Two Sides of the Laffer

Happy New Year readers.   2013!

I still owe everyone some commentary on Steig’s 3rd (or is it the 4th) victory lap.   I have spent several hours on the new Antarctic doom paper, hopefully I will have some time shortly to write on that.  In the meantime, we are awaiting some movement on the “fiscal cliff” and as usual, I have a few thoughts on that.

My first thought is that the “deep spending cuts”, is that they don’t even touch the overspending by the Federal government, yet we are told that these cuts are disastrous.   I do agree that they are cut from the wrong areas, i.e. defense instead of EPA, but disastrous is not how I would describe any cuts at this point.   We desperately need to reduce spending, so I’m ready for whatever we can get.   The defense spending will be reinstated at the first opportunity anyway.

My second thought leaves me more confused.   Democrats are pretending concern about the middle class paying too much tax, yet this is exactly what they have so often demanded.  Raising taxes is the only way under the worldview of the anti-industrial left to logically balance the budget.  Cutting spending is simply not an option.  Keynesian economics is literally driven by the ignorant view that theft from business and spending of money by government, drives business.  So they must spend or the economy will die and they will have less money to spend.   Of course, like so much of life, they are partially right.  The US government has so ingrained itself into business at this point, that they are in control of massive percentages of the workforce and the economy.

And this brings me to the Laffer curve.

The Laffer curve is basic economic theory representing a tax vs revenue curve, which represents how much revenue is gained at different tax levels.   Wikipedia has a typically extreme leftist view of the subject here and like taxation, the public understanding of the subject is a huge irritation to me.  If you tax personal income at 100 percent – or greater – then there is no incentive to make income and the government receives zero tax.   If you tax at zero percent, the government gets zero tax so somewhere in-between, the government makes more than zero.   The left will have you believe that you can maximize income at about 70% tax rate, which is just dumb, but that is what they think.  Often, the argument the “blogging left” makes for higher tax is based on revenue as a percentage of GDP, but capitalism doesn’t exist to maximize a percentage of dollars sold,  it exists to maximize total dollars earned.  Because taxes retard the gross economy, maximizing a percentage of GDP is not related to the Laffer curve.

Politicians of all types are fond of saying, X tax will create additional revenue to pay for Y program.  This language has then been regularly repeated by the ever-compliant and rarely understanding media.  On the left, both the media and the politicians firmly believe that increasing tax on the wealthy will bring them more money,  and in the short run, they will be correct.

This is where it all falls apart.

The same Democrat politicians and extreme left media are today making the claim that raising tax on the middle class, would be economic disaster and less government income would be had.

So on which side of the Laffer curve are we?   We cannot be on both.  Either more tax is more revenue with a decent economy and more ability for government investment, or more tax is less revenue and a terrible economy.   It cannot be both.   Yet the Democrats freely admit that taxing the middle class will ruin the economy.  These same leftists often point out the increasing separation in wealth between the rich and poor to justify the taxes, rarely noting the indirect economic pressures that their re-distributive policies create on the poor.  The reality is that a good economy has guaranteed for nearly a century that America’s poor, are some of the wealthiest poor people in the world.   It isn’t about the wealth of the rich, or it shouldn’t be, it should be about the wealth of the rich and the poor, and despite the propaganda, that is what capitalism has done best.  Provide money for the people, from rich to poor.

The Laffer curve is a funny thing.  If you want to maximize tax revenue, you need to find the balance of where business is competitive and making a strong profit, and government is taking just enough green blood out, such that the gross economy isn’t dragged below the optimized limit.   Currenlty, many countries are taxing businesses at under 20%, yet the near-bankrupt Europe is far higher.   China is right at 20%  by this table, but the laws are also written to allow many deductions.   US business competes with these countries today.  Business is war, and business in these countries are what we are at war with.    Looking deeper into the table, the US is listed as taxing business at  40%, yet the reality is far worse.   We are faced with many taxes, such that the true rate is north of 50% already –  keeping in mind that we haven’t yet experienced the next 5% tax increase in the next few hours, and another percent for the affordable health care act.

