How Local, State, and Federal Governments are doing Battle with their Citizens

By John Loeffler
for eco-logic


"How did it come to this?" muses King Theoden in Tolkien's Lord of the Rings as the Battle of Helm's Deep was about to commence. The residents of Middle Earth never saw their time of trial coming, until it had grown to a level of grave crisis, and so it is today. Look about you, resident of Middle Class, the Battle of Pockets Deep is about to begin, as Lord Taxman wages war.

Last week the media gasped when former Treasury Secretary, Paul O'Neil, announced that the Bush administration had planned to attack Iraq long before 9/11. (I'm shocked, aren't you?) Seems like Mr. O'Neil was privy to a lot more than he told.

Last November, a Fortune magazine article featured Professor Lawrence Kotlikoff of Boston University relating a study Mr. O'Neil executed during his tenure as Secretary of the Treasury, examining the U.S. government's capability to meet its future unfunded liabilities, notably Social Security and Medicare. The answer staggered even the Secretary.

By the end of the decade, there will be a gut-wrenching $44T abyss between what the government will be required to pay to retiring baby boomers, and what it currently absorbs in taxes. The only solution - if there is one - will be a staggering 95% increase in payroll taxes, on an already overtaxed populace, or massive monetary inflation. Either way the result is the same: the bailout will have to be rolled over, onto the middle class, not the rich.

Needless to say, the Treasury study became a victim of partial-birth-abortion and the Bush administration proceeded to fire Mr. O'Neil, as well. No team player there, and ignore that man behind the curtain. But sit down, Mrs. Middle Class, there's more.

Sixty years of social(ist) programs, deficit spending, monetary inflation, and Keynesian economics have left the U.S. economic system in a shambles. We are currently in the middle of a prolonged bear market rally with no real recovery, because little debt was discharged at the so-called "bottom," and thus we're fueling the current "recovery" with even more debt and consumer spending. The slide into a massive recession will continue over time. Viva the "jobless recovery!"

Official government numbers are cooked, whether reports on GDP, unemployment, etc, being jimmied to provide pre-determined outcomes, which will convince the American public it isn't as bad as it seems, and persuading them to stay in the game. There is not one market where there is not some form of often-illegal meddling, price manipulation, or regulation by the government or its Federal Reserve partners.

In reality, all overspending from Roosevelt's New Deal to Lyndon Johnson's Great Society, and beyond, instituted to help yesterday's "little guys," is now due and payable. The bill will be bled from the backs of today's "little guys," and even now, one hears the fining, feeing, and taxing turbines spooling up for takeoff, in the various states. An increasingly-wise public is already engaging in the three historical defenses of abusive taxation: fraud, flight, or fight. They either cheat, flee the taxation jurisdiction, or fight - either at the polls, or sometimes, violently.


So-called "untax" programs are doing a booming business, regardless of legality or illegality. The IRS makes public truck of prosecuting some prominent promoters, but the untaxers are convinced they're right, and for every one prosecuted, dozens more drop out. For those who "stay in the system," under-reporting of income, fake deductions, cash, and barter are traditional ways to evade taxation.

Of late, Lord Taxman has informed us his evil eye is focused on tax abuse using credit cards issued by offshore banks, whereby income is deposited in those banks, the account holders fail to report it as income, and then use the credit cards to bring the money back into the country by paying for living expenses with the cards. This will have some effect, but it will be only temporary. Everybody knows the system is broken.

When the real hammer drops, and national personal buying power continues to fall, the concept of scaling back sprawling government and its "essential services" will remain unthinkable, so local, state, and federal agencies will require a flawless collection engine to prosecute public plunder. Thus, the system is already arming itself, under guise of fighting the War on Terror, with steadily increasingly monitoring of citizens in all facets of their lives. What better way to close the current loopholes, than by having detailed snooping capability at the push of a button?


In state legislatures, there is not a drip of recognition that the country has been bled dry. We really have a spending problem, not a taxation problem. California's recall election was a microcosm of future events. A battle is brewing between Governator Schwarzenegger and the state legislature, which is determined to balance its wildly out-of-control budget, on the backs of "rich people" ($50K plus per annum) and business.

