The purpose of the tax is ostensibly for direct beneficiaries of TARP – the 2008 “bailout” legislation – to repay the government. “We want out money back, and we’re going to get it,” claims President Obama. The rationale of TARP and “too-big-to-fail” policy in general, however, was that the failure of financial institutions was a “systemic risk” to the economy, and that preventing failure would indirectly benefit the public. Depicting financial institutions as the sole beneficiaries of TARP misrepresents the entire purpose of the legislation.

TARP funds, furthermore, were not distributed solely according to financial need; in order to protect runs on failing financial institutions, all were required to accept some TARP funds regardless of need.  Many of the financial institutions this tax targets have already repaid the government for TARP. For example, of the 10 major financial institutions which received TARP funds – some of which neither needed nor wanted it – only 1 has not fully repaid the government.

In fact, the government’s biggest losses are from the bailout of Fannie Mae, Freddie Mac, General Motors, and Chrysler, yet these government-sponsored enterprises and union-backed automakers are exempted from the new tax. Perhaps the Obama Administration’s ulterior motive is to tax financial institutions in order to recoup its losses from bailing out its favored failures; Fannie and Freddie can continue to underwrite risky mortgages, and Detroit unions can continue to fund the Democratic Party. Or maybe the tax is simply an election-year stunt to pander to public resentment of “Wall Street,” sacrificing innocent financial institutions on the altar of reelection. With such a disingenuous rationale and unfair administration, this tax cannot be considered serious policymaking, but rather a shameless political ploy.

Levying a tax upon a financial institution’s liabilities has the potential for negative economic effects, particularly decreased lending operations and a globally disadvantaged American financial industry. Given that the tax is levied upon liabilities (rather than a more liquid base), financial institutions will pay the tax from net income, though cash-flow problems may force them to pay from retained earnings. Since lending is a “fractional reserve” process (meaning bank reserves are only a fraction of their total loans), any such decrease in the equity of financial institutions will exponentially decrease lending. Of course, financial institutions – like all taxed corporations – will cancel out the tax by passing its costs along to the consumer as much as possible. If the tax becomes too burdensome, however, financial institutions can relocate to more competitive financial centers like London or Tokyo, thus depriving the American economy of valuable financial services, and the government of corporate and income tax revenue. Although Obama wishes to gratify liberal rage at financial institutions, this tax will do the economy more harm than good.

The Obama Administration’s financial-crisis-responsibility fee is based on false pretenses, an egregious display of political favoritism, and will negatively affect the economy. The American people should reject Obama’s populism and demagoguery for rational economic policymaking.

Speaking in the tongues of the Obama cult, the op-ed explains that Obama’s tax plan is premised on the “broken status quo.” They’re certainly not referring to fact that the bottom 50% of taxpayers pay under 3% of the income tax burden, and the top 1% pay 40%. Obama prays nightly to see these statistics further stratified. When liberals wail about the tax status quo, they are referring to Washington’s failure to address income inequality and introduce social justice.

Obama envisions the richest Americans paying an even greater share, and the downtrodden 50% paying nothing at all. Unfortunately, he seems oblivious to the fact that higher top tax rates shrink the amount of taxable revenue. This is because people respond accordingly to positive and negative incentives. High taxes are a negative incentive that discourages work. Since the reward of work – for rich and poor earners alike – is money, payroll and income taxes detract from work’s reward. Eventually, the diminishing returns of work are reduced to such a level that leisure becomes preferable to work. Taxes accelerate earners’ natural shift from work to leisure, depriving the economy of potential output and the government of potential tax revenue.

The downside of high taxes is especially devastating when the rich bear the majority of the tax burden. Since most of America’s business owners and entrepreneurs are in the upper-income tax brackets, sapping their will to work with high taxes compromises business growth, and kills potential job opportunities for Americans.

