The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.

Did you know? The government would have to double income tax rates and not see any tax avoidance or evasion to close the deficit.

• 2011 Deficit: $1,299 billion
• 2011 Income tax revenue: $1,273 billion

Taxes paid keeps rising, despite the media’s claims to the opposite

Headline: “Tax bills in 2009 at lowest level since 1950”

The reality according to the very same article:

“Federal, state and local income taxes consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.”

Notice that this is only talking about income taxes. As if income taxes are the only means of collecting taxes. In fact, look at what has been happening in Arizona. The legislature has been dropping income tax rates here, but at the same time they and the people through ballot initiatives have been raising the sales tax rate. Looking at only income taxes is looking at about a third of the total.

I decided to collect the data from http://www.usgovernmentspending.com/ and http://www.usgovernmentrevenue.com and create some simple charts.

Yes, taxes paid have declined recently and hit their lowest level as a percentage of GDP since 1959 (not 1950). However, as you can see, tax revenue is 2010 was back up to the same level as 1971 and 2011’s are expected to be the same as 1973’s. In fact, 2011’s tax revenue is expected to be just a point less than that of 2003’s. Big deal! Yet, look at that outstanding increase in taxes between 1910 and 2000.

But that only tells part of the story. As government’s share of GDP grows, the shrinking private sector has to pay for all that new government. So let’s look at taxes as a percentage of the private economy:

The decline in taxes is now much less pronounced. Taxes paid as a percentage of the private economy hovers around 50%. Looking at taxes against the private is much better because it is the private economy tax actually produces. Let’s look at it another way. If taxes were 60% of GDP but 100% of GDP, everybody in the private economy would stop working and government would get no revenue and would be forced to close down. So the private economy is the determining factor in tax revenues, not the total economy.

So the average person working in the private sector as an employer or employees pays, on average, a tax rate of 50%. This includes income taxes, sales taxes, property taxes, vehicle registration taxes, social security and Medicare taxes, corporate taxes, capital gains taxes, etc. FIFTY PERCENT!

And people have the nerve to complain that tax rates and tax revenues are falling.

Taxes need to fall much further. A decline to the 100-year average of 25% of GDP and 36% of private sector GDP would be a good start. In other words, to return to the average would mean a tax cut of $750 billion to $1300 billion. But with huge deficits, spending would have to decline by two to three trillion. But given the immense growth in government over the last 100 years, spending cuts like that would simply return us to the 100-year average.

Remember, USA today compared 2009 income tax revenue to the 50-year average. I am simply following their lead, but looking at all taxes and looking at a 100-year average.

Taxing the rich to death hurts everybody involved

Robert Price writes in The Wall Street Journal about The Price of Taxing the Rich:

Nearly half of California’s income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population’s during the recession. When they crashed, they took California’s finances down with them.

Maybe, instead of villainizing the rich, the people should pray for their success. And instead of taxing them to death, the government should enable and encourage them to prosper.

New York ruling changes tax law. Get ready for a marginal tax rate of 288%.

New York has decided that owners of property living in another state may still have to pay income taxes in New York. The Wall Street Journal reports:

Connecticut and New Jersey residents with a Hamptons summer cottage or a Manhattan pied-a-terre are about to get a nasty surprise: New York state wants more taxes from them.

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.

Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York’s other vacation-home communities.

I want to focus on this line:

Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

If every state applied this ruling and federal court does not overturn it, a person could in theory own housing property in every single state and thus owe income tax in every single state and the District of Columbia. By my rough calculation using the top marginal federal income tax rate of 35% and the sum of all the top marginal state income tax rates, a person could theoretically be taxed at a rate of 288%. (Yes, I recognize it is absurd for somebody to have property in all 50 states and DC, but the whole notion of paying income taxes in every state you own property is equally absurd.)

I urge the federal courts to overturn this ruling. A permanent residence should be and must be the state in which the person lives the most. Income should only be taxed by states once, either by residency or by where it is earned. Not both and certainly not in a state where a person is neither a resident nor an income earner.

Isn’t this why we have the interstate commerce clause in the first place? To stop states from conducting commercial and financial warfare against other states or residents of other states?

Adam Smith and Alexander Hamilton on income and sales taxes.

Back in the 1700s, income taxes were rare, yet more countries were adopting such revenue generating schemes. Adam Smith minced no words in attacking such “absurd and destructive” taxes. In a section of The Wealth of Nations titled “Taxes upon the Wages of Labour,” Adam Smith wonders why countries institute such income taxes:

Absurd and destructive as such taxes are, however, they take place in many countries.

