The Larger Lessons of the IRS Scandal

The Larger Lessons of the IRS Scandal: Far from being merely a one-time error, the IRS scandal is the result of... http://t.co/hbBwzIPNMl

— American Thinker (@amthinker) June 6, 2013

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One of the truest and most profound observations ever made was Lord Acton's "Power tends to corrupt and absolute power corrupts absolutely." All the scandals now engulfing the Obama administration are applications of Acton's profundity.

From the standpoint of ongoing damage, a danger even greater than corruption is abuse. Power, especially concentrated power, almost inevitably gets abused. If our goal is to avoid or minimize the abuse of power, our challenge is to minimize the concentration of power.

We have basically only two available choices for organizing a society and economy -- socialism or the market. The difference between those two systems is primarily a matter of where power and control will be vested. Will control be centralized or decentralized?

The benefits of organizing an economy and society around a voluntary-exchange market system are numerous. The most obvious is that the market is the most powerful wealth-producing force that ever existed.

Besides the vast difference in terms of wealth creation, a market economy and socialism differ in regard to who has power and whether or not power is concentrated. A voluntary exchange economy is the greatest limiter of concentrated power ever conceived. Socialism concentrates power, the market disperses it.

When you disperse power, you defang it. When you divide power into millions of pieces you remove most of its ability to do major and lasting damage. The greater the concentration of power, the greater the abuse. North Korea, Zimbabwe, and Cuba are extreme examples of that relationship.

Private businesses have strict limitations on their power mainly for two reasons -- (1) they interact with people through voluntary exchange, and (2) they have competitors. The existence of competitors means that their customers have alternatives. When a privately-owned business abuses any of its customers it pays a price in terms of lost sales.

Unlike the government, there is almost nothing that a private company can actually force you to do. You interact with Exxon or Microsoft by way of voluntary exchange. Each of them must entice you away from the many ways you can spend your money by offering something that has value to you. That something has to be competitively priced.

The IRS's abuse of power is aggravated by the characteristics of the power it has. Of all the thousands of government agencies, the IRS is the most intrusive into the lives of the citizenry. Law-abiding citizens are more afraid of the IRS than they are of the FBI.

The Internal Revenue Code is massive, incredibly complex, and incomprehensible. The complexity also opens the door to abuse. One reason most people are afraid of the IRS is that there are so many rules no one can know for sure he's not in violation of at least one. The sheer number of rules and complex definitions opens the door to selective enforcement. The agency's targeting of conservative groups was a case of selective enforcement.

The complexity of the code is also largely to blame for the fact that the agency adds insult to injury by taking not only our money, but also significant chunks of our time. Complexity also makes true enforcement impossible.

The operation of public agencies is qualitatively different from how the private sector operates. Entities in the public sector tend to be organized for the benefit of the employees and not the customers. Tenure, for example, is far more common in the public sector than in private companies. Because of tenure it is almost impossible to fire incompetent public school teachers. That's good for the incompetent teachers, but bad for the students.

Government agencies almost never have to worry about survival, no matter how poorly the agency is doing its job or even if it's a job that still needs doing. No private company's survival is guaranteed, especially over the long run. Private companies must forever fight for survival. Public entities have virtual eternal life.

When you deal with the IRS, the EPA, or your local building-permit bureaucracy, they hold all the cards. Each of these agencies and others like them has you at a distinct disadvantage. They have you at a disadvantage because you have no other options. They have the power to stop you in your tracks -- "my way or the highway." There is only one IRS, only one EPA. Power and control are largely a function of having alternatives. When conservative groups got abused by the IRS, there was no competing agency for them to try.

Obamacare will be an even more obnoxious intrusion into how we live our lives. A sad and dangerous detail of this further concentration of power is that the IRS will be the enforcer of Obamacare. We are about to embark on a substantial increase in the power and control of the IRS. The IRS is currently in the process of hiring an additional 16,000 agents to carry out its new Obamacare duties. The IRS will decide who will receive subsidies.