For example, under President Carter, the top income tax rate was 70%, yet the richest 1% paid only 19% of Federal taxes, rather than the 40% that they pay today with a top rate of 35%. In other words, the rich paid more at a lower rate than they did at a higher rate. President Coolidge lowered the top rate from 73% to 25%, and the government witnessed a budget surplus. President Reagan slashed the top rate from 70% to 28%, Federal tax revenue decreased by only 1%. In these cases, high tax rates repelled economic activity, and thus constrained tax revenue. Lowering the top rate encouraged growth, and expanded the government’s taxable income, thus increasing total tax revenue. An appreciation of the inverse correlation of tax revenue and tax rates destroys conventional tax policy.

However, United States’ taxation is indeed broken. A study by the Tax Foundation estimates that nearly $265 billion is wasted merely in complying with the Internal Revenue Service’s 67,000 pages of administrative statutes and regulations. These billions of dollars are an unacceptable opportunity cost; imagine the good that a regular addition of $265 billion – far more than last spring’s so-called “stimulus” – would do to the American economy.

Sadly, Obama – who bills himself as a revolutionary reformer – will not challenge the injustice of the IRS. Rather than truly simplify American taxes by implementing a flat tax or a consumption tax, Obama wants to lead America further into the labyrinth of deductions and credits.

The op-ed claims that, “Overall, Sen. Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP – the level of taxes that prevailed under President Reagan.” Yet Obama’s tax credits are not authentic tax cuts, but stealth income redistribution. An individual’s owed taxes would be subtracted from his credit; the difference is how much he will be “refunded.” This clearly benefits those who already pay nothing in Federal taxes, for they shall be refunded credits with no subtracted taxes. Billing this income redistribution as a tax cut is grossly misleading, if not outright untrue. Rather than champion change, Obama is digging our graves deeper into the current status quo.

Despite Obama’s past remarks about a high-tax ideology and anti-rich agenda, he now apparently advocates raising taxes simply for revenue’s sake. Of course, this proves that Obama remains ignorant of the negative correlation of taxes and revenues, as discussed above. Planning an increase of $100 billion, he will blithely raise top tax rates, but will be disappointed by the expected revenue shortfall.

Nevertheless, the amount of squirming that Obama’s economic acolytes do to gloss over their master’s tax increases is amusing. Here is what they promise:

(1) The two highest income tax brackets – $164,551 and $357,701, respectively – would be raised to 36% and 39.6%.

(2) The top capital gains rate – for families over $250,000 – would be raised to 20%.

(3) The top dividends rate – for households making over $250,000 – would be raised to 20%.

(4) The death tax would apply to only .3% of estates, and raised to 45% for estates worth over $7 million.

(5) A special tax will be levied on earnings exceeding $250,000 at a rate between 2% or 4%. This is supposed to solve Social Security’s financial woes.

Payroll Taxes

Obama’s biggest tax increase of all – uncapping FICA taxes on incomes exceeding $250,000 – would amount to a total tax increase of approximately 16%, sending the top rate soaring to 52.4% – not even counting state income taxes. So instead of returning tax rates to the cool 1990s, Obama would send them back to the groovy 1970s, when the misery index (combination of inflation and unemployment rates) reached a crippling 22%. Thankfully, the op-ed claims that Obama would only uncap payroll taxes on earnings exceeding $250,000 by a percentage 2% or 4%. This is a relative improvement, but still an unnecessary tax.

Politicians refuse to acknowledge that Congress’ raids of the Social Security Trust Fund, combined with the narrowing of the taxpayer/retiree ratio has doomed the program to bankruptcy. Its only hope is to be resurrected as a private savings plan, rather than as a system of social insurance. Again, rather than embracing true change and privatizing Social Security, Obama opts to worsen the status quo by heightening the tax burden of a chronically insolvent program.

Income Taxes

Liberals have always failed to understand the indirect consequences of their taxes. They mistakenly believe that taxes targeting the rich will be confined to the rich. Sadly, saddling the rich with the cost of big government hurts everyone, especially the lower and middle classes, who are more sensitive to slight economic vagaries, and are the first casualties of contraction or recession.

