Populism to Kill the US Economy?

Yesterday I finished a monologue by Manuel F. Ayau titled Not a Zero-Sum Game in which he explains the basis of economics with common sense passages like:

Understanding that in a market economy a person can only get rich by enriching others torpedoes claims to the moral high ground of those who propose that government redistribution of wealth is a means to alleviate poverty.


[In a market economy], one cannot "make a fortune" at the expense of others, but only by offering others a better deal and, thereby, making them richer.

On some levels some type of wealth is built through fraud (see the mortgage industry over the past 5 years), cronyism (see Iraq), and other nefarious means, but on average most entrepreneurs create wealth through efficiency improvements. Google makes so much money because they make advertising more targeted and automated. I do well because I help people get more exposure on Google at a rate much cheaper than what it costs to buy that traffic directly from Google.

You can take wealth creation and distribution as a concept and move it away from our own industries to everyday trade and consumption. For example, I had an eye appointment and just got my prescription today. Rather than paying retail in the store I decided to hunt online to save money. And that worked out well because

  • I found a discounter
  • that offered free shipping on a bulk purchase
  • there was no sales tax
  • I ordered enough that I got a $60 rebate coupon from the manufacturer
  • I found an affiliate link for a coupon that got me another 15% off my order (before the $60 rebate)

The net result is that I saved hundreds of dollars today due to the efforts of the above people. But if the government takes away their incentive to take risks in the hopes of profit (through higher taxes), then those cost savings to me as a consumer disappear. Thus I pay more to get less. Worse yet, as government spending increases it drives up the costs in most marketplaces it touches because it is not as efficient as individuals are.

Brian Provost highlighted a WSJ article about Obama's tax plan.

As ugly as that chart is, the situation is even uglier than that. If I am only taking home ~ 37% of my earnings and many of my customers are only getting 37% I get hit both directly and indirectly...I get a smaller piece of a smaller piece.

The WSJ article also highlights 2 more frighting issues

While Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike in the marginal rate with no deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world.

And the article also states that Obama is a protectionist who dislikes free international trade.

Mr. Obama has also opposed other important free-trade agreements, including those with Colombia, South Korea and Central America. He has spoken eloquently about America's responsibility to help alleviate global poverty -- even to the point of saying it would help defeat terrorism -- but he has yet to endorse, let alone forcefully advocate, the single most potent policy for doing so: a successful completion of the Doha round of global trade liberalization. Worse yet, he wants to put restrictions into trade treaties that would damage the ability of poor countries to compete.

All trade is from individual to individual. When intermediaries exist it is typically because they lower cost and/or make trade more efficient (like the use of cash does). If we block foreign trade we increase the cost of goods and services to our poor because they will not be able to benefit from the division of labor driven by lower overseas labor costs. Read Underdeveloping Indiana to see how absurd blocking free trade is as an international economic strategy.

The true reasons the US economy is so screwed up right now is because the government is already too big, we use our military in an attempt to force our view of the world onto other countries (economically inefficient and ineffective), and the average American feels entitled to consume more than they can afford while suffering from uncompromising intellectual sloth.

  • I can't vote for McCain because I would feel like I was promoting the spread of unjust wars, torture, and murder.
  • But I can't really vote for Obama if he wants to kill both my incentive to work and the economy.
  • I wish Ron Paul would have been nominated. :(

If you live in the United States, at what point would a tax hike be high enough to make you work less or move overseas? A 65% to 70% tax rate would probably do it for me!

[Update: a reader pointed out a couple other tax charts that did not look as scary as the above charts. You would think you could trust the WSJ, but I probably should have done more research before posting this...too often I let emotions get the best of me.]

Published: August 5, 2008 by Aaron Wall in business


Sam I Am
August 5, 2008 - 10:20am

Ah, but that's nothing. Come to Norway. 25% VAT, 14% employers taxes, another 30% or so on lowest salary + tax on (already taxed) capital and (already taxed) inheritance. Dividends tax rate at 28%.