This all fits together when you realize that when other countries tax business at a lower rate than the US or Europe, they are shifting the maximum income which can be gained through tax to a lower percentage level.    If we tax the US more, and other countries tax less, their competitiveness is increased, and ours is reduced.   Laffer teaches that less tax revenue for the government is a guaranteed result of a tax hike after some optimized yet unknown percentage rate, and international competition in general means that the magic point at which less government revenue is realized, is guaranteed to have shifted to a lower percentage.

Now this whole subject is way to complicated for most people, and most won’t spend more than a minute or two even thinking about it, it is key to understanding what they are voting for.  Unfortunately, it literally hurts their stupid little uneducated brains, but they are not the readers of this blog.

Many economists have spent time trying to calculate the peak government revenue point (shape of the Laffer curve), but the subject is as elusive as moisture and condensation in a climate model.  My impression is that the widely differing results are more based on author belief than in true accuracy.   Still, it is my opinion that you can look at the successes of other countries and spot which tax levels are working, and which are not.   Unfortunately, there is a great deal of noise in the data created by individual political and resource situations that allows plenty of obfuscatory argument for any direction you want to go so there are no solid answers.    A low tax in a country like Somalia, cannot correct the insane government situation which destabilizes any business viability.   A high tax on a country like Saudi Arabia, is equally confused by the massive oil reserves, they have a 20% rate though.

So, since I have declared a true calculation all but impossible, I will tell you my belief of where we sit on the curve.   If the US government cut taxes on business income in half, halved the capital gains tax, reduced some of the stupid employment laws and the unreasonable environmental controls, slash the IRS code and filing requirements, we would see a massive influx of international business looking for a politically stable ground to put their headquarters.  We could double the size of America’s economy in very short order, putting nearly everyone who wanted a job to work.  Such a move would take the world by complete surprise and again, companies would compete for workers and America’s poor would stay near the top of the world in wealth.   There would be a huge influx of cash from the rest of the world that over twenty years could eliminate our National Debt- except that politicians would have their hands in the cookie jar.  More than that, it would again allow America the economic power to lead the world toward the freedom and health that they all deserve.  If it were done suddenly, there would absolutely be a huge drop in revenue in the first few years though, just as a huge tax hike creates more revenue in the short term, yet could kill the economy in a decade.

Even if you disagree, the thinking person should not forget that more tax does not necessarily equate to more revenue.

May you live in interesting times….  2013!

Gun Control Demands

Liberals are in a froth over a new gun ban on semi-automatic rifles (fire once per trigger pull).  While these are powerful and dangerous weapons, I flatly don’t believe this new ban will have any impact at all on violent crime.  Like so many things from the unbiased media, I cannot see any logical path that achieves their stated intent of reducing public harm.  A new regulation based on banning of one completely-fake classification of gun, can’t do much when there are so many smaller, faster, and more easily concealed weapons.   Yes, the primary design purpose of an “assault weapon” is killing, but it is also the primary purpose of any pistol ever made.  In reasonably practiced hands, pistols have more potential to be dangerous to the general public, just because of their size.

Sure you can ban “clips” or “high-capacity” magazines, but there are so many already available, how would that stop a crazy person from purchasing them? Of course it won’t.  Small magazines might limit the number of people killed in one of those rampage style slaughters, but I doubt it actually would. Motivated people are smart enough to find a way.  Mass injury is actually done quite effectively with knives in China, because gun ownership is not allowed and civilians are often too impoverished by the communist system to actually purchase an illegal gun.  Tax the ammo is another “solution” offered, and all you do is make it expensive for good people to shoot and for the insane to accomplish the same thing.