More disposable income in anyone’s hands – rich or poor – will return to the economy somehow. The difference is that while the middle class spends most of its money on basic consumption, wealthy earners have a surplus to either save or invest. Depositing money in a bank increases that bank’s lending capacity, allowing them to make more loans to others. Investing money increases a businesses’ capital, which can help keep a company productive and competitive. Both of these options ultimately redound to the bottom of the pyramid’s benefit through lower interest rates and a lower price level.

As explained earlier, higher income taxes poison the economy by choking off key incentives to open new or expand current businesses. The economic reward of success – money – is less enticing when the government takes a hefty percentage of it, and so many settle for more leisure and less money than less leisure and more money. Unfortunately, the entrepreneurs that Obama is so eager to tax create jobs for other Americans. Since a stable job is the best way of ensuring a family’s housing, education, and health, punishing the rich with high taxes also punishes the rest of Americans by denying them potential job opportunities.

Few understand that everyone can indirectly benefit from public policy that directly benefits another; the positive or negative effects of legislation are not confined to their targeted class. A tax cut for the rich does not merely benefit the rich, but “trickles down” to everyone. Similarly, higher taxes on the rich will diffuse throughout the economy, pinching output.

Most of America’s small businesses are subchapter-S corporations or limited liability companies, neither of which pay taxes on their profits. However, both are subject to FICA and income taxes, meaning they will be hurt by Obama’s new tax rates. If Obama seriously believed that “small businesses are the engine of job growth” and that “one of the principal problems facing the economy today is the lack of discretionary income for middle-class wage earners” then he would not be so eager to raise their Federal taxes.

Although he offers conditional tax credits to small businesses and eliminates capital gains for small businesses and other start-ups, Obama’s overall Federal tax burden negates this largess. Exemption from capital gains is irrelevant when over 50% of your paycheck disappears into the Beltway black hole, and you’re forced to “contribute” to a social insurance program at a loss. Besides, further complications of the tax code keep the billion-dollar cost of compliance with the IRS high.

It is easy to see the hypocrisy in Obama’s alleged devotion to small businesses. For example, he touts the threat of an ephemeral “windfall profits” tax (the gallows of anti-capitalist witch hunts), damns Wall Street’s “ethic of greed” for destroying middle-class livelihoods, and supports on the extortionate “pay or play” health-care tax. And then there is affirmative-action harpy Michelle Obama – reporting six-figure salaries at various sinecures – stigmatizing the business world by exhorting young people to eschew “corporate America” for volunteer work. Meanwhile, she and her husband live in a ritzy Chicago neighborhood on million-dollar royalties from his book sales, donating a paltry 5% to charity.

Capital Gains and Dividend Taxes

Obama is not only increasing top earnings taxes, though. Dividends and capital gains rates are also scheduled to rise. Dividends (payments made from corporations to their shareholders) and capital gains (profits from the sale of capital assets) are crucial investment incentives. However, raising taxes on these incentives will diminish their appeal and reduce overall investment. Individuals who would have otherwise risked an investment for the hope of comfy dividends or hefty trading profits will use their money elsewhere. Businesses will avoid losing money to a dividends tax by simply reducing the amount or frequency of their dividends. Many retirement plans rely on the receipt of regular dividends, making dividend tax hikes a threat to many Americans’ retirement.

Continual investment is crucial to a dynamic and resilient economy. Businesses – especially new ventures – rely on the capital from investment to expand. Entrepreneurship will wane without this key source of start-up money. The “alternative energy” industry would benefit from investment. Investors would buy stock in the most promising companies, giving them the necessary capital to expand their operations. If business succeeded and its stock price increased, those investors could sell their stock for a profit, or enjoy receiving dividends from it. The country benefits from a more affordable and efficient source of alternative energy; the profitable energy company provides employment to many Americans; and the investors are financially rewarded for their insight. However, the wedge of capital gains and dividends taxes abort such success stories.