If Barack Obama achieves his ultimate objective of a "single-payer" health care system, there will be only one health care alternative. Single payer means single choice.

Being able to choose among alternatives is an essential element of freedom. Freedom doesn't mean much if you have only one option.

As a way for humans to interact, a decentralized market economy is vastly superior to the centralized, coercive, one-size-fits-all socialist model. This is true now and will be even truer in the future. The market offers consumers an ever-expanding menu of choices. If anything, the market's superiority is widening.

The popularity of socialism is a bubble. Admittedly it's a bubble with a long life span. Bubbles, however, eventually burst. Usually the demise of bubbles results in painful adjustments. The demise of socialism, however, would be a boon to mankind.

This particular scandal will eventually go away. We can replace individuals at the IRS but the structure will remain. It's the structure, not the individuals that is the problem. The only solution that will actually work in the long run is to stop and eventually reverse the growth of government. ______________________

Ron Ross Ph.D.A is an economist and author of The Unbeatable Market. He can be reached at rossecon@gmail.com.

The Democrats’ Rough Re-entry Into Reality

Is there a limit to self-delusion? And if there is, what happens when the limit is exceeded?

New York Times columnist Gail Collins began her column last week as follows, “When Democrats run into each other on elevators, they exchange glances and sigh. Or make little whimpering sounds.” She went on to observe that “Democrats are going bipolar. Democrats spend all their waking hours thinking about the swing states. If Wisconsin starts looking wobbly, their day is ruined.” It makes you wonder what their days are going to be like if Obama loses the actual election.

Liberals are angry and frustrated with Obama. He, however, is not the real object of their anger. Someone once observed, “Our strongest anger is reserved for ourselves.” (If you doubt that, just ask any golfer.) Liberals are angry and frustrated with themselves because they bought into the fantasy of Barack Obama.

For the past four years conservatives have been asking themselves, “Why can’t more people see what a fraud this guy is?” That may be an impossible question to answer, but the population of those who see him for who and what he is seems to be growing.

One of the things that makes Hans Christian Andersen’s “The Emperor’s New Clothes” such an enduring parable is how it is both absurd and painfully true. The emperor was naked, but no one wanted to be the first to admit it. A kind of mass hysteria affected the citizens. Once a child spoke the obvious truth, the delusion was shattered. If there were not a lot of truth about human nature reflected in the story, it wouldn’t be such a classic.

Obama’s nakedness is not physical but rather intellectual. Time magazine’s Joe Klein said recently, “Anyone who says Barack Obama is not intelligent is either crazy or bigoted.” What makes Klein so certain that Obama is intelligent? The evidence is all in the opposite direction. Forrest Gump famously said, “Stupid is as stupid does.” The corollary is also true. Smart is as smart does. Was choosing Joe Biden as someone to be a heartbeat away from the presidency a smart decision? If you think so, you need to watch the video of last week’s vice-presidential debate.

Another reality that may be penetrating the liberals’ self-delusion shield is the Benghazi debacle. It’s been said that a liberal is someone who will not take his own side in a fight. A perfect example of that perverse attitude is how Obama, Hillary Clinton, and Susan Rice were all so eager to take the terrorists’ side in the attacks on our embassies. They used the strongest possible words in condemning the obscure video and its creator. Ms. Clinton said the video was “disgusting and reprehensible” and “truly abhorrent.” By blaming the video so vehemently they effectively implied the attackers were justified. They took the terrorists’ side in the fight. They basically said, “We totally understand why you wanted to kill our ambassador. You don’t like America; neither do we.”

Democrats ridiculed Clint Eastwood for his empty chair speech at the Republican National Convention. In retrospect his metaphor appears to have been spot-on. Eastwood later observed that “Obama is the biggest hoax ever committed on the American people.”

Even if some Democrats are seeing the hollow reality of Barack Obama for the first time, it’s unlikely to affect their overall mind-set. When a liberal has a choice between fantasy and reality, he will choose fantasy every time. There’s no reason to think that will change anytime soon.