There is another relevant secret in America, which is rarely reported by the unbiased media, our jails are full of people who suffer from psychological problems.  I’m not just talking about criminal murderers, but everything in the spectrum of the low-functioning mind.  From dimwits to violent outbursts to thieves to killers, the jails are a catch-all for people who cannot “think” of a better solution to their lives.  Our jails have replaced our otherwise rudimentary mental health system, and today America imprisons more people than any other nation.  Oddly enough, it is usually conservatives who primarily support this draconian system.

Yet our crime rates are still high.  To me, it is an example of another government solution, which doesn’t really work.

Americans have a lot of money or at least that is what the world tells us.  All of us can purchase an item for $1000 — if we really want it.   We are not an island, can own boats and planes, and can travel on the ocean without restriction.  Travel across a border is as easy as finding a vehicle.  What would happen if we banned all guns in the US, not just a fabricated class of “assault weapons”?   Would that stop criminals and gangs from owning weapons?  Would that law stop anyone with intent, from finding a gun and taking revenge?  I don’t think so, I think a complete gun ban would generally empower those with criminal intent, because they know that the victim is likely defenseless.  Like the control aspect that psychologists say drives a rapist, a full ban probably even encourages some types of defective personalities to be violent.

We should never forget that despite their best intentions, the typical role of the police is not to protect you.  They usually investigate, and subsequently ruin the life of whomever they decide did something wrong, well after the event actually occurred.   Evidence of crime is perception based, so the rule of law is far more flexible than people in general typically grasp.  The protection aspect of the police is therefore primarily driven by fear of their power.  In practice, it is actually up to you to protect yourself.  People of all viewpoints often make the same mistakes on this and demand more severe punishment to maximize an already frightening deterrent, without considering what sort of people actually violate the rules.  The point is that when someone makes the decision that they have nothing left to live for, or to lesser extent that they want to commit an illegal act which they will get away with, the police and law for that matter become completely moot.

Do you need an “assault weapon” to protect yourself from what is essentially a person bent on kamakazi attack?   Nope, any gun will do the same.

Will banning “assault weapons” protect our defenseless from attack?   Nope.

Will a ban reduce the danger of the attacks?  Nope, not according to the data.

Is it ok for everyone to carry a weapon?  Nope.

This is the point where every article tells you that it is a “complex issue” and that lawmakers will be working on the solution.   Trust me, their solution will be nothing but more government spending and crap.  A useless weapons ban, with useless people to enforce it, etc…  The NRA issued a statement regarding the recent murders, which while mostly reasonable, was flatly stupid in its solution.  We cannot afford to place full time police in every school when we already overspend the government budget by stupidly large margins.

However, we do have teachers who are apparently willing to throw their bodies between guns and our children. We know that teachers are generally people who would never intentionally harm our most valuable assets, and they already protect them all day long.  The leftists insist, against all forms of logic, that these same people remain unarmed.  Amazingly, the left-leaning politicians further demand that all schools are gun-free zones, which of course applies only to law abiding citizens, including teachers and administrators.  The situation is now obviously stupid to the point were it is dangerous, yet the same leftists react by demanding “gun bans”.  How many times do you stick your finger in the empty light socket before you realize it is on?

It is obvious that America needs a proper mental health care system, as well as protection for our schools and public areas. Since a mental health system is more than a slow moving object, I demand reasonable and proper correction of the predictable outcome of the no-guns-at-school laws.  I demand that an absolute minimum of two, trained first responder, concealed carry, teachers/administrators are on property at all times.  I demand that my state-educated children are protected by armed and vetted “good guys”, whom we already pay for, at all times.

In my opinion, this is no longer a negotiable issue. When they are home, my children are protected by numerous child-safe firearms.  Both they and you are safer from harm where I am sitting, than at my son’s elementary school, and that is a completely unacceptable situation.  Even if the leftist media succeeds in creating support for a ban of all weapons including sharpened chopsticks, I demand the same thing.   Gun-free policy has made the schools, stadiums and theaters the targets of choice, because everywhere else in America is personally dangerous to the untreated psychopaths who snap and wish to maximize law abiding citizen’s anguish.

