Reason for a New Age

Posts Tagged ‘taxes’

Romney 5-59

Posted by publius2point0 on 2012/10/14


Mitt Romney, candidate for President of the US, has been reluctant to discuss policy in public beyond high level soundbites like, “I will reduce the deficit.” To many, this has seemed a dishonest method to go about running your campaign, but as he has pointed out, anyone who so cares to do so can look up his 59-point plan for turning around the economy – the economic situation of the nation being his principal running issue for the election.

Now, I have realized by going back over some of my old posts that I have never been great at bringing quotes from materials into the body of my text. This may be unfortunate, but I’ll just note that I am going to maintain this standard for at least this one article, given that the full document is some 153 pages and I don’t have an interest in writing something of equal length, nor of breaking the document into sections to be discussed over many weeks. I would recommend to read the plan alongside my text.

Here is the full document.

One general commentary that I will make is that I am quite pleased with the honesty of the document. The numbers it cites come from the OECD, the Office of Management and Budget, the Bureau of Labor Statistics, etc. Up to page 63 (the Heritage Foundation), there isn’t a number in the document that anyone could decry as patently deceitful (which people are liable to do, when discussing a partisan think-tank). Most significantly, the Office of Management and Budget is a cabinet office, and hence no number from this source can Obama decry.

Starting off, it mentions the larger 5-point plan:

End Obamacare

After this bold proclamation of a title the explanation then waffles about any specifics. In plain speech, it effectively says, “We’re going to direct all the agencies who were tasked with choosing how to implement Obamacare to cut out anything that they believe is wasteful.” I am not impressed, and otherwise he doesn’t seem to actually comment on Obamacare anywhere in the document except as the occasional pejorative. Turning instead to places where he has actually been questioned on his stance on health care, the result seems to be that he supports a personal mandate to purchase health care, with the government stepping in to pay it for those who can’t. He pushes towards making the only insurance providers private, not public, which I also encourage, but that is not significantly different from ObamaCare in any short nor long-term way. What he does say, that is different, is that private insurers should be no different from insurance gained via an employer. That is the one step that the nation needs to make, and a good one. Saying that he wants to end ObamaCare is a meaningless soundbite, which I’m sure he’s aware of. The real plan here seems solid.

Cut Red Tape

Again, “I will tell everyone to stop doing all those bad, costly things they shouldn’t be doing.” We will have to see what the document says further along as this is meaningless as stated.

Boost Domestic Energy Production

“I will direct the government to rubber stamp any applications to drill, where the application is a clone of one which has been submitted before.” I.e., if Charlie has used a Turboencabulator x5000 to make widgets before and everything went well, with no complaints, and now Charlie wants to use the exact same Turboencabulator x5000 to do the same thing in basically the same conditions, there’s no purpose in re-doing all the red-tape and paperwork that was involved the first time. Romney wants to streamline this process.

I suppose that this seems reasonable. But I would really need to question just how frequent an occurrence this is? Given advances in technology and the difference in geological makeup from one location to the next, I’m not sure that I would trust that there’s ever really two setups that are so similar as to merit a pass. And of course, this would mean that companies need to file paperwork to get checked for whether they should go on the fast-track or the old, slow path. For those who are rejected, they now have even more red tape to get through than before.

More importantly, I would rather see something more dynamic as regards our energy future – nuclear, natural gas, smart grids, etc. Overall, I’m reading this as a fluff piece to keep the average Republican who wants to thumb their nose at the Democrats happy, when in reality, Romney has basically committed to nothing.

Call out China as a Liar

To actually quote the body of the text, “Directs the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.”

I think the main thing to say about this is that it’s never going to happen. The grand majority of American debt is held by China. For us to start down a warpath of trying to ruin their credit rating around the world is just going to be met by them coming to call for us to repay what we owe them.

While I think we would be the ones with the more morally righteous foundation to stand on in that particular game of chicken, the end result will be that we’ll be the ones to swerve. China doesn’t feel bad about behaving badly, they’re never going to admit that they’re lying about their financial situation. The US will continue to honestly admit that we owe them quite a bit of money and quickly come to realize that we just look like buttheads to go after our creditor, however bad they are.

Overall, Romney would be a fool to do this, and certainly Congress and the Senate will do their best to shut it down.

