Monday, August 20, 2012

Beware of the Tax Zombies

I have a Miniature German Schnauzer named “Midnight”. One characteristic of this breed is its ravenous appetite.  Midnight wolfs down every meal and constantly begs for more.  If you gave him all the food that he wanted, he would literally eat himself to death in a short time. He has an almost insatiable appetite for food.


And like Midnight, there are people in this country that have an insatiable hunger for tax money.  They want more taxes continuously.  They spend time thinking of new ways to get it.  They make emotional pleas for it.  At times, like Midnight, they even beg for it. 

They are “Tax Zombies” who seek to bite open your wallets and eat up all the cash.  They exist both inside and outside of government. A commentary in last week’s New York Times argued that higher taxes are the solution to all our problems.

But how much taxes would be enough for the Tax Zombies?  Just like Midnight and food, I don’t think there are enough taxes to satisfy them. They would just develop more and more programs and more and more ways to spend the money and then ask for more.  It’s like a spendaholic with a credit card.  No credit limit is high enough because they will always spend all the available funds and then want more.

If allowed, the Tax Zombies would take every dollar you earn and then give some it back in food stamps, housing allowance, and other credits.  Therefore the power to tax is the power to control.  The more you are taxed, the less freedom you have.  An increase in taxes results in a decrease in freedom.  Some taxes are necessary, but nations that figure out how to provide “Public Goods” with the lowest tax rates are rewarded with stronger economies.  Remember that every dollar removed from the private sector in taxes is one less dollar available to fuel economic expansion.  Higher taxes will not solve all our problems – it is the problem.

The Affordable Care Act (aka Obamacare) includes 21 new taxes or increases (7 hitting the “non-rich”).  This is expected in order to be able to cover people who are currently uninsured.  But the problem is how government will manage your tax “contribution”.  Fraud is so rampant in Medicare that it can’t even be accurately estimated.  A sample audit found fraud at over 30% in one location.  There will be much fraud with the government managing the ACA and this is not factored into the cost estimates.  This means the ACA, even if the costs estimates are accurate (and you know they are too low), the program will cost 25-30% more due to fraud.  After you make promises to people and you come up short on funds, how are you ever going to pay for it?  Here come the Tax Zombies again!

Both Illinois and California have huge deficits because they spent way more money than they collected in taxes.  The solution? Even though they already have very high tax rates, both states plan to raise taxes even higher.  The Tax Zombies strike again! My friend Mike just ran (moved) across the border to Indiana to avoid the monsters.

Our enormous tax code is composed of thousands of ways for the Tax Zombies to get your money and thousands of ways you try to keep ahold of it.  We are in dire need for tax reform because running and hiding from the Tax Zombies results in too much cost and inefficient use of resources. 

Economic theory says that collective money (taxes) is necessary to pay for public goods (roads, bridges, security forces, education, etc.)  But the government didn’t create these, it merely manages the process. (Think about it, the government didn’t build the bridge, a private construction company did)  And when you factor in the fraud and inefficiencies of government processes, it manages your tax money very poorly. 

The government cannot generate any revenue on its own, it is dependent on taxes and fees) collected from people who earned income in jobs that were created by entrepreneurs who took personal risks.  These business owners also paid corporate and personal taxes along the way.  So what about those “ungrateful” business owners?  Because of their successful efforts they created jobs that provided the tax money for the “Public Goods” to be produced. Yes they did build their businesses and they helped build those roads and bridges too.    

Monday, August 6, 2012

A Very Different Type of Economic Recovery

This recovery has been inconsistent, sporadic, and unpredictable.  At times it looks like the economy is getting stronger and starting to zoom.  At other times it has looked so feeble that you question if we are making much progress at all.

This recovery is certainly very different from past recoveries.  To get a ground-level perspective on how things are progressing, let’s go back and look at that distressed business district near my home in Stark County, Ohio.

This is the place I have written about before, where things were so bad that the self-serve car wash was encouraging people to bring their buckets with them to wash their cars.   During the depths of the Great Recession about half of the business along this nearly two-mile stretch closed up shop. 

It is interesting to note that the first business to close up was the dancer bar / strip joint.  This happened before the recession actually started.  I believe strippers are a good economic indicator.   This industry is based on disposable, discretionary, male, entertainment, spending.   This type of spending is the first to be cut during bad economic times and should be the last to return in a full recovery.  I think an economics student needs to do a doctorate thesis to prove this.  There is a connection here and of course the research would not be boring.

The owner of the strip club tore down the existing old building and put the property up for sale.  I doubt that he has heard from any interested buyers in years.  And the car wash will still let you “bucket wash”, but business is still slow.

There are signs of recovery in the distressed district.  About half of the vacant buildings have new businesses.  But the types of new businesses that moved in give an indication about the nature and quality of the recovery.  Let’s look at a few of the more interesting ones:
Internet Café

This is the ultimate in misnomers because it does not offer Internet service nor is it a coffee shop.   You buy time on terminals that allow you to win money if you are able to click on targets at just the right moment.  They say they are games of skill, but of course it is really just gambling.  Actually it is worse than gambling because it is unregulated which means that payouts are just high enough to keep the pathetic customer hooked.  So far law enforcement has not shut them down and there are many of these “cafes” opening all over Ohio.

Dog and Cat Shampoo 
Kitty right before the shampoo
I am guessing the owner started this business at home and after building up a customer base, moved out into a building.  This is a tough business to grow in a slow economy because people can wash their own pets if necessary.   But this can be a tough job.  Many breeds of dogs will not resist bathing, but cats are another story.  Shampooing a cat can be dangerous for all involved, so the proprietor must be good at what she does.  Many she can video the cat shampooing sessions and then sell DVDs for entertainment.

Arabian Food Market

This business moved into a building where there has been much turnover.  However, I think this business is going to do well.  There is a growing Arab population in the area and there is no competition of any sort for miles.  The location is also close to the interstate which means it can draw customers from a wide area. 

The Gift Boutique

According to an article in the local newspaper, this business opened based on a permit to sell retail purses, women’s wallets, scarves and knick-knacks.  They must believe that it is very stressful for men to shop for these gifts because in the back of the store they offer full-body massages performed by unlicensed masseuses.  Unlicensed masseuses often rub their customers the “wrong way”.  I don’t know whether the opening of the boutique has resulting in greater employment, but it can be assumed that it has resulted in an increase in the number of “jobs”.  A police spokesperson said they are “accessing” the situation, but the business still appears to be open.

The Church 

A local factory closed and put its large warehouse and surrounding property up for sale. This facility was a prime business property because it was situated right off the interstate and just over 10 miles away from an intersecting interstate.  It would have been a great property for a new factory or distribution facility.  

But who bought it?  It was an expanding church.  I have no problem with a church buying the facility.  They renovated the place and it is much better than having the building sit idle.  However something is wrong with your local economy when the organization that is able to gain the most value (by paying the highest price) from this property is a church and not an expanding business.

The Conclusion

Regarding this business district, this is an economic recovery built on saints, sinners, hungry Arabs and smelly cats.  No wonder it is inconsistent and unpredictable.