Hedgehog Party

When does Money Start to Eat Itself?

I post this offering from PFP Wealth Management without comment.

Economist John Tamny is similarly sceptical, recalling the words of Ludwig Von Mises that the entrepreneur who fails to use his capital to the best possible satisfaction of consumers is "relegated to a place in which his ineptitude no longer hurts people's well-being". Detroit's so-called Big Three are curiously vestigial entities - embarrassing, mismanaged throwbacks to the dawn of car-making. And there can be little doubt that any business (such as General Motors) that has posted $70 billion in losses over the past four years - versus a current market capitalisation of just $1.8 billion - is hardly a success story. President-elect Barack Obama has described US carmakers as "the backbone of American manufacturing". This particular backbone has advanced osteoporosis.

Citigroup's Hans Kullberg ("Reconstructing America: Why the US Government should turn a blind eye to US automakers.. and invest in the future") has written an interesting piece in which he details the extent of the problems facing the US auto sector, but also puts forward a strategic alternative simply to shovelling money at them (in the form of investing into energy and alternative energy infrastructure):

"Every time I see a commercial on television advertising a "0% APR No-Fees, No-Money Down" loan for a car, I cringe. The average American household currently owns 2.28 cars - how many of these are idle? The days of "buy now and pay later" are over, meaning there's no money left to buy cars, meaning there's no money left to support the auto industry, meaning there's no sales revenues to pay absurd pension plans, meaning there's no reason for the US Government to extend a lifeline simply to postpone the inevitable future of a futile auto industry. Although politically appeasing, to do so would be a disservice to the American taxpayer, which is a much larger contingent than the 2 million or so odd jobs that would be saved. It's readily apparent the "modest" loan would be used simply to renegotiate debt terms which are now trading at 25 cents on the dollar and yielding over 30% a year. To put off the day of reckoning will make the downfall worse when it finally comes."

But then, let he who doesn't need government money cast the first stone. And the problem with government money is that in most jurisdictions the very term is a misnomer, because governments too are already heavily indebted, so it's taxpayers' money we're really talking about. And this gets us to the heart of the debate: at what tipping point do effectively unlimited guarantees and capital support by governments start to become self-defeating, inasmuch as they start to erode belief in the very instruments (specifically, government bonds, and in due course fiat currency) from which they are constructed ? Or to put it another way, when does money start to eat itself?

The Emperor has no Clothes

We have written in a few posts about the core issue of our times.  Excessive use of leverage is rampant at every level of our economy, and, it turns out, in every major economy in the world.  The detonator for the destruction of this mountain of debt was the subprime crisis.  As events have unfolded, it is clear that the subprime crisis was not The Crisis.  Other much larger obligations such as collateralized debt obligations and credit default swaps represent an even greater risk to the world economy.

Our financial and political leaders have rushed mountains of new money into financial institutions.  Despite the soothing words, it is clear that the need for new money is accelerating.  A bewildering array of states, local governments and companies are lining up for their share of the bailout money.  Obviously, the credit markets are destroying money at a faster rate than the new money injection rate.  The emperor has no clothes.

Along with money injections, politicians are urging and demanding the resurgence of new lending by the favored banks.  But is this wise?  It is certainly politically expedient.  In the private sector, the solution to bad debts is restructuring or default and bankruptcy.  This solution is politically impossible for souverign entities and some of our major corporations and financial insititutions.   New lending to prevent default of toxic debt would seem to be a temporary patch at best.

Slow to rapid inflation of currencies on a world-wide basis would relieve debt pressure, and this probably the politically favored route.  Major currency inflation creates its own set of problems, but like our politicians, we'll leave that to later posts. 

The big question is: Will the reflation work?  No one knows.  But while we are going through this trauma, let us remember that our uncontrolled tax and spend regime is the real culprit.  The tax reform proposed by the Hedgehog would and could protect the taxpayer from this unfolding tragedy. 

Joe the Plumber

The recent exchange between Barack Obama and Joe the Plumber was quite revealing.  What it revealed was...neither Obama or McCain understand tax policy or the workings of the economy.

In case you somehow misssed it, Joe the Plumber accused Obama of raising his taxes.  Obama responded that he "wanted to spread the wealth around and give others a chance."

