Happy Tax Day

Happy Tax Day!    I cannot let this day pass without commenting again on our federal tax laws, which are a national disgrace.   As long as I can remember, politicians from both parties have been talking about the need to simplify our tax laws, but they have done just the opposite.   The federal tax code and the accompanying regulations consist of more than 67,500 pages.  Nina Olson, the National Taxpayer Advocate at the Internal Revenue Service, says the tax code contains some 3.7 million words and has more than tripled in length since 1975.    Since 2001, according to Ms. Olson, there have been more than 3,250 changes to the tax code, including more than 500 changes last year alone.   It is impossible for anyone to understand the tax code or to keep up with the changes to it.  

The length and complexity of our tax laws create massive problems for the American people, but our politicians obviously could care less because they are doing nothing to address these problems and instead are constantly making them worse.   In a column published in The Wall Street Journal last week, Ms. Olson said her office “estimates that the costs of complying with individual and corporate income tax requirements in 2006 amount to $193 billion—or a staggering 14% of aggregate income tax receipts.”   Ms. Olson also says taxpayers and businesses spend about 7.6 billion hours a year—or the equivalent of 3.8 million full-time workers—complying with the filing requirements of the Internal Revenue Service.   She reports that about 60% of taxpayers pay someone to prepare their returns for them, and another 22% purchase tax software to help them prepare their returns. 

Our current tax system also results—and even encourages—an extensive amount of cheating.     The IRS estimates that the country’s “tax gap” is approximately $290 billion per year.   The “tax gap” represents the difference between what the IRS actually collects and what the IRS estimates it should have collected.   Several nominees to President Obama’s cabinet contributed to the “tax gap” by voluntarily or involuntarily cheating on their taxes.  The current Secretary of the Treasury—the Cabinet officer responsible for the IRS—was confirmed by the Senate despite admitting he failed to pay taxes on a portion of his income.  

The money spent on compliance plus the amount of the “tax cap” equals almost $500,000,000,000—or roughly a half a trillion dollars.    We are talking about serious money that could be used to reduce the enormous tax burden on those who actually pay taxes.   Of course, if this money were available, I know the government would find a way to spend it rather than let those who earned it keep it. 

Our tax laws are full of complexity and ambiguity.   Ms. Olson points out, for example, that there are at least 27 separate provisions designed to encourage people to save for education and retirement.   These provisions contain different definitions, income-level thresholds, phase-out ranges and inflation adjustments.   In addition, Ms. Olson says about 100 tax benefits are not available to people in higher income brackets, but these “phase out” ranges and amounts are not uniform. 

Although we live in a society that frowns on almost any type of discrimination, our tax laws are full of provisions specifically designed to discriminate in favor of one group of taxpayers and against another group of taxpayers.   A taxpayer who owns his own home, for example, gets to deduct the interest paid on his or her mortgage whereas a taxpayer who cannot afford to own a home, or who does not wish to own a home, does not get a corresponding tax break for the rent he or she pays to lease a home.    Another example relates to health insurance.    A taxpayer who receives health insurance as a benefit of employment generally does not have to pay taxes on the value of the health insurance benefit.    On the other hand, taxpayers who are unemployed or retired or do not have employer-provided health insurance are required to pay for their own health insurance with after-tax dollars. 

There is a simple reason why our tax laws are so complicated.   Politicians have tremendous power over our lives because of their ability to make and change the tax laws.   Politicians use the tax laws as a tool to reward their favorite constituents by giving them special tax breaks.   The favorite constituents are usually those who make the largest contributions to the politicians.   It is legalized bribery.  A lobbyist for a special interest group gives money to a politician who in turn sponsors legislation to give tax breaks to the interest group.  Politicians also use the tax laws to punish groups of taxpayers who have not supported them.    In short, the tax laws give politicians the opportunity to reward their friends and punish their enemies.  

It should be obvious to everyone that our existing tax laws need to be abolished in their entirety, and we need to start all over with a new simplified and much fairer tax system.   This is very unlikely to happen, however, because members of Congress would lose too much power under a simplified tax system.    

Why do the voters who elect our politicians continue to tolerate our existing tax laws?   In my opinion, there are two reasons.    First, almost half of the voters don’t pay any federal income taxes, so they simply don’t care.   The federal income tax laws don’t affect them.    Second, the voters who are affected by the complexity of our existing tax laws, including me, are simply too passive.   We sit back and complain, but we do not demand change.   There is some hope voters are beginning to demand change, as evidenced by the taxpayer “tea parties” being held throughout the country today.   The focus of the tea parties will be on high taxes and out-of-control government spending rather than on the complexity of the tax laws.   In my view, it’s a package deal.   We need to lower taxes, lower government spending, and at the same time simplify the tax laws.  Today’s tea parties are an encouraging development, but it will take a lot more of these public displays before politicians begin to take notice.   