Employees working for me end up with about 50% of what they cost our company. When you then pay 25% VAT, the math doesn't look good. Of course we actually have free health care and a whole whopper of other stuff like one year paid leave from the government with pregnancies, minimum 5 weeks holiday per year etc. One big difference is definitely the way the government handles their money though. Norway's army is small and they don't start wars that cost billions. But then again, Norway already has a lot of oil so the government doesn't have to go out and conquer other countries just to keep the oil flowing.

Personally I'd say the grass always looks better elsewhere. It rarely really is.

Art Name Thingy
August 5, 2008 - 11:13am

Don't come to the UK either, the overall tax is about 80% once you take fuel and other bits into account.

August 5, 2008 - 2:04pm

I like where the guy says something along the lines "if you do all that (tax raising) then you end up with (the productivity of) France".

But then again France a tax haven for rich people in Monaco (though technically it does not belong to France and all) with 0 taxes hehe.

Also, I've heard that there was a huge gap in productivity between the people in northern France (Paris, etc.) and in southern France, because people in the European south tend to be 'lazy' (or well into enjoying life..most people don't have a job their passionate about, unfortunately). Unfortunately, I don't have any figures on this, but I've been told by a French person before that the productivity in Northern France was twice as high as in Southern France lol.

August 5, 2008 - 2:38pm

The "rich" are typically business owners with the majority running small businesses.

The vast majority of people in the U.S. are employed by small businesses.

If you raise taxes on the "rich" you are raising taxes on small businesses the single biggest employer in the country.

Small businesses like any business are out to make money from their products and services (not to employ people).

Threaten those profits with higher taxes the first thing a business will do is look for ways to reduce expenses.

The single biggest expense for many businesses are their employees.

So the first thing to go are jobs, people are laid off, unemployment goes up, there it less money being spent in the marketplace and the economy goes down the crapper.

Is this not common sense? Is this not so obvious it's like a kick to the groin?

I've been convinced for along time that many people don't want to know the reality of things they just want to be told things that make them feel better without having to actually think things through or simply have others do and provide for them.

In many regards the U.S is becoming a nation of wimps and cry babies. I hate to say that. I love being an American but it's true none the less.

August 5, 2008 - 2:40pm

Wow, Norway sounds like a place I would never want to live. So basically the government takes more of my money and tells me what I get from it in health care etc. What if I don't need health care? Uh oh, still gotta pay for it in taxes.

First rule of economics... There is no free lunch. I am 100% more efficient with my money than any government would ever be. Anyone that understands economics knows that Obama and his Marxist view on life is a scary prospect for our standards of living in the US. I am sorry, but most of Europe is not really a place I want to emulate nor any other socialist government.

I am for a higher standard of living for all and a free market system unrestrained from government is the only way.

August 5, 2008 - 3:21pm

A very brave post, as I've always found that political posts are the first ones to fall to Godwin's Law.

I don't want to get into a long winded discussion on the rights & wrongs of various nations' political systems but there are a couple of points that spring to mind.

* The US (and many other Western nations) have always talked about free trade, but so long as it's only one way (especially in agriculture). As long as that continues to be the case all the talk about liberalising markets is just that - hot air that under-developed countries have to suck up whilst the big boys keep protecting their own industries.

* I seem to recall a report which showed that standards of living, education, health and all sorts of other things tended to be better in countries with a smaller gap between the richest & the poorest: this generally only happens with a distributive tax system of some sort.

Like I said, I'm not going to get into some huge discussion here, but do think that there are interesting points on all sides.

August 5, 2008 - 5:07pm

The US (and many other Western nations) have always talked about free trade, but so long as it's only one way (especially in agriculture).


I will be moving to Sweden in the next 9 months or so and the taxes there are pretty gnarley...40% for a engineer's salary and then another 25% sales tax...So gives you about 50% of your original purchacing power...unless you buy books; then its only 8% sales tax...just like California. Good thing I like books alot.

Here in Taiwan the taxes are pretty reasonable...like 15-25%, depending on your tax bracket. I can live here very comfortably for about 1,500US/month(I have no kids).