Remove any Pro-Union Laws Initiated by Obama

Unfortunately, I don’t know much about this. My belief had been that Obama was relatively tepid about unions. For years, GM was making awful, archaic vehicles. Starting a couple of years ago, they began to see their reappearance in the limelight with car shows featuring their vehicles and positive reviews coming out about them. This had lead me to believe that GM (by order of Obama) had gone union busting in an attempt to curb the thinking processes that spoiled innovation, as well as shutting down the unfeasible pension plans the unions had bargained themselves into that were ultimately killing the company. Apparently, this was not the case. The unions are now part owners of GM and outside of some contract workers, Obama only seems to have been working to preserve the full payment of those pensions. Given that, I suppose that my only fallback explanation for how GM started to make a few decent cars is in the same manner that the Russians got into space: Technological theft and pointed political pressure to create one or two reasonable items, at the expense of everything else. It may be that GM bankruptcy #2 is just around the bend.

Anyways, we shall have to see what Romney says further on in the document, if anything. Not enough is said here for me to evaluate his approach.

 

Going on to the rest of the document, the first section is his Tax Plan, starting on page 40.

Tax Plan

I will skip over a few of the lesser items that are mentioned, but the general gist is the lowering of taxes. The big items follow.

Simplify the Tax Code

Romney desires to restructure the tax code and make it simpler and more rigorous. This appears to be less out of a desire to raise or lower the tax rate so much as due to the realization that an additional 36.4% beyond what is paid in taxes is spent on avoiding taxes. While it may be true that people can reduce their tax burden to 0% if they get sufficiently creative, it’s still likely that most people pay more to avoid a percentage of their taxes than they would pay just by paying their taxes. Making that the case saves the people money and allows the government to lower tax rates without lowering receipts.

While I question the accuracy of these numbers – it doesn’t seem like something one can accurately quantify without a lot of assumptions – overall this seems like a reasonable goal on the face of it.

The problem with this proposal is two-fold. Firstly, reducing spending is always equivalent to laying someone off. Specifically, if this measure reduces the spending on tax lawyers and tax advisers across the nation by 50%, then that is equivalent to laying off 50% of all tax lawyers and tax advisers across the nation.

Secondly, the reason for the bizarre tax code is because the principal method by which politicians hog trade or otherwise seek to achieve political ends is by affecting the tax code. In example, if you are the governor of a state which relied on corn sales to support the populace, getting tax breaks for the local corn businesses from the federal government is a big win. If you’re a president who is pro-union, removing the tax burden on union-guaranteed pension plans is a method of accomplishing your aims.

At the end of the day, all tax loopholes or disincentives that have been imposed are due to the political might of some corporation, party, coalition, or other entity. While it may be the case that to the majority of those who are taxed, these tax oddities are annoyances, and if we all voted on it we would vote to simplify and standardize tax code, the reality is that we don’t live in a democracy. Those who are willing to make their way to Washington DC and play hardball are the ones who get the grease, and the rest of us do not.

Fundamentally, I don’t think that Romney could hope to have much if any traction on this issue short of removing the lobbying system. But minus an alternative method for protecting against the tyranny of the majority (i.e. the lobbying system), I don’t know that I could really advocate this. I’m more concerned with the rights of advocacy groups like the NRA, the ACLU, or the Financial Industry. Minus pushback from the Financial Industry after Obama was elected, for example, I’m sure that ObamaCare would have done more than simply establish a new government health care agency. Private health care may well have gone away entirely.

Transition to a Territorial Tax System

Apparently, at the moment, the US taxes money which was earned abroad by a corporation as soon as the money hits American shores (though only if the US tax rate on that money is higher than the foreign tax rate, and only for the difference of the two). The theory that Romney offers is that this reduces the desire for American companies to bring the money home and invest in American growth.

According to Warren Buffet, “I have worked with investors for 60 years and I have yet to see anyone—not even when capital gains rates were 39.9 percent in 1976-77—shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.” I’ve seen people take this to mean that taxes don’t factor into business decisions in the real world – it’s all just a myth. It’s possible that Buffet meant it that way – though it’s also possible that he was being political and adjusted his phrasing of the truth towards that sort of interpretation. It’s probably true that people don’t invest in places with low tax rates and shy away from places with high tax rates. Rather they invest based on the sum total of all numbers – which includes tax rates, but also includes expected profit margins, growth rates, etc. – which overall form a “sensible” or “nonsensical” investment. The fact of the matter is that all the big box stores in the Seattle area are in the city of SeaTac because it offered them a tax incentive to settle there.

Delaware has a large number of the incorporated business of the US as “legal denizens” even though the headquarters are in other states, because Delaware has a long history of dealing with business law and its easier for businesses to work together if they’re all under the same legal system. So certainly taxes aren’t the only factor that a business or an investor takes into account, but that doesn’t mean that there aren’t times when the number that makes everything come together be the tax rate at location X. Ultimately, every point you have in your favor as someone making a bid for new business is one more point in your favor.

So while I believe that Romney is correct in his assessment here, this still comes down to Keanesian math. He’s proposing to raise the deficit by cutting taxes for the sake of stimulating the economy. While the specific methodology is different, the big picture isn’t much different from Obama.

