On taxation, income disparity, and government. An Indian['s] perspective.

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**sourclams**

While reading today's Gartman Letter, I came across this very interesting piece by Dr. Dilip Gadkar, a professional money manager and Indian native who has lived and been educated within the 'States.

It's a bit long, but I found it thought provoking.

Dilip Gadkar, Macro Viewpoints wrote:Today, about 48% of Americans do not pay any income taxes. So about 48% of Americans now take from the American government without contributing to it. Barack Obama is the first American President whose election symbolizes the united efforts of this half of American society. He knows it and that is why his economical policies, right from his inauguration, have been essentially distributive and oriented towards providing government resources to the less advantaged.

The American taxpayers instinctively understood that President Obama was engaged in transferring wealth from taxpayers to non-taxpayers. This realization led to the political explosion we call the Tea Party. The 1773 Tea Party revolt was against Taxation without Political Representation. The 2010 Tea Party revolt was essentially against Political Representation without Taxation. The taxpayers won the first battle in November 2010. The next important battle is the Presidential election in November 2012. That may be the last Presidential battle won by taxpayers in this long war. Because, the demographic tide is inexorably moving towards a majority of non-taxpayers in 2020 or perhaps by 2016.

In this setup, we see the Democratic Party slowly morphing into a party of the non-taxpayers plus a slice of the very wealthy and the Republican Party becoming the voice of the taxpayers who are unwilling to have their earnings taken away from them. The demographic tide, as we said, favors the Democratic Party.

So we expect the Republicans, if they win the White House and keep effective control of the Congress, to take steps to build a policy framework for Less Representation for Non-Taxation. These steps might include changing electoral districts, making voting registrations difficult for non-taxpayers and even imposing minimum income tax levels (perhaps like the one already proposed by Congresswoman Michelle Bachman) on all Americans. We might see easier and increased immigration policies for wealthy and highly educated immigrants.

We see this battle shaping up as the central conflict or a civil war within American society during this decade. So any one who pines for a united, 'can'twe- all-get-along' American society may be hoping against hope.

As 2011 ends, we see Indian society in the grip of its own revolt, a revolt against widespread corruption in the government at all levels. But like in America, this reason is basically optics. The real reason for this revolt is the tectonic shift underway in Indian society, a 180 degree opposite shift to the one occurring in America.

Since its independence in 1947, Indian society has been a society dominated by non-taxpayers. Even today, about 75% of Indians do not pay any income tax at all. As a result, Indian Politics and Indian Government has been dominated by policies that distribute free services and goods, that seek to distribute income and wealth from people who earn to people who need.

The natural result has been corruption, endemic corruption:
• corruption in the business class that tries to hide much of its income from tax collectors,
• corruption in the administrative machinery that distributes government goodies to the poor, and
• above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

The patient, quiet sufferers in this machine were and are the helpless middle class - the people who are unable to hide their income, the people who need services from the government - the middle class, especially the salaried middle class. But this hapless middle class has slowly but surely grown in size and confidence.

Today, this group is anywhere between 150-300 million strong, not strong enough to dominate Indian politics electorally but strong enough to create a revolt that can bring the Indian Government to its proverbial knees. In 2011, this middle class got a leader that it can rally around - a symbol more than an actual leader, a Gandhian figure who lives a simple life and is above personal corruption.

The Congress Party, the party in power, is the leader of traditional Indian politics - giveaway policies and maintenance of vote banks by rural politicians who today are screaming bloody murder of parliamentary democracy by what they term as non-elected civil society. The opposition parties, especially ones with a more urban political base, are supporting this revolt because it is their best chance to topple the Congress Party from power. The political players in this war are not as clear cut as the two parties in the battle for political power in America. But the societal shift is the same and the demographic forces are arrayed similarly. The big difference is the direction and relative ascendancy.

**Kilkrazy**

I thought there were sales taxes in the US?

**sourclams**

The US does have sales tax, typically at the State level primarily.

**dogma**

While the comparison to India is novel, the article makes all the standard rhetorical moves regarding the equation of not paying income tax with not paying taxes. It further doesn't really line up with political reality, assuming that people who do not "pay taxes" will vote Democrat, which even a cursory poll of the national electorate will show to be incorrect in terms of political identification.

**sourclams**

If you're at an income level where you don't pay income tax, the various aid programs you're eligible for ought to offset other taxes you likely do pay, like sales tax. Thus some individuals are net beneficiaries, some are net donors, but as an average it washes out.

I do agree with you that the political affilations are being painted with a broad, broad brush.

**dogma**

Some individuals are net beneficiaries, but I doubt its 48% of the population (it would be an interesting thing to study, though).

Of course, there's also the standard exchange:

A: Taxation is redistributive!

B: That's the point!

**biccat**

dogma wrote:Some individuals are net beneficiaries, but I doubt its 48% of the population (it would be an interesting thing to study, though).

Of course, there's also the standard exchange:

A: Taxation is redistributive!

B: That's the point!

No it's not. The standard exchange is:
A: Taxation is redistributive!
B: No it's not!

See various posters here.

edited to remove specific names.

