stainless and aluminum inventory at General Steel, Inc. Macon GA

In 2008 General Steel, Inc, the company I run, had a good year. We generated record sales, profits and taxes.

In 2009 volume fell sharply as a result the credit collapse and the collapse of the prices of the commodities we sell. We lost money and paid no taxes. In fact the losses will carry forward and ‘shelter’ the profits  we are now making ( on much lower volume ).   I much prefer the year we were paying taxes.

When business was good we never complained about the taxes. We understood it as a cost of business and planned accordingly.  I rarely heard about what our fair share was,  but given the amount of taxes we paid, I would take exception with those who contend that we did not pay more than our share.

I started to complain in 2009 when  the new regime started talking about cap and trade and the card check bill.  We started to expect the worst.  We were fighting to control expenses in a bad market, but this set the tone of the new government.

Cap and Trade and the Card Check Bill never came to fruition but The Affordable Health Care Bill and the Dodd Frank financial bill did.  Besides the substantial tax increases  embedded in the bill, we are saddled with higher costs and fees because of these bills.  Unlike taxes which I have to pay only when I earn a profit, these regulatory costs and fees are incurred regardless.

For those who think anyone with a six figure income should pay more taxes in the name of social justice or “structural unfairness”  (a phrase I saw on Facebook from a ‘social activist’),  I am with you.  I would love to pay more taxes.  I would like to hire more people.

For me to pay more taxes I need to make more profit, and this is hard to do when every week  I am targeted with new laws and regulations, and when the constant words from the bully pulpit is that I am never paying enough.  The biggest obstacle is not that rates may be higher, but that I never know what the rates will be or how long they will remain stable before they go up again.  Before the taxes from the Affordable Health Care Act  (Orwellian name of the year) have taken effect, Warren Buffet is trotted out to justify even more taxes.  Now $200,000 in income will merit a tax on millionaires.

Earth to K Street: I can’t pay taxes on income I don’t make.

The super wealthy want to pay more taxes, and the lowest income pay no taxes.  The ‘working wealthy’, those who start and run the small companies like the ones  Warren Buffet buys,  were OK making money and paying the vast majority of taxes and creating the vast majority of new jobs.

I bet most of them would like to return to those days.

I’m proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money. – Arthur Godfrey..

Taxes are often defended as the price we pay for a civilized society. Yet financial newsletter writer Mark Skousen contends the opposite: that taxes are the price we pay for FAILING to achieve a civilized society.

In a civilized society citizens do not have to be forced to be responsible for the themselves or for their neighbors.  Charity is expected, not forced by government.

In our less than perfect world where we need protection it makes senses to equalize contributions for defense, property protection, courts and some infrastructure.  Our republic recognizes the need for a limited government. Where we stray is when goods and services are labeled as rights.  In order for these to be considered rights, it requires a transfer of money from one citizen to another.

The constitution recognizes the rights to a free press, free speech and freedom of religion.  These are truly rights.  There is not a price tag associated with them.  Transportation, a comfortable retirement, health care, food, and a minimum income have price tags and as such are not rights but consumables.  As consumables they must be paid for by someone.  These ‘rights’ require money extricated from someone else and thus requires the force of a government. This requires government to become a usurper of property rights rather than their protector.

Once we use government to distribute commodities and services then government becomes a means to wealth rather than an enabler.  Government rather than private initiatives becomes a source of wealth.

We are at a crux where we must face the limits of government.  While the debate is often framed between those who want the government to do good for the citizens and those who want to protect the rich, this is a ruse and the voters know it.  The debate over how much we want government to control our lives and decisions is about power.  The ruling class is not just those who draw a check directly from the government but includes those know well how to use the government to obtain preferences in the market at the expense of their competitors.  This is what drives the lobbying industry.

This struggle is about whether power should rest in the hands of the people or in the hands of an elite who use this power to try and buy off just enough voters to stay in power.

We like to think the government is just protecting the environment when we see incandescent light bulbs being outlawed. What I see is an industry that has succeeded in getting the government to pass a law eliminating a cheap light bulb so they can sell one that costs ten times the price, not to mention a bulb with a much higher cost to dispose of safely.

When we see how our tax dollars are being spent today there is little that is civilized about it.

Preaching that this is not class warfare generally precedes a volley in the self destructive attacks on the wealthy.  It is like the shyster who precedes a dishonest act with “trust me.”

There was some news of some of the protesters on Wall Street being paid to march.  That pretty much sums up the integrity of their argument.

Apparently the Democrats do not agree what wealthy is.  The president wants to define it as over $200,000 for singles, $250,000 for households.  Chuck Schumer and Nancy Pelosi  thinks it should be over $1,000,000 in income.  I have contended that clarity destroys poorly thought out plans. For the controlling elites excess wealth is the income from anybody who either a) makes more money than they do or b) makes it in an industry or profession that they deem less worthy than their chosen or preferred profession.

Speaking of poorly thought out plans, Herman Cain’s 9-9-9 plan smacks of yet another poorly thought out  populist idea.  I like Herman Cain in many ways and I like a consumption tax for several reasons, but the devil is in the details and tax policy is no place to think out loud.  It takes some thought.

The President’s jobs bill was dead on arrival: another poorly thought out plan, a political hip shot at poor economic performance. The tax increases from the health care bill have not even taken effect yet and he is already piling on additional taxes.  Republicans in the Senate have petitioned to bring it to the floor (assuming to embarrass the president and his own party) and Harry Reid has killed the vote.  The bill does not even have a co-sponsor from his own party in the House.  Yet the Republicans are blamed for obstruction. This is not a serious effort to stimulate job production; it is a cheap political stunt.

