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The Solution to Sovereign Insolvency, Part II: Taxation Follies

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In Part I, I explained how our system of income taxation was a horrible mistake – nothing more than an unfortunate accident of history. I introduced readers to the concept of a “wealth tax”, and pointed out how that formed the basis of a much more equitable system of taxation, using the Islamic religion as an example.

Before I go on to explain the virtues of wealth taxation, in detail, I will spend some time demonstrating why it is impossible to ever have “fair” income taxation. More than that, I will demonstrate why no system of income taxation can be economically viable over the long-term.

To do this requires nothing more than some simple, numerical examples. For purposes of this analysis, I am going to assume that everyone’s assets (i.e.  their wealth) appreciate at an identical rate: 10%/year. Note that very few of these assets actually become “more valuable”, rather, this rate of “appreciation” is in fact nothing more than the rate at which bankers are diluting our purchasing-power through their excessive money-printing. While this may be a high estimate of asset-appreciation as of this moment, the unprecedented money-printing of Western bankers taking place today ensures that this will be a low estimate of future inflation.

Let’s begin with a hypothetical individual who is very wealthy. The individual has $1 billion in net wealth, and one of the highest salaries on the planet: $10 million/year. Indeed, the average billionaire has a smaller annual salary than this (meaning this analysis will be a slight understatement).

The first point to note here is that with total wealth of $1 billion, even the huge, $10 million/year salary of this individual only amounts to 1% of this person’s wealth – an insignificant amount. Meanwhile, the wealth of this individual increases by $100 million/year, just through the appreciation of assets (ten times the amount of incremental wealth generated from income). In other words, even if this individual was taxed (on income) at a 100% rate, his increase in net wealth would only decline by 10%.

Now let’s take an average person, who has an annual salary of $50,000 and net wealth of $500,000 (an above-average level of wealth for people in this income bracket). The first point to note is that this person’s income is equal to 10% of his/her total wealth. Put another way, income is ten times as important to this individual – meaning that taxing income has ten times the impact on this individual. Equally important, this person’s wealth increases incrementally by $50,000 per year, identical to the increased wealth from income.

What this means is that if we were to tax this average person at 100% on his income, we would reduce his incremental wealth by 50%, five times the impact of that rate of taxation on a very wealthy individual. We would have to reduce this individual’s tax rate to less than 20% in order for such taxation to have an equivalent wealth-effect on these two individuals.

Now let’s take an equally common example: a person in a low-wage, service sector job, which pays $30,000 per year. We’ll assume (for purposes of this example) that this individual has net assets totaling $100,000 (again, this estimate is on the “high” side). For this individual, annual income represents 30% of his total wealth, or thirty times the level of the billionaire, with the $10 million/year salary, and every dollar of income tax paid by the low-wage earner has thirty times the impact on this individual.

With little in the way of assets, his wealth only appreciates by $10,000 per year. Thus, if we were to tax 100% of this person’s wages, we would reduce his increase in wealth not by a mere 10% (like the billionaire) but by 75%. Of greater relevance, the appreciation of assets only represents 25% of this person’s increase in wealth, compared to 90% for the billionaire.

In short, in an income taxation system, even a 100% tax-rate has only a trivial impact on the very wealthy, while tax-rates far below that level have a very punitive impact on the average person. And in absolute terms, if we taxed the $30,000/year worker at 0%, his total wealth would only increase by $40,000/year, while if the billionaire was taxed at 100% (on his income) that person’s wealth would still increase by $100 million per year. Simply, it is mathematically impossible to have income taxation without giving the ultra-wealthy a “free ride” – and concentrating more and more wealth, in fewer and fewer hands, every year.

Worse still, as I pointed out in Part I, there is nothing more detrimental to an economy (as a whole) than by allowing most of a society’s wealth to be concentrated amongst a tiny portion of the population. Thus, income taxation is not only a system which inevitably and unjustifiably makes the obscenely wealthy even more obscene, but it also steadily weakens our economies in the process.

This concept can be illustrated by the chart below, which shows how incomes in the U.S. became horribly concentrated among the ultra-wealthy – and then came the Great Depression. Looking ahead to today, we see that (once again) incomes have become shamefully skewed in favor of the wealthy, and (once again) we are faced with the imminent threat of another, Greater Depression.