Beyond the specific reality of Barack Obama, the Democrats’ fundamental problem is their adherence to liberalism. Obama is a glaring manifestation of liberalism. If he fails to win reelection, Democrats will blame him. They will do everything in their power to deny where the real blame truly belongs.

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◼ The Democrats’ Rough Re-entry Into Reality October 19, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Plot Thickens

What’s the only private business that gives the equivalent of an obscene gesture to forty percent of its potential customers? Hint: it’s also the only private institution mentioned in the Constitution. The answer, of course, is the press, or more specifically, that segment of the press known as the mainstream media or MSM. The MSM is a strange animal in more ways than one, an animal with puzzling behavior.

The MSM consists of ABC, CBS, NBC, and most big city newspapers. The supporting cast includes CNN, MSNBC, and NPR.

If you’re a conservative there have probably been countless times you’ve felt disgusted and infuriated at the bias, double standards, and lack of balance exhibited by the MSM. As a conservative I can’t count the times my mouth has dropped by what I’ve heard said and written in the mainstream media. The bias is dumbfounding.

According to the latest installment of a poll Gallop has conducted since 1992, 41 percent of the respondents self-identified as conservative, 36 percent moderate, and 21 percent liberal.

Another recent Gallup poll reported that “Americans’ confidence in television news is at a new low by one percentage point, with 21% of adults expressing a great deal or quite a lot of confidence in it. This marks a decline from 27% last year and from 46% when Gallup stared tracking confidence in television news in 1993…. Confidence in newspapers is now half of what it was at its peak of 51% in 1979.”

Obviously the MSM is paying a high price for its bias and lack of balance. Scoring only a 21% confidence level is quite an indictment. Obviously they have lost the trust of more than just conservatives. The MSM has squandered its credibility.

By all outward appearances it seems that their compensation is being provided by the Democratic Party. They behave as though their primary loyalty is to the Democratic Party rather than the news organization they ostensibly work for.

The MSM is the only private business that seems all but immune to the profit motive. If they simply treated all of their audience with respect it’s hard to tell how much how much of an increase they would see in their gross and net revenues.

It makes me wonder if they have any explicit or implicit mission statement. For example, is it, “My mission as a journalist is to choose a political candidate and then select and slant what I report so as to help him/her get into office.” Or possibly, “My mission as a journalist/reporter is to show my like-minded colleagues that I’m one of them.” I simply cannot conceive what they perceive their professional responsibilities to be. It apparently never enters their minds.

Economists hate to attribute behavior to irrationality. It’s essentially a cop out. It’s like saying, “I can’t explain the behavior, so I’ll just say it’s irrational.” Therefore, I won’t categorize the MSM behavior as irrational. Let’s just say it’s unusual. They have other priorities and values that are not obvious to the rest of us.

There is a stunning amount of conformity. Does that ever bother them? They behave like a flock of sheep. There seems to be no sense of originality, no desire to be different. They usually report stories with exactly the same slant and often with almost identical wording.

Recently, for example, when reporting on the beginning of the Republican National Convention, several reporters used almost exactly the same words in saying that Hurricane Isaac “was sure to revive memories of Hurricane Katrina.” Obviously, they sure hoped it would. (Hurricane Katrina was, in their minds, a perfect example of the incompetence and insensitivity of George W. Bush’s presidency.) At least the same number of reporters told us how terrible it would look to viewers when they saw a “split screen” with the devastation of the hurricane on one side and the convention festivities on the other.

You have to admire whoever orchestrates their performances. They definitely are all kept on the same sheet of music and sing the same lyrics.

When I write a column, I have absolutely no interest in making the same observations someone else has made or sounding like someone else. Saying what has been said by someone else is a waste of my time and the reader’s. I don’t think that’s an unusual attitude, but the MSM certainly don’t share it.

In most instances the perspective and analysis of the MSM is largely predictable. A central tenet of information theory is there is no information in a predictable statement.

The MSM loathed George W. Bush and adores Barack Obama. They have allowed both of these extreme attitudes to corrupt and distort their reporting.

