Showing posts with label Milton Friedman. Show all posts
Showing posts with label Milton Friedman. Show all posts

Tuesday, November 29, 2016

Trump, Explained



Apparently Trump's detractors still don't understand him.  How else to explain their continued reaction to every action and tweet.  Freelance journalist Salena Zito perhaps said it best:

"The press takes him literally, but not seriously; his supporters take him seriously, but not literally."

As good as that is, and brevity being the soul of wit and all, there are times when more depth is required.  For those interested in better understanding, for example, why Trump still provocatively tweets about illegal votes and flag burning knowing he is opening a huge can-o-worms,  I offer the following in-depth Trumpsplanation.

Six Unconventional Trump Perspectives


Full disclosure:  I was a #NeverTrump-er before it got a hashtag.   Right after Trump announced I called him a shock-jock and compared him to Howard Stern.  Later I made a video parody of Caddyshack featuring Rodney Dangerfield’s character with Donald Trump’s voice.  I considered the whole thing to be good comedy.  Throughout the primaries I wrote often about how he was making unforced errors and was certainly not a conservative.  In short, I never thought Trump would go as far as he has. 

But he has, and as the primary wore on he grew on me.  For one thing he kept winning.  For another, he was fearless, tenacious, energetic, politically incorrect, and able to think on his feet.   That’s not to say I ever warmed to his demeanor.  I continue to cringe at his antics though the difference is, at least now I understand why he does it. 

Trump is doing these things deliberately.  There is a method to his madness.   He’s following a game plan he wrote about thirty years ago that he developed for success in business.   He has been far more strategic, methodical, and consistent than he’s ever given credit for.    Now that he's won, we must pay attention.            

1. Trump on Trump

A good place to start is this whole issue of demeanor.   Many Americans are particularly turned-off by Trumps demeanor.  Many women especially.  Donald Trump is not playing the gentleman’s game of politics we are used to.  While it doesn't make it right, it is absolutely by design.  

"In most cases I'm very easy to get along with. I'm very good to people who are good to me. But when people treat me badly or unfairly or try to take advantage of me, my general attitude, all my life, has been to fight back very hard."                                                                                                                                                     Donald Trump, “Art of the Deal”, 1987

This “attitude” of his to “fight back very hard” is why he has attacked John McCain, Megyn Kelly, The Khans, and countless others.  It is an attitude that served him well in the ultra-competitive world of Manhattan real estate, but it has also gotten him in lots of trouble lately.  It is obviously a risky strategy in national politics. 

One reason the attacks hurt him so badly is that he does it all personally.  Trump has had to be his own one-man war-room.  He had a skeleton staff, spent almost no money on negative ads, and lacked even a party to fight for him.  But he'll probably continue to operate like that as president because after all these years it's who he is.   

One side-note on Trump’s tendency to attack:  He was born at the same time and place as the saying, “nice guys finish last”.  Leo Durocher was the manager of the Brooklyn Dodgers and coined that phrase around the summer of 1946.  Donald Trump was born that same summer, a stone’s throw away in Queens.   

As I’ll explain later, Trump’s "nice guys finish last" attitude has thrown the other side off their game.    


"One thing I've learned about the press is that they're always hungry for a good story, and the more sensational the better...The point is that if you are a little different, a little outrageous, or if you do things that are bold or controversial, the press is going to write about you." 
                                                                                     Donald Trump, “Art of the Deal”, 1987

Donald Trump is a veteran media maestro.  His very business model – branding his name – was achieved in large measure by being controversial and getting free media.  For years, his tabloid antics helped keep his name in the spotlight, and the Trump name was emblazoned on every one of his properties and projects.  For Trump Inc. any publicity was good publicity.  

His presidential bid used the same game plan.  By being “sensational”, “different”, “outrageous”, “bold”, and “controversial” he managed to run a presidential race on the cheap with almost no staff or ground-game.  He played the media like a Stradivarius to get his name, face, and candidacy in the conversation every day.  That’s why he started this bid with the Obama birth certificate quest.  It made news. Trump was being sensational and outrageous by design.  Does he really think Mexico will pay for the wall?  Does he really think we should have seized Iraq’s oil?  All we know is what he reveals in his own book.

A vintage example of Trump playing the media was his birther press conference during the campaign.  Trump announced he was going to make a big statement about Barack Obama’s birthplace and invited all the media to a presser.  The networks all covered it live expecting a big announcement, but instead they got a lengthy parade of military endorsements for Trump.  At the very end he made a brief statement that Obama was born in the U.S.  The press went apoplectic.  They knew they’d been trolled.     

By trolling the media Trump has been able to provoke them into over-reactions that almost always backfire.  (See Salena Zito quote in the first paragraph.) The public knows that calling a bomb, “a bomb”, is not an unreasonable assertion.  The public knows that a temporary halt to unscreened Muslim immigration is not outrageous in the context of a global jihad that has declared war on us.
    
Granted, Trump has tweaked the media so often that nearly all his coverage is negative at this point.   But that doesn’t seem to concern him.  He seems to be banking on his ability to go directly to the people, a la Ronald Reagan. 

     
"You can't con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don't deliver the goods, people will eventually catch on."                                                                                                                          Donald Trump, “Art of the Deal”, 1987


Donald Trump really likes to throw in some “hyperbole”.  Does he really want to throw flag burners in prison?  Can President Trump really Make America Great Again?  Will he really be the best jobs President God ever created?  Does he really think America’s going to win so much we are going to be tired of winning?  All we know is that he knows he has to eventually “deliver the goods”.    

And he has delivered.  He won the nomination and then the Presidency.  He has over-achieved by every single measure of a rank amateur in politics, let alone on the biggest stage - presidential politics.

