An Economic Lesson from the Boston Marathon Bombing

Looking at the events in Boston, between the bombing and the capture of the second suspect, an interesting economic analogy can be made and a lesson learned:  The free market triumphed where socialism would have failed.

In every case, the key intelligence that ID'd the suspects, led to them, and eventually got them, came not from elite crime experts at the top, but rather from average people functioning in a free market of observations and feedback.  Those that solved this crime were not endowed with special training or powers.  They had no advanced degrees in criminology.  They were simply closest to the action and in the largest possible numbers.  

To review:  A victim named Jeff Bauman woke-up minus two legs and the first thing he did was describe the bomber.  Armed with that information, the investigation proceeded to the video cameras of Lord & Taylor, where the described suspects were clearly visible.  Next the public was recruited to find them, and this paid off when a 7-11 clerk reported a robbery.  Finally, a boat owner stepped outside for a smoke, noticed something amiss with his boat, and climbed up a ladder to take a peek.  There he saw the semi-concious wounded bomber and alerted officials.

To draw an economic lesson from this, free market intelligence signals succeeded where a top-down socialist style intelligence model could not.  The point is, as in socialism where there are impediments to economic market signals, the FBI could not have succeeded if they had shut out the public from this manhunt.  In fact, the government was warned about these two terrorists by a foreign nation, and completely dropped the ball.

This is not to downplay the role of the FBI and local law enforcement in fighting crime.  The armed guys and the intelligence guys who pulled all the threads together were essential to the eventual resolution.  Just as in any functioning market economy, the government is essential to performing functions of law and order.

But under socialism, the government is not limited to roles of law and order.  They either own or control a majority of the economic activity too.  The socialists try to tweak their managed economy according to market signals, but they can never do so as efficiently, quickly, or accurately as a free market economy.  All those non-experts, close to the action, making second-to-second decisions will outperform the elite experts trying to do so every time.  That's what happened in Boston.
 

               

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.

Marriage Equality Symbol - Utah Version

I'm sorry, I find the marriage equality symbol particularly annoying.  Personally, I don't give a whit who marries who, as long as it's consensual and between adults.  But, I can't abide hypocrisy.   Gay and straight proponents of this new "right" are almost uniformly opposed to plural marriage.  These sanctimonious hypocrites are the same folks who just spent the last year dragging Mormonism through the mud behind their Priuses, ridiculing the faith and its plural marriage history.  These are the tolerant ones who want equality?  I call bullshit.  Why not a right for all marriages?  With that in mind, I offer the plural marriage equality symbol above.  (or more accurately, the any marriage congruence symbol!)      

Iraq - 10 Years On

Comparing Iraq and Libya

(In observance of the 10 year anniversary of the Iraq war -

originally posted 3/11) 

Gay Marriage Is Mostly About Money

Gay marriage is usually thought of as a cultural issue or a human rights issue and of course it is on some level.  But there is not a single state in the union in which it is not possible for gay couples to legally and openly live together as a couple.  Moreover, turn on a TV today and gay characters are everywhere, attesting to their complete acceptance and ordinariness in pop culture.

Yet there is still a huge issue separating gay and straight couples and in most cases it boils down to money.   Here is a partial list of the legal and financial entitlements which currently are not available to gay couples:

• Social Security Survivor Benefits
• Estate Tax Exemptions
• Inheritance Exemptions
• Tax Free Transfers To Spouses
• Joint Filing (which can lower taxes)
• Health Insurance Rates
• Government Employee Spousal Benefits
• Workman's Compensation
• Preferential Standing in Wrongful Death
• Miscellaneous Federal and State Benefits
• Approx. 1,138 Legal Rights (according to GLAD)

Most of the above list are areas which the Federal Government was not intended by the founders to be involved in in the first place.  But now it is in an ever expanding role, and the financial fate of gay and straight couples alike relies on it's laws and re-distributional largesse.   Despite losing consistently at the polls, big money is flowing the other way because even bigger money is at stake in the gay marriage debate.  It is for this reason that a federal law endorsing gay marriage is inevitable.   Just follow the money.  

       

Ted Cruz is Awesome!

Senator Ted Cruz (R, TX) has a point.  In the latest freak-out over Cruz’s venturing off the freshman plantation, members of the old guard are wetting their Depends because Cruz had the audacity to pose a really good question to Diane Feinstein (D, CA)  about guns and the second amendment.  If you haven’t seen the exchange, here is the question Cruz asked Feinstein: 

“The question that I would pose to the senior Senator from California is: Would she deem it consistent with the Bill of Rights for Congress to engage in the same endeavor that we are contemplating doing with the Second Amendment in the context of the First or Fourth Amendment? Namely, would she consider it constitutional for Congress to specify that the First Amendment shall apply only to the following books and shall not apply to the books that Congress has deemed outside the protection of the Bill of Rights?

“Likewise, would she think that the Fourth Amendment’s protection against searches and seizures could properly apply only to the following specified individuals and not to the individuals that Congress has deemed outside the protection of the Bill of Rights?”

After the question, the entire Democrat contingency went apoplectic talking out of turn to lecture Cruz about how the first and fourth amendments have limitations and are not absolute.  The reason Cruz has a point is that in all limitations on the first and fourth amendments, those limitations exist because the rights of others have already been infringed.  

