No Laffing Matter

Economist Arthur Laffer, part of the Reagan Economic Policy Advisory Board, came up with one of the simplest ways in history to equate taxation to actual revenue taken in by the federal government. According to Laffer, a linear curves exists where taxation brings in zero revenue and a tip of a bell curve that could be thought to be the optimum rate for taxation.  This theory, in graph form, became The Laffer Curve. At 0 and 100% tax rates, no revenue is derived. Zero is self-explanatory and 100% should be self-evident – you have no incentive to work if every penny goes to the government. Somewhere in between is where people can make money and pay taxes. 

One little problem with the Curve – it does not account for the nearly 49% of Americans who pay zero in taxes. Therefore, the ones on the curve are paying their share and the share of those who pay no taxes.

Enter the debt ceiling debate. There are serious ramifications for the debt ceiling debates coming down to the wire before next week. It boils down to spending, our ability to pay off the debt, interest rates on the debt, etc. I have no doubt that a deal will be reached and the US will not default. I also doubt with the Senate and White House still in Dem hands that the debt ceiling will be left as is. It will be increased to get a deal done. While this round of this heavyweight battle has been laden with jabs, it will be a draw when it settles. The real question once again comes to the table about taxes and the impact on the ability to repay this Goliath.

A key anchor in the US economic ship right now is uncertainty of future taxes. We know the Communist One wants to raise the living hell out of taxes to pay for his social wonderland. The reality is that our current tax rate is already onerous enough as is. The current max income tax bracket is 35% on income. However, that is before Social Security and Medicare take their bites. That is 4.2 % and 1.45% respectively for a total of 40.65%. However, there are other taxes placed on high income earners such as  the Alternative Income Tax that make the effective rate over 50%. This does not include any state income or sales taxes people also pay from the hip.For 2013, the income bracket goes up another 4.6%. Past 2013 no one is certain and with this mountain of debt, many forecast additional increases to pay down the debt. Somehow the Dem’s feel that taking more than 40 to 50% of your money at the federal level is not fair. What dope are they smoking??

I am leaning more and more to a flat tax on everyone of 15 to 20% with the only way to raise taxes to be 2/3 majority of the House and Senate. If everyone pays, then everyone watches the money closer. There is solid evidence the government would lose revenue under such a system and it would be forced to shrink in size. This would be fair across the board to taxpayers and would provide the mechanism to force the government back to essential services and eliminate waste.

There is no easy way out. Even when we start getting the cuts we need in spending, it will have a negative economic impact if the private sector cannot absorb public sector losses. We know it will be hard to absorb all that into the private sector due to the damage wrought by this Administration and the 111th Congress; so expect a sluggish economy for a while.  No matter how we tackle this, it is going to be long, loud, and painful.

And that, my friends, is no Laffing Matter.

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