut spending. Raising our taxes will not help because it will slow economic growth and decrease revenue. Please consider this when you vote in current primary elections and when you vote in November.

Bad Decisions Based On Faulty Premises

There are still some legislators that believe raising taxes increases revenue. Up to a point it does, but only up to a point. At a certain level, increased taxes result in people finding creative ways to avoid those taxes.

Hot Air posted an article yesterday about a proposed tax increase in the Rhode Island 2019 budget. The proposal would levy an 80 percent wholesale tax on all vapor products and related equipment in the state. There was an attempt to include this tax in the Rhode Island 2018 budget, but the attempt failed.

The article reports:

The tax would effectively label electronic nicotine delivery systems as tobacco products, despite containing no actual tobacco. Vaping advocates argue the tax will harm overall public health in the state by cutting off former smokers’ access to vapor products. They also note the proposal will fail to boost state revenues due to diminished sales, coupled with consumers crossing into neighboring states to buy their vapor products.

Rhode Island is a relatively small state–you don’t have to drive too far to cross into another state. That is what people will probably do to avoid this tax.

The article lists the problems with the proposal:

First, these are not tobacco products. The state plans to tax them under the same category, despite the fact that there is no tobacco involved in the process. Further, the tax applies to the equipment used to “vape” the liquid nicotine. Compare that to the tax system applied to tobacco. Even the worst sin taxing states haven’t tried applying that sort of a penalty to buying a pipe.

Next, as noted above, the damage to the nascent vaping industry will be epic just as it was in Pennsylvania when they instituted a 40% tax. After the tax went into effect, more than one hundred new businesses shut down just in the greater Philadelphia region.

In terms of health, not only will this likely push people who managed to quit cigarettes by switching to vaping back to tobacco, but new vapers who have probably developed a habit may feel compelled to go try smoking cigarettes for the first time. Rather than allowing this new technology to continue to help people quit smoking, a tax such as this will likely lead to the opposite effect, creating a new generation of smokers who find it more economically practical to light up rather than vape.

And finally, in terms of raising revenue for the state, this scheme never works. Every time states push for a big new sin tax on tobacco it blows up in their face and that’s what going to happen to a vaping tax as well. In 2016, New York State actually lost a half billion dollars in tax revenue on tobacco rather than seeing an increase.

This is a picture of the Laffer Curve:

The Laffer Curve is simply a representation of how human nature responds to increased taxes. When taxes reach a certain point, people begin to look for ways to avoid them, and tax revenue goes down. That is exactly what will happen if the tax on vapor products and equipment in Rhode Island becomes law. People will make the trip to neighboring states rather than pay the increased tax. As an unintended consequence, the vaping industry in Rhode Island will be destroyed, and more people will make the trip to Foxwoods to buy cigarettes to avoid the cigarette tax.

The Laffer Curve At Work

Yesterday CNS News reported that during the month of January (the first month the Trump tax cuts were in effect), the federal government ran a surplus.

The article reports:

January was the first month under the new tax law that President Donald Trump signed in December.

During January, the Treasury collected approximately $361,038,000,000 in total tax revenues and spent a total of approximately $311,802,000,000 to run a surplus of approximately $49,236,000,000.

Despite the monthly surplus of $49,236,000,000, the federal government is still running a deficit of approximately $175,718,000,000 for fiscal year 2018. That is because the government entered the month with a deficit of approximately $224,955,000,000.

The article also reports some of the history:

Over the last twenty fiscal years, going back to 1999, the federal government has run surpluses in the month of January 13 times and deficits 7 times. Six of the Januaries in which the federal government ran deficits overlapped President Barack Obama’s time in office—including January 2009, the month Obama was inaugurated, and the Januaries in 2010, 2011, 2012, 2014 and 2016.

If you are not familiar with the Laffer Curve, it is a financial theory that the website the balance describes as follows:

The Laffer Curve is a theory that states lower tax rates boost economic growth. It underpins supply-side economicsReaganomics and the Tea Party’s economic policies. Economist Arthur Laffer developed it in 1979.

The Laffer Curve describes how changes in tax rates affect government revenues in two ways. One is immediate, which Laffer describes as “arithmetic.” Every dollar in tax cuts translates directly to one less dollar in government revenue. 

