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"Wow, a real gaucho!"
He stood there in the waiting area of the Salta Airport. He was a thin man of average height, a swarthy complexion and narrow face bordered by a slight beard. He might have been a pirate or a gypsy, except for his get up.
Looking at him from the ground up, we saw that he wore high leather gaucho boots, colored tan, out of which sprouted a bloomy pair of cotton pants, embroidered along the side. His belt was wide - almost like a cummerbund, such as you would wear with a tuxedo, but it was made of brown leather and fastened by two silver hooks...also rather elaborately worked.
His shoulders were wide, but bony. A black leather coat was draped over them, and a blue sweater was underneath. Upon his head was a wide black hat with a straight brim and a trim of golden-colored cord with tassels on the end. The only thing that kept him from making the perfect bad guy for a Sergio Leone western was a gun in his hand.
He was standing there in the lobby waiting for someone. We were surprised to find he was waiting for us.
"I am Francisco," he said in Spanish. "I will take you to the ranch."
Twenty-four hours later, we were riding across the high plains on horseback, following Francisco and Jorge to check on cattle.
But let us back up.
First, we are describing our trip to the ranch in Argentina because that is what we are doing and because we are out of touch almost completely with the outside world. We are a long way from nowhere with no telephone, no Internet, no electricity, no heat, and no television.
"I wish there were at least a bathroom," said Maria.
Maria was exaggerating. There is a bathroom. It just doesn't work. And, to get hot water, you have to think of it ahead of time and build a fire at the base of a large water tank. If you keep the fire going long enough, the water will eventually get to be lukewarm.
We are only able to send this note by driving an hour to a neighbor who has a satellite dish. And since there is no electricity, we doubt that we will be able to write much more.
Our spirits have both risen and fallen since we left Buenos Aires. We set off well enough; for some reason we were upgraded to business class. But after we left Salta Airport, we got a shock. The weather was not what we expected. Salta is the capital of a large area in the Northwest of Argentina. There are jungles in the north, but in the Salta area and to the south, where we were headed, it is usually warm and dry. The Tropic of Capricorn runs just to the north of the city. Topographically and climatologically, the place reminds us of New Mexico and Arizona. But yesterday, it was rainy and cold.
In order to get where we were going, we had to drive over a mountain. The higher we went, the thicker the clouds became until we could barely make out the road in front of us. This was not only depressing...it was dangerous. There were sharp drop-offs and high cliffs all along the way.
In many places it looked as though the road had been almost washed away.
In other places, it looked as though some poor soul had knocked out the barrier and fallen down to the river bottom. We checked the temperature; it was one degree Centigrade.
"Dad, how can people live in a house without heat?" Maria wanted to know.
"I don't know, but we're going to find out."
We found out the following day. 'Not well' was the answer.
More to come...
Over to Aussie Joel and The Rude Awakening...
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Eric Fry, reporting from Manhattan:
"We are hopeful both that creative individuals will develop ground-breaking alternative energy technologies, and also that vigilant investors will profit as these technologies gain acceptance."
For the rest of this story, and for more market insights, see today's issue of The Rude Awakening:
Geek Power
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The Daily Reckoning PRESENTS: The deadline for sending taxes in has come and gone...but our current beast of a tax code is here to stay - unless some changes are made. In the second part of this essay, Steve Forbes explains how our country arrived at today's tax system. Read on...
THE BIRTH OF THE TAX BEAST, PART II
by Steve Forbes
World War II also ushered in a new era of tax collection, changing forever the way Americans pay Uncle Sam. Until the war, we paid our income taxes in a single lump sum each year. But now, thanks to higher tax rates, millions of people for the first time couldn't save enough money to pay the larger amounts they owed the Bureau of Internal Revenue, as the IRS was then called.
What to do? Washington realized it could not jail millions of noncomplying Americans. And so it invented withholding. Like department store customers paying for consumer goods on an installment plan, people would pay a part of their tax bill with each paycheck. Voila, thought the bureaucrats, your problems were solved. Taxpayers using withholding wouldn't be walloped by a mammoth bill each year. Your employer would gradually deduct from your paycheck what you owe over twelve months. You'd never even have to see that money! Uh, gee thanks.
The problem with withholding is that it reduces the discomfort of paying income tax by spreading payments out over the course of a year. Americans end up feeling a sting instead of a painful bite. Withholding made collection easier. But it also made Americans less acutely aware of the impact of taxes on their financial well-being - allowing the system to grow more easily and become less accountable. And, like income taxes themselves, withholding was supposed to be a temporary wartime measure!
