Taxes | More Liberty - Less Government

Inequality in America V – Putting it All Together

May 29, 2016May 14, 2016 George Noga

Surprising answers to questions about inequality in America

By: George Noga – May 29, 2016

Even socialists agree inequality from newly created wealth (even massive wealth a la Gates and Jobs) is an unalloyed benefit to society because it is the best metric for how well an economy is innovating, becoming more productive and responding to the needs of all people. Inherited wealth is mostly dissipated in a few generations, heavily taxed and often used charitably. Last, if Social Security and Medicare benefits were capitalized and included in wealth measurements, inequality would plunge markedly. At the outset of this series, I promised to explore and to answer many questions about inequality in America based on facts and logic. Following are the answers.

It is nigh impossible to get an accurate picture of inequality of income due to deeply flawed statistics based on AGI and household income, inconsistencies between income cohorts and flawed comparisons that don’t track the same people over time. One conclusion is certain. Accurate data would show much less inequality of income. Progressives oppose disparity in pay between CEOs and workers but are okay with similar clefts for athletes and movie stars. Steve Jobs took a nearly bankrupt Apple and created $750 billion of value; he made $2 billion, or 0.27%; was he overpaid?

Data based on spending shows sharply less inequality; the lowest income cohort spends $2 for each $1 of income. There is no inequality based on taxation (including payroll taxes) as America has one of the most progressive tax systems in the world. Nor would a $15 minimum wage reduce inequality; less than 1% earn the minimum and their average household income is $50,000. Young, poor, minorities and the unskilled are harmed by minimum wage laws. The truly poor need jobs not a higher minimum wage. Progressives claim a moral imperative to increase the minimum wage knowing aforehand it creates unemployment. Where is the morality in that?

The chasm between reality and rhetoric is wide. All measures of inequality, Gini, Theil and MLD, are markedly worse under Clinton compared to Reagan and under Obama versus Bush 43. Inequality is fueled by progressive policies including: (1) tepid economic growth; (2) higher taxation; (3) opposition to school choice; (4) energy policies; (5) ObamaCare; (6) opposition to trade; and (7) spending, debt and deficits. It is progressive dogma that creates inequality despite its self righteous rhetoric.

All metrics show less inequality in Europe; however, we must ask if that is a good thing or a bad thing. Many Europeans lead lives of quiet desperation with no economic mobility and a permanently moribund economy; they even refuse to reproduce or to defend themselves. Europe produces no innovations in electronics, software, drugs or even pop culture. The former USSR would have scored favorably on measures of inequality as does Botswana; where everyone is poor, there is no inequality. The Gini coefficient for happiness in America is the highest in the world; that says it all!

There are some things we should do to reduce inequality. Foremost is to stop corporate welfare as wealth created by government is illegitimate. Too big to fail needs to be eliminated as this is but another form of government largess. Capitalism must be based on both the carrot and the stick. Most Americans understand and accept inequality created by the marketplace; their beef is with government playing favorites.

At its beating heart, inequality is mostly an imaginary problem. The vapid dogma of progressivism is incapable of solving real problems; therefore, it creates a series of phony problems for political maskirovka. As demonstrated in this series, progressives have created the very inequality they now hypocritically rail against. In sum, inequality in America is not a serious problem except when created by government.

The next post June 5th entitled “Hurricane Warning” is particularly pithy.

Inequality in America IV – Reality versus Rhetoric

May 22, 2016May 14, 2016 George Noga

There is an abyss between what progressives say and do. They vehemently condemn inequality while advocating policies that create and exacerbate it.

By: George Noga – May 22, 2016

There is a staccato drumbeat from progressives asserting there is a grave and metastasizing crisis of inequality in America. In this fourth part of our series, we reveal the specific policies of Obama and progressivism that result in greater inequality.

1. Tepid economic growth is the 900-pound gorilla. Under Obama, coming off a bad recession, there has never been a year with 3% growth. It is the worst economy ever under these circumstances. The lack of growth is due to Obama’s policies for taxes, regulation and health care amidst great uncertainty. A languishing economy coupled with tiny wage gains is radioactive for poor and minorities and exacerbates inequality.

