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Courtesy of Frank Capra

 

Any investor knows you buy low and sell high.  Buying high and selling low makes you a loser. The same goes with a business.  Buying a business doing very well, will leave you no room for growth.  Your pie can only get smaller, as more businesses arrive on your block and begin exploiting the fact you are so busy, by offering similar quality and prices with lower wait-times.  Their profits grow; while both your market share and profitability decline.

This is why people like monopolies so much.  One can consistently almost guarantee one’s income and profitability.

Now because of “math” it is easier to show great gains on low profitability options, more bang for the buck, than on high ones.  The closer one is to zero the higher percent increase one can show their clients.  If you have just one customer sale, it is easy to have a 100% increase by having 2 customer sales; someone just has to walk into your store.  But if you have 1000 customer sales per day, then it is rather hard to jump up to 2000 customer sales per day.  Where are you going to put them?

Understanding this  is critical to growing the economy.

History lesson.  In the summer of 2007 ARM’s started defaulting as the higher rates kicked in, starting a mushrooming effect up and down the securitized mortgage chain.   In 2008 when Lehman Brothers collapsed,  all hell broke loose.  The world financial markets came within 20 minutes of collapsing entirely.  But the US under George W. Bush restored confidence in the dollar, and people decided to leave their investments alone and let them ride.  That is his most defining moment.  That is one memoir I want to read.

Fortunately Ben Bernanke was an expert on the Great Depression.   Bolster the banks, keep money solvent, coddle corporations, and keep the infrastructure intact.   Knowing full well, if it totally collapsed (like a small town losing its factory) there would be no economic driver to hammer the economy back into shape.

For this reason, great pains were taken to assist big business on their bounce-back.

They bounced back very well.  Only this time, they didn’t need as many people to work for them.  Over the last decade, software had become smart enough to replace many jobs people had previously occupied..  Just that before the recession,  it wasn’t that obvious, It was only after one let people go and ran well or better without them, that one realized how just how fat you were beforehand.

So this brings us to the point.  We have invested in corporate bounce-backs as far as we can go. We have hit the ceiling as far as getting a return on our investment.  On the other hand, now on the labor side, we have great opportunity.  Every little investment over there into into putting people to work, will return great dividends very quickly.

We have to realize there as simply some jobs in society that cannot be performed by machines inside  corporate establishments or a banks.   Those jobs, simply put, are ones whose duty is to watch corporate giants and banks to insure that they comply within the law and prosecute them fully when they step out.

We need these jobs.  We really need them now.  After all, people do not work best without any accountability.  In fact the opposite is mostly true.   When you have to personally answer to a boss, you are more productive. Even when  that demanding boss is oneself; they still answer to someone. Consider the opposite.  If you could be paid whether you did work or not,  would you be as productive as you are now, where if you don’t do work, you don’t get paid?  Or would you take advantage of that opportunity, to heck with productivity, and seek to experience some of the quality of life you missed hereto? Our corporate entities and banks need to answer to a boss. That boss should be the American People via their proxies. the government watchdogs.

Those record breaking Corporate profits which are achieved by cheating society, are not really profits towards society’s benefit at all.  Some one has to eventually pay for them.  If you pump toxic chemicals into the ground to avoid paying for their disposal, at some future point when they hit a water table, society will have to pay to remove them and the damage they caused as well.

It is cheaper now to prevent that action while we have tons of money, than it will be to fix it when we simply do not.

The small business method to fix our economy, is to hire more government workers (invest in a brand new business) and pay for them out of the corporate earnings (our business already tapped out) because they can run with less people.

It is really no change from before.  Except for the person writing the check.  Prior to the recession these people worked for a corporation and got paid by their company. Where we need to go, is to have these people work watching over their former corporations,  now getting their pay checks written by the government, which gets its extra funding to cover their pay, from taxing the excessive profits those corporations are making.  Why are the making them?  Because they aren’t working as many people….

This is quite sustainable when viewed from this perspective, as would be readily seen by the owner of a small business.   If we were happy in the nineties, back when everyone was better off each year than they were before,  then we can be happy again, just by keeping all portions similar, just moving labor from the private to the public, and increasing assessments on the private sector to pay for it.

There are those who will scream.  They are selfish. They will be proven wrong.

As our planet becomes more crowded, we need more solutions. Some solutions are not very profitable and for that reason, we need a government capable to grow to meet them.

The old arguments of government being the problem, are long gone.  They weren’t true ever, though a lot of people believed them back in the day.  The opposite is certainly true now.  As a society we need more watchdogs working to make our lives better.  As a society we really don’t need more profits.  We have too many of them now and really, what good are profits really doing for us? None. Instead, we need more people working and buying things..  Nice things that someone’s got to make…

It is time to pivot in how we view the entire American economy.  Let’s hire us some watchdogs and cut the deficit while doing so, by increasing the rate of taxes on all those profits being sucked up in excess because a lot of workers got fired..

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This is post number 2000.

The only real significance is it is 150 posts more than where Tommywonk stopped exactly one year and fifteen days ago…

If some future historian looks back, I can only guess they may kindly make some note of the quality of thought that underlies these efforts, but my guess, is no one will ever notice…

Irregardless, as long as the urge to put thoughts down for others continues, we will go on. As usual, with no goal, no direction, and no ulterior motive. Probably upon reflection, my biggest surprise, right here, right now … is that I still enjoy it so much, and can’t wait to jot my thoughts down, click the button, and send them off to where ever cyberspace and the vast internet ocean, lets them drift….

For each of you who have become regular over the years, … thank you friend…


Right click to open full image… Pictograph Courtesy of Viral..

So, can someone tell me again, why we shouldn’t tax the rich, and instead, balance the budget on the backs of everyone else?…….

I seem to be missing that little detail where that all makes sense……

First his argument, then my rebuttal. Most of you have already read the article by Warren Buffet: Stop Coddling the Super Rich.

Jeffery Miron rebuts that with Why Buffet Was Wrong

Encapsulated (read the whole in the link above), Miron says Buffet was wrong because

1) number of $uper-rich too few to make a deficit dent.
2) focusing on the $uper-rich fosters a counter-productive attitude towards material success;
3) focusing on the $uper-rich distracts us from the real problems: “policies that make no sense”;
4) the tax on capital gains needs to be zero prevent economic stalemate.
5) High taxes on income/capital gains, drive investment overseas.
6) Buffet errs by focusing on outcomes, not policies…

His closing jab…. In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should stand back and applaud the winners.

Agreed: As in sports, we should adopt good rules and insist that everyone play by them……

But which rules?

Take football. Formulated in 1873 the original rules representatives from Yale, Princeton, and Rutgers met to discuss formulating rules for this new game of football. The new rules consisted of reducing the number of men on the field from fifteen to eleven. Adding a fourth down before surrendering the ball. Tackling below the waist was allowed. …..

Yet the first legal forward pass wasn’t attempted until 1906, 33 years later… after a change in rules. So when one discusses following the rules, the immediate question is, which rules are we going to go by?

When it comes to football, obviously not the purest approach, instead we go by those rules reached by a consensus by those who represent those on the field who will be playing… (Incidentally, the previous year’s (1905) season saw several on-field football deaths and serious injuries around the country. President Theodore Roosevelt (The Bull Moose) met with universities officials to find ways to make the game safer. That’s when rules were modified to allow passing.) One can see why they would want to change…..

So something like the forward pass which we take for granted, was added as an innovation 33 years after the game was formulated…

Whose rules is Miron talking about? Keynes? The Chicago School of Business? This Libertarian’s Take?

Here are the fallacies of Miron’s argument.

Are the number of the $uper-rich too few to make a difference? Miron takes Buffets 10% surcharge and multiplies it out giving an optimistic $73 billion off of the top 1% adjusted gross income of $727 billion.

Allow me to ask a question? Would it be easier to balance the budget and cut back on the deficit if we had this additional $73 billion, or if we didn’t?

That is a no-brainer. Is $73 billion everything that we need? No, it is not $4 Trillion.. It is a $73 billion that should have already been in our system had the Bush Tax Cuts not been extended…. It is one simple step towards that $4 Trillion.

Furthermore, just playing with averages, taking this $73 billion in taxes, that Warren Buffet says his group would feel good about giving, especially since 99% of the population are suffering so much,…. This top 1% would at the end of one year…(.assuming they paid Buffet’s average of 17%, plus the proposed 10% surcharge, ie 123 billion plus 73 billion) ….be responsible for $196 billion of America’s Revenue.

Leaving $531 billion of their aggregate income left over for private investment. If receiving a return of 3% on that money (I earned 40%), just sitting their money gains an additional profit of $16 billion the subsequent year, which will will in itself, yield the following year at (17% + 10%), an additional 4.3 billion in revenue once it is taxed…..

