Why We're Mostly Immoral

I've posited in the past (and present) that government is inherently immoral. Here is my explanation in response to a facebook post and a comment from someone who supports "social democracy" or "socialism" as the desired political and economic organization for the United States and the world. Note that I put "socialism" in quotes because apparently they don't go by the dictionary definition of socialism where the means of production are owned and/or controlled by the government, but it's unclear exactly what they do mean by socialism.

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The following is how I view the political structure of the United States in regards to, say, redistribution. You may completely disagree, but keep in mind that millions of citizens view it like I do.

There are four groups:

A. Voters and their elected representatives
B. Bureaucrats and law enforcement
C. Taxpayers
D. Recipients of the redistribution

In the case of redistribution, the United States is A directing B to take from C and give to D.

The first immoral part is B taking from C. If C is willing or nearly universally willing, this wouldn't be immoral, but that's not how it is in reality. When a substantial part of C is NOT willing, then this step has a lot in common with banditry - C is forced, with ever increasing levels of violence to comply. In political philosophy the government is described by some as a "stationary bandit" for this very reason. Most people consider banditry by non-government entities to be immoral. Since you've noted that our government is just a covenant between private citizens and a ruling entity, group A is basically directing B to be bandits and are accomplices to the banditry. Since banditry is immoral, group A is also immoral. Group D is the recipient of money that has been acquired immorally and that makes them willing participants and also immoral.

Lastly, you'll probably be quick to point out that group C is immoral because they don't volunteer their money to group D or willingly and happily give it to group B to do what they like with it. I agree with that assessment as well. We therefore agree that at least part of group C is immoral. Note that most people consider banditry even against immoral people to be immoral so that doesn't absolve any of the other groups.

Therefore, since we all belong to one or more of these groups, we are all immoral and so is the government.

Again, I know you don't agree with that and find it "laughable." Nonetheless, that is how millions of people view it to some degree so if and when you lose another election, you'll know what us laughable deplorables are thinking and why we vote against people like you and Hillary. You think we're immoral and you're right. We think you're immoral and we're right, in our unshakably strong opinion.

Also again, we believe government to be a necessary immoral evil. Yes, we're all immoral, but there's no choice but to be so. The human animal is simply a nasty, evil, immoral creature and no matter how we organize ourselves, we will still be that. We can be somewhat more moral by limiting the banditry, but we can only limit it so far and maintain a working civilization.

The last point is that when people make the argument that X is immoral, the answer is yes, but so what? Those sorts of arguments hold no water for me since we're all immoral.

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I suppose some of group C might be "moral" if they willingly and happily pay their taxes and would do so without enforcement AND they're not part of group B or D AND they vote against candidates that agree with the forcible extraction of taxes from group C. However, I think those folks are basically suicidal because without said forceable extraction of taxes, I doubt civilization would survive for long and without civilization, the vast majority of us are dead in short order.

The Keynesian Track Record

Keynesian Economics is all the rage these days, especially since the global financial crisis that began in 2008. The basic gist of Keynesian Economics is:

"...that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle."

In practice, on the fiscal policy side, this amounts to calls for increased government borrowing and spending, and sometimes reduced taxation.

One important part of the Narrative for those who believe (or believe in) Keynesian Economics is that what brought the world in general, and the United States in particular, out of the Great Depression, was the stimulative effect of the greatly increased federal government spending due to WWII.

Maybe so (or maybe not), but let's consider the other side of the equation.  In 1943, during the midst of WWII, Paul Samuelson (Nobel Prize in Economics, 1970) wrote[1]:

"When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. ... The final conclusion to be drawn from our experience at the end of the last war is inescapable ... were we again planning  ... to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced."

That is what Keynesians believed - that we faced the "greatest period of unemployment and industrial dislocation which any economy has ever faced."

Yet, we did "shift from astronomical deficits to even the large deficits of the thirties" (spending dropped from 43% to 14% of GDP) and what happened?  I'll let President Truman answer [2]:

"During 1946, civilian employment approached 58 million. This was the highest civilian employment this Nation has ever known— 10 million more than in 1940 and several million higher than the wartime peak. If we include the military services, total employment exceeded 60 million. ... 

"Thus, at the end of 1946, less than a year and a half after VJ-day, more than 10 million demobilized veterans and other millions of war- time workers have found employment in the swiftest and most gigantic change-over that any nation has ever made from war to peace."

Samuelson's prediction based on the Keynesian narrative simply couldn't have been more wrong.  Instead of the "greatest period of unemployment and economic dislocation" we had "the swiftest and most gigantic change-over that any nation has ever made from war to peace."