But - horror of horrors, businesses and producing people are fleeing the state, and thousands more are planning to do so. Even the rich Hollywood types are moving their assets to safe havens, while they preach socialism in their films. When it comes to their money, Hollywood liberals behave like those conservatives they're always demonizing.

The Fight

Some predictions:

1. When governments are forced to cut back, rather than cut the fat, they will go directly for the services they are supposed to provide for the public, so the public feels the pain! Meanwhile, fees charged for every government service will increase.

2. As people try to legally avoid excessive taxation, they will be demonized by government officials, and the media, as selfish and unpatriotic. There will be much hand-wringing about the horrible deficits, as if these somehow just appeared out of nowhere, and how the public is now responsible for them.

As businesses' flight from California increases, for example, the state may even institute an "exit tax," or something like it, whereby leaving will be made as financially painful as possible. California is in the unsustainable position of swelling ranks of people on the dole, over-controlled businesses, and impossible environmental regulations, coupled with a declining tax base, which cannot pay for it. Long live the dead goose that lays golden eggs that everyone wants! We'll just pretend the goose hasn't quit laying.

3. Anyone who counsels others on how to avoid abusive taxation and protect their assets will be demonized as unpatriotic. Look at this deficit! We may well witness prosecutions of financial advisors under the guise of "conspiracy to commit domestic economic terrorism," covered by abstruse and obscure provisions of Patriot Act "X." This will be designed to panic the rest of the financial industry into getting in line with the plunder program.

4. Those who think they have escaped the system by untaxing will find new systems they have to join, which will be linked to the old, only to find this difficult, because questions will be asked, as to where they were all these years. Naughty, naughty. Oh yes, beware a national sales tax, or worse, a value-added tax, without repealing the income tax!

5. As the Social Security and Medicare crisis becomes unmanageable - after all it is a Ponzi scheme, in every sense of the word - the national government will thrash around, looking for plunderable assets to feed a dying dragon. Private retirement plans will afford an overwhelming temptation. Under some law, bearing a title such as the "Retirement Security Act of 20XX," government may well seize private retirement plans etc., leaving an IOU for the owners, while assuring them their assets will be well managed and "protected" and available to them when they need it.

6. Federal, state, and local governments will waffle on their promises and raise the bar so high for benefits programs of all kinds, that only a limited number will qualify. Thus, little will be paid out, while much will be consumed. The only alternative, to save the system at the federal level, is massive inflation of the currency, which will deflate the value of the dollar. You'll get your promised money, but it won't be worth anything. Expect Alan Greenspan to be dumping cash out of helicopters.

7. The trend to raising fees for government services, for which the public already pays taxes will continue. As tax-fine-fee-inflate burdens grow to unbearable levels, and the quantity of services and benefits falls, the potential for civil unrest among the squeezed populace will grow, in direct proportion. This will be exacerbated when increasing numbers of working people realize their hard-earned, desperately-needed income is being transferred to faceless bureaucrats, and non-working recipients against their will.

8. Even with total information collection, officials will be hard pressed to digest it, so the rat system will be broadened by means of "public-private partnerships," whereby doctors, dentists, counselors, bankers, teachers, et al., will be encouraged (read coerced) to spy on their clientele, and report "suspicious" activities, which will come to mean virtually everything. The public-private partnerships also offload bloated government programs and responsibilities onto private groups, which must then bear the cost, even though taxes were paid to have George do it.

Lenin understood that socialism, and a heavily graduated income tax, inevitably destroys the middle class, because it ALWAYS bears the full brunt of this system, which collapses of its own imponderable weight, leaving the middle class impoverished, at the bottom, and a small group of rich elites at the top. There just aren't enough rich people to soak!

I would love to argue myself out of this scenario, especially the potential for civil unrest, but nevertheless, the Battle of Pockets Deep of the War of Middle Class has begun. However did it come to this?

(Hint: Ask your congressman, who has exempted himself from the burdens laid on you, and whose richly generous retirement pension is funded and guaranteed, regardless of the fate of the promises he made to you.)


John Loeffler is host of the weekly syndicated talk show "Steel on Steel," which can be heard online at



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