What it revealed was Obama's apparent lack of understanding of who is taxed when the "rich" are taxed.  Small business would be hit hard by these tax increases.  The very rich (as we have explained many times) would largely avoid them.  Since small business is responsible for most of the job creation, a weakened economy would be weaker still.

McCain took on the issue and probably gained a few votes.  But he missed the point as well.  Instead of pointing out the potential loss of jobs.  He talked about redistribution of wealth.  Pretty vague stuff if you are trying to win middle class votes.

Neither of these candidates seem to understand the effects of tax policy on mainstream economics.  Obama seems to be caught up in grievance politics.  McCain seems to be caught up in big corporate and Wall Street issues.  None of this promotes essential economic growth, and it certainly does not appeal to the average swing voter.

The Hedge tax is a much better answer.

The Solution to The Systemic Crisis

http://caseyresearch.com/pdfs/20081019_Crisisnoxsell.pdf

This is a article by the Casey Group...a hard money advocacy.  Ignore the bias and anti-national tone, and take a close look at the charts...especially the one where the Feds have added toxic loans to the federal balance sheet.  The main point is that for the past 10 years, all of the chickens have come to roost in the federal balance sheet.

This tendency to stuff the fiscal and monetary folly into the public financial ledger is not new.  We have done this for the past 100 years.  What is new is that we are doing it at such a rate that there seems to be no way to purge the toxins from the system without a massive upheaval.  That would include the destruction of the US credit rating and very hard times.

Prior to "The Rats are in the Cheese," I concluded that there were too many degrees of freedom for our legislature in the writing of taxation and spending legislation.  Our legislative process has devolved into serving a series of narrow interests rather than the broad interests of the electorate as a whole.  The tax code I proposed would force our representatives to craft legislation that required broad consensus rather than pandering to our special interests that have virtually ruined the integrity of our financial system.

This issue is truly non partisan.  It is truly a systemic failure enabled by a tax and spend regime that is exploited by all parties on behalf our special interests.  It is quite discouraging in the midst of our current crisis to see a series of proposals that are just extensions of what has become routine.  But rather than blame one political group or politician consider this:  there really is no other way to acquire and hold office in our country. 

There is literally no politician suggesting that we have a structural problem.  Instead, all sides try to ride to victory on the imagined poor character of their opponent.  Make your voice heard in the wilderness.

Insanity

This Barron's piece is another summary of the steps to our current financial crisis.  The proposed bailout seems to involve the same politicians and methods that caused our continuing financial madness.  It is a cliche, but insanity is doing the same thing over and over...and expecting a different result.

The Road to Hell

This article by the Washington Post staff writers is a good summary of the route to the current FreddieMac/FannieMae debacle.   Most commentary has been focused on "Bush Policies" or "Greedy CEOs."  The Post article makes it pretty clear that the entire politcal process was involved.  Rats always gravitate to a big pile of cheese.  In my view, the key moment occurred when government regulators changed reserve requirements from 10 to 1 to 30 to 1 for Freddie and Fannie.  With that much leverage, greed had its way.

Charlie Rose (late nite talk show), has presented 2-3 hour long interviews with people knowledgeable on these financial matters.  I watched the Robert Rubin/Larry Summers interview.  Both of these men were (and are) at the center of the Wall Street world.  Both were Clinton Treasury secretaries.  Both are very smooth political operators.  It turns out that our financial problems were a "confluence of events" and a "perfect storm."  I thought the high point was Rubin's claim that he had no idea that the financial risk was as severe as it was. 

This all represents mile wide/mile deep conflicts of interest in our financial and political processes   The Federal Reserve, Treasury, Congress and Administrations from both parties are up to their neck in this mess.  They are standing on the shoulders of the taxpayers.   Kinda leaves you breathless doesn't it?

Rational Tax Discussion

This article summarizes the politics of taxing corporations.  You would think the argument would be about economics...jobs...economic growth, equity in taxation, etc.  Instead is becomes a "good vs. evil" diatribe.

A recent column in the New York accused corporations of avoiding $875 billion in taxes.  Of course the Times later appologized because they had based the avoided tax on REVENUE instead of profits.  Sloppy thinking, indeed.

Despite all the smoke and fire, the source of the taxation conflicts is not so much partisanship.  The source is the convoluted and complex tax code.  There is a world of unfairness in the code, so partisans can easily get carried away by mob mentality.

What is a Rat to do?

