The myths about taxes – revised

I am an old guy who has heard the myths about taxes for over 50 years.  I remember a discussion in college economics about these myths.  Every American President in my lifetime has said he would cut taxes and keep the programs we need.  The myths are:

 

1.      We can lower everyone’s taxes and keep the programs we like and we need.  Simple math and common sense should tell us this isn’t true.  If we want the program we have to pay for the program.  The real underlying problem is we all want something for nothing.  We want the other taxpayers to pay for our programs and we don’t want to pay for their programs.  In fact most of us want to pay no taxes at all.      

 

2.      There is a lot of waste and fraud in our government programs and if we just cut all the waste and fraud we can cut taxes.  This problem has been studied and restudied over the years and the waste and fraud found is less than 2% in any given government program, with the exception of the military programs and there it is 5%.  Of course when we hear there is $25 billion in waste in the Military budget of $548 billion, but we don’t demand cuts in these military contracts.  Having spent 35 years in corporate America I can attest to the fact all programs have some waste and even some fraud.  You can never eliminate all waste and fraud, because these programs are run by imperfect human beings, like you and me, who make mistakes and errors in judgment.

 

3.      Americans are over taxed as a society.  This is the biggest myth.  If we look at the industrial countries in the world including Europe, Canada and Japan it is clear Americans are the least taxed.  Americans pay 26% of GNP in taxes.  The other industrial countries pay an average of 36%, with Sweden paying 51% of GNP and Canada paying 33%.  Many of these countries have a higher standard of living, far fewer poor people, almost no poverty, far fewer really rich people and most have universal health care.  No one wants to pay 51% or even the 36% average, but can we afford to continue to borrow to pay for programs we all want?

 

4.      All Americans pay their fair share in taxes.  This is not so.  Every tax year over 5,000 Americans have income over $1 million and pay no taxes.  Warren Buffett, the second richest man in America, with net worth over $40 billion brags he paid a tax rate of 17% while those working for him paid 34%.  Buffett said in an interview in the New York Times in 2006,”There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”  We need to fix the tax system and the rich must pay taxes.         

 

5.      We can cut taxes by eliminating government programs.  This is just plain false.  How about no federal funding for education?  If we cut the entire program it would save us $32 billion out of a total budget of over $2 trillion, a drop in the bucket.  Teachers all over America would lose their jobs and children who are already at risk would suffer.  Most Americans want this program and in fact want all the government programs we now have.

 

6.      We can avoid taxes by borrowing to pay for our government programs.  This is the Bush policy and that of the Republicans in Congress.  They added $2 trillion dollars to our national debt in the 7 plus years we have suffered with this highly dishonest group.  The national debt is currently $9.4 trillion, $31,094 for each and every citizen, man, women and child.  It increases by $1.6 billion each day, because we aren’t honest enough to pay for our spending.  We can’t continue to run up our national debt and expect our economy not to suffer.     

 

 

The Bush administration cut taxes, mostly for the richest Americans me included, and then borrowed $2 trillion to cover his spending.  This is dishonest.  He tells the American people he cut taxes and then borrows $2 trillion and pays interest on the money he borrowed.  It costs us $243 billion a year just to pay the interest on the national debt and we are still borrowing at the rate of $1.6 billion per day.  Our children and grandchildren will have to pay for our irresponsible and dishonest behavior.  

 

The truth is we can’t cut taxes and our taxes are not too high.  We need to start being honest about our financial situation and either start funding the programs we all want through taxes, or start eliminating them.  Our national debt will soon begin to harm us all.     

 

Next time you hear one of the myths about American taxes remember this; Americans are the lowest taxed people in the industrial world, many rich people pay no taxes and the middle class in some cases pays a higher tax rate than the 400 American billionaires.  We are also the biggest borrowers and the most dishonest about how we fund our government.

 

Debt – Is a huge problem for America and Americans

American has become addicted to debt and borrowing.  We have trained ourselves to ignore this problem and it has now become a pending disaster.

The facts do not lie in this regard.  The national debt is now at $9 trillion and we add another $1.6 billion each day and we borrow the money from the Chinese and the Saudis among others we should fear.  China and Saudis Arabia are both dictatorships. While the two countries are not alike in many regards they share the realities of no freedom of speech, press, political action, religion and they are not democratic.  Each and every American, man, women and child now owes $31,000 of the national debt.  This costs us $250 billion per year for the interest alone.  If we didn’t owe the debt that money could be spent on schools or health care for the 10 million American children with no health insurance.   

 

America has been transformed in my lifetime from a country that made things and sold them to the world into a country that buys things from China on credit.  The things we buy are mostly made in third world countries and more and more in China.  I tried to find a pair of shoes to buy last week that were not made in China and I found it is impossible.  I like Clarks and they too are made in China.  Even expensive shoes like ECCO are made in China. 

