Raising Taxes Will Cripple An Already Fragile Economy

As I'm sure you are painfully aware, the economy is in serious trouble. Lately the stock market is in constant turmoil with more daily volatility than we've ever seen. The bond market, which drives interest rates, is going through the same type of daily turmoil. House values are still in the twilight zone and government bailouts aren't having quite the effect they were supposed to. At least in the timeframe they were supposed to. Unemployment is on the rise. Blah, blah, blah...

So why would anyone want to raise taxes in an already fragile environment? When are people going to understand that higher taxes stifle growth? In a higher tax environment, obviously many of us will pay higher taxes. But we will also pay more for the goods and services we use on a daily basis because businesses will not absorb the higher taxes they have to pay. They will simply pass the higher taxes on to their customers, us, via higher prices. A double-whammy we just can' afford.

Here is a quote that sums it up nicely. "Given current economic conditions, if Americans elect a presidential candidate who will raise taxes instead of lower them, the economy probably will not rebound by spring 2009 as it otherwise would, Steve Forbes, editor-in-chief of Forbes magazine said. Click here http://www.cnsnews.com/public/content/article.aspx?RsrcID=38138 to view the article.

So who is talking about raising taxes? No one, right? Both candidates are claiming to cut taxes. But who is telling the truth and who is omitting the truth? If you take a few minutes to read an article posted on American Thinker at http://www.americanthinker.com/2008/10/senator_obamas_four_tax_increa.html, you'll surely find out. It is a worthwhile read and I highly encourage you to take the time.

Just in case you don't have the time to read the article I will gladly summarize. On January 1, 2011 the Bush tax cuts of 2001 and 2003 are set to lapse and thus return to the level they were in 2000 if they are not renewed or made permanent. Whether you are a Bush supporter or not, you have benefited from them whether you believe it or not. The media tells you that only the rich benefited so I am providing you a link so you can see if you benefited or not. Go to http://www.moneychimp.com/features/tax_brackets.htm and input your income for any tax year you wish and then compare that to the tax you would have paid in the year 2000, which is what the tax rates will return to if they are allowed to lapse.

Senator McCain, like him or not, vows to make the Bush tax cuts permanent and even lower taxes further. Lower taxes spur economic growth. Companies can expand, which will require them to higher more people. Americans get to keep more of the money they earn, which can then be used to buy the things they want or need and, ultimately, stimulates the economy.

Senator Obama, on the other hand, vows to let the Bush tax cuts lapse, thus rasing taxes. In the American Thinker article Ned Barnett says, "Senator Obama claims that letting a tax cut lapse - allowing the rates to return to a higher level - is not actually a "tax increase." It's just a lapsing of a tax cut.

Do you see the difference?

Neither do I!"

Senator Obama gets around the raising taxes issue because technically he did not raise the taxes. The cuts simply lapsed because he chose not to renew them. He claims that 95% of Americans will get a tax cut under his plan but fails to mention that up to 40% of Americans don't pay income taxes. How do you cut taxes for someone who doesn't pay taxes? You give them money anyway, which, simply put, is WELFARE.

The bottom line is that we cannot afford a tax increase even if it is a passive increase. Obviously, there are other issues to consider and it is not my intent to turn this into a political debate. I simply want to shed some light on a very important issue facing us all as we go forward.

How Taxes Work

Here is an oldie but a goodie that I thought would be appropriate to share again because it is a VERY simple way to understand how taxes work.

Suppose that every day, ten men go out for dinner together. The bill for all ten men comes to $100. If they pay their bill the way we pay our taxes, it would go something like this.

The first four men, the poorest, would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh would pay $7, the eighth would pay $12, the ninth would pay $18, and the tenth man, the richest, would pay $59. That's what they decide to do.

The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement until one day, the owner threw the men a curve ball. In tax lingo it's called a tax cut. "Since you are all such good customers," the owner said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten men costs only $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six men, the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill the way we pay our taxes and he proceeded to work out the amounts each should pay.