There evidently a misunderstanding of the purpose of the Fed's sponorship of "auction packages."  I thought everyone understood that this was a thinly veiled opportunity for miscreant lenders to unload toxic lending on to the taxpayers.  Some are surprised when they open the "goodie bag."  But there are no shrieks of joy...quite the opposite as this article attests.

Hedge rule number one...when you leave cheese unguarded...the rat will steal it...it is in his nature.

Tax Contortionists

Watching a really good contortionist can be entertaining.  One achievement of our complex tax code is to produce the very best contortions and contortionists.  This article by Bill Bischoff at SmartMoney.com shows the efforts of our congresspersons and tax writers at their best.  In this case, they are "solving" part of our subprime crisis by tinkering with the tax code. 

Pretending to give a tax break while losing no votes is difficult.  The thing is, after you have watched contortionists for a while, it seems weird and silly.  "Beam me up Scotty...no sign of intelligent life here."  The ideas in "The Rats are in the Cheese" could put an end to these contortions.  We could all go back to watching something more culturally uplifting...like mud wrestling.

The Fog of (Political) War

This article by Charles Babington tries to analyze Obama's tax proposal for Social Security.  As described in earlier posts, tax proposals these days means taxing your supporters to benefit a lot of my supporters.  This rule applies to both parties.  Obama is using the old politician's sleight of hand to prevent analysis of his proposals.  A fog of vagueness has settled over what he really intends.  So lots of voters can believe that they are helped and someone else is taxed.

Raising taxes without connecting them to a large majority of the electorate simply extends class warfare over tax and spend.  The inevitable result is more of the same...unfair taxes...and inefficient and corrupt governance of spending.

Jumping the Shark

There was in episode on the old TV Series "Happy Days" starring Ron Howard and Henry Winkler.  Winkler played "The Fonz."  The Fonz was always the coolest and always on top of things.  One day, while surfing, the Fonz jumped over an attacking shark.  TV shows can be far out, but their viewers require a level of credibility to maintain interest. That incident began the loss of credibility for the Fonz.  After that, people described the beginning of the end as "Jumping the Shark."

I keep thinking our tax, spend, and deficit builders in the Congress and voting public are going to author a "Jumping the Shark" moment for the US.  Maybe an unfunded prescription benefit funded by a bankrupt medical payments system didn't do it.  Maybe an unfunded Iraq war didn't do it.  However, by joining forces with an inept Federal Reserve and banking oversight, the "National Bailout of Everybody in Real Estate and Mortgage Banking Bill" has zipped through a vote buying congress.  This bill, I think, represents the final frontier...the outer space of public finance...our Jumping the Shark moment.

We the people need tax reform that works and helps keep the rat in all of us out of the cheese. 

"Doing the Impossible"

Any fundamental tax reform will require the support of 70% of the voters.  Any tax reform that requires a consititutional amendment will require the support of 60% of our congresspersons.  Most issues of our time feature highly polarized debate and very close votes.  How then are we to legislate the Hedge Tax?

The Internet raises the promise that it is possible.  Some politicians have realized the power of this technology.  Mostly, it has been the Democrats (Howard Dean, Jim Webb, and Barack Obama to name a few).  The theme of "power to the people" has played well, and the grassroots have given a powerful push to those that have adopted the new reality.

From a people perspective, though, little has changed.  Powerful politicians and special interests are vacuuming up money and votes.  To what end?  If anything, the future portends a more exaggerated version of what now exists...pandering to powerful interests, further fragmentation of tax and spend, and further polarization of the electorate.

The central idea of the Hedge Tax is to directly reconnect the voter to tax and spend.  We propose to do this by constitutionally driven equity and tying spending directly to the taxes of 85% of the electorate.  Achieving this through the power of the Internet will require another iteration in the use of the Internet.   We need the Internet to create the group, and raise suppport and money.  Once achieved, how do we use this power?

History shows us that politicians pursue money, power, and their own interest.  Clearly, if we are to succeed, we need to convince (or force) politicians to support the Hedge Tax.  History also shows us that the next fresh breeze will blow away most political promises.  But, there is a way.

Generally, politicians want one thing more than any other...election and re-election.  This is a time when elections are close and voter apathy is high.  The route to victory for the Hedge Tax is to create a left/right voting block that supports the single issue of tax reform.  A 10% block could put most politicians out of office (either in the primary or the general election).  A 10% block could make a new political career.

