Hedgehog Party

Class Warfare

We can expect a lot more of these "tax the rich" schemes as our financial crisis deepens.  Although the Hedgehog has criticized the taxation of the wealthy, high tax rates on the income rich do more harm than good both for tax collections and economic development.  The logic of this author would support a return to 70%+ tax rates, but history shows that it just generates many more pages to the tax code and not much revenue. 

Too Much Freedom

Increased regulation of business and and financial institutions, and the potential of increased taxation to reduce deficits does not equate to greater freedom.  Yet, there is blossoming freedom in our country.  Where?  Why, Congress, the Federal Reserve, the US Treasury, and the President.  Power and money are flowing to these institutions in a torrent.  In addition to the unleashing of our constitutional centers of power, we are on the verge of the appointment of a range of "czars."  A czar of auto bailouts, a health czar...can a immigration czar and global warming czar be far behind?  In fact, we may soon need a "czar of czars" to manage these super bureaucrats.

Well, at least we have accountability.  Except for the $2 trillion that the Federal Reserve has recently lent.  Bloomberg has filed a lawsuit on the Federal Reserve for refusing to reveal the use of the money.  Oh, and there is the use of half of the original $700 billion bailout.  What assets were purchased with that money?  Accountability?  There seems to be less than ever. 

Our out of control tax and spend train has arrived at the station.  The tide has gone out and the dearth of swimsuits has been revealed.  The massive fraud and corruption express is boarding... maybe we should all try to get on board. 

Deficits Equal Taxation

One of the least discussed aspects of our tax and spend government is the true effect of deficits.  Deficits are simply an additional form of taxation.  Over time, the taxes are collected as the deficits are absorbed into the economy in the form of inflation.

You don't have to have economic training to accept the truth of the argument.  Simply compare today's cost of items with their cost 40 years ago.  Pick just those items that are largely unaffected by productivity increases or unusual scaracity (or plenty).  There aren't too many...tailor made clothes, symphony tickets, precious metals, etc.  What you find is that the cost increase in dollar terms is 500-1000%.

On the surface, the broad economy seems to display lower inflation rates.  There are a number of reasons for this.  First, many things that are purchased in our economy are produced much more efficiently than they were 40 years ago.   For example, agriculture is far more productive than it was 40 years ago, and grain prices have advanced at a rate much less than the inflation rates.  Purchasing habits have changed dramatically in the past 40 years...we buy more of some things and less of others.  Changes in quality and taste coupled with productivity increases dampen the effect of inflation.  Taxes and tax increases are poorly reflected in price index calculations.  In sum, our complex economy obscures the extent of inflation of the currency.

Normally, the inflation caused by deficits is absorbed without much of a political ripple. But when they become large (or eggregiously large as they are now), the resulting inflation will suddenly flourish when least expected.  The big risk is that public debt will accelerate so rapidly against a backdrop of deflation, that service of the debt will create a currency crisis.  If that happens, the connection in the voter's mind will be direct.  It will be a painful time for both citizens and politicians. 

Why is taxation in the form of deficits so bad?  The specter of high inflation rates is bad.  But as a form of taxation, inflation is the worst of all.  It is much more regressive than, say, a sales tax because it attacks both consumption and savings.  The people that are most affected are the lower classes; those on pensions; and those dependent on private savings.  It is a substantial fraction of our citizentry, and they are about to be very angry.

Our system of tax and spend is at the heart of this problem...not a few thieves and criminals.  No politician's promise will solve the problem unless it is a promise of constitutionally driven tax reform.

Bailouts

This timely piece from the TaxProf reminds us of the potential for tax shenanigans built on bailout money.  Lately, we have been stunned into silence by the breadth and depth of deficits generated in an attempt to save our system of leveraged debt.  These bailouts (though generated largely by tax and spend policy) have trivalized the discussion of tax reform.

Let's remind ourselves of a couple of key points:

1.  All debts are always repaid...either by the borrower or the lender.

2.  Deficit spending is simply another form of taxation...albeit one usually imposed several years after the spending.

Things are complicated by the massive use of souverign debt.  Liquidation is painfully simpler in the private sector.  The weak, unwise, and unlucky are simply liquidated and their assets pass on to more capable hands that use them to generate a new wave of prosperity.

Liquidating souverign debt is far more difficult.  Taxation is usually not an option in modern times, because everybody is "tapped out"...they don't have any money.  Inflation has been a tried and true solution to dissolve souverign debt.  It works okay until inflation edges above 12-15%.  That event creates a bull market in pitchforks and torches as the restless natives gather near government buildings.

As it stands now, we are faced with a stark choice of deflation and eventual repudiation of our souverign debt, or hyperinflation of our currency.  BTW, all other industrialized nations face similar or worse problems.  Either way, there is an absence of money or sound money to drive commerce.  Bad tidings indeed.

Our brilliant financial and government leaders are desperately trying to generate more new debt to bail out the current crisis.  So far, the plan to roll this bailout snowball on to future generations is holding.  If it works, our children will be in the market later for pitchforks and torches instead of us. 

This trial and turmoil re-enforces the argument that tax and spend urgently needs reform.  Our leaders simply have too much financial latitude...and they have used it corruptily and unwisely.  Support the Hedge tax.