A Socialist President? What Are The French Thinking?

Well, if you don't know by now, Nicolas Sarkozy lost the top job in French politics.  In his place will be an avowed socialist: François Hollande.  Now, if this newly minted socialist President gets his way, my guess is that it won't be long before France wishes they had Sarkozy back, because every economic plan that Hollande has for France is an economy killer.

For one, Hollande plans not to just raise the taxes on the rich, but, instead, he's clearly stated that he wants to "soak the rich".  If you make a million euros or more a year, he plans a 75% tax.  For those making 150,000 euros or more, the tax will be 45%.  Executive pay will be mandatorily limited to 20 times that of the pay of the average worker.  He will increase the Value Added Tax (VAT) on everything people buy to help pay for his new social programs.  He also plans to arbitrarily hire 60,000 additional teachers.  And, the retirement age with full pension benefits will be lowered from 62 to 60 years of age for those working at least 41 years.

Sarkozy lost because the French economy was floundering.  But, there is nothing in the Hollande plan for  that will make the French economy any better. Just more taxes and more spending.  Socialism doesn't work.  It hasn't worked in Venezuela and it won't work in France.  All that will happen is that the wealthy and some businesses will leave the country.  With earlier retirements, pension expenses will eat the country alive. With higher VAT's, consumer spending will be slowed and the economy along with it.  France is already in recession. Hollande will only exacerbate that harsh economic reality.

No! Not Another Academic Economist In the Obama Administration

On Monday, Obama announced his choice to lead his Economic Council: Princeton Professor, Alan Krueger. While doing so, Obama claimed he was some kind of "superhuman" labor economist.

But, Krueger, like a lot of appointments in the Obama's Administration, has some pretty quirky, academic beliefs that don't hold water when scrutinized.

First, there was Krueger's supposedly famed and ground breaking study in support of increasing the minimum wage which contradicted almost every other economist's belief that an increase in the minimum wage killed jobs. Krueger, along with another Princeton economist, David Card, conducted phone surveys of fast food restaurant managers in both New Jersey (where the minimum wage had just been raised) and in Pennsylvania (where no such raise occurred) and found that New Jersey hired more people after the rise in the minimum wage; while, in Pennsylvania, the level of jobs actually declined. However, since publishing their so-called study, the results were peer-reviewed and the conclusions were found to be substantially flawed (Click here to see the results of the Employment Policy Institutes' Counter-Study: The Crippling Flaws of the New Jersey Fast Food Study).

Then, there was Krueger's brilliant idea to increase tax revenues so that Obama could just keep spending: A National Sales Tax of 5%. While, yes, there might be an immediate increase in revenues, the long term impact would kill the economy because that tax would completely rob it of 5% of its consumer spending activity; which normally drives more than two-third of this country's economic activity. On top of that, the hardest hit by this tax would be the poor and working poor and those on fixed incomes; resulting in higher food stamp activity and other welfare support.

To me, Krueger is not a superhuman; he's a super-ideologue who is willing to bend normal rules of economics to support a progressive agenda. Certainly, that's the only reason why Obama really wanted to hire him. The President must think, that by hiring someone with the title "labor economist", Americans will believe, falsely, that he's keenly focused on labor; as in jobs. Sadly, Krueger's philosophies are mainly job killers. That's why some have already taken to calling him "Freddy Krueger": That disfigured killer from the horror movie: "Nightmare on Elm Street". Except, in the case of this Krueger, the nightmare will be on both Main street and Wall Street.

A "VAT" Chance That The Deficit Will Ever Be Reduced

Over the years, numerous countries have implemented the Value Added Tax (VAT) as a means of lowering their high deficits. Initially, the VAT did manage to lower the debt level in each of those countries. But, eventually the debt returned to even higher levels than before and the rate at which the VAT was set just kept being increased. Almost every country started their VAT at 10 percent. Today, most are now at a 20% plus level and expected to go even higher as governments try to fight the worldwide recession.

Initially VATs sounded like the ultimate solution for solving a country's debt problems. However, there is a human component that almost always causes it to fall short of its intended goal. Almost genetically, a politician can't view any new tax as a means of reducing debt. Instead, they only see any new revenue stream as a means of spending more taxpayer money. Politicians see a new tax as the cachet they need to spend more and more money in order to buy votes. The best example of this, today, is Greece who at a 19% VAT is literally at the doorstep of complete financial collapse.

If the U.S. goes with the Value Added Tax, you can expect spending to never stop. Over time, the VAT will continue to be increased with more spending to follow. And, it isn't just me saying this. History has proven it so.

