How Immoral Government Creates the Perfect Investment
by Alexander Green, Investment U Chief Investment Strategist
Monday, October 29, 2012: Issue #1892
If insanity is doing the same thing over and over and expecting a different result, you really have to wonder about California Governor Jerry Brown.
The two-time Democratic Governor is calling for a 3% tax hike on the state’s richest 1% to help pay for the state’s perpetually cash-strapped education system. He calls it “a moral issue.”
I couldn’t agree more. And it’s one, as you’ll see, that leads directly to a particular investment conclusion.
Let me begin by confessing I have no dog in this fight. I’m not a California resident, so the state’s top marginal income tax – whatever it winds up being – is no skin off my nose. (As for the cost and accountability of our public education system, click here and weep.)
State Treasurer Bill Lockyer concedes – and Governor Brown well knows – that half of California’s income taxes already come from the top 1% of earners. Yet even with the highest marginal income tax rate in the country, California is in the biggest fiscal mess of all 50 states. (That’s something citizens calling for higher taxes at the national level might bear in mind.)
And the state’s budget calamity is even worse than it looks. First off, California’s finances are dependent on its most unstable income group. It’s a myth that high income-earners are the same individuals year after year. Fortunes and careers routinely ebb and flow for professional actors, musicians, filmmakers, athletes and business owners. These folks can make a million dollars one year and find themselves hard up the next.
Second, while redistributionists routinely boo-hoo about how these spoil-sports won’t sit still and let the state government clean them out, the truth is just 144,000 taxpayers are ponying up nearly half the taxes in a state of 37.7 million people. Needless to say, these individuals have an enormous incentive to get the heck out of California. Many of them do. I can’t tell you how many businessmen and entrepreneurs I know who’ve left the Golden State for Nevada, Washington, Texas or Florida, just four of the seven states with no income tax on individuals.
California is hardly alone in soaking its citizens, however. According to an annual study by the Tax Foundation, state and local taxes total 12.3% in Connecticut, 12.4% in New Jersey and 12.8% in New York.
If Obama is re-elected and raises the top marginal rate to 39.6%, as he has promised, many business owners and self-employed individuals will forfeit most of what they make to the government. The math is pretty depressing. A top marginal rate of 39.6% plus an average state income tax of 6% plus a Social Security tax of 10.4% (on income up to $110,000) plus an unlimited Medicare tax (1.45% for employees and 2.9% for the self-employed) can easily equal most of what an individual makes. And these numbers don’t include sales taxes, property taxes, sin taxes and many others.
The real problem with raising the top marginal rate is that this country badly needs entrepreneurs to create jobs in the private sector. The top 2% of the nation’s income earners – who currently pay half of all federal income taxes according to the Internal Revenue Service – are overwhelmingly small business owners. Over half of Americans work for small companies that pay taxes at the individual not the corporate rate. If the economy is going to pick up steam again, we want to encourage these businessmen (and businesswomen) to take risks.
Sadly, many in power – and others who hope to gain power – won’t risk political exile by clamping down on spending. It’s safer and easier to soak the rich. (Heck, even if they all turn against you, it’s only 1% to 2% of the vote.)
That makes single-state municipal bonds – whose semi-annual payments are exempt from federal and state taxes – the no-brainer of the season, especially for beleaguered high-income earners in states charging punitive rates.
This investment choice will keep the government out of your pocket. However, it’s also capital denied to companies that need it. It won’t create new businesses or expand existing ones or help generate more private sector jobs. That’s the unintended consequence of government spending and selective taxation run amuck.
So Governor Brown has a point. Presiding over massive, inefficient spending, demanding that a tiny minority pay for it, and – in the process – disincentivizing entrepreneurs from creating desperately needed jobs is a serious moral issue.
Too bad he’s on the wrong side of it.
Good Investing,
Alex
How Immoral Government Creates the Perfect Investment,
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14 Responses to “How Immoral Government Creates the Perfect Investment”
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Thanks Alex. Now I know why the economy was so bad under Clinton and so good under Bush.
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Any businessman who bases his investments mainly on taxes is a fool. Choosing where to live is another matter.
Incidentally, state taxes are deductable from income for federal tax purposes, they are not on top of them–unless, of course, Romney gets elected and that is one of the deductions he chooses to eliminate.
Who knows, he won’t tell.
California was a rich state before the Mexican invasion, which was allowed to enrich the big growers. Now, they complain because they are taxed to help support all those poor people.
What goes around comes around.
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It has been the top, tiny minority that captured all the wealth during the past 30 years as well. Don’t be worried; they can easily afford it.
We must not hurt the Small Business Men in this Country. Just raise the Threshold on earnings to exempt them. Provide them with tax incentives to hire more people. Yet, I doubt that will help create jobs. Problem is, there just aren’t enough Consumers who can buy much, anymore, beyond necessities. There is no need to produce large surpluses, for old and existing products; because, the DEMAND is just not there! The Rich already have everything; thus, no increased consumption among them.
