Tag Archives: Tax Donkey

Migration of the Tax Donkeys

https://i1.wp.com/www.zerohedge.com/sites/default/files/imagecache/fp_thumb/images/user3303/imageroot/20171006_donkey.jpg
A Great Migration of the Tax Donkeys is underway, still very much under the radar of the mainstream media and conventional economists. If you are confident no such migration of those who pay the bulk of the taxes could ever occur, please consider the long-term ramifications of these two articles:
Allow me to summarize for those who aren’t too squeamish: a lot of cities and counties are going to go broke, slashing services and jacking up taxes, all to no avail. The promises made by corrupt politicos cannot possibly be kept, despite constant assurances to the contrary, and those expecting services and taxes to remain untouched will be shocked by the massive cuts in services and the equally massive tax increases that will be imposed in a misguided effort to “save” politically powerful constituencies and fiefdoms.
These dynamics will power a Great Migration of the Tax Donkeys from failing cities, counties and states to more frugal, well-managed and small business-friendly locales. I’ve sketched out the migration in this graphic: the move by those who can from incompetently managed and/or corrupt cities/counties/states to more innovative, open, frugal and better managed locales.
Unlike Communist regimes which strictly control who has permission to transfer residency, Americans are still free to move about the nation. This creates a very Darwinian competition between sclerotic, corrupt, overpriced one-party-dictatorships whose hubris-soaked political class is convinced the insane housing prices, tech unicorns, abundant services, and a high-brow culture ruled by an artsy elite are irresistible to everyone, and locales that are low-cost, responsive to their Tax Donkey class, welcoming to new small businesses, employers and talent, unbeholden to a politically-correct dictatorship and conservatively managed, i.e. not headed for insolvency.
Not everyone can move. Many people find it essentially impossible to move due to family
roots and obligations, poverty, secure employment, kids in school, and numerous other compelling reasons.
However, some people are able to move–typically the self-employed independent types who can no longer afford (or tolerate) anti-small-business, high-tax municipalities and their smug elitist leadership that’s more into virtue-signaling than creating jobs and a small-biz conducive ecosystem. (Giving lip-service to small-biz doesn’t count.)
https://i0.wp.com/www.oftwominds.com/photos2017/migration-tax-donkeys10-17.png
Memo to hubris-soaked politicos and elites: in case you haven’t noticed, an increasing number of the most talented and experienced workers can live anywhere they please and submit their output digitally. In other words, they don’t have to live in Brooklyn, Santa Monica or San Francisco.
This is the model for many half-farmer, half-X refugees I’ve described elsewhere: people who are moving to homesteads with the networks and skills needed to earn a part-time living in the digital economy. In a lower cost area, they only need to earn a third or even a fourth of their former income to live a much more fulfilling and rewarding life.
Not that hubris-soaked politicos and elites have noticed, but only the top few percent of households can afford to own a home in their bubble economies.Paying $4,000 a month in rent for a one-bedroom cubbyhole in San Francisco may strike the elites living in mansions as a splendid deal, but to the people who have surrendered all hope of ever owning anything of their own to call home–not so much.
https://i2.wp.com/www.oftwominds.com/photos2017/LanceR-home-ownership.jpg
Though this chart is based on national data, there are many regional variations. When it takes a year just to obtain a permit to open an ice cream shop (in San Francisco), how much will the insolvent “owner” have to charge per ice cream cone to make up a year in hyper-costly rent paid for nothing but the privilege of being a scorned peon in a city ruled by privilege and protected fiefdoms?
https://i2.wp.com/www.oftwominds.com/photos2017/new-biz-growth6-16a.png
Dear Rest of the Country: you have a once-in-a-generation opportunity to eat the lunch of all the overpriced, corrupt, bubble-dependent locales that are convinced they are irresistible to the cultured, creative class. Many of those folks would actually like to own some land and a house without sacrificing everything, including their health and family.
Dear local leadership: here’s the formula for long-term success: welcome talent from everywhere in the U.S. and the world; make it cheap and quick to open a business, and cheap to operate that business; make public spaces free, safe and well-maintained; insist on a transparent, responsive government obsessed with serving the public as frugally as possible; support a political class drawn from people with real-world enterprise experience, not professional politicos, lobbyists, etc., and treat incoming capital well–not just financial capital but intellectual, social and human capital. Focus on building collaboration between education and enterprise–foster apprenticeships not just in the trades but in every field of endeavor.
Provide all these things and success will follow; ignore all these in favor entrenched elites and fiefdoms and go broke as those paying the taxes decide to save their sanity, health and future by getting out while the getting’s good.

