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The Daily Reckoning | Thursday, January 19, 2012 Exiting the police state: better a year too early than a minute too late, The ever-changing tax code: 10,000 rules and 20,000 exceptions, Plus, Bill Bonner on finding just the right man to sink the Fed’s ship... When the Economy Runs Aground Debunking the Myth of the Great Recession Bill Bonner Reckoning today from Los Angeles, California... There is a rumor — which we started ourselves — that Captain Francesco Schettino of the Costa Concordia has been invited to join the Federal Reserve. Obviously, in view of the recently released minutes of its meetings in 2006, the Italian ship’s captain and the Fed are meant for each other. Both are prone to error, cowardice and confusion. Ben Bernanke in 2006, just as the housing and finance bubble was reaching its zenith: “I think it would take a very strong decline in the housing market to substantially derail the strong momentum for growth that we are currently seeing in the economy.” “Capital markets are probably more profitable and more robust than they have perhaps ever been,” added fellow Fed governor Kevin Warsh. A year later, the great ship hit the rock that was clearly visible to dear readers and to anyone else who cared to look — subprime mortgage debt. Captain Schettino will probably never be asked to take command of another cruise ship. But Captain Bernanke and his crew are still at the controls of the US economy. Apparently, they still have no idea where they are...or where they are going. They think we’re coming out of a recession. But the recovery is so slow and so hesitant, that the press has begun referring to it as a “Great Recession.” Wrong on both counts, in our opinion. It’s not a recession. And certainly not a great one. It’s not a recession because it is not a temporary setback for an otherwise healthy economy. Instead, it is a turning point...a major turning point. Besides, a ‘great recession’ is self-contradictory. It’s oxymoronic. Like “prudent banker” or “honest politician,” the words don’t go together. If it were a recession, it might end soon, and then the economy could go back to what it was. But that can’t happen. Because the economy pre-2007 depended on a couple of myths and more than a few frauds. The biggest myth was that housing would rise forever. This is what allowed households to go further and further into debt, confident that they were getting richer all the time. And it allowed Wall Street to package up mortgage debt, slice it, dice it, and spread it all over town. The combination of rising housing prices and financial engineering produced the biggest bubble in human history. But once a bubble like that explodes, there is no question of going back...or recovering. It’s over. You might as well try to put a suicide bomber back together as to recover the bubble economy of 2006. You can’t go back. You have to go forward to something new. What are we going forward to? That’s the big question. No one knows the answer. Here’s the funny thing, dear reader; the people who are charged with guiding us to this new world are the same goofballs who got us into this mess...and then who didn’t see the fix they had gotten us into until it was too late. But heck...that’s just the way it is... We’re not going to hold out much hope that they figure it out and guide the economy safely into port. More than likely, they’ll soon run aground again. Higher Taxes to Appease the Zombies Bill Bonner Dow up 96 yesterday. Gold up $4. Oil above $100. Nothing special to report, in other words. Mitt Romney has revealed his effective tax rate. “About 15%,” he says. That seems like more than enough to us. But it’s not enough to satisfy the zombies. Romney has made a lot of money. They want more of it. It turns out that 15% is lower than average. The AP reports: At 15 percent, Romney’s federal income tax rate would still be higher than the rate paid by many Americans. On average, households making between $50,000 and $75,000 will pay a federal income tax rate of 5.7 percent this year, according to projections by the Tax Policy Center, a Washington think tank. However, when Social Security and other taxes are included, that same household would pay an average federal tax rate of 16.6 percent. Overall, the average American household will pay 9.3 percent in federal income taxes — and 19.7 percent in all federal taxes. Romney’s wealth — he is worth between $190 million and $250 million — puts him among the richest Americans. But if most of his income is from investments, it could help him to significantly lower his federal tax bill compared to people who make money in other ways. While the top federal tax rate for investment income — qualified dividends and long-term capital gains — is 15 percent, the top tax rate for wages is 35 percent on taxable income above $388,350. Wages are also subject to Social Security and Medicare payroll taxes, while investment earnings are not. Newt Gingrich has suggested a flat tax rate of 15%, which he now proposes to call the “Romney Tax.” But the zombies not only want a higher rate (so they can squeeze the producers a bit harder) they also don’t want a flat tax. They prefer a confusing, complex, and ever-changing tax code, with 10,000 rules and 20,000 exceptions. Why? Three reasons: First, complexity provides rich cover in which to hide special favors and privileges. Second, the more special favors available, the more campaign contributions, donations, job offers and speaking fees Congress can count on. Third, and don’t forget the lawyers and accountants — the corrupt insiders — who make money by helping lay the mines...and then helping taxpayers get through the minefields without blowing up. Sure, you could replace the government’s revenue with a much simpler tax system...but you’d inconvenience the zombies. In short, the tax system is completely corrupt. It is a drag on the whole economy...but it serves the zombies well. Regards, Bill Bonner, for The Daily Reckoning