Do what you will with gun bans, but remember that until we do something reasonable to physically “defend” our children, they are nothing more than low-hanging meat-targets for the insane.

IPCC – Full Speed Ahead

Thanks to some very hard working bloggers and readers who care at WUWT, the IPCC second order draft has been released.   Steig 09 appears to be much less prominently referenced in the second order draft than in the zero order which is still too often.  I take it as an indication that some people have actually figured out that S09 was not in any way accurate.  Still, in the Second order draft, the IPCC is reporting warming values so high that they are not supported by either the S09 paper or the O’Donnell correction.

From Chapter 5 – Information from Paleoclimate Archives:

Currently there is no compelling observational evidence for a robust CO2-induced polar amplification in
Antarctica. Whereas the Antarctic Peninsula is experiencing one of the strongest regional warming trends
(0.5°C decade–1 over the past 50 years), almost twice that of the global mean temperature, zonal mean
Antarctic surface warming has been modest at 0.1°C per decade over the same time period (O’Donnell et al.,
2010; Steig et al., 2009). West Antarctic Ice Sheet (WAIS) Divide borehole measurements indicate warming
of 0.8°C per decade during the last two decades (Orsi et al., 2012), but it remains unclear if this trend
represents long term polar amplification, or is within the range of regional decadal variability (see also AR5
Chapter 2). Polar amplification in the Southern Ocean and Antarctica is virtually absent in the transient
CMIP5 RCP4.5 future simulations (see Chapter 12).

Below are the actual numbers from Steig (far right column) and O’Donnell’s two methods E-W and RLS in the center and left column.   At 0.1C/decade for the continent, the IPCC is reporting approximately 2X the actual Antarctic trend measured by the skeptic-leaning “thermometers”.   It is also right at the farthest edge of the 95% margin of error threshold for the continental Eigenweighted calculation (0.4+/- 0.06).   The peninsula was reported too low by S09 as we have long discussed, but in O10 some regions do reach 0.5C/decade (again according to the thermomters) but the peninsula regional average is only 0.35 +/- 0.11.  Therefore the IPCC reporting 0.5C/Decade for the peninsula is completely outside the margin of error for both papers.  Not surprisingly to those of us who spend time reading climate science and IPCC UN politics, the reported values fail in the alarmist direction.

Region	RLS  C/Dec	E-W  C/Dec	S09   C/Dec
Continent	0.06 ± 0.08	0.04 ± 0.06	0.12 ± 0.09
East Antarctica	0.03 ± 0.09	0.02 ± 0.07	0.10 ± 0.10
West Antarctica	0.10 ± 0.09	0.06 ± 0.07	0.20 ± 0.09
Peninsula	0.35 ± 0.11	0.32 ± 0.09	0.13 ± 0.05

.
It is really unfortunate that they have chosen to report the Orsi borehole mathmagic as though it were a thermometer, but this is the paleoscience chapter so they need to put something in.  That paper claimed a 0.8C/decade warming in the last two decades.  Readers will recall that this was the paper which Steig famously claimed “proved” O’Donnell was wrong.  Besides the whole field of borehole thermometery being ridiculous, it seems to me that the 0.8C/decade value is completely outside the realm of any possibility.  I write that because it is 13 times the continental average and were the trend real, nearby thermometers would have obviously detected it.

I don’t know folks, it doesn’t look like the world of Climate ever changes.  Maybe they will get it right in a few more drafts.

Just a Little More Fair

What will we do when the US runs out of money? A few months ago it seemed that the American public may actually grasp the size of the numerical problem, but the elections revealed that people in bulk are not capable of basic math. It only takes the most cursory of reviews to understand that increased taxes will not even dent the overspending, yet somehow that is not a problem. Unfortunately, it takes a slightly larger intellect to understand that more taxes do not always equate to more revenue. It takes still more for people to understand that top-loading the wealthy, dramatically affects the poor.