In closing, in honor of tax day, I would like to share a poem that several friends have sent to me on different occasions.   I don’t know who wrote the poem, but whoever did has a good understanding of government tax policies. 

Tax his land, tax his bed, tax the table at which he's fed.  

Tax his tractor, tax his mule, teach him taxes are the rule.  

Tax his work, tax his pay, he works for peanuts anyway.  

Tax his cow, tax his goat, tax his pants, tax his coat. 

Tax his ties, tax his shirt, tax his work, tax his dirt.  

Tax his tobacco, tax his drink, tax him if he tries to think.  

Tax his cigars, tax his beer, and if he cries tax his tears. 

Tax his car, tax his gas, find other ways to tax his ……  

Tax all he has, then let him know that you won't be done till he has no dough. 

When he screams and hollers, then tax him some more; tax him till he's good and sore. 

Then tax his coffin, tax his grave, tax the sod in which he's laid. 

Put these words upon his tomb, taxes drove me to my doom. 

When he's gone, do not relax, it’s time to apply the inheritance tax. 

My Good Friday Homily

The church that I have attended for many years has a special service on Good Friday each year.   The service contains seven segments focused on the seven last words of Christ.  Each segment includes a homily.    Today, I delivered the last homily, which was based on the last words of Christ when he said, “Father, into thy hands I commit my spirit.”   The text of my homily is set forth below. 

Have you ever contemplated your own death?   Have you ever had a near-death experience?    How will you respond when your death is imminent? 

I have never had a serious illness, but I have had a few experiences where I feared—at least for a brief period of time—that my life was about to end.   On one occasion, I was flying to New York with two other passengers in a small private airplane when we encountered a terrific thunderstorm.   The winds were extremely strong, and lightning bolts were lighting up the night sky.  The plane was bouncing all over the sky.  It was flying sideways half of the time and losing altitude.    One of the passengers on the plane was the chief executive officer of the company for which I was then working.   He told the pilot to get us out of the storm and onto the ground—anywhere—as soon as possible.  I was terrified.    I prayed that God would allow me to survive.   I prayed that God would give me strength.   I prayed for my family. 

Obviously, I survived this experience because I am here to tell my story.   My experience, although frightening, does not compare with the experience of those who know they are going to die.   My experience lasted about 30 or 40 minutes, and then it was over.  I was too scared to think seriously about my own death.   When it was all over and I knew I was safe, my thoughts quickly returned to the problems of the day. 

Unlike my experience, Jesus knew he was going to die on the cross, and he had plenty of time to contemplate his death.   Likewise, thousands of people at any given point in time are struggling with terminal illnesses, and they know their death is imminent.   What can we learn from Jesus and from others who have faced or are facing death?  

The last words of Jesus before his death were, “Father, into thy hands I commit my spirit.”   In speaking these words, Jesus was repeating a verse from Psalms 31.   The phrase that Jesus repeated was the prayer every Jewish mother taught her child to say the last thing at night.   Dr. William Barclay writes that Jesus made the prayer more intimate by adding the word “Father” at the beginning, and he then died like a child falling asleep in his father’s arms.    Of course, Jesus did not enjoy a quiet and peaceful death.  He was crucified.  He was tortured.  He endured indescribable suffering.   Despite his suffering, however, when he died, Jesus was at peace with himself, and he was at peace with God.   He surrendered himself to God, and he entrusted his spirit to God.    

Approximately one year ago, my brother-in-law, Ann’s brother Sam, was diagnosed with cancer.    He died four months later.    Ann and I observed Sam as he went though the various stages that are common to someone facing death.   These stages included denial, fear, anger, self-pity, and resentment.    In the last days before his death, however, Sam surrendered.  He made peace with his death, and we could almost see the weight being lifted from his shoulders.   Several days before he took his final breath, Sam was ready to commit himself to God. 

I frequently listen to the Day1 radio broadcast on Sunday morning.  Several weeks ago, Dr. Donovan Drake, the pastor of Trinity Avenue Presbyterian Church in Durham, North Carolina, told a story about a young woman in his church who was ten years removed from the youth group when she was diagnosed with cancer.  Dr. Donovan said the woman once said to him, “I know how to live, but how do you die?”   Dr. Donovan said he cannot remember his answer, but he remembers what the woman told him.   On late evenings when she could not sleep from either pain or worry, the young woman and her mother would open a hymnal and sing hymns together.   They would sing until they could see the future together. 

Dr. Donovan concluded that you know how to die when you know what the future will bring.   God!    You know how to die when you know what the future will bring.  Joy!    You know how to die when you know what the future brings?  Life. 