And he has delivered the goods throughout his career.  Of course not every project succeeded, but Steve Jobs also had plenty of flops along with his successes.  That's just the nature of risk and high achievers.  At least Trump never got booted from his own company.

“You always, when the service was over, you said, ‘I’d have sat there for another hour,’” Mr. Trump recalled. “There aren’t too many people like that. It wasn’t the speaking ability, it was the thought process.”    
                                      Donald Trump on Dr. Norman Vincent Peale, Minister at Marble Collegiate Church

Dr. Norman Vincent Peale is an often overlooked piece of the Donald Trump puzzle.  Beginning as a teenager, and continuing for decades,  he attended The Marble Collegiate Church, which was led by Dr. Peale, author of the bestselling book, "The Power of Positive Thinking".

The power of positive thinking, according to Peale, was that if you you could train your thought process to focus on positive visions of yourself, your abilities, your prospects, your achievements, etc., you could go as far as you wanted to go in life.  Nothing could stop you as long as you held firm to this positive picture.

Typical Peale quotes are:   "Change your thoughts and you change your world."   "There is a real magic in enthusiasm. It spells the difference between mediocrity and accomplishment."   "If you have zest and enthusiasm you attract zest and enthusiasm. Life does give back in kind."

You can hear echoes of Peale in every aspect of Trump's oversized positive image of himself, his abilities, and his accomplishments.  It's hard to deny Peale's power, though, when so many of those accomplishments are real.    


“While he may be the billionaire from New York … he’s much more of a blue-collar guy.”                                                        
                                                                                                                          Donald Trump Jr., 2016


Back in the ‘80s and ‘90s, when Donald Trump was a household name and a fixture of the NY tabloids, I ran an industrial plant in the NY metropolitan area.  Trump was a surprisingly popular figure with the hourly plant workers, truck drivers, tradesmen, and office workers I worked with.  It struck me as odd that a brash billionaire with his name in big gold letters, flying around in a helicopter, with bejeweled arm-candy always at his side, could be a hero to these hard-working blue-collar workers.  Didn’t they know he was a “greedy one-percenter”?  (Though we didn’t talk like that back then.)  Didn’t they know he ran an “evil corporation”?  Didn’t they know he made “a profit”?  Didn’t they know he had a “yacht”?

Sure, they knew all that, but they also knew he was genuine, he shared their affection for pro wrestling, he was unabashed about his wealth, and he was having a good time.  Yes, he was having a really good time!  In short… they wanted to be like him. This was the American Dream they grew up hearing about.  It made him a working-class hero.   

They also saw that Trump spoke more like a blue-collar guy than an elitist rich guy.  The lingua franca on New York construction sites was not what you hear coming out of the mouths of Barack Obama and Hillary Clinton.  Trump’s fluent blue-collar, sentence-fragment lingo is refreshing after eight years of Obama’s hyper-careful, faculty-lounge act.  Voters loved Obama’s erudition after George W. Bush’s seeming inability to speak fluent English, but after eight years, that act has worn thin for many. 

2. Milton Friedman 

I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion, which will make it politically profitable for the wrong people to do the right thing
                                                                                                                          Milton Friedman 

Many Americans believed Hillary and Donald were precisely the wrong people for the job.  But according to Dr. Friedman, they could still do the right thing under certain circumstances.

In 1992 Bill Clinton was elected president with far less than a majority of the electorate. Most Americans thought he too was the wrong person for the job.  In his first two years, he raised taxes and grew government.  The economy stagnated, and the stock market was soft.  As a result, Democrats lost big in the mid-term elections of 1994.   In came Newt Gingrich and The Contract With America. Weakened by the rout in ’94, Bill Clinton was forced to do the right thing against his instincts.   He lowered taxes, supported free trade, declared an end to big government, and supported welfare reform.  The economy and the stock market went on a tear, all without the aid of zero percent interest rates.  The budget got nearly balanced, and to this day Bill Clinton is known for the strong economy that came after he "triangulated" and reluctantly agreed to many of the planks of Newt's contract. Bill Clinton was forced to do the right thing despite being the wrong person.

Can the electorate make it "politically profitable" for President Trump to do the right thing?  Based on the example of Barack Obama, I think we have a much better shot given that this "wrong person" is not a "historical first" from a politically favored class of citizens. 

Donald Trump will not be coddled by the media, or Hollywood, or academia, or anyone.  He will not be given the benefit of any doubt.  It will be politically unprofitable for him to do the wrong thing.     

3. Think Tanks

We think we just elected a single person to be President, but it’s not that simple. 

Aaron Klein, a journalist based in Israel, has written extensively about what Barack Obama is going to do before he even does it.  Does Mr. Klein have some prophetic powers acquired in the Holy Land?  No, he simply reads the policy papers from The Center for American Progress (CAP).  Apparently, so does Obama.  

During the campaign Donald Trump came out with a detailed proposal for school funding.   Did he just think up this plan in-between campaign stops?  No, he got it from a think tank. 

And that’s the point.  Presidents lean heavily on their think tanks.  For Democrats it’s CAP, Center on Budget and Policy Priorities, Human Rights Watch, and George Soros’ Open Societies Institute.  For Republicans it’s The Heritage Foundation, American Enterprise Institute, Hoover Institution, and Freedom House.

There’s an army of very qualified eggheads who will conceive and implement any presidential priorities. Trump’s lack of government experience is irrelevant in this context.

4. Saul Alinsky

To paraphrase Leon Trotsky, you may not be interested in Saul Alinsky, but Saul Alinsky  is very interested in you.  The late Saul Alinsky is the most influential political strategist of our time.  Barack Obama went into community organizing because of Saul Alinsky, settled in Chicago because of Alinsky, and taught Alinsky’s “Rules for Radicals” as an instructor.  Hillary Clinton knew Alinsky, corresponded with him in college, and wrote her college thesis on Alinsky. 