For myself, as a business owner, it is difficult for me to understand how people think our current situation ‘might’ be ok. It clearly is not, and more of the same will simply destroy our future, as well as that of our children. After this past election, I’m expecting future generations to experience tremendous difficulties in America as well as the world. It doesn’t take much historic review to see where liberal cradle-to-grave policies will take us. There is nothing wrong with wanting to give people everything, except that we require them to create in order to be able to give it. When you incentivize people to stay home and not work, that is exactly what you get.

See, the basic problem with government control of populations is that the people making the rules, don’t focus on the incentives they create. They never will and that is why less government is nearly always beneficial. If you make a rule that allows life-sustaining payment for extended unemployment, the people are incentivized to remain unemployed. Yes, some will seek jobs, but many times they chose unemployment as a reasonable and understandable alternative. In the past two years, I have seen dozens of examples of people who turned down employment in favor of government checks. When you allow “permanent disability” to mean anything from a broken back to emotional harm, a lot of people are suddenly incented to experience serious emotional harm! Duh.. Disability claims have absolutely skyrocketed in recent years and people who really qualify are being left off the list in favor of those who should not. It has been a common theme of this blog that groups of people incentivized to a certain path, are numerically biased to that path. It is no different than the fake Mannian math which preferentially choses data to create hockey sticks. If you bias the population, you skew the “average” result toward the bias.

But tax hikes are still the solution to insane overspending…

Just a little more from the “rich”.

The numbers don’t add up, and worse yet, they are not even close! So…… When a tiny little country like Greece, with less per-capita debt than the US, economically collapses and sends shudders through the global economy, what will the world do when the US does something far worse? I can’t even imagine what it will be like, and at the same time, after this election, I can’t even imagine how we will manage to avoid it.

While the liberals in America make the false argument that the rich don’t pay their “fare share”, whatever that is, it is business owners who are actually being targeted. Of course the truly rich politicians won’t tell you that. When real wages are dropping across the country and a minimum wage job draws a thousand applicants, does it really make any sense to tax business further? Liberals tax cigarettes because they say they want less of them. Obama taxes the rich because he believes that redistribution is the key to happiness. This government has not enacted one single pro-business reform in the last 4 years and we are reaping the benefits in spades. Guess what that means for the workers wages a company hires when high unemployment creates an oversupply of qualified candidates?

In the past decades, regulations and costs have been added to business operations. Business owners have continually pointed out the consequences and are regularly ignored or demonized in return. Higher electric cost, higher compliance cost, higher reporting requirements, hundred page tax filings, higher employment compliance costs, communication taxes, gas taxes, border crossing taxes, foreign business taxes……on and on. These are all added costs. These have continued to increase over the past 20 years, the result has been a herkey-jerkey decrease in real income for the middle class and poor in America. Just like every socialist country in the world, the population is generally poorer, and the separation between those with money and those without is generally larger. Of course the media blames corporate greed rather than the obvious governmental problem.

And on we go, down the same stupid path.

This time though, is very different than any other in history. America holds a huge fraction of the wealth of this planet. An enormous amount of business is controlled by this country, yet these American customers of the globe are about to go flat broke. No amount of tax increase on the wealthy can even dent the over 1 trillion per year deficit. In fact, it is my contention that a further tax increase will result in a reduced net revenue. Of course you have to adjust for inflation and you have to estimate GDP with and without the tax. A second method, which is far easier to understand, is to simply calculate what a manufacturing business would have do to react to higher taxes!

Unlike the fake government economics, business actually has to live within their budget or they go broke. In the current banking environment, often there is literally zero backup.

Below are a hundred individual numbers. 10 rows of 10 representing the income of a 10 million dollar fictitious S corporation manufacturing company.

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In this company 40% of the total income goes to pay for product material cost.