Regulatory Policy

The majority of this section of the document talks about the amount of money spent by businesses in dealing with Federal Regulation (specifically, $1.75 trillion), in a generally negative tone. Of course, this disregards the fact that regulations are (at least in theory) intended to provide benefits. For example, say that my preferred method of doing business is to literally work my employees to death and then replace them with fresh new employees. The government does some math and determines that giving trained workers 20% more personal time so that they do not die on the job ends up sparing the economy the losses incurred by training row after row of unskilled labor, while freeing those bodies for other, new industries. Overall, this regulation on my business, while costing me money in the sense that I must now close down the factory for a few hours each day, it will end up benefiting me by an even greater amount, such that I actually end up profiting.

The question isn’t how much regulation is costing us, it’s what is the cost-benefit tradeoff on average? Since 1997, the Office of Management and Budget has been required to analyse and report these values to the best of their extent. For example, here is the 2011 report. If you look over their numbers, you will note that the average ratio is positive. Of course this makes sense. If anyone was reporting a detrimental regulation, financially, you would expect it to be cut. Of course, if your livelihood thus depended on the financial cost/benefit ratio of a particular regulation, you might be inclined to provide favorable estimates. Still, one can pontificate on the true reliability of this report till his head starts to float off blissfully into the clouds, the fact would remain that you’re limited to what data there is in existence, and this is it.

But so what, precisely, does Romney intend to do about any of this? This seems to come down to the REINS Act.

I think we will need to take a step back to understand this.

Most government regulatory agencies, like the EPA, are part of the Executive Branch of the government. At some point in the past, Congress and the Senate were convinced to cede the day-to-day nitty-gritty of managing the welfare of the environment to a group with greater technical knowledge of the impact of particular technologies and wastes. Now that they have ceded this power, their ability to control the regulations created by these groups is limited to that they have over any Executive power – not much.

Technically, they can veto anything which the President or other body of the Executive Branch has passed, but this takes some effort. The Congressional Review Act de-ceded some of this power, stating that new regulations have to be passed by Congress – though if Congress doesn’t care to bother reading through or voting on the regulation within X amount of time from submission, then it will become law on its own. This spares them having to vote on every single thing the regulatory agencies are doing, while giving them the theoretic ability to block anything whatsoever that they do not want.

The REINS Act strengthens this by further stating that if the cost analysis of a new regulation exceeds $100 million (presumably, in today’s dollars), then it does not get the automatic pass. It must be passed by the Legislative branch officially.

Now that we understand the act…so what? To date, the Legislative branch has largely ignored their power to review legislation. Unless something makes headlines, they really don’t care and very few people are so bored as to sift through Federal regulations, hoping that a body which is specifically designed and crewed to review and monitor one particular bailiwick of the world will flub up in some glorious fashion.

If I work in a research group in the Department of Agriculture and want to propose something to my superiors that will have a noteworthy impact on the economy of the nation, I’m doubtful that I’ll do so flippantly. Is the bar for me to prove my work to my bosses in the DoA lower than it is for them to sell my work to the Legislature? Given that they have the technical background to analyze my work, probably not.

Overall, I don’t see a large demerit to the passage of this law, but nor do I see a great bonus. Romney has failed to make any strong case for using 1/7th of his plan target Federal Regulations. The most favorable thing I can say is that perhaps the number of specifics was too large for him to present in a document like this. The document doesn’t make any indication to this effect, though.

 

To be continued in a part 2.

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Libertarianism and Human Foibles

Posted by publius2point0 on 2010/04/11


The self-made man is a very impressive fellow. He starts from nothing, works hard, works smart, and he comes out on top.

Except that he didn’t.

If he made his millions in the stock market, he is beholden to the men who created the stock market to begin with. That he can communicate his thoughts is thanks to the people who invented the language. That he could get to work in a timely fashion was thanks to the people who invented the motor, the tire, and all of the other trappings of modern life. That he even survived past the age of 5 years old is a minor marvel, compared to most of human history. That he was allowed to rise out of poverty is thanks to the first people who said that intelligence and capability is not reliant on your parents position in the world, but on the individual.

All of this isn’t to disparage the fact that he has earned his millions by bringing something of great value to the modern world, but he would certainly be shortsighted to think anything other than that 99.9% of his success rested on the shoulders of other, similar giants.

The Libertarian generally is this shortsighted fellow. He thinks to himself, “I managed to climb to the top, everyone else can too.” Of course, that’s like saying that everyone can be special. In any competitive system, even if everyone gives it their all, you’re still going to have it that almost everyone is at the bottom of the heap. The important thing is to get the heap wiser, better, and faster than the old one.