Death Taxes

Levying taxes on rich estates is a Democrats’ dream come true. The political fallout is virtually non-existent, since few Americans sympathize with a rich inheritor’s tax burdens. However, like all taxes, the pains of a high rate often spread to others.

In a 1994 study, the Tax Foundation determined that the current death tax rate of 55% had the same effect as a doubling of one’s marginal income bracket. Since Obama will raise the top two income rates to 35% and 39.6%, and set the death tax at 45%, it’s likely that top earners will behave as if income taxes were roughly 70%. As discussed above, such steeply progressive marginal rates discourages hard work and productivity. Punishing rates make each hour of work less rewarding, compelling workers to simply work less and/or retire early. The result is less wealth generation and a poorer America.

Bush’s Tax Cuts

Recent economic woes have tainted the otherwise prosperous two terms of President Bush. The president has little power over the current depreciation of the dollar, inflationary spike in commodities, and lack of liquidity in the credit market, but still serves as a popular scapegoat for the masses. However, the real culprit is the specter of Keynesian monetary policy at the Federal Reserve. Bush’s 2001 and 2003 tax cuts were crucial in lifting the country from Clinton’s recession, as well as reassuring shaken consumers and investors after the 9/11 terrorist bombings. Voters should also remember that the United States’ gross domestic product led the developed world with an average growth 2.5% from 2001 to 2005, and that data from the Census Bureau charts increased tax revenues (despite lower rates) from upper-income taxpayers.

Recognizing the value of his predecessor’s tax policy, Obama should defend Bush’s tax cuts on earnings, capital gains, and dividends, and further reduce corporate tax rates, if not remove them altogether. This would not be the dreaded disaster predicted by the liberal Cassandras. In fact, it would be an amazing change from over a century of IRS failure, inviting a wave of foreign investment, as well as a mass return of American companies lost to the offshore exodus.

Edmund Burke, lamenting France’s expropriation of church property, wrote that “…an absolute democracy, no more than absolute monarchy, is to be reckoned among the legitimate forms of government. Of this I am certain, that in a democracy, the majority of the citizens is capable of exercising the most cruel oppressions upon the minority, whenever strong divisions prevail in that kind of polity.” Despite its clever rationalizations and slick half-truths, Obama’s tax policy is ultimately derived from the crude mob rule that Burke observed in France.

Perhaps Ayn Rand said it best when she noted that, “The smallest minority on earth is the individual. Those who deny individual rights cannot claim to be defenders of minorities.” Until Obama pledges to respect the dignity of all men – both rich and poor – he is nothing more than another populist pitting Americans against each other.

<%image(20080814-change.jpg|268|244|Obama proselytizing to some born-again socialists)%>

The Keynesian logic behind these rebates is that returning tax dollars to taxpayers will briefly jolt aggregate demand, temporarily sustaining output. Depending on consumers’ “marginal propensity to consume” (i.e. what percentage of every dollar they spend), the billions of dollars will multiply throughout the economy.

However, a small cash infusion is futile during commodity inflation, an anemic financial sector, escalating unemployment, a burst housing bubble, and flagging consumer confidence. Like the last stimulus, it will only provide a few months of relief, delaying the inevitable downturn of the business cycle. In fact, the demonstrated ‘marginal propensity to consume’ of the last stimulus round was beneath 20%. This means that consumers spent about 20% of their tax rebate, and used the remainder to pay down debt or simply save.

Sadly, the value of $500 and $1000 diminishes daily. The Federal Reserve’s expansionary monetary policy has ruined the dollar and driven investors to commodities. At the same time, the dollar’s depreciation makes imports – such as oil – more expensive. The subsequent inflation in the price of commodities saps the purchasing power of these checks.

But wait, there’s more! Obama has promised that this largess won’t worsen the Federal deficit. He’ll feed the 5,000 through a special “windfall profits” tax on oil companies, Washington’s demon du jour.