From the standpoint of a functioning democracy, there is probably no other institution as important as a free press. Unfortunately, those at the highest echelons of the press are guilty of journalistic dereliction of duty. The MSM is grossly abusing the special freedoms, privileges, and responsibilities it’s been granted.

Whether or not you think Barack Obama has been a good president, he would probably not be president if the MSM had come within a country mile of its professional responsibilities. They effectively colluded with the Obama campaign to keep who he is and what he believes hidden from view.

There is no reason to expect the MSM to change its behavior. If anything the bias is increasing as they become more and more desperate. However, their bias is becoming more transparent and media consumers have more choices — Fox News, talk radio, and the Internet, for example. The price they pay for their malpractice is just going to increase.

On the first night of the RNC, Fox News had 44 percent more viewers than NBC, more than twice as many viewers as CBS or ABC, and more than four times as many viewers as either CNN or MSNBC.

The main reason for optimism is that, although powerful, the MSM is not omnipotent. It’s entirely possible that, despite their best efforts, Barack Obama will not be reelected.

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◼ The Plot Thickens September 12, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Obama’s Labor Theory of Value

Beyond being infuriating and insulting, President Obama’s now notorious “you didn’t build that” speech probably left many people puzzled. It is so foreign to how most Americans think they might have wondered where such thinking comes from.

Whether or not you think it’s accurate to call Obama a Marxist, his perspective on how the economy works is Marxian through and through. More specifically, it is a reflection of what’s referred to as Marx’s “labor theory of value.”

That theory is defined in the Dictionary of Economics as “[t]he worth of a product or service is in proportion to the labor employed to generate it.”

Economists not under the spell of Marxism consider the labor theory of value to be a convoluted mess. Marx himself had great difficulty papering over the logical gaps and contradictions of the theory. One obvious problem is that “labor” is not a homogeneous resource. Furthermore, it is not the only scarce resource necessary for the production of practically every product or service.

The question of how relative prices are determined is still a central question in economics. “Price theory” is what comprises most of microeconomics.

Today the mainstream conclusion about what determines relative prices is that they result from the interaction of “supply and demand.” In the context of price theory, supply and demand are like file drawers where numerous factors can be organized and analyzed.

The price of any product is affected by the quantity of all the resources necessary to produce it — labor, energy, land, information, time, for example. Marx’s position was that only one of these resources mattered, i.e., labor. Furthermore, he devoted none of his attention to the demand side of price determination. It’s as though he tried to design a pair of scissors using a single blade and, in fact, only a small piece of a single blade. I don’t think that it’s an exaggeration to say that no economist, other than true-believer Marxists, thinks that the labor theory of value makes any economic sense or is useful in understanding how an economy actually works.

In his classic textbook on the history of economic thought, William Fellner poses the following question about the labor theory of value and offers an explanation:

What function does the theory perform in the Marxian system, and why do contemporary Marxists continue to cling to it? The answer, we suggest, is that a simple and sweeping doctrine of exploitation is the essence of Marxism as a creed, and that it is impossible to obtain a doctrine of exploitation as simple and sweeping as is the Marxian from premises other than the “worker’s right to the whole produce.” Marxism as a creed is founded on the idea that all income going to the owners of wealth results from exploitation. The Marxian creed requires the exploitation doctrine as its foundation. (Emphasis in original.) — William Fellner, Modern Economic Analysis

A belief in the labor theory of value is what explains the hostility toward profits that is so prevalent on the left. If labor is 100 percent responsible for the creation of value, profit is theft. Profits are only possible if labor is exploited and only if capitalists get what’s not rightfully theirs. Likewise, property is theft, as are various forms of capital. Marx is the inventor of the word “capitalism.” His turgid three volume magnum opus is titled Das Kapital.

In countless ways Marxism is an intellectual mess. Theoretically it makes no sense. In practice it has led not to utopia, but to dystopia. The most horrific and repressive regimes in the world today — North Korea, Cuba, and Zimbabwe, for example — are Marxian in theory and practice.

