2005
Occasional #4

Hi

This time, reflections on taxes. Next time, implications for public budgets.

Our Seattle national conference drew over 6,000 state legislators and staff people. We passed the LaRouche crowd (so young!) each day as we entered. They walked alongside for a block or so with “We have a plan.” I said, “So do we.” “Tell me about your plan. Please.” “We are here to work on it.” My, it is exciting to have a 20 year old begging for info from an old geezer.

I saw no one of our group brought aboard on their plan. Inside was a similar plan, at a booth. The flat tax people would replace all taxes with a sales tax. They were enthusiastic and have someone to introduce it in congress. The rate depends of course on the tax base, but they were in general agreement to tax most anything that moves (excludes buying a house) with a 37% sales tax. The bill introduced proposes to start with a 23% rate. Utilities, services, lawyers, everything.

Has anyone asked if they know about the effect of sales tax on consumer purchasing? Yes. They respond with a question: have we considered the reduced cost of goods if the manufacturer and the banks paid no taxes? The more you think about it the more your head hurts. Some businesses would be devastated as consumers will not pay one-third more to buy that product. Other products would go gangbusters as they are more essential.

Since savings and stocks are exempt, those who have no money left for that will pay the heaviest load on their income. It figures out to a 25% tax on all income, if you spend it. That is the easy part. The bureaucracy to administer it would make the IRS look like a company picnic. HOW do we decide how much goes to local schools, fire departments, roads, health care, public assistance, universities, colleges, community education, town councils, the convention center, airport control, police, prisons, Indian affairs, CIA, border control, Medicaid, disability, mental health, corporations' welfare and development, governors, mayors, farmers, teachers, public retirement funds, special education, research and development, environment, public parks, NASA..... who did I leave out?

On to serious matters, the economy looks good for the next five quarters. The fed rate is expected to get to 4.25% next summer, staying neutral in effect and letting the economy coast. Why do long term rates remain stable as the Fed raises short term rates? The inflation factors are stable at 2%. Hopefully, remain there. Growth in productivity will bounce around between 2 and 3%.

We have recovered three-fourths of the economic losses in the down turn. Revenues are up in all states, with almost no increase in tax rates. My question of the Fed rep was what happens if China chooses not to fund any more of our deficit? He smiled. China has the incentive to keep loaning because if the $ crashes China will lose a lot of equity. China owns a lot of us. We are getting ready to ask them and a few others for $200 billion more in loans. Soon.

The deficit will probably double the next 10 years. The haunting question is should we tell our grandchildren that this is all for them? We could come closer to paying our (tax) bills. We are the second least taxed nation in the world, by per cent of gross domestic product. Half of Sweden's rate.

Mix in with that a real shocker. We have all heard that cutting taxes boosts the economy. We are told that every day. How many times have you been told that increasing government spending boosts the economy, by the same rate? Research shows very similar effects. So do not cut taxes by 10 billion. Improve the infrastructure by 10 billion and you have long term benefit plus an economic boost. Fiscal conservatism at work.

Hmmm. Should we welcome the Katrina expense as an economic boost? Not too quickly. That depends on the efficiency of the investment, which is clearly up for grabs and is the true test of conservative philosophy.

I was haunted in all of this by public attitude, which has more power than laws. We spend $$$ on SUV and say that is cool. We spend a similar yearly amount on health care and say that is bad. The public seems to feel that if they spend as they please all will come out O.K. One of the speakers noted the old timer's wisdom: “A frog at the bottom of the well sees only sunshine.” Sounds cute, but I think that is all it has going for it. The frog may see only muck and a light that is not attainable. Some of the poor in our country have come to that conclusion.

How do we move ahead, bottom line? Research and development won support from almost all sectors. That is great news for Nebraska, because we can do R & D across the state. In a quick image, Idaho must decide the balance between potato chips and computer chips.

We really need the brightest for R & D. Bill Gates shared a humorous experience. His company went to India to get the brightest who were also trained how to use brightness. Hired 40. The headline in India was: “Bad news. Microsoft is taking 40 of our best out of the country.” The headline in Seattle was: “Bad news. Microsoft is importing 40 of India's best.” He assumes India has good news, because half of the recruits will receive our best training and then go back to India to improve that country's production. But he was obviously frustrated that we do not understand that the 20 who remain will produce a major bonus for our economy.

This may sound dull, but the Boeing president enforced Gates. He said we need the brightest to be “integrated systems thinkers.” The premium goes to the researcher who has 1. basic skills, 2. thinking skills and 3. personal qualities. This becomes more clear as he applies it to the three basic tasks of an integrated systems thinker: 1. acts with accountability, 2. can pick the right time for the right things, and 3. engages more stakeholders (most of us) in development of the ideas/products.

Hoo Boy. Each morning as I sit on the edge of the bed I think, “I must get my thinking integrated."

Try it.

Lowen