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Source link: http://archive.mises.org/15893/taxpayers-in-revolt-a-look-back-to-see-the-future/

Taxpayers in Revolt: A Look Back to See the Future

March 4, 2011 by

State legislators will have a hard time cutting budgets. You might say government workers feel entitled. When it comes to raising taxes, when the government pushes you down on the sidewalk — seeking to lighten your wallet and claiming someone else is more worthy of your money than you — you push back. FULL ARTICLE by Doug French


Daniel Hewitt March 4, 2011 at 9:31 am

“What would happen if tax victims, rather than tax-feeders, were to go on strike?”


A Liberal in Lakeview March 5, 2011 at 2:21 pm

They would have to defend theirselves against the tax victims who benefit more from taxgathering than the taxgathering costs them. Of course, I don’t mean to suggest that government employees are tax victims. Those employees are tax beneficiaries, but not tax victims. They pay no taxes at all and are put through the ordeal of withholding and filing tax returns merely to avoid embarrassing questions from tax victims.

Instead, the tax victims I’m thinking of are people like the Primary Dealers, whose interests are intimately linked with the rebellious taxfeeders in Wisconsin by way of massive government borrowing. If the Hydra’s credit rating were to plunge, that would be bad for the Primary Dealers’ business with the FRBNY.

Other such victims include business people who build and maintain federal roads, esp. that obnoxious interstate system. Another group is the Pentagon’s vendors. Can’t imagine them being too happy about a strike against Hydra. Then you have all those veterans on the dole and the flagwaving for military communism. So you have no shortage of enemies who’d be happy to see the police (taxfeeders who operate a security monopoly) crack your skull for daring to end their taxfeeding.

Btw, the 16th amendment was adopted in February of 1913. It’s 99th anniversary will therefore be in 2012, which is the subject of various prophesies, New Age flimflam about spiritual transformation, and so on. In fact, I think the Mayan prophesy was based on flawed astronomy, now discredited. Nevertheless, maybe 2012 can be put to good use anyway, and, most importantly, outside and apart from that year’s electoral circus. Let the Hydra on the Potomac be weakened by a starvation diet.

A strike on the 99th anniversary will develop some momentum and provide an opportunity to gain some valuable experience. Then comes the big 100. What’s needed are an army of Herculeses and charioteers.

Oh, yes, one more thing. The Federal Reserve Act turns 100 late in 2013, and the first FRB, 100 in 2014, if I’m not mistaken. Whoever is appointed President in Nov. 2012 will have a hellish term, and wouldn’t it be great if that were Obama?

Walt D. March 4, 2011 at 11:09 am

The big problem for the States is that they can not tax their way out of debt.
One of the reasons that California is in so much trouble is the progressive tax code. When the Dot Com bubble burst, the number of “millionaires” dried up and the windfall went away. Meanwhile, the long term obligations, based on this stream of revenue continuing forever, stayed.
The primary problem of raising taxes at the State level is the so called “Dukakis Effect”, named after the governor of Massachusetts who raised tax rates only to see a large part of the high tech industry move to Texas.
There is big difference between raising tax rates and actually collecting the taxes. Not only do large businesses relocate, but small businesses, who can not relocate, close. As people follow their jobs out of state, property prices become distressed, and property tax receipts go down. Also, claims for unemployment go up. The high taxes discourage new businesses from starting up, or relocating to the state.
We need only look to Michigan to see where the tax and spend policy ultimately leads.

Wuggles March 4, 2011 at 5:07 pm

Amen brother.

Ray Rock March 4, 2011 at 11:47 am

A big part of the problem for many states are retired bureaucrats’ pensions and healthcare. They should deal with that by turning the system over to the beneficiaries and making them take responsibility for themselves.

They can turn the pension fund over to the union and the municipality can contribute say 6% of participants wages into the system. The workers and union can determine what each worker will pay and how benefits will be distributed. It would be up to them to manage it and if it runs short they will have to deal with it with no help from the taxpayers. GM did something similar when they turned their pension fund over to the union. Workers should be given the choice to join the union pension fund or to take the employer contribution as a match to a 401K.

Utah did something similar for new workers, the state contribution to the plan is no longer open-ended but is legally capped at 10%.

Gustavo Sanin March 4, 2011 at 12:13 pm

Bravo Mr. French!! Mises.org is a beacon of knowledge and a generator of hope!