So exactly the amount the Bush Tax Cuts are costing us per year of income by continuing them for the top 1% using the figures compiled by the extinguished Mr. Miron, is…. $75 billion if their rate of return that year, was 3%.

This year alone, we will be borrowing $1,270 Billion just to fund our Federal Government Spending…. So how can someone realistically say ,,, NO NEW TAXES! and continue borrowing $1270 Billion at hopefully less than 3% ($38 Billion) when they have the $uper-rich lining up to cut them a check for $73 Billion? And all they need to be, is asked? Instantly our budget deficit drops slightly and we now only have to borrow $1195 Billion which costs us at 3%, $35 Billion… We just saved $3 Billion in interest a year!….

How can anyone say this is a bad plan? Especially when it impacts ONLY 236,833 taxpayers….a number slightly less then the number of citizens of the nation’s second smallest state (Delaware), who have a bachelor’s degree or higher (246,932)

So Take Down 1: Miron says Buffet is wrong because the $uper-rich can’t make up all the difference! Correct: but that doesn’t make Buffet wrong; it makes not raising taxes on the wealthiest 1% wrong, because that $75 billion that is a difference, is one that will be paid at some point by 99% of Americans making less than $1 million a year.

Next:

2) Focusing on the $uper-rich, fosters a counter-productive attitude towards material success.

No offense to the distinguished Mr.Miron, but this is simply a stab in the dark. It, believe it or not, is attempting of all things, to use… the discipline of psychology, as an economic instrument. Most psychologists, can’t tell me what psychology is… As a science, it is very imprecise. In fact, I remember back in the day, when psychology was called “the discipline without discipline.” because it was mostly made up. Those students who could make up theories on a dime, and find threads of reality to defend those theories, did well. Back then, it wasn’t real science. There was no way to invade the brain to test ones theories… (Seriously, everything we do, is phallic? That’s what that discipline’s founder Freud said…)

Miron’s own words: The way to promote a hard-working, entrepreneurial and innovative society is to celebrate great wealth so long as it has been earned by legitimate means. When this is not the case, policy should target the wrongdoing directly, not demonize everyone who hits it big. This is called: preaching to the choir; it is repeating back what those listening want to hear; it is not something based in reality.

I know where he is coming from. Anyone who’d stood in West Berlin, and looked out across East Berlin, knows that the economics used on West Berlin side, were the more preferable. Communism wiped out wealth, and eventually they had no bread. But they had to actually kill millions of citizens to reach that point.

Denmark is pretty cool place to live; it’s top tax rate is 51$. Norway is ranked the best place to live in the world: it has a 40% tax rate. Belgium is a marvelous place: taxed at 50%… So there is a balance that can be achieved. Higher taxes do not necessarily imply an East Berlin. In fact, these three countries, for its own citizens, are the equivalent of a cruise ship. You pay one price (taxes) that you can afford, and everything thereafter is free. Really, if there was something wrong with that concept, why would so many Americans take cruises?

With those two myths out of the way, let’s look at his statement stripped of bluster, and poke at the skeleton of fact…. A quick question rather illustrates the inanity of the remark…

Dear Reader: you who can barely pay your bills, if you could make $28 Billion a year, would you want to? (Oh, I forgot the part where you really make $56 billion but give $28 back to the government, but that doesn’t really affect your choice now, does it?) Are you really going to stick with your $30,000 assembly line job, because if you made $56 billion, the government would take 50%?

So that line, that celebrating wealth is a requirement to motivate an entrepreneurial society, I can buy only if confined in certain contexts. It certainly doesn’t mean that the out-paying by the top 1%, of 10% more of their income to the Federal Government is going to stop all entrepreneurial activity… Did every business close its door, when our local electric company jumped its rates 60% over the previous year? No? Not one? And those same businesses won’t shut down if taxes go up. Paying taxes is just an additional cost of business. Fortunately people will always worship money, and will always work to make it, irregardless of the amount they pay out in taxes, provided that the amount they do make, is still deemed worth their effort…

Remember, the top marginal rate in 1944 was 94%… Back then the economy was booming; an entire Liberty ship was being built in 17 days! Again, we had boom years during the 1950’s (top marginal rate 82%) and again in the 1960’s (70%) and again in the 1970’s (70%)…. Real History disputes that statement by the distinguished Mr. Miron and his implication that increasing taxes on the wealthy, cause a lack of effort and growth.

Take down number 2: Just because a person says values are important for entrepreneurship and a productive economic system, doesn’t mean they are. The Amish do quite well in their business endeavors, but I doubt anyone would believe they worship and celebrate wealth. Certainly taking 10% more from the top 1%, will not destroy America’s work ethic and cause people to stop trying to better their financial lot.

So next.

3) Focusing on the $uper-rich draws our focus away from the real problems: policies that don’t make sense. Most specifically, policies that make no sense in the first place because they inhibit economic growth and that simultaneously redistribute from low-income households to the middle and upper classes.

Examples he offers: The deductibility of home interest rates; the favorable tax treatment of employer-paid health insurance; numerous loopholes for favored industries; Excessive licensing requirements, permitting fees, restrictive examinations and other barriers to entry into medicine, law, plumbing, hair styling and many other professions; crony capitalism; the too big to fail doctrine.. all of which inhibit an entirely free market place from functioning as it theoretically could.

He argues; the home interest rates benefit upper income levels, because the poor continue to rent. Employer based health insurance gives the wealthier greater benefit than the poor, causes excessive use, raises the cost for all; loopholes for favored industries, interfere with economics because what you sell, is not as important as “who you know”.
Excessive permits restrict competition, raising prices for the privileged few. Being too big to fail props up bad companies and swells executives salaries.

He argues these policies are what shifts the money flow upward: benefiting those more who make more, and taking money from those who now make less…. For example, bailouts allow a few to receive great gains in times of good, and taxpayers to pay the costs in times that are bad… Obviously a big shift of money upward.

Back to his original statement: focusing on the rich draws our attention away from these real problems…

No it doesn’t… Take Down #3: Each of these factors is a piece of the puzzle. Just taxing the wealthy 1$ an additional 10% does not take attention off or away from these problems. All pieces of the puzzle need to be in place before the puzzle is deemed completed. And though some of those other items mentioned might theoretically cause an upward shift of money, it appears you failed to see that a majority of these items pump extra money into our economy at the bottom. That money flowing upward through the economy, is the best thing that can happen for the two quintiles of Americans resting on the bottom.

Fourth, he argues that capital gains needs to be taxed at zero. Reminds me of my Santa Clause wishes when I was tiny. Of course anyone with money, would “wish” that capital gains need to be untaxed… The inherent problem with that scenario, is that it benefits only those already endowed with wealth. Those others who can’t save, see no benefit aat all, from it…

Mr. Miron states: Economists agree broadly that an efficient tax system should avoid taxing income, dividends and capital gains to promote savings, investment and growth… But are they right? If so… why then does it never work?

When tax rates were extremely high, the economy boomed. Think about that. Of course it would. If you were about to be charged 94% of everything you made after expenses, ….. you would do everything within your power to raise your expenses higher so that you had little or no income to be taxed!… You might build another factory; you might add on to your business; you might increase your sales force figuring more salesmen, more sales possibilities; you might decide to give a raise or two or three, because better to have experience by your side, than have it walk because someone else was less stingy with their money that they had to spend or lose too. Great things happen when you raise the top marginal tax rate.. And they happen for this very reason: so the amount of tax paid to the entity demanding it, is as small as possible….

Does this decrease the amount corporations pay to the treasury? Yes, but, those new, additional people now working for that corporation, will be paying income taxes; all that money was unavailable before. And once those people who are now working, are buying, the sales tax revenues climb back into each state’s coffers.

But lets look at the opposite spectrum. What happens when capital gains actually go to zero? In a global economy, money does flee the country. And it should. Why should a business build a manufacturing plant here, when he can build overseas for 1/10 of what his cost would be if built domestically? Currently, the unfortunate truth is this: there is no reason to build here in the US, unless one is forced to by a higher tax rate.

After all, what’s the point in building a US factory with ones current profits, a factory that may lose money it’s first ten years (costing you to have opened it), only to barely break even in it’s tenth year?

When instead, one could put those profits into a high-growth foreign investment fund and make 40% this past year alone! When tax rates are low, or close to zero… what incentive is there to invest in the United States? Absolute zero.

Conversely, if one owns a manufacturing site overseas when tax rates go up, one is better off to close it down, move back here, and open a new plant in the US, where one can expand, then write-off their taxes to zero because of all those expansion expenses.