Just a decade later, the Founding Fathers recognized that limits needed to be placed on government. One such limit would be to make it more difficult for government to raise our taxes. In Federalist #21, Alexander Hamilton argued that a consumption tax would effectively limit the size of government:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

We have seen how the income tax has accomplished the growth of government that duties were unable to do previously. I return to this chart of the size of government excluding defense dating back to 1910. Remember, the income tax amendment to the Constitution was ratified in 1913.

Click on image to zoom in:

Seeing the growth of government since the income tax appeared a century ago, Smith and Hamilton were correct in their assessments. Based on the above quotes and their other writings, Adam Smith and Alexander Hamilton would support a switch to a consumption tax, more commonly called a sales tax today or the proposed Fair Tax.

Enumerated Powers Amendment for the Constitution

In addition to repealing the 16th and 17th Amendments and getting rid of the Federal Reserve (all of which began in 1913), I propose this new Amendment:

The federal government shall have no powers beyond those specifically enumerated in the Constitution or absolutely required for the enforcement of those enumerated powers.

The general welfare and commerce clauses do not give the federal government any powers beyond those specifically expressed elsewhere in the Constitution.

All commitments and liabilities of the United States must be honored and paid out either immediately or in their due course. No new commitments or liabilities from unconstitutional programs may be added after the ratification of this amendment.

If anybody has suggestions to improve this amendment, feel free to comment below or email me from the contact page.

Should we return to the Clinton years? Hell yes!

I often hear from those on the left about how much better the Clinton years were than the Bush years and today. Well, let’s compare the size of government during the Clinton years (1993-2000) to the Bush years and today.

First, my favorite chart again to get a general idea of where we are now versus the Clinton years. Clearly, government spending is much higher now:

Total government spending (federal, state, and local) during the Clinton years averaged 34.3% of GDP. During the Bush years, it averaged 35.0%. During the fiscal year just completed (2010) it was 43.9%. Are those on the left really arguing for a 9.6 percentage point reduction in government spending? And what 21.9% (9.6 divided by 43.9) of government will the cut?

Let’s look at the tax side of the equation. Total government revenue (federal, state, and local) averaged 35.2% of GDP during the Clinton years. It was 34.4% during the Bush years. Today (FY 2010), due to the recession, it stands at 30.4%.

What is remarkable is the similarity between the Clinton years and the Bush years, on average. The Bush years saw total government spending 0.7 percentage points higher than during the Clinton years, but total government revenue 0.8 percentage points lower. However, not all this credit and/or blame can be assigned to these Presidents or even to the Congresses because these figures include state and local government, as well. On the balance though, these periods were remarkably similar.

Another interesting factor is that government spending fell 4.5 percentage points during the Clinton years, yet rose 4.4 percentage during the Bush years. Government revenue saw the reverse, up 3.9 percentage points under Clinton but down 4.2 percentage points under Bush. Much of this is simply the result of economic cycles. Clinton started after a recession and ended with a bubble. Bush started with that bubble and ended with a recession.

But the most notable thing is what is occurring today. Under President Obama, government spending as a percentage of GDP has risen 6.9 points while revenue has fallen 2.6 point. Again, President Obama and Congress cannot take all the credit/blame because most of this change has been due to the recession. However, government spending has risen more under Barack Obama in just two years than it did under Bush in eight. In fact, government spending as a percentage of GDP in 2009 alone rose more than it had in the previous 36 years. During the previous recession (2000-2003), total government spending rose 2.7 percentage points and we recovered from that recession just fine. In this recession (2007-2010 so far), government spending as a percentage of GDP has risen 8.9 points and the recession continues.

All this raises a few questions:

• What have we to show for this 8.9 percentage point increase in the size of government?
• Do the liberals really want to return to the Clinton day? Are the liberals willing to reduce government spending by 21.9% (9.6% of GDP)?
• Will conservatives trade a tax increase equal to 4.8% of GDP in exchange for cuts to government equal to 9.6%?

As for me, I’d gladly trade the tax increase for smaller government because we are already paying for the tax increase. To fund our budget deficit, government is issuing debt and printing money. Instead of charging us taxes, they are devaluing the Dollar. Instead of paying for our large government through taxation, we are paying for it with reduced value of our wealth and increasing foreign ownership of our country. Therefore, taxes are much less important than government spending. So yes, I’d certainly support an increase in taxes equivalent to 4.8% of GDP IF AND ONLY IF we reduce government spending by 9.6%, returning us to those much hallowed days of the Clinton Presidency and Contract With America Congress.

* This does not reflect my opinion of Clinton as a person or his policies. Likewise, much of the above talk of “Clinton years” was the result of general economic trends and the Republican Congress. As always, I am a firm believer that history moves in trends and our leaders reflect those trends. (See my book, The Path to Tyranny. Additionally, I plan to write an entire book on this subject in the future.)