The United States is not the only country attempting to “soak the rich” in order to pay its bills.  The United Kingdom has also regrettably moved in that direction, and now Spain has indicated that it too will raise taxes on high-income earners.  The Financial Times writes, “Spain’s cash-strapped Socialist government is poised to emulate the UK and increase taxes on the rich, reversing its policy of tax cuts…”

With unsustainable budget deficits, the Spanish government has decided that it’s easier and more politically expedient to plug the gaps with tax hikes rather than unpopular spending cuts.  Sound familiar?

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Do the rich — as President Obama seems to think — fail to pay their fair share? Gerald Prante of the Tax Foundation recently took a good, hard look look at IRS tax data, and some of the results are pasted in the table below.

Yes, Mr. Obama, the rich do pay their share. The top 1% of Americans really do pay 40% of all taxes and also pay a higher percentage of their income. At 22.45%, they pay nearly double the rate of the average taxpayer, who pays 12.68%. The bottom half of all taxpayers contribute less than 3% to the tax pool and has an effective tax rate of only 3%! (It should also be remembered that these numbers reflect only those Americans who filed tax returns; if you consider the not insignificant number of Americans who do not bother to file a return, the burden upon the rich would appear even bigger.) Read the rest of this entry »

For the last several months, every time I see/hear/read analysis about our economic crisis, from unemployment to profits to healthcare to tax receipts to tax rates, the shape of the conversation seems to centered around how things will look as the economy, measured by GDP growth, improves.  Will there be nagging unemployment?  Will Health care costs continue rising?  Will tax receipts rebound quickly or slowly?  and on and on… I’m ready for some sober, quality dialogue about how we will move forward if this is not the case.

For a few minutes,  think about the consequences if things go the other way. 

What if revenues do not grow? 

What if tax receipts at the state level, which are now running at a down 20% year over year don’t come back, but stay down or even get worse?

What if the mythical savings in a government run healthcare system fail to materialize and we are left with even higher costs while the greater economy sputters?

What if pensions, which are relying on fantasyland rates of return, simply go broke?

What then.  I believe we need some leadership that clearly puts forth what they see as the best course of action, but also ways to measure success or failure along the way, and corrective measures that would then be taken. 

What I do not need is yet another program or plan that is put forth simply because someone believes “we have to” or that we “have no choice.” 

In light of the recently announced Federal budget—complete with $1.7 trillion deficit—we found David Leonhardt’s article this week interesting.  “Your taxes are going up,” he tells us in no uncertain terms.  And not for the reasons you think.
 

“Like Having Medicare? Then Taxes Must Rise”Your taxes are going up.  They will probably go up in the coming decade, and the increase will be permanent. For a half-century, federal taxes have remained fairly constant relative to the size of the American economy — equal to about 18 percent of gross domestic product. But the 18 percent era has to end soon. It won’t end because President Obama is some radical tax and spender, either. It will end because of a basic economic reality.

 
And what might that economic reality be?   The hard demographic reality of Medicare and other federal programs.
 
Republicans are (rightly) quick to complain of excessive government spending.  But when they fall back on their tried-and-true anti-tax rhetoric, they are simply being unrealistic.  High ranking members of Senator McCain’s presidential campaign staff admitted candidly that taxes would be rising in the years to come regardless of who held the White House.  In our own writings on Baby Boomer pension and health issues, we reached the same conclusion. 
 
At all layers of government, we see a common trend: taxes will rise and services will be reduced.  More on this to come.  

As a follow-up to the last post, we thought we’d mention another wrinkle.  Even while the states are suffering through unprecedented budget crises, many are still offering tax breaks to companies setting up shop in state.  The problem is, this is made possible with your tax dollars.  As we see in the New York Times,

“More States Considering Tax Breaks to Woo Jobs”

Governors from both parties and from states large and small are counting on the federal stimulus package…to perk up their economies and create tens of thousands of new construction jobs, but they’re not convinced it will be enough. So they’ve laid out urgent calls to chase private-sector jobs with public money…. 

Not surprisingly, this has drawn criticism from both the left and right.  

Read the rest of this entry »