TAX THE RICH AND THE POOR WILL GET POORER
Part 8 of a Series
Reagan Renaissance
August 19, 2004

Paul van Eden published an excellent article last week entitled, Ripping Off the Poor. It is essential to remember that under socialism the incentives are backwards. This is the underlying fundamental reason that explains why many of the actions taken by "professional" politicians result in unintended consequences that are backwards from what was expected or intended. The home of record for socialism in the United States is the Democratic Party. This is why virtually everything that most Democrats believe about their socialistic programs is basically wrong. Let's look at a few examples to understand why this is true.

Democrats have adjusted the tax code to the point where the top 1% of taxpayers pay one-third of all income taxes. The top 5% of taxpayers pay 53% of the income tax and the top 20% of taxpayers pay roughly 80% of the total income tax. The bottom 50% of taxpayers directly pay only 4% of the tax. Is it any surprise that Democratic politicians are proud of their record and continue to trumpet the tax the rich theme?

On the other hand most accounting experts recognize that corporations don't pay taxes; people do, whether it's shareholders or customers. Taxes paid by corporations are in truth passed through to the customer and any taxes not able to be passed through to the customer are ultimately paid by the shareholders. What is true for corporations is also true to an extent for affluent individuals. In general, the more affluent the individual the more that individual can control when, how, and how much income they receive and the better able they are to pass the tax through to the source of their income, either customers or a corporation. The working middle class and the poor actually pay the taxes of the rich in the form of higher prices for goods and services. The middle class and the poor are not able to shift the burden of higher prices to anyone else. Regardless of the illusions created by "professional" politicians, the tax burden will fall disproportionately on those not able to shift the tax burden to others. Logic suggests that the ability to shift the burden is directly proportional to income. The lower an individual's income the less their ability to shift the tax burden. And to the extent this is true, the higher the total tax burden becomes the more the standard of living of the poor and the middle class will fall. Some Democratic politicians might argue that the poor and middle class are the beneficiaries of these programs, but they forget the twenty plus percent for salaries levied to support the bureaucrats needed to administer the programs and the additional ten percent needed for space, fixtures-furniture, utilities and supplies. Roughly speaking, one third of the tax raised to support socialism is consumed by overhead and only two thirds ends up in the pockets of beneficiaries. And this makes no allowance for the amounts paid by wealthier Americans to avoid taxes or to calculate the amounts owed under a constantly changing but ever more complex tax code.

Capitalism is dependent on savings. Savings can then be invested in training or capital goods that increase productivity. Higher productivity leads to higher incomes which can in turn support even greater savings plus an increase in consumption. Capitalism fosters higher standards of living for everybody in three ways. First, rising productivity when combined with the competition of free markets, leads to both a decline in prices and an increase in quality of almost all goods and services. Rising quality and falling prices mean that at any given level of income, an individual will enjoy a progressively higher standard of living. Second, higher incomes in the absence of inflation produces a higher standard living, a self-evident truth. The third mechanism is by far the most important. Savings enable the long term compounding of wealth. Compounding is the ultimate wealth builder. Through the miracle of compounding, relatively small of amounts of periodic savings, even at low rates of return when compounded over a long enough period of time will allow even the poorest of people to become rich. Before 1913, the freedom once enjoyed by Americans and the stabile dollar guaranteed by the Constitution, made it possible for the poor to quickly become part of the burgeoning middle class and eventually to become rich over time thanks to the miracle of compounding. Socialism short circuits the whole process and ends up destroying the middle class and impoverishing all but the wealthy who can and do flee socialistic jurisdictions. It is no sin to be rich, but it is a sin that all families in America are not rich and "professional" politicians are to blame. Remember my favorite graph?

