When Belief in the System Fades (California Tax Rebellion)
  (May 20, 2009)

The profound disincentives in our economy are leading productive middle class entrepreneurs to drop out. The government's response is to raise taxes, speeding up the loss of faith of those still struggling to survive.

The entire Survival+ analysis focuses on the multilayered ways the middle class is being squeezed to exhaustion / insolvency. I began addressing the first step of this process last year-- a process which begins When Belief in the System Fades (March 12, 2008).

I then added further analysis as part of the Survival+ project (eBook to be released for free July 4, 2009): Survival+ 10: When Belief in the System Fades (April 9, 2009)

The fundamental theses:

1. taxes are crushingly high in the U.S. for small business, and the supposed "low tax rates" are propaganda/disinformation

2. systemic disincentives include overregulation, a tort/legal system run amok and insanely overpriced healthcare costs

3. an overlapping series of parasitic fees, levies, licensing, etc. burden the productive class while evading the label of "tax"

4. The Plutocracy and State (two sides of the same coin) have overreached in grabbing ever-larger shares of the national income, and they need the middle class to believe in the system and keep paying the taxes needed to support the State's overreach.

Readers have provided confirmation of this analysis: Reader Comments on When Belief in the System Fades (April 10, 2009)

Reader Mike B. recently sent in a comprehensive, incisive commentary on all the issues I describe with the term "When Belief in the System Fades."

1) I really enjoy your articles. You write with clarity and with a great sense of presence. Your background is responsible for this...you've "been there, done that"...and it shows.

2) I've been in business for myself since 26 years of age...40 years ago. I've always been a small-scale entrepreneur, and been quite successful. I live very economically, laughably low on the scale in terms of consumerism, and have good health and a pleasant life as a result. So we have a good deal in common in that respect.

3) I read with interest all your articles respecting the economy, the current flounderings of big government, big banking, and big business...all obscenely intertwined in this day and age. I agree with practically all your views on these subjects.

4) As a result of the above, the main question in my mind is this. If the bulk of the economy is currently based on small business, how can this economy ever "recover" to even a shell of its former self if there's no longer any real incentive for anyone to go into business?

I talk weekly with other small-businessmen/women, and to a person they adamantly state they'd NEVER start another small business today because of the onerous taxes, regulations, and other outside influences by government which make it nearly impossible for them to do this. They're psychologically completely demoralized, and if they're close to retirement, they plan to "stick with the game" only for the few more months or years needed to "wrap it all up". If not close to retirement, they're "pulling in their horns", learning how to build wealth by keeping a low profile, and when possible, shifting income to cash, barter, worksharing, etc.. Many are those who would sell out...if they only could!

The entrepreneur who's bound and determined to attempt enterprise in the future is left to forage mainly for "underground" activities...presumably legal ones...such as small-scale manufacturing, farming, etc.. Markets for their products will be the Internet, flea-markets, farmers' markets, and the like.

Predictably, because of these limited markets, such entrepreneurs will tend to rely on small, less risky, cash only, capital investments, and thus, small production facilities, small workforces, "under the radar" tax payments, no benefits to part-time employees, and the other techniques needed to maintain their enterprises.

While this may result in a fairly good living for the entrepreneur, and perhaps even for his/her favored employees, it's not the stuff of which enough capital is generally produced to develop community wealth.

Thus, it appears to many reasonable people with whom I discuss the matter, the main obstacle to renewed economic stability is not lack of printed paper money to be loaned out at interest, and which will only add to future financial instability, but rather, the great fear of mindless government confiscation of any small profit the entrepreneur may accidentally acquire in this very risky business climate.

If this is true, it's clear there will be no recovery, at least in rational terms, until thousands of government regulations which destroy personal incentive are removed from the books.

I can't see this happening anytime soon. In fact, each day brings the news more and more governments are INCREASING taxes, enforcement personnel, regulations...all in the name of maintaining "services" such as government payrolls, pension plans, various w elfare systems, but all of which further destroys entrepreneurial incentive. Therefore, I must also conclude there'll be no stability of the economy any time soon either.

From all evidence, we're now seeing the real-life results of yet another experiment in socialism concluding predictably, but on the largest scale in history. We now have a population trained almost to a person to believe in the omnipotence of "big daddy" government. So much so, it's abandoned the principles which formerly gave it great strength...principles of self-sufficiency, moral belief in hard-work and enjoying the rewards of this, principles of thrift, respect for the property of others...on and on.

With a belief in "cradle to the grave" so-called "security" offered by glib politicians who have no idea how to deliver such "benefits", this former noble population has been reduced to a nation of beggars demanding eternal handouts...handouts which are dwindling as fast as the former forests of Easter Island.