The Keynesian narrative was extended to handle this and other rather significant exceptions.  Nonetheless, for those of us who haven't swallowed it hook, line, and sinker, it looks like the Keynesian narrative explains the relationship between government spending and economic health - except when it doesn't.

References

[1] Paul Samuelson, “Full Employment after the War,” in S.E. Harris, ed., Postwar Economic Problems, 1943.
[2] Harry Truman, "The Economic Report of the President", page 1, issued January 8, 1947

The Furnace and the Tax

My furnace recently quit.  Fortunately, it wasn't that big of a deal because I live in San Diego and it's just not that cold, even in the middle of winter.

It was obvious what was wrong.  A motor started making lots of noise and then quit completely.  I looked it up and it was the "Draft Inducer Motor".

I got a local furnace repair place that I qualified with Yelp to come start the repair process.  I told the dispatcher what was needed.  The repair guy showed up without the part ("We don't stock our trucks with that part").  He verified that it was indeed that the "Draft Inducer Motor" needed to be replaced.

The next day he gave me a quote of around $900 to fix the furnace.  I was in the middle of a meeting in the middle of some lettuce fields when he called so I told him I'd get back to him.

$900 sounded like a lot to me so I removed the motor assembly from the furnace (took 1 minute), got the part number off of the motor, and looked it up on the Internet.  I found it for well less than $100.  Ultimately, I bought from a place that seemed reputable and was able to deliver it overnight and from them the motor was $140.

When it arrived, I disassembled the draft inducer motor assembly and reassembled it with the new motor and put it back in the furnace.  Everything was very straightforward and easy and took me about an hour and the furnace works fine again.

A $900 estimate for a $100 part and an hour of time (or less for someone who does this frequently)?  Great work if you can get it!

I gave them a bad Yelp!  The owner commented to my Yelp!:

"We appreciate this members concern with regards to pricing.  However there are a lot of things to account for when running an HVAC business that this customer fails to see. 

"First of all the service call and diagnostic are totally refunded from the repair charge that I quoted at $865 bringing it down to $770 when all is said and done. Secondly of course when you buy a non factory part online that comes with no warranty and install it yourself you are going to get it for cheaper, much cheaper!  We only install factory parts from the manufacture that comes with a 5 year warranty not to mentioned installed by a licensed and insured contractor. 

"For example my son's braces cost me over $4,500 this year however all the parts and metal only cost the dentist $185.  Do I feel I got ripped off because of this?  Absolutely not!  When you acquire a professional service to perform work; you are paying for many things, not just the part. You are paying for the skill and technical know how of the technician.  Not to mention things like Insurance, trucks, liability, workers compensation, employee training, vehicle maintenance, gas, test equipment, state and federal taxes, employee compensation, advertising, tools, warehouse and  office rent, phones, lighting, warehouse and truck stock, management administration, office equipment, computerization, legal fees, employee benefits, office staff and supplies just to name a few. [...]"

The motor I ordered was new and an exact replacement part with a 5-year warranty.  I remembered his quote being $900, but maybe he said $865, not really a significant difference.  The braces analogy made me laugh - my kid's orthodontist and assistants spent many, many hours over a period of years working on my children's teeth.

But then he gets to some valid points: "Insurance, ..., liability, workers compensation, ..., state and federal taxes, ..., legal fees, employee benefits, ...".  A whole lot of costs imposed by government and lawyers.  I rather doubt they justify charging $900 for a $100 part and less than an hour of time, but it justifies part of it.

Now let's consider what I would have to earn in order to cover that $900 fee.  Since I'm a programmer and I do some hourly consulting, I actually can consider what it costs me on a marginal basis pre-tax.  Between FICA (15.3% - both halves since I'm a consultant),  Federal Taxes (36%), and State Taxes (11% in California), with AMT ensuring that there are no deductions, my marginal rate is 60+%.  In order to pay that $900, I'd have to earn $2,250 pre-tax.  Of that $1,350 off the top would go to various governments, $800 would go to the furnace repair company of which a significant portion would also go to various governments, I estimate that $15 would go to the motor distributor, and finally $85 would go to the motor manufacturer and much of the manufacturer's cost also would reflect taxes and costs imposed by various governments.

This is a great example of a simple transaction in which governments are sucking the life out the economy.  Probably near 80% of the money required for this simple repair would've gone to governments.  All for no real gain by me, rather just trying to repair a rather critical household item and get back to where I was before it broke.