Tax rates were reduced somewhat after World War II, but were again boosted at the onset of the Korean War. President Dwight D. Eisenhower ended the Korean conflict in 1953, but in the name of balancing the budget, he refused to support any major tax reductions - thereby helping to give us recessions in 1954, 1958, and 1960.
America's fabled prosperity of the 1950s was not nearly as vigorous as it would have been had the tax system been more benign. As incomes rose, more and more people found themselves in chokingly high tax brackets. Tax shelters, especially in commercial real estate, became more common. The U.S. economy grew more sluggish as the 1950s wore on.
Finally, in the early 1960s, President John F. Kennedy proposed dramatic tax cuts as a spur to growth. These reductions were enacted by President Lyndon Johnson after Kennedy's assassination. The highest tax bracket was whacked from 91 percent to 70 percent; the lowest bracket, from 20 percent to 14 percent. The U.S. economy boomed.
Washington's revenues blossomed. Receipts from the highest income earners almost doubled within three years. Then came the Vietnam War and with it a 10 percent income tax surcharge, imposed in 1967. The highest rate went from 70 percent to 77 percent.
Relief was supposed to come when this top rate on salaries and wages, so-called earned income, was reduced to 50 percent in 1969 (The highest rate on dividends and interest, though, was 70 percent). However, at the same time, the capital gains tax was catastrophically raised, which more than undid the benefits of this reduction. The high capital gains levy punished individuals and companies for taking risks. Investors aren't going to risk money on unproven ventures if the rewards are overly taxed.
As a result, the stock market stagnated. The American economy turned sluggish. Then as the 1970s progressed, things got worse. Congress raised the maximum capital gains tax even higher, to almost 50 percent. Inflation kicked people into higher tax brackets - remember, a family earning $7,000 in 1968 was better off than a family earning $18,000 in 1979.
Something dramatic had to be done. In 1980, Ronald Reagan took office after defeating President Jimmy Carter. Reagan sat at the helm of a nation with disastrously high taxes, economic stagnation, a severely depressed stock market, and out-of-control inflation. America was reeling from setbacks overseas, thanks to Carter's gutting the military and his weak, dithering foreign policy.
Reagan slashed income tax rates, reined in non-military government spending and pushed economic deregulation. He also launched a massive military build-up and instituted a confident, assertive foreign policy to challenge the Soviet Union. Reagan's approach on taxes had already been vindicated in 1978, when Congress, against the wishes of President Carter, cut the maximum capital gains tax from a suffocating level of nearly 50 percent down to 28 percent. Silicon Valley started to take off. New high-tech ventures began to get funding. Despite the sizeable rate cut, revenue from the capital gains levy went up.
Ronald Reagan took office with a keen awareness of America's tax burden and a desire to sharply ease it. To him, high income taxes were personal.
At one point during his movie career, Reagan was told he shouldn't make more than two films a year. If he made more than two, he would jump into such a high tax bracket that he'd be left with little or no after-tax money on his earnings from the new movie. He thought it was absurd that we had a tax code that punished people who wanted to work more, to produce more.
Reagan signed two bold tax cuts into law: One in 1981, the next in 1986.
The first lowered the top rate down to 50 percent and reduced other rates by about 25 percent. The second bill abolished numerous tax shelters and cut the number of tax brackets to two - 28 percent and 15 percent.
These dramatic cuts pulled the U.S. out of the deep rut Reagan had inherited from the 1970s by increasing individual incentives to work more productively and to take more risks. Receipts from income taxes swelled.
The American economy expanded by more than one-third during the Reagan years. In dollar terms, our growth exceeded the entire size of West Germany's economy, the world's third largest. In 1980, the top 1 percent of income earners in America paid 18 percent of the federal government's tax receipts. By the time Reagan left office, that 1 percent was kicking in over 27 percent of those receipts. (Today, it's over 30 percent.)
The Reagan cuts illustrated a paradox most politicians can't fathom: Lower the tax rates and you get more tax money from the rich.
Why? With more reasonable tax rates, fewer top earners opted to expend time and effort on tax avoidance strategies aimed at achieving deductions.
And so they took their pay the old fashioned way - as taxable income.
People took more risks - which meant more investment, more innovation - and thus a larger tax base.
Reagan was able to get his tax bill passed in 1986 at the height of simplify-the-tax-code sentiment. Unfortunately, in the years to come, Washington politicians slid back into their bad habits - cluttering the code with new brackets, exemptions, deductions, phase-ins, phase-outs, and special breaks for special interests. Since Reagan's day, the code has been amended 14,000 times. Millions of new words were added, and the monster ballooned by nearly 60 percent.