Again, as I see it, it's not a problem of printing more paper money. It's a problem of individual thinking in terms of personal morality.

Printing money, especially in the form of computer digits, can be done in an instant. Building character and building a nation of solid financial structure takes generations.

The relative value of both is readily apparent.

Interestingly, readers who are not small business entrepreneurs occasionally write to say that paying taxes is a social obligation, etc. and so why are people complaining? This disconnect between the experience of those who create the jobs and pay the lion's share of the taxes and those who are feeding off the taxes is disturbing.

The citizen who has a few children and a modest income pays no Federal taxes and only 7.65% FICA (Social Security) tax. A citizen with a slightly higher income pays only 15% tax on all income above a rather high threshold, and perhaps some state income tax. Compared to European nations, these modest-income employees do pay very little tax.

Meanwhile, the small business owner in states with income taxes pays an effective rate of 50% or more once all the various costs are included. To hire an employee, the employer must pay not just the employer's half of FICA (also 7.65%) but unemployment insurance, TDI (temporary disability insurance), workers compensation and in some states, at least partial healthcare insurance. Depending on the industry and state, these costs can easily add 50%-100% to the wage/salary costs.

The self-employed pay 15.3% FICA right off the top and then Federal and state taxes plus city and county business license fees and what I term "garbage fees" for various "services" which were once paid for by regular taxes. Add in skyhigh property taxes paid on the property used for business purposes and an effective rate over 50% is "normal."

In my wonderful city, we pay a flat 1.012% of gross revenues "business license fee." The city could care less if your business is losing money; you pay them on your gross revenues, not your net income. This is just one example of many which are unknown to the salaried employee of the city who wonders why tax revenues are falling.

Here in California, voters soundly rejected a series of tax increases which were cloaked in Orwellian-like innocuous terms like "rainy day fund" and "stabilization fund." The politicos who wrote these initiatives didn't have the courage to state the fact that they were tax increases directly, for they feared they wouldn't pass. They hoped they could con voters with misleading language into giving them billions more to squander.

Let me state what no newspaper or media outlet in the state of California has the courage to print: The state of California's budget was less than $100 Billion earlier in this decade. It rose to $130 Billion, and now the governor is bleating about "financial Armageddon" because there's a $21 Billion deficit which might turn into a $30 Billion deficit by next year.

In other words, "Armageddon" is a return to the budget of 2002. The 2002 population was 35,116,033 and the July 2008 total was 36,756,666, an increase of about 4%. So adjusted for population and inflation, the budget should have increased by no more than 10%. The state has zero justification for a $130 billion budget; by all rights the budget should be $110 billion--almost exactly where it would be if we slash the $21 billion deficit to zero via spending cuts.

The City and County of San Francisco has about 800,000 residents and a budget of $6.5 Billion. The enormity of that number doesn't faze the politicos or government employees at all; everything they say tells us they think "that's as it should be." Never mind the budget was only $4 billion not that many years ago--now $6.5 Billion is the new baseline, and anything less than that "will cause dramatic cuts in core programs," blah blah blah.

But a funny thing happened on the way to endless growth of government revenues: the housing/debt bubble popped and belief in the system has faded. I am in total agreement with the business owners Mike described; not only would I never start a business in California, I'd never buy another property here, either, due to the insane property taxes and "revenue enhancements" tacked on to property taxes.

One of my friends bought a fixer-upper at the top of the bubble and he and his wife (and young son) pay almost $20,000 a year in property taxes. Yes, on a single family residence and not in some "millionaire's row" either.

His business fell off and so he's paying no state income tax this year. I would guess he won't be paying any state income tax next year, or for many years after that, either.

So the state's response is to raise taxes on those still standing. Brilliant. If over-regulation, tort insanity, high taxes, garbage fees and a hostile attitude to business aren't enough to convince you to drop out/become a sole proprietor/underground economy denizen, then maybe higher taxes, crumbling roadways and stridently demanding public unions will finally trigger a loss of faith in the system.

Meanwhile, while you're scraping by, trying to make your quarterly tax payments, the banking/Wall Street Plutocracy is still collecting massive bonuses on their "earnings" and State politcos are drawing $150,000-plus salaries to sit on useless boards, etc. Their belief in the system isn't fading because the system "works" for them. But anyone who thinks it works for the average entrepreneur just doesn't have any skin in the game.

If you want to understand why tax revenues will be dropping in California and other clueless "tax the rich" (sic) states, then look no further than "when belief in the system fades."

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

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