August 5, 2008 - 3:40pm

I was born in England and would go back at the drop of a hat - my present circumstances own home, medical benefits (yuk) happily married and wife makes $$$s, being self employed since 1997 and having a widowed MIL keeps us here.

I have lived in Norway for many years (Tromso) and would go back there too.

Both countries are very good places to live and the UK will get better again when the Lib Dems get back in.

Both countries have super duper safety nets and here in the US you are totally up the creek if anything goes wrong.

If I was sick and we were uninsured we could wave goodbye to our house....

Now who said Ron Paul ;) Looks like Obama for us without a doubt as war is for fools and horses


Q? I love Timberland footwear and expensive clothes BUT loathe the Made in China (or elsewhere tag)

August 5, 2008 - 3:44pm

gee Aaron, I like what you are doing with your blog these days, but are you really complaining about tax hikes for the top bracket? Did you know that making rich guys like you a little richer does very little for your happiness and lifting poor people out of misery does a lot for their happiness? citation:

I'm a big believer in lowering the world's net misery, rather than waiting for it to get so bad that privileged humans like you and me are targets.

What I'm really surprised about though is that you don't seem to understand that there are opportunity costs to every to every economic choice. It's pretty irrational to rail about the price without examining the benefit, what does Obama want to give you for your money?

August 5, 2008 - 5:34pm

Before you call me rich please note that an above-average income does not make a person rich. Consider the following

  • If you make a living off the Internet and make big bets on websites and then have Google wipe away your investments from time to time the level of cashflow can change drastically...just ask anyone who has ever had an AdWords account Google-slapped or a top earning site banned.
  • I live in the San Fransisco area, where $250,000 may not be enough to support a family on and afford a local home (with decent ones running at $1,000,000 plus).
  • You assume I am rich, but I might end up paying 70% off the top, then need another 35% to pay for health expenses I can no longer afford. I may or may not have health insurance and I may or may not have heath conditions that preclude me from getting coveraged. If I am paying 70% and still have no guaranteed coverage that sucks beyond the scope of my imagination.
James Dunn
August 5, 2008 - 3:49pm

That's just what we need when the economy is in the toilet is more taxes. Shouldn't there be some sort of requirement that you have to take a basic economics class before you are allowed to restructure the world's largest economy?

Many of our founding fathers wanted only property owners to have the right to vote. I don't think it would be a bad idea if receiving welfare forfeited your right to vote. Who wouldn't vote for someone who wanted to tax others to give to you?

August 5, 2008 - 4:54pm

Bush didn't raise taxes, he raised the deficit, which is the same damned thing. You can't "spend money" and not call it "tax money". You can only, legitimately, claim to "not raise taxes" if you don't "fund government by deficit spending". Money spent is money taxed. Political liars and con men hide their tax increases "in the deficit". If you want to see where your tax increases are look at the TRUE deficit, which will run approximately $900 billion in 2009 when all true costs/expenses are accounted for, according to some fairly reliable third-party estimates/accountings.

So, from my economic perspective, Bush passed some of the largest "tax increases" in history. From my economic perspective GWB's "I'm not raising taxes" has been one of the consistent biggest lies of U.S. history.

IF Bush taxed responsibly, i.e., if he ran the government like financially responsible people run their households - on a pay as you go basis - your current tax rate, to foot the bill for GWB's profligate spending, would likely BE 50% or more depending on tax being indexed to income. So don't argue to me about the horror of the pending "tax increases" if Obama is elected. TAX RATES are already REALLY HIGH. The "real tax rate" is tucked away, in the deficit spending. Those who think otherwise are unconscionably in cahoots with GWB's sickening willingness to stick future generations - the millennials, for example - with the bill for his HIDDEN TAX INCREASES. (Sorry about the CAPITALs but GWB's "no tax increase" rhetoric is infuriating. It's utter BS.)

Either we are collectively morons, for believing that "taxes are low and GWB did it" or we are merely asleep at the wheel and stand some small chance to wake up, grow up and stop this nonsense of killing the prospects of future generations by shoveling debt upon them.