 

The consumer debt in America has now reached $2.5 trillion and each and every man, women and child now owes $8,200.  If you are a family of four your family consumer debt on average is $33,000 and you share of the national debt is $120,000.   The consumer debt is 133% of disposable income.  Americans are spending 33% more than their disposable income.  None of this borrowing, by our federal government and by individuals can go on forever.  In fact we are reaching a point where our entire economy is at risk.  The other side of the ledger is income and we all know income is not growing to accommodate the bad borrowing habits we have become addicted to.

 

This is an area we can all address.  We can’t do much about the Iraq War, the price of gas at the pump or government waste, but we can stop borrowing money.  Ben Franklin said, “A penny saved is a penny earned”, and he was correct.  We need to start asking some basic questions about our spending.  We can start by asking is this an item I need or just something that would be nice to have?  If we don’t need it, don’t buy it.  We need to teach our children to save and not to spend on items they can’t afford and they do not need.  I have a friend who buys shirts when ever he is under stress.  He likes shirts and he now has so many he can’t wear them all.  He has some he hasn’t taken the tags off and still in the Nordstrom bags.  My advice to him is to take up running, walking or tennis.  Stop buying to alleviate your stress.

 

Our American culture is about things and getting more things.  We need to rethink this idea of an economy based on consumer spending.  The economy is now 70% consumer spending and we as a nation spend little or no money on investment in infrastructure.  Our roads, bridges, trains and buses and other infrastructure are old and failing.  Jobs to fix the infrastructure actually pay a living wage as opposed to the jobs in retail where 70% of our money goes.  My friend with all the shirts just came back from Europe and he was amazed at their roads, mass transit, buses and trains and their internet.  The internet speeds are 5 times faster than anything in America and it is free and everywhere.  The EU is investing in infrastructure and they are not burdened with the national debt or high consumer debt we have in America.  They have less disposable income but they have good roads and social services unknown in this country.  I know this is heresy.  No American dare say anything good about the Europeans.  My friend is a right wing Republican and he doesn’t understand how the Europeans can have such great services and America does have the same things.

 

American needs to demand that our elected officials (the President and the US Congress) pay as we go for our federal budget.  No more deficit financing and no more borrowing from the Chinese and the Saudis.  This means we need to raise taxes or cut spending or both.  You heard me right, raise taxes or cut spending down so there is no deficit spending.  This will not eliminate the $9 trillion we already owe but it will stop the bleeding.  Borrowing $1.6 billion per day and pretending there is no problem is insanity.  Step one is admitting we have a problem.  We need to act responsibility ourselves and stop our credit card borrowing.  We need to start paying off our balance each month and not running a balance at 29% interest.

 

Ben Franklin also said, “Neither a borrower nor lender be.”  We all need to start reading more Ben Franklin.

 

                            

 

Barack, Hillary & John

Every four years I ponder the state of America.  Soon we will be down to the two most qualified people in the entire country to be president.  The way we select our supreme leader has dealt us more than a few headaches.  While the president has little direct personal impact on each of us, he or maybe this time she has a huge impact on the country and the world. 

 

My brother and I began rating candidates years ago and staging our own personal debate on who was best qualified to be elected President.  We are both in our sixties, so by any definition we are old guys.  We watched the first ever presidential TV debate between Nixon and JFK.  It was 1960 and it was a first for many reasons.  JFK was young, many said too young, and Catholic and many were worried about the Pope telling him what to do.  JFK was different in another way, he sounded very different to most people who had never heard a Boston accent.  He had little or no real experience being a junior senator who had done nothing in the senate.  He was a true war hero who never talked about his service.  He never referred to it at anytime.  He served on PT boats in the Pacific and was a wounded war hero by anyone’s measure.   

 

JFK had a theme and it was the New Frontier.  We all love new beginnings and hope they mean a better world for us all.  He said something that moved us all when he said, “Ask not what your country can do for you, but what you can do for your country.”  He also started the Peace Core and sent young Americans around the world to help the less fortunate.  Thousands rushed to enlist in this endeavor and they helped ten of thousands. 

 

The election of 1960 and all those since have been contentious and in many ways mean spirited.  This is the nature of the American election process.  It never amazes me much when our politicians start slinging the dirt or having their supporter sling the dirt, but I always hope they won’t do it.

 

As part of evaluating each candidate my brother and I list their positives and negatives.  We argue over this a bit, but not to much.  After doing this for decades we have the most important factors down to just four things.    

 

Why just four and not a hundred?  Because some just don’t matter.  Experience is okay but no one is ready based on experience to be president, even the presidents we reelect.  Most two term presidents actually are better their first 4 years than their second.  This is true of every president in my lifetime.

 

The four we have select are raw honesty, intelligence, and flexibility or ability to change your mind based on new information and changing facts and the baggage they bring with them to the job.  We have from time to time included admitting when you get it wrong, but we think this is probably included in honesty.  We think toughness; loyalty to your party, friends and allies is a negative factor and probably hurts America.