2. Black youth unemployment is over 50%. Obama refuses to consider a temporary entry level wage. Instead, he wants to increase the federal minimum wage by 40%.

3. Higher taxes are like steroids for inequality. Obama’s tax increases on dividends, capital gains and small business constrain capital investment and are a death-knell for job creation. His refusal to lower the corporate tax rate keeps trillions locked up abroad instead of financing jobs at home. Tobacco taxes have skyrocketed, disproportionately harming the poor; one pack a day costs $1,000 a year more in taxes – more inequality.

4. Opposition to free trade is harmful. Obama deserves credit for the TPP; however, progressives led by Clinton and Sanders are demagoguing it to death and want to kill it. The underclass benefits more than any other group from free trade. For liberals however, obeisance to labor unions trumps the welfare of the underclass.

5. Opposition to school choice keeps poor kids in failing schools. School choice is not only the civil rights issue of our time, it is a potent economic issue. Liberals choose to pander to teachers unions while throwing poor kids under the school bus. Lack of school choice could very well be the number one contributor to increased inequality.

6. Higher prices for food and energy wreak havoc on the poor. Food prices have surged due to Obama and progressive support for ethanol subsidies. Energy takes 25% of the income of poor families but only 10% for a high income household. The average price of a kilowatt hour was up nearly 40% under Obama – until the recent drop in oil and gas prices – which occurred despite, not because of, Obama’s policies.

7. ObamaCare is a disaster and poor Americans bear its brunt. Health care costs are rising along with taxes to fund it while access and quality of care plummets. Doctor shortages, rationing and death panels will have more impact on the poor. Meanwhile, the legions of 29ers and 49ers are growing due to perverse incentives in the ACA.

8. Obama’s spending, debt and deficits savage savings. Poor elderly Americans have seen incredibly low interest rates damage their lives. For every $25,000 a retired couple has in savings, monetary policy under Obama costs them $100 per month.

9. Increasing the minimum wage fuels inequality. Progressives claim a moral imperative to raise the minimum wage knowing it costs poor and minority jobs. The real minimum wage always is zero, and that is exactly what the wage will be for many.

10. Obama has created a poverty trap. If a low-middle income family with children has a second worker enter the labor force, the effective tax rate on the extra earnings is up to 80% due to phaseout of benefits. Under Obama, the number of single earner households has increased 2.6 million and households with no earners by 5 million.

Every one of the above factors increases inequality and every one is a creature of progressive dogma. The difference between progressives’ rhetoric and reality is indeed a bottomless abyss. Progressives created the inequality in America they now demonize.

Part V, the final post in this series, is scheduled for May 29th.

Truths About Tax Inversions

April 17, 2016April 12, 2016 George Noga

Obama’s attack on tax inversions is nothing but liberal anti-business class warfare
and demagoguery that caters to widespread ignorance and causes economic harm.

By: George Noga – April 17, 2016

A goal of the new MLLG blog is to be more responsive to current issues; in that spirit, this post addresses corporate tax inversions (such as the Pfizer-Allergan merger stymied by the Obama justice department) with a perspective you will not encounter elsewhere. Upcoming posts will focus on the $15 minimum wage and inequality in America including a comparison with Nordic countries – Sweden and Denmark.

A tax inversion is the relocation of a US corporation’s headquarters to a lower tax nation (usually via merger with a foreign company) so that it “inverts”, i.e. becomes a foreign corporation for US tax purposes. The benefits to the inverting company are twofold: first, tax on income earned abroad is payable at the much lower foreign rate; second, foreign profits can be returned to the US without further taxation. Following are the principal truths you should know about corporate tax inversions.