Obama and his ilk portray oil companies as cackling, mustache-twiddling villains, spending nights greedily counting the obscene profits they’ve hoarded in their mansions. Instead, oil companies use their profits to maintain and improve their capital stock, or distribute it among shareholders as dividends. The former increases productivity, which would drive down oil prices; the latter is a crucial part of many retirees’ pensions or other long-term investments.

The key to dismantling the liberal lie of “outrageous” profits in Big Oil is the insight of a simple profit margin. A profit margin measures how much money a firm keeps from every dollar of sales. It is obtained through a simple formula – net income divided by gross revenues. So if James Inc. has a total revenue of $100, and a net income of $20, its profit margin is 20%, meaning it keeps 20 cents of every dollar it makes.

American oil companies have some of the lowest profit margins in the country – approximately 10%, or 10 cents per dollar. Incidentally, the Federal government currently collects double this figure –20 cents per dollar – in oil taxes. However, the masses require a scapegoat, and the subtle importance of a profit margin is lost amid the political grandstanding.

Below is a list of other profit margins- taken from the Wall Street Journal – from other businesses. Following Obama’s logic, additional taxes should be heaped on these capitalist vampires.

Outrageous Profit Chart
Chemicals: 12.7%
Computers: 13.7%
Electronics & appliances: 14.5%
Pharmaceuticals: 18.4%
Beverages & tobacco: 19.1%
(I wonder what kind of margins civil trial lawyers report?)

The same WSJ editorial defined a “windfall profit” as “nothing more than a profit earned by a business that some politician dislikes.” Obviously.

President Carter implemented a Big Oil “windfall profits” tax once. Like most of Carter’s policies, the tax was disastrous. The results crippled the American oil industry, compelling many businesses to move overseas or simply shut down. Besides ruining the livelihoods of many American employers and employees, Carter’s taxes did nothing to improve prices, and deepened our dependence on foreign oil.

There are countless statistics and factoids that expose the sheer idiocy of a “windfall profits” tax. What’s important to remember is that such a tax is sharply contradictory with the basic precepts of a free, capitalist society, where a profit rewards the successful application of land, labor, capital and entrepreneurial ability. The anointed philosopher king rejects this time-honored truth, instead proclaiming that, “The oil companies need to know that there is a limit on how much profit they can take in this economy.” Statements like this are the harbingers of totalitarianism.

Also, the United States already has the second-highest corporate tax rates in the world, which repels foreign investment and drives American businesses overseas. The last thing our economy needs factored into its tax system is the perverted notion of a “windfall” profit.

In short, Obama’s “stimulus” is to electrocute the economy with short-term tax rebates and hinder oil companies’ ability to improve their business or distribute profits. This will only temporarily stave off a recession, while doing nothing to deflate gas prices. By keeping the U.S. economy from the trough of the business cycle, the Washington political class prolongs the misery (imagined or otherwise) of Americans. And since short-term energy demand is mostly inelastic (meaning consumers respond slowly to price increases) oil companies will simply boost prices to make up the difference, betting on a future appreciation of the dollar, or a healthy revision of Congress’ jumbled energy policy.

If you’re sure you won’t vote for such an imbecile, you’re sadly mistaken. Here’s what Obama prophesied about this fateful November: “A light will shine down from somewhere. It will light upon you. You will experience an epiphany and say to yourself, ‘I have to vote for Barack.’” Sounds like a fine introduction to Jesse Jackson’s suggested addition to the Biblical canon – the biography of Barack Obama.

Obama/Calvin 2008 – Preordained for your gain!

<%image(20080808-obama1.jpg|500|364|The best way to energy security is to punish American oil companies)%>

The Framers were so afraid of such a factional apportionment of taxes that income taxes were ruled “unconstitutional” until the 16th Amendment. James Madison – “The Father of the Constitution” – wrote that, “The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.” Indubitably.