GWB has presided over some of the largest tax increases in history and anyone who holds out the argument that GWB has "done otherwise" is a moron of convenience, at best, and a con man otherwise.

August 5, 2008 - 5:27pm

Agreed. One need only look at the debt, deficit, and rate of inflation (the hidden tax nobody talks about as such) to see the Bush tax hikes. Numerous local Chinese bakeries are raising prices 20%.

August 5, 2008 - 4:50pm

I agree with you that over spending is a terrible problem in the government. Sooner or later that will come back to bite us in a huge way. Government should be run like financially responsible households like you said, BUT raising taxes does not fix the problem. It only increases it. We need less government, not more. Don't lie to yourself and think that Obama or any socialist is the solution to that problem. Spending LESS is the only solution. Just multiply the problem with socialist policies. Unfortunately, we don't have any good choices this election, so I will be voting against Obama this year.

It would be nice if every voter was required to study economic principles before they were allowed to vote.

August 5, 2008 - 5:19pm

"Less government", without specifics, is just more economic bullshit.

Less "what government"? Less Food and Drug Administration? Fewer food inspections? Less National Institutes of Health? Let's do less about the next flu pandemic? Less Medicare/healthcare for the aged? Fewer bridge inspections? It's all in the specifics.

"Less government" is nothing more than a mind numbing, sleep inducing mantra. Keep it to yourself. Your little hypnotic tricks don't work on me.

I'll never vote for "less government" any more than I'll vote for "more government". I'll vote for that government that makes the most sense by making the most of my tax dollars and cents.

August 5, 2008 - 5:25pm

I meant less government spending :)

Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare. - James Madison

The easiest spot to make large cuts is going to be military spending. Given that we spend nearly as much as the rest of the world combined there has got to be plenty of fat to trim in there.

Then from there something should probably be done to ensure social security, Medicare, and Medicade stay funded for a long time. Some likely options include things like a reduction in future benefits for people like me.

August 5, 2008 - 5:27pm

Sorry but you Americans are screwed.

Even if you setup shop in country X that has NO tax you cannot escape the IRS. They make you pay US tax on income earned outside the US.

Divorce your wife Aaron, marry an English girl, take out UK citizenship, dump your US citizenship, move to country X (with no tax) and then you WILL pay no tax.

Then divorce the English wife (or pay her off, it is was a marriage of convenience), re-marry your American girl a la Burton/Tailor and then you're FR££......

PS. david who said -

"Both countries are very good places to live and the UK will get better again when the Lib Dems get back in."

Yeah, when the Lib/dems get back in. You talk as though they were recently in Government, last time was what about 100 years ago!

August 5, 2008 - 5:30pm

My wife is not a US citizen yet. There is little benefit for her to become one (voting in exchange for jury duty and guaranteed US taxes for a decade after moving out of the country).

August 5, 2008 - 5:51pm

The Guardian recently had an article related to this as well, albeit from bankers and lawyers in the top 10% of British earners. Their ignorance of the situation was laughable, if it didn't translate into them living cloistered detached lives, and the remaining 90% being in threat of financial ruin if a medical emergency arose. Anywho, the link:


Personally, I think there should be no taxes on the first $30K a person earns. None. Especially here in the US where the government is the biggest addict in the room when it comes to oil and militant spending. Maybe if we didn't have a massive standing army, we'd be a little less likely to get into frivolous wars.

August 5, 2008 - 7:00pm

Amen, Aaron. It seems there is a growing belief in the country that Europe is SO great and Europe's government has got it figured out. Not really...just look at the unemployment rate. The more we move towards a free market global economy we can increase the standard of living for everyone.

August 5, 2008 - 8:02pm

"I'll vote for that government that makes the most sense by making the most of my tax dollars and cents."

Sorry, but no government will ever make the most out of your tax dollars and cents. You should vote for the government that spends the least... that way you don't contradict your original post about GWB. I'll let you stick to the mantra's and mind numbing rhetoric.