Prior to Alinsky politics was a dirty business, but post-Alinsky it got radicalized.  At least on one side, that is.   Alinsky's 1971 book, “Rules for Radicals” quickly became the tactical political bible of the radicalized Left.  The Right haplessly ignored it.  

And then came Trump.  Trump’s own book, “The Art of the Deal”, is kind of a “Rules for Radical Businessmen”.  Donald Trump is a natural-born Alinskyite.  His ability to “fight back very hard”, and take a “nice guys finish last” approach, threw the Left off their game. 

The radical Alinsky tactics did not work as effectively on Donald Trump as they did on gentleman GOPers like George W. Bush, Mitt Romney, and John McCain.  They were all turned into Hitler caricatures via the Alinsky tactics, and their only response was to turn the other cheek.  It is sad to say this, but running a race for president as a GOP gentleman is an enormous liability in this radicalized Alinsky age. 

5. The Trump Family

Donald Trump has been quoted as saying he was a lousy husband, but a good father.  I believe he is right.  His kids are all amazing.  They are not typical billionaire ne’er-do-wells.  They all work in the family business, are doing great things, are stable citizens, and aren’t taking salaries from the family charitable foundation.   

If his kids are a reflection of him, and to a person they claim to be, Donald Trump looks pretty good as a human being. 

6. What was, What is, and What may be 

Perhaps Trump’s biggest advantage in the race was his lack of government experience.  No matter what you think of Donald Trump, you cannot be certain what he will do as President because he has never even held a public office.  Everything negative ever said about a prospective Trump presidency, is exactly that - prospective.

My advice when it comes to all politicians is never listen to what they say, only what they do.  Forget what Trump says.  Just watch what he does.    

Conclusion

Think about this:  a complete neophyte, who’s never run for dog-catcher, let alone national office, with a bad haircut, a penchant for controversy, and a shocking lack of decorum, was elected President over a person described by President Obama as, “the most qualified person to ever run for President.”

Now we must do our best to understand our new President and not be whip-sawed by every Trumpian tactic he used to get elected, and will most likely continue to rely on.  It's a new game, and it's best to know the rules.      

As I have said throughout this political season, I consider the country to be like a stage four cancer patient. We have $20 trillion in debt, no prospects of growing out of it, radical Islam is metastasizing here and overseas, Karl Marx is the most assigned economist on U.S. college campuses, most Americans would choose the constitution of the old Soviet Union over our own in a blind test, and cops are being gunned down in cities across the country.

President Trump has almost no chance of singlehandedly curing us of this cancer.  But he could be like chemotherapy.  We may lose our hair, we may get nauseous, and we may feel drained, but we may also go into remission.       

Thursday, May 5, 2016

Trump vs. Clinton - Milton Friedman's Ultimate Test

So Hillary Clinton and Donald Trump are the two best people we have come up with to be the next president.  What do we do now? 
  
I would suggest, as I do on many sticky occasions, that we turn to the wisdom of Milton Friedman:

I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. 
Milton Friedman 

Many Americans believe Hillary and Donald are precisely the wrong people.  But according to Dr. Friedman they can still do the right things under certain circumstances.

Recall in 1992 when Hillary's husband Bill was elected president with less than a majority of the electorate. Most Americans thought he too was the wrong person for the job.  For his first two years he raised taxes,  pursued big government, the economy stagnated, and the stock market lagged.  The Democrats lost big in the mid-term congressional elections of 1994.  In came Newt Gingrich and The Contract With America.  Low taxes, free trade, limited government, and welfare reform were the order of the day. The economy went on a tear.  Stock market gains were unprecedented.  The budget got nearly balanced.   And to this day Bill Clinton is known for the strong economy that came after he "triangulated" and signed into law many of the planks of Newt's contract.  Bill Clinton was forced to do the right thing despite being the wrong person.

Can the electorate make it "politically profitable" for Hillary or Donald to do the right thing despite being the wrong people?  Based on the example of Barack Obama I think we have a much better shot if our next "wrong person" is not a "historical first" from a politically favored class of citizens. Donald will not be coddled by the media, Hollywood, academia, or anyone for that matter.  He will not be given the benefit of any doubt.  He will be held to the highest of standards each and every day.

Hillary?  The historic "First Woman President"?  Not so much.    

  
And also there's this to ponder: Donald Trump has never:

And this: 


And this:


And this:  


But, of course, also this:  ;-)

Wednesday, July 31, 2013

In Honor Of Milton Friedman's 101st Birthday


(In honor of the late Dr. Friedman's birthday, this piece is based on a few of his gems of logic.)

Almost every interesting economic proposition shares a confusing characteristic: what’s true for the individual is the opposite of what’s true for the country as a whole. To a consumer buying shoes, it appears as though the price is fixed and the supply is elastic. Consumers can buy as many shoes as they want as long as they are willing to pay the asking price. But to the country as a whole, it is the supply of shoes that is fixed and the price that is elastic depending on demand. This paradox permeates economics.

-- Milton Friedman - paraphrased from a speech titled “Money and Inflation” , 1980 (herein referred to as "Friedman's Paradox")

On Nov. 29, 2012 the New York Times ran a piece by Binyamin Applebaum and Robert Gebeloff titled, “Tax Burden for Most Americans Is Lower Than in the 1980’s”. The authors cite New York Times research, which makes the case that taxes are historically low especially on the rich. They calculate rates for various income groups and come up with a top marginal tax rate, at all levels of government (federal, state, and local), of 42.1%, compared to the 1980’s when it was 49%.