Liberals believe that higher tax rates yield higher tax revenue. This fairy tale is what makes a steeply progressive system so appealing to the Left; the wealthy few will endure exorbitant taxation, fully funding the government’s agenda. Thus, when presidential candidate Barack Obama fantasizes about repealing the Bush tax cuts and uncapping Social Security taxes, he naively believes that this will increase Federal tax revenue, as if people do not react to positive or negative incentives.

Sadly for the liberals, the rich are not an endless fountainhead of wealth; they respond negatively to punishing tax rates. Often, they simply work and earn less, spend less on capital assets, and decrease or eliminate profit dividends. This contraction of economic activity yields less tax revenue for the government.

The IRS recently released 2008 income statistics, and much of the information is typical of any progressive tax. However, the data also happens to disprove the simplistic notion that higher tax rates increase tax revenue, and that individuals do not respond to punitive taxation. This is a basic argument of supply-side economists, illustrated beautifully by the Laffer Curve below:

<%image(20080806-untitled.jpg|320|251|The Laffer Curve illustrates the consequences of positive and negative tax incentives)%>
The grayed area is the “prohibitive” tax rate, where taxes begin to constrict economic activity, and thus decrease government revenue. In this area, revenue can only be increased by lowering tax rates.

Note: the ideal tax rate is not necessarily 50%, as this curve seems to imply. Rather, it varies according to the values of the electorate. A dramatic reversal of Bush’s tax policy would undo the prosperity enjoyed by the private sector and government (i.e. growth and revenue windfall), and would shift the U.S. deep into prohibitive levels

The top 1% of taxpayers ($388,806 or above) pay 40% of Federal taxes, though only receiving 22% of total income. The top 10% ($108,904) paid 71% of Federal taxes. Overall, the top 50% paid 97% of the tax share, and the remaining 50% paid roughly 3%. Given these statistics, it will be difficult for Obama to honor his promise of reducing the bottom 50%’s puny tax share.

The statistics chart a dramatic increase in Americans who declared an income of over $1 million. Three years after President Bush’s 2003 tax cuts, millionaires doubled from 181,000 to 354,000. Lower tax rates (even a small difference of 35% from 40%) are powerful incentives to work harder for more money, explaining the surge in $1 million salaries. In 2003, millionaires paid $136 billion in taxes; in 2006, bolstered by the “new rich,” of Bush’s tax cuts they paid $274 billion. So by lowering taxes, President Bush created an extra $138 billion of taxable income.

Lowering taxes on capital gains and dividends ensures similar outcomes. At a favorable tax rate, investors will declare more capital gains, and businesses will distribute greater dividends. An increase in declared capital gains or distributed dividends is also an increase in tax revenue. This truth – that people respond favorably to low taxes and unfavorably to high taxes – voids the liberal lamentation of the rich escaping their “fair share.”

Despite the obvious benefits to low tax rates, Obama has outlined an enormous tax increase on income, capital gains, and dividends. His tax vision would return the United States to the 1970s, the age of creeping stagflation. Then, the top income tax rate was 70%, yet the richest 1% paid only 19% of Federal taxes, rather than the 40% that they pay today with a top rate of 35%. Apparently, “change we can believe in” is a destructive repeat of economic contraction, ballooning inflation, and high taxes. “Yes we can,” but do we really want to?

OBAMA’S TAX VISION
Top income tax rate: 39.6% from 35% (not including state income taxes)
Top income tax rate w/ uncapped payroll tax (not including state income taxes): 52.2% from 37.4%
Capital gains tax rate: 28% from 15%
Dividends tax rate: 39.6% from 15%
Estate tax rate: 55% from 0%

