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In a 1924 speech before the National Republican Club, President Calvin Coolidge observed "that when the taxation of large incomes is excessive, they tend to disappear." Coolidge found that in 1916, 206 people had incomes of $1,000,000 or more, but once a higher tax rate on million-dollar incomes was passed, the number dwindled--falling all the way to 21 in 1921.

In his book, The View From No. 11, Nigel Lawson, Margaret Thatcher's former chancellor of the exchequer, answered the above riddle with great ease. The Thatcher government inherited nosebleed rates of taxation, but as Lawson quickly found, the "higher rates we inherited were frequently not paid. The well-heeled and well-advised took great pains to avoid liability through the perfectly legal use of tax shelters of one kind or another; and the tax avoidance industry flourished as never before." Translated: When politicians target income for tax purposes, incomes change.

As is frequently the case in Washington, there's a debate going on now between the two major political parties about the proper level of taxation, particularly when it comes to the rich. Both sides have seemingly bought into the notion that the highest earners should be taxed at the highest rate. The debate really comes down to what the rate should be.

What's interesting here is that Democrats and Republicans alike presumably both understand the anecdotal and empirical reality of taxation. Simplified, there are rates of taxation that we're all aware of, but rarely do even the richest in the United States pay the top rate. Despite top tax rates since World War II that have ranged from 28% to 90%, Americans--irrespective of income--have rarely forfeited anywhere near 90% of their income to the government.

More realistically, American workers are among the least taxed in the world, with combined forfeitures to federal, state and local governments averaging out to about 25% of income. In 2008, perennial Forbes 400 member Warren Buffett was very public in his admission that his actual tax rate was nowhere near the top federal rate of 35%, but was actually at 17.7%.

So if we ignore for a moment the incentives and productivity issues that are an essential part of the tax discussion, it can be said upfront that, on a dollar basis, the tax rates that politicians argue about are quite irrelevant. No matter the graduated rates of taxation that most people concentrate on, at first glance they have very little to do with what the various governments take from us.

That being the case, why all the argument about tax rates? Indeed, wouldn't it be better to acknowledge that Americans are only willing to return a certain amount of their wealth to the government each year? And that, therefore, Congress should simply set a flat rate at around that number?

A flat tax rate would of course be a dream, but given the incentives that politicians have, it's a Utopian one. High and ever-changing tax rates are the lifeblood of a political class that clings to power through favors offered through the tax code.

To read more: http://www.forbes.com/2009/03/20/tax-rates-flat-opinions-columnists-john-tamny.html

In Depth: Surprising Auto Sales Figures

It's not all gloom and doom for automakers. Amid news that auto sales in the U.S. have fallen to their lowest annual rate since December 1981 and lag 39.4% behind year-to-date sales at this point last year, some models are bucking the trend.

Fifteen cars from 10 automakers saw their sales hold steady or increase last month, when compared to year-over-year data from February 2008. Hyundai, Mercedes-Benz and Porsche (other-otc: PSEPF.PK - news - people ) were the big movers, each with multiple models that gained ground.

The bad news, however, is that only two models from domestic automakers made the list: the Saturn Astra, which saw sales increase 30.3% over last year, and the Mercury Sable, with an increase of 35.5%. General Motors recently announced plans to halt production on all Saturn models and phase the brand out of existence by 2011.

Total sales by Detroit's Big Three are down 48.5% this year to date compared to last year. European brands were down almost half that.

Behind the Numbers
To find the cars that came through with recent sales success, we used February 2009 numbers from Autodata, a research firm in Woodcliff Lake, N.J. The numbers tally total U.S. sales for all brands on a year-over-year rate. Percentages are based on actual sales each month, and were not adjusted for more or less selling days per month.

Despite the gains, individual models don't reflect the industry at large; most of the cars with the strongest gains come from brands that lost ground last month. Audi's A5 and S5 coupes, for instance, gained 28.6% in sales from February 2008, but the brand declined 24.4% in overall sales. Models like the A3 (down 51.6% in February), A6 (down 47.5% in February) and A8 (down 67.5% in February) did more than their part to drag Audi down.

Similarly, the Nissan 350Z's 33% gain couldn't fully mitigate the brand's 37.1% loss compared to February 2008. All told, only Kia (0.4%), Smart (28.5%) and Subaru (1.4%) posted overall gains last month over February 2008.

Sign of the Times
Even models with only slightly decreased sales are cause for celebration in the grim economic climate. The Mercedes-Benz SLR Class is one such example: By merely maintaining its sales from month to month, it made our list of the best performers.

Some of the vehicles with the largest gains on our list got ahead because of product launches that had only just started in February 2008. Models like the redesigned Porsche Boxster had time to reach more robust sales figures by this year; it had practically nowhere to go but up.

A Perfect Storm for Sales
Other vehicles, like Hyundai's Accent and Elantra, benefited from several factors: the widely publicized win of the underdog Hyundai Genesis as North American Car of the Year at the 2009 Detroit Auto Show; Hyundai's unprecedented "Assurance" program, which allows new-car buyers to return their vehicle if they lose their job; and aggressive marketing through the month of February.