And that is the problem that occurs when one follows the Chicago Business School’s model in a global economy. It doesn’t keep money in the US. If Reagonomics had said,”we will cut taxes but only on that amount of physical capital you put inside this country, then it might have worked. Unfortunately when it passed, it didn’t make that specification.

But that is exactly what higher tax rates do. If you raise the corporate and top marginal tax rates, expansion quickly follows as all that profit (1.7 Trillion this past quarter) tries to find somewhere to go… For example, if you are a bank, you make loans. Capital suddenly becomes available again.

Take down number 4: Contrary to what economists say, historians are right when they point out that an economy was far more lively and productive, and investment in physical capital flourished, when tax rates were higher. As soon as taxes were cut, jobs were as well.

Buffet is scolded in this remark.

“Buffet asserts that taxing capital income has never deterred anyone from investing. Well, then he has never discussed the issue with me or many of my friends.”

Again, a shallow statement. Are you telling me that you really expect us to believe that those with money put it under their mattress, in a tree with a hole, or under their squeaky floorboard, because tax rates go up?

You really expect us to believe that a person is going to choose to settle for a loss, just because tax rates are going up, instead of settling for some solid wins, minus the amount taxed off the gains?

If so, your friends are fools.. No personal offense; it’s just that only fools would pursue such a policy. Granted, I’ve met some; they are out there.

But I highly agree with you on this point.

More importantly, taxing investment returns plays a huge role in what kinds of investments occur, and where, even if it has minor effects on the amounts..

It sure does. If you want economic growth, and put that 2nd quarter’s $1.7 Trillion dollars of profit back into the economy where it can grow jobs, then you’d better raise the rates on capital gains and the top marginal tax rate of the top 1% of income. Suddenly there is an incentive, one that has been missing since 2003, to build and expand your business here in America.

Take Down Number 5: high taxation of investment drives investment overseas…. History proves this wrong: high taxes keep businesses here. Low taxes send companies overseas because that is where the higher profit is. If you can keep more of your money by burying it back into your business, then that’s what you do. If you build overseas, and Uncle Sam insists that you pay 40$ of that profit over here to this fed, you soon will realize it is better off to have put that profit into an expansion facility here in the US, and make more money per day, per week, per year through increased volume (all of which comes to you), as opposed to investing and then turning 40% over to the IRS…

Take down #6: Buffet focuses on outcomes; not on policies.

In fact, most citizens of this country are tired of policies being argued back and forth. They want outcomes.

Outcomes are what it’s about. All proper focuses need to be on outcomes. The outcome is what is important. Whatever policy which can reach that desired outcome is desirable. Some policies may work at different time and different people. Some policies may not work at all. But focusing on the outcome is exactly what the American people are saying they want. Forget policies and philosophies.

Fix it please…Make the top 1% bear more of the burden, please? It worked so well before, make it work that well again, please?

So it comes down to deciding which set of rules we are to follow. A set of rules desired for by a very small select group of people, the top 1% of the wealthy? Or… rules that will benefit the other 99%…

Sometimes when the results don’t quite work out, changing the rules is deemed a good thing…….

It’s time to tax the wealthy. We’ve starved the economy long enough.

The global markets lost 1% today… Actually that is pretty good. The losses stemmed over the fact that Republicans won’t allow new revenue to enhance our failing budget…….

Like George Washington, they want to apply more leeches (tax cuts) which eventually will bleed the father of our country dry, and kill him dead.

There are great ideas to get around the impasse……

One was so close last week in which Obama and Boehner had come almost to a 4$ Trillion Deal… It was so, so close. Boehner was about to become the Alexander Hamilton of the 21st Century: Historians would forever know him as the man who brought America back from economic ruin…….

But Boehner’s owner, jerked hard on his leash… cracking Boehner’s trachea. He then spun Boehner to the ground, and applied zip strips to his wrists and ankles. He then tazed Boehner repeatedly. For the first time in his life, Boehner did not cry. He was then strapped to a board, tilted backwards into a tank of water, and held for 45 seconds, over 111 times. He was then blindfolded and pummelled with cans of Pepsi, embedded in old cotton socks, leaving no evidence. He then poked with a tube, in his (you know where) and the other end was attached to a fire hydrant.

The next morning, Boehner said the deal was off; he refused to return Obama’s calls.

Leaks from those working for his owners, tell us the taxes on the wealthy 1% were the sole reason Boehner was given “the treatment”… It’s a damn shame; for a package of $3 trillion in cuts, (yes, includes modifications to SS and Medicare) and a Trillion in tax increases on the top 1%… would shake the dynamics of our economy.

It would spur investment here in America.
It would therefore create jobs.
It would stop the uncertainty where America was financially headed.
It would prevent the immediate loss to our economy of $4 billion a day.
It would reduce the deficit over time, and save money spent paying interest, which could then be used for services.
It would be the proper step at this time in the direction we need to go.

But, if the US defaults on its debt, nothing in the financial markets is sacred, and when nothing is sacred, that… causes panics…

And a panic in 1929… caused the Great Depression. A panic in 2008, caused the mess we’re in right now.

The world’s managed wealth is $122 trillion… A one percent drop.. is $1.2 trillion. That is the amount, that one half, of one third our government,… cost the world today.

They are kids, playing with a live junction box… Sticking a screwdriver in the wrong hole, burns down the entire house……

(At $50,000 a job, today’s loss is the financial equivalent of putting 24 million human beings out of work)

Senator Hatch’s own words….

“We’ve been down this road before,” he said. “In 1990 Congress and the president struck a deficit reduction deal that combined spending cuts with tax increases. Unfortunately, while the tax hikes remained, the spending restraint did not, and our debt has marched higher.”

The Reality:

Graph showing Republicans are Sole Cause of Bad Government and ever since Bush we've been fucked
Courtesy of TPM

So if you knock off the 74% overspent on both wars, and knock off the 32% overspent on the Medicare Medical Profit Enhancement Act signed by Bush in 2003, spending is flat relative to GDP.

Revenue isn’t… Hatch says it worked great then… As reality shows, the only difference between then and now, is we aren’t taxing enough… Any Republican who says we are taxing too much, is like Hatch, a big, fat liar….

Poor Roger Clemens: Apparently it’s more of a crime to lie before Congress, than it is for a member of Congress to blatantly lie on CNN to the American people?

Did he just say (1:00) “although the tax hikes remained (uhh, is he so old his memory skipped over the Bush tax cuts?) … our spending cuts (see above chart) did not?

Caught in the act, Big Fat Liar…. Got some water to pour on to your pants?
Republicans Now Scramble for Damage Control over All The Lies They've Told To The American People
Image Courtesy of Cape Cod Living

Today the White House issued this Executive Order.

“Should the debt ceiling not be lifted in time by May 16, in order to prevent the Treasury from running out of funds, I am hereby using the emergency powers given to the Chief Executive by the Constitution, to temporarily suspend the Bush Tax Cuts until: 1) either we can legally borrow the funds to continue paying on our commitments, or 2) we bring our debt down to the 2008 level by having much more tax revenue pour in.

This is in effect, immediately, and I have instructed the IRS to recalculate all 2010 tax forms over the level of $2 million dollars, and asses those individuals and companies, for the differences.

We must take this action because Republicans want to pay politics with your lives. As Chief Executive, I am responsible to you, not them. I won’t let that happen.

With these tax cuts out of the way, and with our austerity programs already in effect, that windfall of profit the Treasury will receive, will be entirely funneled towards the paying off our debt.

This policy will continue until Republicans can act reasonably and in a productive fashion.

Barack Obama.

There already is a flat tax for Delaware that begins above $60,000 dollars… Some, like El at Delaware Liberal, ask for a progressive rate to continue into the higher elevations of income levels.. The more you make, the more you pay…

This may sound unfair to some… and at face value it is… By face value I mean as the words themselves are written. For what is actually happening in a progressive tax, is this:

The more you make over what you can possibly spend in your wildest dreams, the higher percentage you pay of all that excess back the government that made your extravagant wealth possible….

Put that way…. that’s fair. That’s damn fair…

Most of us don’t have enough money. Most of us don’t pay much in taxes. That’s fair. But those with too much money over what they can spend? Don’t they have a duty too?

They’re the ones benefiting the most from the American dream. Shouldn’t they be the ones contributing the most to make it happen for others? Don’t they have the most to lose if all stability ruptures and violence, rioting and revolution begin eating away at all they have gained?

Obviously yes… and when people are starving next to you, it inhumane not to want to give up some of that money THAT YOU CANNOT POSSIBLY SPEND IN YOUR WILDEST DREAMS so they can get one bite of food and live.

So we need a flat tax in Delaware… One that is fair. Republicans like flat taxes; they say they are fair. But somehow I don’t think they will like this one…

This upcoming year we have a budget deficit of $300 to $400 million ….. again…

WE the people, can make it go away if we invoke a flat tax based on percentages.