A couple of weeks later, On Dec. 12, 2012, the Wall Street Journal ran an op-ed by Edward C. Prescott and Lee E. Ohanian with nearly the opposite title, "Taxes Are Much Higher Than You Think". After studying tax rates, again at all levels of government, Prescott arrived at an average marginal tax rate of 40%, while the authors contend that the perception is that taxes are much lower.

So, the New York Times pegs the top marginal rate at 42.1% and Prescott and Ohanian have the average marginal rate at 40%; not enough of a difference to get too excited about. Yet, the two pieces seem to ascribe opposite perceptions to the public, and seem to promote opposite policy prescriptions. Who’s right?

With all due respect to these esteemed authors, neither is right. Here’s why taxes are much higher than most people think, and much higher than even Prescott and Ohanian think. Here’s also why The New York Times piece is wrong about taxes being higher in the 1980’s.

Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax ... If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.

--Milton Friedman - from the same "Money & Inflation" speech, 1980 (herein referred to as "The True Tax")

Both studies above employ similar methodologies based on individual tax rates. But according to Friedman’s Paradox, what is true for the individual is often the opposite for the country as a whole. Instead of looking at individual rates in every jurisdiction and arriving at an average rate as both sets of authors appear to have done, the better way, the simpler way, the more inclusive way, and the Friedman "True Tax" way, is to find total government spending and compare that to Total Income. By doing that, we learn what is happening with taxes in the country as a whole, inclusive of all borrowing, printing, business taxes, and indirect taxes.

Here are the results when Friedman’s True Tax methodology is applied to 2012:

· Gross Domestic Product (GDP) was about $15.8 trillion*
· Total govt. spending at all levels was about $6.2 trillion
· Total Income was about $9.6 trillion. ($15.8t - $6.2t = Total Income)
· True Tax rate is about 65%. (6.2t / $9.6t = True Tax Rate)
(Traditionally, tax rates are expressed as a percent of GDP, but GDP can be artificially inflated by money printing and borrowing. Since Friedman referred to “income”, subtracting govt. spending from GDP, makes sense. Government does not generate income, only the private sector does. Moreover, Total Income closely tracks AGI (Adjusted Gross Income) reported on 1040s. AGI is the basis on which income taxes are calculated.)

So the True Tax rate was 65% in 2012, when expressed as a percent of Total Income. But that doesn’t include money creation/printing by the Fed, which may or may not be considered spending. Since 2008, the Federal Reserve has created two trillion dollars in new money and that money is not included on any ledger of government spending. The Fed claims it isn’t actually spending money when it creates money because it is buying US bonds, which it can later sell. This is the exact same argument Fannie Mae and Freddie Mac were making about home mortgages - right before they went under. To settle this, let’s just say inflation has averaged about 5% since we dropped the gold standard in 1971. If we use that conservative figure, and add 5% to 65%, that yields a total True Tax rate of 70%!**

That is not the top marginal tax rate for high earners like the New York Times calculated. Nor is it an average marginal rate like Prescott arrives at. That’s the average tax rate on every single dollar of our Total Income. When Friedman’s Paradox is applied to tax rates, the illusion of progressive taxation goes away. Essentially, we are all in one big tax bracket, whether we know it or not. Our individual income tax rates vary, but there are enough taxes buried in everything we buy that it levels-out our average burden. We all pay roughly $.70 of every dollar we earn on taxes. You may think your lawyer, oil company, or banker just got a big tax hike, but their increased tax burden is passed right back to you in the form of higher fees. Their hike is your hike, and so it goes, ‘round and ‘round.

(Update: Having recently read some commentary and heard Robert Reich speak glowingly about the economics of the 1950's with its high wages, "high taxes", lots of unions, narrow income gap, etc., I thought I'd calculate the True Tax rate for 1950 and 1960. About those “high taxes”, eh, not so much...the rate in 1950 clocks in at 31.4% and 1960 at 40.3%. True Taxes today are double what they were in the 1950s. The 1950s are so beloved because Europe, Japan, the USSR, etc. were still smoldering from WWII, China was still in loincloths, and we had a brand new industrial infrastructure to unleash. The desire to return to the economics of the 1950s is a fantasy that could only be fulfilled by a third world war fought in Europe and China!)

Here’s a rough breakdown of the $.70 tax everyone pays on every dollar of Total Income: $.30 is paid in direct taxes. These are the explicit taxes everyone sees: Income taxes, employee’s portion of payroll taxes, sales taxes, property taxes, etc. $.25 is buried in the prices of things we buy. These are the stealth taxes: business income taxes, employer’s portion of payroll taxes, business property taxes, use taxes, fees, etc. $.10 is deferred onto future generations as borrowings, and $.05 is deferred and/or eaten by inflation due to money creation. ***

In 1985, the middle of that decade, we spent $1.5 trillion at all levels of government, reported GDP of $4.2 trillion, and had Total Income of $2.7 trillion resulting in a True Tax rate of 56%.* If we add 5% for inflation, as we did for 2012, that would yield 61%, but the Fed was not printing $.5 trillion a year in 1985!** In either case, whether we use 56% or 61% , taxes today at 70% are quite a bit higher than they were in 1985. Certainly not less, as The New York Times piece asserts.

Inflation is taxation without legislation.
--Milton Friedman
The differences between all these numbers and our perceptions are the result of our political and monetary systems. Politicians at all levels of government and The Federal Reserve are able to hide huge chunks of our True Tax burden from us. All we see is the $.30 in explicit taxes, while the remaining $.40 is buried and/or deferred on others.