The other effect is longer-term, which Laffer describes as the “economic” effect. It works in the opposite direction. Lower tax rates put money into the hands of taxpayers, who then spend it. It creates more business activity to meet consumer demand. For this, companies hire more workers, who then spend their additional income. This boost to economic growth generates a larger tax base. It eventually replaces any revenue lost from the tax cut.

This is an illustration of how the Laffer Curve works:

As you can see, there is a point where taxes reach a high point and the amount of revenue generated from taxes goes down. That is not a coincidence–that is what tax attorneys get paid for. One of the reasons we need to make the tax code simpler is that we need to take away the complexities that allow people to hide income and avoid taxes. I believe that was one of the goals of the Trump tax plan. It remains to be seen whether or not that goal was achieved.

Preventing The Fleecing Of The Middle Class

The American tax code is a tribute to the effectiveness of lobbyists and big campaign donors. The loopholes in the code for people who make a lot of money are numerous. Even with loopholes in place, the rich pay a lot of taxes. As I have previously reported, The top 10 percent of income earners, those having an adjusted gross income over $138,031, pay about 70.6 percent of federal income taxes. About 1.7 million Americans, less than 1 percent of our population, pay 70.6 percent of federal income taxes. These numbers come from actual IRS data.

However, it seems that when it comes to eliminating loopholes, it’s always the middle class loopholes that go away.

Breitbart posted an article today about Congress‘ latest effort to take away a middle-class tax break. Because of a certain lack of faith in the future solvency of Social Security, many employers offer employees 401k retirement plans. Aside from allowing middle-class families to save for the future, these programs provide a place to put money so that it will not be taxed during the highest earning period of the employee. It will be taxed later at retirement when traditionally a person’s earnings are lower and generally taxed at a lower rate. Congress was evidently planning to alter the current system.

Breitbart reports:

“There will be NO change to your 401(k),” Trump tweeted. “This has always been a great and popular middle class tax break that works, and it stays!”

House Republicans were considering a plan to slash the amount of income American workers can save in tax-deferred retirement accounts. Currently, workers can put up to $18,000 a year into 401(k) accounts without paying taxes on that money until they retire and withdraw money from their savings. Proposals under discussion on Capitol Hill would set the cap lower, perhaps as low as $2,400. The effect would be a huge tax hike on middle class workers.

The plan to lower the cap on 401(k)’s would not have had an effect on long-term government deficits. Instead, it would have raised tax revenue now but lowered it in the future, since the retirement savings would already have been taxed. But taxing the savings would have had an impact on household budgets and may have discouraged workers from saving, increasing their future dependence on government benefits.

Let’s cut spending to ‘pay for’ tax cuts. Actually, if taxes are cut, economic growth should increase to a point where there is no loss of revenue. During the 1980’s, after President Reagan cut taxes, government revenue soared. Unfortunately, the Democrats who controlled Congress at the time greatly increased spending, so the government debt increased rather than decreased. Generally speaking, lowering taxes increases revenue–people are less inclined to look for tax shelters.

The Laffer Curve works:

Congress needs to keep this in mind while revising the tax code.

 

What Tax Reform Can Do

President Truman is quoted as saying, “It’s amazing what you can accomplish if you do not care who gets the credit.” He also said, “You can’t get rich in politics unless you’re a crook.” We are seeing the truth in both of those observations in the current tax debate.

This is a picture of America‘s Gross Domestic Product (GDP) in recent years from the balance:

You might remember that 2012 was the year the tax increases to pay for ObamaCare began. In 2013 the Capital Gains tax increased for high income earners, and the increase in the medicare payroll tax also began in 2013. Obviously raising taxes did not help the economy.

This is the laffer curve:

As you can see, there is a point where tax increases no longer generate revenue.

I am going to assume that Democrats are going to try to block President Trump’s tax reform. I think that is rather obvious. So the question becomes, “Do Democrats not understand economic principles and economic growth (e.g. the Laffer curve) or do they simply want to enslave the American worker?” At this point it is a valid question.

