Thursday, March 21, 2013

"Progressive" Policies and "Progressive" Taxes are a Loser ... Be Careful What You Wish For

Be careful what you wish for is advice well worth heeding. What initially sounds good often turns out to have incredibly bad effects when implemented.

And so it is with the "progressive" programs and political policies being offered up as the solution to America's financial issues and our citizens' general well being. The "progressives" have it all wrong when it comes to dealing with our country's financial problems and economic issues.

In fact, it's my view that the American "progressives" may well have a longer term existential problem on their hands. As the old saying goes, if you're doing the wrong thing, you're probably doing it poorly. And they definitely are doing the wrong thing to stimulate economic growth, jobs and financial stability in a 'balanced way.'

In other words, their 'balanced approach' apparently has resulted in their having dug themselves a deep hole from which there may be no easy or politically palatable escape hatch.

Taxing the so-called 'rich' and thereby fixing the financial problems in America has been the 'progressive'  formula to achieve financial balance and solving the enormous problems assoicated with our nation's deficits and debts, high unemployment and too little economic growth issues.

Unfortunately for We the People, they have it all wrong. When raising taxes on the rich is presented as the only approach and answer to resolve our nation's financial, jobs and economic growth problems, the results achieved will be pretty much the opposite of those intended. Not only will ongoing deficits and the nation's debt levels remain unresolved, but the government's tax receipts will get smaller and its spending will go higher. As that happens, the job creation that we so desperately need and want will suffer at the same time. It's nothing other than a double whammy of bad news that the 'progressives' are proposing, in other words.

And the results will speak for themselves and hardly serve as a ringing endorsement for more 'progressivism,' either in our government policies or our progressive tax system.

So now let's review some revealing facts about how all this 'progressivism' is working, or better said, not working.

The Revenue Deficit From Progressive Tax Rates is subtitled 'The government now relies far more on fewer and wealthier taxpayers. No wonder revenues are lower:'

"The two policies that national Democrats blame for massively unbalanced federal budgets—the Bush tax cuts and the wars in Iraq and Afghanistan—have been largely repealed. Yet deficits are projected to average $700 billion a year over the next decade before rising again to $1 trillion.

So as the Senate and House take up competing budgets this week, President Obama and his congressional allies have renewed their demands for more revenue. The claim is that taxes remain far below historical norms, despite the recent rise in tax rates.

Well, yes, federal revenues have averaged only 15.3% of GDP over the past four years, the lowest share in 60 years. But that did not happen because tax rates are too low. Federal revenues are down because economic growth is too slow.

This simple distinction is profoundly important. . . .

It is hardly news that revenues are lost during a recession or a weak recovery. But these taxes do not have to be gone forever. As CBO reports on previous recessions have shown, an average recovery can recapture lost revenues and increase collections beyond their previously projected highs.

Unfortunately, America is experiencing nothing like a normal recovery. Government figures show that payroll employment is still 2.9 million below the pre-recession levels and 12.7 million below what a normal recovery would have delivered. The average real income of every individual is $702 less today than five years ago and $4,837 short of what an average post World-War II recovery would have generated. Compared with 2007, federal revenues in 2012 are down 5% nominally, and down 14% after inflation.

What is shocking is the degree to which federal revenues have underperformed even for an underperforming economy; revenues have dropped by 2.7% of GDP since 2007.

Why? A more progressive tax code now leverages the negative impact of slow economic growth. The share of all individual income taxes paid by the top 1% has risen to 41.8% in 2008 from 17.4% in 1980—but almost two-thirds of the income from the top 1% comes from nonwage income, including capital gains, dividends and proprietor's profits.

Individual income taxes as well as corporate taxes are now far more rooted in the shifting sands of volatile business income and capital profits rather than in the terra firma of wage income that stabilizes payroll taxes. From 1960 to 2000, payroll taxes were never lower than in the previous year, individual income taxes dipped only twice, and corporate taxes dropped 11 times. Since 2000, individual income and corporate tax revenues dropped five times, while payroll taxes fell twice. Not only do revenues from individual tax returns drop more often now. They fall more severely, with recent collapses of 14%-20% versus the 3%-5% range before 2000.

Yet if the economy improves, federal revenues can surge. . . .

By consistently pushing for higher tax rates on top earners, and tax credits and lower rates for lower- and middle-income earners, Democratic tax policies have unintentionally left the government dependent on the prosperity of upper-income taxpayers. Since the current recovery is so dismal, revenues have tanked.

The country's fiscal condition thus poses a choice for Democrats. They can harvest a great deal of revenue by making peace with a profitable and growing economy and with those productive individuals who create such an economy. Or they can embrace new taxes on both upper- and middle-income earners that will restrain economic growth. The latter course will make it harder and harder to raise the revenue that Democrats demand to fund the government they love."

Summing Up

The point is simple. The so-called 'rich' individuals pay 41.8% of the individual income taxes, up from 17% in 1980.

And the kicker is that two thirds of their taxable income doesn't come from wages but rather from investment related income.

Thus, as their investment income suffers due to the weak economy, it has a negative ripple effect on the remaining vast majority of the people whose income consists of mostly wages and salaries.

And as jobs and income for those other than the so-called rich suffer as a result of a weak economy, their income shrinks and the nation's overall tax receipts are negatively impacted further.

Then as the government knows best gang proceeds to raise taxes even higher on the "1%" to achieve better 'balance,' the investment income of the so-called rich will shrink again. And so on.

The "tax the rich a little more" idea, albeit politically popular, is a loser for the progressives and the rest of us as well, but how will the progressive politicians ever explain that to the vast majority of We the People? That's the real question that needs answering.

And if the progressives don't somehow find a way politically to switch gears soon and change direction, we're all in for a real long slog and an unnecessarily weak economy, as well as a jobless and deficit ridden one at that.

And for a long time, too.

That's my take.

Thanks. Bob.

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