It was determined that the fifth man would pay nothing, the sixth man would pitch in $2, the seventh would pay $5, the eighth would pay $9, the ninth would pay $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six men were better off than before and the first four men continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. "But he, pointing to the tenth man, got $7." "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar too. It's unfair that he got seven times more than me!"

"That's true!" shouted the seventh man. "Why should he get $7 benefit when I only got $2? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late, something very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Where would that leave the rest of us?

Unfortunately, most taxing authorities do not seem to grasp this rather straight-forward logic!

The Housing Crisis Revisited

I decided to write this new post to my blog because I am beyond fed up listening to the mainstream media place the blame for the current housing crisis firmly on the shoulders of President Bush. While I concede that he is part of the problem, let me give you a little history lesson.

In 1999 the Clinton Administration began pressuring Fannie Mae to expand mortgage loans among low and moderate income people. Fannie Mae also felt pressure from stock holders to maintain its phenomenal growth. There was an article written in The New York Times in September 1999 about this that states that "Fannie Mae does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make loans to people with less-than-stellar credit ratings." For your viewing pleasure click here to read the article written by The New York Times entitled "Fannie Mae Eases Credit To Aid Mortgage Lending," which details the actions.

The Clinton Administration, just like every administration, simply wanted to expand the homeownership rate in America. But they added a twist. They chose to target low to moderate-income borrowers. The administration wanted to increase homeownership rates for a variety of reasons, not the least of which was to expand the economy. A strong housing market affects every sector of the economy. When people own homes they tend to fix them up so companies like Home Depot, Lowes and Dixieline benefit. When people have equity, like the last bull housing market provided, they tend to remodel so contractors and the like benefit. Those same homeowners like to drive new cars and in many cases cars they could not otherwise afford to own, except through equity lines of credit and cashout refinances. They also enjoy their hobbies such as going to the river and going to the desert as well as family vacations to exotic places. In order to fully enjoy the experience they need toy haulers for their dune buggies, quads, motorcycles, jet skiis, boats, etc...

There are other businesses that benefit as well like the restaurant industry and the retail industry. I am the first to admit that when times were "roaring" along I was eating out quite a bit with the family. I was also indulging myself with a big screen TV, vacation place in Cabo, and slew of other goodies I didn't really need. But I digress.

The action encouraged by the Clinton Administration extended mortgages to individuals whose incomes, credit ratings and savings were not good enough to qualify for conventional loans. They go on to say that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. The proposed goal was that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers.

I'm not entirely convinced that this should be a goal. We shouldn't be focusing on increasing homeownership rates among any particular class. It seems to me we should be focusing on making loans to those that qualify and have good credit. If that excludes a few people from the homeownership pool then so be it. If an aspiring homeowners' credit rating prevents them from buying a home right now, then they have something to work toward. If they cannot afford to buy a home due to income then they have something to work toward.

The article goes on to warn that "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a governement rescue similar to that of the savings and loan industry in the 1980s."

I am not advocating that this is the Clinton Administration's fault. Only that they opened the door rather wide. Bush played a role in the debacle as well. He was asleep at the wheel, perfectly content to watch homeownership rates rise, without regard for what the consequences of what such loose policy could lead to. Certainly Franklin Raines, Chris Dodd, Barney Frank, et al, have dirty hands as well. There were signs as well as warnings from many high ranking people and they were ignored because times were good. But, as the saying goes, all good things must come to an end.

There are MANY to blame for the housing crisis, not the least of which is the American public. As convenient as it is to blame the government, Wall Street, the lenders, the loan officers, the Realtors, etc... The American public has to shoulder its share of the responsibility as well. People wanted to own a home so much that they took on payments they couldn't afford, even if they could initially, and loans they didn't understand. We wanted to believe that we could borrow $500,000 for only $1,268 per month so much that we didn't ask any questions. I know you've heard the saying "If it sounds too good to be true then it probably is." When and why did we forget that? Just sharing a few thoughts.