 

The final factor is very important.  How much baggage does the candidate have to carry with them into the job?  Who do they owe?  Who are their friends and supporters and their allies?  What positions have they taken over the years that prohibit them from acting differently?  It turns out that baggage plays an important role in how people govern.  Their supporters, earlier positions and the people close to them will have a major impact on how they govern us and what interests are served? 

 

We have rated the three candidates and we agree again this year as to who is the best qualified to be president.

 

#1 Barack – first by a mile based only on the Mike & Pat rating scale.  Honest, intelligent, open to new ideas and opinions and no baggage.  He is his own man and he is by far the brightest person running now and since JFK. 

 

#2 Hillary – second by a nose over John, but not honest and carrying way too much baggage.  She has to carry Bill and he is just too heavy for us as a country to carry again.  He lied on TV to us all and he has never said he was sorry.  She too lies; her statements about being under fire are just one too many for the country to carry.  She should stay in the Senate and try to help Barack when he becomes President.

 

#3 John – he is a nice old man who served his country and does some good work in the Senate.  He is for the Iraq war and supports the failed President Bush policy that has hurt America.  He continually misstates facts about the war and he says he will stay in Iraq for 100 years.  That is 99 years too long.

 

What is the Federal Reserve (Fed) and why are they helping Bear Stearns?

We hear about the Fed continually now as the credit crisis continues.  The Fed is on all the TV shows and in every newspaper, but no one tells us what the Fed is and what it is supposed to do.  The Fed was established by the US congress in 1913 to provide stability and liquidity to charter banks.  These banks are members of the Fed and they must meet certain requirements including keeping capital reserves and insuring their deposits (FDIC members) in order to protect the people who put money into the banks.  These banks are regulated closely and forced to provide safety to their clients (you and me).  The Fed also lends money to the member banks in order to provide liquidity and keep commerce moving.  They make changes to the interest rate they charge the member banks as a tool to provide liquidity and stability.   They are not charter to help non-member businesses.  They can not lend money to any organization that is not a member bank.   Bear Stearns is an investment bank, a big time gambler in the investment world and the biggest player in the mortgage security market over the past five years.   What is the mortgage security market?  This is the way the mortgage security market works.  Banks (BofA, WAMU, etc), mortgage companies (Countrywide, etc) and loan brokers (Get it Fast and Run, Etc) write loans and they sell these to Bear Stearns (BS) and others.  Yes there is some irony in the BS part of this story.  Many of these mortgages were what the lenders called “liar loans”, loans that were going to go bad from day one.  It is clear that lender gave mortgages to people who were not qualified because the lenders knew they were going to sell these bad loan to others and not have to suffer any loss themselves.  BS then packaged these loans some good loans and many bad loans (liar loans) up into a security and sold them to pension funds and other investors, sometimes to other banks.  Investment banks by their nature assume risk and they get paid a very high return for that risk.  The people who run BS made hundreds of millions of dollars for packing loans and selling them.  But BS was very greedy and they continued to run this game too long and got caught with a lot of liar loans in-house in their inventory.  In the capitalists system when investors make bad decisions they lose money.  If you or I did the same thing we would lose money. But keep in mind we now have to add the players involved in the Fed Bear Stearns fraud.  Yes I said fraud.  Enter the Secretary of the US Treasury – Henry Paulson, former partner of Goldman Sachs, and a personal friend of the president of BS, Alan Schwartz.  We might reconstruct how this happened by saying Alan call Henry and Henry called Ben Bernenke, head of the Fed.  So we have Alan, Henry and Ben all old buddies on the phone discussing the bale-out of BS.  Alan and Henry are the riches of the rich in this country with a net worth of over half a billion each and they don’t want to lose a dime of that if the taxpayers can bale them out.  Ben tells them he can’t help a non-member especially one that helped create this mess like BS.  Ben also tells Alan and Henry that the market creates winners and losers and sometime BS has to lose especially after making really bad decisions.  But something magical happens in this conversation and these three men decide that BS can’t be allowed to fail or the entire US economy of $14 trillion dollars will fail.  So you and I have guaranteed BS will not go under, Alan will continue to make hundreds of millions and Henry didn’t have to see a personal friend unconvinced by failure.  I’m absolutely sure the millions of unemployed workers think this is the right move. So we had a little fun with this, but what really happened?  What usually happens; the rich get baled-out and the poor lose their homes.  The Fed broke the law but the Bush administration says so what?  Bush is so use to this it hardly matters anymore. The Republicans in Congress who claim to be for free markets are all for baling out BS and any other investment bank, when they make bad decisions.  You and I are guaranteeing $30 billion in bad debt so Alan and his buddies at BS don’t’ have to face their dishonest behavior in the marketplace.                     Finally, Ben has set the model to bale out more investments banks in the future with our money.  Ben wants to lend them our money right now (at rates you and I can’t get) and he doesn’t care if they are members of the Fed system, take actions to protect their clients, keep responsible capital reserves or join the FDIC to insure we will not lose our money.  If I were at any of the investment banks I would ramp up the next scam knowing full well the Fed will bale them out, with taxpayer money, when the scam goes bad, as all scams do.