Nevertheless, a Marxian view of the world continues to be popular on the left. Obama’s speech reflects his deeply held belief that business owners do not deserve the share of income and wealth they receive. All value ought to go to the workers. Any other outcome is the result of “the exploitation of humans by humans.” According to Marx, that’s what happens under capitalism and will continue to happen until private property rights are abolished. Only then can true equality be achieved.

It’s important to remember that even bankrupt ideas can be popular over long periods of time. Two other leading examples are Malthusianism and Keynesianism. Their predictions and policy prescriptions have proven wrong countless times, yet as doctrines they still hold wide appeal. Malthus’s Essay on the Principle of Population was published in 1798 and Keynes’ General Theory of Employment, Interest, and Money was published in 1936. The failure of the Democrats’ massive stimulus spending ought to be enough to toss Keynesianism into the dumpster of ideas that sound good but turn out to be disasters when applied to the real world.

Marx fully expected capitalism to collapse within a few years after the publication of The Communist Manifesto in 1848. V. I. Lenin’s Imperialism: The Highest Stage of Capitalism, published in 1916, was essentially an attempt to explain why capitalism still existed. By then Marxists fully expected that capitalism would be long gone.

One thing that J.M. Keynes got right was his understanding of the power of ideology. In the final paragraph of The General Theory he wrote, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.… Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Whether or not Barack Obama is a Marxist depends on how you define Marxist. Most everyone who acts like a Marxist reacts strongly if called a Marxist. There are probably a hundred Marxists for every one who admits to being one. The birth certificate I would like to see is one that would show where Obama’s ideology was born.

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◼ Obama’s Labor Theory of Value August 13, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Lopez Lomong’s Incredible Odyssey

Running for My Life: One Lost Boy’s Journey from the Killing Fields of Sudan to the Olympic Games By Lopez Lomong with Mark Tabb (Thomas Nelson, 230 pages, $24.99)

Two years ago on a flight from Denver to Des Moines my wife, Jan, had the good fortune of sitting next to a truly remarkable young man. His name is Lopez Lomong and he was on his way to compete in the Drake Relays, one of the premier track and field competitions held annually at Drake University in Des Moines.

Jan was on her way to spend a few days with our daughter who was in her final year of Veterinary School at Iowa State University. When Jan called me that evening she was still feeling the effects of her two hour conversion with Mr. Lomong. She said, “On the plane today I met the most amazing and inspirational person I’ve ever met.”

The remarkable story she heard from Lopez Lomong is now a book titled Running for My Life: One Lost Boy’s Journey from the Killing Fields of Sudan to the Olympic Games. I strongly recommend you read his book and then watch him compete in the London Olympics. He will be running the 5,000 meters for the USA. It will be his second Olympics. At the Beijing Olympics he competed in the 1,500 meter run. His book will have you laughing, crying, and shaking your head in amazement. Lopez Lomong’s odyssey from childhood to the present is a tale for the ages.

His story begins in South Sudan. Sudanese rebels burst into the village’s Sunday worship services and kidnapped all of the children, both girls and boys. All the children were jammed into a truck: “A green canopy covered the top and sides of the truck bed, so I could not see out. Suddenly the tailgate slammed shut and the truck lurched forward. I did not know it at the time, but my childhood had just ended. I was six years old.”

What happened to Lomong has happened to thousands of other children in Africa. They are referred to as “the lost boys.” This is not just man’s inhumanity to man, it is man’s inhumanity to children.

There are many pivotal and improbable moments in Lomong’s story. One is seeing a few minutes of the Atlanta Olympics on a television a few miles from his refugee camp. The event and award ceremony he saw was Michael Johnson winning the 400 meter run during the 1996 Olympics in Atlanta. It was the first time Lomong became aware that running could be a sport. Afterwards Lomong walked back to the refugee camp:

I walked along in the night, staring up at the night sky. The image of Michael Johnson standing on that platform, the letters USA across his chest, weeping openly and without shame, flashed through my head. For a man to react to winning a race in such a manner told me that this had been more than a race. Those letters on his chest and the flag he carried around the track had to be the key. Clearly he was not just running for himself. The gold medal by itself was not enough to bring a real man to tears. No this man, this man with skin like mine, ran for something bigger than himself. That had to be the reason why he wept.… I now had a dream that would change the course of my life: I would be an Olympian.