If you make $100 million over what you can possibly spend…. we tax it at !00%….
If you make $ 99 million over what you can possibly spend,….we tax it at 99%….
If you make $ 90 million over what you can possibly spend….. we tax it at 90%…
If you make $ 50 million over what you can possibly spend….. we tax it at 50%…

We follow the same pattern all the way down… fair is fair…

If you make $ 20 million over what you can possibly spend….. we tax it at 20%…
If you make $ 10 million over what you can possibly spend….. we tax it at 10%…
If you make $ 5 million over what you can possibly spend….. we tax it at 5%…
If you make $ 1 million over what you can possibly spend….. we tax it at 1%…

Under $1 million the tax code can stay the same… The budget crises had been solved…

Under this arrangement, those in the high end may grumble… “Why should we support a government that allowed us to prosper?” But if any of you are making near the low end, you see this arrangement causes you to pay far less taxes than you do now… Imagine… having more money…

Ironically this plan benefits those who the Republican leadership is always saying needs the help: those new millionaires…. Of course some tweaking will be done… It is not fair that someone would pay more taxes at $999,999 still under the old plan than they would at $1,000,001 under the new.. But we can fix that.

Some may say the top earner will leave Delaware.. He should. He’s not paying state taxes anyway, so his loss means nothing to us as far as revenue goes… But that is a threat, we have to take into account.

But just the top ten percent of left-over-income earners would clear our deficit.. Boom… Gone… Goodbye.

And the economy would get back into shape as Delaware got back to work….

It is rather obvious we must raise taxes on the top earners of this state, no matter what one’s political persuasion may be.. It is not about politics; it is about money….

Everyone else has sacrificed as much as they can possibly stand. It is time those spoiled ones at the top, who have no idea of what sacrifice entails, step up and contribute their fair share… After all, it’s only money they can’t possibly spend anyway…..

So the next time someone says they won’t raise taxes in Delaware ask them why?

Say why won’t you raise taxes on those who can’t possibly spend the money they’re earning anyway? Why should they get to keep their money, while everyone else in the state has to lose theirs?

When, but for just a few people, taxing them fairly under a flat tax based on percentages, would improve the lives of many?

It makes just way too much sense. We need $400 million? We take it from the top.

My bills are too high to expect me to help out the economy.….– kavips

One Trillion shy of all domestic Household debt (14T) , is the debt imposed upon us by “the borrowing of our governments”… local, state, and Federal (13T). The majority (10.4T) is our Federal debt. It should come as no surprise that tackling this task should be our first priority to insure that any short term economic gains we create, are not wiped out months or years later.

We were on a successful track to achieve this goal just 8 years ago… Budget surpluses were projected far into the future, and before our eyes, the whittling down of our national debt actually happened . Today, Generation X’rs and Y’rs simply accept that as fact, that balancing the budget is possible. Very few recognize how much of a miraculous achievement that thing is: a budget surplus… For until Clinton-Gore arrived, no one ever expected our national debt to decrease. But decrease it did and not only did it actually drop within our lifetimes, but a credible path was tracked showing it decreasing year by year to negligible amounts. And then … with one election… things drastically changed. We stopped our Treasury from taking in enough money to cover its known expenses and instead, borrowed the amount to fund what was necessary.

In eight years we went from a projected $5 trillion dollar surplus to an actual $10.4 trillion dollar deficit; a flip flop of $15 trillion dollars! Political afficiendos will be quick to blame Republican philosophy and their elected president: George W. Bush. Unfortunately they are way off the mark. (I say unfortunately for if one party and one president were truly the problem.. the fix would be much easier to amend…)

The problem is a systemic one. The entire financing system of the Federal government is now broken; almost to a point where returning to the glory days of before 2000, is barely considered a laughable alternative. The problem can be best ascribed to a head on collision between a poorly timed demographic shift, and unreal expectations. Put simply in one word, entitlements; put in four words, Social Security, Medicaid, Medicare.

Here’s how paying off our nation’s trillion dollar debt benefits us.

2007 Federal Budget Expenditures
Courtesy of Federal Budget 2009 (Right click for full image)

Looking at the image and being asked what can be cut under current law, one sees that only two areas of the above pie chart cover discretionary spending. The other four cover mandatory, non-discretionary items. That means that they get paid, … irregardless. We have no choice but to pay them fully. We have to pay interest. We have to pay Social Security. We have to pay Medicare and Medicaid, as well as all other mandatory payments such as Treasury obligations.

The only two areas where we can slice, dice, and cut back on expenses, are between that of national defense, and everything else we think of as being “our government”; both together amount to a paltry 38% our our entire expenditures. 62% of our Budget is locked down, and commitments have already been determined where it will be spent…. long before the fiscal year even begins.

So one sees that if we were to pay down the National debt, we free up the interest payments ( 9% of our current budget) which can then be applied to other things we might need ten years from now.

Obviously our entitlement programs will have to be changed. One can see that ridding ourselves of Medicare and Medicaid as a governmental expense would go a long way to reducing our deficit, and ultimately be a big push bringing our interest payment closer to zero…. But doing so… brings up the ugly social issue of what to do with those Americans lacking health care….

Contrary to popular belief getting rid of these programs is not completely impossible. Except for the time-frame covering the past 40 years, mankind has survived OK without Medicare and Medicaid. Rome lasted a thousand years without it. We all know that if we suddenly became faced with an all-out-war against some type of alien invader (Independence Day),what money was currently designated as a mandatory expense to cover health costs, would instantly be moved to supplement our planet’s defense with nary a whimper. Our sick would make due the best they could… perhaps even do better than they do now… (at least for those 2 million Americans a year who pick up a nosocomial infection!)

The writing is on the wall. One entitlement will have to fall in order to save this country. As America’s retirees get older, the medicare problem is one costly extravagance that must be looked at closely to determine whether it helps or hurts our nations viability.

When compounded with Social Security’s insolvency, the Medicare situation takes on an additional albatross around its neck. For as one thinks about it, we are using federal funds to extend the lives of those who are receiving Social Security. Using all and any expense available to keep someone resuscitated long enough to earn one more Social Security check, does not make practical or financial sense. We must rethink our commitment on how we will provide long term health care, based on today’s prices… not those prices existing back when the Great Society was envisioned….. the 1960s.

Ultimately for governmental medical assistance to survive, we will have to suck the profits out of health care. There will be a few who protest. But if Medicare were suddenly to cease to exist, and health care became a cash only commodity, somehow we would survive. Who knows? When faced with no free blood pressure medicine, we might try other methods to keep alive… such as eating right and exercise.

The amount of people dying will never change. Everyone born will die at some point. All we are doing, is removing the unlimited amount of taxpayer money used to support the unreasonable assertion,that we have the right to use lots of other people’s money to live as long as we selfishly can.

Think about this. Very few of us would purposefully bankrupt our own flesh and blood children by forcing them to pay out of pocket for our over-the-hill medical needs… With Medicare being fully funded by taxpayers….. it is doing just that…

Of course there is another method we can use to fund our budget and keep Medicaid and Medicare: bring in double the revenue…

But, because of the demographics of our aging population and the sparsity of those working young who are paying for the old people’s expenses, keeping this cancerous expense on-board, and paying for it by saddling those still working with double taxes, is not a viable option…. One could argue that it is morally wrong. It would be saying to our children that “yes, we had the American Dream freely given to us by our parents; now you will have to work much harder, and earn even less, just to continue that dream for us.”

The writing is on the wall… Sometime, somewhere in our future, it will have to go… Not disappear, mind you, but in its form now, funded as it is currently… it cannot last… The pie chart tells all. Tweaking 3 or 4 percent in any one category makes no dent upon our unfunded problem.. We must begin preparing ourselves for this uncompromising reality; one entitlement will have to go. Looking above we see the absence of Medicare and Medicaid in the Federal Budget, is more plausible than the loss of any other category.

If we were to wean ourselves away from that entitlement, and apply that amount in bulk towards our national debt as a payment of one half of one trillion per year, within 20 years…. our debt will be gone.

For when it comes down to discretionary spending… we are as low… as we can go… The cut has to come from Medicare/ Medicaid. What replaces it is a whole different discussion…..

So how high do taxes need to rise, (using today’s figures without cutting out one entitlement), if we truly wish to decrease our national debt? Since the economy grew significantly during the Clinton years when all taxes were higher, those rates we can be assured do not stifle economic growth. As a first step, that would be the smartest move; let the Bush tax cuts expire. …To those who argue that increased taxes constrain our economy, try and get a solid answer from them as to why the economy grew like magic when they were previously in place.