Tax inversions are an imaginary enemy! Progressives can’t solve real problems facing America such as terrorism, economic growth or failed schools. Instead, they pander to their base and to low-information voters by conjuring imaginary enemies such as tax inversions, climate change, institutional racism, campus rape culture, inequality and war on women. Yes, it’s really that simple.
Corporations don’t bear the tax burden. Taxes may be collected from businesses but the burden (those who ultimately pay the tax) falls on all Americans via higher prices as corporate taxes are passed on to consumers. Business taxation is misdirection intended to beguile voters into accepting higher overall taxes.
Taxation intentionally is opaque. Politicians make taxation opaque so Americans are fleeced with as little push-back as possible. It’s always in taxpayers’ interest for taxes to be direct and transparent. Liberals instead disguise tax collections, always preferring borrowing or stealthy tax increases to cutting spending or raising taxes directly. That’s why they strongly prefer business taxes.
Inversions can be beneficial. Following an inversion, cash can be brought back to the US without added tax and invested to create American jobs. The increased productivity from this investment helps all Americans in the long run.
The rule of law has been abandoned. In its place is retroactive, capricious, ad hoc and arbitrary imposition of political power. It is precisely this imperative of political dogma over the rule of law that is responsible for the economic malaise of the past seven years, creating slow economic growth and tiny wage gains.
Inversions can be ended quickly and easily. The US corporate tax rate is the highest in the world at 41% (35% federal, 6% state). Everyone agrees it should be lowered and the $2+ trillion overseas should come home. A political solution is low hanging fruit; however, President Obama sees more value politically in keeping the issue alive for continued class warfare and demagoguery.

As long as liberals remain in control, trillions of dollars will remain offshore and working Americans will continue to suffer low growth and wage stagnation. All this damage accrues solely because Obama chooses to flog imaginary enemies for perceived political gain while failing to deal with the real problems facing America.

The next post is April 24th and begins our series: Inequality in America.

The Panacea of Economic Growth

November 1, 2014January 28, 2016 George Noga

By: George Noga – November 1, 2014

Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.

America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.

“Failure to grow America’s economy is a choice; decline is not inevitable.”

Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.

Economic Growth as the Panacea

As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems. Only countries with strong economies can afford to spend copiously on the environment.
National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs. Absent a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.

Recipe for Economic Growth

Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following we will achieve vigorous, long-lasting economic growth.

Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.

The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.

Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.

Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?

Why I Write This Blog?

September 10, 2014January 28, 2016 George Noga

By: George Noga – September 10, 2014

This posting marks the beginning of the end. Between now and mid-December I will publish the final MLLG posts. I often have been asked why I have taken the trouble. Why have I spent 1,000 hours writing 300 posts filling 900 pages containing 500,000 words since November 2007? Why have I written fact-based and principled tracts about public policy even though I am unenamored with politics and politicians? This post answers the question: why. In the Federalist, Alexander Hamilton questioned and challenged his fellow Americans thusly:

“Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.”

If any society of men fails to get its politics right, it affects every aspect of life and life itself. Get politics right and we live our lives in freedom, prosperity and pursuit of our dreams. Get politics wrong and liberty, happiness and property are forfeit and life itself is nasty, brutal and brief. Politics, grubby as it is, is the sine qua non to having a life worth living.

Examples abound of those who got their politics wrong: Hitler’s Germany, Mussolini’s Italy, Imperial Japan, Mao’s China, Pol Pot’s Cambodia and Stalin’s USSR were all black holes where life and liberty were trampled. Today we have,inter alia, Putin’s Russia, the Jongs’ North Korea, the Castro brothers’ Cuba and Mugabe’s Zimbabwe. And don’t forget the entire Arab world, nearly all of Central and South America, Africa and any place ending in “stan”.

If you believe the western world is exempt, think again. WWI was a senseless slaughter with 40 million casualties; its politically inept conclusion led to WWII with its 150 million casualties. This was due to a failure of politics in Europe and also in the USA. In the past century and continuing to the present, “civilized” Europe has experienced 100 genocides, pogroms and ethnic cleansings. Vietnam was a colossal failure of American politics to get it right; it cost 58,220 American lives and 303,644 more wounded. Nor have we learned; we continue to get it wrong right up to this day.

If we don’t get our politics right, our children and our children’s children will live in an Orwellian torpor with their lives, liberty and property constantly at risk because of obeisance to failed ideologies, fantasies, vote buying, political correctness and the never ending and fruitless search for Utopias. Politics is inherently personal. Following are but some of the ways I have been directly harmed throughout my life by our failure to get politics right.

