Tuesday, September 20, 2011

Class warfare...or math? Does one plus one equal three?

“This is not class warfare….this is math.”
                                              Obama, 9/19/2011

I like the way Obama has basically stated that his new tax plan is one or other of these possibilities. By inference, if it is not math, it must be class warfare, right?

Math is a funny thing. In purely the mathematic science, math is pure…you have rules and the answer to any question will always be the same no matter how often the question is asked.

One plus one will always equal two, right?

That is correct, unless you are an accountant…in which case one plus one is whatever you want it to be.

For non-accounting types, this hard to imagine, but the best accountants in the world can manipulate numbers to be whatever they want them to be. This is because while the rules of mathematics never change, the definitions of the number change when talking with an accountant. A good accountant can argue that the cost of panting a building is a capital item and belongs on the balance sheet, and not an expense effecting profit.

There are hundreds of examples of this, and this is one of the reasons that Warren Buffet pays low taxes. His team of accountants is able to manipulate the numbers to mean whatever they want them to mean.  (Now, the fact that Buffet is guilty about this and claims should pay more taxes is totally up to him. He can simply choose to tell his accountants to increase his tax bill, and it will be done!)

Let’s talk economics for a moment.

The truth about the accounting profession and it’s manipulation of numbers is tenfold worse in the world of the economist. The economist purposely uses weird phrases (“jobs saved or created” is just the latest of the weird immeasurable metrics that economists have started using), in an attempt to make the math behind economics invisible to the normal non-economist. The truth is that economics is not difficult; it is just camouflaged well by economists and politicians who have a vested interest in keeping the truth hidden.

So we have accountants and economists distorting the math behind raising taxes on the rich. So what is Obama talking about when he speaks of it being” not class warfare….but math”?

It’s time to look at the math.

I like to keep things really simple if I can…so let’s keep this simple.

If the government taxed everybody at zero percent…how much revenue would the government receive?

Correct! Zero.  Simple math.

Now, if the government taxed everybody at 100%, how much revenue would the government receive?

Don’t know? I will tell you. Zero!

If everything you eared were taken by the government in the form of taxation, there is no inducement to work, so you and all your friends would simply stop working, right? When that happens, the government gets nothing.

This creates an interesting issue for the government. We know that a tax rate of zero produces zero revenue and that a tax rate of 100% produces zero revenue. Somewhere between those two extremes, the government can generate revenue. The question? Where is the optimum rate that allows for optimum revenue?

Every individual will have a point at which the next tax increase will be a de-motivator. Most people feel that 10% is a fair number….some believe 20% is ok, and some may think 45% is fine. However, EVERY time the tax rates increase, SOME people will say it is no longer worth work 16 hour days because the government just takes more. They will stop working as hard, or stop working completely.

In any event, economic activity REDUCES with every increase in taxation. THAT is the real math!

Obama will argue that an increase in taxation on the rich, so that they “pay their fair share” will not damage the economy because they can afford it anyway, and the money is just sitting in the bank doing nothing.

So, he has a right to just steal it and use it to do what?

He has several choices:-
-         he can use the money to create jobs like shovel ready construction jobs
-         he can pay down government debt
-         he can take the money out of circulation

Let’s look at each of these.

Using the money to create jobs.

Shovel ready infrastructure jobs sounds like a great idea to stimulate the economy, and get people back to work. The problem is that these jobs are being paid for with funds that have been taken out of the economy in the first place, so there is no net gain in economic activity. (See my blog yesterday for a detailed analysis of government jobs). Even though the jobs are possibly created by private firms, they are funded by government activity not economic activity. End result of taxes raised to pay for shovel ready projects? A net reduction in economic growth. The tax increase lead to some people stopping their own economic activity, slowing down the economy. The government paid building of infrastructure simply redirects the economic activity that existed prior to the tax increase.

The final result is an economic slow down.

Pay down government debt.

On the face of it, this looks like a good option (and I am certainly in favor of paying down debt). The problem here is that the debt is not being paid down through increased economic activity, but through a process that has already slowed down economic activity. IN fact this option sis very bad because the tax taken has not been redirected into new economic activity to offset the reduction from the tax in the first place.

This option effectively slows down the economy.

Take the money out of circulation.

What do I mean by this? I mean, simply burn it. Do not use it, do not spend it…burn it. The reason to do this is to reduce the inflationary impact of inflation created by printing money. This option will increase the value of dollars in existence and therefore increase the purchasing power of those dollars. The net effect on economic activity is zero since the taxpayer has fewer dollars after the tax increase but those dollars buy more.

Can you imagine the outrage if a government should do this?

No politician would EVER say they were doing this. Just not going to happen.

There are no other options!!

Creating more entitlement programs, extending unemployment benefits, buying property…it doesn’t matter what it is, everything the government can do with increased taxes eventually falls into the three categories above.

THAT math never changes.

Now, I know some of you are saying that the wealthy don’t need to have millions of dollars in the bank (or even billons) and that this wealth would be better used paying down the debt. Really?

Let’s look at what happens with the “excess wealth” of the millionaires and billionaires….

-         they use it to invest in companies and businesses that they expect to one day be successful
-         the banks holding the dollars lend them to people to buy houses, cars, boats and TV’s
-         the banks holding the funds lend the money to businesses to grow their business
-         etc, etc

All of this results in economic activity.

You see, it does not have to be the rich person using the funds, it can be the banks where his money is kept that can use the funds. Unless he keeps his money under his mattress, he is directly or indirectly financing economic activity….growth!

Tax him more, and he has fewer funds, or his bank has fewer funds, available for economic activity. The economy is starved of capital and slows down.

So, Mr. Obama…your simple statement that a tax on the rich is not class warfare, t is math, leaves me with few choices when drawing conclusions.

There is no doubt that you failed math, even at a remedial level, if you do not understand the simple truths written above. If that be the case, then you must have surrounded yourself with advisors who also failed remedial math…if they did not prevent you from making that outlandish statement.

And here, sir, is where your credibility gap has grown even wider…

By your own statement, if it is not math….it must be class warfare.

We all knew this guy was stupid, incompetent and a narcissistic fool….but I never expected him to openly state that he was indulging in class warfare…and that is what he effectively did yesterday.

Higher taxes on the rich is not good math…it IS class warfare.


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