I can understand high-tax states not wanting to give up the benefit they reap in the current tax code. I can also understand all the lobbyists tearing their hair out because their special interest will no longer get a tax break, but at some point Congress needs to do what is best for the country and for the American people. Economic growth is struggling under the current tax burden. Every American who works is giving the government a higher percentage of what they earn than the Medieval surfs paid their lords. That is a scary thought. At the same time, many people who choose not to work are driving expensive cars and living better than the people who do work. The poverty in America that the government is now supporting currently owns a nice car, a big-screen television, an ipad, a smart phones, and central air conditioning. I am all for helping people in time of need, but I think we have lost our way.

Congress needs to pass President Trump’s tax plan. Every Congressman who does not support the plan needs to be voted out of office as soon as possible. Unless the American voters begin to hold their representatives accountable for what they do, the swamp will never get drained. The problem is in both political parties. It is time to take note of the people whose votes help America and the people whose votes hurt America.

 

The New York Times Posts A Favorable Opinion Article About Donald Trump

Wow. The opinion page of the New York Times today posted an article entitled, “Why This Economy Needs Donald Trump.” The article was written by David Malpass, a senior economic adviser to the Trump campaign.

Mr. Malpass explains:

There is no doubt who has the better plan. Our economy is growing at only 1.1 percent per year, a fraction of our average rate, and the Congressional Budget Office forecasts just 2 percent annual growth (in inflation-adjusted gross domestic product) for the next 10 years.

Yes, we went through a deep recession, but it ended in 2009. The recovery has been the weakest in decades, and the first that has actually pushed median incomes down. Business investment and profits are lower now than a year ago. Counterproductive federal policies squash small businesses with inane regulatory sprawl that affects hiring, taxes, credit and medical care.

The result is a stagnant economy that leaves out millions of Americans who would like to work and get ahead, and a devastating report card on the Obama White House.

To restart growth, Mr. Trump would immediately lower tax rates, including for middle-income voters, and simplify the tax code. Americans would be able to exempt average child-care expenses from taxes, and Mr. Trump’s administration would eliminate the death tax, which falls especially hard on some small businesses and farmers.

The article goes on to explain that simplifying the tax system while reducing corporate taxes and eliminating or capping many tax deductions would make us more competitive in the world market and create jobs in America. Mr. Malpass contrasts this with Hillary Clinton’s plan to raise taxes, creating an noncompetitive corporate tax rate and discouraging investment with higher estate and capital gains taxes. Obviously Mrs. Clinton is not familiar with the Laffer Curve. This is a picture of the Laffer Curve. What the curve illustrates is that there is a point of no return in raising taxes where increased taxes no longer result in increased revenue.LafferCurveMr. Malpass also points out that Donald Trump wants to halt the negative impact of federal regulations on business. These regulations represent a hidden tax that increases the cost of doing business so that the consumer is forced to pay higher prices for goods. Government overreach is expensive.

The article concludes:

Voters will have an opportunity to decide for or against a government that’s failing on health care, taxes, trade, cost control and regulation. One candidate wants higher tax rates. The other would lower them. One candidate thinks the economic recovery has been successful whereas the other thinks it left millions of Americans out. One candidate has spent her lifetime seeking the presidency. Mr. Trump hasn’t.

As Thomas Jefferson said, “A little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical.” It’s time for one now.

Agreed.

The Laffer Curve Also Applies To Cigarette Taxes

Investor’s Business Daily posted an article today about the increased cigarette taxes in New York State.

The article reports:

The state of New York thought it would reap a bonanza after increasing taxes on cigarettes. But there was no bonanza. In fact, the tax take actually fell. New Yorkers, may we introduce Art Laffer?

Art Laffer is the creator of the Laffer Curve, seen below:

LafferCurveThe Laffer Curve illustrates the relationship between tax rates and revenue, showing that increasing tax rates will only increase revenue up to a point.

The article further reports:

The New York Post cites a National Academies of Sciences, Engineering and Medicine report that says the state’s losses are much bigger — some $1.3 billion in taxes aren’t collected each year, due to behavioral changes.

Of course, some of that loss might be considered favorable in that it represents people who simply quit rather than pay the higher levy. Indeed, estimates say that 19% of those who smoked have quit in the last decade.

