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Hauser's Law & Soaking The Rich Fallacy
#21
Mellon, financier of the days of Hoover and Roosevelt, knew all the dodges that the rich played to escape high taxes. Needless to say the politicians ignored his explanations and raised taxes anyway. It seems that the politicians just keep trying to "tax the rich" severely, and never learn from the past about tax avoidance. What does this say about the intelligence of the politicians?
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#22
jt Wrote:Mellon, financier of the days of Hoover and Roosevelt, knew all the dodges that the rich played to escape high taxes. Needless to say the politicians ignored his explanations and raised taxes anyway. It seems that the politicians just keep trying to "tax the rich" severely, and never learn from the past about tax avoidance. What does this say about the intelligence of the politicians?

Most of them are very intelligent. Their problem is that they have too much intelligence, and not enough common sense. It's like having a high powered automobile, but no steering wheel. Wink1
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#23
These three people, writing in the WSJ, realize that the problem is not the increase of taxes, since it will tend to decrease revenues. Rather, it is Spending that needs to be cut drastically. And it is going to be a bitter pill, but must be done.

Neglecting Hauser's Law will come back to bite the country.

Quote:The Right Way to Balance the Budget
The experience of 21 countries over 37 years yields a simple truth: Cutting spending works, and raising taxes doesn't.


By ANDREW G. BIGGS, KEVIN HASSETT AND MATT JENSEN

The federal debt is at its highest level since the aftermath of World War II—and it's projected to rise further. Simply stabilizing debt levels would require an immediate and permanent 23% increase in all federal tax revenues or equivalent cuts in government expenditures, according to Congressional Budget Office forecasts. What's clear is that to avoid a crisis, the federal government must undergo a significant retrenchment, or fiscal consolidation. The question is whether to do so by raising taxes or reducing government spending.

Rumors have it that President Obama will propose steps to address growing deficits in his next State of the Union address. The natural impulse of a conciliator might be to split the difference: reduce the deficit with equal parts spending cuts and tax increases. But history suggests that such an approach would be a recipe for failure. (think GOP's typical outlook to fixing problems)

In new research that builds on the pioneering work of Harvard economists Alberto Alesina and Silvia Ardagna, we analyzed the history of fiscal consolidations in 21 countries of the Organization for Economic Cooperation and Development over 37 years. Some of those nations repaired their fiscal problems; many did not. Our goal was to establish a detailed recipe for success. If the United States were to copy past consolidations that succeeded, what would it do?

This is an important question, because failed consolidations are more the rule than the exception. To be blunt, countries in fiscal trouble generally get there by making years of concessions to their left wing, and their fiscal consolidations tend to make too many as well. As a result, successful consolidations are rare: In only around one-fifth of cases do countries reduce their debt-to-GDP ratios by the relatively modest sum of 4.5 percentage points three years following the beginning of a consolidation. Finland from 1996 to 1998 and the United Kingdom in 1997 are two examples of successful consolidations.

The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.

[Image: OB-LN805_biggs_D_20101228142014.jpg]

By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts. While tax increases play little role in successful efforts to balance budgets, there are some cases where governments reduced spending by more than was needed to lower the budget deficit, and then went on to cut taxes. Finland's consolidation in the late 1990s consisted of 108% spending cuts, accompanied by modest tax cuts.

Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force. A 1996 International Monetary Fund study concluded that "fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation." For example, in the U.K's 1997 consolidation, cuts to transfers made up 32% of expenditure cuts, and cuts to government wages made up 21%.

Likewise, a 1996 research paper by Columbia University economist Roberto Perotti concluded that "the more persistent adjustments are the ones that reduce the deficit mainly by cutting two specific types of outlays: social expenditure and the wage component of government consumption. Adjustments that do not last, by contrast, rely primarily on labor-tax increases and on capital-spending cuts."

The numbers are striking. Our research shows that the typical successful consolidation allocates 38% of the spending cuts to entitlements and 25% to reductions in government salaries. The residual comes from areas such as subsidies, infrastructure and defense.

Why is reducing entitlements and government pay so important? One explanation is that lower social transfers spur people to work and save. Reducing the government work force shifts resources to the more productive private sector.

Another reason is credibility. Governments that take on entrenched, politically sensitive spending show citizens and financial markets they are serious about fiscal responsibility.

While tax hikes slow revenue growth, policies that credibly reduce government spending in the long run boost economic growth by more than their simple effects on deficits might imply. Any attempt to address the federal government's budget shortfall that relies on less than 85% spending cuts runs too large a risk of failure. The experience of so many other countries shows that it's crucial for the U.S. to get this right.