Are voters stupid? They’re probably just human. The main reason voters do not realize they are being taxed $.70 of every dollar of Total Income is that $.40 is in the form of stealth, or indirect taxes, which are buried in everyday prices. All the taxes and fees paid by businesses, like payroll taxes, income taxes, property taxes, use taxes, and fees, are built into everyday prices. Take a simple MacDonald’s Big Mac hamburger: Before that hamburger gets to you, the farmer who grows the corn, the rancher who raises the beef, the farmers who grow the wheat, tomato, lettuce, onions, eggs, the trucking company, the oil companies, the restaurant owner, the advertising company, and many more, all pay taxes for their payrolls, income, land, fuel, and supplies. Those taxes are passed on to you when you buy that hamburger, but you have no way of measuring their cost!

Then there are the deferred taxes. The difference between what governments spend and what they collect in taxes must be acquired either by creating/printing, or borrowing money. Creating new money devalues the currency (all other things being equal) and will eventually cause inflation. Excessive inflation is politically dangerous and therefore avoided, except as a last resort. Borrowing is simply deferred taxation, or deferred money creation. Of the two, it is much easier to get away with. Both borrowing and creating money have a deferred negative impact, but an instantaneous positive one. Voters are simply acting like imperfect humans and choosing instant gratification while deferring pain. Unfortunately, they are also taking benefits for themselves in exchange for passing the costs onto future generations.

The two big disconnects confronting taxpayers are 1) The level of stealth taxes at all levels of government, and 2) The ability of the federal government to create and borrow money, and then spend it on benefits to buy votes.

1) Stealth taxes are surprisingly the biggest item in the gap between perceptions and reality. Voters should insist on eliminating hidden taxes. Every tax should be leveled at a voter. None at businesses. After all, businesses do not vote. We must go back to the idea of “no taxation without representation”. This is a loophole in our political system and has led to a huge economic disconnect. A hidden tax is a license for politicians to do what comes naturally: buy votes. All taxes, to use Milton Friedman’s word, should be made “explicit” to voters.
2) The Federal Government, due to its role as issuer of the currency, must not be the entity providing safety net and/or entitlement items. There is an inherent conflict of interest when politicians control the creation and borrowing of money and can lavish benefits on their constituents. State and local governments cannot print and borrow as the feds can. Therefore, they must be the ones handling safety net and/or entitlement items. If states want to increase payments, they must raise revenue. If they want to cut taxes, they must cut spending. States therefore should take-over things like Medicare, Medicaid, Obamacare, Social Security, etc. Voters should insist on this. Moreover, the constitution clearly intended these things be done by the people and the states, not the federal government.

The way to align the needs of voters and politicians in the US is to get the states and local governments to handle all safety net and/or entitlements, and get voters to explicitly pay the True Tax. Of course, federal taxes would drop, federal business taxes would be eliminated, and a commensurate rise in state and local taxes would occur. But going forward, the whole system would be more responsive and visible to voters. If we did just those two things, we would quickly have a smaller, more efficient, less costly, and more responsive government at all levels.

And everyone including Prescott, Ohanian, Applebaum, and Gebeloff would know the True Tax rate.

This piece has been updated from the original which was titled "Taxing Logic" and was published on this site 1/14/13
*Spending figures are from usgovernmentspending.com, and GDP figures are from BEA. Various pages were used on all sites. 2012 numbers are estimates. All numbers were rounded.
**Inflation figures are from BLS.gov and numbers were rounded.
***Breakdown figures come from usgovernmentspending.com where each revenue line item was subjectively allocated to either direct taxes or indirect taxes. Numbers were rounded.

Monday, April 15, 2013

The True Tax Rate is 70%!



Almost every interesting economic proposition shares a confusing characteristic: what’s true for the individual is the opposite of what’s true for the country as a whole. To a consumer buying shoes, it appears as though the price is fixed and the supply is elastic. Consumers can buy as many shoes as they want as long as they are willing to pay the asking price. But to the country as a whole, it is the supply of shoes that is fixed and the price that is elastic depending on demand. This paradox permeates economics.
-- Milton Friedman - paraphrased from a speech titled “Money and Inflation” , 1980 (herein referred to as "Friedman's Paradox")
On Nov. 29, 2012 the New York Times ran a piece by Binyamin Applebaum and Robert Gebeloff titled, “Tax Burden for Most Americans Is Lower Than in the 1980’s”. The authors cite New York Times research, which makes the case that taxes are historically low especially on the rich. They calculate rates for various income groups and come up with a top marginal tax rate, at all levels of government (federal, state, and local), of 42.1%, compared to the 1980’s when it was 49%.

A couple of weeks later, On Dec. 12, 2012, the Wall Street Journal ran an op-ed by Edward C. Prescott and Lee E. Ohanian with nearly the opposite title, "Taxes Are Much Higher Than You Think". After studying tax rates, again at all levels of government, Prescott arrived at an average marginal tax rate of 40%, while the authors contend that the perception is that taxes are much lower.

So, the New York Times pegs the top marginal rate at 42.1% and Prescott and Ohanian have the average marginal rate at 40%; not enough of a difference to get too excited about. Yet, the two pieces seem to ascribe opposite perceptions to the public, and seem to promote opposite policy prescriptions. Who’s right?

With all due respect to these esteemed authors, neither is right. Here’s why taxes are much higher than most people think, and much higher than even Prescott and Ohanian think. Here’s also why The New York Times piece is wrong about taxes being higher in the 1980’s.
Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax ... If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.
--Milton Friedman - from the same "Money & Inflation" speech, 1980 (herein referred to as "The True Tax") 

Both studies above employ similar methodologies based on individual tax rates. But according to Friedman’s Paradox, what is true for the individual is often the opposite for the country as a whole. Instead of looking at individual rates in every jurisdiction and arriving at an average rate as both sets of authors appear to have done, the better way, the simpler way, the more inclusive way, and the Friedman "True Tax" way, is to find total government spending and compare that to Total Income. By doing that, we learn what is happening with taxes in the country as a whole, inclusive of all borrowing, printing, business taxes, and indirect taxes.