In his book Mending the Heart, the late Dr. John Claypool compared death to birth.    Life begins when a living sperm interacts with a fertile egg.   For the first nine months, the new life is housed in the mother’s womb, surrounded by protective and nurturing walls.  Then comes the moment of birth.  From the standpoint of the newborn, the birth is like a death.   The baby has been taken from a comfortable place where all has been provided and moved into a new world.    According to Dr. Claypool, this pattern of dying to a smaller world so that we might be born into a larger world repeats itself as we make our way through life, and it continues at the point of death.  We die to a smaller place so that we might move on to a greater place.  Death, like birth, represents an exit from one form of life and an entrance into another form. 

But what about those of us who are left behind?   How do we deal with our grief?   How do we deal with the loss of our loved ones? 

Jesus committed his spirit to God, but his spirit also remains with us and in us.   His teachings about how we should live have survived for more than 2,000 years.   There can be no doubt that Jesus’ death did not extinguish his spirit because his spirit is alive and with us today. 

During my lifetime, I have grieved over the deaths of many loved ones, including my grandparents, both of my parents, both of Ann’s parents, my brother, Ann’s brother, and several uncles and aunts.    In each case, the spirit of the person who died has remained as an important part of my life.   I remember and cherish each person’s love, character, personality, and sense of humor.  My loved ones who have died have moved on to a new life with God, but their spirit remains with me, and I hope their spirit will be passed along through me to my children and grandchildren. 

Earlier this week, I attended a prayer service for an elderly Jewish man who had died.    The Rabbi who spoke said many people have a greater impact on the lives of others after they have died than they did when they were alive.  The Rabbi talked about the character and integrity of the man who had died and said his soul and his spirit would continue to have a large influence on the lives of those who knew and loved him.  

Two years ago, I stood in this same place on Good Friday and delivered a homily based on the words of Jesus when he said, “My God, My God, why have you forsaken me?”   I talked about how I felt abandoned by God following the death of my younger brother Mike, who committed suicide on February 15, 2001.    It has now been a little more than eight years since Mike’s suicide.   My grief remains strong, but my feeling of abandonment by God has been replaced by feelings of appreciation and gratitude for Mike’s life.   Mike’s spirit is now with God, but it also remains with me. 

I would like to refer again to John Claypool’s book Mending the Heart, which helped me make the transition from abandonment to gratitude after my brother’s death.  In the book, Dr. Claypool wrote about the death of his daughter Laura Lue, who was diagnosed with leukemia at age 8 1/2.    When Laura Lue later died at age 10, Dr. Claypool was devastated and went through a period of intense grief.   After a while, he began to see Laura Lue’s life and death in a new perspective.   His viewpoint changed when he came to the following conclusion, and I quote:   “I had never deserved her for a single day.  She was not a possession to which I was entitled, but a gift by which I had been utterly blessed.”    Dr. Claypool went on to say he realized he had to make a choice.   He wrote, “I could spend the rest of my life in anger and resentment because she had lived so short a time and so much of her promise had been cut short, or I could spend the rest of my life in gratitude that she had ever lived at all and that I had the wonder of those ten grace-filled years.” 

Jesus was a gift from God to all of us.    Jesus taught us how to live, but he also taught us how to die.   Have you ever contemplated your own death?   How will you respond when your death is imminent?    God does not guarantee that our life will be free of trouble or that our death will be free of pain and suffering.  We do have God’s assurance, however, that we will not be alone.  God is with us always, even when we are suffering, and even when we are preparing to exit from one form of life and enter into a new life with Him.  When my death is imminent, I pray that I will be able to commit my spirit to God and rest in the arms of God just as Jesus did.  Amen.      

A Letter to Eggo

Dear Eggo: 

Thank you very much for your comment on my last post, which was entitled “Lessons on Human Nature.”    I always appreciate comments because it makes me realize someone is reading my blog.    It doesn’t bother me when a reader disagrees with my views because I value diversity of thought.   Even though I don’t know who you are, I want you to know I appreciate the fact you are reading my blog and adding your comments from time to time.    

Your last comment pointed out that my story about the economics professor who failed an entire class is an urban legend.   An “urban legend” is defined by Wikipedia as a form of modern folklore consisting of stories thought to be factual by those circulating them.   As I said in my last post, I did not know whether the story about the economics professor was true or not.   I repeated the story because I thought the story—whether true or not—contained an important lesson about human nature. 

Some of our most important moral lessons are taught by means of stories.  Jesus, for example, used parables to illustrate a truth or lesson.   A parable is nothing more than a short story told to describe or illustrate a truth or lesson.  Jesus communicated with stories because they clearly and effectively illustrated his points in a manner to which his listeners could relate.   This form of teaching can be much more effective than an abstract presentation. 

Many children’s books also use stories to teach important life lessons.   Consider, for example, the story about “The Boy Who Cried Wolf” from Aesop’s fables, which teaches children about the importance of trust.   Another one of Aesop’s fables, “The Hare and the Tortoise,” makes the point that hard work and determination are more important than natural talent and skill.  The children’s book The Little Engine That Could teaches perseverance.   