Taxable sales, however, are down 54% in the same period. If the goal of the higher tax was just to get some smokers to quit, then mission accomplished. But if the goal was twofold — get smokers to quit and raise revenue — then it has failed.

But for many others who still smoke, the behavioral changes haven’t been as favorable. Some just pay up. But others simply buy black-market cigarettes, supplied mostly by organized crime. The Tax Foundation estimates that 58% of cigarettes in New York come from out of state. So roughly 6 in 10 cigarettes now are not taxed by New York.

The article also points out that the year after the tax increase imposed, a household earning less than $30,000 a year spent 23.6% on cigarettes, as opposed to 11.6% in 2004. A family earning over $60,000 a year, spent 2.2% on cigarettes. Seems a little uneven to me.

The article concludes:

So is it any surprise that the tax take is shrinking? No. This was in fact entirely foreseeable. But, of course, foreseeing it would have required New York voters and the politicians they put into office to actually learn something about economics.

Agreed.

How To Create Economic Growth

Yesterday Stephen Moore posted an article at the Wall Street Journal about what has happened in North Carolina since 2013.

The article reports:

Four years ago North Carolina’s unemployment rate was above 10% and the state still bore the effects of its battering in the recession. Many rural towns faced jobless rates of more than 20%. But in 2013 a combination of the biggest tax-rate reductions in the state’s history and a gutsy but controversial unemployment-insurance reform supercharged the state’s economy and has even helped finance budget surpluses.

As Wells Fargo ’s Economics Group recently put it: “North Carolina’s economy has shifted into high gear. Hiring has picked up across nearly every industry.”

The tax cut slashed the state’s top personal income-tax rate to 5.75%, near the regional average, from 7.75%, which had been the highest in the South. The corporate tax rate was cut to 5% from 6.9%. The estate tax was eliminated.

So what happened next? Did the state go bankrupt? Is everyone in the state walking around in rags wondering where their next meal is coming from? Not hardly. On May 6, Gov. McCrory announced that the state has a budget surplus of $400 million.

The article explains:

This is the opposite of what has happened in Kansas, where jobs have been created but revenues have fallen since the top personal income-tax rate was cut from 6.45% in 2012 to 4.6% today and the income tax for small business owners who file as individuals has been eliminated. North Carolina’s former budget director, Art Pope, says one difference between the two states is that “we cut spending too. Kansas didn’t.”

…You won’t hear much about this in national news media, where the preferred story line is that tax cuts don’t work because they were followed by budget deficits in Kansas. In North Carolina, policies to reduce taxes and stop paying people for not working have created jobs and surpluses. Mr. Pope says: “I wish people criticizing Kansas would look at what’s happened here.”

Unfortunately the State of North Carolina has not cut spending as much as some of us would like to see it cut, but we have made progress in the right direction.

For any of you who are still skeptical, this is a picture of the Laffer Curve:

Higher Revenues with Lower Taxes? The Laffer Curve Explained

The bottom line here is very simple–after a certain point, raising taxes is counter productive and will not produce revenue. The best way to increase revenue is to decrease taxes, which stimulates economic activity. As economic activity increases, tax revenue generated as a result of that activity increases. North Carolina has learned that lesson. However, it also helps to reduce government spending–every dollar spent by the government is a dollar taken out of the private sector.

Proof The Laffer Curve Works

On Wednesday, CBN News reported that France was ending its super tax on millionaires.

The article reports:

Socialist President Francois Hollande proposed a tax of up to 75 percent on people earning above 1 million euros a year, equal to about $1.2 million a year in the United States

One critic of the super-tax said it makes France “Cuba without the sun.”

Many wealthy French citizens fled the country to avoid paying the super tax, including actor Gerard Depardieu, who became a Russian citizen. 

Because millionaires left the country or found tax shelters, the excessive tax did not generate nearly the amount of money that politicians predicted it would.

What is at play here is the Laffer Curve.

On April 15, 2012, Forbes Magazine posted a graph of the Laffer Curve:

Contrary to what you may have heard, people are not stupid. If it becomes obvious that the harder they work the more will be taken from them, they will not work as hard. There is a point where excessive taxation does not reap positive rewards. Congress  needs to remember this. It didn’t work in France, and it won’t work in America.