The Hedgehog requires little for this largesse.  Just the execution of a binding contract requiring the introduction and support of the Hedge Tax in every session of congress.  Taking down one or two major congresspersons from both parties should start the revolution.

High Tax Rates

People do react to high tax rates.  This Wall Street Opinon Journal article examines the effect of Obama tax proposals.  In some countries, people exercise their Alec Baldwin option and vote with their feet.  They leave.

As the article states, it won't work for Americans, because US citizens are taxed on their worldwide income.  However, it should reduce the number of talented and educated foreigners trying to get into the US.

Tax proposals that are targeted at various activities and special groups are a source of mischief.  First, they are political chips that are used for various forms of vote buying and punishment.  Second, they are gasoline on the fires of class warfare and political discord.  Third, they provide the openings for outright corruption of the tax code. 

Worst of all, they do not collect a higher rate of revenue, because the economy is weakened, and people arrange their affairs so as to not generate taxable income.

Obama Tax and McCain Tax

The tax code has become a political plaything.   The machinations or our two presumptive candidates are discussed in this Human Events article.  All of these articles miss the point.  Why should the tax code be in play in every election and every meeting of Congress?  Why should important elements of our economy be at the constant mercy of the political hot wind de jour?

Why not adopt the tax policy of "The Rats are in the Cheese."  After that, there is only one discussion...how much to raise the tax rate to cover the latest idea of our representatives.  I believe it would result in a fundamental shift in the way we conduct politics.   Gone would be the slice and dice of the electorate that we have now.  That is real change to believe in.

Tiger Woods Taxed

This post by the TaxProf analyzes the effect of Obama's proposed tax changes on Tiger Woods.  Those that want to "tax the rich" will get a lot of satisfaction from this.  But I doubt that Tiger thinks that it is fair.  Under this new regime, the high ordinary income earners are brutally punished.  Obama had better hope that Tiger (among others) don't just leave the country.

The electorate is so polarized over tax and spend that our country faces "Yo-yo taxation" every time a new party gets in office.

In the meantime, the truly wealthy are largely unaffected by these changes because they can manipulate their affairs to avoid or minimize taxable transactions.

All of this is ultimately a drag on the most productive areas of the economy.  The end game is lower economic activity and lower tax collections.   The tax regime proposed in "The Rats are in the Cheese" aims at equity and control of tax and spend by the voters.

Creative Thinking-The Rich and the Rest of Us

This article in the "Nation" is a repeat of the same "tax the rich" philosophy that carries the left to electoral victory from time to time.  Cavanagh and Collins lament about inequality in our economy, and, of course, propose much higher income taxes on the rich and expanded social programs as a solution.  Insanity is understood to be "doing the same thing over and over and expecting a different result."  In this case the result would be a weaker economy and more tax code games.

The Hedgehog proposes a different approach.  Change the tax regime to include an asset tax so that the rich are really taxed.  Use a single rate income tax to create upward mobility for the hardworking and creative.  Use a balanced budget amendment to keep everybody honest about public financing.

Medicare Insurance

This column by Scott Burns analyzes the effect of the escalation of Medicare premiums.  It is a sobering article when you consider the potential for renewed inflation.

The Burns column does not address a larger question.  Why is it that Medicare as well as other medical insurance premiums consistently rise faster than inflation?  A large part of the answer is the tax code.  When we allow new benefits in any system, a fragmented tax code and unbalanced budgets encourage political expediency.  That is the reason that our Congress and President were able to pass a Medicare prescription benefit with little cost debate and no new taxes.

Political corruption of healthcare finance does not end there.  I have written a short piece linked here that addresses the general question of high inflation rates of health insurance.  Specifically, it discusses the effect of medical cost shifting to private health insurance buyers.  This practice, encouraged by health insurance companies, drug companies and federal agencies, is wrecking our healthcare finances.

The tax proposal in "The Rats are in the Cheese" is a major step in the solution to one of the thorniest policy issues of our time.

Welcome "Money Sense" Listeners

I'd like to welcome those of you who are visiting our site following my radio interview with Karen Ellenbecker.  The interview was taped last week, and it was broadcast today, June 14, from 3:00 to 4:00 p.m. EDT. 