I would also like to address your comment about the Social Security System.   You said you would sign up for my “anti-socialism” plan if you could be assured of receiving a larger Social Security check upon retirement than those who have paid less money into the system than you have.   Of course, I cannot give you the assurance you are seeking, but I know you are much less likely under socialism to benefit from your continued hard work and your increased payments into the Social Security System.   One of the goals of socialism is to transfer money from people like you, who have earned it, to those who have not.   Accordingly, an “anti-socialism” plan represents your best hope for obtaining the assurance you are seeking. 

The subject of our Social Security System reminds me of a new story I would like to tell for the first time.    Maybe I can start a new urban legend.   

Here is my story.   I have two glasses on my desk.   One glass used to be full but is now only half-full.   This glass represents my Individual Retirement Account, which consists of money I have saved over the last 38 years by making voluntary contributions to the 401(k) savings plans and other retirement plans sponsored by my employers.   In some cases, my employer matched a portion of my voluntary contributions.   Although this glass used to be full, it is now only half-full because I have lost almost half of the value of my IRA during the last 18 months.   The second glass on my desk is empty.   The empty glass represents the retirement benefit to which I am entitled under the Social Security System. 

Why is the glass representing my Social Security benefit empty?   It is empty because it has always been empty.   It has a hole in the bottom.   Every penny I have added to this glass over the years fell out through the hole in the bottom.   The government spent all of my money for other purposes.   I have nothing more than a promise from the government to pay me a retirement benefit as long as the government can afford to do so and chooses to do so.   The Social Security System is a Ponzi scheme.   The money contributed to the system by those who are retired is gone.  It was not set aside for their benefit.  The government is relying on current workers to pay the benefits due to those who have already retired.   Like all Ponzi schemes, the Social Security System will ultimately collapse. 

I have no assurance the government will continue to pay my Social Security benefits.    The government may well decide there is no need to continue my Social Security benefits because I have another half-full glass on my desk and there are other people with two empty glasses on their desks.   The fact that I worked hard to fill one of the two glasses on my desk and other people left both of their glasses empty may be irrelevant to the politicians who make and have the power to change the rules.  

The bottom line is that the Social Security System does not provide me with any security.   The glass representing my Social Security benefit is and always has been empty.   My only security comes from the half-full glass representing the money that remains in my IRA.   Even though I have suffered significant losses in this account, this account represents my money—at least until the government changes the rules and decides to take it from me.    If I die before I spend all the money in the half-full glass, or before the government takes it from me, then I can pass whatever is left in the glass along to my children.    My children will never realize any benefit from the money I have deposited into the glass representing the Social Security System. 

President Obama has promised to reform our Social Security System, and he has also promised to improve our health care system and reduce the cost of health care.   It occurs to me he will be able to reduce the cost of health care and reform our Social Security System all at the same time.   All he has to do is obtain control over the health care system, which he is likely to be successful in doing.   He can then implement rules to deny expensive health care treatments to the elderly on the grounds that the treatments are not cost effective.    This will kill two birds with one stone.  It will reduce the cost of health care by denying expensive treatments to the elderly, and it will reduce the burden on the Social Security System when elderly people die earlier than they otherwise would have and are no longer eligible to receive future Social Security benefits.   

In closing, Eggo, I hope you will join my “anti-socialism” plan.    It may be too late for the United States to turn away from socialism, but it’s the only hope we have.   Now it’s time for you to get back to work.   Those of us who are retired are depending on those of you who are still working to keep dropping money into the empty glass with the hole in the bottom.   We need to keep this Ponzi scheme going for a little while longer.    Sincerely, Wildcat   

Lessons on Human Nature

A friend told me a story this week about an experiment conducted by a professor at a major university.   I cannot verify whether the story is true, but it easily could be true if it is not.   The story demonstrates basic human nature, and I am sure all of us—if we are honest with ourselves—will be able to relate to it.    

As the story goes, an economics professor at the university said he had never failed a single student but had once failed an entire class. The class had insisted that socialism worked and that under socialism no one would be poor and no one would be rich, a great equalizer.  The professor decided to conduct an experiment with his class.  He announced that all grades would be averaged and everyone would receive the same grade so that no one would fail and no one would receive an A.  After the first test, the grades were averaged and everyone got a B.  The students who studied hard for the first test were upset, and the students who studied little were happy.   As the second test rolled around, the students who had studied little for the first test studied even less, and the ones who had studied hard for the first test decided they wanted a free ride too so they studied less.  The class average for the second test was a D!   No one was happy.   When the third test rolled around, the class average was an F. 

The scores never increased as bickering, blame, and name calling all resulted in hard feelings, and no one was willing to study for the benefit of everyone else.  Everyone failed.  The professor pointed out that socialism would ultimately fail for the same reasons.   People are willing to work hard if the rewards for hard work are great.   When the government takes away the rewards for hard work, no one will succeed because no one will try. 

