The Dark(er) Side of Raising Taxes

As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.

As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:

According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!

But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.

With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.

Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!

Clueless Leadership

Today we learned a 'Pension Relief' bill whizzed through the U.S. Congress, passing both houses unanimously. Among the many popular items, was one in particular that caught our eye: easing the requirement that Corporate Defined-Benefit Pensions be fully funded. This comes just two years after the Federal Government toughened enforcement to protect workers and the Government Pension Insurance Fund.

No one likes to lose money, but pretending one didn't lose it doesn't help the situation. If a pension fund had terrible losses in the stock market this year, the employer should put more money in to ensure there will be enough to pay the retirees. If it can't cough up the bucks, then the benefits need to be cut. One can't go on paying out as if nothing happened.

This sort of thinking is not the exception these days. For another example, banks are being allowed to shuffle more of their impaired investments into the 'marked to make-believe' category of valuation to avoid writing it down to actual market values. The most extreme examples are to be found in the 'horror stories' of people who loose their income and yet continue spending on their credit cards all the way to bankruptcy and homelessness.

If any economic unit - be it household, business, or nation - is to emerge from the 2007 Depression not ruined, it must begin by fully acknowledging the painful losses that have already happened, and accept the possibility of further losses ahead. Only then can there be a truly appropriate response - which typically involves austerity and hard work. The glaring lack of leadership from elected representatives and regulators on this point is certain to have destructive consequences, namely: more insolvency, more income loss, and (as long as governments can pretend they have resources) more bailouts.