It is fitting to discuss the American economy on a day when three Americans have won the Nobel Prize in Economics. Here’s what Tim Iocono thinks about that.
Speaking of expert opinions, I’ve been hearing a lot over the last day about a superfund to help provide liquidity in something called SIVs. Now, I’ve followed the markets for some years now and yet I don’t know much about these things. And the first several things I saw on the matter didn’t even mention what the letters stand for — which makes me wonder if the journalists know what the heck they are. Luckily for us all, the BondDad was kind enough too run down what these are and what the problem is. Oh, and SIV stands for Structured Investment Vehicle.
The American mortgage problem continues to have international repercussions as Japanese brokerage Nomura Holdings decides to get out of the mortgage backed securities business in the United States. Actually, I enjoyed this item in my local newspaper yesterday. A now unemployed mortgage broker explains what happened: programs that allowed people to buy homes with nothing down; mortgage brokers that were using programs with such shoddy documentation that there are “brokers who have never made a fully documented loan”; an industry that would rather hire some young recent graduate than somebody with actual experience in bad times.
No discussion of the American economy today would be complete without addressing the anniversary of 1987’s Black Monday. Could it happen again, MSNBC asks. My answer? A big drop in the Dow could happen over the course of several weeks — remember that we are at Dow 14,000, it was just over 8000 in September of 2001. But it won’t happen in one day. There have been too many changes in the way the stock markets work since then: trading curbs; an increase in electronic trading; the rise of online trading, enabling Joe Average to put in a market order that goes much more quickly to execution than it could in 1987.
Now oil is trading at roughly $85 per barrel. Oh, and the dollar is flirting with new lows, which is making the oil problem worse. Breathe. Today, Marc Faber was on CNBC and he said what I have maintained for quite a while: the core inflation rate does not reflect what you and I see when we pay our bills. The day of reckoning is coming when it will no longer be able to hide inflation in the statistics.
A couple items on wealth and the lack thereof: this very nice article on the problems of getting out of the “underclass”; paired with EconoSpeak asking what a service economy does to the middle class (answer, nothing good!). Well, there is a little silver lining, American toy manufacturers are having a mini-boom as people avoid Chinese toys.
And one last thing, Presidential Candidate Mike Huckabee is for a tax simplification program that boils down to a flat, national retail sales tax. For the record, I’d like to point out that a retail sales tax puts the entire tax burden on Joe and Jane Average. Corporate profits would be completely untaxed. Now then, corporations use taxpayer-funded services and facilities too. They ship things on our roads. They call the fire department and the police department in emergencies. They benefit from the actions of our government, whether it is our Coast Guard preventing drugs from getting into the country and workplace, or the Department of Education providing funds to teach future employees to read. Do you think it’s fair for them to be exempt from taxes?
In closing: John Edwards points out that Hillary Clinton hasn’t so much as won a primary yet; needless to say China is not happy about the Dalai Lama visiting President Bush and receiving a Congressional Gold Medal; Qwest was approached about wiretapping Americans months before 9/11 and punished for refusing; it’s fun to work at the USDA!; the Farm Bill matters because you eat food; thank goodness, a new designer of clothes for people like me, who are too short for petites; permission to fly in or over the United States is now required; and finally, when economics and markets news source TheStreet.com is running a piece on your First Amendment right to peaceably assemble, we have a big problem in the civil liberties department.
Have you even read about the FairTax? If anything it increases the burden on the rich. Why? Well if you have more money what are you going to do with it? Spend it of course! Duh! Assuming that the people who make more money are going to spend more money, they are going to pay more of the tax. It’s that simple. Not only that, but every person in America legally will get a check to cover “The basic necessities” which they can do whatever they want with. They can spend it or better yet, save it. With no more taxes withheld from paychecks and add the monthly check each month there is more money for everyone which cna allow the people at the lowest end of the ladder to rise up out of poverty. The FairTax would do more to end poverty than LBJ did during his “War on Poverty.”
Thanks for responding, Brian. In fact I have read about the so-called Fair Tax. If you look at consumption habits, you will find that the poor tend to spend all their income while the rich do not. While the rich spend more than the poor, they also save more than the poor. Furthermore, your criticism completely ignores my point, which is that corporations and other business entities make profits *and* use services paid for by taxpayer dollars. I agree that the tax system needs simplification, which is why I think the standard deduction needs to equal the poverty line for a family of four, and itemized deductions should be capped at, say, 3 or 4 times the standard deduction. Thus nobody would ever be “taxed into poverty” again, most people would be able to complete their taxes in less than an hour, and the AMT could be eliminated. I’ve said this several times over the years, usually every April.
And if you could provide me with a link about the “check to cover the basic necessities” I’d appreciate it, because I have never seen that claim before and don’t see it addressed in the Fairtax.org FAQ or thumbnail of the plan. That seems like the sort of important detail that could sell the plan to the masses, and if it is there, I am at a loss for why it is not more prominent.
This idea that taxing business is somehow other than taxing consumers is a myth. Costs of doing business are either passed on to consumers in higher prices, eaten in reduced distributions to shareholders, or results in business failures resulting in major economic dislocations for the families of those employed – or some mix of all three; this is, perhaps, the most important educational lesson that FairTax seeks to convey.
Dale Jorgenson, Harvard economist, calculated that on avg 22% of every retail dollar was attributable to the costs attributable to complying with business income and payroll taxes. So, besides the payroll tax, itself, being the most regressive, this effect is multiplied by higher prices (hidden tax).