The Myth of the Lazy

A common argument against any sort of government policy is that it just goes to support the lazy who don’t wish to work.

Since 1970, the poverty rate has held fairly consistently around the 12.5% mark (of the total population of the US.) Of those, only 10% will be homeless at any time in their life. 2/3rds of those who become homeless are mentally ill or have substance abuse problems (this is roughly an even split). Of those who do become homeless, 80% of the time it will be for less than three weeks, 90% of the time it will be for less than two months.

At any given time, about 48.5% of the population is employed or looking for work. Roughly 24.7% of the population is below the age of 18, 13% is 65 or older, though since the average age of retirement is closer to 62, the number of retirees is probably closer to 15% of the population (+6 million people). A further 1.8% are stay-at-home parents. Those who are on active duty in the military (which doesn’t count as “employed” in BLS statistics) comprise 0.5%, university students are 1.5% (downgraded from 4.75% since about 75% are also employed). 7.5% of the population are severely impaired physically, 2.7% have severe cognitive impairment.

What do all of these figures mean, you might ask? The only people of whom we can be absolutely certain are content to do no work and live entirely off of government handouts are the chronic homeless who are not mentally ill. Defining “chronic” as anyone who stays homeless for more than two months, this calculates out to (300m * 0.125 * 0.10 * 0.10 * 0.667 =) 250,125 people or 0.08% (8 out of every 10,000 people). But at most we can say that minors, retirees, and stay-at-home parents, soldiers, and university students don’t count as being “the lazy”. Adding these together with the employed and those looking for work, 92% of the population is proven to be not-lazy. While some of the disabled can work, not all can in any truly feasible way. An upper bound to the number of lazy in the US could probably be pegged at no more than 1%.

Ultimately, basing policy around “putting it to the lazy” is chasing a bogey man. It simply isn’t an issue.

The Secret of Success

Nearly everyone who is expected to work, in American society, does work. And, it’s probably a given that each one of them would rather be making more money than they are now. As stated before, even with everyone in competition, most of everyone will still be at the bottom.

To rise to the top, you really need a fair combination of:

  1. Working longer hours than others
  2. Ingenuity
  3. Being in the right place at the right time (AKA having the right idea at the right time)
  4. People skills
  5. Money handling skills

Of all of those, only #1 and #5 is really up to the individual. #4 can be worked at, but generally you either have it or you don’t (and to some extent that is true of #5 as well). But there are plenty of Mexicans who will tell you that working three jobs sweeping floors and scrubbing toilets can last you a whole lifetime without upwards movement. There are plenty of reclusive geniuses who will never rise from sitting behind a computer in a dark room, analyzing data.

Success is down to a lot of luck of genetics, upbringing, and where you happened to end up and when. You can kick at people to rise higher, but they can rise no higher than their level of ability. No purpose is served in trying to get anyone any higher than that.

Family, Education, and Success

If you compare the integration of African Americans into the American pay ladder to that of, for example, the Chinese, you will find that the Chinese are winning and have become more or less fully integrated. And yet, the Chinese have been in the country nearly as long as the blacks, and were still treated as an inferior class up until the 70s. Assuming that there is no genetic weight that keeps African Americans from succeeding, then we must assume that the issue is cultural.

If a person is taught, as a child, that banks cannot be trusted, that “the man is out to get them”, and so on, that person tends to not work hard in school, to turn to crime, or to waste all money that he earns on bling. If you feel that you cannot get ahead no matter how hard you compete, you will not get ahead. It might be foolish, but there is plenty of evidence to support this. Among other things, I recall reading surveys of children in Japan who had turned to bullying. The common factor of all of them was that they felt that they had no future. Or, for example, if you look at the average earnings trajectories by educational attainment, you will note that there is a very strong correlation.

The Libertarian World

To simply state the basic view of the Libertarian, it’s that you should get what you have earned by your own hand, no more and no less.

Financially speaking, this must irrevocably lead to a class society. In areas where land is cheap, the poor will gather, and with their meager wages they will hire the worst teachers for their children. Those children will have no belief in their own prospects and very few will strive to succeed. The wealthiest will gather into the areas where land is the most expensive, hire the best teachers and tutors, and their children will stay at the top because there is no one else to take their place. A Libertarian might say that they would let their children rot as they will if they expended no effort of their own, but I think the real world shows that parents nearly always try to do the best by their children as they can.

While each of us may deserve what we have earned, our children simply don’t. Attempting such is detrimental to society in the long run. As it is now, 80% of the wealthy were not born wealthy. That’s a good thing, it shows that the people who are capable and have amazing ideas are able to rise and implement those ideas.