Here are the results when Friedman’s True Tax methodology is applied to 2012:
· Gross Domestic Product (GDP) was about $15.8 trillion*
· Total govt. spending at all levels was about $6.2 trillion
· Total Income was about $9.6 trillion. ($15.8t - $6.2t = Total Income)
· True Tax rate is about 65%. (6.2t / $9.6t = True Tax Rate)

(Traditionally, tax rates are expressed as a percent of GDP, but GDP can be artificially inflated by money printing and borrowing. Since Friedman referred to “income”, subtracting govt. spending from GDP, makes sense. Government does not generate income, only the private sector does. Moreover, Total Income closely tracks AGI (Adjusted Gross Income) reported on 1040s. AGI is the basis on which income taxes are calculated.)
So the True Tax rate was 65% in 2012, when expressed as a percent of Total Income. But that doesn’t include money creation/printing by the Fed, which may or may not be considered spending. Since 2008, the Federal Reserve has created two trillion dollars in new money and that money is not included on any ledger of government spending. The Fed claims it isn’t actually spending money when it creates money because it is buying US bonds, which it can later sell. This is the exact same argument Fannie Mae and Freddie Mac were making about home mortgages - right before they went under. To settle this, let’s just say inflation has averaged about 5% since we dropped the gold standard in 1971. If we use that conservative figure, and add 5% to 65%, that yields a total True Tax rate of 70%!**

That is not the top marginal tax rate for high earners like the New York Times calculated. Nor is it an average marginal rate like Prescott arrives at. That’s the average tax rate on every single dollar of our Total Income. When Friedman’s Paradox is applied to tax rates, the illusion of progressive taxation goes away. Essentially, we are all in one big tax bracket, whether we know it or not. Our individual income tax rates vary, but there are enough taxes buried in everything we buy that it levels-out our average burden. We all pay roughly $.70 of every dollar we earn on taxes. You may think your lawyer, oil company, or banker just got a big tax hike, but their increased tax burden is passed right back to you in the form of higher fees. Their hike is your hike, and so it goes, ‘round and ‘round.

(Update: Having recently read some commentary and heard Robert Reich speak glowingly about the economics of the 1950's with its high wages, "high taxes", lots of unions, narrow income gap, etc., I thought I'd calculate the True Tax rate for 1950 and 1960. About those “high taxes”, eh, not so much...the rate in 1950 clocks in at 31.4% and 1960 at 40.3%. True Taxes today are double what they were in the 1950s. The 1950s are so beloved because Europe, Japan, the USSR, etc. were still smoldering from WWII, China was still in loincloths, and we had a brand new industrial infrastructure to unleash. The desire to return to the economics of the 1950s is a fantasy that could only be fulfilled by a third world war fought in Europe and China!)

Here’s a rough breakdown of the $.70 tax everyone pays on every dollar of Total Income: $.30 is paid in direct taxes. These are the explicit taxes everyone sees: Income taxes, employee’s portion of payroll taxes, sales taxes, property taxes, etc. $.25 is buried in the prices of things we buy. These are the stealth taxes: business income taxes, employer’s portion of payroll taxes, business property taxes, use taxes, fees, etc. $.10 is deferred onto future generations as borrowings, and $.05 is deferred and/or eaten by inflation due to money creation. ***

In 1985, the middle of that decade, we spent $1.5 trillion at all levels of government, reported GDP of $4.2 trillion, and had Total Income of $2.7 trillion resulting in a True Tax rate of 56%.* If we add 5% for inflation, as we did for 2012, that would yield 61%, but the Fed was not printing $.5 trillion a year in 1985!** In either case, whether we use 56% or 61% , taxes today at 70% are quite a bit higher than they were in 1985. Certainly not less, as The New York Times piece asserts.

Inflation is taxation without legislation.
--Milton Friedman

The differences between all these numbers and our perceptions are the result of our political and monetary systems. Politicians at all levels of government and The Federal Reserve are able to hide huge chunks of our True Tax burden from us. All we see is the $.30 in explicit taxes, while the remaining $.40 is buried and/or deferred on others.

Are voters stupid? They’re probably just human. The main reason voters do not realize they are being taxed $.70 of every dollar of Total Income is that $.40 is in the form of stealth, or indirect taxes, which are buried in everyday prices. All the taxes and fees paid by businesses, like payroll taxes, income taxes, property taxes, use taxes, and fees, are built into everyday prices. Take a simple MacDonald’s Big Mac hamburger: Before that hamburger gets to you, the farmer who grows the corn, the rancher who raises the beef, the farmers who grow the wheat, tomato, lettuce, onions, eggs, the trucking company, the oil companies, the restaurant owner, the advertising company, and many more, all pay taxes for their payrolls, income, land, fuel, and supplies. Those taxes are passed on to you when you buy that hamburger, but you have no way of measuring their cost!

Then there are the deferred taxes. The difference between what governments spend and what they collect in taxes must be acquired either by creating/printing, or borrowing money. Creating new money devalues the currency (all other things being equal) and will eventually cause inflation. Excessive inflation is politically dangerous and therefore avoided, except as a last resort. Borrowing is simply deferred taxation, or deferred money creation. Of the two, it is much easier to get away with. Both borrowing and creating money have a deferred negative impact, but an instantaneous positive one. Voters are simply acting like imperfect humans and choosing instant gratification while deferring pain. Unfortunately, they are also taking benefits for themselves in exchange for passing the costs onto future generations.

The two big disconnects confronting taxpayers are 1) The level of stealth taxes at all levels of government, and 2) The ability of the federal government to create and borrow money, and then spend it on benefits to buy votes.