The only thing good any government can do is protect personal freedom, otherwise get out of the way :)

August 5, 2008 - 8:18pm

"Less "what government"?"

let's start by bringing home our servicemen and their families. 125,000 americans live in japan, and worldwide we have almost 1,000 bases in other nations. how many countries have bases in america?

August 5, 2008 - 9:43pm

Niiice chart!
Gotta love those WSJ opinion pieces.

August 5, 2008 - 10:08pm

It sounds like you hold some Libertarian ideas. I just Stumbled upon this list of quotes.


August 5, 2008 - 11:35pm

"Sorry, but no government will ever make the most out of your tax dollars and cents."

Fella, when is the last time you actually served time in a low paying elected role? I served time as the Mayor of my little burb, serving 2 3-year terms in office as committeeman and then as mayor, and then choosing to not run again. It was public service, not a career.

Get a grip and a clue. You insult all manner of decent hardworking people - many who work public sector jobs - with your absolutist crap.

While your at it tell me how well the private sector is managing the billions of dollars being pumped into Iraq.

August 6, 2008 - 1:24am

While your at it tell me how well the private sector is managing the billions of dollars being pumped into Iraq.

I thought it was the US government that created and mis-managed that blunder.

Look no further than the presidential humor videos about not being able to find "weapons of mass destruction" while hundreds and thousands of people were still being killed in Iraq.

August 6, 2008 - 2:44am

Random off topic question you have probably already answered a dozen times:

Why did you decide to price your training program at $100 instead of $99 or $95?


August 6, 2008 - 3:22am

I think $99, $97, and $95 are prices often used by internet marketers selling something not worth buying. And I wanted to look relatively expensive rather than relatively cheap to filter out the lower end of the market.

August 6, 2008 - 3:03am

U.S. government "created"? Hmmm . . Fear created? WOMD created? "Destroy all those Iraqi Al Quaeda training camps" created? "Regime change" created? "Do something!" created? "No one is going to push U.S./US around" created? A war created not out of courage but by virtue of a lack of political courage to say "No"?

We the people were sold a bill of goods. Shame on us, not on "the government". This war is on us, just like ending this occupation is once again going to be on us.

P.S. Sorry for the overall cranky tone Aaron. I sometimes give myself license to engage when reason suggests that the better course would be to find a beach and to start ordering frozen drinks with little umbrellas and lots of rum. ;)

August 6, 2008 - 3:21am

Hi Webwork
But when people are lied to (intentionally and often) they come to the wrong conclusions. And in spite of repeated lies most Americans did not want the Iraq war.

If George W. Bush held himself to the standards he held Saddam to then they would have shared the same fate. But do as I say, not as I do...

August 6, 2008 - 5:04am

Wow Aaron,

You got a lot of posts on this one in a relatively short period of time. This post got more attention than the BrowseRank post!

- Sean

August 6, 2008 - 7:46am

I guess that is how it works Sean. Everyone is somehow at least a bit interested in politics, and nearly nobody cares about the potential future algorithm research stuff. :)

August 6, 2008 - 6:21am

Webwork, I am still waiting for a decent point besides the government needs to be fiscally responsible. You keep talking, but not really saying anything. What is your point? Are you defending Obama or what?

August 6, 2008 - 7:24am

I don't see Obama as a qualified candidate at all. Right now the country is so divided, anybody can come in and the more different from Bush that you are, the more MTV is going to plug you to the young people. Honestly, this is the election year with the worst candidates ever. Maybe if Joe Lieberman was to switch parties and become McCain's VP that would be cool.
but I guess Obama may win and be up there for 4 years to keep the media happy until someone more serious comes along to take care of business.

And whether you are rich or not shouldn't matter when it comes to voting. Tax breaks for businesses stimulate the economy. It benefits everyone. Sure you can try to cater (publically) to the masses and look cool "getting the upper 5 percent", but will it benefit us in the long run?