Moreover, I wanted to run with those same three letters across my chest: USA.

Other than the fact that it came true, his dream was insanely improbable.

Lopez Lomong’s story is a lesson for the rest of us in many ways. This book will give you a new and deeper appreciation for the blessings you have. As a reader comment on Amazon put it, “Read this book and try to feel sorry for yourself.” If your patriotism needs recharging, this book will do it for you. Seeing the world through Lomong’s eyes will change the way you see it through your own. You will not soon forget this book.

It will give you a new appreciation for the importance of family, and not in the narrow sense of the term. Lopez describes numerous times when people around him treated him like family and how he would not have survived and succeeded without them. Lomong now has two sets of loving and devoted parents, an African set and an American set. Lomong has a talent for conveying his feelings and emotions. He is honest and self-effacing. Reading his words will make you feel that you know him well. He has a total lack of bitterness. His optimism and positive attitude are infectious.

At the 2008 Beijing Olympics Lomong was chosen by his teammates to be the flag bearer for the U.S. delegation at the opening ceremonies. Characteristically, he said he didn’t deserve it and tried to decline the honor. His teammates told him he best represented what the Olympics are all about. They didn’t take no for an answer.

The proceeds for his book go to a charity he has established: 4 South Sudan. The four purposes of the foundation are providing clean water, access to education, better farming tools and methods, and basic medicines for people in South Sudan.

God bless you, Lopez Lopepe Lomong, and God speed to you. I hope I have the privilege of meeting you some day.

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◼ Lopez Lomong’s Incredible Odyssey July 26, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Infuriator in Chief

President Obama’s greatest talent seems to be his ability to infuriate his opponents. The latest example is the campaign speech he gave in Roanoke, Virginia last weekend. In that speech he declared, “If you’ve got a business — you didn’t build that. Somebody else made that happen.” The Wall Street Journal opines that, “This burst of ideological candor is already resonating like nothing else Mr. Obama’s said in years.”

Of course, Obama’s explanation of how success happens is absurd, but that’s only part of the story. Also interesting are the motivations and consequences of his remarks. His view is much more than wrong, it is insulting, infuriating, and demeaning to a large portion of the populace.

Obama’s supporters may agree with the views he is expressing. His words may make them more enthusiastic in their support for him, make it more likely they will donate to his campaign, and show up to vote in November.

On the other hand, do those words cost him any votes? Those who are incensed by what he says probably weren’t going to vote for him anyway. When the people who are already angry enough to vote against him get even angrier, are there any consequences? Is he increasing the population of voters who are livid, or is the impact simply redundant?

Coaches tell their professional sports teams to measure their words when talking to sports reporters. They tell them not to say disrespectful things about their upcoming opponents, and not to say something that will end up on their opponents’ locker room bulletin boards. Providing extra motivation for your opponents is never a good idea.

There is a vast difference between Barak Obama’s public persona and his true nature. In other words, his public persona is a fraud. An inherent problem with a fraud is that it is not easy to sustain in the long run. There is a constant tension between the reality and the fraudulent image. An old adage says, “The truth is easy to remember.” The corollary of that is lies are hard to remember. Like bubbles, the truth tends to rise to the surface. What we saw in Roanoke is the real deal Obama. Now and again Obama actually delivers on his promise of transparency.

There is a degree of internal logic to Obama’s world view. In his Roanoke speech he said, “There are a lot of smart people out there — there are a whole bunch of smart people out there.” In other words, there’s no real difference among individuals, therefore, incomes and wealth ought to be equal.

Getting our arms around Barak Obama’s worldview is extremely difficult for those of us who don’t share it. We ask ourselves, how can anyone believe such things? But believe it he does, and the rest of us need to recognize that fact.