This story reminds me of another example of human nature sent to me by another friend several months ago.    Under this story, an economics professor demonstrated the problems of government tax policies through the following example: 

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.  If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing. 

The fifth would pay $1. 

The sixth would pay $3. 

The seventh would pay $7. 

The eighth would pay $12. 

The ninth would pay $18. 

The tenth man (the richest) would pay $59. 

So that’s what they decided to do.  The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.  “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”   Drinks for the ten now cost just $80. 

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.  They would still drink for free.  But what about the other six men—the paying customers?   How could they divide the $20 windfall so that everyone would get his “fair share?”   They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.   So the bar owner suggested it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.  And so: 

The fifth man, like the first four, now paid nothing (100% savings). 

The sixth now paid $2 instead of $3 (33%savings). 

The seventh now paid $5 instead of $7 (28%savings).
 

The eighth now paid $9 instead of $12 (25% savings).
 

The ninth now paid $14 instead of $18 (22% savings).
 

The tenth now paid $50 instead of $59 (16% savings).  

Each of the six was better off than before.  And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.  “I only got a dollar out of the $20,” declared the sixth man.  He pointed to the tenth man, “but he got $9!”   “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too.  It’s unfair that he got nine times more than I!”  “That’s true!!” shouted the seventh man.  “Why should he get $9 back when I got only two?   The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all.  The system exploits the poor!”   The nine men surrounded the tenth man and beat him up. 

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money between all of them for even half of the bill! 

The economics professor concluded by pointing out that his example demonstrates how our tax system works.   The people who pay the highest taxes normally get the most benefit from a tax reduction.   If you tax them too much, and attack them for being wealthy, they just may not show up anymore.   

Both of these stories, whether true or not, contain an important lesson.   Both stories are very realistic and demonstrate the risks of reducing the rewards for hard work and imposing excessive burdens on the wealthiest members of our society.     

Outrage Over Outrage

There are plenty of things to be outraged about these days.    I am outraged about something almost everyday when I read the newspaper or listen to the news on television.  I am outraged every time I see or read about a politician who is outraged.  Politicians are usually outraged over something they caused or could have prevented, although they always blame someone else for their outrage. 

Everyone, including me, has been outraged this week over the special retention bonuses paid by American International Group, Inc. to some of its key employees.  I share the outrage over the retention bonuses because they seem to me to have been unnecessary or excessive or both.  But my outrage over the retention bonuses pales in comparison to my outrage over the way the President of the United States and most members of Congress, both Democrats and Republicans, have reacted with outrage to the retention bonuses.  Our politicians are attempting to incite a public riot over a problem they knew about or should have known about and could have prevented. 

Let’s try to put aside our mutual outrage for a moment and look at the facts.   Retention bonuses are not unusual.   Companies that are being sold or are under financial stress frequently use retention bonuses in order to retain the key employees who will be needed to complete the sale process or to solve the company’s financial problems.   A key executive who realizes his or her position is likely to be eliminated due to the company’s sale or financial difficulties will probably start looking for other opportunities.   The more talented and marketable executives will have the most opportunities and will be the first to leave.    Retention bonuses are designed to give key executives an incentive to remain in their current positions until a sale can be completed or until other issues can be addressed. 

The AIG Financial Products Corp. 2008 Employee Retention Plan, effective December 1, 2007, was adopted by AIG to provide incentives for employees of its Financial Products Group to remain with the company during a period of uncertainty due to losses in AIG’s complex financial portfolios.   The AIG Plan covered the calendar years 2008 and 2009 and provided for the payment of guaranteed bonuses on or before March 15 following the end of each calendar year.   Each participant had to remain as an employee of AIG on the payment date in order to receive his or her guaranteed bonus.    AIG retained the right to terminate any employee who was not performing his or her duties in a satisfactory manner. 

The AIG Retention Plan was adopted and was in effect before the government invested taxpayer money in and took control of AIG.   Before purchasing or making a substantial investment in a company, the normal process requires the purchaser or investor to conduct a due diligence investigation.   The purpose of the due diligence investigation is to identify all of the problems and liabilities that will be assumed by the party making the investment.    The AIG Retention Plan was fully disclosed and was known or should have been known to the government before it made its investment in AIG.    The government had three choices:  (1) make the investment and thereby indirectly assume AIG’s obligations, both known and unknown, including its obligations under the Retention Plan, (2) decline to make the investment, or (3) agree to make the investment on the condition that AIG amend the contractual obligations that were unsatisfactory to the government. 

In short, the government could have required AIG to amend the AIG Retention Plan as a condition to the government’s bailout of AIG.  It did not do so.   AIG, of course, did not have the unilateral right to negate its contractual obligations to third parties, including its employees.    Both the government and AIG, however, had tremendous leverage over AIG’s employees before the government bailout.    AIG was going down the tubes.   The government could have said to AIG, “We are not bailing you out unless you can get your employees to release you from your obligations under the Retention Plan.”    If the government had done so, the employees would have been under tremendous pressure to release AIG from its obligations under the Retention Plan.   It is not unusual for a purchaser of or an investor in a company to require changes to contractual obligations as a condition of the purchase or investment. 