1) Stealth taxes are surprisingly the biggest item in the gap between perceptions and reality. Voters should insist on eliminating hidden taxes. Every tax should be leveled at a voter. None at businesses. After all, businesses do not vote. We must go back to the idea of “no taxation without representation”. This is a loophole in our political system and has led to a huge economic disconnect. A hidden tax is a license for politicians to do what comes naturally: buy votes. All taxes, to use Milton Friedman’s word, should be made “explicit” to voters.
2) The Federal Government, due to its role as issuer of the currency, must not be the entity providing safety net and/or entitlement items. There is an inherent conflict of interest when politicians control the creation and borrowing of money and can lavish benefits on their constituents. State and local governments cannot print and borrow as the feds can. Therefore, they must be the ones handling safety net and/or entitlement items. If states want to increase payments, they must raise revenue. If they want to cut taxes, they must cut spending. States therefore should take-over things like Medicare, Medicaid, Obamacare, Social Security, etc. Voters should insist on this. Moreover, the constitution clearly intended these things be done by the people and the states, not the federal government.
The way to align the needs of voters and politicians in the US is to get the states and local governments to handle all safety net and/or entitlements, and get voters to explicitly pay the True Tax. Of course, federal taxes would drop, federal business taxes would be eliminated, and a commensurate rise in state and local taxes would occur. But going forward, the whole system would be more responsive and visible to voters. If we did just those two things, we would quickly have a smaller, more efficient, less costly, and more responsive government at all levels.

And everyone including Prescott, Ohanian, Applebaum, and Gebeloff would know the True Tax rate.


This piece has been updated from the original which was titled "Taxing Logic" and was published on this site 1/14/13
*Spending figures are from usgovernmentspending.com, and GDP figures are from BEA . Various pages were used on all sites. 2012 numbers are estimates. All numbers were rounded.
**Inflation figures are from BLS.gov and numbers were rounded.
***Breakdown figures come from usgovernmentspending.com where each revenue line item was subjectively allocated to either direct taxes or indirect taxes. Numbers were rounded.


Monday, January 14, 2013

Taxing Logic

Friedman’s Paradox 
Almost every interesting economic proposition shares a confusing characteristic: what’s true for the individual is the opposite of what’s true for the country as a whole. To a consumer buying shoes, it appears as though the price is fixed and the supply is elastic. Consumers can buy as many shoes as they want as long as they are willing to pay the asking price. But to the country as a whole, it is the supply of shoes that is fixed and the price that is elastic depending on demand. This paradox permeates economics.
 -- Milton Friedman - paraphrased from a speech titled “Money and Inflation” , 1980 (herein referred to as "Friedman's Paradox")

Two Pieces

On Nov. 29, 2012 the New York Times ran a piece by Binyamin Applebaum and Robert Gebeloff titled, “Tax Burden for Most Americans Is Lower Than in the 1980’s”. The authors cite New York Times research, which makes the case that taxes are historically low especially on the rich. They calculate rates for various income groups and come up with a top marginal tax rate, at all levels of government (federal, state, and local), of 42.1%, compared to the 1980’s when it was 49%.

A couple of weeks later, On Dec. 12, 2012, the Wall Street Journal ran an op-ed by Edward C. Prescott and Lee E. Ohanian with nearly the opposite title, "Taxes Are Much Higher Than You Think". After studying tax rates, again at all levels of government, Prescott arrived at an average marginal tax rate of 40%, while the authors contend that the perception is that taxes are much lower.

So, the New York Times pegs the top marginal rate at 42.1% and Prescott and Ohanian have the average marginal rate at 40%; not enough of a difference to get too excited about. Yet, the two pieces seem to ascribe opposite perceptions to the public, and seem to promote opposite policy prescriptions. Who’s right?
 
With all due respect to these esteemed authors, neither is right. Here’s why taxes are much higher than most people think, and much higher than even Prescott and Ohanian think. Here’s also why The New York Times piece is wrong about taxes being higher in the 1980’s. 

The True Tax
Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax ... If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.
--Milton Friedman - from the same "Money & Inflation" speech, 1980 (herein referred to as "The True Tax")

Both studies cited above employ similar methodologies based on individual tax rates. But according to Friedman’s Paradox, what is true for the individual is often the opposite for the country as a whole. Instead of looking at individual rates in every jurisdiction and arriving at an average rate as both sets of authors appear to have done, the better way, the simpler way, the more inclusive way, and the Friedman True Tax way, is to find total government spending and compare that to Total Income. By doing that, we learn what is happening with taxes in the country as a whole, inclusive of all borrowing, printing, business taxes, and indirect taxes.
 
Here are the results when Friedman’s True Tax methodology is applied to 2012: Total government spending at all levels was about $6.2 trillion, and Gross Domestic Product was about $15.8 trillion.* To arrive at Total Income, all government activity was subtracted from GDP as government activity cannot generate income, only the private sector can do that. $15.8t less $6.2t results in Total Income of $9.6 trillion. $6.2t divided by $9.6t yields a True Tax rate of 65%. 

But that doesn’t include money creation/printing by the Fed, which may or may not be considered spending. Since 2008, the Federal Reserve has created two trillion dollars in new money and that money is not included on any ledger of government spending. The Fed claims it isn’t actually spending money when it creates money because it is buying US bonds, which it can later sell. This is the exact same argument Fannie Mae and Freddie Mac were making about home mortgages - right before they went under! To settle this, let’s just say inflation has averaged about 5% since we dropped the gold standard in 1971. If we use that conservative figure, and add 5% to 65%, that yields a total True Tax rate of 70%!**
 
That is not the top marginal tax rate for high earners like the New York Times calculated. Nor is it an average marginal rate like Prescott arrives at. That’s the average tax rate on every single dollar of our Total Income. When Friedman’s Paradox is applied to tax rates, the illusion of progressive taxation goes away. Essentially, we are all in one big tax bracket, whether we know it or not. Our individual income tax rates vary, but there are enough taxes buried in everything we buy that it levels-out our average burden, and we all pay roughly $.70. You may think your doctor just got a big tax hike, but his increased tax burden is passed right back to you in the form of higher fees. His hike is your hike, and so it goes, ‘round and ‘round.