It’s a truism that life is better for the poorest of today than it was for the wealthiest of a hundred years ago. The iPod you have now would not exist if society was 50% slower at creating new technologies. It may be a cheap trinket that everyone in the nation can reasonably purchase now, but at the 50% the pace, we’d still be in the 1960s. That iPod wouldn’t exist if it wasn’t for the multitude of people who were able to rise up from the bottom, get into a nice school, and make it in the marketplace. Stifling that for the sake of grandiose ideas, in end result, makes your life worse.

Each person should get what he earns, but even the guy at the top earns the most when every child can start from an even standing. That is far more true to the ideal of Libertarianism, in fact.

Taxes and Feasibility

Jane is walking along through the hills and plains of Hawaii and she comes across a farmer named Rudy. She watches him work at his farming for a moment before interjecting, “Excuse me but why are you doing that?”

Rudy looks up at her querulous, “This? I’m milking.”

“Yes but, why are you pouring the milk into that coconut shell and then back out after each time you milk the cow?” She asks.

“Ah. Well, I figure that I have to work just as hard to see to it that this here coconut palm continues to provide as I do for this cow. So, you know, it deserves to give me just as much milk.”

“A coconut doesn’t make as much milk as a cow….” Jane replies with consternation.

“So that’s why I’m doing this.” Rudy smiles and goes back to his work.

To a large extent, people are like a gravity well for money. Some can hardly keep it without it flying back out, while as others simply continue to pull and pull it in. Part of this is to do with ones ability to climb the ladder, but mostly it’s a question of money management. The poorest people are the poorest people not because they don’t work hard enough — they work a 40 work hour work week just like anyone else — but more because they have poor money management skills.

I can offer two items of evidence for this.

Here is a chart that compares the median income (horizontal) of each state by the mean (vertical):

To explain the difference between median and mean, for those who aren’t aware, say that we have the following salaries:

$7, $7, $7, $7, $8, $8, $9, $11, $20

The mean is calculated by adding these nine values and dividing by nine: $9.33

The median isn’t calculated. You simply list everything in ascending (or descending) order and choose the value in the middle: $8

You will notice that the median is a lower number than the mean. When the distribution of values is fairly even like this:

$7, $8, $9, $10, $11, $12, $13, $14, $15

Mean: $11

Median: $11

The two values are similar or the same. When one end of a distribution of values is “fatter”, the median will vary that direction. When the distribution is evenly arranged, the median will line up with the mean.

In the above chart, the states are each given a different color. Red states are those which have no minimum wage. Gold are those which have a lower minimum wage than the Federal, blue those which have the same minimum wage as the Federal, and green is those who are above.

For a minimum wage to boost the wage of those at the bottom, it must take that money from the top. Generally, more money is taken from the top top than the middle top, and more is taken from the middle top than the lower top, and so on. In a location where the minimum wage law is raising the actual minimum wage from whatever it would naturally be according to the free market,  you would expect to see that the median income would be closer to the mean — in our graph, this means further to the right. And you would expect that locations where the minimum wage law was having little or no effect on the natural distribution of wages — for instance, where there simply was no such law — to have a lower median. That is to say, you would expect to see a curve. Instead, the ratio of median to mean is quite linear regardless of what their laws are.

So like I theorized in my previous discussion of the minimum wage, such a thing isn’t needed because people don’t take a salary less than they need to survive.

People who can manage their money well, however, do not just plan for immediate survival. They need a wage that can support them through retirement. As I pointed out in the discussion of the minimum wage, every state’s minimum wage is far too low for that. And since we know that the current minimum wage, as I’ve just demonstrated, is the same as the open market minimum wage, this means that your average minimum wage worker is accepting an irrational wage.

Now you might say that most minimum wage employees are high school students or people working their first job right out of college. If you look through the previously mentioned census report which tracks average income by educational attainment (see, specifically, Figure 4), you will notice that for anyone with an Associate’s Degree or less there is only a minimal increase in income from the start of their career to the time they retire. Whatever your starting salary was, you are more-or-less stuck with (on average). Adjusting my estimate of the lifetime average income necessary for self-sufficiency to 1999 dollars, it would be about $25.5k. Your average non-high school graduate (13.4% of the population) does not make enough money to be self-sufficient. Your average high school graduate (31.2%) is generally self-sufficient, but many are not. To take a wild guess, let’s say that half of the first and a fourth of the latter do not make it. This would be 10.6% of the population. Adding a little change for those who fall from greater heights, let’s make it 11-12%. Given that the poverty rate is about 13-17%, but does include high school students working their first job, etc., this number seems fairly plausible.