**sourclams**

Taxation is redistributive, but as it goes from some skin in the game > no skin in the game > winning regardless of the score, it becomes in the best interests of poorer individuals to push for ever higher tax levels, because they end up making money even though their 'taxes' increase.

The super mega ultra rich, or 1% in today's parlance, because they are super mega ultra rich, possess the resources to simply shift their assets into some shelter, and the burden of taxation falls onto the upper-middle earners.

Edit: Which, in a nod to biccat, is why taxation is redistributive but can completely miss the target on who is supposed to be redistributing to whom.

**Rented Tritium**

Right yes, here's a guy who loses his house if he has to call in sick. Let's take a little bit more of his money so he has some skin in the game

**sourclams**

Question for you: How many individuals last year lost their houses because they called in sick?

Having skin in the game is important. It's why people who sell on consignment outperfom those with flat salaries, and why government projects tend to take longer and be more costly than similar endeavors undertaken by the private sector.

**dogma**

sourclams wrote:Taxation is redistributive, but as it goes from some skin in the game > no skin in the game > winning regardless of the score, it becomes in the best interests of poorer individuals to push for ever higher tax levels, because they end up making money even though their 'taxes' increase.

Sure, but people don't tend to vote that way (in America) because there are other things that are in their interests, like not being a recipient of government assistance, or not endorsing government.

sourclams wrote:
Edit: Which, in a nod to biccat, is why taxation is redistributive but can completely miss the target on who is supposed to be redistributing to whom.

Sure, its a shell game, of sorts. The problem is that the government doesn't take the game as seriously as private citizens do.

Automatically Appended Next Post:

sourclams wrote:
Having skin in the game is important.

But, in this instance, everyone has skin in the game.

**Kilkrazy**

Having skin in the game is what justified all kinds of reactionary social organisation from the Roman republic to the British army of the 18th and 19th centuries.

**Rented Tritium**

Millions of Americans are living paycheck to paycheck. Those people are a single disaster away from missing bills and losing ground. A single illness or car crash can ruin their lives.

But of course, they should pay federal income tax. That will make them care more.

**sourclams**

dogma wrote:[Sure, but people don't tend to vote that way (in America) because there are other things that are in their interests, like not being a recipient of government assistance, or not endorsing government.

So what exactly do you attribute to the formation of the Tea Party, and its rather phenomenal track record of successfully roadblocking spending and tax increases?

**dogma**

sourclams wrote:
dogma wrote:[Sure, but people don't tend to vote that way (in America) because there are other things that are in their interests, like not being a recipient of government assistance, or not endorsing government.

So what exactly do you attribute to the formation of the Tea Party, and its rather phenomenal track record of successfully roadblocking spending and tax increases?

I already answered that question.

Also, the Tea Party is generally composed of people that "pay taxes."

Rented Tritium wrote:Those people are a single disaster away from missing bills and losing ground. A single illness or car crash can ruin their lives.

Well, that's true of everyone, even the filthy rich.

**Easy E**

sourclams wrote:
dogma wrote:[Sure, but people don't tend to vote that way (in America) because there are other things that are in their interests, like not being a recipient of government assistance, or not endorsing government.

So what exactly do you attribute to the formation of the Tea Party, and its rather phenomenal track record of successfully roadblocking spending and tax increases?

People make irrrational decisions? Hence, why rational actor based models are inherently flawed?

As for the article just remember, there ain't no war like the class war.

**sourclams**

dogma wrote:I already answered that question.

Then from my perspective your viewpoint is completely wrong; the tea party was, and is, almost entirely focused on spending and taxation.

Also, the Tea Party is generally composed of people that "pay taxes."

That's... also exactly the point. The people who pay taxes dislike seeing tax money fueling a Eurozone-esque entitlement state.

Automatically Appended Next Post:

Easy E wrote:People make irrrational decisions? Hence, why rational actor based models are inherently flawed?

Taxpayers opposed to gratuitous spending (both in the form of social welfare programs and 'too big to fail' bailouts) form a political party dedicated to cutting spending?

What part of that cause:effect has resulted in irrational goal forming or subsequent behavior?

**dogma**

Easy E wrote:
People make irrrational decisions? Hence, why rational actor based models are inherently flawed?

I didn't say those decisions were irrational.

I would actually argue that irrational decisions are not what most people think they are.

Automatically Appended Next Post:

sourclams wrote:
Then from my perspective your viewpoint is completely wrong; the tea party was, and is, almost entirely focused on spending and taxation.

Sure it is, but per your argument, as I understand it, and the argument made in the article posted, lots of Tea Party supporters should really be supporting Democrats. But they don't, they support the Tea Party.

sourclams wrote:
The people who pay taxes dislike seeing tax money fueling a Eurozone-esque entitlement state.

I pay taxes, and I don't dislike it. I don't like it either, I really don't care, but I do take endless joy in reading the arguments of people that are greatly upset by it. Especially the people (not you, I don't know anything about you) that are basically making the same argument from entitlement that they criticize welfare recipients for.

But, that's really only relevant in terms of voting, what people like has only limited bearing on what should be done in terms of policy.

