Tax Talk

"Elections should be held on April 16th - the day after we pay our income taxes.  That is one of the few things that might discourage politicians from being big spenders." - Thomas Sowell

"If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further.  But I think that people at the high end - people like myself - should be paying a lot more in taxes.  We have it better than we've ever had it." - Warren Buffet

"We have a system that increasingly taxes work and subsidizes nonwork." - Milton Friedman

Talk about taxes always leads to a heated debate as the quotes above show.  I remember back to my university days when our economics professor had us perform a class project in which we were to put forth an equitable tax structure.  After a week of debating it was clear that this was an impossibility as there was always a group that received benefits at the expense of the others!  One thing was clear though, the higher the tax rate went the less the desire was to work, innovate and start a new businesses.  The headwinds were just too great increasing the risk of failure and thus putting a bullet to many a great idea.

With the tax rates in the United States at their highest effective level since The Tax Reform Act of 1986 and on par with the rates in 1937 a look back at history is of interest.  Back in the 30's as the economy was finally showing some signs of recovery the bullet that drove economic progress backwards sharply was the hike in the rate of taxes.  Admittedly there were other problems such as retaliatory currency devaluations and monetary policy mistakes - wait a minute, this all sounds familiar!  The result was that the Great Depression was prolonged for a few more years.

The hike in tax rates looks like it is perfectly timed to sideline the economy in 2013 and possibly 2014.  Worse than that with tax rates set to rise around the globe this could really spell trouble ahead.  In France there is a proposal to raise the top tax rate to 75%.  Think about that for a second - you earn $200,000 but you only take home $50,000!  The other $150,000 goes to pay down debt and finance worthless government spending!  How much incentive is there to work harder so that you can pay even more?  While this may not happen the French tax rate is still high at around 48%.  Britain has already hiked its tax rate and other countries facing budget deficits are planning to follow suit.  This global burden will affect global growth right at a time when growth is what the world desperately needs.

In an interesting twist taxes may be further increased due to better fuel consumption.  In the past it was thought a good idea to tax fuel purchases through a gasoline surcharge.  This tax money would then be used to service the roads and bridges.  The more that you drove, the more benefit you received from the roads so the more you would pay in tax to service the roads.  The problem now is that the tax received is not covering the required upkeep expenses due to the fact that cars are becoming more and more fuel efficient.  Less money spent at the pump means less revenue to repair the roads but the roads are getting more use as cars go further on less.  I don't know about you but it seems that there are potholes where ever I go these days.  Bring back the Hummer that will sort this out!

The solution many states are proposing is to switch the tax to a value added tax on goods and services.  This VAT tax would transfer the burden to repairing the roads onto the consumer rather than the driver.  Definitely not an equitable tax system but one that is being used to fill the shortfall in the road maintenance budget.  I personally think this a very poor idea as the purchase of a chocolate bar at the convenience store is not going to pay for the damage to the road.  Another idea is to charge a onetime tax on fuel efficient vehicles.  The reasoning behind the idea is that they use the road but by using less fuel do not contribute the same percentage to the road upkeep.  Now how is that for irony!  To me both of these ideas are absurd; why not just raise the fuel tax?  This in turn will raise the price of gasoline and would reduce the use of cars further, a win all around! 

The issue is that taxes, whether on income or fuel, have to go higher to support the massive debt burdens and budget deficits being run by governments the world over.  This will create another drag on global economic growth and, with the crowding out effect that large government debt levels are having, will take global growth down around the 2% level in 2013.  Considering that the IMF is expecting 3.5% growth and that the world grew by 3.2% in 2012 this level of global growth will be the equivalent of a global recession which is why I continue to expound the virtue of exiting the market.