The difference between the conditions of the first “Great Depression” and today, is that 80 years ago, wealth was much, much less concentrated. Following eight (more) decades of income taxation funneling all of our societies’ wealth into the pockets of the top-1%, average individuals are far less able to cope with the coming (Greater) Depression than they were the first time around.

Compounding this economic catastrophe, our governments, themselves, have become indebted to the point of obvious insolvency (in the case of the U.S.) or near-insolvency (in the case of most other Western economies). In other words, while our “leaders” were busily destroying all of our “economies” (on an individual basis), they have been equally busy destroying our overall economies.

With ordinary individuals taxed-to-the-max, while our economies are drowning in debt, clueless commentators do nothing but yammer on and on about the “inefficiency of government”. Clearly, what is monstrously “inefficient” is our taxation system. Certainly there is “bureaucratic waste” in government – the same inefficiencies which we can find in every one of the corporate behemoths which have been allowed to grow into such unhealthy, unwieldy conglomerates. Strangely, not one of the critics of “big government” expresses the same animosity toward “big business”.

What should be crystal-clear following my analysis is cause-and-effect. With a taxation system which automatically cripples its own tax-base (by funneling ever-increasing hoards of untaxed wealth into the hands of the ultra-wealthy), our current, fiscal nightmares became inevitable the day we adopted systems of income-taxation.

After more than a century of the worst, possible taxation system, we have been left with the following parameters:

1) Our governments are drowning in debts, and cannot avoid sovereign debt-defaults without finding large, new streams of revenues

2) After being “squeezed” by our own governments for decade after decade, the average citizen cannot possibly contribute one, extra penny in taxes

3) After more than one hundred years of getting a “free ride” from our tax systems, the ultra-wealthy have amassed gigantic hoards of wealth which would be the envy of any “king” of the Middle Ages, or even the most despotic, Third-World tyrant of today.

Clearly, there is only one, possible way to restore solvency to our governments (and economies). In Part III, I will explain how governments can claw-back the illegitimate fortunes of the ultra-wealthy – in both a fair and equitable manner.

 

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Jeff Nielson
...
written by Jeff Nielson, September 08, 2010
Navderek, your confusion is understandable.

With 90% of the talking-heads out there complaining about "socialist policies", the MYTH believed by most of the market (and most of our citizens) is that government problems were caused by over-spending on "the little people", rather than ridiculously under-TAXING the very wealthy.

Indeed, it was after I saw yet ANOTHER piece of such trash that I decided that I couldn't wait any longer to return to this subject.

Paxjds, to add even further "insult to injury" while we are all being royally "screwed" by the tax system (except for those near the very top), these same traitor-governments CHOOSE massive, structural unemployment for our societies: not ALLOWING 10's of millions of people to (ever) work - in order to further depress the wages of "the little people".

You should feel MUCH more oppressed than your ancestors of 1776 - since (by today's standards), those were "the good, old days!"
navderek
...
written by navderek, September 08, 2010
This article really opened my eyes in a BIG way. I always thought that the tax system "punished" those that earned higher wages but I can see now that this is really the complete opposite. What we need is some form of taxation system that takes this information into account and taxes based not only on wage income, but also on "net worth" based on assets and debt that the person or entity carries. Of course the system should work in such a way as to permit the wealthy to maintain their wealth because this is the whole purpose of generating competition, but the way it is now looks certainly like a free ride for the 1-2% and a horrible nightmare for the other 98% of people who try and lead an honest and good life.
paxjds
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written by paxjds, September 08, 2010
Jeff,
regarding point 3 in Part II above, the trillions of $'s spent on Bailouts did not go to you and I, nor the other men and woman on the street. It went to the Super Wealthy to bail them out of their Ponzi schemes. We the people now pay interest of those trillions, which amounts to another TAX. To make matters worse, the Wealthy Banksters then take this money and instead of lending it out to help stimulate the economy; the Banksters buy Treasury notes and make app. 3% more in interest. You guessed it: you, I, and our great grandchildren will be paying the super wealth interest on this for years to come.
By the way, excellent PartII which demonstrates the Narcisstic Wealthy are always working on their Ponzi schemes to screw the people. I feel like an American colonist before 1776, I am really getting pissed over taxes and subsidies to the super wealthy.
Jeff Nielson
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written by Jeff Nielson, September 07, 2010
DayOwl, this is what is so infuriating. The BANKERS (being closest to the printing press) print FULL-VALUE "dollars" for THEMSELVES. The money doesn't start to "dilute" until the bankers release it into the broader economy (at which point, not just the NEW "dollars", but ALL the currency is diluted).