 

 

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What If The Tax Donkeys Rebel?

I would hazard a guess that an increasing number of tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life.

Since federal income taxes are in the spotlight, let’s ask a question that rarely (if ever) makes it into the public discussion: what if the tax donkeys who pay most of the tax rebel? There are several likely reasons why this question rarely arises.

1. Most commentators may not realize that the vast majority of income taxes are paid by the top 10%–and that roughly 60% are paid by the top 4% of households. (A nice example of the Pareto Distribution, i.e. the 80/20 rule, which can be extended to the 64/4 rule.)

As David Stockman noted in Trump’s 1,500-word Airball, “Among the 148 million income tax filers, the bottom 53 million owed zero taxes in the most recent year (2014), and the bottom half (74 million) paid an aggregate total of just $45 billion. So let me be very clear. There was still $4 trillion left in the collective pockets of these 122 million taxpayers — even after the IRS had its way with them!

By contrast, the top 4% or 6.2 million filers paid $802 billion in Federal income taxes. That amounted to nearly 58% of total Federal income tax payments.”

2. Few commentators draw a distinction between earned income (wages and salaries) and unearned income (dividends, interest, and more broadly, rentier income streams from the ownership of productive assets.

Here are a few examples to clarify the difference. Let’s say a couple earn $300,000 a year–a nice chunk of change, to be sure, but since this is earned income, it’s exposed to higher tax rates: 33% and up.

The primary tax breaks available to wage earners are mortgage interest and tax-deferred retirement contributions (IRAs and 401Ks). But there’s only so much income that can be sheltered with these deductions. The household earning $300,000 may not own much in the way of wealth, and might even devote much of that income to servicing student loans, paying private school tuition, supporting elderly parents, etc.

If this household is typical, its primary wealth/assets are home equity and retirement funds. A house doesn’t generate income, and any income generated by retirement funds is unavailable until retirement age, unless the owners are willing to pay steep penalties.

Now compare the hard-working folks earning $300,000 with a couple who don’t work at all, but live off a rentier/investment income of $300,000 annually. Long-time readers know I often distinguish between assets that don’t generate income (the family home, etc.) and assets that produce income, i.e. productive assets such as family businesses, stocks, bonds, commercial real estate, etc.

If these wealthy folks are typical, much of their income is taxed as capital gains at 15%, not 35%, and they also avoid the Social Security/Medicare payroll taxes paid by wage earners and the self-employed.

If we separate out these sources of income and types of wealth, we can distinguish two separate classes of high-income taxpayers: those who earn a lot of money and pay a lot of taxes, but who don’t get much income from productive assets/wealth. Furthermore, any increases in the value of their primary assets (the family home and retirement funds) are not available in the same way as gains registered in stocks, bonds, and other income-yielding assets.

These high-earners are tax donkeys–they pay much of the nation’s income tax but have to work hard for that privilege. While they typically have considerably more wealth than lower income households, their wealth is either inaccessible or unproductive, i.e. doesn’t generate income.

The top 9.5% of households are tax donkeys to some degree, while the top .5% are typically rentiers who live very well off the income streams flowing from productive wealth (apartment buildings, ownership of businesses, stocks, bonds, etc.)

At some point, tax donkeys may decide that it’s no longer worth it to work so hard, and so they downsize, retire, sell the business, etc.–get out while the getting’s good. The average wage earner may reckon that those making the big bucks and paying the big taxes would never stop slaving away because their net income would drop–and who would voluntarily let their income decline?

I would hazard a guess that an increasing number of tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life. When the often overworked tax donkeys start bailing out, there may be no substitute source of taxes.

Those who reckon some new tax donkey will quickly take the place of the retiring tax donkey overlook the fact that many are entrepreneurs and/or highly experienced professionals who can’t be replaced as easily as a typical salaried person.

Courtesy of my esteemed colleague Lance Roberts, here are some charts that illuminate the widening disparities of income and wealth that differentiate those who pay little income tax, the tax donkeys and those who pay lower rates of taxes on unearned income: (Fed Admits The Failure Of Prosperity For The Bottom 90%):

Family Income:

https://i1.wp.com/www.oftwominds.com/photos2017/family-income9-17.png

Family Financial Assets:

https://i1.wp.com/www.oftwominds.com/photos2017/family-assets9-17.png

Business Equity:

https://i1.wp.com/www.oftwominds.com/photos2017/family-business-equity9-17.png

Source: ZeroHedge