Our government knew or should have known about the Retention Plan when it bailed out AIG.   It did nothing.   It allowed the AIG employees who were participants in the Retention Plan to continue to rely on their guaranteed bonuses.    Congress even included language in the recently enacted stimulus legislation to protect the AIG bonuses.  Of course, most members of Congress now say they were unaware of the language in the stimulus legislation protecting the bonuses.    This should be no surprise because no one in Congress read the legislation before voting on it.   The stimulus bill contained hundreds of pages and was only available a few hours before the vote.    As for the AIG Retention Plan, it was only after the bonuses had been paid and became public knowledge that members of Congress began blaming everyone but themselves.    

Here’s where we find ourselves today.   The President and most members of Congress, both Democrats and Republicans, are furious because a company controlled by the government fulfilled its contractual obligations.    Members of Congress this week publicly blasted Edward M. Liddy, the newly appointed Chief Executive Officer of AIG who took the position at the government’s request, who is working for $1 per year, and who did not create but inherited AIG’s obligations under the Retention Plan.  All Mr. Liddy did was fulfill a contractual obligation by paying the bonuses that had been promised to AIG’s employees.    For that, members of Congress excoriated him.    They have also excoriated the employees of AIG who received bonuses under the Retention Plan, some of whom have received death threats and are embarrassed to leave their homes.  According to The New York Times, some AIG executives have retained private security guards.   They and their children are being humiliated by their angry neighbors, who are being encouraged by politicians who are pouring fuel on the fire in an effort to avoid any personal blame for the problem. 

When members of Congress were told that nothing could be done because AIG had a contractual obligation to pay the bonuses and the bonuses had already been paid, they decided they would simply confiscate the bonuses from the individuals who had received them.    Amazingly, 328 members of the House of Representatives, both Democrats and Republicans, voted this week to impose a 90% retroactive tax on the bonuses that had already been paid.    According to The Wall Street Journal, the 90% federal tax combined with state, local and Medicare taxes would result in taxes equal to 102.5% of the bonus payments.    There is no honor among thieves, and our politicians are thieves.   They are shameless. 

We cannot rescue our economy without private investment.    The government is relying on private investors to purchase toxic assets from banks and to rebuild the financial markets.   We need to be able to attract the best talent to run the companies in which the government has invested taxpayer money.    Unfortunately, it is clear the government cannot be trusted.  Why would anyone run the risk of relying on the government’s promises, which obviously don’t mean anything?    Even if the government does fulfill its promises and allows investors to make a little money, there is always the risk the government will later decide to confiscate 100% or more of an investor’s earnings.  

I am sure much fault can be found with the AIG Retention Plan.   The plan probably included too many participants, including participants whose continued employment with AIG was not essential.   Many of the bonuses that were guaranteed under the plan were clearly excessive.    I am not defending the merits of the AIG Retention Plan.   I am simply pointing out that the AIG Retention Plan was a contractual obligation of AIG that the government, as the controlling stockholder of AIG, had a moral and ethical obligation to honor.   The employees who were participants in the Retention Plan and who fulfilled their obligations under the Retention Plan had the right to rely on it.    An honorable government would not unilaterally and retroactively take away the rights that were earned under the Retention Plan, even if the Retention Plan was misguided.   

It’s easy to be outraged these days.   I am outraged over the politicians who are outraged over the outrageous bonuses paid by AIG.    

Other People's Money

During the first 13 years of my career, I was engaged in private law practice with one of the largest law firms in Atlanta.   One of my former clients loved the term “OPM,” which was short for Other People’s Money.   My client loved to start a new business, invest as little as possible to get it going, and then seek outside investors to provide the capital needed for the success of the business.   He would, of course, retain a large stake in the business and would do very well if it were successful, all without having very much at risk.    The strategy was to make money by using OPM.  It’s not a unique strategy, and it has worked for many people. 

Later in my career, I served as an executive officer and general counsel of a company controlled by Kohlberg Kravis Roberts & Co. (“KKR”).    This is the same KKR that inspired the book Barbarians At the Gate.   KKR knows something about OPM, but it also is a strong believer in “skin in the game.”    KKR wants the members of its management teams to have skin in the game.    When I was being recruited, I was told I would have the “opportunity”—which I understood to mean the obligation—to buy shares in the company for which I would be working on the same terms as KKR.    To give me even more “skin in the game,” if I purchased $X worth of stock, I would get stock options covering one share for each share purchased, if I purchased $XX worth of stock, I would get two stock options for each share purchased, and if I purchased $XXX worth of stock, I would get three stock options for each share purchased.   KKR wanted me to have as much skin in the game as I could stomach.  If the company had been successful, I would have done very well.   Unfortunately, the company went into bankruptcy, and KKR lost its entire investment, as did all of the members of the management team, including me, who had skin in the game.  In this case, “skin in the game” meant sharing the pain.    Despite my personal loss, I think KKR had the right approach. 