Since it has already once been done, it should not be hard to do it again. Right? Need more detail?

Let’s look at the twentieth century as a whole.. This chart simply shows the highest marginal tax rate per year. It ranges from 7% in 1913 up to 94% in 1944-45. Graphically displayed it looks like this….

Graph of Top Marginal Tax Rates 20th Century
Graph Courtesy of Truth and Politics.org

Although the graph stops at 2003, this evidence shows the ending level extends at 35% through to 2008.

If one couples one’s knowledge of history with numbers portrayed upon the graph, a correlating factor of 40% seems to be the ideal marginal tax rate.. When rates dip below that amount….they may last for a few years at that level, then they soar sky high for many years thereafter… It appears that languishing below 40% puts too much stress on the private sector. Something goes wrong, it buckles, and great governmental expense is taken to bring it back under control.

But if one uses the same evidence portrayed on the graph, and this time couples it with one’s knowledge of economics, they notice that lower rates produced boom economies, and the higher rates stifled economic growth.

Recent knowledge ( ie. today’s events) coming off of the experimenting and tinkering between 40 and 35 percent, leads one to believe that 35% is too low to sustain the economic viability of this country. As a nation we have socialized ourselves a bit too far to survive upon those lower rates…. 40% seems to be the optimum low that we can go….

Unfortunately because we played around with cutting underneath that magic number, we will be paying steep rates throughout the near future, very much like those which occurred between 1933 through 1963. Those who lived their full lives listening to Republican partisans constantly complaining about today’s high taxes… well, thanks to them (Republican partisans), America’s wealthy is about to find out just what “high taxes” really are…. As one can see from the chart, and can estimate from the amounts of the bailouts being currently given out…. the highest marginal tax rates for the wealthy, will climb higher than most of our wealthy has seen in their lifetime…

And because of that increase… our economy will slow.

The beauty within this chart is that it provides to all a sense of where the line needs to be drawn.. When we talk of raising taxes… we are speaking of returning to 40%, a level only 5% different from where we are now… What that means is … instead of someone making a full billion dollars now, after future taxes are deducted that person would be still sitting on $950,000,000 dollars… Who wants $950,000,000 dollars? I do. I certainly would not fold my business just because I had to give an additional 50 million over to my government, a scare tactic some may make us try to believe. Especially since I already know that our economy functions more consistently with that additional 5% amount financing the support structure on which all businesses depend on.

So how much revenue does that paltry 5% increase raise? Try $390 billion dollars per year, based on current data provided for this year’s third quarter.

True, that five percent does suck a little spending out of the economy, but if applied to the deficit, it reduces the amount borrowed which in turn lowers government’s cost. Eventually when interest payments reach zero, we can again fund our government on a pay as you go plan, thereby balancing taxes with costs in a fine equilibrium….

So if we hold costs the same. How long and how high do we raise taxes to bring our deficit to nothing in 11 years… 2020.

Debt —–Yr Expenses—Yr income—-Yearly incremental amount
10.4T——— 2.7T ————-2.6T ———————– 204 B

(The extra 100 Billion comes from above: it’s the yearly difference between current expenses and income multiplied by 10 for each year.)

So how much does that cost us? 204 Billion is what percentage of 2.6 Trillion? 7.8%

We need a yearly increase of just 7.8 percent to pull us out of debt in ten years, assuming we continue to spend as much as we do now, and that we continue to receive as much national income as we do now……..

That would make the highest marginal rate (35% + 7.8%) equal to 42.8%: just 2.8% higher than it was during the booming Clinton Presidency. Really…. is that not a lot of hardship to undertake?… Especially when one compares it what our predecessors, “the Greatest Generation” had to pay in order to give us the prosperous America which we inherited?……

And if that increase amount is spread across the entire spectrum of our sources of income.

Preliminary Estimated Receipts for US Federal Budget 2009
Courtesy Federal Budget 2009 (Right Click for Full Image)

The actual cost to the top ranked taxpayers, could be less…. One would be well advised to realize that the stimulus packages perhaps costing up to 3 Trillion by the time politicians finish robbing our future, will extend these estimates considerably.

But seeing the numbers makes one realize that we are not at the end of financial stability…. The United States has vast resources at its disposal to throw towards the global economic meltdown, slowing and then stopping its progress. We need just a moderate revenue increase to make it happen as well as begin making plans for shedding responsibility for one of our hitherto guaranteed…. Federal entitlements.

The question is what is in it for us… Bottom line… a job.

Although distant and remote, the National Debt plays a huge role in our economy, just as do charges and credit card payments play a similar role in everyone’s household finance. Think of all the spending you personally would be free to do, if you owed no one any money and could pocket what you earned…. That same principal holds for our government as well.

Those of us who still have jobs today are worried. Those of us without… are worried even more. Our jobs and long term security, depend upon our Federal Government getting costs in line and living within their means as well…. As with any investment, paying out an additional 7.8 percent is affordable if one gets a payback of a higher return…

Those living in the 90’s saw it with their own eyes… Dropping the debt creates long term stability and that…. creates jobs.

How Higher Tax Rates Benefit Household Net Worth

Compound it! It’s in our nation’s best interest to do so! — kavips

Most people do not understand the role credit plays in one’s everyday transactions… We use credit when we go out to eat; we order, and at the end hand a plastic card to our server, wait, sign a piece of paper, and move on… We know that we get a bill sometime, and that we have to look at it to make sure someone else is not using our number, and pay it hopefully before the deadline or due date. So when someone talks about credit being used by business we think of the transaction we have just made and say “yeah, I get it: Americans buy with credit cards.”

Well, I hate to break it to you but that is not exactly what we mean when we say credit is important in everyday business transactions…

Perhaps one could understand better if we preceded with an example…. Let’s take the restaurant we were just eating at and diagnose its transactions to comprehend how the use of credit fuels all our business transactions…

Let’s go back to when the restaurant was originally built. Most people think that cash builds restaurants, but really it is banks that pay for the construction…You can see their signs at construction sites… It’s simple, really. You, the business person, ask a bank for a start up amount… That amount should cover the cost of the building, start-up and running costs for a minimum of 6 months… Let’s say you buy $4 million.. over 5 years at 6%, your monthly payback is $77,331. If you are a really good operator (25% after controllables), you will need sales of $309,324 dollars that month to break even… Your weekly sales must average $77331 dollars to meet that target…

So on a month you take in $310,000 in sales, and you have to cut payroll checks twice, as well as two cuts of invoice checks… But wait, 3/5ths of your sales are in credit cards. You will receive that reimbursement in a little over three months.. Currently you have only $124,000 in your bank account and all of that is needed to pay the 75% ($231,993) of your sales that is going to expenses……. You are short. The cash on hand just barely covers payroll (30% of 310,000 = $93,000)… Payroll is something that must be paid… and so you hold off on the other bills.. You have thirty days to pay them, and you can stretch it out to forty five by jawboning… So on the forty fifth day, you cut all the checks and dig into your surplus loan amount to cover them… Basically until your credit card payments start flowing in after the third month past your opening, all you will have cash which will mostly be used to cover payroll.

So during this time you bought food on credit, bought electricity on credit, bought liquor on credit, in fact, every invoice you signed while preparing for the opening, was a credit memo on which you were promising to pay… For example, the food distributor upon getting your order, has to buy your product from his wholesaler, and then store it on his premises until you are ready to order it.. He then has to wait 45 days before your payment check comes in for all that food.. So he takes out a loan to buy the food, and when you pay him… he pays back his bank….. Likewise, your electricity is supplied to you up front without a monthly payment… That distributor had to buy that electricity from the midwest, and got a loan to do so… When he gets your payment, he will pay it back…

So it is with all your suppliers. They are without money until you pay them… They also survive on “loan money” until you cut your check..after which they pay back their loan….

So what does it mean when they say credit is freezing up? It means your supplier cannot get his food for you unless he puts up his cash first. It means the electricity gets cut off until the electric company gets your cash. It means the repair company won’t come out unless it gets paid in cash. It means that: since you don’t have cash….. you are out of luck….

According to the Federal Reserve, approximately 60 percent of banks have decreased credit limits on commercial construction; 30 percent have reduced the account limit on business credit cards; and 50 percent have reduced credit lines to financial firms.

Approximately 65 percent of banks (good news is it’s down from the 80% of October) said they are tightening lending standards and reducing the size and maturity of credit on commercial and industrial loans to middle- to large-market companies.

The day to day transactions needed to get goods and services from one point to another are in jeopardy…..It is especially clear if you break down this same transaction and follow it through its process from beginning to end.. How much credit does it take to get a jalapeno onto your taco?