I had no father at home for 4 years during WWII which resulted from government ineptitude in fighting and ending WWI. Father was in Korea, also the result of political blunder, for another year during my childhood.
I received an execrable, pathetic non education in government schools from age 5 to 18.
The Federal Reserve created economic conditions that resulted in severe cycles, bubbles, panics, meltdowns and deep recessions throughout my life continuing to the present.
I was subject to income taxes of over 90%, creating perverse, uneconomic incentives.
It now requires $15,000 to buy what cost $1,000 when I was born due to government currency debasement.
Regulation run amok made owning my business onerous. The regulations, all in the guise of protecting consumers, in actuality, caused them (and me) great harm.
The politically micromanaged Vietnam War disrupted my life for the 6 years I served in the military.
The Fed has brutally devalued a lifetime of hard work via chronic negative real interest rates intended to protect a feckless government from the consequences of its ongoing debt binge.
A torpid, Europesque economy has been imposed, dooming me to economic stagnation instead of robust growth.
The current crisis of spending, debt and deficits ultimately will result in a lost generation.
Our government has recklessly created and/or exacerbated dangerous situations throughout the world by weakening our military and appeasing tyrants. An existential crisis likely will result.
Obamacare death panels will ration and deny medical care and ultimately could kill me.

Due entirely to failed politics I was fatherless for five years and lucky I wasn’t orphaned into a life of poverty. I survived utterly wretched government schools, incessant and severe economic cycles, debilitating inflation, astronomical tax rates and hyper regulation. Vietnam discombobulated my life. And all this was because of a government most consider one of the best extant. And all because we failed to get our politics right.

Now, in my eighth decade of life, our once vibrant economy is riven by government-created anemia. America has transmogrified into sclerotic Europe where men lead lives of quiet desperation. Government has created a crisis of spending, debt and deficits, one consequence being sustained negative real interest rates that savage my decades of prudence. My final indignity is Obamacare; its rationing and death panels may end my life prematurely.

Unfortunately, it doesn’t end with me. Our children and our children’s children are doomed to a much poorer and more dangerous future; they will be a lost generation. They will pay for our debt binge and generational theft with vastly reduced opportunity. They will inhabit a Clockwork Orange world where nuclear arms proliferate in places committed to our destruction and solely because we weakened our defense and kowtowed to tyrants. Our weakness invites terror and slaughter for which they will pay dearly, perhaps with their lives. And all this from a government most consider one of the best extant. And all because we failed to get our politics right.

“The correct answer to Alexander Hamilton’s question may be in the negative.”

As you can see, if we don’t get our politics right, our lives are vastly diminished and trivialized in countless ways; we condemn our progeny to economic stagnation and loss of freedom. Their lives and liberty are at grave risk because we failed to get our politics right. It appears the correct answer to Alexander Hamilton’s question may be in the negative.

I have tried mightily through this blog to show that the answer lies in more liberty and less government. Hopefully, my efforts have given our children’s children that infinitesimally better chance for liberty. And that is my answer to the question: why I write this blog.

Note to readers: I am striving to make the final postings between now and mid-December special as I seek to end my MLLG blog on a high note. I hope you enjoy them.

Balanced Budget Amendment No Holy Grail

March 19, 2014April 3, 2016 George Noga

By: George Noga – Updated March 10, 2014

A balanced budget amendment (“BBA”) is favored by 80% of all Americans in the belief it will, once and for all time, force fiscal discipline on the government. They are putting way too many eggs in the BBA basket. Watch out what you wish for. If there is a BBA, all those eggs will end up scrambled into a rather unpalatable omelet.

There are myriad paths through, over, under and around a BBA. In short, it would not be worth the paper it was written on – assuming it can garner two-thirds majorities in Congress and ratification by 38 states. Following is a partial list of ways a BBA could be eviscerated.