Let’s look at our second piece of evidence, where we examine the spending habits of the poor:

http://www.ncpa.org/pub/st300?pg=5

http://www.heritage.org/Research/Reports/2004/01/Understanding-Poverty-in-America

~47% of households where the combined household earns less than $25k per year spends about $1080 on gambling per year. Of course, we are talking about self-sufficiency not household-sufficiency, so we must include everyone up to not quite $50k per year and factor for a household being two people. We’ll guesstimate that out as 25% of individuals spend $2000 per year on gambling. On average, a poor person will spend about $1000 per year on alcohol.

The average poor person owns a three bedroom house with a patio and garage. Most of them are overweight.

The point here isn’t that they are sinful and have bad habits, it’s that someone who isn’t earning a wage that can be considered self-sufficient presuming a person who does little more than go to work and come back home right after and stare at a blank wall for entertainment can’t afford to buy $1000 of beer when he has water on tap for less than 1¢ per gallon. He can’t afford to purchase a three bedroom house, he should be living barracks style with two or three other families. This is how he is able to save up and support himself through retirement at his salary. If he wants beer, a roomy house, a non-working spouse, etc. he either needs to live the life of an ascetic, or he needs to demand a higher salary.

Like I said, the people at the bottom have poor money management skills. This is why they are at the bottom.

If you were to raise the minimum wage to be a meaningful number that matched the actual needed income, I see no reason to think that this would help the situation. If you were to drive through the poorest area of town throwing money out the window, you would see people driving around in cars with giant speakers a week later, not people setting up a retirement fund. Giving money to someone who is almost certainly useless with money serves no purpose. It creates jobs in the sense that there are more casinos and more car modification shops, but those jobs are coming at the cost of jobs researching cancer or developing the next thing after the internet. All money creates jobs. It’s only a question of where that money serves the best purpose.

Now, the presumable Libertarian response to this would be that even so, this is their right. If a person wants to waste all of his money and be destitute the moment he retires, he has every right to die of famine a month later. It’s the future he chose.

But you’ll note that I didn’t title this section “Why Libertarians are Wrong about Taxation”, I titled it “Taxes and Feasibility”. Personally, I’m perfectly fine to let someone choose a future where they have no retirement plan. But, that’s not true of at least 50% of the nation. I suspect that it would not be true of 80-90% of the population once there were millions of poor elderly men and women dying of starvation every year. Emergency legislation would be passed to prevent this from happening, and taxes would be imposed to raise money for it.

Rally against social programs all you want, the simple truth is that you aren’t the emperor. In a country ruled by the ballot not the king, only solutions that have any hope in hell of getting passed are feasible.

It is a simple truth that you, as the government, will have to raise money for social programs. That money will cost a certain amount, and nearly all of it will go to the poor. If you tax those poor to raise that money, that money just goes straight back to them. If you tax only the wealthy, there isn’t enough of them to afford it even if you taxed them 100%. As the government, your only feasible solution for raising this money is to go where the money is. If 10% of the people have 90% of the money and you need 40% of all money, like it or not, that’s where you have to tax from.

But the more important thing to realize is that when you tax the poor, all that’s doing is raising their wage, which is lowering the wage of those above them. It’s the same as the miniature story at the start of this section where the man takes the milk from the cow to give to the coconut, just so he can take it away again. It simply wastes effort.

And you can’t say that he should get two cows because even among cows there’s going to be those who produce massive quantities of milk and those who produce less; this may or may not correlate to how much effort they are to raise. The only question is whether they are producing enough milk to pay themselves off. If they do, you’re still better off to expend that energy getting their milk than to get rid of them. It might only be +1 gallon of profitability for that cow each week, where others get +8 gallons, but that’s better than zero.

If you would advocate that anyone who finds a market sustainable job, works 40 hours a week, and continues to work from young age to old, then he has been a net positive in society, then looking at the wage he made is a false metric. How much a person produces, how much he earns, and how good he is at saving money are unrelated values. Nikola Tesla invented AC power and the first major electric power generator and yet lived most of his life destitute because he just kept giving everything away for free. He deserved more, but he was an idiot in his own special way.

When a person accepts money from social security, medicaid, or medicair, he almost certainly earned it. It’s simply a matter that instead of being given his salary when he earned it, he is given it at a later point when he needs it. In the meantime, that money can be invested by those who are wiser in things of more value than casinos and speaker systems.

When you keep taxes low or non-existent on those with the lowest wage, it also makes it easier for small, startup businesses. They could pay all employees, manager or not, a more-or-less similar wage so that they can afford the people they need. But practically speaking, you have to be able to offer at least somewhat competitive wages for those in management if you want to be able to find anyone worth having, which means you have to pay the grunt workers the minimum that you can to afford it. The lower that is, the more readily you can run your business.