Ned Netterville March 4, 2011 at 1:50 pm

I’ve been (labeled by the IRS) an “illegal-tax protester” since 1971. Haven’t paid federal, state or local income taxes since then, and certainly never will again. I kinda think its about time for many others to join the revolt and tell those thieving consumers of OPM (sounds like opium, is equally addicting, stands for other people’s money) to take a hike.

J. Murray March 4, 2011 at 2:09 pm

By that definition, it makes me wonder what it takes to be labeled as a legal tax protester.

El Tonno March 5, 2011 at 8:46 am

It’s when you go on strike to ask for more taxes.

Donald Nash March 4, 2011 at 2:50 pm

CAUTION: This article over-hypes the possibility of municipal bond defaults. Unless you think your state and local governments are going to disappear any time soon, there’s not too much to be concerned about. If asked, I doubt many people could list the names of a mere half dozen municipal defaults… not just in a single year, but ever.

If you’re an investor, make sure you do your homework and understand the underlying pledge behind each bond you hold. In the state of Indiana for example, municipal issuers of General Obligation debt are statutorily required to levy property taxes large enough to pay the debt service, and these local rates and levies are reviewed annually by the state government to verify their accuracy.

Like I said, unless you think that you’re local government or school district is going to suddenly disappear, you probably don’t have much to be worried about. And even in the unlikely event that this were to ocurr, you obviously wouldn’t have to pay taxes either.

Libertarian jerry March 4, 2011 at 6:10 pm

This is what happens when socialism and socialists reign. They think that by passing a law or a tax people are going to act the same way after the laws and taxes were passed. When people rearrange their lives to avoid paying taxes or to avoid obeying certain laws the collectivists don’t know what to do. These same socialists think that the “just” laws and taxes they pass will solve society’s problems. In the end these laws and taxes only make things worse. Only when violence or threat of violence takes place do people conform to the new laws and taxes. This is why Socialism is a gutter philosophy. Because it is based on envy,violence and on mob rule that we call democracy.

Don March 4, 2011 at 10:49 pm

The Illinois Pension Funding/Campaign Contribution Cycle
Is my understanding of the situation in Illinois correct?
Unions give Quinn $10 million in campaign contributions to run for governor.
Quinn wins the race and becomes a union puppet.
Quinn proposes a multi-billion dollar increase in income tax to fund the underfunded union pension plans. The funding would be immediate because the state would sell muni bonds to investors. The income tax increase is needed to persuade investors to lend money at low interest rates.
The union members receive billions in exchange for $10 million in campaign contributions.
Quinn, when he decides not to run again for public office, pockets the leftover campaign contributions, because in Illinois politicians have made it legal to steal, and called it “campaign finance reform”.
The names change but to game is the same.
As Yogi Berra once said “it’s like deja vu all over again”.
The only way I know to stop the cycle is to stop funding it. Perhaps investors should consider not buying muni-bonds from California and Illinois.

Joe March 5, 2011 at 6:56 pm

There is another way. The citizens of Illinois get their head out of their butts and out vote the union voters.
They just voted in another crook in Raul.
Leave the state and try and find more friendly people that hate taxes.

Don March 4, 2011 at 10:53 pm

Underfunded state pensions are the direct result of the 2008 sub-prime loan driven stock market collapse.

The State of Wisconsin plans took a $23 billion hit from that torpedo in 2008 and never recovered.
Wisconsin is one of the better managed states. This was a good performance that year.

According to the 2010 Pew Study of States, the consolidated losses of all states is in the $Trillions.
In the private sector most people took an immediate hit in their 401ks and IRAs. After the creditors, shareholders and bondholders were wiped out at Chrysler and GM, UAW members received an $80 billion pension fund bailout from the Federal Government.

In the public sector people are not willing to take any hits. They want to recover their losses from the taxpayers.

Now taxpayers have elected 900 pound gorillas to represent them in negotiations.

This is not a pretty picture. I hope cooler heads prevail.


Don March 4, 2011 at 10:56 pm

This is like a religious pilgrimage of liberal Democrats, from Wisconsin and Indiana, to Illinois.
Illinois is the new Mecca. Liberal Democrats are praying for ALL THE—ALL THE money it takes to pay the debt they created. According to a recent Pew report (available on the internet), unfunded pension liabilities for these states were:
Illinois $54,383,939,000
Indiana $ 9,825,830,000
Wisconsin $ 252,600,000


Tim Kern March 6, 2011 at 3:44 pm

Illinois has long beeh a haven for rogue politicians.Now they’re just importing more of them.

