Thursday, December 11, 2008

Taxation and Beer

Simple economics about taxes

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid 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.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
'Since you are all such good customers,' he said, ''I'm going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $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 drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They 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 each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink 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. He pointed to the tenth man,' but he got $10!'

'Yeah, that's right', exclaimed the fifth man.
'I only saved a dollar, too. It's unfair that he gotten times more than I!'
''That's true!!' shouted the seventh man.
'Why should he get $10 back when I got only two? 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 drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our 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 anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia

For those who understand, no explanation is needed
For those who do not understand, no explanation is possible

Friday, November 07, 2008

The Virtues of the Electric Car

Everyone has seen the ad where the smart looking lime green car rolls up on to the suburban driveway and the astute owner gets out and plug the moral vehicle into the electrical outlet. The piece finishes with some mention of us all doing our part to clean up the planet. I watch this ad nine to ten times a day always wondering the same thing. Is electricity really a better alternative than gasoline? I mean sure the car doesn’t produce pollution directly, but where do people think electricity comes from? 57% of electricity in the lower 48 is produced by burning coal.

Here is a breakdown of burning coal

What are the environmental issues?
The popularity of coal is largely due to its low cost.
Nevertheless, coal power plants are responsible for 93 percent of the sulfur dioxide and 80 percent of the nitrogen oxide emissions generated by the electric utility industry.

These emissions spawn the acid rain that is eating away red spruce forests in the Northeast and Appalachia, and rob previously pristine streams of brook trout and other fish species in the Adirondacks, upper Midwest and Rocky Mountains.
Coal emissions also cause urban smog, which has been linked to respiratory ailments, and coal-fired power plants also contribute to global climate change. Coal plants emit 73 percent of the carbon dioxide emitted into the atmosphere from electricity generators. By releasing the energy stored in coal, large quantities of carbon dioxide that have been stored in the coal for millions of years are released back into the atmosphere, increasing the threat of global warming. Coal plants are also a major source of airborne emissions of mercury, a toxic heavy metal.
Federal law requires that air pollution be kept within limits. However, these limits are significantly lower for older coal plants than for newer ones. Even when kept within the air emission limits set by the Clean Air Act, state-of-the-art coal power plants still produce significant damage to human health, public and private property, and ecosystems.

I suppose we could always resort back to damning up all the rivers to produce more electricity. That would sure make less of an environmental impact than a small wellhead sticking a foot out of the ground!

Wednesday, October 22, 2008

The Difference Between Political and Economic Freedom

The notion that economic freedom precedes political freedom is a popular myth amongst academic leftists. Perhaps you have heard "Well who cares about ideology when there is starvation" or the bearded close fisted revolutionary yell of "bread precedes liberty" Ironically ivory tower socialists claim philosophy or ideology "is a middle class term throw away" term without any practical implications because men’s needs are primarily economic and not political or said differently physical instead of intellectual. Declaring man’s needs as material and that the mind is of no importance is not original; it’s an essential tenet of Communism and is rehashed in many alternate forms by contemporary leftists. Believing man’s needs may not move beyond the material until his physical needs are met is naïve at best as it is easily seen to be evidentially false in both historical and logical contexts.

Historically the idea is radically false. Never in history has an increase in economic wealth existed prior to political freedom. Liberty preceded wealth in ancient Greece. Rule of law (rule of law awards liberty because it frees people from being ruled by the unpredictable arbitrary whims of a tyrant. Instead there is an open code of laws which all men, regardless of birth, must adhere to) lead to the prosperity in ancient Rome. Free trade—the Corn laws— led to the industrial revolution in Great Britain, The bill of Right led to America being the most prosperous county in the modern world and freedom preceded wealth in 20’th century South Korea, Hong Kong, And Japan. And in contrast evaluate the economic freedom produced in historically politically un-free countries—China, North Korea, Palestine, Cuba, Iran, Iraq, Sudan and East Germany. This is not a coincidence because individual freedom and limited government are absolutely necessary for obtaining man’s most basic needs and material wealth.

Logically the notion that man can be a slave ruled by force and still be economically prosperous—on any general level— is false and ultimately arbitrary because the assertion refuses to attach itself to any context. It fails to take into account how material wealth is created or how physical requirements are most efficiently met. To claim they both exist separately and independent from one and another is absurd. They are not corollaries but rather they are related causally. Man needs to be free for the very reason of meeting his most basic goals. A moral code that says man has no right to his own life, or to the rewards he produces is antithetical to in every way to economic freedom. To deny man freedom is to condemn him to death for the very reason that on a grand scale he will not be able to meet his physical needs.

Marxists claim that philosophy is a bourgeois pastime of no relevance to the real world yet this philosophical misunderstanding has lead to over 100 million deaths. "Philosophy" and "Freedom" are not unimportant middle class leisure words but rather they are some of the most important concepts man has ever created and without their understanding we doomed to endless misery, slavery, famine and warmongering

Tuesday, October 21, 2008


The other day I was bemoaning the point that Canadians are the second most taxed people in the world, second only to China. Second to China is only good if we are talking gold medals at the summer Olympics—in terms of taxation it is brutal. I was ranting about 30% of my paycheck, 5% on everything I purchase (recently $25,000 on a house), property taxes on that same house I already own, GST on gasoline taxes….etc. Anyway a co-worker overheard me and quipped triumphantly “Oh I guess I’m not as greedy.”
“What do you mean?”
“Oh well I ma not as concerned about money. I don’t mind doing my fare share.” She smiled. I scowled.