With Friends Like These…

The friendship between President Obama and Warren Buffett is not news. Warren Buffett supported President Obama’s tax increase proposals saying that his secretary paid higher taxes than he did. The failure of the Obama Administration to permit the Keystone Pipeline to be built allows the Burlington Northern Santa Fe railroad, owned by Berkshire Hathaway, owned by Warren Buffett, to transport the oil (see rightwinggranny.com) from the oil fields to other areas of the United States.

Well, President Obama has often stated that companies that move their headquarters overseas are unpatriotic. He has stated that it is patriotic to stay in America and pay higher taxes. I guess Warren Buffett does not let President Obama’s opinion interfere with his business decisions.

Today’s Washington Post is reporting that Burger King is buying Canadian chain Tim Hortons Inc.. CNBC is reporting today that Berkshire Hathaway (Warren Buffett) is helping to fund the deal by committing $3 billion of preferred equity financing. Berkshire Hathaway will not play a role in the management, it is only providing the financing.

So why is this ironic? This acquisition will allow Burger King to move its headquarters to Canada where the corporate tax rate is 26.3 percent as opposed to America where the corporate tax rate is 39.1 percent.

It is not unpatriotic to want to save money. Burger King is accountable to its stockholders for its finances. It is not illegal for the company to move its headquarters to Canada to avoid an unreasonable tax burden. The solution to the exodus of corporations from America would be for Congress to lower the corporate tax rate. The Laffer Curve illustrates that this would create income for the government–not reduce income.

An Explanation I Can Understand

IJReview has posted this in the past, but I thought it was worth sharing again.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

The first four men (the poorest) would pay nothing The fifth would pay $1 The sixth would pay $3 The seventh would pay $7 The eighth would pay $12 The ninth would pay $18 The tenth man (the richest) would pay $59

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!” “That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.  –   Professor of Economics.

The same general principle is explained in the Laffer Curve.

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Tax Policies Have Consequences

Today’s New York Post posted an article about the impact of Mayor de Blasio’s proposed tax policies.

The article reports:

Taking a page out of Barack Obama’s playbook, de Blasio casts his push for a tax hike on those earning over $500,000 as a moral imperative.

“I believe it’s time to ask the wealthy to do a little more,” he said last year. He paints taxes as a matter of giving back, as though the money was taken from others.

The article also reports New Yorkers’ response to this idea:

One friend says 10 wealthy people have told him they are leaving and another says disgusted New Yorkers bought $1 billion in residential property in Florida since the November election. The Sunshine State confers an automatic tax cut of about 12 percent because it has no city or state income tax, nor does it have an inheritance tax.

Below is the Laffer Curve. It represents the fact that there is a point where you raise taxes to the point that revenue decreases. There are many reasons for this–people find ways to shield their money from taxes, people relocate to places with lower taxes, and people make a decision to earn less so that they will be taxes less. At any rate, there is a tipping point. It remains to be seen if New York City has reached it.

English: The standard Laffer Curve

English: The standard Laffer Curve (Photo credit: Wikipedia)

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Voting With Your Feet

CBN News posted a story today about the relationship between tax rates in different states and where people choose to live.

The article reports:

Brown (author Travis H. Brown) discovered that the nine states with no personal income tax gained $146.2 billion in AGI. Those states include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Conversely, the states with the highest personal income tax rates lost a total of $107.4 billion. They are California, Hawaii, Oregon, Iowa, New Jersey, Vermont, New York, and Maine. Washington, D.C., was also included.

Another measurement delivers similar results. Brown looked at the 10 states with the lowest per capita state and local tax burdens and found they netted $69.9 billion in AGI. Those states include Alaska, South Dakota, Tennessee, Louisiana, Wyoming, Texas, New Hampshire, Alabama, Nevada, and South Carolina.

The 10 states with the highest state and local tax burden lost $139 billion in AGI. They are New York, New Jersey, Connecticut, California, Wisconsin, Rhode Island, Minnesota, Massachusetts, Maine, and Pennsylvania.

