Who are the Tea Partiers?

According the a Gallup poll, they represent average America.

Laffer Curve

So, I was at the bookstore browsing through the business section and came across a book by Steve Forbes, Capitalism Will Save US. Aside from it appearing to be an overall interesting book, I came across a chapter that discusses tax cuts simulating economic activity and leading to more overall tax revenues. It is an economic theory called the Laffer Curve. I have encountered this theory numerous times throughout the years in both my education and in articles, but I haven't researched it for its empirical veracity. There are many critics who say we are not on the side of the curve that increases tax revenue (such as one of the few ultra-liberal economists, Krugman), but actual studies that present data seem to be in short supply. I plan to research this a little more thoroughly for a more in-depth blog article, but a cursory search on information led to a study by the independent International Monetary Fund (IMF) that showed tax revenues increased in Russia when they cut taxes to a flat tax system.

More to come.

High Taxes

What these governments don't understand is that taxes reduce innovation. They seem to think that people will tolerate any tax rate and business will continue as usual. It doesn't.

A good example is France. France has one of the highest tax rates in the world. If people are willing to leave their homeland to keep more of the money they earn, they will do so. About 3.5 years ago, an article published in the Washington Post titled, "Old Money, New Money Flee France and Its Wealth Tax" is a good example of the flight from taxes. Or, more recently, the flight from the new taxes imposed in the UK, "Hundreds of bosses flee UK over 50% tax".

Relatively, USA looks pretty good on the list (except for New York and Illinois). But our relative position is not as important. People always get caught up with how we compare to something else. Relatively, I am rich compared to a homeless guy living on the street. At the same time, relatively, I am poor compared to Steve Jobs. Relatively is not what matters. Absolute terms does because that is what affects you.

A top federal income tax rate of 35% + social security taxes (since I will never see a return) + medicare/medicaid taxes + state income taxes + sales taxes + property taxes + car registration taxes + and on and on. At the end of the day, easily 60% of the money you make goes to the government.

You may not work for the government, but in fact, you do.

Low Savings Rate and Social Security

The government always expresses concern about the low savings rate in this country, but in reality it is their own fault. They don't encourage policies that promote saving. If I put money into a bank account (or other investment) and then 30% of it goes back to the government, why not just go buy a Hummer or a BMW 7 series like everybody else in America? Plus, is the government really setting a good example here when they have a massive budget deficit and federal debt is $14 trillion dollars? By way of example, living loaded with debt is a stamp of approval. It's the American way.

Social security. So the idea is that I pay into this system and am supposed to get money later in my life (which I won't because the system will be bankrupt, but let's pretend for the original sake of the program; also, the program is financed with taxes being paid by the young directly going to payments for the old - the 'trust account' is more like a checkbook, tallying up what is owed). Essentially this program is forcing me to save at a paltry rate of return (treasury bills). How about I opt out and handle my own affairs? By its very nature, this program impedes on my economic freedom. I don't need the government to hold my hand and force me to save. If I fail to save on my own, then I would get my just desserts. It's about personal responsibility. And anyway, people put too much emphasis on what this program will provide for them. The implication is, why save, when the government will take care of me?

Here's an idea, unlock the cap of 401ks and IRAs. For IRAs, why are we limited to $5k a year? If all young people were encouraged to save for their retirement now, then reliance on social security 40 years from now would not be as important and this government ponzi scheme wouldn't be such a crisis. Why is it a felony for Bernie Madoff, but an entitlement when the government does it?

A simple piece of advice for Americans: Live below your means, not above them.

Flat Tax Theory

I will discuss more about this later, but I think if there were a flat tax, citizens of the United States would be more concerned about the wasteful spending of this country. As the situation stands, only a small minority of Americans pays the bulk of taxes in this country (see prior posts) and therefore the voice against prodigality is muted. The way I see it, if everybody were putting in their fair share, they would care more.

Health Insurance Costs

Well, it looks like I called it. The CEO of Aetna is interviewed in the April 5, issue of BusinessWeek. The answer to the question, "Will insurance premiums go up?" Is a direct yes. He cites that some of the reasons leading to higher premiums will be an increase in taxes, but I have a hunch that is just a small part. It may be politically difficult to blame the very sick people who previously couldn't get coverage and will now be subsidized by the rest of payers.

Think about it: according to aids.org, nearly 900,000 people live in the US with HIV. Since it costs nearly $25,000 a year in health case costs for a person with this disease a simple calculation shows that these insurers will now be paying an additional $22,500,000,000 per year. And that is just one disease.

And what about those who live irresponsibly with unhealthy lifestyles: smoking, obese, excessive fast-food eaters, excessive drinking, drugs, the list goes on. Don't make the responsible people pay for other people's poor life choices.

Term Limits for Congressmen (and women!)

Should term limits be imposed on people in office? This is an interesting issue that I haven't fully decided upon, but I slightly lean towards the affirmative. I think that too many politicians continue to be voted in as a result of name recognition to the voting public. Unless these politicians really mess up and the media picks it up, the status quo remains. Perhaps voters think that because the representative (or senator) is currently in office, it's less risk to take a chance on a new guy. It's easier (and lazier) than having to research a competing politician's viewpoints.
But maybe that is what we need? We want voters to know what politicians are up to and what issues are important to them. Perhaps this would force voters to pay attention.

And if the politician is well liked, he or she can still run for another area of office. For instance, a Representative of the House can run as a Senator or Governor, etc.
Voters always pay lip-service to wanting change, but they continually vote in the same candidates. So why not upset the status quo and put some new representatives in place after the old ones have had their chance?

Flat Tax Article

An interesting read on Forbes.com by a distinguished professor at Chicago about a flat tax system. He discusses a lot of the same issues that I have mentioned in my blog.

Book recommendation

Since I am an economist, I review a lot of books related to the subject. I recently reviewed one that is written so clearly and intuitively and it really breaks down a huge portion of the field into an, admittedly large, book. The book, Basic Economics by Sowell is a must read to understand basic principles in the economy. There are no political slants or underlying messages being conveyed - just economic science. Every politician should be required to read this book before being admitted to office.

The major parts are broken down into these divisions, with a few chapters in each part:
Part I. Prices and Markets
Part II. Industry and Commerce
Part III. Work and Pay
Part IV. Time and Risk
Part V. The National Economy
Part VI. The International Economy
Part VII. Special Economic Issues

U.S. = Socialism?

So, every year, the IRS reports income and outlays with the categories for the previous year at the bottom of tax booklets. So, for 2008 (2009 tax document), the government paid out more than 50% of its income to social entitlement programs! Is this not the definition of a socialist government? Get ready for more!