What we need in this country is a mandate that forces politicians into controlling spending. We don't need another tax. We need a Balanced Budget Amendment to our Constitution with financial penalties or even jail time for any politician or politicians who violate that law. Only then will spending and deficits get under control.

The Destruction And Resurection Of The Tax Base

Under Clinton, the number of Americans who paid absolutely no taxes was raised to 30%. Under G.W. Bush, that percentage was increased to about 40% through his tax cuts (Contrary to popular belief, the Bush tax cuts weren't just for the rich!) Now, with Obama having only been in office a little over a year, the number of Americans who won't pay any taxes has been raised to 47%.

In effect, each of these Presidents has destroyed the tax base to the extent that, now, almost half of all Americans are dependent on the other half to fund our government activities. At the same time, spending has been going through the roof. In fact, this current President and Congress have actually created more debt in one year than was created by almost all the other Presidents, combined. In a little over a year, the national debt has jumped from $10.4 trillion to nearly $14 trillion; a more than 30% rise in debt.

Realistically, you can't keep growing a class of people who live off the government and who don't contribute anything to it. At some point, there just won't be enough income from the other class who pay the taxes to keep our ship of state afloat. In effect, we are sinking that ship even more quickly under Obama and this Congress.

Right now, there is all this talk of adding a new, additional tax to our current plethora of taxation: The Value Added Tax (VAT). If implemented, it will be a tax that will force the price of almost everything we buy to go up by 20 to 30%. And, it is a tax will be totally blind to a person's economic stature; with the lower and lower middle classes being hurt the most.

Of course the true stupidity of this is that a VAT, if adopted, will completely reverse the destruction of the income tax base that had been taking place over the 17 years with the current and two previous Presidents and their Congresses. The sham promise of giving more and more Americans a better lifestyle by lowering and/or completely removing their income taxes will, in one fell swoop, evaporate when they have to pay 20 or 30% more at the cash register. Worse yet, many of those who had paid no taxes before may actually lose their jobs as a consequence of higher prices and the inevitable slowdown in retail sales. Further, expect more manufacturing jobs to leave the U.S. as American business are forced to go off-shore to a country without the tax; like China and India. Lastly, we will see another broken promise from this President. You know, that promise of not raising taxes on anyone making $250,000 or more. Of course the VAT is against our wallets and not our paychecks and that will be Obama's out. Sort of like that famous line: "It depends what the definition of is is."

What A Value Added Tax Will Do To America

Yesterday, Obama's lead man on financial issues, former Federal Reserve Chief, Paul Volker, said that America must consider a Value Added Tax (VAT) in order to reverse deficit spending and clear our high national debt.

Most American's are under the false belief that a VAT is just some kind of national sales tax. But, they're wrong. The VAT is actually a compounded tax that is applied every time any product gains or "adds value" over its entire production process. Take, for example, a piece of steel that will be ultimately sold as part of a new automobile. When the original iron ore was mined and, then, turned into steel ingots , there was a change in the ore's value and, as a consequence, the value differential that was created would be subject to a VAT. Once those ingots are turned into rolled steel, that, too, is a change in value, and the VAT would be applied. Then, that same steel, after being stamped into a more valuable automobile frame would be VAT'ed again. Finally, as part of a finished car, the value increase of that auto frame would be included in the final VAT that is applied to the finished car. Because the VAT is a compounding tax, it is highly possible that a nominal 10% VAT could result in a 30% increase in the price of any product; depending on how complex the manufacturing chain is. As a result, the VAT favors building products out-of-country so the step-by-step VAT charges can be avoided. That, then, favors importation and not domestic production. (So, much for Obama's promise to double our exports in 5 years!)

Throughout the health care debate, liberals would always point to Europe as the shinning star that we should strive to match. But, as part of my former job, I spent a lot of time in Europe and things are hardly rosier there than in the good ole U.S. of A. My experience is that people in Europe lived smaller; had less to spend; and, almost always paid higher prices for everything they bought. Clearly, this is the trade-off they've had to accept as part of all of their social programs.

To prove this point, let me give you some very interesting comparisons between Europe and the U.S. In this country, the median after-tax yearly income (disposable income) is about $31,400. Throughout Europe, that number is almost 25% less because of their high taxes. For example, the median disposable annual income in France is $26,416. In Germany, that supposed economic powerhouse of Western Europe, its even less at $25,146. So, right off the bat, people have less to spend.