The problem with our country today is that too many people are relying on OPM for their livelihood and not enough people have skin in the game.   This problem is rapidly getting worse.   In fact, President Barak Obama campaigned on the promise of increasing the number of people relying on OPM and decreasing the number of people who have skin in the game.   It’s easy for a politician to get elected when he tells voters that, if he is elected, the majority of people will benefit from OPM and won’t have to worry about having skin in the game. 

President Obama and the Democrats in Congress would like for you to believe the wealthiest Americans are not paying their fair share of taxes and should pay more.  They would like for you to believe the tax cuts implemented under President Bush benefitted only the wealthiest Americans.   In fact, the wealthiest Americans did benefit from the tax cuts because they were already paying most of the taxes, but the wealthiest Americans also ended up paying a higher share of the overall tax burden because taxes were also reduced or eliminated for lower income citizens.  Let’s take a look at the statistics.    In 2006, the last year for which statistics are available, the top 1% of taxpayers paid 39.89% of all personal federal income taxes, which represented an increase from 33.71% in 2002.   The bottom 50% of all taxpayers paid only 2.99% of all personal federal income taxes in 2006, which represented a decrease from 3.5% in 2002.    If you are interested in more statistics, click on the link below, where you will find that the top 5% paid 60.14% and the top 10% paid 70.79% of all personal federal income taxes in 2006: 

http://www.ntu.org/main/page.php?PageID=6 

President Obama is now proposing massive new spending programs that will substantially increase the size and power of the federal government as well as the size of the federal deficit.    At the same time, he is promising that 98% of Americans will receive tax cuts and only the wealthiest 2% will see tax increases.    In other words, 98% of Americans will have less skin in the game because they will be benefitting from OPM.  

If you believe President Obama can pull off this miracle, I have a bridge in Brooklyn I would like to sell you.   As The Wall Street Journal noted in an editorial on February 26, 2009, “Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can’t possibly raise enough revenue to fund Mr. Obama’s new spending ambitions.”    David Brooks, a columnist for The New York Times, put it this way:  “Obama enthusiastically perpetuates the myth that the American people can have everything they want without a dose of shared sacrifice.   They can have health care, education reform, even a cure for cancer, and 98 percent of them need pay nothing.  The burdens of progress will be borne by the rich while everyone else can enjoy their tax cuts and go shopping.” 

As for the rich, they clearly should pay their fair share, but how much is fair?    We already have a highly progressive tax system.   The top marginal rate for federal income taxes is currently 35%.    Obama proposes to raise the top rate to 39.6%, plus he proposes to limit certain currently available tax deductions, such as mortgage interest and charitable contributions, with the effect that the top federal income tax rate would be approximately 42%.  In addition, he wants to raise the capital gains and dividend tax rates.   All of this, of course, would be on top of state income taxes with rates as high as 8% to 10% in some states, and on top of all of the many other taxes imposed on all individuals, including Social Security taxes, Medicare taxes, sales taxes, real estate taxes, gasoline taxes, personal property taxes, school taxes, and vehicle registration taxes.   Don’t forget all of the taxes imposed on businesses, which get passed along to consumers as part of the cost of the goods and services provided by the businesses.   These taxes include the corporate income tax, accounts receivable taxes, building permit taxes, unemployment taxes, worker’s compensation taxes, inventory taxes, sales taxes, franchise taxes, and many more. 

The bottom line is that all of us, especially the wealthiest Americans, already have a heavy tax burden on our shoulders.    For the wealthiest American, the federal, state and local governments combined will soon take more than half of every dollar they earn.   These folks, in effect, will be government employees.   If they choose to continue working, they will be working for the government more than they will be working for themselves.   If they are able to save a little bit from the amount the government allows them to keep from their own earnings, then the government will reward them when they die by confiscating approximately half of their savings above the ever-changing exemption amount. 

In addition to increasing taxes on the wealthiest Americans, Obama also is proposing to increase government payments to people who do not pay any federal income taxes.   These payments are called refundable tax credits, but they are nothing more than giving OPM to people who do not pay income taxes.    During his campaign for President, Obama said he wanted to “spread the wealth around.”    Give him credit for following through on his promise.  

Dr. Walter E. Williams, an economics professor, columnist, and author, recently wrote, "Two-thirds of the federal budget consists of taking property from one American and giving it to another.  Were a private person to do the same thing, we'd call it theft.  When government does it, we euphemistically call it income redistribution, but that's exactly what thieves do -- redistribute income.  Income redistribution not only betrays the founders' vision, it's a sin in the eyes of God. ... No human should be coerced by the state to bear the medical expense, or any other expense, for his fellow man.  In other words, the forcible use of one person to serve the purposes of another is morally offensive. ... One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one's fellow man, as it has throughout most of human history, but by serving and pleasing him."