Don March 4, 2011 at 10:59 pm

Part one
In the year 2008 the State of Wisconsin pension funds lost $23 billion due primarily to the subprime loan fraud.
The subprime loan fraud did severe damage to almost every State pension portfolio in 2008. This fund like most other State Pension Funds has yet to recover completely from the subprime loan debt torpedo. The math is brutal. When you lose 50% you need to gain 100% to recover. People talk about the unfunded portions of State Pension Plans, and it is in reality a discussion of the impact of the Subprime loan fraud.
This fraud was originated, orchestrated, and enabled by the Federal Government.

Don March 4, 2011 at 11:00 pm

Part 2 Re: Subprime loan fraud (continued):
The subprime loan fraud originated in the 1960’s in response to the social unrest at that time. Major parts of Chicago, Detroit and Los Angeles were set on fire. Conditions were not unlike the social unrest we are now witnessing in the Mid-East.
Most of the areas of the USA that were destroyed were never rebuilt. The Johnson Administration and local politicians like Mayor Richard J. Daley of Chicago caved. President Johnson offered FHA and VA financing for anyone looking for homes. Mayor Daley allowed teams of realtors to go door to door to bully, intimidate, manipulate and extort homes from the civil-servant class people on the south side of Chicago (except for the sacred cow ward of Bridgeport, which is where he lived.) This practice was later called “block busting” and is now illegal. I refer to this as the birth of BIME socialism (Bully, Intimidate, Manipulate, and Extort). http://en.wikipedia.org/wiki/Blockbusting
After passing the Civil Rights Act of 1968 (commonly known as the Fair Housing Act) http://en.wikipedia.org/wiki/Civil_Rights_Act_of_1968
President Johnson did a masterful job of making the debt and bad debts disappear. He converted Fannie Mae and Freddie Mac into quasi-governmental institutions to remove the debt from the books of the Federal government. http://en.wikipedia.org/wiki/Fannie_mae. At this point in 1968 Fannie and Freddie became publicly traded companies.
Bankers unloaded the risk from mortgages on Freddie Mac and Fannie Mae.

Don March 4, 2011 at 11:01 pm

Part 3 Re: Subprime loan fraud (continued):
Other politicians fed the problem. For example:
President Carter gave us the Community Reinvestment Act of 1978. This, coupled with the Fair Housing Act, placed the subprime loan program on steroids. http://en.wikipedia.org/wiki/Community_Reinvestment_Act
In 1999 President Clinton signed into law the Gramm-Leach-Bliley Act, a bank deregulation bill that repealed a Depression era law known as Glass-Stegal. http://en.wikipedia.org/wiki/President_Clinton.
This allowed commercial banks, investment banks, security firms, and insurance companies to consolidate. Stock Brokers masqueraded as bankers. They sliced, diced and bundled these mortgages for sale to the public.
By the time the subprime debt torpedo hit, about 40 years later, millions participated in the fraud including BANKERS, REALTORS, CONTRACTORS, INVESTMENT BANKERS, and STOCKBROKERS AND FINALLY THE PERSON APPLYING FOR THE LOAN. NIJA loans were a joke (no income, job or assets) you get a mortgage.
Now the joke is over. Pension plans may never recover from the losses. In the private sector people accepted the losses and the consequences. Public sector employees are not willing to accept the losses and, based on union contracts; expect taxpayers to pay for these losses as well as the losses they experienced in their private portfolios, 401ks and IRAs.

Don March 4, 2011 at 11:02 pm

Part 4 Re: Subprime loan fraud (continued):
After the birth of BIME socialism the attitude of entitlement thinking continued in the union movement. Emboldened by the success in the subprime loan fraud, union members gained control of the Democratic Party. They are the primary financial sponsors of these union puppet politicians. The puppets sit on the taxpayer side of the negotiating table. They never saw a contract presented by the union that they would not sign. As a result public sector employees have received better compensation packages than employees in the private sector.
Now the financial well is running dry in most states. As a result union members may be losing their collective bargaining rights. If this happens the liberals in the Democratic Party will lose their source of campaign financing— Union PAC money. Since liberal Democrats introduced, originated, orchestrated and enabled the sub-prime loan fraud, it will be poetic justice when their union funding disappears.
I only have two suggestions for resolution of the Wisconsin situation:
1) Increase the retirement age from 57 to 67 to reduce the life expectancy for paying pensions from about 30 years to about 20 years.
2) Replace the defined benefit pension plans with defined contribution programs.