This ever-increasing complexity has undermined our long-standing tradition of paying the taxes we owe. Even the most law-abiding individuals (as that infamous Money magazine survey made clear) couldn't be sure they were in compliance. Complexity has led to flagrant abuses of authority by the IRS, which finally prompted congressional hearings in 1997 and 1998 that led to a series of reforms. But make no mistake - as long as the code remains the monster it is today, voluntary compliance of paying taxes will be eroded and tax collecting abuses will emerge.
Sadly, too, the lessons of the Reagan years on the positive power of properly structured tax reductions were temporarily forgotten. His successor, George H.W. Bush, agreed to the Democrats' tax increase in 1990. The U.S. economy, already reeling from reduced defense spending and from the Savings-and-Loan banking collapse, promptly went into recession.
Recovery was initially slow. Not until the last six months of the Bush presidency did the economy exhibit any real signs of life. By then it was too late: Bush was defeated in 1992 by Bill Clinton on economic issues.
President Clinton raised taxes again in 1993. The nascent recovery was weakened. Taxpayers boosted their borrowings to help make up the income they lost to higher taxes. During Clinton's first year, the economy grew at a lower rate than it had under the last year of President Bush. This was a critical reason that Republicans won control of both houses of Congress in 1994, the first time the GOP had pulled off such as feat since 1952.
Thankfully, numerous other factors intervened in the 1990s to help revive the economy. They included the near-elimination of inflation; the 29 percent slash in the capital gains levy in 1997; the virtual elimination of capital gains taxes for most homes, triggering a housing boom that continues to this day; the moratorium on Internet taxation; welfare reform (signed by President Clinton under pressure from public opinion); and the North American Free Trade Agreement (NAFTA), which helped spur more trade with Mexico and Canada. The new GOPcontrolled Congress, meanwhile, also helped control spending by the federal government.
But not all these initiatives were entirely successful. The 1997 tax bill Republicans forced on a reluctant President Clinton reduced the capital gains exaction from 28 percent to 20 percent. But it introduced new credits and other convoluted permutations that made the code still more complicated.
Clinton's successor, George W. Bush, is a genuine tax-cutter. However his first bill, passed in 2001, was relatively weak. Personal income tax rate reductions, none too big in the first place, were phased in over a number of years. As a result, the legislation had little impact and produced disappointing results.
Bush's tax cut of 2003, however, was a dramatic improvement. The capital gains levy was cut from 20 percent to 15 percent, which meant that people would take more risks. The personal dividend tax was cut from 38 percent to 15 percent, meaning more capital creation. And the personal tax rate cuts of 2001 were made effective immediately - instead of being dribbled in over several years.
As a result of those measures, the economy improved as businesses responded to incentives to invest more. People had more money to pay their bills for the first time since the early 1990s. The percentage of their incomes applied to financing their debts began to fall.
Nonetheless, the beast is hardly in retreat. Full-time employment at the IRS is already 97,440 in fiscal year 2005! The tax code's complexity has grown; existing credits, like the one for children, have expanded and new credits have been created. They include limited deductions for college expenses, as well as credits for the purchase of electric vehicles and for the production of certain kinds of electricity.
The president's tax reductions, however, reflect his fundamental belief in tax simplification along the lines of a flat tax. The president tried to abolish the dividend tax for individuals, just as the flat tax would do.
He also tried to get rid of the death tax, and he pushed for faster expensing of business capital expenditures. The president has also advocated tax reduction through the Lifetime Savings Accounts and Retirement Savings Accounts (LSAs and RSAs), two innovative super-savings vehicles. The RSA would allow individuals to put $5,000 each year in an account for retirement that would grow tax-free; withdrawals from the account - which could begin after age 58 - would also be free from taxation. The other vehicle, the LSA, would permit individuals to put $5,000 annually into an account that would grow taxfree. But you could take the money out at anytime for any kind of expense.
Clearly President Bush is fully committed to a major overhaul of the tax code. Let's hope there will be no more half steps, that he will advocate an exciting, flat tax approach. If he drops the ball on genuine tax simplification and reduction, the Republicans may well pay the price in 2008. Entrepreneurial Democrats may finally ask themselves, "Why do we keep letting Republicans beat our brains out on taxes? Why not turn the tables on the GOP by stealing this issue right out from under them?" How?
By advocating a flat tax. Unlikely? Politics has seen stranger things.
Regards,
Steve Forbes
for The Daily Reckoning
Editor's Note: The above essay has been adapted from Steve Forbes' latest book, Flat Tax Revolution. To order your copy, click on the link below:
Flat Tax Revolution: Using a Postcard to Abolish the IRS
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