Ever More Taxation

Recently, a friend pointed me to an article that made the rather surprising claim that "by historical standards, what we pay in federal taxes - rich, poor and everyone in between - has gone down."

Surprising, and not true.

I conveniently happened to have a table lying around that shows historical federal tax revenue. In constant 2005 dollars, 50 years ago (in 1960), federal government revenue was $631 billion. In 2010, it was $1,919 billion (i.e. $1.9 trillion) or three times as much. So by historical standards, we're paying a hell of a lot more on average.

There are more people now, so I also did the calculation on a per capita basis. In 1960 the federal government revenue per capita was $3,518, while in 2010, it was $6,215, or nearly double. Again, these are in constant 2005 dollars. I graphed per capita revenue and it basically shows relentless increases in per capita (and total) collected taxes. There is a bit of chop (i.e. the trend is not perfectly smooth), but it's definitely clear what the trend is - up, up, and up.

So while we spend about the same or less per capita for most goods and services due to increasing technology and efficiency, my question is why do we need to be taxed twice as much per person to fund government as we did 50 years ago? Why is the baseline assumption, even among tea partiers, that we should be taxed a constant percent of GDP, which means increasing taxes forever (assuming GDP keeps growing), instead paying the same amount of taxes per person over time (adjusted for inflation, of course)? Why is the base assumption that government should expand (beyond population growth) forever? Do we really need ever more taxation, ever more government regulation, ever more government intrusion, and ever more government redistribution?

Just wondering.

The Foundation of the Blue State Blues

Some Blue States, like California (my home State), are really hurting. Not only do they face never ending fiscal crises, but people, especially people in their most productive years, are starting to leave these States in droves.

California was once a really great place to live. It had (and still has) great weather, beautiful terrain, and bountiful natural resources.

The typical conservative explanation is that all this wealth attracted leaching liberals who took over the government and taxed and regulated the State from prosperity into its current mess.

There may be a grain of truth to that, but the question is why did everybody else (besides the leaching liberals) let this happen. The answer, in my opinion, is that changes in Federal Tax law deserves a substantial part of the blame.

Let me explain.

From FDR's administration until after Reagan was elected, the top Federal Tax Rates were always above 70% and even exceeded 90% at points. But State Income tax was deductible. During that period, in those States with a preponderance of high income earners, both the earners and the rest of the State could benefit from instituting high State income tax rates for the high income earners and returning part of those taxes as services.

To illustrate, let's consider an example. Let's say your marginal Federal Tax rate is 90%. Then for each dollar the State taxes and receives from you (which you then deduct from your Federal taxable income), your total income tax bill (State plus Federal) rises only 10 cents. The State then provides 15 or 20 cents in services to you, a bit goes to help the poor in your State, and the rest is pocketed by the bureaucrats and lobbyists. Everybody wins! Well, everybody but the poor and middle class in all States who have to pay more to provide the revenue needed by the Federal government.

California leveraged that situation wonderfully well. They built great infrastructure (like the University of California), provided great services and funded fabulous levels of graft and corruption. Everybody assumed this gravy train would run forever.

However, two things happened that ended the free ride fairly abruptly. Federal income taxes were slashed by Reagan and the Alternate Minimum Tax (AMT) scheme was instituted which greatly reduced the ability to deduct State income tax. Suddenly paying State income taxes was a big net negative for the taxpayer. A dollar of revenue to the State was pretty much a dollar out of the pocket of the high income taxpayer.

Suddenly the services to the high income tax payers couldn't possibly make it worth it to pay the tax (that's why high income earners are leaving in droves), the programs for the poor couldn't be lavishly funded, infrastructure couldn't be maintained, and, worst of all, the fabulous levels of graft and corruption to which so many people had become so addicted could only be maintained by massive and unsustainable borrowing. Since graft and corruption are the lifeblood of politicians and lobbyists, the massive and unsustainable borrowing is a given.

This is simply a case of people responding to incentives created beyond their control. Unfortunately, bureaucracies can generally only expand, so it can't really be undone at this point until the Blue States go hopelessly bankrupt. It's a bit like a Roach Motel - or for my State, "Welcome to the Hotel California."

The Burden of Taxes

A common belief is that levying additional income taxes on those with high incomes has negligible adverse impacts on the poor. In this post, for a hypothetical economy, I will show why this isn't true. In future posts, I will discuss how this result for the hypothetical economy still has at least some relevance to the real world.