Say you’re a small businessman with a $500,000 salary. Obama would take approximately $160,684 from you in income taxes. However, after factoring in his uncapped FICA “contribution” (12.5% on all marginal income over $250,000), you pay an extra $30,000, totaling $190,684 in Federal taxes alone. Say you live in California, where a top income tax rate of 12% on all marginal income over $100,000 pushes your tax bill to $238,000. Your business has an average profit of $2 million, but combined Federal and state corporate tax rates take $860,000, leaving $1.4 million for dividends or capital investment. Discouraged, you decide to sell your capital assets – business and home – and retire to a low-tax state like Texas. Your business sells for $10 million, and your home for $1 million. You pay 28%, or $3.08 million to the IRS. You become suicidal after losing your successful business and beautiful California home, but realize that suicide would void your life insurance policy; you can’t afford to kill yourself. When you finally die, your estate is valued at $7 million. Your will divides that $7 million equally among your two children. Each must pay an estate tax of 55% on their $3.5 million – $1.925 million.

However, such economics are irrelevant to Obama. He uniquely views taxation as a weapon to punish the rich, rather than as a means to collect revenue for the government. Constricted economic activity, less tax revenue, and widening deficits are acceptable casualties in his war against America’s wealthy households. He fashions himself as “post-partisan,” but is slavishly devoted to petty politics of wealth envy and class warfare.

Do not let Obama drive his punishing wedge into the economy.

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The program was first ratified by FDR in 1935, along with other misguided Keynesian flops. FDR’s ‘Brain Trust’ – a vast left-wing conspiracy – convinced the president that enormous government spending and economic intervention would restore growth to the American economy. This liberal cadre was oblivious to the wedge that their punitive taxation created in the economy, keeping both Americans and the government poor. Although the Supreme Court courageously overturned much of the radical ‘New Deal,’ it upheld Social Security as an acceptable “promotion of the general welfare” amid unprecedented economic contraction.

Several years later, in 1939, FDR passed the ‘Federal Insurance Contribution Act’ (FICA), which created a special payroll tax of 6.2% on employee and employer income. Currently, the income is capped at $102,000. The ‘Social Security Trust Fund’ was also opened the same year.

LBJ needed money for his ‘Great Society,’ and so began the fatal practice of opening Social Security surplus to general Congressional spending. This conduct – considered criminal mismanagement in the private sector – ensured eventual bankruptcy. He also added Medicare – another trillion dollar disaster – to the payroll tax.

In the 1970s Congress, having gorged itself on the trust fund, generously voted to increase benefits. However, a dismal financial outlook (the decade’s ruinous stagflation stoked uncertainty) compelled President Carter to reform. But like most things of the Carter administration, those fixes spectacularly failed.

In 1983, National Commission on Social Security Reform (chaired by Alan Greenspan) presented a sobering set of recommendations. They urged President Reagan to accelerate increases in the tax schedule, raise the retirement age of full benefits, to make Social Security payments taxable income, and to shield the fund from the general budget.

Now, Social Security pays $610 billion (21% of Federal spending) annually. Many politicians have sank their careers venturing Social Security reform. Amazingly, total reform can be easily achieved without any benefit loss or tax hike. This miraculous solution is privatization – turning Social Security from a system of social insurance to a pension plan. However, the political class has always undermined such efforts, preferring to keep America fearful and dependent on Washington.

After payments to current beneficiaries our financially incontinent Congress spends the FICA surpluses in its general budget, rather than saving it for future beneficiaries. After spending the surplus, the government deposits Treasury bonds in the Social Security Trust Fund, to be repaid later. This creates the illusion of solvency.

Tax receipts currently exceed expenses, so Social Security has been able to absorb such raids. Unfortunately, the further narrowing of the payee/payer ratio will result in a program deficit (expenses exceeding receipts) by 2017. By then, Congress will have expropriated $4.3 trillion from Social Security. To stay solvent, the bonds held in the Social Security Trust Fund must be redeemed. However, Treasury securities are paid from the general budget, meaning Americans will be be taxed again to cover Congress’ failure.

This was the ultimate outcome of Social Security from its inauspicious beginning. As long as it is a system of ’social insurance’ (i.e. pay-as-you-go), a narrowing ratio of payee to payer without prudent surplus investment requires the deceit of bond illusion. These bonds can only be redeemed by 1) raising FICA taxes, 2) cutting government spending, 3) selling government assets, or 4) borrowing money. None of these measures are final, though, and will all necessitate future contingencies.

