Elkhorn Creek Lodge

Fraud, Pink Elephants, Taxes and Elvis

Posted in economics by Eugene Podrazik on February 25, 2009

Consider this.  A survey, completed in the mid-90’s calculated that the average American family had tax liabilities (federal, FICA, state, local, ect) that consumed 40 percent of that family income.  That’s the average.  You have to know that liability is much higher in localities like New Jersey or California.  That is, in round numbers, the need to earn two dollars before you can have one dollar to put food on the table, clothes on your children’s backs and a roof over their heads.

But, on a macro level, every transaction, whether buyer or seller has this assumption built in–that any purchase must account for the fact that for every dollar spent, another dollar will go to the government.

Now, consider this.  There was another survey of generation X’ers done in the mid-90’s that determined that a greater percentage believed that Elvis would return to earth on a UFO than ever seeing a dime out of Social Security.  The 90’s, before our latest financial meltdown, back when time were really good.  Aside from the humor in this survey there is an undercurrent that nobody really believes that US government is going to really deliver.

So, here’s the pink elephant, standing in the middle of the living room, that everyone seems to tip-toe around.  The enormous incentives to “game” the system to eek out an extra dollar from wherever you can find it.  It is not to justify the moral righteousness of the excesses of Wall Street or the tawdry tax evasions of Obama cabinet appointment after appointment.  But, we live in an era of such moral turpitude in which our money is being spent by our solons in congress that will beggar our grandchildren’s grandchildren.  We have seen tax evasions on the part of cabinet appointees, an ex-senator in one case, that gets off with a slap on a wrist or appointment anyway to Treasury Secretary.  And, we therefore have a tax cheat as head of the IRS.  What sort of wrath would be visited upon the “unconnected” by the IRS for similiar offenses.

In Obama’s home town of Chicago it isn’t subtle.  Everything is for sale.  Even Senate seats.  There is a resultant cynicism seeped into the bones of every Chicagoan that makes even the rare examples of true public spiritedness suspect.

And, in so may ways we have governance by people who seem to think that laws and rules are for other people.  And, so with such conditions of confiscatory taxes and moral turpitude the temptation to cheat starts to grow.  It becomes a game.  Minimizing exposure to the IRS.  Bartering dental fillings for an auto tune-up.  Everything done on the black market is an automatic 50 percent discount.

If people could actually keep more of what they earned would there be less cheating?  Would there be less incentive to take short cuts?  It’s interesting to note that VAT taxes never yield more than ten percent of the items being taxes.  Since any VAT tax over ten percent stimulates the establishment of a black market that immediately drives the the VAT tax yield back down to ten percent.

A while back, I read in the WSJ that a socialist economist, I think in the 50’s, calculated the most efficient tax rate to maximize wealth transfer.  This taking into account that higher tax rates would depress economic activity to drive down the amount of wealth that could be transfered.  His result; his optimal tax rate was 20 percent.  The exact same percentage that Pharaoh, at Joseph’s behest, taxed to have enough save away from the seven good years for the seven lean years.


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