August 6, 2008 - 8:14am

Hasn't this country had enough of the joke that is trickle-down economics? Tax cuts for the rich gets you things like UBS being investigated for helping 200,000 rich Americans hide their wealth and avoid taxes. It *erodes* the tax base and fuels debt, which might as well be infinity at this point. Only in theory does it fuel growth by reinvestment by businesses. I have run my own business for the last 5 years and make pretty good money. My marginal tax rate is like 12% LESS than it was when I had a normal job, thanks to IRAs, 401ks, and tons of tax deductions. Hell I write off 20% of my house's expenses, all thanks to business-friendly tax codes. Do you really expect me to believe that you will work 2% less hard if you are taxed 2% more? Someone has to pay the bill, and economies grow fastest when the rich are taxed the most. If you want to destroy an economy, punish the middle class. It's very simple.

By accrual standards (the only ethical way to account), we owe 60-80 trillion in unfunded liabilities. All of the 'economic growth' of the last 10 or so years has been fueled by bubbles - first tech, then housing. There are no bubbles left to blow that can keep the party going.

The fact is neither candidate even talks about the massive, crushing deficit. Neither tax plan will generate a single extra dollar in tax revenue. We are still digging the hole deeper at a mind-boggling rate of 500+ billion/year, and that doesn't even include our illegal and immoral war, which has just been mindlessly thrown onto the country's credit card.

I'm an independent. I'm no fan of Obama after he legalized the destruction of the 4th amendment without even a whimper. But Jesus, how can anyone support a 71 year old who can't go minutes without a senior moment and thinks drilling for oil (which will start producing in 10 years) is an energy policy? Every election is a selection of evil #1 and evil #2. I'll take the guy endorsed by the last Fed chief with integrity, Volker. The only thing that could save this country from another depression is 18% interest rates, but Obama lacks the balls to fix it.

August 6, 2008 - 2:40pm

"Every election is a selection of evil #1 and evil #2."

Lately, sad, but true.

August 25, 2008 - 4:41pm

"But Jesus, how can anyone support a 71 year old who can't go minutes without a senior moment and thinks drilling for oil (which will start producing in 10 years) is an energy policy?"

This is how I interpret this logic:

My family is hungry and may starve. I know! I know where to find seeds for different fruits and vegetables. I can plant those in my yard and grow food to feed my family...oh wait...it will take months before before I have any food to eat...shoot...guess I'll not even get started and try to find other unproven untested ways to get my food....

The thing is, we know where the oil is, we know how to get it, we know how much it will cost, we know how to make it usable, we know how long it will take to get it, we have a proven distribution system, and the public is comfortable and familiar with it.

Alternative fuels:
we kind sorta know what they are, we don't know how long it will take to get a usable form in place (10 years versus a complete unknown...), we don't really know the costs, there is no infrastructure in place to support and distribute it and people are not familiar with it.

It will take decades to get the US on an alternative energy plan that is used by even half the population.

So here is a novel idea...

Do both...get the oil domestically so we don't need to depend on overseas supplies and also invest very heavily in alternative fuels.

Can the US not multitask? Why does this have to be liberal vs conservative issue?

As for taxes, I know how to fix the problem.

Instead of automatically taking out taxes on everyone's paycheck. Let us get all of our money.

Then, every month the IRS, Social Security and Medicare folks send us a bill for what we owe into each system.

I bet less than 3 months pass before people are outraged (of all economic "classes") about how the government is "stealing" from them.

Why else do you think the taxes are taken out first, it's so we don't have to even think about them.

I have my first child on the way...matter of weeks...and more than anything I hope he has truck loads of common sense over intelligence because it will get you so much further in life.

My self righteous rant aside...I don't like either candidate :-)

September 10, 2008 - 10:25pm

I'm not sure where those 2 other charts in your update to this post are getting their data from but a CPA friend confirmed for me that the WSJ chart is an accurate representation of the tax increase. You have every reason to be concerned about what that kind of taxation with do to innovation in this country.

Also, I am not directly impacted by capital gains but I'm really frightful Obama's plan to nearly double it will do to investment in new business in America.



September 10, 2008 - 10:39pm

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