Even when hyperinflation hits, the ONLY people who will be able to "buy" anything with the near-zero currency is the BANKERS - who can SPEND the newly-printed money at the time of dilution, not AFTERWARD, like the rest of us.

The people who CAUSE our money to lose all its value are the SAME people who SUFFER the least from destroying their own paper.
DayOwl
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written by DayOwl, September 07, 2010
To some extent, it isn't really wealth at all. Dollars created out of thin air will represent their real value eventually. So, even the monster-hoards will be revealed to have far less value than they seem to at present. The wealthy will still be wealthy, but not as much as they think. They're undermining their own wealth as well.

I guess what I'm saying s that what many of us thought of as wealth was already worthless some time ago. It's already been stolen.
Jeff Nielson
...
written by Jeff Nielson, September 07, 2010
DayOwl, this is PRECISELY the problem. Every year, a larger and larger percentage of our TOTAL wealth goes into the monster-hoards of the ultra-wealthy.

Not only does NONE of this money benefit the economy (in any way), but it is PERMANENTLY removed from the "tax base". Thus Western economies (and the U.S., in particular) are trying to finance government operations with about HALF the percentage of total wealth being taxed as happened a generation or two ago.
DayOwl
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written by DayOwl, September 07, 2010
I've read somewhere that tax revenues only amount to 24% of the money spent by the government each year. Therefore, the rest is debt creation. So, no matter how much they raise taxes, the system is bound to fail.

Do you really think there is a chance that the plutarchy will go after itself to dig the country out of the hole? Aren't the events of the past few years all efforts to avoid just that?
Jeff Nielson
...
written by Jeff Nielson, September 06, 2010
Dylan, you're reading my mind with some of your remarks.

I strongly SUSPECT that income taxation in our societies "is no accident", but without any proof to offer there, I decided it was one less "conspiracy" I needed to discuss (lol).

Also, your point about "charitable foundations" was something which I expected to get into. Most people don't realize that tax-lawyers don't get paid $100's of millions each year by their clients to find TRUE "tax loop-holes".

Instead, what tax-lawyers make BIG BUCKS in doing is to find all sorts of ways to DELAY being taxed on wealth/assets/income. Charitable deductions are actually a small part of tax-avoidance strategies - unless you're someone like Warren Buffet or Bill Gates, who WANT to give away most of their fortunes.

A much easier example is simply to BORROW AGAINST a valuable asset, find one of the (many) ways to write-off the interest et voila!, you have "liberated" (or LAUNDERED) some of the wealth from that asset (tax-free)...
Dylan
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written by Dylan, September 06, 2010
Another fascinating article, Jeff. Ayn Rand has truly met her match!

The powers that be seem to get the best of both the right and left paradigms, privitising profits and socialising losses.
The welfare statists seem to be one and the the same as the capitalists.

A true tax on wealth would be a great thing, Unfortunately, it is impossible to separate the ultra-wealthy from the government that should regulate them. This is the main reason why they are ultra-wealthy in the first place! The one who makes the rules owns the gold!

As to Income tax, if it was an accident, its because someone planned it that way! The inefficiency ruse is a cover for a deliberate policy of wealth transfer. It keeps the pyramid intact.

The tax is used to pay off the interest on the fraudulent debt to the Banksters and not used productively for the society. More debt is taken on merely to service the interest, whilst the principal will never be repaid and was never intended to be. The hidden tax ensues.
Why has this system persisted? Because the people who run it and the people who benefit from it are the same. They are just very good at convincing people that they are mortal enemies.

Don't forget the Tax-free foundations, set up so the Cartel can play at philanthropy while the money is really used for nefarious purposes.


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