Feel free to look around on our site - there are lots of interesting posts on the problems we face because of our flawed tax code.  In addition, I'd like to draw your attention to a few items that best summarize some of our own thinking:

• A synopsis of our proposals for tax reform
• A piece entitled "Four Goals of Tax Reform - Revisited"
• An editorial I wrote entitled, "Mr. Buffett's Taxes"

Finally, please consider buying the book!  I know you will enjoy the story and appreciate the serious call for reform embedded therein.  Amazon has it for sale here.  Thanks!

Radio Interview - Saturday June 14

I taped an interview with Karen Ellenbecker, who hosts a regular radio show called "Money Sense."  Ms. Ellenbacker owns an investment management firm in Milwaukee and frequently addresses issues regarding finances and investing on her program. 

The interview will be broadcast this Saturday, June 14, on WISN News Talk Radio 1130 AM from 3:00 p.m. to 4:00 p.m. EDT.  You can hear our lively discussion on the radio (if you're in Milwaukee!) or by clicking onto the station's web site here.

I had a lot of fun with this interview!  At the end of the program, I offered to come to Milwaukee to speak about the book.  We're already planning this trip, which will likely be after Labor Day.  Listen in if you can, and let me know what you think.  Cheers!

Tax Uncertainty

Maybe it is a Financial Planner "full employment" bill that both of the presumptive candidates are proposing.  Both candidates are obviously for tax change...therein lies the problem.

The Tax Prof makes a comparison of the Obama and McCain tax proposals.  Both plans are straight down the party lines.  They play to the major constituencies of both parties.

The average taxpayer should vigorously object to both of these plans.   We have described the average taxpayer as "Generation V"...the Vegamatic Generation.  Our politicians "slice and dice" the taxpayers to pander for votes.  After each cycle, some group of taxpayers is disadvantaged, and there is more out of control spending...frequently in favor of the well-connected rats.  Over time, the average taxpayer foots most of the bill.

Why stand still for this?  Let's enact the Hedge Tax, and end the class warfare over taxes for good.

Tax Complexity - Amity Shlaes

Amity Shlaes has a good piece today on Bloomberg.com (here) regarding the complexity of tax plans offered by Democrats and Republicans.  Tax complexity serves a variety of interests, none of them productive:

• Obscures tax increases, or at least makes them hard to see and understand
• Enables the wealthy and well-connected to avoid taxation, since they're the only ones really able to navigate complexity to their advantage
• Empowers politicians, who can reward or punish groups with targeted tax breaks or increases 
• Facilitates fiscal irresponsibility 
• Fans the flames of class warfare and division

The Hedge Tax is designed to eliminate complexity, which is the most important tax reform we need to undertake. 

Tax Relief for the Agile Wealthy

This blog post summarizes the effects of two seemingly minor tax code modifications.  The extension of foreign tax credits and the removal of deductible limits on Katrina related donations have been a bonanza.  Wealthy people that do not have to depend on domestic W-2 income can "score at will" as they say in the NBA.  Those that do carry the load for the well-connected rats. 

An important lesson from this post is to realize the futilty of reform of the existing code.  Unintended consequences and shrewd manipulation will undo the best of intentions.  As citizens, it is past time to realize that tax reform via the Hedge Tax is urgent.  The Hedge Tax puts the power to tax and spend in the hands of all of the people instead of a few vested special interest rats.

The Bill Lerach Tax Cut

This piece of tax cut/tax increase legislation sponsored by Charles Rangel is typical of the congressional idea of tax reform.  It has everything...a little "spite" taxation; some tax breaks for favored political groups; and a nice little gift for major campaign contributors (trial lawyers).

Challenging Tax Exempt Status of Nonprofits

On the front page (well, front web page) of today's New York Times, there's an interesting article (here) reporting on a Minnesota Supreme Court decision that "said a small nonprofit day care agency here had to pay property taxes because, in essence, it gave nothing away." 

While it's clear that charitable organizations play a valuable role in our society, it seems to me that the concept has been taken a little too far. 

Nationwide, there are more than 1.4 million charitable and nonprofit entities registered with the IRS, accounting for 5.2% of GDP and 8.3% of wages and salaries.  Private foundations and other nonprofit organizations command $1.1 trillion in assets and reported more than $300 billion in revenue last year.  In short, a substantial and growing segment of the economy is not supporting the tax burden. 

