Internet Kill Switch

I'm a little bit worried that lawmakers are proposing a bill that would give the President authority to turn off all internet activity with a "Kill Switch." What the hell is this country turning into? Are we going to be living in communist China pretty soon here? Sure, they sell it as a way to protect us, but remember this is how they always sell new ideas - they are good for you. They'd never tell you something like, "You're only on a need to know basis when our great Führer, Barrack Hussein Obama, converts this country to a totalitarian regime." Note how the bill specifically targets search engines. What, are terrorists going to undermine America by creating websites? Wake up America!!

A Look to the Future

At least we know where Obama is getting his playbook from. Coming soon, The United Socialist States of America.

Extension of Home Tax Credit

Some lawmakers are pushing for an extension of the home buyers tax credit (unfortunately this is a yahoo news link, so the link will disappear in the not too distant future). Let it Die! All these credits do is move the decision to buying a home sooner, at taxpayer's expense. People who were either on the fence or considering buying in the near future will jump on the chance of saving $8,000, but those without the means to afford a mortgage or do not want to buy a home soon are not affected. Once the first tax credit was announced, home buying activity increased, but once it expired, home buying activity decreased below the level before the tax credit (Series: HXQ.US at economy.com). So, essentially over the time period, the same number of homes would have been sold, but taxpayers got fleeced for billions of dollars. Not a great deal for the rest of Americans who already own their homes or will continue to rent. Essentially these people are subsidizing other people to buy homes (remember, it may not sound like to are going over to your neighbor and handing him a check, but if money like this wasn't wasted, the government could lower taxes, or spend it on more productive purposes)

Also interesting is the rampant fraud found as apart of this tax credit. Many were not first time home buyers, many didn't even buy a home, some people were putting the credit into their children's names, and I'm sure countless other schemes.

So, notice in the first article, "The Realtors group has been pushing hard in Congress for the extension." Once again, lobbyists fleece America for their own benefit. And who is the lead supporter of this bill? Nevada's Harry Reid, of course. This is not surprising, since home values tanked in that state and he would probably like to garner some additional support since his popularity is decreasing.

Evil Shareholders

Being a shareholder gets a bad rap when it comes to populist politics sometimes. Whenever a company runs into trouble, the public and politicians demand that the shareholders be punished. Why? The average shareholder is just mom and dad who have a pension or own a mutual fund. All they wanted was a place to store their savings to gain a return on their investment. They might not even know they own part of the company if they invest through an institution.

So, unless you've been living in a cave, BP/Transocean had an oil rig disaster that exploded back in April and has been spewing oil into the gulf since. Numerous attempts have been made to fix the leak, but there has only been limited success. It is quite a tragedy for those who lost their lives, the animals, and the businesses affected by it. So,

Obama is demanding that BP cut its dividend although analysts are confident that BP could pay both its dividend and handle the cleanup costs/claims expected to near $40 billion. BP made $20 billion in profit last year and can handle additional debt.

So who are these shareholders anyway? They must be real bastards to invest in an oil company, right? Well as it would turn out, there are quite a few U.S. pension funds who now have a capital loss of 40% since $90 billion in market capitalization has been wiped out. Things haven't been helped much with Obama repeatedly beating the drum with his oil bashing and his other highly professional comments such as "whose ass to kick."

But, if the company can handle both the costs and the dividend, then it is not a politician's business to say what a company should do with its stakeholder's money.

As an update, BP bowed to political pressure and cut its dividend for year and set up a $20 billion fund.

Top Federal Tax Rates

So, this blog entry is a two part series where here I will discuss the top tax rates and the next post I will discuss whether lowering income tax stimulate growth or not. These are hotly debated issues.

So, to start, there is a little political cartoon being passed around on the internet titled, "Socialism: The top tax rate, a little historical perspective". It is clearly mocking those who think Obama's soon to be 40% top tax bracket is a big jump from today's 35%. However, this cartoon is an apples-to-oranges comparison because the top rate is only half the information. The other half of the information is what level of income that rate applies to. People probably assume, which is obviously the cartoonist's biased message, that the level of income that the top tax rate applies to has been the same throughout history. Also, what is not shown are the tax rates before the year the 77% rate took effect.

So, that's where I come in. I will give you some real perspective. So before we begin, let me remind you that the planned 2011 Obama 40% tax rate will apply to income over 200k (if the Bush tax cuts were extended, a 35% rate would still apply to income over 373k). And while this may seem like a lot to many people, it is not accounting for the cost of living for those who live in the largest cities in America, where a dollar goes about half the distance.

