Wednesday, April 20, 2011

‘Calling the Bluff’ On Tax Hikes and Balancing the Budget

President Obama has chosen the well-worn and worn-out ‘tax the rich!’ mantra to try to become the 19th US President to win re-election when he runs in 2012.

It seems like he never stopped running, does it?

But we think it is time for the Washington Republicans to agree to his wishes and ‘tax the rich!’ and get a budget deal done for the good of this nation….like next week.

‘How can you say that, Mr. Budgeteer!?  Have you lost your mind completely…again?’

Nope, we just think it would be a simple case of ‘calling the bluff’ of President Obama and the ‘Tax Hike First!’ crowd that have wrung the neck out of the class warfare chicken so many times it is near about dead by now.

First of all, do you know what percentage of the total federal income tax paid by the top 1% of the Rockefellers and the Carnegie-Mellons of 1981 was under President Reagan?


Know what percentage the Bill Gates and Warren Buffets of the top 1% of American taxpayers pay today?


Man!  Something the income-redistributionists have been doing seems to have been 'working' over the past 30 years, doesn't it?

If you are a great poker player, your opponent can never tell what you have in the cards in your hand at any time based on any facial tic, expression or sweat dripping down your face.

And if you are a truly superior poker player, you also know when to call your opponent’s bluff when he thinks you think he has a royal straight flush….and you know he doesn’t.

Now is the time to call the bluff on ‘raising taxes on the rich’ and here’s the reason why:

‘The truly and fabulously wealthy never pay the full amount of taxes mere congressmen or senators and their mortal staffs can come up with in the first place.’

Never, ever. Not at any time in the history of mankind after they evolved upwards from the apes. (Mark Twain thought otherwise; he thought man ‘descended’ from the apes and went downwards from there. ‘God made man because He was disappointed with the apes’, he once opined.)

Why? Because the truly wealthy can hire an army of high-priced and very talented tax attorneys and accountants to figure out ways to minimize their taxable income each year much like the NASA scientists figured out how to land a man on the moon with less computing power in their computers than what is now on your hand-held IPhone.


We have a friend who is now wealthy but went through all the crazy ups-and-downs of starting a business; borrowing against his second mortgage and credit cards; and sweating out weekly payrolls and potential bankruptcy several times before hitting it big in this wonderful thing called the American Free Enterprise System (try it sometime…it is much harder than you think)

Now that he has made it to the Other Side, he can afford many of the same tax lawyers and accountants mentioned above.

Know what he paid in federal income tax this year?


He probably earned more interest on his bank account at a measly 1% in a month than 95% of American households earned all year. Think about that for a moment.

We bet most of the people reading this column right now paid more than 20% of your net income in federal income taxes this past week.

See? That is his ‘effective tax rate’ but that is the ‘important’ rate, not the ‘marginal tax rate’ that 'Obama and the Tax Hikers' always love to rant about.

The effective tax rate is the amount you actually send to the IRS on April 15 each year. (April 18 for some reason this year)

Anyway, here’s where we think the GOP and Tea Party can ‘call the bluff’ of Obama and the Tax Hikers and do the nation a humongous service:

  • Agree to a ‘massive tax hike’ of whatever proportions they want on people making $1 million/year and more in return for just a few of the spending reduction proposals that will actually knock the legs out from under the ‘structural’ budget deficits that are out there and are threatening to suffocate us all under tsunami-style deficits, debts and interest payments to the Chinese and foreign sovereigns.
  • CBO can, and will, ‘officially’ score the tax hikes as going to bring in $2 trillion, maybe $3 trillion in new revenue over the next 10 years. (It won’t, but bear with us here for the time being)
  • Lock down in a steel-reinforced concrete ‘lockbox’ spending reductions by raising the retirement age in Social Security and Medicare to 70; change all of the federal entitlement programs to help only people who are poor and can not help themselves at all; and about $10 trillion in other spending reductions we have identified in these pages over the past 2 years now.
(The thing most of you will have to worry about in any tax deal is that the 'dreaded' AMT threshold will not be raised and you'll get sucked in the back door of higher taxes that you will never get out of.  But for purposes of this argument, we are focusing solely on higher marginal tax rates on people with incomes over $1 million per year...which ain't too shabby)

The total Grand Budget Compromise of 2011 will total about $13 trillion over the next 10 years and completely break the back of all negative expectations of our budget and economy going forward.

But the very wealthy will do what they have always done which is to be smart and hire the best people and continue to pay 14% in effective taxes instead of the insane 91% that was ‘law’ in some income tax brackets before Ronald Reagan took office in 1980.

You know what President Hoover tried to do in 1930 to address the budget deficit in the face of ‘The-Great-Recession-That-Was-About-To-Turn-Into-The-Great-Depression’? Raise taxes. Know how much was actually ‘realized’ when all was said and done?

5% of those projected revenues.

We are not sure how those 'truly wealthy' back then paid even that slight amount of 5%, or why, to be honest about it. Maybe they got rich by ‘dumb luck’ like some Jed Clampett ‘shooting at some food and up through the ground came a bubblin’ crude’.

Our wealthy friend? He will pay 14% of his income in federal taxes next year, and the year after that, and the year after that, just like he did this year. These new higher tax rates will mean nothing to him and his army of tax accountants and lawyers. He will pay what he wants to pay and that magic figure for him is ‘14%’, take it or leave it.

And it will all be ‘legal’ in this crazy, nutty, archaic, byzantine tax structure of America today.

Same will happen with this ‘Grand Compromise’.  Revenues from the higher tax rates will not be realized.  But the lockboxed structural changes in spending, which is the REAL problem, will be realized because that is what can be controlled and changed by Congress.

So we will get $10 trillion in spending reductions and therefore $10 trillion in reduced spending and debt not accumulated and the Republic will be saved.

And then we can focus on paying off the $14 trillion in debt we already have…but at least we will have a fighting chance then.

We are just very concerned that the Republicans and the Tea Party may not actually cut spending even if they agreed to a 'deal' with these higher tax rates.  70% of the Tea Party say:  'Keep Your Government Hands Off Of My Medicare!' which was a pretty darned enormous government program the last time we looked.

It goes both ways, doesn't it?

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