Farming is all done on credit. The farmer considers his costs, his interest costs, and the price of his commodity, takes out a loan, and upon selling his product, pays it off.. Any extra he keeps. He repeats the process for the following crop.. A “no” from a bank, means no crop. His buyer, estimates the price of all the jalapenos he will buy from different farmers, calculates the interest, and then takes out a loan to pay off the farmers selling him jalapenos, and after selling the product, pays off the loan… Any extra he keeps. A “no” from a bank, means he is out of business. His seller. a major US Produce distributor, follows the same principal. It takes out a big loan to buy a large percentage of the entire season’s crop of jalapenos… It calculates the interest as part of the cost of doing business, and sells the jalapenos to chain grocery stores, restaurants, and regional local produce companies. Upon receiving his payments, he pays off his loan, pocketing any extra he made for his distributorship… A “no” from his bank, means the jalapenos never make it across the border. The regional distributorship buying off the national distributorship, gets a loan to buy the product, and after receiving payment, pays off the loan and interest and uses to difference to fund his business.. Likewise,.. a “no” from the bank means the National Distributor will be throwing away some jalapenos.. The restaurant needs jalapenos and is expecting them on the next day… We have already discussed the payment method they use, and in forty five days, their check clears… The distributor deposits their check and writes one for the national distributor… That business takes that check to the bank and then writes its check to the Mexican buyer of the farmer’s produce.. Upon receipt of that last check, the buyer cuts all his checks and sends them out to the farmers…. Upon receipt of all these checks, their recipients head to their local banks… Hopefully the amount they get, covers the loan and its interest… As we saw during the last decade in our own America with Farm Aid concerts year after year after year…. quite often it is not enough… The bank then forecloses…

If one bank says no anywhere along the chain, the whole system shuts down and none of the entities within that chain can pay back their loan… Now if it was your money and you had six times the possibility of never getting it back…. would you lend it out? Like me, you’re saying “hell no.” So you see… you can’t blame the banks for not lending in such times of crises….

You can also see that easy credit is a necessity, not a luxury that must be maintained if we are not to break down completely.

Why do we operate on credit and not on a cash base economic structure?

That is a valid question.. For as a consumer, we are a cash base society.. We get a pay check, deposit it, and then spend down to zero. We then put another one in and do the same.. and repeat… Why can’t our economic system function in the same fashion, … get the money first, pay in real time with cash, and wait to receive your payment in cash upon selling?

The answer is that it can and does on a small scale… Your yard sale for instance…. Farmer’s and flea markets are another example… But running an economy on a cash-only basis requires just one thing: lots of cash up front… Very few of us have it… Economies cannot grow on a cash basis, because the process is closed ended.. That is a fancy way of saying that an God given opportunity cannot be exploited in a timely fashion, Imagine if you as a dairy farmer lucked into having all your cows produce twins.. Your cash was tapped out so you could not buy a milker to take on the extra load. Upon seeing the milk go to waste, you capitalize on your good fortune by selling the cows cheaply for beef… If only you could have had another milker, you sighed..

In a static cash-based economy, growth can only be done by those with cash on hand… Take the top 10% for instance that owns 60% of the wealth for example… The top 10% that owns the plurality of this nations wealth, would have to make all of this nation’s economic transactions. If they don’t have a hand in the transaction, it doesn’t get done. As in the Middle Ages, our bottom 60% would live a limited existence and could only move out of the legions of the “have-nots” and into the realm of the “haves” through crime and highwaymanship. Responsible lending is the reason our economy is so prosperous and egalitarian. Without easy credit there would be no Jobs, no Gates, no Turners, no Hagels,no Markells, and no Hiltons… Easy credit is responsible for almost all the risers on our current list’s of industrial tycoons, just as it was during the Golden Ages of the latter 1800s….

But with credit, which is basically a guaranteed form of trust, we can raise jalapenos, we can buy and distribute them, and we can get our pay later. The fluidity of our market which we take for granted, would not be there without credit…

65% of our banks say they are tightening credit. What does that do to our economy? The answer as we saw above, is obvious. Our economy grinds down to a halt.

So what options can be used to grease the wheels, to get more “yes”s to come from banks than “no”s….

Obviously instilling confidence in everyone that we are indeed “out-of-the-woods” is the key… As long as we truly believe the system is intact and that when we lend out our money we are confident that we will get it back plus interest, then nothing else needs to take place.. All the other stuff we hear, such as buying up commercial paper, toxic mortgages, bank stocks, are all just tools to get us back to that psychological point of losing fear…

We must realize at some point, as did Roosevelt, that we have nothing to fear but fear itself.. He then put the banks on holiday…

Forcing someone to part with their money is close to impossible… It is called robbery and usually involves holding a gun to someone’s head… That is what a lot of those tax breaks in the stimulus package do and is why they will fail… A tax incentive for me to build and hire? What’s the point if doing so causes me to go under because no one has money to buy whatever it is that I spent all of this investment to make? No! Something out there needs to happen so lenders holding on to their money see they have a better chance to survive by lending it out than they do keeping it tightly fisted….

Again, the opposite of tax cuts can have a great effect here.. The effect is temporal and must be rescinded as soon as we reach two quarters of continuous GDP growth… And that is to tax the money that is being held in a bank’s reserves and not being lent, at a relatively high rate of 50%… Doing so would provide sufficient shock to the system which might then push recalcitrant bankers to prefer to lend at a “no tax rate” and take that minuscule chance on the economy tubing… instead of keeping their money close by and guaranteeing they will lose 50%… If they chose the latter, the Fed can certainly use that tax money amounting to 50% of that banks assets, to turn around and buy the controlling share of that bank, and then, make good quality loans and slowly ease the system of credit back into fluidity…. Taxing reserves at 50% sends the appropriate signal to banks: “Start lending, sorry, you have no choice.”

Again, contrary to what we have often heard, taxes are good… And the secret to good taxes is that they must be applied in moderation… Yes, there is such a thing as a too high level of taxation… We have plenty of evidence where high taxes stifle growth… But we now have at our disposal an arsenal of evidence illustrating the poor effects of following policies of “no” or “extremely low” taxation…. The obvious answer to both points, is that we need to find a level of equilibrium and hold at that mark where our tax needs and economic growth needs balance and compliment each other… We were at that level once…. As mentioned in another chapter, and as evidenced during the last decade, the ideal marginal rate level appears to be holding at 30%…. Our goal then is not to lower taxes… Our goal is to achieve an equilibrium that balances the needs of our government, economy, and our people. All three need to be growing for our nation to be successful…. not just one…

I’ve often thought about pulling this stunt at one of my public speaking engagements but so far have chickened out… It involves pulling out on stage a three legged stool with two legs sawed shorter so it fiercely wobbles and then nonchalantly back up and sit down on it while speaking and topple over to the floor… As I pick myself back up in front of the audience, I pick up the stool and announce (the audience realizing by now they have been rather cleverly set up). “This is what happens when you elevate one leg of our system past the others… The welfare of “Our Wealthy Corporations” over the past eight years has been force fed and elevated to where it is now sapping away the wealth away from “We The People”. as well as the wealth of our Federal and state Governments through excessive borrowing and deficit spending… For eight years we have focused on the economy, by cutting taxes, dropping our oversight abilities, merging while deregulating, allowing our multinational businesses to do whatever they want with no one looking over their shoulders… We created this situation, one piece of legislation at a time… Overall, what is urgently needed is to bring the economic model back into balance… Cutting it back too far does just as much damage as well. Remember the stool metaphor; it simply needs to be in balance!”

To achieve this balance we need to re-evaluate the rate of taxes levied on our investment community, tweaking them upward to a point where the government can again receive sufficient money back into its treasury to re-begin its trip back to solvency. Likewise raising the tax burden slightly higher makes reinvestment into research and development (R & D) the optimal choice for every business seeking an avenue to avoid returning that increased taxation back to the government coffers. That investment into R & D creates jobs, jobs, and more jobs….

Now here is the irony. As irony it is delicious and historically has been proven to be a correct hypothesis based on the results of its implementation during the Golden Years of the 1990’s… It also was a driving force behind our economy during the Eisenhower years, although at that time we did not yet fully understand the intricacies of how it worked… The higher rates of taxes directed more money to head towards R & D’s within all corporations, so it could not hit the books as “profit” and therefore not be “taxed”. New jobs were hired to fill those positions in R & D, and new buildings were built, new products developed, and new investment was spurred. The effect of putting money into all those people, buildings, new products, and additional investment, is that their increased money was now entering the community, and creating demand for such common use items as more orange juice, potato chips, coca cola, houses, cars, restaurants, and you name it… etc.. As each of those industries found themselves forced to expand just to keep up with the growing demand of their products, they too created new jobs, which in turn created even more demand for those common everyday products. The following year, because of the past year’s growth, even more investment was internalized in order to keep it out of the government’s hands… Which, as you can well guess…..spurred the cycle forward even faster… Now with all those new businesses (along with all the old businesses) investing a higher percentage of leftover money back into themselves, they, as well as the entire economy, grew larger, served more people, and expanded.

