Politicians are like Sharks, Always Looking for a New Meal
by Ryan Hinds
To many Americans, President Obama’s 2014 budget seems like a compromise between the more partisan House and Senate budgets. Long overdue cuts to farm subsidies were proposed, and even entitlements (Social Security and Medicare) are on the table. But the incessant crusade to tax the rich is in full swing, with a Buffett Rule encore (a 30% minimum tax for millionaires). A $3 million cap on tax-preferred retirement accounts (IRAs and 401Ks) is another idea that would discourage savings in our already consumerist culture. Sadly, after all of what Mr. Obama brought to the table (or so he says), the budget leaves $439 billion in red ink after ten years.
It is harder to raise taxes on the more populous lower and middle classes, but President Obama found a loophole (no pun intended). If the government uses an alternate measure of inflation, known as the Chained CPI, tax brackets and government benefits will increase more slowly. If I receive a raise of 2% (to compensate for inflation), but the tax brackets only move upward 1%, I essentially pay higher taxes without the benefit of a true pay increase. In fact, the Tax Policy Center estimates that the average household will pay $100/year more in taxes by 2021 if the change is adopted.
Governments are like drug addicts: they increase taxes to fuel their never-ending desire to spend more. To see how, let’s enter my time machine and travel back one hundred years to 1913, when the federal government was a fraction of its current size.
1913 was not a good year for America. In addition to instituting the first permanent income tax, President Woodrow Wilson signed the Federal Reserve Act. But the top tax rate was a whopping 7% for those making more than $12 million annually. The first $70,000 to $90,000 of income (depending on filing status) was tax-free (all values are inflation adjusted). Today, all working Americans pay a higher rate in Social Security and Medicare taxes than a multimillionaire would have paid in income taxes 100 years ago.
By World War II, the income tax was not merely for the wealthy, but a patriotic way for all Americans to “support our troops”. Withholding made it easier to increase taxes, as the government could get its share of your paycheck before you did. Top tax rates hit 94%, but few actually paid this, such that in 1969, Congress enacted the predecessor to the Buffett Rule, the Alternative Minimum Tax (AMT). This Awfully Mean Tax (pun intended this time) was not indexed to inflation until 2013, so it has hit a substantial number of non-affluent taxpayers every year.
Rather than enact significant spending reforms and a pro-growth tax system (see my last article), politicians would rather kick the can down the road. It is much easier to make up new government statistics and target small groups of the population than to solve America’s daunting structural problems. In the near future, our fiscal issues will be unavoidable, and politicians will have to take drastic measures. The government of Cyprus tried to confiscate citizens’ bank accounts to pay its creditors, and sadly, I fear that the same thing will happen here.
As libertarians, we must fight for financial freedom (say that five times fast!). At the same time, how do we prepare for our own future? 401Ks have nice tax benefits, but I fear the government will go after them first. Or we can be like Ron Paul and primarily invest in precious metals. But when chaos ensues, will they be accessible and usable? I’m no financial advisor, but in my opinion, the best advice is to diversify, wait, and hope that, as libertarians, we can return America to fiscal sanity before it’s too late.