Elizabeth Warren

While our political conversation should be focused on the deficit and unemployment, or the size and role of the government in our lives, we have been distracted by rhetoric on fairness and the wealthy. We are mislead by extreme examples like Warren Buffet that most wealthy are not paying their fair share.  Warren Buffet decried the fact that he pays a lower percentage of his total income in taxes than his secretary.  The President has mirrored his statement saying that billionaires should not pay a lower tax rate than janitors.

Elizabeth Warren, running against Massachusetts  Senator Scott Brown for his seat, fired a volley in the class war claiming that “There is nobody in this country who got rich on his own — nobody.”  She clarified further:

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea.  God bless. Keep a big hunk of it.  But part of the underlying social contract is you take a hunk of it and pay forward for the next kid who comes along.

Ms. Warren’s comments reflects a juvenile understanding of our tax system and addresses only one side of the social contract.

There are many different kinds of taxes that carry different rates for various reasons.  A wealthy retired person could have all of his money in municipal bonds and pay no taxes?  Is that fair? Should we remove the tax break for municipal bond interest?  This will certainly raise the cost of financing your new sewer system or power plant and will raise your power and water bills?

Warren Buffet likely makes a much larger percentage of his income from capital gains.  There are already plans to raise the capital gains taxes embedded in the Health Care bill that was passed, but this curiously takes effect after the 2012 election.  Just the anticipation of it, however,  will have an effect of current capital investment.  Currently the capital gains tax rate is 15%. It was lowered by both Bill Clinton and George W. Bush.

Capital gains is distinct from income in a few ways.  Capital gains is often the income that accrues over many years but is actually realized in a single year.  When we recently sold a company that had been in the family for three generations the capital gains we paid reflected the growth of the company over 90 years. Over nearly a century we paid millions in income tax, sales tax, and property taxes.  All of that is incurred before the gain on the basis is taxed at a lower capital gains rate.

This is true with any company that grows over time and generates a capital gains tax if it’s stock is sold at a  profit.  The capital gains rate is lower because it reflects these realities.

There is also the reality that we compete with other nations for investment capital.  There may be advantages to investing in the United States that would merit a higher tax rate, but while the president is refuting the idea of American exceptionalism, he should also be aware that we have become a much less ‘exceptional’ place to invest. Our corporate taxes are relatively high and the capital gains rate in China is zero.

If we are using the example of Warren Buffet and the reason that he pays a lower percentage than his secretary is that he has a higher percent of his income in capital gains or tax free muni bonds then I must assume that the president is calling for a much higher tax rate on these two sorts of income.  If he is not then he is either being intentionally deceptive or monumentally naive and ignorant .

If he is talking about raising the rates on these taxes then he risks major damage to investments, and without more investment then there will not be more jobs.  I doubt such an idea would make it through either house.  So far his own party seems reluctant to push for his recent jobs bill because it is aimed more at higher taxes on the rich than it is about creating jobs.

Warren Buffet himself noted that even if they substantially raised the taxes on the rich that it would do very little for solving the debt crisis.  And even Obama has noted that higher rates may reduce the actual dollar revenues.  Would they pursue their distracting quest for fairness even if it makes the deficit worse and increases joblessness?

Elizabeth Warren speaks of a social contract when she suggests that the successful should pay higher taxes.  The current progressive tax structure accomplishes that, but that does not give the government carte blanc to spend whatever it wants on whoever it wants or to regulate the light bulbs we read by, the amount of water we flush or the type of wood used on my Gibson guitar.  We don’t mind spending for roads, police or schools, and even some welfare, but a contract means there is also some obligation of the other party to be prudent with the money they spend.  Few Americans feel that the government is upholding their end of the social contract.

More than  few from the opposition have criticized corporations for sitting on too much cash.  Companies are not in the cash holding or cash management business.  Especially in today’s environment of near zero return on short term holdings, one should ask  why the companies are sitting on so much cash.  The short answer is that they cannot find a better risk adjusted return… yet.

That ‘yet’ answers why they do not just return it to the shareholders.  They are optimistic that opportunities will return.  And they are less optimistic that the banking system can be depended on to supply them with the credit when they need it.  It is safer to keep the cash to finance new projects internally.  It also avoids taxes on dividends to the shareholders.  And then shareholders must decide how to deploy the capital, and they face the same limitations.

But the big reason for this state of affairs is a the inconsistent and self defeating economic policy of this administration.  The Federal Reserve has plied a loose monetary policy to stimulate demand, but at the same time we have been showered with new laws and regulations and other friction costs that have stifled production.   The Federal Reserve has showered us with money and the Congress has made us afraid to spend it.

The bully pulpit war on wealth is not inviting to capital investment.  We are foolish to look at the laws themselves.  Risk is combination of hazard and outrage.  The OMB does not know how to score outrage, but it has become a major factor in the minds of those who deploy capital (and create jobs).

The short term horizon of the tax breaks is useless.  Nobody will take long term risks for short term gains.  Business and individuals do not think nearly as short term as the government that tries to control their actions.

At the risk of repetition the tax rates are secondary to their consistency. If we have to fear that our taxes will go up, deductions will be eliminated, depreciation schedules will be altered, and penalties will be triggered  then we will be hesitant to deploy new capital.  We also realize that we will have to comply with regulations that are yet to be written by regulators that have yet to be appointed.

We have deployed a discordant capricious policy that has brought us to a very liquid state of inaction.