A BBA appears simple but is complex. How do you define budget; what does balanced mean; what is a tax? It would be the only part of the Constitution that could be waived.
What are allowable exceptions such as for military actions and natural disasters? There will be escape hatches big enough to drive a truck through. Whatever exceptions are carved out for some things, expect many more of such things. How would waivers work?
How would a BBA deal with economic cycles? Revenues can both skyrocket and plunge from year to year. Are we to slash spending in a recession and be profligate in a boom? How do we define recession and boom? How is a BBA to be managed over the course of an entire economic cycle without opening to door to great mischief?
Lawsuits will tie up a BBA for decades and federal judges will wind up with enormous power to change it. Consider how the federal bench has dealt with desegregation and busing; they still are entangling themselves over 60 years after the initial ruling.
How do we distinguish capital expenditures from annual expenses? Surely, the argument will go, a BBA was not meant to include infrastructure spending that has a life of 50 years. If capital is treated differently, more expenditures will be classified as such.
How do we address off-budget spending such as by Fannie, Freddie, USPS and the Federal Reserve? Who will prevent government from creating scores of new off-budget entities? Do we exempt interest on the debt; what happens when interest rates skyrocket?
Watch out for so-called special taxing districts; these are favorites of local government with 50,000 nationwide. If they are not under the BBA ambit, they will mushroom.
Are Social Security, Medicare, Medicaid and civilian/military pensions to be part of the regular budget? Are they no longer to be considered off budget entitlements?
User fees will sharply increase and the government will be creative in imposing new ones. Be prepared to pay handsomely for everything you get from Washington – how about $100 to file a paper income tax return or $50 to get into a national park?
Loan guarantees will become de rigueur as a way to fund programs off budget. After all, a loan guarantee is not an expenditure – is it?
Instead of direct taxation, costly new regulations will flourish. Rather than spend tax money, Congress will bypass taxes and accomplish the same result through regulation.
The tax code can be used for far more than raising taxes subject to a BBA. It can be larded with tax expenditures, incentives, penalties and all sorts of tomfoolery.
Don’t forget mandates. Since the ObamaCare mandate survived judicial scrutiny, what is to stop government from substituting mandates for taxes or spending? The feds could mandate that states, counties, cities (and even people) spend money not subject to BBA.
A budget can be balanced with tax increases. This would strictly comply with a BBA but tax increases are certainly not what BBA proponents intended.

Reluctantly, I have come to the view that a BBA is not the answer because: (1) we would expend lots of energy (perhaps for naught) enacting a BBA better spent elsewhere; (2) it will not work for all the reasons noted supra; (3) it would beguile us into falsely believing the problem is solved once and for all; (4) many of us would declare victory and move on while the other side would keep fighting; and (5) you can’t take the politics out of politics.

The solution is to remain engaged permanently, albeit this is contradictory to human nature. Once a problem appears solved, we tend to go back about our private business. But big government and its acolytes never stop and neither must we. As seductive as it may seem, a balanced budget amendment is fool’s gold; it is not the Holy Grail.

How Government Destroyed the American Dream

March 1, 2014April 3, 2016 George Noga

By: George Noga – Updated March 1, 2014

In 1957 my parents paid $10,900 for a new median-price home. Their monthly payment including principal, interest, taxes and insurance was under $100. The house cost 1.5 years of my father’s income and the annual cost of ownership consumed less than 15% of income. We lived quite well without my mother ever working a single day.

I graduated from high school in 1961 and went on to college. Most high school chums remained in Orlando, began work at entry-level positions, married, had children and bought homes. The wives stayed home as a second income was not necessary to own a home or to raise children. I kept in touch with many erstwhile high school classmates and often visited them in their homes. Following is the story of two such people, Steve and Sandy.

The True Story of Steve and Sandy

Steve and Sandy (their real names) were high school sweethearts who married following graduation. Steve was hired in the paint shop of the Martin Company. His starting wage of $2.00/hour soon was increased to $2.25; including a little overtime, their family income was $5,000 per year. Less than a year after their marriage, they bought a new home; soon thereafter they had a daughter. Sandy did not work and stayed home to care for the baby.