And it also makes it easier for Americans to compete against illegal immigrants, since a legal worker who is paying taxes is more costly than an illegal who does not.

While there certainly is the argument to be made that allowing people to screw themselves over, for people to have to pay their own way, etc. everything still ultimately comes down to two things:

1) It will never happen.

2) No practical good would come of it beyond the smugness of having won, if that’s the policy you wanted.

Sources:

http://www.census.gov/prod/2008pubs/p60-235.pdf

http://en.wikipedia.org/wiki/Homelessness_in_the_United_States#Statistics_and_demographics

http://www.mi.vt.edu/data/files/hpd%202(3)/hpd%202(3)%20wright.pdf

http://www.census.gov/popest/national/asrh/NC-EST2008/NC-EST2008-01.xls

http://www.census.gov/popest/national/asrh/NC-EST2008/NC-EST2008-02.xls

http://www.bls.gov/opub/mlr/2001/10/art2full.pdf

http://www.census.gov/Press-Release/www/releases/archives/families_households/003118.html

http://www.census.gov/hhes/www/cpstables/032009/perinc/new11_001.htm

http://www.census.gov/hhes/www/cpstables/032009/perinc/new11_002.htm

http://www.bls.gov/news.release/empsit.t01.htm

http://en.wikipedia.org/wiki/United_States_armed_forces

http://www.bls.gov/cps/cps_htgm.htm

http://en.wikipedia.org/wiki/Higher_education_in_the_United_States

http://answers.yahoo.com/question/index?qid=20080703133340AAKxnR8

http://www.infouse.com/disabilitydata/disability/1_2.php

http://www.infouse.com/disabilitydata/disability/1_5.php

http://www.usgovernmentspending.com/

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The Minimum Wage

Posted by publius2point0 on 2010/02/20


For the sake of clarity, let’s say that the philosophy behind the minimum wage runs as such: A person who can find labor, works 40 hours a week, and produces something that sells well enough to maintain a solvent company, is being treated unfairly by that company if he is not making at least enough money to support himself.

This does seem fair enough. Our fellow is working at least as hard as anyone else. He’s not lazy, and he’s not working to create something that no one wants. If the company can’t afford to pay him enough for him to survive and still stay in business, that business either isn’t creating anything of sufficient value as to not be a drain on society, or the money is being horded at the center.

For instance, let’s say that we have a company which manages farms. It has ten employees (including the boss), but only produces 5 food units per day–less than is needed to support even the company’s employees. If each employee earns only 0.5 food units, he’ll starve to death. If the boss of the company pays himself 1 food unit, paying the others all ~0.45 food units, they’ll still starve, while he at least lives. In either case, the government needs to step in and support the workers, which means they must force others to trade (i.e. be taxed) against their own survival, for something which doesn’t produce anything of sufficient value to support the survival of anyone. That’s just a drain on the economy.

But say that the company does produce enough food to be worthwhile, say 10 food units exactly. If each employee makes exactly 1 food unit, the company is not a drain on society and so can be considered to be free to do whatever it wishes. If the boss decides that he deserves to make more than his employees, however, he must necessarily make them go below the below the rate of survival. Here we are left with a company which can be self-sustaining, but is choosing not to be, even though all of its employees (including the boss) are guilty of choosing a profession that is just on the edge of survival. Assuming that the government will indeed step in, using taxes to keep those workers alive, this company is still creating a drain on society by forcing the government to hire more tax collectors or to have more people manage registering and tracking those in the welfare net, all for the sake of one man who wants to run a business that can barely survive, but isn’t willing to take the personal sacrifice to keep his business afloat naturally.

But of course whether something makes sense logically and works perfectly on paper is of no consequence if it is not operating as intended in the real world.

Mankind is Shortsighted

There is one singular issue with the minimum wage, which is that human are shortsighted (on average). Past scales of the next year or so, we really aren’t very good at planning. Most likely it simply wasn’t an ability that was useful when we were still swinging on vines, and spending time thinking about it simply distracted from immediate worries in a negative and dangerous way. Regardless of the reason, it’s almost certainly so.

The minimum wage varies by state, some not even having it, but a good modern day average would be the Federal minimum wage at $7.25 per hour.

Let’s take our ideal cheap liver, named Richard, who works for minimum wage. He is willing to live with a roommate or 5, he uses the bus, he goes without TV, radio, books, or anything beyond the exact minimum he needs to survive. We’ll say that he finds an apartment for $300 a month, he has a $50 a month bus pass, purchases $250 worth of food, and has $100 in utilities and other minor fees. Theoretically, one can survive on $700 a month. At minimum wage, he will earn about ($7.25 * 40 * 52 / 12 =) $1256.67 per month, but minus taxes we’ll say that it’s more around ($1256.67 * 0.65 =) $816.84. This is perfectly enough to survive and still have extra money for emergencies or TV or whatever.