This story has personal relevance to me. My husband will be retiring at the end of the year, and we are about to put our house on the market. (If anyone wants a five-bedroom house in Southeastern Massachusetts, please leave a comment). We are moving for many reasons–one of those reasons is the cost of living in Massachusetts. We will be headed to North Carolina where we have family and the cost of living is lower.

Recently, Massachusetts raised the taxes on cigarettes. I don’t smoke, so that doesn’t impact me, but I was in a store yesterday in Rhode Island near the Massachusetts state line. The person ahead of me in line was commenting that she would no longer be buying cigarettes in Massachusetts because they were cheaper in Rhode Island. Right now, gasoline is more expensive in Rhode Island than in Massachusetts, but since the gasoline tax in Massachusetts is now indexed to inflation, I wonder how long that will be the case.

When people have an option, they give less money to the government, whether it is state or federal government. The Laffer Curve explains one aspect of that.

At some point, government needs to realize that at some point it has all of the money we have earned that it is entitled to. The question is exactly where the point of enough taxes is reached.

 

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This Really Does Not Sound Like Co-operation

Yesterday’s Washington Examiner posted an article stating that the Democrat Senate intends to pass a budget this year. Sounds like good news, but wait a minute.

The article reports:

But now a prominent Democratic lawmaker says his party will finally pass a budget — for the express purpose of raising taxes.  “We Democrats have always intended to do a budget this year,” Sen. Charles Schumer said on NBC’s “Meet the Press.”  “It’s a great opportunity to get us some more revenues.”

“You’re going to need more revenues as well as more cuts to get the deficit down,” Schumer said.  “And I’ve talked to Leader Reid. I’ve talked to Budget Chair Murray. We’re going to do a budget this year. And it’s going to have revenues in it. And our Republican colleagues better get used to that fact.”

Great. More taxes. The article also explains why the Democrats have not passed a budget since 2009:

The Democrats’ strategy has long been clear.  The last time Majority Leader Harry Reid allowed a budget through the Senate was in April 2009, when huge Democratic majorities in Congress passed steep increases in spending.  Since then, Democrats have funded the government through a series of continuing resolutions — essentially locking in the 2009 budget as the new baseline for spending.

The article concludes:

Schumer, with 55 Democrats in the Senate, is now saying: Think again.  We’re going to raise taxes, and you can’t stop us.  The battle between the two sides will likely consume the Senate for the next two years.

The question is simple. Are there enough grown-ups who vote in America who realize that we cannot continue to spend money we don’t have? Raising taxes does not necessarily increase revenue. (Please see the Laffer Curve.) Raising taxes also slows the economy, increases unemployment, and ultimately causes the cost of government to increase while slowing growth in the private sector.

Part of our current economic problems is the relationship between government spending levels and the Gross Domestic Product (GDP). Traditionally spending has been about 18 percent of GDP and tax revenue has been about 18 percent of GDP.  Unfortunately since 2009 (when the Democrats took control of the House of Representatives), spending has been approaching 25 percent of GDP. Unless the government takes almost all of the money that Americans earn away from them, there will never be enough tax revenue to fund that spending.

The chart below (from The Big Picture) shows where we are:

The American voters will determine in 2014 whether or not America survives economically.

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The French Court Rejects The Millionaires Tax

Reuters is reporting today that France’s Constitutional Council has rejected French President Francois Hollande’s planned 75 percent tax on people with an annual income above 1 million euros ($1.32 million). The tax was due to take effect in 2013.

The article reports:

Prime Minister Jean-Marc Ayrault said the government would redraft the upper tax rate proposal to answer the Council’s concerns and resubmit it in a new budget law, meaning Saturday’s decision could only amount to a temporary political blow.

While the tax plan was largely symbolic and would only have affected a few thousand people, it has infuriated high earners in France, prompting some such as actor Gerard Depardieu to flee abroad. The message it sent also shocked entrepreneurs and foreign investors, who accuse Hollande of being anti-business.

The article explains, “The Constitutional Council is a politically independent body that rules on whether laws, elections and referenda are constitutional.”

Raising taxes does not mean increased revenue. The Laffer Curve (google it for more information) shows the relationship between the rate at which people are taxed and the amount of revenue collected. In July, I posted an article (rightwinggranny.com) about the consequences of raising taxes on millionaires in Maryland.