**Cannerus_The_Unbearable**

dogma wrote:

Rented Tritium wrote:Those people are a single disaster away from missing bills and losing ground. A single illness or car crash can ruin their lives.

Well, that's true of everyone, even the filthy rich.

You have to admit, some much moreso than others. Again, how many Americans will go to the doctor when they're sick or would lose their income if a hit and run driver took out their car?

dogma wrote:

sourclams wrote:
Having skin in the game is important.

But, in this instance, everyone has skin in the game.

biccat wrote:
dogma wrote:Some individuals are net beneficiaries, but I doubt its 48% of the population (it would be an interesting thing to study, though).

Of course, there's also the standard exchange:

A: Taxation is redistributive!

B: That's the point!

No it's not. The standard exchange is:
A: Taxation is redistributive!
B: No it's not!

...whatisthisidon'teven.

**Rented Tritium**

I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

**Polonius**

sourclams wrote:If you're at an income level where you don't pay income tax, the various aid programs you're eligible for ought to offset other taxes you likely do pay, like sales tax. Thus some individuals are net beneficiaries, some are net donors, but as an average it washes out.

This is an interesting assertion.

48% of the country is not on food stamps or otherwise receiving cash or easily liquid aid (aside from the EIC). Most households break even on federal income taxes due to some combination of child/child care credits, various homeowners deductions, and the earned income credit (EIC). Now, the EIC does put cash in the hands lower income households with children, so you can argue that they are net beneficieries.

For example, a person earning $8/hr, working 40 hours a week for 52 weeks, earns $16,640 a year. If they had three children, their actual federal tax burden reduces to $0, but they'll get the maximum EIC credit of $5,666. So, thus far, the person is "up" $5,666. Now, to be fair, this single mom will be getting ~$2400 a year in food stamps, so she actually sitting at about $24,600 in total income, with about $8000 being "benefits." Now, there's no way she's paying $8000 in taxes. Assuming 6.2% OASDI on her $16,640 is only about $1000, and even 8% sales tax on the rest won't get us to eight grand, nor will the amount of her rent/gas that goes to taxes.

The fact that we're saying that a person raising three children and working full time "has no skin in the game" because, after government help, they're living fat on $25,000 with three kids says a lot about us as a culture.

I think, and maybe I'm just a dirty liberal, that any person working full time, on the books, has "skin in the game."

Automatically Appended Next Post:

Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

There's a story I've seen run in a few places that discusses how few American households have even $1000 in emergency cash.

**Easy E**

yeah, I really thought the line of thinking this "professional Money Manager" was espousing had been discredited long ago.

Polonius gives a pretty nice takedown.

**Frazzled**

Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

And?

**Rented Tritium**

Frazzled wrote:
Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

And?

And I live in a developed first world nation.

**Frazzled**

Rented Tritium wrote:
Frazzled wrote:
Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

And?

And I live in a developed first world nation.

And?

**Easy E**

http://money.cnn.com/2011/08/10/pf/emergency_fund/index.htm

Here is an article from CNN Money that covers the percentage of Americans that can come up with $1,000 in an emergency. $1,000 is not even the typical deductible on a High Deductible 80/20 plan commonly referred to as a HRA/HSA.* The deductibel for such plans average around $1,500.

*=Note- These insurance plans typically have other mechanisms to help off set the high-deductible. HRA is an amountof cash fromt he employer. HSA provides a tax sheltered self-funding mechanism. However, the amounts in the HRA/HSA vary greatly.

**Rented Tritium**

Frazzled wrote:
Rented Tritium wrote:
Frazzled wrote:
Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

And?

And I live in a developed first world nation.

And?

It's kind of hard to pull yourself up by your bootstraps when the bootstraps are expensive and covered in Vaseline.

**sourclams**

Polonius wrote:I think, and maybe I'm just a dirty liberal, that any person working full time, on the books, has "skin in the game."

...How? Regardless of your income level or unemployment status, if, net, you pay between zero and negative federal taxes, how is voting for higher taxes, either directly or through a candidate that will do so, anything but either indifferent to your individual financial situation or in your best interests?

**Rented Tritium**

sourclams wrote:
Polonius wrote:I think, and maybe I'm just a dirty liberal, that any person working full time, on the books, has "skin in the game."

...How? Regardless of your income level or unemployment status, if, net, you pay between zero and negative federal taxes, how is voting for higher taxes, either directly or through a candidate that will do so, anything but either indifferent to your individual financial situation or in your best interests?

What's your solution, then? Tax the single mother of 3 until she's living on 16k again? If it's such a problem, how do you fix it?

**Frazzled**

Rented Tritium wrote:
Frazzled wrote:
Rented Tritium wrote:
Frazzled wrote:
Rented Tritium wrote:I can tell you right now that if I personally got appendicitis right now, it would pretty much ruin my life, career and education.

And?

And I live in a developed first world nation.

And?

It's kind of hard to pull yourself up by your bootstraps when the bootstraps are expensive and covered in Vaseline.

Wait, so barring getting something that can kill you, you're fine?