Source: Grandfather Economic Report

One of the factors that keeps these lines diverging and prevents their convergence is the fact that the taxes raised by Social Security are immediately spent. None are saved and invested to allow compounding to work. With no inflation or income tax, assuming the minimum wage, the current average 33 hour work week, and absent SS, current FICA tax rates would allow an 18 year-old hamburger flipper to save and invest $1,125 annually. Even at the current historic bottom for treasury interest rates, SS benefits pale in comparison to the power of compounding. And if our mythical high school drop-out had historic average treasury rates, he would have doubled his benefit in comparison to SS. With no raises or promotions, if our hero had accumulated his savings until he could afford to buy two shares of Berkshire B and then re-invested all future savings in Berkshire, our drop-out would have had a chance to become a millionaire by age 50. If tens of millions of Americans had been allowed to save and invest all of their Social Security taxes thereby allowing compounding to work, how much of the gap between the red and blue lines would have disappeared? Mr. Buffet wonders why Americans don't save. Have the socialists effectively stolen the capacity of working Americans to save? Have socialists not only destroyed the capacity to save but also destroyed the incentive to save by stealing most of the savings benefit through inflation?

Contrary to what "professional" politicians would have people believe, inflation cannot be defined as rising prices. Rising prices are a manifestation of inflation. Inflation is a growth in the supply of money and/or credit that exceeds the growth of goods and services in the economy. If the amount of credit and money remain constant, capitalism combined with free markets will result in falling prices and therefore rising standards of living for all. A combined credit growth plus money growth that exceeds the growth of GDP will result in rising prices and falling standards of living in direct proportion to the combined amounts of excess credit and money.

Who benefits from inflation? Under the Constitution, Congress was authorized to turn gold and silver into coins of a fixed weight. Without any Constitutional authority, Congress passed and Woodrow Wilson signed the Federal Reserve Act in 1913 to enable the Federal Reserve to expand credit growth and to allow the printing of paper "money". Paraphrasing former Treasury Secretary John Connally's famous quote, "It may be "legal tender", but that doesn't make it Constitutionally authorized money." Just as "professional" politicians are the only people to benefit from socialism, "professional" politicians are the only people to benefit from inflation. The sole reason for the existence of the Federal Reserve is to serve as the instrument through which the federal government creates inflation. The Federal Reserve has nothing to do with fighting inflation; it is the source. Credit growth usually initiates the inflation process; money printing follows as the vicious cycle begins. Even the "money" of the federal reserve is borrowed into existence. In spite of thousands of years of history to the contrary, for almost a century now, "professional" politicians still act as though it is possible to borrow our way into prosperity.

Who suffers more from inflation, the rich or the poor? If inflation consumes and destroys the benefits of savings and the rich have most of the savings, is inflation a way to transfer wealth from the rich to the poor? Inflation has been said to be the cruelest tax. If true, what was said about taxes at the beginning of this article must be true for inflation as well. The lower the individual's income, the less their ability to pass the costs of inflation through to others. The poorer the person, the more they suffer from the higher prices caused by inflation. Lower skilled workers are the lowest paid workers. As inflation drives labor costs higher, lower skilled workers contribute the least to company profits and are the first to be laid off. The higher the inflation rate, the faster and the farther the standard of living of lower income individuals will fall. And because inflation completely undermines savings, it is the loss of the ability to compound savings that keeps the poor from first becoming members of the middle class and then successively compounding their savings to eventually become rich.

Retirement planning is now on the minds of the boomers. What makes retirement planning difficult? It is not knowing how much inflation "professional" politicians are going to cause that makes retirement planning impossible and turns it into a pure gamble. What and how much they are going to tax adds to the casino atmosphere. Eliminating socialism would remove most of the incentives for government to inflate the money supply. In the absence of inflation, people could actually figure out how much money they will need and can expect to have when they retire. A planned savings program would allow prospective retirees to accurately plan their retirement threshold, the point where total savings are adequate to cover their reasonable retirement expenses. The same is true for health care for all Americans. In the absence of inflation, Health Savings Accounts and completely private insurance plans for individuals would allow individuals to reliably estimate their own health care needs at virtually any age and to plan accordingly.

Several of your emails have asked when are we going to get to the means of ending socialism? There are millions of Americans that are now dependent on their checks from government socialism. There are even more millions of Americans who are counting on being able to receive the government's socialism checks in the future. And there are millions of Americans that are simply sympathetic to the plights of the less fortunate among us. Every one of these millions of Americans will need to understand that there is an alternative that is better and that nobody's life is going to be unfairly compromised or jeopardized during any type of transition. To an extent all of the articles so far have been a part of the first step.