The path we are following in this country cannot be sustained.  Sooner or later, the wealthy will be poor, and the poor will still be poor.   Sooner or later, some of the wealthiest Americans will decide it is no longer worth their time, effort and risk to keep working hard and making investments.   Sooner or later, the theme of Ayn Rand’s novel, Atlas Shrugged, will be play out in real life.   In the novel, which I read many years ago, the most productive members of society went on strike and quit working in protest against the government’s confiscation of their earnings.   The government removed their incentives to work and invest, so they simply quit working and investing. 

There is a quote circulating on the internet that is attributed to former British Prime Minister Margaret Thatcher.    I don’t know whether Margaret Thatcher actually said these words, but the words contain a lot of wisdom:  “The problem with socialism is that you eventually run out of other people's money......” 

In closing, let me be very clear about my own beliefs.   I believe wealthy individuals—and others to the extent they can—should freely and voluntarily help those in need.   In fact, I believe all of us have a moral obligation to help those who need help, especially those who are willing to help themselves.   But I do not think it is the role of government to take money from someone who has earned it and give it to someone who has not.   The government should not allow its citizens to become dependent upon OPM.   We are treading on dangerous waters when politicians promise to use the force of government to “spread the wealth around.”    The economic prosperity that our country has enjoyed will no longer exist if the majority of voters have no skin in the game and are relying on OPM for their livelihood.    

The End of Common Sense

There are certain basic principles that have universal application.   In my opinion, these principles represent basic common sense and can and should be applied to the extent applicable when raising children, managing an educational institution, teaching students in a classroom, coaching a sports team, managing a business or group of employees, creating or maintaining relationships with friends or family members, or making decisions on how to live a responsible and independent life.  Unfortunately, there is at least one place where these principles are ignored more often than they are followed.   Our elected government officials do not apply these principles when they are adopting and implementing the laws and regulations that affect virtually every aspect of our lives.

It is difficult for me to see how anyone could disagree with the basic common sense principles to which I am referring, but it is obvious that many people do.  Because we elect our government officials and have the power to remove them from office, and because our government officials do not follow these principles, I have to assume that most voters do not agree with them.  Some of the principles to which I am referring are as follows:

(1)   Every adult, unless disabled, has an obligation to provide for his or her own livelihood and for the livelihood of his or her children.  Children are the responsibility of their parents—not of their parent’s neighbors or anyone else.    People are less likely to assume personal responsibility for themselves and their families when they are encouraged to become dependent on other people or on the government. 

(2)   People do not have the right to be rewarded simply for doing what they are expected to do, such as attending school, showing up for work, or paying their bills.  Someone who fails to do what he or she is expected to do should suffer the consequences of the failure.

(3)   Life is not fair.   All people have the right to equal opportunities, but some people will always have an advantage and other people will always have a disadvantage because of the families or the circumstances into which they are born.   Moreover, an equal opportunity does not guarantee an equal outcome.  No one has the right to a favorable outcome for everything he or she does.    

(4)   Individuals should be rewarded rather than penalized for their success, which may result from hard work, the willingness to take risks, a gifted mind, luck, other factors, or a combination of factors.   Individuals who are unsuccessful for whatever reason do not have the right to benefit from the success of others.

(5)    Bad decisions have consequences.  People do not have the right to be protected from the consequences of their bad decisions.  Someone who makes a bad decision, however, deserves forgiveness and a second chance but does not have the right to transfer the adverse consequences of his or her decision to others.     

(6)    Everyone should live within his or her means.   No one should purchase goods or services unless he or she can afford to pay for them.  No one should borrow from the future.   A person who is in debt cannot expect to get out of debt by incurring more debt.

(7)    Everyone should always save for a rainy day and remember that a penny saved is a penny earned.

(8)    Nothing in life is free.  There will be unlimited demand for any good or service provided for free, but someone has to pay for it.  If an individual obtains goods or services without working for them or paying for them, then he or she is benefitting from someone else’s labor.      

 (9)   All people should give voluntarily and generously to help those in need, and they can experience great joy and satisfaction by doing so.   The joy and satisfaction of giving, however, will be replaced by resentment when property is involuntarily taken from someone who has earned it and transferred to someone who did not earn it.    

(10)   Fear of shame creates an incentive for moral and ethical behavior.  When immoral or unethical behavior is tolerated and accepted by society, there will be no shame and the result will be increased immoral or unethical behavior.

It is obvious, of course, that many people are and always will be unable or unwilling to live their lives in accordance with the principles I have identified.  It seems to me, however, that our government policies should be designed to provide incentives for people who follow these principles and disincentives for those who do not.  Instead, many of our government policies do just the opposite.  They encourage the behavior that should be discouraged and discourage the behavior that should be encouraged.