I visited Steve and Sandy frequently during summers. They bought and furnished a new median-price single family home in Orlando. They were able to accumulate the down payment and to furnish the home in less than one year with both working. Once Sandy became pregnant, she quit work as they were able to afford the cost of home ownership solely on Steve’s income. Their home cost two years of Steve’s income; their monthly house payment including principal, interest, taxes and insurance was under $100. They comfortably managed the cost of home and baby and never contemplated Sandy going back to work as it simply wasn’t necessary.

Let’s fast forward 50 years to 2012 and to Steve and Sandy’s grandchild, Steve III. After high school Steve III earns at best $12/hour, or $24,000 per year. The median home costs 10 times his income and accumulating even a low 10% down payment would be daunting requiring years of saving. Even at low interest rates, the monthly nut would be $1,500, or $18,000 annually – nearly equal to Steve III’s take home pay. What possibly could account for such a dramatic change in only two generations? The answer in one word: government.

The American dream is dead, thanks entirely to government that sucks the blood out of its citizens, i.e. the vampire state. For the first time ever, Americans believe the next generation will be worse off. In 1962 single-income families like Steve and Sandy were the norm; it was rare indeed for a married woman, especially one with children, to work outside the home.

Within one generation (by 1985) two-income families became a majority. Now Steve and Sandy’s son, Steve Jr., was 50% likely to have his wife in the work force. Today, during the generation of Steve III, wives and mothers must work to keep the family afloat. How and why did these changes happen? Why is it necessary today for a family to have two wage earners merely to live as well as their grandparents once lived with only one wage-earner?

“Two-income families are a Faustian bargain; the second income

pays only for more government, i.e. more blood for the vampire.”

The causes are many but all have a nexus to government. Fiat money and the abolition of the gold standard debased the dollar and devalued thrift and savings. Payroll and income taxes mushroomed and applied to ever more income. Property taxes rose exponentially. Regulation chokes growth and hidden taxes proliferate. Housing costs skyrocketed due to government growth management diktats such as concurrency, greenbelts, zoning, bureaucracy, regulatory delay, infill and anti leap-frogging to name only some of the culprits. The vampire state sucked out ever increasing amounts of blood – but it never is sated.

We were hoodwinked and seduced; for a brief time ersatz prosperity seemed to follow the transition to two-income households. Yes, we could have a second car (albeit a necessity not a luxury for two wage earners) and an extra TV and a few other accoutrements. By the time people noticed the degradation in their quality of life, it was too late for a volte-face. Two-worker families are a Faustian bargain; the second salary pays only for more blood for the vampire. Families doubled the number of workers and received only fool’s gold in return. Are Steve and Sandy’s grandchildren really better off today than their grandparents?

Inflation and Taxes – A Primer

September 20, 2010June 29, 2017 George Noga

Inflation and Taxes – A Primer

By: George Noga – September 20, 2010

So – you think you understand inflation and taxes? Well, you are about to read analysis you haven’t seen anywhere else. There are counter-intuitive aspects to this twin-headed monster, both heads of which are brought to us exclusively by government. This exposé about taxes and inflation is part of our focus on the crisis of spending, debt and deficits. One possible outcome of the crisis is the government will monetize the debt by printing money and presto – we have high inflation. The last inflationary spiral under President Carter peaked at 15%. It likely will be worse next time.

“Inflation is an immediate and real cost; it affects not just your expenses but also your capital.”

Because we mistakenly believe we are familiar with inflation, it sometimes is necessary to look at it from an entirely different perspective to gain the needed insight. We will consider two examples. The first illustrates the impact of 7% inflation on a just-retired couple age 65 with $1 million of investable assets. Our retirees have no debts and own their home with no mortgage. They take 5% (actually far too much) from their investment portfolio and receive $24,000 social security; hence, their income is $74,000. Their living expenses are a modest $4,000 per month. They have it made; don’t they?

From their $74,000 income we subtract living expenses of $48,000. Of course, they pay income taxes which at today’s rates would be $12,000; this makes their total cash outflow $60,000. Thus, they have a cash surplus of $14,000 after their first year of retirement. They can look forward to a carefree life of leisure; right? There is one niggling oversight, i.e. they failed to account for inflation. Unfortunately inflation is an immediate and real cost; furthermore, it batters and bloodies not just expenses but also capital.