Assume the following:

1. All people have exactly equal talent and capabilities.
2. All markets are perfectly efficient and fair.
3. Return on Investment (ROI) for all occupations is exactly equal, where the definition of "Investment" is non-standard and includes the following:

a. Cost (Money & Opportunity Cost) of Education.
b. Difficulty/Stress/Unpleasantness of the job.
c. Negative of the Satisfaction produced by the job.
d. Other similar considerations.

Note that (b), (c) and (d) have a strong subjective component and even (a) has a significant subjective component via an individualized Discount Rate (a rate of interest that relates the value of future income to current income to a given individual). Because of the differing "Investments" required for various occupations, there would be significant differences in compensation for those occupations since the ROI for all occupations is constrained to be equal.

This means that only those occupations that provide adequate value to justify the ROI will exists. In other words, if an occupation requires a great deal of "Investment" and therefore requires a high wage according to the ROI constraint, but nobody is willing to pay for the goods or services that this occupation would provide at that wage level, the occupation won't exist.

The ROI is an after-tax ROI. In this hypothetical world, nobody cares what their compensation is before taxes and instead they focus on their after tax compensation.

Consider the effect of increasing taxes on a given occupation while leaving the taxes on all other occupations the same. It doesn't matter if it's an occupation with high or low compensation, the effect is the same. If everybody with the occupation stayed in it, the after tax ROI for that occupation would be reduced. However, this violates the ROI constraint, so enough people would leave this occupation and do something else until the supply of people working at this occupation is reduced enough so that supply and demand balance to drive the after tax ROI for this occupation back up to nearly its original level.

Since people have left this occupation and are now competing in other occupations, all occupations' ROIs are slightly reduced (including this occupation with its additional tax burden). Taxes and regulation essentially have the effect of reducing our ROI for the work we do.

That's the first interesting effect. All ROIs are reduced by the same amount. Any attempt at making income taxes progressive is completely thwarted. The ROIs for the occupations with the highest and lowest compensations remain equal after the tax increase.

Since the occupation with the new tax burden has similar after tax compensation, the pre-tax compensation must be higher. That means that the production of goods and services dependent on this occupation incur greater cost, which implies that everybody will end up paying a higher prices for these goods and services. Again, any attempt at making income taxes progressive is lost, since everybody, rich or poor, will pay the same increased cost for these goods and services.

In this hypothetical economy, it is impossible for income taxes, regardless how progressive by design, to actually be progressive in effect. Since the poor feel the burden of reduced ROI and higher prices most acutely, the poor feel the burden of higher taxes more than anyone else.

In future posts I'll argue why the real economy bears significant resemblance to this hypothetical economy in regards to taxation.

Government Versus Growth

This chart says it all:





(HT: Carpe Diem)









If want a better future for your children and grandchildren, keep total government expenditures under 25%.

California's Woes

I like living in California and I hope to continue to be able to live in California. However, if taxes are raised enough, I will feel compelled to leave for a lower tax jurisdiction in order to better provide for my family.

California is having some serious problems governing itself. As Megan McArdle wrote:

California is completely, totally, irreparably hosed. ... You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money .... You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets. Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

We had a bunch of ballot initiatives to vote on yesterday, and while I got held up and didn't make it to the polls before they closed, I would've voted with the "uneducated" majority against tax increases had I been more timely. To vote for tax increases would mean that I'd be more likely to have to move so it would seem rather pointless to me.

I feel that the voters should set the budget and then the governator and legislature should figure out how to operate within that budget. They should choose which jobs and services to cut and they should get started now. Far fewer teachers, police, firemen, bureaucrats, etc. That I'm willing to live without.

Too Big to Fail

"Power tends to corrupt, and absolute power corrupts absolutely. " Lord Acton

Being too big to fail, if true, couples a concentration of power (bigness) with a corruption of the free market ideal. The same concentration of power seems to inherently lead to other corruption as well. Mancur Olson's research and thought regarding the nature of special interests groups makes it seem inevitable to me that mega-corporations, especially in slow changing industries, will (continue to) form symbiotic relationships with the State that further strengthens both the mega-corporation and the State, to the detriment of the rest of the citizenry. We're seeing exactly that with GM, Chrysler, Steel protectionism, banks, etc., etc., etc.

So, given this seemingly inevitable sequence away from an ideal free market economy and towards Corporatism, exacerbated by the existence of huge business, is there anything that can be done to slow it down?

I think that reducing the number and size of large corporations would be helpful. However, giving the Federal government the directive to do such a thing by fiat would be a cure far worse than the disease. The method of reducing the number of large corporations, in order to avoid even more corruption and waste, would have to be formulaic and not subject to the whims of the President, Congress or regulatory agency bureaucrats.