So, we will walk through a sample of the tax rates since the early 1900s. So, what you will notice is that the top tax rates are dropping, but so is the tax bracket, so that the top rate is affecting more and more of American's income.

Before 1914, taxes were sporadic which came and went depending on what war's debt needed to be paid off. The government collected most of its revenue with tariffs.

In 1914, the top tax rate was 7.0% on income over $500,000. After you adjust that for inflation (CPI) that 7% applies to income over $10,764,646. Okay, so then the 16th amendment was passed with the revenue act of 1916, and the tax rate doubled to 15% (gasp!). But that applied to income over $2,000,000 -that's $39,365,137 accounting for inflation. So over the next couple of years the tax rate increases dramatically until we find that 77% top tax rate that we see in the cartoon. That applied to income over $1 million, or $14,207,947 in 2009 dollars. So then the tax rate drops a little (the government has changed the tax code so many times you would think that they would have found the optimal solution by now). In 1922, the top tax rate drops to 58% on income over $200,000 ($2,554,047 accounting for inflation)... it continues to bob around and drop to 25% on income over 100,000 in 1925 ($1,225,942). In 1932 it jumps to 63% on income over $1 million. 1936: 79% on income over $5 million. 1941: 81% on income over $5 million.

1942 is a big year. The tax rate is raised to 88% on income over $200,000... but that's still $2,632,392 in 2009 dollars. Then in 1944 it was raised to 94% on the same bracket.

In 1964, top tax rate drops to 77% on income above $200,000, or $1,384,129 for 2009 dollars. 1965, 70% applies to $100,000 and above. Are you seeing a pattern here?

Taxes started to get really high during the inflationary period of the 1970s-1980s. For example, in 1981, 70% applied on $107,700 or $252,538. The US went through a period of stagnation around this time, and it is probable that excessively high tax rates played a role here, but many factors were at play.

1982: 50% on income over $42,800.

1983: 50% on income over $54,700.

The bracket grew over the next several years.

So, then we arrive in the modern era of tax rates in 1987. The top tax rate drops to 38.5% on income over $54,000 ($101,982).

2009 dollars from now on:

1988: top tax bracket of 28%, applying to income over $89,560.

1991: 31% on income over $51,900.

Clinton comes aboard and adds two top brackets, with the largest being 39.6 on income over $250,000.

2002: Enter Bush's tax policy: drops the tax rates down a few percent for each bracket, with the top 35% tax rate on income over $311,950

So what I left out was that today's era of tax brackets only have about 5 levels. Back in the olden days when there were tax rates above 40%, there were generally 15 or more tax brackets. And because of that, a better tax comparison would be to take a few samples of income levels (25k, 50k, 100k, etc) and calculate the actual tax bill in each year to get a better idea of what a hypothetical earner was actually paying and to determine which era had the largest burdens. Since this little analysis was already time consuming as it was, I don't plan on doing that here. But you can still clearly see that these "top rates" for most of America's history applied to income over a million. That is a stark contrast from today.

And let's not forget that this tax is only the federal income tax. When we tack on social security, Medicare, state, county, city, sales and sales tax [not to mention the million other taxes we end up paying (e.g. property taxes)], that 40% rate becomes 60% or more. Do you really think that the government is better at spending 60% of your money than you are?

How's that for some perspective?

Two Sowell Quotes

I wanted to share some Sowell quotes. If you haven't bought the book yet (see prior post), you really should because it is a treasure trove of education and thought provoking chapters.

In the special issues final chapter, on page 526:

Nowhere is the weighing of some values against other values obscured more often by rhetoric than when discussing government policies. Taxing away what other people have earned, in order to finance one's own moral adventures via social programs, is often depicted as a humanitarian endeavor, while allowing others the same freedom and dignity as oneself, so that they can make their own choices with their earnings, is considered to be pandering to "greed." Greed for power is no less dangerous than greed for money, and has historically shed far more blood in the process.

On page 527:

People who deplore greed often show a disdain for wealth. Although a disdain for wealth may be admired, only those who already have a certain amount of wealth can afford to disdain any further pursuit of it. The hungry do not disdain food nor the homeless disdain shelter. Wealth means options and who would want fewer options? More important, from the standpoint of society as a whole, wealth is the only thing that can prevent poverty. Yet many people who claim to be concerned about poverty show remarkably little interest in how wealth is generated or which policies make it harder or easier to create more wealth.