I'm not saying we should do away with tax exempt status for all nonprofits.  But I do think that it's time to question what reasonably qualifies for this status.  Small day care agencies, like the one in Minnesota?  Rich foundations?  Universities with multi-billion dollar endowments?  Mega-churches with commercial and media businesses?  Are these entities so different from the rest of society that they shouldn't have to contribute to the tax burden? 

The Flat Tax is Here

Scott Burns again demonstrates a good grasp of the operation of the tax code in this Dallas Morning News editorial.  The column exposes the lie that somehow "others" are paying the taxes for that benefit you receive.

There some things that should be added to this narrative.  First, the "flat tax" doesn't apply to the super rich that do not rely on W-2 income.  Their rates (capital gains, dividends) are much lower than the 40% that the peasants pay.  Second, the super rich can avoid taxable transactions altogether...so much of their wealth creation is not subject to taxation at all.  Third, the maize of our tax code prevents any meaningful actions by the voters to rationalize it.

The solution proposed in "The Rats are in the Cheese" will put an end to this tyrannical tax regime.

Scapegoats

When the subprime crisis hit the financial markets, we posted the idea that there would be a search for scapegoats (and miscreants).  Senator Schummer must be feeling some heat in his kitchen.  The Federal Reserve, Congress and many other government agencies are "up to their elbows" in this debacle.

He needs to hurry with his investigation.  He and the other rats need the misdirection.  And the fines he proposes can't be collected as these rating agencies are sued out of existence by investors that relied on their ratings.

Limits of Taxation

This article in the Times of London is an interesting take on taxation vs. spending.  The author's thesis is that government expenditures must produce a return to the public that is greater than the cost of taxation.  In the case of the UK, he argues that their rate of taxation and expenditure is far beyond any reasonable economic test.

Our US fiscal policy should be examined in this light.  Many of our expenditures fail this test.

Endowments

This article by Glenn Beck reflects the right wing irritation with liberal universities.  It really is commentary of no particular value...except it highlights the corruption of the tax code.  Well connected endowment rats are free to prosper without paying taxes...and criticize others for not paying enough taxes.  Could this be hypocrisy?

Obama Tax Policy

This Wall Street Journal article analyzes the Obama argument to "roll back the Bush tax cuts" on wealthy tax payers.  While this is a partisan piece, it offers enlightenment on one way taxes and politics work.

The key paragraphs from the hedgehog party perspective are as follows:

"Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.

If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%."

Inflation fueled bracket creep has always been a cheap "out" for politicans.  Higher taxes with no registered vote.  There is really no way for voters to call politicians to account without the simplification of the tax code.  Without simplification, the well connected rats from the left and right cash in.

The "Rich" Pay Taxes

This column by Scott Burns surveys the tax rates paid by various income groups.  Most taxpayers making $61,000-90,000 per year would be surprised to be classified as "rich."  When labor taxes are included, tax burdens fall heavily on all taxpayers making less than $100,000 per year.  Our complex tax code facilitates a shell game by the well connected rats and special interest rats.  This sleight of hand creates the illusion that someone else is paying for that benefit.  The solution is in "The Rats are in the Cheese."

McCain's Tax Reform

This article in the American Prospect by Robert Gordon and James Kvaal reviews McCain's proposals for revision of the tax code.  The main point of the article is that McCain's proposals pander to special interests rather than ratify his previous positions.  The more interesting points are less prominent.  First, all talk of tax reform by any politician includes goodies for special interest rats (duh).  Could that be because special interest rats are big campaign contributors? 

Second, special interest rats, over time, corrupt and neutralize tax reform. 

Third, it is clear that reform of the existing code creates more opportunity for well-connected rats to exploit the average taxpayer.  The solution proposed in "The Rats are in the Cheese" puts an end to this exploitation.

The Taxpayer Frog in the IRS Pot

This piece by Randall Hoven is a historical summation of the tax tyranny that we inflict on each other.  If that were all there was to it, then presumably we could "undo" any harm that we have done to ourselves.  Unfortunately, an array of well-connected rats feed off this system.  Key to this usurpation of money and power is the disconnect between taxation and spending.  The well connected rats use that disconnect to inflict a tyranny of self interest.  There is a solution in the "The Rats are in the Cheese."

Our Tax Code

This article by Yaron Brook in Forbes is a litany of the distortions produced by our tax code.  Taxpayers have become Pavlov's dogs for "treats" from this sorry tax system.  The well connected rats use the tax code like a drug pusher hooks and uses addicts.  If that is not tyranny, what is?