Mr. Biggs is a resident scholar, Mr. Hassett is the director of economic policy studies, and Mr. Jensen is a research assistant at the American Enterprise Institute.
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#24
Why is it so obvious to everyone but politicians?
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#25
jt Wrote:Why is it so obvious to everyone but politicians?

Unfortunately it's not 'so obvious to everyone'. There are many out there, like our resident Progressive/Fascist, who just refuse to believe that the Free Lunch if a fallacy.

I was just watching The Judge, sitting in for Glenn Beck, earlier today. And he had that bastion of intellect, Nancy Skinner, on the show. Besides being a Motor Mouth, she spewed nothing but intellectual manure, that only a Idiot could agree with.

Hey, there are a lot of them out there, and unfortunately they vote for that Free Lunch, no matter what.
___________________________________________________________________________________________________
"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#26
Notice how Michael Barone inadvertently brings up Hauser's Law in this article, on how Obama must have slept through "Tax 1", during his tenure at law school. In truth, there are many politicians, also lawyers, who must have slept through their tax course as well.



Quote:Did Barack Obama take Tax 1 in law school? I did, and I remember the first day of classes, when mild mannered Professor Boris Bittker asked a simple question, "What is income?"


I was pretty confident I could come up with a quick answer, and so were a lot of other students. By the end of the hour, after Professor Bittker had politely punched huge holes in every student's definition, it was pretty clear that none of us could. Income is a slippery concept -- especially slippery when you're trying to tax it.

Which leads me to think that Obama may have avoided Tax 1. Or perhaps he dozed off in class. For in his April 13 speech at George Washington University, the speech to which Standard & Poor's responded by reducing the government's credit rating to "negative," he seemed to think he could get all the money we need to balance the budget from higher taxes on the rich.

That's wrong as a matter of simple arithmetic, as is clear from a chart reproduced on the Wall Street Journal editorial page showing the total amounts of taxable income of each group.

The chart showed that if the government had simply confiscated every dollar from those reporting more than $1 million taxable income in 2008, it would not have gotten the $1.3 trillion needed to close the current federal budget deficit.

What the chart doesn't show, however, is even more important. And that is that when you reduce income tax rates, high earners have more taxable income. When you raise them, they have less.

High earners don't sit around waiting to have their money confiscated any more than chickens sit around and let you pluck out all their feathers. They pursue other options.

This is most obvious when you think about capital gains. The federal government doesn't try to tax capital gains -- the increase in values of your stocks or your house -- every year (Professor Bittker had us in knots explaining how it might do this). You pay capital gains on a stock or house only in the year you sell it.

What happens if the capital gains tax goes up from 15 percent to 50 percent? People stop selling stocks and hold onto their houses if they possibly can. And when cap gains rates go down? They're more willing to sell, pay the lower tax and invest in something else.

That's why the government's total revenues from capital gains have tended to rise when the capital gains tax rate is lowered. And why increases in the capital gains tax rate never raises the amount of revenues static models estimate it will.

You get the same effect, to a lesser extent, when you change tax rates on ordinary income. People working for minimum wage don't have many options about how they'll be paid. High earners tend to have more options.

If you go back to the 1970s, when the top rates were 50 percent on salary income and 70 percent on investment income, you'll find that a lot of high earners were getting company cars, company payment of country club dues and big expense accounts.

The reason: They didn't have to declare those things as income and pay taxes on them. But when rates went down, there was no demand for company-paid perks any more.

You would find also, if you spent time with those 1970s high earners, that they spent a lot of time and psychic energy in finding tax shelters -- investments that thanks to the intricacies of tax law reduced the amount of taxable income.

After the Ronald Reagan tax cuts, we saw a vast increase in high earners' taxable income. One reason, I suspect, was that they spent less time seeking tax shelters and more time figuring out how to make profitable investments.

There's a reason federal tax revenues since World War II have hovered around 18 or 19 percent of gross domestic product, regardless of tax rates. The reason is that higher rates tend to result in less taxable income. You figure out why in Tax 1.

But perhaps Barack Obama understands this. In 2008, he told ABC's Charlie Gibson that he wanted to raise capital gains rates even if the government got less revenue because of "fairness." Evidently he likes taking people's money away. What he doesn't explain is why this makes anyone better off.
___________________________________________________________________________________________________
"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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