We need stimulus for CREATIVITY, and the Development of NEW Products. And, that ain’t likely to happen after Venture Capitalists and Wall Street have found that it is easier to EXTRACT Wealth from others; than to create anything new. That appears to be the new Culture in Town, these Days. “If you ain’t doing someone; someone, is doing you.!
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You mention the State of Florida as one of those places where bussinesses are fleeing to because they have no State Income Tax but the truth is that the unemployment levels here in Florida are higher than the national average and we are hurting too. The only form of taxation that we have here to fill the state coffers is regressive ones. At least in California and other states where there is a state income tax there is a mix of progressive taxation to offset all the regressive taxes that we pay at the state level.
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Even though Alex Green has his head far up his Republican ***, he can still find the opportunity to stick his amoral nose into California politics. Why not do a piece on the wonderful state of Mississippi and their “enlightened” tax and educational policies? There’s a paragon of Republican virtues for you…. http://www.motherjones.com/politics/2011/03/haley-barbour-budget-fact-check
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As an accountant and tax guy for small business people (grocery stores, wine shops, a variety of sevice providers, etc.), I can say from 40+ years of doing this is that the argument against raising the top tax rate by 3% or so having a deleterious effect on the majority of “small business entrepreneurs” is specious. The personal federal tax rate is now 35% on Taxable Incomes of more than $ 379,150. I can’t imagine an individual small business startup/expander getting close to the level of income where a 3+% increase in the top tax rate would have any effect. Even if the business did manage this, all of the equipment purchases (the big money for small business startups and expanders) can be near totally written off, reducing taxable income to zero, most likely for years to come. If this does not eliminate the federal tax bill, the business does not, in my experience, qualify as “small”. After all that, with that level of income, their accountants would drag them off to the local Secretary of State’s incorporation desk. Again, no individual tax rate effect on business investment. I also disagree with the idea that such an increase will slow investment by large businesses. They’re swimming in cash already (1.2 trillion at last count)that they’re not investing now. The only thing an increased tax rate will slow is the fill rate of that Olympic size “pool”, at least under current economic conditions. Taxes have nothing to do with their investment burn rate. IMHO, its the lack of buyers for the products coming out of any additional facilities that’s holding ‘em back.
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Howard,
As a small business owner (LLC) I agree with you.
Who cares about tax policy. If I can make a profit, then I do the deal, period. The problem is a lack of deals! It is not a lack of $$$$. Money is available and cheap. Heck, inflation adjusted, it is almost free.
Also, this argument that cutting taxes will spur investment is silly. As you stated, the big cos are awash in cash. If there were projects, they would be putting that money to use. The problem again is a lack of investments. Or a lack of a suitable number of investments.
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outstanding article but it misses one important fact! On tip of the insanity of taxes that kill jobs, investment, etc there is the debt, not the 16.5 trillion that everyone is well aware of and not the 1.5 trillion of debt servicing required and not the short fall of .5 trillion no the debit these politicans are leaving is the entitlement debt whereby election promises, unions, government, military,teachers, etc are owed a pension, medical benefits etc! these come out of general revenue and are not part of the 16.5 trillion, and this is frightening this debt owed the people who have worked for the country amounts to 100+ trillion of unfunded libilities! America is in default already to it’s future! the American system owes over 100 trillion in unfunded libilities!
I am a canadian and I fear the elephant is dead!
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“…..1.5 trillion of debt servicing required”
The US Federal budget debt servicing is not $1.5 til USD. I think it is closer to $400 billion.
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If you want to see the future of California, look at Michigan.
If you want to see the future of the United States, look at California.
Hang on, folks,
this ride is gonna get ruff.
tony
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I am surprised to see such support for taxation on an investment forum. The fundamental problem with more taxation is that causes a misallocation of capital from the productive private economy to the nonproductive government economy. Less capital leads to less production and less prosperity for all of society.
I mean if a top rate of 39% is good; why stop there? Why not take it all and give everyone a government job. That’s only fair. Then there would be 100% employment and everyone would have a generous government pension.
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The country was doing quite well, paying ALL the bills AND paying down the debt when Clinton left office. Bush decided that was not good enough, so down went the tax rate and we had a deficit in the budget at the end of his first fiscal year. True, 9/11 happened which made a big difference, but when he started TWO wars and did NOT pay for them, but borrowed, that started the big slide. An increase in taxes at that point would at least have paid for most if not all of the war expenses. Then he cut back regulation of the banking and mortgage industries and dumped the result on Obama. Sorry, but Bush and the Republican Congresses brought it all on. Now they want to go back and do it again. God save us because the politicians won’t.
Doug N.
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Regards to: “Needless to say, these individuals have an enormous incentive to get the heck out of California. Many of them do.”
Yes, I now live overseas. I still pay US Federal income tax, but the State of California no longer takes their ten percent.
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The tipping point has already been reached, we now
have more idiots in this country then sane people.
Immagration should have been shut off in the early
thirties. Muslims are here and ready to ruin what
is left. Obumm is a muslim, don’t ignore that fact
Does anyone study history, why do they want my guns so bad?? Remember what all dictators do first? Bad times are coming, Get ready…..
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