The Rich and Their Taxes

It is true that the rich pay about all of the income taxes as explained in this article by Steven Malanga.  It is true that the super wealthy pay a tax rate about equal to the labor tax rate paid by the poorest Americans.

The biggest truth is that we have a tax system that is unfair and it promotes serious class warfare.  The well-connected use it to cart the cheese out the back door, while the little rats and mice fight over the crumbs.

Where to begin?

This Wall Street Journal editorial reviews the most recent tax loophole offerings from Congress.  The excuse is the housing crisis...but Congress needs no excuse...just political cover for this very lucrative business.  "Business as usual" is selling out the average taxpayer to big corporate and financial institution interests for campaign contributions.  It really is sickening...but there is a solution...read "The Rats are in the Cheese."

Some Rats are More Equal Than Others.

Ted Kennedy is ambushed by the YAF in this video.  This is an old subject.  The super-wealthy do not pay estate taxes.  The estate tax is designed to entrap the new rich, the sorta rich, farming operations and small business.  The super-weathy remain firmly esconched in their trusts, off-shore trusts and foundations.  From that venue (in between Senate duties, yachting and jet-setting), they work tirelessly to improve our lives and their fortunes.

One little known fact about pre-1951 off-shore trusts (that have been extensively used by the old wealth of the United States), is that they are also exempt from taxes on new income.  Specifically, they are exempt from the foreign personal holding company laws that apply to rubes that have have gotten rich in the past 50 years.  Our elite class should feel superior to the rest of us...because they are.  It is time to end the reign of the well-connected rats.

Voters Will Limit Taxation and Spending

Who pays?  Milton Friedman was correct.  Taxation and new spending pass when it is perceived that the new spending will be paid by taxing someone else.  This Financial Times article reports how quickly a constituencies turn against a "tax and spend" politician when they get caught up in the "tax" part.

The Hedge Tax will make life hell for politicians, because major new spending programs will be balanced by new taxation.  Both will require broad support.  Special interests will suffer (loudly).  The days of taxation class warfare and "spite" taxation would be over.  The voters will begin to aggressively limit spending, and put everyone on a better footing vs. the well-connected rats.

Dimensions of the Credit Crisis

This article by Paul McCulley of PIMCO Bonds is both a good review of recent credit market action, and a preview of unfolding events.  While this subject is not directly related to taxation, it tells a story of the potential for inflation.

Inflation along with open ended entitlements are the big sources of unlegislated taxation.  Anyone trying to understand future implications of tax and spend should read and understand this lengthy piece.

Lightening Up

Below are a few quotes on taxes by historical figures.  It is interesting that the complaints are timeless.  These issues will remain unsolved until we focus on a level playing field that cannot be easily mainipulated by the well-connected rats.

Plato:  When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Albert Einstein:  The hardest thing in the world to understand is the income tax.

Will Rogers:  The difference between death and taxes is death doesn't get worse every time Congress meets.

Martin A. Sullivan:  There may be liberty and justice for all, but there are tax breaks only for some.

State Corruption

The Rezko trial in Illinois has national overtones because of the ties to Obama.  Hopefully, that political firestorm will not obscure the breadth of the corruption in the state.  In this Chicago Tribune article by John Kass, he coins the term "Illinois Combine" to describe the bi-partisan corruption in the control of pensions funds and contract awards.

For the moment, we do not have a "Congressional Combine" involved in a lurid trial.  But the routine fiscal mis-mangement and vote buying is there to see.

Corruption is the insidious disease that destroys democracies and undermines the economic health of our country.  Read how Hedge Hedgehog overcomes the well-connected rats in "The Rats are in the Cheese."

More Fed Lending

This Newsmax.com article describes the frenzy of lending at the Fed.  Investment banks are lining up to convert their "Pretend Collateral" for dollars courtesy of the US taxpayer.  This is an example of "Morton's Fork"...banking meltdown now, or inflation later.

The coming search for miscreants and scapegoats will soon begin.  Unfortunately, that is only  a diversion from looking at the basic problem.  The real source of this trouble is the over use of leverage...by everyone...from Congress, to central banks to credit card holders.

A Bull Market!

Jim Cramer says "there is always a bull market someplace."  He is right this time.  There is a bull market in "Pretend Collateral."  We previously noted that Fed loans on subprime collateral had exceeded $50 billions in just a few weeks.  Now the bull market is really blasting off. 