But, remember our salary needs to cover the basic expenses of survival for our retirement and our childhood as well–or we’ll have been a drain on society. The question isn’t whether we can survive from age 18 to 65, while we’re working, but whether we can survive from age 0 to 78.

With that extra $180 a month, working for the 48 years of age 18 through 65, Richard will be able to save up ($116.84 * 12 * 48 =) $67,299.84. His survival expenses for his childhood plus retirement is ($700 * 12 * (78 – 48) =) $252,000, i.e. not enough.

For a 78 year life, the national average, at $700 a month, we must earn a total of ($700 * 12 * 78 =) $655,200. With only 48 years to earn this sum during, that becomes a minimum hourly wage of ($655,200 / 48 / 52 /40 /0.65 =) $10.10. If we didn’t charge him taxes, of course, that 0.65 disappears from our calculation, and instead we only need a minimum wage of $6.56.

But, actually, we haven’t included medical costs. The average American costs around $6000 a year in health bills (mostly incurred at the beginning or end of our lives). For a 78 year life, this adds an extra $468,000. Doing that math over, minus taxes, Richard needs to earn ($1,123,200 / 48 / 52 /40 =) $11.25 an hour. We’ll assume that the taxed portion goes towards paying that $6000 a year health value plus his childhood and retirement needs.

Apparently, the US average minimum wage is $4 too low to accomplish its philosophical purpose. Many many companies are either acting as a drain on society, or are paying their employees an unfairly low value.

The question becomes, why is the US government requiring this random value of $7.25?

The most likely answer is that they are simply pegging the minimum wage to what the market minimum already was.

You see, you don’t really need to establish a minimum wage if people are already looking out for their own survival. If a company is only offering me half as much money as I need to survive, I don’t go to work for that company. Simply human sanity, theoretically, results in the same result as the law. And so, there will already be a market minimum minimum wage, based on what people think they need.

The problem is, is that most people simply look at their monthly income and monthly expenses, and finance based on that. They don’t plan ahead for their children’s birth and schooling, and they don’t plan ahead to their retirement. This means that they accept enough to survive in the moment, and subsequently, the market minimum wage gets set to that value. This leaves the government in a quandary. They can either simply make sure that the market minimum is at least the true minimum, to save people who don’t have basic human sanity, or they can establish a true minimum wage $4 higher per hour than the market minimum, possibly putting significant percentages of companies out of business as well as raising the bottom bar for wages that must be paid by small, start-up businesses, before they become self-sustaining.

Ignoring the issue of small, start-up businesses, we could say that certainly it would be bad for the government to immediately raise the minimum wage by $4, but it could raise it gradually over the course of several decades. But the problem then becomes that the sort of person who lives on minimum wage is generally not the wisest user of money. Given extra cash, he will most likely squander it, buying excess alcohol, a big speaker system, go to Vegas, etc. He won’t use that money to save up, nor will he invest it in new industries or some other useful pursuit. You can raise his taxes so that he is left with only enough to support himself day-to-day, but then you’re still charging every business $11.25 per hour for their lowliest employees and thus raising the bar on starting a new business.

New, smaller businesses must run near or under the rate of survivability for some time–possibly years. And unfortunately, the idea that the boss makes more than his employees is sufficiently set in society that even if the president of the company is willing to work for minimum wage, if he wants to hire any further managerial staff, he will have to pay them more than that.

Ultimately, by fault of the majority of the nation, you’re stuck supporting people through retirement, through childhood and schooling, regardless that you shouldn’t need to. Trying to avoid having to set up the overhead costs of managing this social net becomes silly. You’re just as well to set up a minimum wage that really is only for day-to-day survival. Any more than that and you are financing lottery tickets and alcohol. But you’re also better off not taxing that person at all. This simply raises their wage to no positive effect.

I suppose you could say that the added value caused by taxation balances out to counter those companies that aren’t making enough money to survive, but personally I’d say that the market can figure that out on its own sufficiently well that hindering small businesses isn’t worth it.

If we only needed to survive from week to week and we weren’t being charged taxes, we only need to make about $700 a month. Just to handle emergencies, we’ll raise that to $750. This would be only ($700 * 12 / 52 / 40 =) $4.04 an hour. I think you can appreciate that this would be a boon to the small business.

You might say that this value would simply be offset onto big business, but the truth is that all taxes eventually come down on those who have the money to spare. If someone isn’t making enough to live, you tax him, give that money straight back, and then tax another person to make up the amount the person is still deficient. If you never taxed the first person to begin with, you only need to tax the richer person at the same value as you did before to afford it.

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