Take the old example of unnecessarily yelling “fire” in a crowded theater.  That speech is outside the first amendment because it denies other theatergoers their right to not be trampled in a stampede.  Similarly, the child pornography limitation on free speech exists because children are harmed, rights denied, by the very existence of child pornography.

Similarly, an indiscriminate roadblock, which stops all motorists in an attempt to catch a dangerous criminal, is an exception to the fourth amendment protection on unreasonable search and seizure because it has been deemed reasonable in order to catch a criminal who already has denied someone their rights.

Gun ownership is a different case.  Gun ownership by itself, even if it involves a dangerous assault weapon, denies no one else’s rights.  There is the potential that any gun can be used criminally or negligently, but until that happens, can congress legally deny the people’s constitutional right to keep it and bear it?  This seems like a reasonable enough question, which is why it elicited such a petulant response from princess DiFi and her minions.

Interestingly, if the framers didn’t want the second amendment to be an absolute right, they could have simply used the same word they used in the fourth amendment, unreasonable.  It's not like they didn't know the word existed.  The second amendment would then have read: “…the right of the people to keep and bear arms shall not be unreasonably infringed.”  It doesn’t, and we should not pretend it does.

The more I hear from Ted Cruz the more I respect him.  Please keep it up Ted.  

PS  All this talk of "DC v Heller", which Cruz's critics have cited is completely besides the point.  The question was to DiFi about her views on the constitution, not her opinion of the SCOTUS and the Heller decision.  Her response, Leahy's response, and all the Democrats responses were disrespectful and shameful.   

Here's the whole shebang in case you missed it: 

Dictator

Menendez Hypocrisy

The FBI is investigating Senator Bob Menendez's (D-NJ) connections to a scandal involving underage prostitutes, a Florida donor, unreimbursed and undocumented donations, legislative favors, and said donor's tax status.  The Pop Media, especially network news, is uninterested in reporting these allegations.  According to them, it's not newsworthy because there is no hypocrisy involved.  After all Senator Menendez is a Democrat and Democrats don't go around preaching about morals and values.  When a Republican allegedly cheats on his wife, solicits gay sex, or takes illegal donations, that's news because they are always going on about family values and moral standards.  Apparently, Democrats can't possibly be held to account because they espouse no values and set no standards of accountability or behavior.

Well, I call bullshit.  Turns out Bob Menendez is all about protecting "exploited children".  Hmmmm, wouldn't underage prostitutes fall into that category?        

Menendez is a member of the Congressional Missing & Exploited Children's Caucus!!!

Statement Of Purpose

1. To build awareness around the issue of missing and exploited children for the purpose of finding children who are currently missing and to prevent future abductions.

1. To create a voice within Congress on the issue of missing and exploited children and introduce legislation that would strengthen law enforcement, community organizing and school-based efforts to address child abduction.

1. To identify ways to work effectively in our districts to address child abduction. By developing cooperative efforts that involve police departments, educators, and community groups we can heighten awareness of the issue and pool resources for the purpose of solving outstanding cases and preventing future abductions.

Source: Congressional Caucus Web site 01-CMECC0 on Jan 8, 2001

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. )

Forward!

As you probably know, come January 1^st 2013, taxes are scheduled to go up on everyone and automatic spending cuts will kick in.  This is the law as proposed and signed by President Barack Obama.  He built this, and we voted for it.  Yet he does not want his fingerprints on a tax hike on the middle class.  Nor does he want his fingerprints on a prolonged recession.  He must go through the motions of negotiating so he can then blame higher taxes and a recession on Republicans.  There is absolutely no reason to believe he cannot do this.  He really has all the cards. 

Hence, Republicans have no cards.  They cannot win no matter what they do.  Yet they too have interests.  Republicans don’t want their fingerprints on anyone’s taxes going up.   Nor do they want automatic cuts that don’t address the real problem of entitlements.  Lastly, they do not want to allow the economic damage that will result from both tax hikes and continued runaway entitlement spending.  I don’t see how they alone can stop any of this.    

  

That’s not to say they won’t reach an agreement and pass something.  They usually do.  It will happen at the very last minute.  Then they will both declare victory and go home.  The press will write about how the Republicans blinked, and how once again Obama outmaneuvered his less capable opponents.  The truth is nothing will actually be solved, and best-case scenario, we will just kick the can down the road once again.  

As a student of economics, I say pass nothing!  Let current law prevail.  Let all the taxes go up.  Let the sequester spending cuts go forward.  What a great experiment in economics we would be conducting!  What a great lesson for future generations!  This is our civic duty as educators and parents.  No more kicking the can down the road.  We’ve done that too long.  All that does is muddy the waters and obscure the causal relationship between our actions and their consequences. 

While we're at it, why not stop borrowing?  Let's just print every dollar we need!  Borrowing is just another way of kicking the can down the road.  That makes sense when  fighting an existential war, but we are borrowing from our kids to pay ourselves entitlements!  How can we justify passing on this debt and inflation to our kids?  Why not take the hit ourselves, today, like men and women of character would?     

We voted for this, now we should be allowed to live in the country we deserve.  Forward, I say!  Forward off the cliff!