FairTax removes the hidden tax, and untaxes poverty-level spending – so everyone’s basic necessities are tax free. Prices after FairTax passage would look similar to prices before FairTax – not “30% higher” as opponents contend – competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn’t taxed under FairTax – thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag – this is the way INCOME TAX is figured (parts of the total dollar).
The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly “prebate” (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of HHS poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.’s Kotlikoff and Rapson (10/06) concluded,
“…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.
“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”
Further, per Jokischa and Kotlikoff (circa 2006?) …
“…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”
okay but i must be missing something: if taxes are reduced for joe and jane average and business still pays no taxes what happens to overall levels of revenue for governmental services? And please elaborate how personal property for the rich and middle classes is taxed under fair tax?
I think SW’s point is important. When Rinker (a HUGE excavating co. ) and Cadman (concrete) send out their trucks on the road they are making profit from the operations, and they are putting huge wear and tear on the roads. How are the roads funded for repair? By me? simply for the opportunity to work for them? Business should not be exempt from their share of the obligations for support of infrastructure (beyond merely providing opportunity for employment.)
I am sure my tone sounds argumentative, but I am sure that I know less than the commentors here and am only asking for further comment. Oshiete itadakemasenka?
It never ceases to amaze me how many people assume they understand a proposal–and criticize it–before they actually take the time to research it in its entirety. Please take the time to get the FairTax Book whether you buy it or check it out of your local library. I seem to recall the book is less than 200 pages and describes the proposal and thought process in detail. It is important to have informed debate, but it is unhelpful to debate points that are not pertinent because of an assumption of how the legislation would work.
This is an innovative, creative, intriguing and possibly viable way to make America more competitive, eliminate the tax complexity, eliminate the use of the tax code to manipulate voters and pit one sub-group against another, fund Social Security and Medicare, etc., etc.
For those potentially monumental benefits, it seems worthwhile to familiarize ourselves with the true proposal and evaluate/debate it on the merits.
Just a thought.
Americans are losing their freedoms because they’re too busy escaping from the “slave mines” of tax-withheld paychecks to football and beer.
Wake up your brain, jukkou. Go on over to FairTax.org FAQs.
Where is the outrage over sky-high taxes, regulatory costs?
by Steve Higgins
7/15/07 – New Haven (CT) Register
“Reports last week from two nonprofit groups should serve as a wake-up call to Americans to start agitating for tax reform . . .
“On Monday, the Competitive Enterprise Institute reported that the cost to consumers of complying with federal regulations exceeded $1 trillion in 2006 . . . almost 10 percent of the nation’s gross domestic product. It’s nearly half the amount of government spending.
“Even more worrisome, the cost of complying with these multitudinous regulations exceeds the amount of individual income tax paid in 2006, about $998 billion, as well as corporate incomes taxes of $277 billion.
“According to the Washington, DC-based advocacy group [ Americans for Tax Reform ], the average American had to work through July 11 this year just to pay all federal, state and local taxes, as well as regulatory costs including workers’ compensation and unemployment benefits.
“Congress should take one of two paths: Either cut tax rates and government spending drastically, or adopt the FairTax, an innovative proposal that would involve abolishing the Internal Revenue Service and its income tax and replacing it with a simple national sales tax.”
–(End excerpts)–
. . . The U.S. income tax system and the U.S. economy are inter-related, and are in DIRE trouble. If we, the citizens of these United States, do not act aggressively to spread the FairTax plan with family, friends and associates – our “nest eggs” stand to be devastated through a coming economic meltdown (Summary with podcast: “Laurence J. Kotlikoff on Long-Term Fiscal Problems in the U.S.”).
Politicians are putting demogoguery and pandering above responsible governing – and they’re able to do it because Americans do NOT understand – at the “get go” – politicians’ / bankers’ hunger for ever-increasing shares of the working person’s bi-weekly paycheck; Americans do NOT understand the totality of taxes they pay. The FairTax shines the “light of day” on this, putting citizens back in charge to forcefully demand spending reductons.
YOU AND I MUST ACT to mobilize public opinion, and get the FairTax enacted, because the signs point to a probable devaluation of the dollar (reissuance of an “Amero” ? – under a U.S.-sovereignty-busting North American Union ?).
[ NOTE: Does this help clarify your understanding of what’s going on globally? a) Bush’s persistence on rewarding illegal immigration? b) the North American Highway now under construction in Texas (to stream cheap labor into the covertly-planned North American Union marketplace designed to compete with 21st-century China market? c) the gradual increase in value of the Chinese yuan by China corresponding to China’s economic growth? (This will result in the dumping of dollar-denominated debt as its manufacturing economy grows stronger – which guarantees devaluing and ushering-in of the Amero.) ]
Keep in mind, this NAU strategy – supported by the “super-rich” (member-owners of the Fed) – together with their politician buddies who want NOTHING to do with FairTax – runs contrary to simply making the U.S. a “tax free zone” for business under the FairTax. Politicians and bankers lose power when the U.S. is returned to a “savings-driven economy” from a “debt/interest-driven” economy).
Powerful “elites,” members of political and monied-interest “clubs” reaching into the halls of power in Washington, depend on keeping you and me uninformed of their plans. It is up to YOU and ME to ACT – and not live in a state of denial – based on what we now know is clearly happening to our financial futures.
After you consult the Kotlikoff interview (above):
• (If you’re a member of your State FairTax organization) Contact your state or local FairTax Director to learn what you can do.
• (If you’re just learning about the FairTax bill) Join FairTax.org here: Scrap The CODE, NOW !