The Breakdown

Here’s a rough breakdown of the $.70 tax everyone pays on every dollar of Total Income: $.30 is paid in direct taxes. These are the explicit taxes everyone sees: Income taxes, employee’s portion of payroll taxes, sales taxes, property taxes, etc. $.25 is buried in the prices of things we buy. These are the stealth taxes: business income taxes, employer’s portion of payroll taxes, property taxes, use taxes, fees, etc. $.10 is deferred onto future generations as borrowings, and $.05 is deferred and/or eaten by inflation due to money creation. ***
 
In 1985, the middle of the decade, we spent $1.5 trillion at all levels of government and reported GDP of $4.2 trillion, resulting in a True Tax rate of 56%.* If we add 5% for inflation, as we did for 2012, that would yield 61%, but the Fed was not printing $.5 trillion a year in 1985!** In either case, taxes today are quite a bit higher than they were in 1985. Certainly not less, as The New York Times piece asserts.

Passing the Buck
Inflation is taxation without legislation.

--Milton Friedman
 
The differences between all these numbers and our perceptions are the result of our political and monetary systems. Politicians at all levels of government and The Federal Reserve are able to hide huge chunks of our True Tax burden from us. All we see is the $.30 in explicit taxes, while the remaining $.40 is buried and/or deferred on others.
 
Are voters stupid? No, but they are human. The main reason voters do not realize they are being taxed $.70 of every dollar of Total Income is that a huge chunk is in the form of stealth, or indirect taxes, which are buried in everyday prices. All the taxes and fees paid by businesses, like payroll taxes, income taxes, property taxes, use taxes, and fees, are built into everyday prices. Take a simple MacDonald’s hamburger: Before that hamburger gets to you, the farmer who grows the corn, the rancher who raises the beef, the farmers who grow the wheat, tomato, lettuce, cucumbers, and eggs, the trucking company, the oil companies, the restaurant owner, the advertising company, and many more, all pay taxes for their payrolls, income, land, fuel, and supplies. Those taxes are passed on to you when you buy that hamburger, but you have no way of measuring their cost!
 
Then there are the deferred taxes. The difference between what governments spend and what they collect in taxes must be acquired either by creating/printing or borrowing money. Creating new money devalues the currency (all other things being equal) and will eventually cause inflation. Excessive inflation is politically dangerous and therefore avoided, except as a last resort. Borrowing is simply deferred taxation, or deferred money creation. Of the two, it is much easier to get away with. Both borrowing and creating money have a deferred negative impact, but an instantaneous positive one. Voters are simply acting like imperfect humans and choosing instant gratification while deferring pain. Unfortunately, they are also taking benefits for themselves in exchange for passing the costs onto future generations.
 
Conclusions and Recommendations

The two big confusions we confront as taxpayers are 1) The level of stealth taxes at all levels of government, and 2) The ability of the federal government to create money and borrow, and then spend it on benefits to buy our votes.
 
1) Stealth taxes are surprisingly the biggest item in the gap between perceptions and reality when it comes to taxes. Voters should insist on the elimination of these hidden taxes. Every tax should be leveled at a voter. Businesses do not vote. We must go back to the idea of “no taxation without representation”. This is a loophole in our political system and has led to a huge economic disconnect. A hidden tax is a license for politicians to do what comes naturally: buy votes. All taxes, to use Milton Friedman’s word, should be made “explicit”. 

2) The Federal Government, due to its role as issuer of the currency, must not be the entity providing safety net and entitlement items. There is an inherent conflict of interest when politicians control the creation and borrowing of money and can lavish benefits on their constituents. State and local governments cannot print and borrow as the feds can. Therefore, they must be the ones handling safety net and benefit items. If states want to increase benefits, they will have to raise revenue. If they want to cut taxes, they will have to cut spending. States must take-over Medicare, Medicaid, Obamacare, Social Security, etc. Voters must insist on this. Moreover, the constitution clearly intended these things to be done by the people and the states, not the federal government.
 
The revolution we desperately need in the US is to get the states and local governments to handle all entitlements and benefits, and get voters to explicitly pay the True Tax. If we did just those two things, we would quickly have a smaller, more efficient, less costly, and more responsive government at all levels. That's logical, right?

*Spending figures are from usgovernmentspending.com, and GDP figures are from BEA . Various pages were used on all sites. 2012 numbers are estimates. All numbers were rounded.

**Inflation figures are from BLS.gov and numbers were rounded.

***Breakdown figures come from usgovernmentspending.com where each revenue line item was subjectively allocated to either direct taxes or indirect taxes. Numbers were rounded.

(This piece has had two major updates since it originally appeared. It was updated 1/21 to correct inaccuracies in the 1985 numbers, and to use Adjusted Gross Income for Total Income. Second, it was updated 1/22 to use GDP less Total Government Spending for Total Income. The difficulty is in finding the best number for Total Income as this is what Friedman intended. The government reports many numbers for Income but all have issues. GDP less Total Gov. appears to be the best number for these purposes because it is free of arbitrary deductions and all government transfers. For comparison purposes, AGI is about $9 trillion for 2012, and using GDP less Total Gov., total income is $9.6 trillion. The language has been updated as well for clarity. Overall, no conclusions have changed with these updates. )