Now here is the rub. The taxes coming off all that increased growth, even though a large potential was recycled back into the businesses to avoid the higher rate of taxation, increased the amount of money pouring into the Treasury’s coffers, and coupled with decreased spending, were what enabled this nation to finally balance its budget… so far the only time in our lifetimes…..

The Nineties got it right. Truly it was a Golden Age if there ever was one…..

And what cracks me up every time I think about it…. is that we actually get the Republican dream of a growing economy, one that works exactly the way they say it would, growing treasury revenues through growing the economy, while still sending profits out the gazoo… and we don’t do it by cutting taxes! We accomplish it by raising them! It’s wonderful. The Clinton years are the clinical proof that it works.. One may add the opposite, that the Bush years are the clinical proof that cutting taxes doesn’t work… It really doesn’t… Cutting taxes actually robs the economy of money that it needs to grow… Yes… it does… Need proof? We’re living it.

Lets use the same model….

Taxes are cut…. no longer do we need to hide money into R & D… That was long term investment, kind of hard to explain that one to the shareholders, now isn’t it… Instead, we opt to maximize our profits, which makes sense now that we will not be taxed too harshly on them…We scan the globe for options on how we can push profits…

There are two types of investments… One is real, and the other is virtual… One improves efficiency… The other just climbs in value… or more appropriately, perceived value… As more money pours in, some type of economic bubble inevitably develops… We get too much money chasing too few high yield returns… The bidding goes up, and up, and up, and on paper business appears to be doing well.. But really you are buying just paper certificates… You impose your value on those pieces of paper, and others may view them with the same worth as do you… but if that value is ever diminished… what do you have? Pieces of paper.

When that money is spent on a factory, and it fails, at least some of that money can be recouped from scrap iron. That is the difference between a real expansion and a virtual expansion. Due to 21st Century deregulation and the fact that no one really knew what was going on with unsecured derivatives…. we thought tax cuts were causing our economy to boom… We ignored the tell tale signs of manufacturing loss, increased household indebtedness, increased loan defaults, which were buried under a mountain of data showing tremendous profits from the financial, insurance, and medical sectors. We were told that our coffers were filling because of our tax cuts.. No,

As an economy all our profit was being bet on horses who for a while were paying off… Then one horse, a favorite, on whom everyone’s bets were riding…. stumbled and fell…

And when that one horse went down… so did our entire economy… And as it started collapsing, we glance around and to our surprise, we had nothing at all to show for it… To whom could we turn to bring us out? No one but the American people represented by the Federal Government.

And we faced the same problem after 1920’s when we had the same cavalier approach to investment… We faced the same problem after the Reagan-Bush 1 extravagance finally caught up to us in the early nineties. And we have it now…

Cutting taxes too low is very bad for long term growth.. Of course, raising taxes too high is equally damaging, but as every little child knows: if something is too hot.. or too cold, you go to the one that is just right… If something is too hard… or too soft….. you go to the one that is just right… It is a shame that what every little kid knows was lost on those making our national financial decision over the past eight years…

Balance between the three legs holding us up: The People, Our Government, and Our Businesses.

The idea is not new except perhaps in the economic world… In fact it is simply a transference of Henry Kissinger’s world diplomatic outlook, where stability is achieved by balancing Red China, the Soviet Union, and the United States against each other.. If one country got too feisty, the other two were strong enough to stop it… As a result, balance was created by moving beyond the two-way, unstable, bi-polar arrangement between the US and USSR… With just two players, every gain was the opponent’s loss.. Stability was never achieved…. With three major players, one had always to remain cordial with both adversaries since one had to ensure they would never become the odd man out, and stability eventually followed…

That was in the seventies… It is about time the same principals came to roost in the economic spectrum….

Now an increase in taxes will boost the economy. But…. it is hard when things are going so bad to persuade people in a panic that something that looks like it should have the opposite effect is really one’s savior.. I understand. It is equally hard to tell someone violently vomiting from a bacterial infection, that a moldy piece of orange peel, covered in grey fur, holds the key to their salvation…

So we disguise it… With the orange peel, we make it into a nice little pill, and call it penicillin….

With the tax code, we make it into a nice little pill and call it an “economic incentive”…. Is it a tax? Of course not! Who would dare think of taxing someone during a Depression… It is more of a …………shall I say……. “economic incentive”….. sort of something to get the economy rolling a little faster…. “By using an incentive to get business to spend more in their R & D departments, which we think will eventually drive our economy into high gear, we are going to charge those companies a little more who choose not to invest money into R & D…. I mean that’s a fair as America gets.. Should those helping pull us out of our recession be penalized for spending their money on their business, to grow us new jobs? Or should they be rewarded?

“Most think they should be rewarded…Right? So since our current economy has made it absolutely impossible to cut taxes further and still stay viable (I’m sorry but it’s just a fact of life), it makes sense to raise the tax rate on every other business who does nothing to alleviate our pain and suffering, thereby giving a huge reward to those who are putting their money to work for us… the American people…”

Something like that… you get the drift….

Remember a ways back when I said we needed to force the hands of institutions that controlled capital, and find an incentive they could not refuse to enlist them to begin lending?

Well, raising their tax rates while giving them a discount from it equal to the amount they lend out, is exactly the incentive that is needed.. If one is going to lose “X amount” to the government anyway, might as well lend it out and take a chance that the money will return… That’s an offer no bank can refuse…

There is one important note that occasionally gets mentioned but probably does not get mentioned enough… That is that we have already tried all of our money supply tricks and they do not work… The Fed rate today is 0.25%… Go figure… Borrow a $100 dollars and pay back a $100.25….. over a year?… During the height of the boom the spreads between what lenders got and what they charged to lend, were between 1% and 2 %… Today most loans are between 5% and 6 %, meaning the bank is collecting between 5% and 6% percent off each business transaction. One might expect that since the same rate of return (1%) was acceptable before, that it might be as acceptable today? If banks were happy during boon times making 1%, why can’t we have loans today at 1.25%? And the answer, to be frank, is that they are overcharging all of us to counteract the bad assets they themselves placed on their own books….

Which brings up three questions: Should a bad asset bank be formed? Should banks be allowed to fail? And should shareholders or taxpayers be the ones to bare the brunt of the costs of our recovery?

The principle of the bad asset bank is for the Government (Federal Reserve) to buy bad loans from banks, so the banks can forget about what happened and move on… In principal, the bank owes its investors the money which those loans were supposed to generate… It is duty bound to funnel much as possible of its income back into paying those notes that went bad… Since the amounts are so extravagant (1-2 Trillion) and the money required so great, there is little left over to do what banks are supposed to do…. which is lend it out so it can earn more interest for the bank and its stockholders… If the Fed (federal taxpayers) buys up these assets, the bank no longer has to owe these huge vacuums sucking up their revenues, and can instead use that money towards lending to businesses which are carrying out the commerce of our nation.

There are several reasons that make a toxic bank a bad idea… First is that it was tried during the first bailout… That was the reason the first piece of bailout legislation was passed and very quickly that plan was deemed to be insufficient and the money was switched over to directly infusing capital into the banking system… If the toxic program was not a good idea then; what makes it so great now?

Another downside. Banks are able to lend up to 10% of their capital. By injecting new capital instead of buying toxic assets, the American taxpayers get a $10 dollar bang of money lent, for every $1 dollar of new capital they invest…. Buying up $1 dollar of toxic debt just frees up $1 dollar which can be lent…

Likewise, a bad bank will have to choose which banks to support.. and which to let fail… Most of the toxic wastes are held at the top echelons of bankdom, ie. in the large nationwide corporations… However most of the loans done which allow business transactions to continue on a daily basis, are made at small, community oriented, local banks… The asset plan will do little to get money where it is needed, to those local banks. But direct capital injection, can and should be done on the level of local banks in their communities….

The bad banks are argued to be necessary because the bundled securities markets have dried up… No one is buying bundled loans, and no capital from sales of those is entering the banks financial stream… If the Fed buys the notes, they will most likely be at a premium and if sold, will be devalued almost entirely.. The American taxpayers pick up the cost of the entire security. But instead of using these scarce dollars to pick up bad assets we know we will lose money on, why not simply guarantee for a fee, (sort of what AIG did) that the government would guarantee their value? Then let the market buy the securities as they used to?