This Marketwatch article reports that the europeans are jumping on the bandwagon.  Soon you won't be able to buy a sub-prime mortagage package for love or money.  We taxpayers are just insatiable.

The Tax Code Corrupts Absolutely

This short comment on American Thinker is yet another example (among thousands) of the corrupting influence of the Tax Code.  The Hedge Tax does away with this corruption, and it couldn't happen a moment too soon.

Campaign finance is a separate issue.  Our current system is simply a sheltered form of bribery.  The Hedge Tax can't end that practice completely, but it can end bribery related to the Tax Code.

Universities need to pay taxes like the rest of us

Here's a New York Times editorial criticizing institutions of higher learning with out-sized endowments.  According to the editorial, 76 colleges and universities now have endowments in excess of $1 billion, which they have been able to build and maintain tax-free. 

Why aren't these institutions required to pay taxes like the rest of us?  If they did, the tax bill the rest of us pay would be lower.  Isn't that fair? 

Risk Management

This Financial Times article is a good summary of the role of modern risk management in our current financial crisis.  The underlying points are: 1) Risk management works, but it also enables more risk taking. 2) Excesses in risk taking always come home to roost.  Too bad this author didn't have a better voice a few years ago. 

Retirement Tax Traps

This Market Watch Article by Robert Powell warns about 5 tax traps that are waiting for unwary retirees.  The sad truth is that you could find five cogent articles per week warning you about pitfalls created by the tax code.  There is no solution to this problem via our current tax regime.  Special interests of all types endlessly complicate the tax code to line their pockets.  Only the Hedge Tax offers a viable option to break out of these tax traps.

Leverage is a Dirty Word

A lot of forces have converged to produce the subprime crisis.  The frenzy stage is in full swing.  This Market Watch article on the collapse of the Carlyle Fund is instructive.

A few paragraphs into the article, it is revealed that the Fund had leveraged its assets 32 times.  What makes the current crisis so frightening the the realization that our entire financial system is over leveraged.  It is a time when the addition of greed and malfeisance has created a very toxic stew.

The Hedge Tax could have been an aid in deflecting these poor financial judgements by our finest financiers and regulators.  The Asset Tax would have progressively taken the profit out of over leverage and weakened the incentive to engage in these activities.

Jack Hough

This video by Jack Hough discusses elements of the tax code that are really forms of spending.  It is hidden spending that rarely comes up for review.  This is a good analysis as far as it goes, but our representation feeds off these elements of the tax code.  Only a grass roots adoption of the Hedge Tax will give the voter a chance for change.

Populist Taxation

Congress appears ready to pass a major tax increase on big oil companies.  "Those rats (major oil companies) are taking cheese from our downtrodden rat consituents," declare stalwart congressperson rats. 

Our byzantine tax code makes it difficult to identify the culprit(s).   Oil companies get a number of special tax breaks, but, on the other side, congress has taken a number of actions to increase the cost of oil exploration and production.   Despite this Bizarro history, this tax increase seems especially odd, because it dries up exploration money at a time that is is really needed.

Unraveling this Gordian Knot would take the patience of Job and the wisdom of Solomon.  Rather than continue to feed this collection of rats, let's use our sword, the Hedge Tax, to cut the knot.  The special taxes and exemptions just disappear. 

Income Tax Rates

Some readers had sticker shock when I pointed out in the "Buffet's Gains" posting that his 2007 taxes would be $627 million instead of something like $7 million.  The Hedge Tax is not a populist tax.  It incudes a significant tax cut for high income producers.  It does propose a big tax increase for those that use our current tax system to their advantage.  The proposed tax for Buffet only represents about 6% of the unrealized gains that he experienced...a rate that virtually all tax payers would giddily accept.  Our objection to the current tax regime, is that the very wealthy pay tax rates much lower than those paid by taxpayers of more modest means. 

We pick on Warren Buffett only because he has revealed his tax return in his effort to shed light on the inequities in the tax system.  For those that like to churn through reams of data go to this IRS link.   Click through to 2005 data under All Returns: Selected Income and Tax Items.  After some effort, you will find that average income tax rates under 20% are the norm for the top 5% of taxpayers.  And those rates don't tax unrealized income and gains.

Equity, not punishment, is the goal of the Hedge Tax.