The devil's in the details, but I'm imagining there might be a way to tax bigness such that the shareholders of large corporations would split the corporations into smaller entities, unless the bigness really was so advantageous, because of some manufacturing efficiencies or something like that, as to outweigh the increased tax burden.

What do you think?

Risk and Taxes

Consider the following two portfolios over a ten year period.

1. The 1st portfolio will have a 4% per year guaranteed return.
2. The 2nd portfolio will have either a 50% or -25% annual return for each of the 10 years. The returns for each year are completely random and independent.
   

Which is better?

Well, that depends. At the end of 10 years, portfolio 1 will have increased 48% (with compounding). Portfolio 2 will have a return somewhere between -95% and 5,500% and the expected (geometric mean) return is 80%. 80% is a lot better than 40%, but only about 13 out of 20 people would end up doing better with portfolio 2 than with portfolio 1, the rest would've been better off sticking with portfolio 1.

In my experience, about half (maybe somewhat more than half) would choose portfolio 1 and the others would choose portfolio 2. Those who are more risk-adverse would go with portfolio 1 and those who have a higher tolerance for risk would go with portfolio 2. There is nothing wrong with either choice. It's completely subjective.

However, the rich generally can be more risk-seeking. If you lose 95% of $1 billion, you still have $50 million left, which is a bummer, but no threat to survival or even comfort. If you lose 95% of your $200,000 of retirement savings, you're in serious, serious trouble.

Now let's consider what happens when taxes are added to the equation. Let's use the nice round number of 50% as the tax rate. For a rich investor in California if Obama increases taxes on assets for the rich as he said he would while campaigning, 50% is a pretty realistic number.

Portfolio 1's after tax return is 2% per year which would compound to 22% for the 10 year period.

Portfolio 2 is more interesting. The results depend not only on chance, but also on order. If the early returns are good, they're heavily taxed, and later losses will badly hurt the overall return. If the early returns are losses, then later profits go tax-free until you make the losses up (assuming that losses can be carried forward). Indeed, the calculation is complicated enough that I had to write a short matlab program to calculate the results.

The bottom line is that the expected 10 year return for portfolio 2 is now negative (between -3% and -4%). As a result, except for very risk-seeking individuals, portfolio 1 is now much better.

The point: Taxes on capital punish risk. This isn't an opinion, it is a mathematical certainty. While the above example was specifically picked to help illustrate this point, under a high-tax regime, higher risk investments are negatively impacted more than lower risk investments, and therefore, investors will have a greater incentive to avoid higher risk investments.

In a future post, I'll look at the ramifications of discouraging risk-taking.

Taxes and GDP

Depending on how you measure it, the United States the governments' (fed, state, and local) share of the annual Gross Domestic Product (GDP) is a bit less than 1/3. The governments' take is, therefore, around $4 trillion.

Let's quickly define what "share" and "take" mean. Consider a pie. The "share" (S) is simply a fraction of the pie. The "take" (T) is the weight of the given piece of pie. Given a pie that weighs W, the equation is T = S⋅W. Simple enough.

Clearly, for T to increase, either S or W need to increase (or both). However, in the case of the American pie called GDP, there is also a relationship between S and W. As the governments' share (S) of GDP increases, the pie makers (the private sector) make a relatively smaller pie, so W decreases. Therefore it's not clear if the governments' take will go up our down if they choose to increase their share. If GDP decreases faster than S increases, the take would decrease. If GDP (W) decreases slower than S increase, the take T would increase.

Let's say for a moment that the governments wanted to exactly maximize its take. To do so they would pick the share that maximizes the equation T = S⋅W and therefore the change in W would exactly offset the change in S if S increases or decreases. Let's say the governments have successfully done so and that the current share of 1/3 maximizes their take. If so, we would predict that for each percent increase (or decrease) of the governments' share of GDP, GDP would decrease (or increase) by approximately 3%.

Sure enough, according to a recent paper by Christina and David Romer of the University of California, Berkeley, tax revenue increases are a significant negative for the economy and the relationship between share of GDP and size of GDP happens to exactly maximize the governments' take:

Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

Governments exist only to exert and extend their power via a parasitic relationship with their economic host. One-third GDP maximizes our governments' take so that's what they take. No more, no less.$$

Corporate Taxes

Over at the Market Center Blog via The Center for Freedom and Prosperity they draw upon this article and link to their youtube video.

Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.

The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.

High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.

The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate.

Did they do a good job with the video? Is it an effective form of communication?