Hyundai commercials during two high-profile events, the Super Bowl and the Academy Awards, contributed to the increase in sales, says Chris Hosford, a spokesman for Hyundai. The shows tend to skew to male and female audiences, respectively, Hosford says, which presented a desirable balance in Hyundai's advertising budget.

"We feel that both of them are must-watch TV, and it's the kind of thing that people tend to watch live as opposed to Tivo, and therefore they tend to see the advertising to a greater extent than they might otherwise," Hosford says. "And then also they just have great numbers."

Affordable Luxury
Porsche, meanwhile, credited its higher sales numbers to mechanical updates on its most popular model--the Porsche 911 Carrera/GT3 gained 17.8% over February 2008--and to an "affordability campaign." The message: Owning or leasing a Boxster (up 127.4%) or Cayman (up 0.4%) may be less expensive than drivers assume.

"We're very hopeful that we've gained some traction," says Tony Fouldapour, a spokesman for Porsche. "We're optimistic because of the new models we have; we're able to offer something a little bit different to the consumer in the showroom. So we would hope that that momentum would continue, but it's very hard to predict."

Momentum was certainly a factor with the anomalies on our list. BMW's M3 Convertible, with its 999.9% increase, reflects nascent pre-sales that hadn't gained full traction in the marketplace last February.

"We really didn't get into the market until May [last year], so we're looking at probably another two months where you're going to see very little sales the previous year," says Tom Plucinsky, a spokesperson for BMW. "April, May and June are the hot months for convertibles."

That said, automakers have been hesitant to predict whether the positive sales for these particular models will continue. Most say they are simply focused on enjoying the gains while they last.

Shoichi Nakagawa faces questions about wobbly performance at G-7 meet as government announces economy shrank at 12.7% rate in fourth quarter.

It wasn't the biggest economic contraction in more than three decades that piqued the attention of Japan's media on Monday. It was the apparent drunken attempt of the country's finance minister, Shoichi Nakagawa, to respond to questions at a press conference in Rome following the end of a Group of Seven meeting that fueled chatter in Tokyo.

Eyes drooping and red-faced, Nakagawa slurred his replies and fumbled his answers to reporters in Italy's capital on Saturday. Greeting him back at work in Tokyo on Monday was unequivocal evidence that Japan's economy is the worse for wear. In the three months to the end of the year, the world's second-biggest economy shrank by an annualized rate of 12.7% as exports collapsed. (See "Japan Hits The Skids" and "Asia's Economic Dragons Wheezing")

In a sign of how consumers have shunned made-in-Japan products, Toyota Motor (nyse: TM - news - people ), the nation's leading manufacturer, expects to lose close to $5 billion this year compared with a profit of almost $7 billion a year earlier. (See "Moody's Puts The Boot Into Toyota") Toyota and the rest of the Japanese economy may be in for an even bumpier ride going forward.

"Everything indicates that Q1 will be worse. It's a very severe economic adjustment," said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong. Making matters worse for Japan is the yen. As investors take refuge in the Japanese currency, its value against the dollar and other currencies has gained some 40% in recent months. That means "further retrenchment in capacity and labor," added Maguire, who predicts that average real GDP contraction in 2009 will be between 5% and 8%.

In Rome, Nakagawa, along with other G-7 finance ministers and central bank heads, agreed that the state of the world economy was dire, describing it in a statement as "severe." The group also committed itself to "act together using the full range of policy tools to support growth and employment and strengthen the financial sector.

Back in Tokyo, Nakagawa reportedly blamed his condition on having imbibed too much cough medicine. Speaking on television, one former prime minister, Yoshiro Hori, admonished Nakagawa for his Rome performance.

Nakagawa's boss, Prime Minister Taro Aso, is struggling to deliver on the G-7 commitment. Stimulus measures have been bogged down by political wrangling both within the ruling Liberal Democratic Party and with the opposition Democratic Party Of Japan, which controls the upper chamber of Japan's parliament. With an approval rating dipping below 10% and a national election looming, the beleaguered prime minister, who promised that Japan would be the first industrialized nation to emerge from recession, may have to leave it to his successor to fix the economy.

The reality, reckons Societe Generale's Maguire, is that Japan will be "first in and last out," as a quarterly recovery is unlikely until the second half of 2010. With little hope to sustain it, reaching for the bottle may be the only way for some Japanese to dull the economic pain.

Recession-battered employers eliminated 598,000 jobs in January, the most since the end of 1974, and catapulted the unemployment rate to 7.6 percent. The grim figures were further proof that the nation's job climate is deteriorating at an alarming clip with no end in sight.

The Labor Department's report, released Friday, showed the terrible toll the drawn-out recession is having on workers and companies. It also puts even more pressure on Congress and President Barack Obama's administration to revive the economy through a stimulus package and a revamped financial bailout plan, both of which are nearing completion.