Remember we collect the fee, and pay out only if the security goes bad… Similarly to what we did with the originally FDIC insurance of $35,000, now up to $100,000 depository insurance… We guarantee the deposit… Doesn’t mean we own the bank…. It worked for banks.. It is still working for banks… Thank heavens it works for banks…

That option would move assets out to investors, remove the debts off that banks books, infuse capital into the bank which could then be lent out at levels 10 to 1….

Over all a toxic bank is not the best use of Federal money at this time…

The next question is whether banks should be allowed to fail?

A lot of effort was spent in investigating this question… Even one Nobel Laurette was promoting the idea of letting banks fail….Our investigation after looking at the broad realm of evidence, found considerable disparities in the results and found instead that there were two groups of people who were each supporting their own camp… We classified one as being a group that makes it’s decisions rationally; the other group tended to base their decisions emotionally…

The argument for propping up banks has now become a cliche: they are too big to fail; and that their collapse will impact us far greater than any cost of propping them up. The other side, points to morality and says that propping up bad people has bad implications; letting them fail punishes those who did wrong and were irresponsible.

The problem with these arguments is that neither of these jousts confront and interact with the other, thereby making them both right in their perspective frames.. One stems from the brain… the other from the emotions. The two themes we discovered across the spectrum of literature on this issue are either those appealing intellectually for assistance, or those ratcheting divisive emotions to make their case.

We believe that the best bet to settle the argument is to fast forward fifteen years and look back at how our grandchildren will come to learn about it… Will their lives be better or worse if we let all banks fail….

The argument for letting banks fail is: that is how it works… Banks fail, those holding financial interest in that bank go broke… lose everything…. the pieces are then bought up cheap, and others profit from that bank’s demise… The idea is that fear of collapse will keep banks from ever straying into a stratospheric lending spree that will ultimately cost them everything… The motivation for this method usually can be found in the final lines of its arguments. Statements like “can we continue to reward those who made mistakes”, or “they failed, and they should bear the burden” were pasted at the end of all argument for letting banks go… I have read those arguments and if one wants to take my word for it, they make good sense…. on a small scale… ie. One bank failing out of a 100, should be let go to fail… The system will compensate and the total economic health will improve… Darwinism in the banking world is a good thing. The next question is whether the extinction of a whole species is a good thing.

That is the problem underlying all talk of having banks fail. The discussion and all the evidence takes place in a closed arena. Assumptions are made that do not take into account the wider notion of human nature… Let banks fail they argue? That is just what the former Secretary of the Treasure Henry Paulsen did with Lehman Brothers… Clear the boards… But, that action spread off a widespread panic that spread to the ultra safe money market funds, drying up cash flow to all businesses, large and small. In other words, the free market could not solve the problem without government help. Even the bank the government had hoped would be able to bail out the other banks, Citigroup, required a government handout to stay afloat.

The question brought up is one of degree.. Do we compare our current crises to that of the Great Depression of the 1930s, or is it more like the collapse of he Japanese banking system in the 1990s. The Japanese did what we are in the process of doing, and propped up their banks… Similar to a dilapidated house, they chose to pour money into it, instead of to raze the building and rebuild over-top of its location….The benefit to razing the house and rebuilding, is that costs are fixed… And with the end product, we know exactly what we got…. To pursue the alternative tack, is worry that no one knows whether the house will collapse even long after considerable effort has been made to “restructure” it… The Japanese chose to restructure their financial house giving them a weak system... The Great Depression razed ours and WWII rebuilt it….

Again, notice how the argument takes place in a little bubble… Does anyone consider the experience of the Japanese who lived on the island during this time? To be honest, they lived very well.. Now compare that to how Americans lived through out the Great Depression… not so very well.. Or even better, compare that to how we will be living in two months!.. If one wants to judge the world through bank stock values…. then letting banks fail might make some sense… Like the house metaphor, at some future point they may be stronger if razed and rebuilt. However propping up the system, has done rather well for the Japanese population .. It’s done well for Toyota, Nissan, and Honda..Those car makers are outperforming our own domestic Big Three… And let’s not forget that one of the global consequence of “letting banks fail” before we knew we could fix them, was the fascism that sprang up in Germany, Italy, and Japan… which cost the global economy considerable strife for 5 or 6 years there during the forties… Basically a lot of men died for the principal of “letting banks fail”…

Japan is an island. What is at stake today is the total catastrophic failure across every financial market spanning the entire globe..

When we are talking about entire systems failing, and the collapse of the Bretton Woods world order, and an onset of the post Roman Dark Ages again…. I find fault with some of the Nobel Prize economist’s reasoning… And I have only to look at the last Great Depression to find evidence that makes us wonder what it is that those recommending total collapse and failure are smoking….

It must be good.

To grasp all of the implications of total collapse, where everyone’s money dissipated into thin air, I thought a great model would be to find a microcosm where that actually happened… My reasoning was simply that if all the money evaporated from the global economy, the effects would be similar if not on a greater scale, to what they would be on a small rural community centered around one bank, which collapsed completely. Because of the Great Depression, there is some factual historical evidence of what happens when a one-bank-county loses it’s bank and everyone from top to bottom, is suddenly bankrupt….

Here is a collection of stories (with interviews) that describe that atmosphere around the rural Nebraska town of York during the Great Depression.. It gives us a sense of what to expect… No jobs, no ability to make payments, multiple foreclosures, no buyers for the foreclosed properties, bank failure, and absence of cash based economic transfers…. the use of barter… What eventually pulled rural America out, was the gradual effect of the New Deal legislation… People on “relief” or working on government jobs, began to use money again.

The problem with letting all banks fail and flirting with total collapse… is evident in the scenarios mentioned at the beginning of this chapter… Remember those tracings of lines of credit following jalapeno’s? Everyone depends on credit… If the global economy fails, we do not get our jalapeno’s, our gas, our food… We do not have jobs… we lose our livelihood and house.

The “effect” that bank failures cause upon society is surprisingly absent in each of those epistles that promote total collapse. They always only focus on the banking industry. There appears to be a better way to go than letting everything collapse… What is eminent from our studies of the Great Depression, is that depression lasted far longer than it should have, because less stringent Keynesian methods were applied than were actually needed… We credit the war with bringing us out… What the war did was drop all pretension that the government had no place in its economy, and caused the government to place orders and pay for them with borrowed money. Those orders for ships, steel, and fighting materials are what pulled our nation out of its hole… Today’s stimulus package should be considered as the same response to the same economic troubles that we tried at the outset of WWII, just without the war.

Instead of “letting banks fail” we pump up the economy. The economy will allow banks to write down their bad debts..

The third question is whether it should be the stockholders or the taxpayers who should bear the brunt of rebuilding our Bushwacked economy….

Again the answer should be framed not against who is the more culpable, but which method will get us to where we need to be….. faster…

Which benefits America more? Growing the economy and then selling off the preferred assets bought by the government and pay down its debt? Or, allow wealth to dry up entirely by making all those investors, pension plans, mutual funds worthless by doing nothing and allowing the free market to devalue everyones portfolio….

We saw in the great Midwest… what happens when wealth dries up… Life turns bleak… Making investors pay has some moral benefits such as teaching them that “they who erred shall be punished”, but considering that we are all gamblers of some sort, hurting ourselves severely to teach those who lost, a lesson already learned, seems kind of pointless, really…

The severity of the situation has moved us to a point where practical solutions are needed. Moral ambiguity and waffling philosophies are simply extra baggage getting in our way… When a risk is big, we insure ourselves against it.. What that means is that each of us takes some responsibility for assuming a small burden of the risk, knowing that we can plan against a steady cost, and not be devastated by capriciousness of misfortune…

This bailout plan and our tax system fulfills the role of an insurance company in a time of crises. Our government bails out the banks, the stockholders get some return on their dollar, and the taxpayers pay a little premium over many years to keep our society afloat…. Why? Because we like it that way… Letting anger get the best of us and force us into a cataclysmic decision that destroys our future altogether, …. well… you decide…

Quick access to easy credit is needed to advance ourselves out of this slump… It does not come naturally during times of economic crises… To open avenues towards achieving easy credit, the predominant factor is to return that confidence back to our lending institutions insuring that their lent money will be paid back with interest…. We have determined that the outside forces have the most say in the matter..As the economy shows signs of picking up, the money will be lent.. However history shows that it is slow to return to the levels of exuberance. Human nature being what it is, a “stick” in the form of lost revenues from taxes designed to penalize the hoarding of capital, would be the shortest route to chase the money out of bank vaults and into the world of business. Likewise, guaranteeing repacked toxic assets for a fee attached, and allowing that product to be picked up by private investors, not the Fed, would help move the assets off of banks books at a smaller cost to taxpayers, thereby allowing a bank’s profits to return to the business of lending out some loans……