My willingness or unwillingness to pay exuberant taxes is not an issue of greed rather it is an issue of passivity. I have no qualm with someone donating their earned wealth to whatever cause or causes them deem necessary. I support freedom of choice. Philanthropy is a choice and a highly dignified one at that. I support certain charitable activities, and I suppose that that is the norm rather than the exception. People that succeed are usually only more than happy to give back to the country and community that helped give them that chance.

My hatred of over taxation is an issue of liberty and freedom. I don’t believe in a large interventionist government redistributing my wealth for causes that it deems necessary. I can make my own choices on whether I want to support PETA, the Heart and Stroke foundation, the arts, or political think tanks... My issue with over taxation has nothing to do with greed and everything to do with liberty. A free man does not work the first six months of every year to support his feudal bureaucratic masters. A free man is not passive about his freedom. It is his highest value. I am a free man

Thursday, October 16, 2008

Don't Blame Capitalism

Don't Blame Capitalism

This article was written by Peter Schiff
Here is a breakdown of the financial crisis that deals with the real perpetrators

Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.

Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.

Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.

Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.

Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.

And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.

Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.

The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.

The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."

Finally somebody telling the truth

Thursday, October 09, 2008

Popular Leftwing Misconceptions about the Right

After my last post, four Masters Students from Ontario have invited me to critically assess some of their articles they have published on their new blog. They are interested in a counter view point. I can respect that. As Hegel proclaimed higher ideas are born out of the thesis— antithesis=synthesis dialectic. So let’s give it a shot a roughneck against university academics.

The article historically traces ideology in Canada (from Keynes to Neo-conservatism) and offers us the chance to begin to make some conclusions about the consequences of those changes— albeit through a socialist filter. The conclusions are too broad to argue in 500 words, so let’s start with some of the premises. The article is predicated on popular leftwing misconceptions about the movement toward liberal markets and greater freedoms.

“to maximum state involvement of the Keynesian policies and recently back towards a minimalist neo-conservative view.”

Keynsian economics is a monetary policy not a political one. Keynsian monetary policy dictates that the government should inflate the money supply to match the demands of production. In that sense Keynsian economics is still the order of the day. The Austrian economists would never have advised a 700 billion dollar bailout. In fact Austrian economics predicted the financial collapse which we are now witnessing.

Also neo-conservatism is hardly the Stephen Harper Conservative model. Neo-conservatism believes in world building, big military and are hardly opposed to deficit spending—see George Bush.

“and more specifically Ontario, the reigning political ideology favours minimal state involvement in economic life.”

I don’t consider the Canadian government to be anything near “minimalist intervention”. Powerful unions, crown corporations, wealth transfer payments, some of the highest tax rates in the world… the list could go on, but the point being that any interpretations that are to be made about the Canadian standard of living/economy should be made with the understanding that Canada is closer to socialism than it is to truly capitalist world.

This ideology (free market) rests on the theory that everyone will benefit from free market societies as wealth tends to have a trickle down effect.

Not exactly, the higher premise is that a free individual living in a free world will be better suited to produce wealth without the interfering of a distant bureaucrat. People are better left to making their own decisions than being led about by a powerful government. See the difference between Russia and North America.

"The social spending that is under greatest attack in Ontario is income maintenance programs….This program subsequently works to maintain inequalities, not lessen them."

All socialist schemes entrench class rigidity. Since the Paris Union man has been limited in the wealth he can produce he has none to pass onto his children, instead he passes on his title (job status), and his rent controlled apartment. This is all well and good, but what about the immigrants, the youngster with no nepotistic connections? Government control and high taxes have limited the private sphere and the public sphere/ and unions are being blocked by the third and fourth generation workers so what are the options for outsiders?

Wednesday, October 08, 2008

Circular Reasoning

At last week’s debate Jack Layton and Elizabeth May were clamouring for a “buy Canadian” policy. Jack said something to the effect that we shouldn’t be cutting down our pine trees and letting someone else build the tables. We should be building the tables too! Forget about the sound economic principle of Comparative Advantage and lets dig a little deeper into the rhetoric.

A few minutes later good ol’Liza remarked that Canada needs to do its part to help the developing world and pledged her support of 0.7 of Canada’s GDP on a yearly basis for this pet project of hers. Never mind the how. And then before the how could be asked Jack nodded in affirmation.

Let me get this straight Jack and Liza don’t want to let countries like Mexico and the Dominican Republic buy our lumber so they can develop their own secondary manufacturing industries, but at the same time supports a plan to extort Canadian money to hand over in the form of massive welfare packages to the very same people. Brilliant? Does anyone else have trouble with this type of circular reasoning?

The real difference lies in the results. Where international welfare encourages idleness, corruption (the emphasis shifts from productivity to creating a perception of neediness), and subordination (most aid money ends up in the hands of tyrants who use it to support their own agendas), while trade on the other hand, encourages technological advance, cooperation, independence, responsibility, and dignity and equality between countries.

Leftism has never been about goodwill, instead it is about power. Sure you may claim that we can all break close to even on wealth redistribution schemes but the point is that the government is now picking who wins and who loses, and it also gives them the ability to reward their friends and punish their enemies, in other words maintain control over their populations—by destroying the independence of the people over which they govern.