Obama is well known for his frequent use of argumentum strawmanium. He makes up grotesque caricatures of his opponents’ policy positions. Included in his Roanoke speech was, “There are some things, like fighting fires, we don’t do on our own. I mean, imagine if everybody had their [sic] own fire service. That would be a hard way to organize fighting fires.” Does he not recognize how insulting and condescending that sounds? Who in the world advocates having his own free-standing fire department? No one is that stupid. It speaks volumes about his opinion of his audience’s intelligence. Being talked down to that way is not a way to win friends and influence people. Obama is incapable of dealing with his opponents’ real arguments, so he describes them in absurd, cartoonish ways. It’s pathetic.

Barak Obama is unquestionably the most divisive U.S. president in modern history. People I never would have suspected have expressed to me an intense resentment and anger about what he has done to the country they love. Two wonderful ladies I know, both age 85, have for the first times in their lives become politically energized. I’m pretty sure neither one of these fine ladies have had this much political anger in all of their lives. I don’t think they are isolated examples. In November we will learn just how many voters share their feelings.

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◼ Infuriator in Chief July 19, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Real Damage Done by High Tax Rates

President Obama has once again put the question of income tax rates on center stage. As a Wall Street Journal headline put it, “Obama Intensifies Tax Fight.” He is apparently hell-bent on making our income tax structure more progressive.

Raising tax rates on upper-income earners is an appealing idea to many people. The President certainly hopes that it is. The most common argument against the idea is that it would diminish the incentive for business owners to invest, hire, and grow their businesses. Although that is all too true, it’s only one kind of damage done by high marginal tax rates. Even if we were not in a recession, more tax progressivity would still be a bad idea.

It’s well known that taxes reduce economic effort. If you want less of something, tax it. That, by itself, reduces wealth creation and economic growth. Less well recognized, however, is that high tax rates misdirect and misallocate economic activity.

A flatter, less progressive income tax rate schedule is an idea that never seems to go away. Perhaps the earliest argument for a flat tax was in Milton Friedman’s 1962 classic, Capitalism and Freedom. Its latest sighting is in what’s called the “Ryan Budget” authored by Congressman Paul Ryan. The official name for his budget plan is “The Path to Prosperity: Restoring America’s Promise.” His proposal advocates only two federal personal income tax rates — 10 and 25 percent. A notable and similar recommendation was part of President Obama’s own deficit reduction team of Erskine Bowles and former senator Alan Simpson. Their “National Commission on Fiscal Responsibility and Reform” recommended federal rates of 8, 14, and 23 percent. Obama totally ignored the Bowles-Simpson recommendations.

High marginal tax rates reduce wealth creation in more ways than is immediately obvious. High tax rates not only reduce incentives overall, they also alter and rearrange incentives. Most of the damage done by excessively high tax rates is hidden from view and almost impossible to measure precisely. Although hidden, the damage is real and significant.

Our wealth is as much dependent on how efficiently we use resources as it is on the quantity of resources we have. The worst damage done by high tax rates is the way they distort decisions in the economy and result in a misallocation of resources.

Higher taxes increase the effort expended in avoiding taxes. When you increase the reward for avoidance, you will get more avoidance. It will follow as the night the day. More decisions will be determined by tax considerations. The result is a less productive economy.

Investing is a process of choosing among alternatives. A generalization that is true in most cases is that money and effort go to where they are most rewarded (or more precisely, where there is the best risk-reward ratio). Different rates of returns attract or repel investment capital.

An economy functions most efficiently and experiences the highest possible growth when resources move to their highest-valued uses. That is the natural tendency in a free market economy. High tax rates, however, significantly distort this tendency. Too often resources move not to where they create the highest economic value, but to where they result in the most tax avoidance. High tax rates reduce the reward for productive spending and increase the reward for wasteful spending. If the tax minimizing choice is the most economically productive it’s a happy accident, and a rare one.

High rates make avoiding the tax an option with a very high rate of return. The higher the tax rate the greater the effort expended to avoid them, the greater the misdirection of economic decisions, and the greater the loss to economy and all its participants. High tax rates result in “overinvestment” in tax avoidance. Overinvestment in one activity means reduced investment elsewhere.

