"Figures Lie and Liars Figure"

Dear John Gault,

We still have not figured out who you are, I don't think.

For this post I want to compare two schools of thought when it comes to taxes. One side says "Tax the rich heavily because they have more money to give and then give more entitlements, goodies, rebates, etc. to the poor to help them out, and minimize the burden to the middle class."

The other side says, "Tax everyone less and give deductions and reductions in taxes to the richest so that it will trickle down to the poor in the form of jobs, employee benefits, and salary increases. Minimize pressure on the middle class, but recognize that the upwardly mobile in the middle class will pay more taxes through sales tax and income tax as the make more due to the cuts for the wealthy companies."

Which side is right? Well, lets explore.

First, a concern I have is that we know WHO the middle class is. Funny enough, Politifact.com says that "More than a third of Americans with incomes below $20,000 describe themselves as middle class. So do a third of people with incomes above $150,000". We all want to think of ourselves as middle class, "Average Joes or Janes" (six pack and hockey stick optional). And so the candidates want to pander to that larger group.

But that broad definition certainly does not match with what the candidates mean when they use the term in relationship to their claims about tax increases or reductions. Politifact looked at the middle class as the middle 20% of income earners. That is approximately those who make between about $37,595 and $66,354. When Obama claims the middle class will get three times the tax relief under his plan, he is referring to this abbreviated group and only for the first year of his tax plan. When one looks at other sections of the middle or 2-4 years down the road, the gap is not nearly so large. But this is just one example of how this definition colors the truth of claims, so just keep that in mind. PLEASE go to Politifact's tax claim page and see numerous claims and their level of truth from all candidates. It is so interesting with all the statements and attacks going around.

So we come back to who to tax and how. I found a very interesting article written by someone at Yale talking about the history of taxation and why taxing the rich could work. It was a review of a book called "Does Atlas Shrug?", which plays off Ayn Rand's book "Atlas Shrugged". But there was so much information in both the article and in Ayn Rand's book to really present here. I should do a post just on "Atlas Shrugged" sometimes, as I think that book is seminal to me in thinking about this issue.

So I kept searching for more "layman's" type information. I found an interesting article online, which inspired the title of this post, which is a quote from Mark Twain. There was some mathematical explanation before the writer got to the conclusion, so again, I recommend reading the article, but the conclusion stated:

"But one particular event comes to mind. During the Bush-Kerry election in 2004, each candidate staked out opposite positions on capital gains taxes. President Bush argued that the current 15% rate should be maintained and made permanent, while Senator Kerry advocated raising them on the top 2% of wage earners. An interesting thing happened during that election, as at approximately 2:30 PM EST on November 2nd, flawed polling data leaked to the press indicated that Kerry would win Florida and the entire election. Prior to the false news leaking, the Dow had increased as much as 125 points, or about 1.2% during the day. Afterward the market proceeded to fall 150 points (about 1.5%) from its peak. In other words the prospect of higher taxes immediately motivated investors to sell assets. As clear as the message the market sent about higher taxes was, it sent an even stronger and clearer message about keeping taxes low. Over the next 2 days, the Dow rallied approximately 3% or 280 points signaling its relief that taxes would remain low and capital would likely continue to flow into investments.

America faces a similar choice in 2008. Virtually every Republican has vowed to keep capital gains taxes constant or to reduce them further, while every Democrat has vowed to work to restore capital gains taxes for all (or at least the wealthiest taxpayers) back into the low 30% range. Because polls continue to indicate that no party has a clear path to the White House, the market most likely has not discounted the effect of potential tax changes on stock prices. However, should one side gain a clear advantage, prepare to make appropriate strategic changes in the composition of your portfolio."

Could Obama's apparent path to the White House paired with his desire to tax the rich at a higher rate (or at least not decrease taxes) be playing into the current crisis? From reading the above, one could come to that conclusion...

But many people talk about the need to increase taxes in order to have more revenue for government use. How else can we know we will have money to then budget out for necessary government programs? And this is a sore point for me. We must have a balanced budget, I feel.

Recently here in Tennessee, our governor wanted to fund education through a cigarette tax. This was very confusing to me, because a tax would actually discourage people from buying more cigarettes (not that this is bad), but then our education system was dependant on people buying MORE cigarettes. How can one know how much money will be obtained to then budget out? Granted, there will always be "estimated tax revenue", but I guess it seemed like a strange way to fund something.

So I guess the same would go for taxes on business. You are penalizing people for making money, so the basic behavioral principle is that after a certain point it becomes less reinforcing to make more money because you lose more of it. But if you make more, then you will engage in more of the behaviors (investing, growing business, hiring, saving, etc) that led to making money in the first place.

Now I feel like I am talking in circles. So I will go to another resource... Another link to a good article. Here is a quote from Pete Peterson, a newly minted billionaire who is now using his billions to set up a charitable foundation which will "increase public awareness of fiscal imbalances, Social Security deficits and nuclear proliferation." He feels that the taxes for the rich must go up. He said, "We are at a make-or-break point in American history...The entitlement monster is unfunded. We are dangerously dependent on foreign capital, our health care costs per capita are twice the level of the developed world. The goal is to integrate public policy and charitable giving and to answer this question: How do you educate a public that has become largely inert?"

But Peterson also recognizes that things must change in this country because our current course is not sustainable. From the article: "Peterson's ideas are many. One is organizing a youthful equivalent to the powerful lobbying group for senior citizens, AARP. Another is working with HBO on a documentary film adaptation of his book "Running on Empty," in the hope that the American public wakes up to the dangers of deficits and entitlement spending as it did to global warming after Al Gore's film "An Inconvenient Truth." "

Deficits are a danger we must avoid. And economics are not as simple as I thought before now! And I did not even get into concepts of what government should be doing and how they are spending tax money once they get it...or pork barrel spending...or, well, so many things. Maybe in another post. But I learned a lot doing this one, so that is good.

All to all of you out there, if you want to know how to get through this turmoil, check out Dave Ramsey for how to live debt free. I am not there yet, but I would love to be!!

Bye for now,
CaDh 8