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Twenty five percent of the income goes to pay employees including the company contribution to federal taxes.

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Five percent goes to employee benefits.

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Five percent goes to material transport.

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Five percent goes to various utilities, insurance, supplies and materials which support operations

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Two percent more is invested in commissions and sales activities leaving about 18 percent profit after every possible writeoff has been taken. This is the money reported on an S corporations owners personal tax return as income. One point eight million dollars.

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Currently the Federal government taxes this money at 35% and the state of Michigan taxes it at 5%. Then there are various property taxes and fees which must be paid so the effective rate is about 45% on income.

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So 10 percent is left to invest in growth, savings and profit for distribution. If the company doesn’t invest in growth, it will die.

The company above invests 5% into growth leaving 5 percent for the owners to distribute or save for a less productive time.

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Now in a 10 million dollar company, that 5 percent represents 500,000 dollars which is not an insubstantial amount of money. Except that that 10 million dollar company burns through an average of about 40,000 dollars for every weekday it exists, so 500K isn’t much of a cushion for operations. The federal government sees that 18 percent profit as personal income of course, and taxes it as though the owners were professional hockey players who actually took home 1.8 million dollars.

Today these owners are being asked to pay their “fare share” and are looking at a 5% tax hike along with a massive increase in health care costs, as well as increased capital gains tax which will massively limit investment opportunity.

So now assume that the federal portion of our hypothetical company’s taxes went from 35% to 40% as is currently proposed. Then we are looking at about a 50% rate of taxation. If you are an investor in the company who contributes less than 500 hours of work per year, your rate goes up an additional 3.8% from Obamacare, but we will assume you are an active partner and we will ignore the projected twenty to forty percent increase in health care costs.

After tax, you have then:

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Or 9 percent to spare from your 10 million dollar company.

If you invest 5% as before, you only have:

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Four percent left from your nice 10 million dollar manufacturing company that just paid 900,000 in taxes. That is actually 20% less take-home income after tax from a 5% increase. What’s more is that your company just paid the federal government 900,000 dollars instead of a measley 800,000, while retaining 400,000 for the owners to either save or distribute. Over two times the money you can actually spend on growth or personal profit is paid in tax.

Something is going to have to give, and my guess is that it won’t be the liberals. After the economy gets worse, they will just blame something else and find a new way to attack business. The media has completely brainwashed the public into believing that this tax hike is about ‘increased revenue’ and paying your fair share, when the propaganda has literally zero basis in reality.

Now while this example does not represent my company, this is a very typical scenario for a manufacturing firm in the United States. Just to add a little more “real world” flavor to the discussion, one of our largest competitors just got bought out by a Taiwanese company. Of course Taiwan only taxes their corporations at 17 percent so it is no surprise to see American business being bought out. This Taiwanese company will manufacture at its own plant and charge the maximum amount of cost to the American branch to limit US tax. Even a mental midget can guess what Obama’s expansion of that tax differential means for American competitiveness with Taiwan in a global economy.

In my case the numbers have worked out such that I will pay 4 times more in taxes to the various United States Governments than my personal take home income in 2012. Not 40% tax but 400%.

The general public is completely ignorant of these things. Consider for a moment though what a business must do to react to this massive cost increase. In our case, price hikes are not possible as it is a global economy, so the cash will have to come from somewhere else in the company. Benefits, pay, number of employees, investment, etc… In the end, investment and growth will necessarily suffer as both our company and our customers have less purchasing power. It is absolutely clear that both the government and employees will actually receive less money from us than they would have in the long run.

If you are an employee in private industry, you will likely continue to watch the un-reported inflation of prices rise faster than your check. This isn’t corporate greed, as the idiots on MSNBC would tell you, it represents the cold fact that evil business owners will have less money to pay out. So when you are asking your boss for a raise in the coming years, don’t be surprised if his answer is – go get it from Uncle Sam.