Without recourse to bond illusion, Social Security is a simple pyramid scheme. In a pyramid scheme, the first round of investors is repaid by the second round of investors, and so on. However, each successive round must contribute more than its predecessor. Without this growth losses occur, the fraud is revealed, and the con man vanishes. In Social Security’s case, the recent generations have not equaled the previous Baby Boomers, signaling the end of the scheme. Of course, the government’s way of fleeing to sunny Mexico is to disguise its failure through the issuance of taxpayer-covered bonds. This way, the mirage of Social Security is preserved.

Privatization is the only true answer to the Social Security crisis. An individual’s FICA taxes would be deposited into a private account, from which the payee would receive an annuity upon retirement. The payee could even control how their account was invested, if at all. By designing Social Security this way (as an IRA or 401(k) plan) long-term solvency would be guaranteed without having to consider any of the measures listed above. Taxes could be kept minimal, government spending maintained, assets retained, and further debt avoided.

Barack Obama – the Pied Piper of 2008 – subscribes to the shortstighted responses dreaded by the American taxpayer. Instead of risking genuine change and permanently preventing Social Security’s collapse, Obama proposes the stale idea of higher taxes to merely postpone – yet perpetuate – the system’s long-term defects. Raising taxes now does nothing to address the chronic insolvency of the system, and ensures that future generations will have to face even greater problems. This is an cowardly and disappointing decision from a politician who has staked his career on an uplifting message of hope, change, and dreams.

Specifically, Obama wants to ‘uncap’ the payroll tax, applying it to all income over $250,000. Remember that Social Security is financed through FICA, which is a payroll tax of 6.2% levied on the first $102,000 of employer and employee income. Incomes over this cap paid a “maximum” tax and received a “maximum” benefit. Even those with incomes vastly exceeding $102,000 are confined to the maximum benefit.

Obama believes that this regressive structure (the tax goes from 6.2% to 0%) is unfair, since wage-earners beneath the cap must pay the tax on their entire salary, while wage-earners above the cap only pay the tax on a percentage of their salary. This is not economic or financial reasoning, but plainly populist pandering.

There was a principled reason for the regressivity. FDR envisioned Social Security to be “a base upon which each one of our citizens may build his individual security through his own individual efforts.” That is, the object of Social Security was not wealth redistribution, but savings. A taxpayer’s benefits were to be somewhat proportional to what he paid in taxes.

Obama’s Social Security proposals sever the link between tax payments and benefits. Households making over $250,000 would face a staggering 12.4% tax increase without any corresponding rise in benefits. Thus, Social Security is transformed from a retirement program to yet another welfare program, courtesy of the richest 3%. In fact, Obama’s payroll tax hike will send the future Social Security “returns” of these wealthy taxpayers to 0% or below. The rookie senator either does not understand the financing basics of Social Security, or has ulterior political motives.

Remember that Congress routinely spends the FICA surplus in its general budget. Any new surplus from the uncapped tax would be eagerly devoured by legislators, who would then issue more Treasury securities to mask their greed. Even if Congress declined to raid the trust fund, Obama’s aptly Orwellian “contribution” would only pay half of the projected shortfall. And even this half is meaningless, because Obama would do nothing to prevent he emergence of future shortfalls. His long-term policy fails to attack the actual disease, and his short-term policy does not even fully treat the symptoms.

Obama ignores the systemic flaws of Social Security, exploiting the crisis to advance his precious agenda of steep progressive taxation and massive income redistribution. His slavish devotion to petty politics of wealth envy and class warfare not only jeopardizes the retirement planning of millions of Americans, but also embarks upon a terrible precedent certain to enervate the spirit of top taxpayers.

<%image(20080710-change lol.jpg|500|333|Washington's police power makes Social Security a sound investment!)%>