Woof

You know, sometimes I just feel like a sled dog. It's me and a bunch of other hard-working Americans pulling the weight of this country while the ones in the sled get to enjoy the ride.

I have dedicated nearly a decade investing nearly all of my time into a successful life path. I did the right things - I studied hard and took on student loan debt to earn three difficult university degrees that would guarantee me success. And I found it, but high taxes that I face remove much of the return. Before taxes, I earn a pretty respectable salary. But after taxes are factored in, more than half my income is stolen from me (including taxes at all levels).

In the meantime, plenty of freeloaders who didn't have to work as hard as me have about the same before and after salary/wage because they barely pay any (if at all) taxes (see prior posts). My salary drops pretty close to theirs because of this fact. They didn't bust their ass in school, they don't have student loan debt and they were able to work the entire time making payments on a sports car, while I was hitting the books working a part time gig to pay my rent, food, and a few classes. And they get to keep most of their money. Now how is that fair?

Supposedly, because of my salary, "I can afford to pay more in taxes." Bullshit, I can't even afford a new car. My high tax burden just makes it harder for me to pay down my student loans, half of which are pegged at 6.8%; a good return for the bank. I had expected things to dramatically improve financially after I had finished school and started a career, but really all that changed is that my employer started paying the government more and bypassing me in the transaction as if I didn't exist. It's almost a sham.

See my problem isn't with paying taxes. Taxes are a necessity for a functioning government. But as they stand today, they are too high, inefficient and not equitable. Much of it just goes to waste.

Amendment to Health Care Bill

So, apparently the new amendment for the health care bill is to provide free public housing for HIV/AIDs patients. H. Con. Res. 137 passed in the House on May 24, and is pending in the Senate. HIV spreads through behavioral choices (i.e. intravenous drug use, unprotected sex) Can someone explain to me how giving free housing paid for by tax payers is really going to slow the spread of the disease?

The bill text says,

Whereas homeless and unstably housed persons are 2 to 6 times more likely to use hard drugs, share needles...

They aren't using hard drugs because they are homeless, they are homeless because they are using hard drugs. Does Congress think that these people are going to get some free housing and all of a sudden make better life choices and stop using hard drugs? (And for those who started using hard drugs after becoming homeless, then obviously they are making poor life choices by wasting their resources that could have been spent on housing or food) Many of these people have shown that drugs are more important than having housing because they chose to buy drugs instead of paying rent.

Even still, the logic of this bill doesn't make sense. If homelessness is the symptom, why not provide free housing to all homeless, or all intravenous drug users (for the record, I am not advocating this; just illustrating a point)?

Two Articles of Interest

So there are two interesting articles noteworthy of mention in this week's BusinessWeek (May 24 - 30th).

The first is that France figured out that that high taxes on restaurants is bad for business because bankruptcies in the industry began to soar (p.16). So, the government decided to drop the VAT tax from 19.6% (!!) to 5.5%. So, what happened? The industry added jobs even though the general economy was losing them, and restaurant salaries are up an average of 5 percent. Obama, take note.

The second article of interest is that there are nearly 40 million people on food stamps in the US (p.33). That is not a typo: 40 million people! Are you telling me that over 10% of the population of this country cannot handle their own affairs and feed themselves? This tells me that the requirements to get such handouts is WAY TOO LIBERAL! People always downplay the significance of welfare/food stamps costs, but with a number that high, they should probably think twice. Reuters reports that it will cost nearly $60 billion this year for just the food stamps. Don't make the fallacy of thinking the number is not so bad by comparing it to the Obama deficit (fallacy of anchoring) - $60 billion is huge!

Also, in that article the author mentioned that many states can keep their welfare numbers artificially low by providing a three month lump sum instead of the usual monthly stipend. The states are not required to report them as being recipients if the lump sum is doled out.

A colleague of mine made an excellent suggestion today: anyone receiving government handouts should have to undergo a mandatory drug screening.

High Earners, Not Rich Yet (HENRY)

On Fortune Magazine: This is truly a good article about people who earn high incomes but are essentially middle class due to their location and their huge tax burden. Also, a shorter newer article on Yahoo about the same. It also raises a good point that probably most Americans think that these high earners are riding around on charters jets and have Bently's lined up in their garages, which is not the case.

Obama's plan is to punish those who have worked hard to be successful. Also note how most of these people are small business owners, i.e. people who have created jobs for others. Yeah, great plan Obama; Obviously he never took an economics class.