The article at rightwinggranny.com explained the results of that tax increase:

Maryland Governor Martin O’Malley pushed through a millionaires tax that went into effect in 2007 and expired in 2010. Yesterday CNBC reported that during that time Maryland lost approximately $1.7 billion in lost tax revenues. The tax imposed a rate of 6.25 percent on incomes of more than $1 million a year. Approximately 31,000 residents left the state during the time the tax was in effect.

People who make the kind of money we are talking about have the brains (or the accountants) and the mobility to avoid confiscatory taxation. Increasing taxes on millionaires simply sends them in search of new and better tax shelters for their wealth.

There is a worldwide spending problem. That is what we need to face, and that is what we need to deal with. Even if you confiscated all the money in the world from the ‘wealthy,’ you would still have countries operating with budget deficits. How many times when you or your spouse have received a significant raise has the money just seemed to disappear and you were left wondering how you survived on your previous salary? The other thing to remember is that in the United States, a budget cut is not a budget cut–it simply means slowing the rate of increase. Thus, if your department budget was $100 this year and expected to be $120 next year, if you increased your budget to $110 next year, that would be considered a budget ‘cut.’ That is why spending in Washington never actually decreases.

Taxing ‘the rich’ doesn’t work–decreasing spending does. It’s time we held Congress’ feet to the fire on that fact.

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It Is Possible To Balance The Budget Without Raising Taxes

On Saturday the Washington Examiner posted an editorial about balancing the American budget. The editorial reminds us that everyone–rich or poor–will pay more in taxes after January 1.

The editorial states:

Liberal columnists love to point out that the top marginal rate on personal income was 91 percent in the 1950s and in the early 1960s. But the tax code back then was also chock-full of loopholes and benefits that let top earners escape such stifling tax burdens. As high as top marginal rates were, taxes as a percentage of GDP never rose above 19 percent, and in fact fell as low as 14.5 percent.

In fact, since World War II, federal taxes as a percentage of GDP have never risen above 20.6 percent and have averaged just under 18 percent. This has been consistent, regardless of changes to tax rates.

This fact is also confirmed in the Laffer Curve. There is a point at which tax increases actually result in less revenue. We need to keep this fact in mind as we discuss what to do about the ‘fiscal cliff.’

There are two think tanks that represent the two ways of thinking about solutions to the ‘fiscal cliff’:

Obama’s favorite think tank, the Center for American Progress, submitted a plan that calls for the federal government to eat up more than 20 percent of the American economy through taxation every year, in perpetuity. Being the liberals that they are, CAP calls for even higher levels of spending — above 22 percent of GDP by 2022 alone.

Contrast CAP’s plan with that of the Heritage Foundation. It returns taxation to just above the historical U.S. average at 18.5 percent of GDP. By cutting spending to pre-Great Society levels, the Heritage plan not only balances the budget but actually begins to lower our cumulative national debt.

Taking money from people who earn it and giving it to people who don’t earn it is not a solution to anything. Until Washington stops using American taxpayers as vehicles to get re-elected, nothing will be accomplished.

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Exactly What Does ‘Paying Down The Debt’ Mean ?

John Hinderaker at Power Line posted an article yesterday about President Obama’s claim that he plans to pay down the debt in a balanced fashion–increasing taxes on the wealthy to increase revenue and reduce the deficit. Aside from the fact that it is historically proven that raising taxes does not increase revenue, there are some definite problems with that approach.

This is a picture of a concept called the Laffer Curve:

As the illustration states, 50% is not necessarily the ‘magic number’–that number could be anywhere. The best real life illustration of this principle is the migration of millionaires out of Maryland after the tax on millionaires was increased (see rightwinggranny.com). People who will be impacted by large tax increases on the upper middle class (no–they are not ‘the rich’) usually have the means to shelter their wealth from the tax man (check out the financial disclosure statements of some of the Kennedy’s running for office).

The article at Power Line shows a graph of what President Obama’s budget plan will actually do for the deficit. The graph is based on figures from the Office of Management and Budget (OMB):

As voters, we need to be aware of the consequences of another four years of President Obama’s economic policies.

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