Then, because of the VAT's throughout Europe, things cost more. We can indirectly see that from the average age of cars on the road in Europe versus the average in this country. In Europe, the median age of an automobile is 14 years. In the U.S., it just above 9 years. People just can't afford to buy a new car as frequently as they do here. On top of that, gasoline taxes are so high that the per-gallon price of gasoline is 2 to 3 times what it is here; all throughout Europe. In terms of housing, there is an even larger disparity in the standard of living. In this country, the average new home being built is about 2,220 square feet. In Europe, that number is closer to 1,000 square feet. In Britain, it is actually only 815 square feet.

I get a little tired of all the talk that we should be more like Europe. The direction that Obama and the Democrats are taking us would literally cut our standard of living in half. That's what being more like Europe is all about. And, that's what the VAT will do to us.

Just a few more comments. Despite all their taxation, most of Europe is still neck-deep in deficit spending. That because, as taxes are increased, the economic expansion is reduced and the effect of any new taxes is completely negated. It's like the Post Office raising rates in this country. With every rate increase, the U.S. Post Office actually get's even deeper in debt because they continue to lose business. As a result, any rate increase is never enough.

The European Union -- only just a few years old -- is close to collapsing in favor of returning to country-by-country individualism. That's because Greece, Spain, and Portugal are near bankruptcy and they are dragging down the "Union". In the U.K., they have just raised their taxes even higher and my guess is that will only hurt their economy even more than it is being hurt tight now. Throughout the last two decades, most of Europe has had unemployment rates that were 30-50% higher than this country. This is the great economic model that Obama and his socialist friends seem to think we should follow.

One last comment about Volker. All of a sudden he's worried about all of our debt and is proposing an expansive tax structure to fight it. Where was this supposed genius when Obama and the Democrats decided to raise the national debt by nearly 30% or by $3.2 trillion dollars in "just one year" from the previous $10.8 trillion. All these people have done is put this country on a typical liberal economic treadmill. First, they create the debt. Then, they plan to fix it with taxes. But, with new taxes, they again start spending. And, again, the fix is another new round of higher taxes.

Pelosi Says Value Added Tax Is On The Table

Earlier this week, Nancy Pelosi, in an interview on the Charlie Rose Show, said that a Value Added Tax (VAT) is on the table to help pay for health care:



In that interview, Nancy made it sound like it would be applied to make up for the health care cost differential of domestic versus foreign products. But that's not true. It will be primarily applied to our own manufacturers and not those who import finished goods. It would basically hit our domestically manufactured products the hardest. Otherwise, it would be called an Import Tariff and not what she is calling a VAT. But, she is clearly talking about a Value Added Tax that will be applied to all manufacturing and, I suppose, somehow, finished imported goods.

The problem with a VAT is that it is one of the most job and company killing taxes that ever existed. It ignores whether or not a company is profitable and even able to pay the tax. Instead, it is a tax that becomes attached to the cost of doing business, and it is passed along throughout the manufacturing process of the finished goods from one company to another; with each company paying the tax along the way. In effect, it is a roll-up tax that gets compounded each time value is added to something.

Take for example, a steel company. Assume that it buys iron ore from a mining company and then turns that ore into various types of end-product steel such as rolled steel. The end-product, the rolled steel, is a product that has added value from the original iron ore, and it will be subsequently taxed for the increase in its value. That tax is applied before any profit or loss is realized by the steel company. If the steel company is profitable, it will pay that tax in addition to any income tax on its profits. If the company is losing money, the VAT will still have to be paid and that tax will only deepen the company's losses.

From there, the rolled steel might be sold to another company to make something else. That something else could be an automobile trunk lid or a washing machine frame. Whatever that rolled steel is made into will be considered, again, to be value added. Once again, the government will tax the increase in value. And, so it goes until you or I eventually buy the product.

Ultimately, we will pay for that tax in higher prices for all the things we buy. Further, the VAT will punish our own manufacturers because it will make our products more expensive and less competitive against foreign made finished products. That's because the tax will be applied all along the manufacturing process on a compounded basis. At best, this tax will only be applied to the straight value of the finished imported goods.

We are a country that is losing manufacturing operations by the day. Now, Nancy Pelosi wants to punish American manufacturers even more.

Lastly, it will hurt the poor the most because of their inability to pay the resulting higher prices. So, in effect, we are going to give the poor free health care; but, at the same time, punish them by making all the things they need in order to live, from clothing, to cars, to furniture, more expensive for them to buy. This is totally insane!