In truth, the case against socialism is perfect. In truth, no legitimate defense can be made for socialism. What you have been reading are my initial crude attempts to make and present the case against socialism. If the Reagan Renaissance is to become a reality, its supporters must build and perfect the case against socialism. Then we must recruit and train the citizen-statesmen who will refine and present the debate to the public. The media employs thousands of "presstitutes" that will be promoting socialism in every newspaper story, magazine article, and TV show including the 24 hour a day cable news networks. Our universities employ armies of "profstitutes" supported by government grants that will be attacking our arguments and devising new arguments of their own. As the socialists raise plausible arguments, we must prove those arguments to be impossible or at the very least, implausible. One way of achieving this particular goal should be to establish a monitored forum that tracks and perfects each fact in the case against socialism. Such a forum could become not only a tracking and testing ground, but an improvement ground as well. Each viewer might have a different viewpoint or be potentially capable of providing a new or better angle of attack. Do you have the expertise or ability to create, monitor and provide such a service to this effort? Who among you is willing to volunteer or pool your efforts with others in such an enterprise? Only very limited out of pocket expenses should be required for such an effort. The major cost to participants should only be their time and expertise.

Under the Constitution, Americans were truly "all in this together". What was good for any American was good for any other American. Beginning in 1913, "professional" politicians set the stage with the Federal Reserve Act to make socialism possible. Democrats created class warfare and fired the opening volleys of the war between economic classes when they passed laws creating categories of people who were rewarded for certain attributes or circumstances while other categories were penalized. Special interest groups were borne to lobby for more reward or less penalty. "Professional" politicians have harvested the money and the votes ever since. If freedom and the United States are to survive the Perfect Financial Storm headed to our shores, we must end socialism before the Boomers become dependent on Medicare. Bubbles in the stock, bond and real estate markets are only the tip of the socialism iceberg. Jim Puplava interviewed Professor Laurence Kotlikoff on Financial News Network this past Saturday concerning "The Coming Generational Storm". Waterproof compartments will begin to flood when these bubbles begin to pop, but the real flooding will start when the Medicare bills begin to arrive at the same time that the defined benefit pension plans all go underwater. If Constitutional conservatives are going to melt the ice before it's too late, we are going to have to turn up the heat in the arena of ideas. Democrats are fully engaged in the war of words while the media ties the hands of conservatives with pleas for bipartisanship and "can't we just get along". Step one is to build and organize an impregnable arsenal of arguments against socialism that even a twelve year old will understand. Next we will need to recruit and train a cadre of citizen-statesmen to present our side of the debate during election campaigns to defeat and replace "professional" politicians.

One last question for today: If every American is presented the facts about socialism in a carefully organized easily understood manner by an articulate citizen-statesman, can socialists win an election where the voters are rational?

Interview with Professor Kotlikoff: The Coming Generational Storm. I have not read the professor's book, but am looking forward to learning more about his proposed solutions to the problems posed by Gokhale-Smetters. I would tend to take issue with any solution directed at simply balancing cash flows, but will address this in the next article.

© 2004 Reagan Renaissance
Editorials Archive

Author's Note
The Reagan Renaissance is being moved to the launch pad. It will not be long before we are ready to begin the count down. Have you contacted friends, family and other interested parties? Leveraging the power of the internet will be a vital part of the rocket fuel needed to power our engines to overcome gravity and reach escape velocity. Please send your friends, family and people that you know that are conservative, or to anyone who wants to restore the Constitution's limits on government or to end socialism, this link to the Reagan Renaissance Archive. Please post links to the Reagan Renaissance Archive at internet forum groups, on internet bulletin boards, and internet newsgroups. How far and how wide you spread the word about the Reagan Renaissance will be a major determinate for its success. My thanks again to Financial Sense Online and the Puplavas for allowing me the opportunity to make these views publicly available.

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