Taxing Something Doesn't Make it More Valuable

From an article in the Wall Street Journal:

Last year, Congress sharply increased the federal excise tax on "little" cigars—filtered, often sweetly favored products that are similar in size and shape to cigarettes.
...
Sales of products listed as "little" cigars fell by 79%.

The projected increase in tax revenues generated by this tax increase on little cigars was supposed to be used to help finance the expansion of a children's health-insurance program backed by President Barack Obama. But with the decrease in sales, the money just wont be there.

This is just common sense. Taxes create market distortions because those who would otherwise pay the taxes have an opportunity to change their behavior by buying something else (a replacement without the tax- see the story about how consumers have changed their purchasing behavior) or somewhere else where the punitive tax does not apply.

Thanks for reading.

James

PlanConD Vote

Last night I voted against accepting the Pennsylvania Department of Education's approval of PlanConD.

Part of the purpose of part D is to determine the ability of local taxpayers to actually be able to afford the debt payments associated with the construction project. Unfortunately, due to the inability of the PDE to update their forms, our PlanCon D documents reflect old and stale data. However, if we understand the intent of PlanCon D, then we should be able to roll numbers forward and come up with our own calculation of affordability.

As an example, let's say you want to buy a house for $187,000. The loan officer says it should be no problem to get the loan as long as your payment stays below 35% of your monthly income of $2000. At 5% interest, a $187,000 loan would be about $1,000 a month.

You knew going into it that it would be close, that it would be a stretch to your budget to try to afford this size and price of a home. But what the heck, why not aim for the fences.

You fill out all the paperwork and you get approval from the loan officer. However, when the documents get back you realize that something seems amiss. The documents given to you that outline your debt/income ratio do not reflect the payment on the house you are about to buy. The loan officer did a calculation on your debt/income ratio WITHOUT INCLUDING THE DEBT PAYMENT FROM THE HOME YOU ARE ABOUT TO BUY. So now, even though your debt payments will exceed the loan officers' 35% income limit, you still walk out of that office the owner of a new home.

How does this work? Well, the Pennsylvania Department of Education hasn't updated their PlanCon D forms for a number of years. That means that when the District fills out its forms, it is entering in income and debt payments from past years and these numbers DO NOT reflect the reality of the current project. In fact, the PDE even changed the numbers for us to reflect an Aid Ratio that is no longer relevant and skews the numbers even more to look like the District can afford this project.

When I asked in June to have the District prepare our documents to reflect the current known information, we were given information that created even more confusion when some numbers were changed and some stayed the same.

The information to fill our these forms does exist. but it is in many different places on the PDE website. Please see the link here for a copy of the form that was voted on last night. Page D-18 is the one that deals with affordability. Based on my own analysis of the numbers, I believe the District will be very close to or even exceed what the State says is the maximum allowable budgeted local effort for this project. When you look at D-18 note that the Market Value Aid Ratio has been changed by the PDE to .4154 instead of our current .49. This has the effect of reflecting an increased aid ratio from the State when this is not the reality.

Note also in Section B that the Budgeted Local effort for this project shows a big, fat $0 since we have no debt service payments for this project in 2009-2010 (our payments start in 2010-2011). The intent of the form was to look a few years out from the floating of bonds to determine whether the District is putting too much stress on local taxpayers.

When the PDE changes the form to reflect an incorrect and artificially inflated aid ratio and then ignores actual debt payments that will come due for the project they are supposed to be evaluating, I am not sure how one can realistically evaluate whether this form should be approved or not.

That being said, if the District had made a determined effort to reflect TRUE numbers and the TRUE local effort for this project, I would have been much more inclined to vote in favor of PlanCon D.

Thanks for reading.

James

Debt and Deflation

I came across a terrific economics article written by Steve Keen at Steve Keen's Debt Watch website. The title of his article is, "What Bernanke Doesn't Understand About Deflation".

On this blog I have hit a number of times on the problem with having too much debt. On a national level people (Secretary of State Hillary Clinton for one) are even saying that our debt represents a national security threat. On an economic level, economists such as Steve Keen are making the argument that the deleveraging process following a borrowing and spending boom like the one we have witnessed from 1987 to 2009 will take years to play out.

Keen argues and illustrates that:

Debt reduction is now the real story of the American economy, just as a real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

There are a number of charts and math involved that Steve uses to prove his point. And logically, it makes sense. When you borrow, you have to pay it back. If consumers have indeed increased borrowing over the last 22 years by $34 trillion and GDP has only grown by $9 trillion, then we are in for quite a period of economic staleness, especially if the deleveraging process continues. What happens when the consumer appetite for debt goes away? Surely the GDP growth cannot be sustained.

This is what part of last year's stimulus was intended to do; stimulate aggregate demand. Since consumers have clearly and demonstrably started to become net savers instead of net spenders, the government was looking for a way to increase GDP. Any kind of government spending will have a positive impact on GDP. As I have said many times before, the problem with debt is that it needs to be paid back at interest. This payment is a tax on future production and future spending.

When you max out the amount you can borrow, the consequences are long lasting and staggering. Other, normal expenses will come under stress while a less fool-hardy approach would have produced better long-term results.

Thanks for reading.

James