Everyone understands that with 7% inflation something that formerly cost $100 now costs $107. What precious few people grasp is that inflation also savages capital. Hence 7% of the $1 million portfolio must be viewed as the cost of inflation during the first year of retirement. This $70,000 must be deducted from our retirees’ income and added to their capital; otherwise, they are devouring their principal and their capital loses purchasing power and rapidly is dissipated.

“After properly accounting for inflation, our retirees’ $14,000 surplus transmogrifies into a first year deficit of $56,000.”

After properly accounting for inflation, our retirees’ putative $14,000 cash surplus transmogrifies into a first year deficit of $56,000. Our retirees’ story does not have a fairytale ending. Their principal increases for the first several years; but as inflation compounds (it is an exponential function) their capital inexorably begins to plummet and all too soon their once seemingly formidable capital base is totally gone – poof!

The Grotesque Mathematics of Retirement, Taxes and Inflation

We now move on to an example of Mr. and Mrs. Ritz, fairly wealthy new retirees with a stash of $3 million in investments. The Ritzes have no debts and no home mortgage; they spend $10,000 per month for living along with income taxes of $30,000 in the first year of retirement. With the same 7% inflation, investments valued at $3 million must double to $6 million in 10 years just to maintain purchasing power parity. At 7% inflation for ten years, the value of the dollar is cut in half. This is akin to a tax on capital of $3 million.

But whoa! The Ritzes haven’t yet factored income taxes into the equation. They would have to increase their assets not just to $6 million but to $8 million to allow for the ≈$2 million of taxes on the phantom, tax and inflation-induced investment gain of $5 million – from $3 million to $8 million. In the Ritzes’ first decade of retirement, $3 million of capital would have to grow to $8 million pretax – or by a compound rate of 17% – just for them to remain even with the ravenous tax and inflation monster. Even if the Ritzes made the $5 million ($500,000 per year), they would have gained nothing; this is the utter horror of taxes and inflation.

“Even if the Ritzes made $5 million in 10 years, they would have gained nothing; this is the utter horror of taxes and inflation.”

Believe it or not, it gets even worse. The preceding data assume the Ritzes do not take any money out of their investments to pay for living expenses. If they take 5% a year out for expenses, they now need to earn about 21% – 22% per year just to break even – just to tread water. This is an impossibility; even Warren Buffet has averaged only between 15% and 18%.

The preceding discussion focused only on the Ritzes’ first decade of retirement; imagine what fate would befall them in twenty or thirty years. They undoubtedly worked hard, saved money, lived within their means and had every expectation of a lengthy, happy and worry free retirement. Instead, they were brought to perdition by their own government via the train wreck of high taxes combined with the stealth tax of inflation.

Four Horsemen of the Apocalypse

Prominent liberals and big government apologists writing in the blogosphere have opined with approbation that a decade of high inflation could be an acceptable solution to the debt crisis. One wonders if they comprehend the mortal damage to the fabric of our republic that 10 years of double digit inflation would wreak. If they, like you now should, comprehended the horrors of inflation, they wouldn’t write approvingly.

As noted in The Crisis of Spending, Debt and Deficits (available on our website), inflation is but one of four major possibilities after the crisis reaches critical mass. I am reminded of the four horsemen of the apocalypse from the Book of Revelation. The four horsemen appear when the lamb (Jesus) opens the first of four seals of a scroll of seven seals. As each of the first four seals is opened, a different colored horse and its rider is seen by the apostle John.

“The four horsemen of the apocalypse today could auger inflation, deflation, repudiation and economic collapse.”

When the first seal is opened a white horse appears; its rider is holding a bow symbolizing conquest. As the second seal is opened a red horse appears; its rider holds a sword for war. The third horse is black with its rider holding scales revealing famine. The fourth seal is opened and a pale horse appears; its rider is called death. Today, instead of conquest, war, famine and death, we may substitute inflation, deflation, repudiation and economic collapse.