High tax rates also reduce the price or “opportunity cost” of leisure. You could define leisure as wealth non-creation. There’s nothing inherently wrong with choosing more leisure, but it does cost something in terms of output. The higher the tax rate, the lower the price of leisure. More leisure means less wealth creation. High tax rates are equivalent to a subsidy for leisure. Is that really something we want to do? Have we made a policy choice that people work too hard?

ONE CLEAR EXAMPLE of taxes distorting economic choices is the tax on capital gains. The capital gains tax is due only when the gains are “realized.” In other words, only when the appreciated asset someone owns is sold. In most cases the choice to sell something is controlled by the owner. The capital gains tax is the closest thing we have to a voluntary tax, at least in regard to timing.

The voluntary characteristic of the tax on capital gains is why such taxes are especially sensitive to changes in rates. Even more than is the case with other taxes, revenue from changes often move contrary to the changes in rates. Capital gains taxes are the easiest tax to avoid or at least to postpone. In the past whenever capital gains taxes have been reduced there is invariably an increase in the turnover rate of investments and, therefore, many more “realized” gains and increased tax revenue.

There are millions of assets people would like to sell but don’t because they do not want to trigger the tax. Among other things, this prevents people from diversifying their investments as much as they would prefer. Many people have most of their wealth concentrated in one or two assets. Diversification is far and away the most effective way to reduce risk. Consequently, the tax on capital gains results in people bearing an undesired amount of risk.

When tax rates are raised there is almost never a proportional increase in government revenue. Why not? To understand why, it helps to remember that ours is mostly a voluntary exchange economy. Although taxes are not voluntary, the economic transactions you enter into are.

Taxpayers in the top brackets have the most flexibility in how they arrange their incomes, where they reside, and how they invest. This week we learned that the billionaire Denise Rich has renounced her U.S. citizenship in order to avoid U.S. income and estate taxes. In May, Facebook co-founder Eduardo Saverin renounced his citizenship for what many consider the same reasons. Now, rather than getting, for example, 35 percent of these peoples’ incomes and estates, our federal and state treasuries will get zero. California and New York, two states with top income tax rates over ten percent, have experienced out-migration of upper income residents in recent years.

A friend of mine is a chemical engineer for a large biotech firm. For several years he spent much of his time in Singapore overseeing the construction of a major new research and production facility there. When I asked him why the decision was made to build it there rather than the U.S., he answered even before I finished my question: “Taxes.”

Over-investment in tax avoidance is magnified in an environment of tax complexity. Every serious proposal for a flatter income tax schedule has also included tax simplification and the elimination of tax loopholes. Lower rates and a broader base — you can’t have one without the other. It was such a combination that was central to the tax reform President Reagan successfully passed in 1986. Reagan reduced the top income tax bracket from 70 percent to 28 percent. What followed was an extended period of robust economic growth.

A flatter tax rate schedule would increase productivity and economic efficiency. We would all be better off, not just “millionaires and billionaires.” President Obama, however, is far more focused on punishing the rich than he is in growing the economy.

Obama wants the top federal tax bracket to increase from 35 percent to 39.6 percent, the capital gains rate to increase from 15 percent to 20 percent, and the estate tax rate to increase from 35 percent to 45 percent. Buried in Obamacare’s 2,500 plus pages is a totally new 3.8 percent tax on all “unearned income,” which includes interest and dividends from investments, income from rental property, and the sale of single family homes. In other words, if Obama gets his way the top marginal rate will increase from 35 percent to 43.4 percent. That would have a poisonous impact on the economy.

Mitt Romney, on the other hand, wants a top income tax rate of 28 percent, the capital gains rate to be zero for incomes below $200,000, complete repeal of the estate tax, and a complete repeal of Obamacare .

The battle lines have been drawn. May lower rates and the economy be the victors!

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◼ The Real Damage Done by High Tax Rates July 13, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.