Don March 4, 2011 at 11:07 pm

Thanks for the great article. Your research pays off.

Ned Netterville March 5, 2011 at 10:27 am

@DONALD NASH: “In the state of Indiana for example, municipal issuers of General Obligation debt are statutorily required to levy property taxes large enough to pay the debt service.”

So what? Mr. Nash, Doug French’s article points out that at some point levying large property taxes doesn’t work. There is a finite ceiling on all taxes above which they cannot go because the tax slaves can’t or refuse to pay. Above that point the higher taxes are raised the less revenues are collected as more and more people can’t or wont pay. Your assurance that municipalities wont default on their bonds is akin to the assurance of those triple-A ratings that the rating-agency crooks put on those mortgage-backed bonds before they imploded. With those AAA ratings there were many suckers, including not only the rating agencies but many of Wall Street’s leading lights as well, who believed those bonds were as safe, just as you believe muni bonds are today. Nor is a history of few muny defaults much of an assurance. Before the housing crash there were few defaults on mortgage-backed bonds, but that didn’t help the bond holders when the crash came.

The only recourse municipalities have to address taxpayers who can’t or refuse to pay their property taxes is to foreclose on the delinquent property. But there are many municipalities in America today where that is practically impossible. Due to the crash in the housing market there are a ton of properties already in foreclosure in those communities. Adding more houses to that inventory in a vain attempt to collect taxes to raise revenues would have the effect of further reducing already depreciated property values, and thus reduce total tax revenues by more than could be raised by the foreclosures. The fact that the municipalities themselves cannot disappear is no assurance that the bonds can’t lose much of their value. I’d say that in general they are about as safe as those GM bonds were before the company went bankrupt.

@DON. Thanks for your comments. Very informative and a fine supplement to Doug French’s article.

Walt D. March 5, 2011 at 11:09 am

The problem in California is that under State Law (Proposition 13), property taxes as limited to 1% of the purchase price or the fair market value. The purchase price grandfather stops the tax from increasing until the property is sold. (There is a small annual escalation amount).
The problem is that many houses that were purchased during the bubble are now under water – the owner can apply to have the property taxes re-assessed down. This results in less revenue to local municipalities.
There are literally millions of muni-bonds. Some of these bonds do go into default. However, they are usually small.
That does not mean that a State could not default. As Nassim Taleb would say – the fact that I have never been observed in a dead state does not make me immortal!
If there is a collapse, the muni-bond rating agencies may well go the way of Arthur Anderson. They were very lucky to get off scot free in the mortgage meltdown. Without their erroneous AAA ratings, the housing bubble could not have taken place.

A Liberal in Lakeview March 5, 2011 at 2:34 pm

“They [the teachers] chanted ‘Freedom, democracy, unions!’ ”

Maybe those were the teachers of civics. And they wonder why so many people want to homeschool
their kids and to shut down the public schools.

A Liberal in Lakeview March 5, 2011 at 3:10 pm

“At the same time, real-estate values plunged between 1927 and 1931 with the value of new construction falling 86 percent and existing real estate dropping 38 percent in value.”

Not true. Real estate has prices that are offered and bid, but real estate has no intrinsic value, not even when the Cook Co. Assessor says so. Like the money metals, real estate is desired and valued, but to claim that it has value is to project subjective desires onto it.

Tim Kern March 6, 2011 at 3:51 pm

Poor Jimmy John — he didn’t do his homework! Florida has no personal income tax, but the state taxes everything else to the hilt! A rental car out of Orlando recently cost me $96 — and just $54 of that went to the rental car company. My real estate tax tripled in five years, even as no one outside the assessor’s office thought the “value” was escalating.

I left that state for Indiana, where real estate is affordable buy from its owner and to rent from the state, after it’s paid for. (Property taxes on residences are capped — constitutionally, now — at 1%.)

Anybody want a couple houses in Florida?

Ned Netterville March 6, 2011 at 10:24 pm

Hey Mr. French, there’s an article on the troubles facing municipalities in today’s (Sunday 3/6/11) NYT. I commented there (#272) and linked to your article. Hope some of those folks who read the Times and think Wall Street and the greedy rich are to blame for the financial problems of the cities and states will come by the Mises blog, have a look around the site, and perhaps learn something new while they are here.

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