Wednesday, January 5, 2011

Representation Without Taxation Can Lead to Calamity

Dennis Berman's article in The Game column in The Wall Street Journal contrasts another time in U.S. history when asset values soared, were leveraged, then went bust. State budgets were in dire straits, just like California and Illinois in 2011, which are seriously discussing defaulting on their debts.

In 1841, 8 states and Florida (which was a territory at the time) defaulted on their debts. Investors were understandably alarmed. Yields for state bonds went from 12% in 1841 to nearly 30% in 1842. "To this day, Mississippi hasn't paid back some of those bonds, even after a 100-year English bid to collect," Mr. Berman wrote.

Those were very different times than we are currently experiencing, with the rise of deficit hawks and the greater influence of Grover Norquist, who founded the Americans for Tax Reform, which firmly requests that all politicians sign a loyalty oath never to raise taxes.

There is a large disconnect between the notion that taxes pay for necessary state and city services and that taxes are an abomination. If state services are maintained, that actually encourages investors to buy bonds because with improved services, the state becomes sustainable and hence, more valuable. This is what happened in 1841, when taxes were raised in the defaulting states:

Leaders and citizens of the 1850s were more willing to accept new taxes to pay for the infrastructure and to defend, in the earn words of the time, their "moral duty" of meeting debts.

Most of the states eventually paid off their debts, and changed their laws to safeguard their finances, helping make U.S. states some of the world's best credits.

Elementary arithmetic. It's better to pay, say, 4.02% (current yield) on a 20-year Treasury bond than a 30% yield.

The railroad boom came along in the 1850s, bringing with it prosperity, which eased the burden on the states.

"People didn't want to raise taxes but they did," says John J. Wallis, a University of Maryland economic historian. "[C]onstitutional laws have made it harder to raise taxes than to raise expenditures," he says.

Unless we as a nation want our states to crumble, we have to have a more sane, less knee jerk reaction to paying for our upkeep.

After all, the Congressional Republicans (and influential outsiders), whose motto might as well be, "Let everyone fend for themselves, unless they have political influence," and who undoubtably intend to veto any bill that might save our states and cities, pushed through a continuation of the Bush tax cuts. As estimated by the Congressional Budget Office (CBO) in 2005 when the cuts were in effect:

In 2005, the cost of tax cuts enacted over the past four years will be over three times the cost of all domestic program increases enacted over this period.

They neglected to include any way to pay for the cuts' exorbitant costs, a breathtakingly hypocritical stance according to their avowed philosophy. From my perspective, their major policy stance is that they intend to roll back all Democratic initiatives. If I were a cynic, I might believe that this was a plan to keep our country in a state of neglect and disrepair heading into the 2012 elections. More from Mr. Wallis:

"There is nothing wrong with raising taxes to support government services that voters want and are willing to pay for," he says. But government needs to be set up "so that both voters and legislatures are forced to make decisions about taxing, spending and borrowing simultaneously."

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