I have a sneaking suspicion that the Federal Reserve is planning to put a halt to the Trump stock market rally by raising interest rates and talking endlessly about future increases. There is an uptick in the Consumer Price Index (CPI) in recent months, but that is not enough reason to raise the rates to choke off a rally. Consider two factors: 1. The long term inflation rate is trending down, and trending down sharply in recent years going back to the 1980’s. Reagan and Volcker defeated inflation in the 1980’s. The greater long term threat is now deflation, not inflation. Excessive debt is a long term deflationary factor for individual households, small businesses, large corporations, and nations. If there is too much debt that cannot be serviced, then assets must be sold to pay the debts. Deflation is a real possibility for the United States, not inflation. The Fed quite often fights the last war, with a knee-jerk reaction to the 1970’s and 1980’s, and misses other macro events, such as too much debt. Just check out the commodity prices of the last four or five years. Factor number 2: The Federal Reserve is not some right-wing bastion of conservatism. Federal Reserve Chair Yellen and all the other governors have been nominated by Mr. Obama. Only one other governor that I saw had any connection to a Republican. Partisan politics will play a role in the market.
qcconservative
My conservative opinions to the world.
Tag Archives: politics
Obama, Syria, and Cynicism
If I was a cynical guy about politics in Washington, I could be convinced that Mr. Obama picked this time to make Syria an issue to avoid the national spotlight about jobs, the economy, Obamacare, the debt ceiling, the IRS, the NSA spying, Benghazi, and who knows what else. Now the President will use more time in September to listen attentively to the discussions in Congress before he acts upon his own decision. We’ll see if Congress helps him out and gives the okay to attack Syria. He has talked himself into a corner without a strategic vision for dealing with Syria and telegraphs his moves. Gas attacks and red lines have existed since 2012; why did he pick this particular time? Conventional wisdom says we have to do something because of the horrific images of children killed by a gas attack. I contend that all images of war are horrific, regardless of the ages of the people killed. Mr. President, residents of the Middle East have been killing each other for thousands of years over race, religion and ethnicity. A few stray Tomahawk missiles will not solve a thing. Those Tomahawk missiles will, in fact, make us weaker because of the international scorn and loss of trust. If I was a cynical guy, I would not believe that your military tactics are as pure as the wind-driven snow. Are these the actions-to-come that earned you the Nobel Peace Prize?
Prospective US tax policy
The Federal tax codes for individuals and businesses are a mess. They are a combination of some good intentions, self-perpetuating complexity, and special interest money to support any number of causes or industries. The best way to deal with the mess is to start over. I believe the answer to the chaos is extraordinary simplicity, which can create fairness. Here is my attempt.
- Each person has an individual deduction of $8000. This is the only deduction.
- Net taxable income is taxed at 20% for all individuals, after calculating the total individual deductions for the family. Examples are included at the end of the presentation. Focus on the effective rate of taxation instead of the 20% rate.
- There is no deduction for donations. All donations are done after-tax. Why should you subsidize my giving to my church or other organizations with which you may strongly disagree? Why should I subsidize your giving to your church or other organization with which I may strongly disagree? The large individual deduction can help to cover some or all of your giving.
- There is no deduction for mortgage interest. All mortgage interest paid on private homes is after-tax. Why should you subsidize my home and my lifestyle? Why should I subsidize your home and your lifestyle? The large individual deduction can help to cover some or all of your mortgage interest.
- Tax-free municipal bonds would no longer be issued. Bond-issuing entities would compete in the marketplace for capital just like businesses. Existing bonds would continue as tax-free until the bonds mature.
- Interest income and capital gains income are taxed at the same level as earned income.
- The tax on dividends would be eliminated. If corporations pay taxes on income; then taxing dividends is double taxation on those profits. Instead, all profits of corporations would be treated as Subchapter S, and divided among the stockholders. Annual tax forms sent from the corporation would detail the share of profits, not dividends.
- The income tax on businesses would be eliminated. Profits are divided among the owners.
- Regular business expense would continue.
- New IRA’s would no longer be opened. IRA contributions would no longer take place. IRA contributions now take place before-tax. By definition, the only deduction in this plan is the individual deduction. Why should someone who cannot afford to contribute to an IRA subsidize the tax-deferred savings of someone who has the higher income and can afford to contribute to an IRA?
- Inheritance taxes would be eliminated. This prospective tax plan is for taxes on income, not for taxes on assets. The power to tax an inheritance is the power to kill family businesses.
- The task is then to score the plan by the CBO (Congressional Budget Office) and see if the plan is revenue-deficient, revenue-neutral, or revenue-enhancing. Based on the results of that scoring, change the elements of the system only by increasing or decreasing the $8000 individual deduction and increasing or decreasing the 20% rate.
- In a perfect world, these changes to the tax laws should be reinforced with a Constitutional Amendment. An amendment forces lawmakers to deal with only two variables, i.e., deduction level and the tax rate. An amendment would eliminate or deny the creation of inequalities in the tax code.
- If the American people want to help a particular industry, then do it through the expenditure side instead of through the tax side. The expenditures to help a particular industry would come up for a vote each year. If a benefit to an industry is buried in the tax code, then it is almost impossible to end that subsidy.
Example 1
$36,000 income for household of 4
$36,000 minus (4 X $8000 = $32,000 deduction) = $4000 taxable income X 20% = $800 taxes paid
$800 taxes paid divided by $36,000 income = 2.22% effective rate
Example 2
$40,000 income for household of 4
$40,000 minus (4 X $8000 = $32,000 deduction) = $8000 taxable income X 20% = $1600 taxes paid
$1600 taxes paid divided by $40,000 income = 4% effective tax rate
Example 3
$100,000 income for household of 3
$100,000 minus (3 X $8000 = $24,000 deduction) = $76,000 taxable income X 20% = $15,200 taxes paid
$15,200 taxes paid divided by $100,000 income = 15.2% effective rate
Example 4
$100,000 income for household of 8
$100,000 minus (8 X $8000 = $64,000 deduction) = $36,000 taxable income X 20% = $7,200 taxes paid
$7200 taxes paid divided by $100,000 income = 7.2% effective rate
Example 5
$60,000 income for household of 4
$60,000 minus (4 X $8000 = $32,000 deduction) = $28,000 taxable income X 20% = $5600 taxes paid
$5600 taxes paid divided by $60,000 income = 9.33% effective rate
Example 6
$250,000 income for household of 1
$250,000 minus (1 X $8000 = $8,000 deduction) = $242,000 taxable income X 20% = $48,400 taxes paid
$48,400 taxes paid divided by $250,000 income = 19.36% effective rate
Example 7
$1,000,000 income for household of 5
$1,000,000 minus (5 X $8000 = $40,000 deduction) = $960,000 taxable income X 20% = $190,000 taxes paid
$190,000 taxes paid divided by $1,000,000 income = 19% effective rate
Example 8
$3,000,000,000 income for household of 1
$3,000,000,000 minus (1 X $8000 = $8,000 deduction) = $2,999,992,000 taxable income X 20% = $599,998,400 taxes
$599,998,400 taxes paid divided by $3,000,000,000 income = 19.9999% effective rate
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