"These numbers, and the very real suffering of American workers they represent, reinforce the need for bold fiscal action," said Christina Romer, chief of the White House's Council of Economic Advisers. "If we fail to act, we are likely to lose millions more jobs and the unemployment rate could reach double digits."

The latest net total of job losses was far worse than the 524,000 that economists expected. Job reductions in November and December also were deeper than previously reported.

With cost-cutting employers in no mood to hire, the unemployment rate bolted to 7.6 percent in January, the highest since September 1992. The increase in the jobless rate from 7.2 percent in December also was worse than the 7.5 percent rate economists expected.

All told, the economy has lost a staggering 3.6 million jobs since the recession began in December 2007. About half of this decline occurred in the past three months.

"Companies are in survival mode and are really cutting to the bone," said economist Ken Mayland, president of ClearView Economics. "They are cutting and cutting hard now out of fear of an uncertain future."

The interest rate on six-month U.S. Treasury bills dropped to its lowest level on record at the weekly Treasury auction, the government said Monday.

The Treasury Department said it auctioned $27 billion in six-month bills at a yield of 0.25 percent, an all-time low. That's down from a rate of 0.285 percent last week.

Treasury rates have fallen to historic lows as the worst financial crisis in 70 years has triggered a rush by investors to the safety of government securities. Higher demand for such securities pushes their yield, or interest rate, down.

The lower rates make it cheaper for the government to borrow money, just as the federal deficit is set to balloon due to the rising cost of aid to banks, increased spending on unemployment insurance and lower tax revenues.

The department also auctioned $26 billion in three-month bills at a yield of 0.05 percent, up slightly from last week's 0.04 percent. That matches the rate from two weeks ago and is the highest since three-month bills averaged 0.15 percent on Nov. 24.

Earlier this month, rates on the three-month bill fell to a record low of 0.005 percent.

The rates are known as discount rates because the bills sell for less than face value. For a $10,000 bill, the three-month price was $9,998.75 while a six-month bill sold for $9,987.43. That equals an annualized rate of 0.051 percent for three-month bills and 0.254 percent for the six-month securities.

Japan's central bank concluded Friday that near-zero interest rates would not be enough to stimulate lending and has taken the extra step of buying corporate debt as well. But the measures are unlikely to bring the yen down from decade highs, a problem which continues to batter Japanese exporters. The central bank also made clear that for all its pro-activeness, Western economies would need to improve to brighten Japan's fortunes.

Following in the footsteps of the U.S. Federal Reserve, the Bank of Japan cut its key overnight lending rate to 0.1%, from 0.3%, in a 7-1 board vote. It also said it would temporarily buy commercial paper, or short-term corporate bonds, but did not specify how big the program would be or how long it would last.

The additional measures "were necessary for the effects of extremely low policy interest rates to prevail in financial markets and corporate financing," the Bank of Japan said in a statement.

Though the scale of the program is unclear, buying corporate debt "is quite significant because it's the most aggressive we've seen from the Bank of Japan in terms of readiness to take riskier assets," said Tokyo-based Macquarie economist Richard Jerram. Japanese companies are not as strapped for funds as those in the U.S. but the commercial paper market has struggled in the last two months, and any measures to boost liquidity are welcome, he added.

The government will also buy up to 20.0 trillion yen ($223.7 billion) in shares from banks, which have suffered heavy portfolio losses as the Japanese stock market has lost over 40.0% this year. The program is intended to ease banks' sensitivity to the stock market.

But for all these measures, the health of Japan's economy next year depends on Western economies, whose recessions have battered exports and made overseas lending tight. "Uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased," the central bank's statement read. "Much depends on financial conditions in the United States and Europe as well as developments in overseas economies."

It is unlikely that Friday's measures will be enough to keep down the yen, whose 25.0% surge this year to a 13-year high against the dollar has eroded companies' overseas earnings. After the Fed cut rates to 0.25% this week, the yen had been a higher-yielding currency than the dollar because Japan's key rate of 0.3% had been higher than the Fed's benchmark rate for the first time in nearly 15 years.

Though the dollar's plunge below the psychologically significant 90-yen level "has provoked speculation that FX intervention is imminent," "we do not expect a return to the 2001-04 policy of rapid reserve accumulation in order to resist yen appreciation," Merrill Lynch currency strategist Daniel Tenengauzer wrote in a Friday research note. He predicted that the yen would retain its strength over the next six months and then start weakening in late 2009, as an unwinding of the carry trade faded.

The central bank said Friday that it would also increase monthly purchases of government bonds, to 1.4 trillion yen ($15.6 billion), from 1.2 trillion yen ($13.5 billion), in the first increase since 2002.

Mortgage rates are falling as this week's dramatic action by the Federal Reserve provides a boost to the dismal housing market, but the nation's unemployment rolls are stuck at historically high levels amid a deepening recession.

Mortgage giant Freddie Mac (nyse: FRE - news - people ) on Thursday reported that rates had fallen to the lowest level on records dating back to 1971. Average rates on 30-year fixed-rate mortgages dropped to 5.19 percent, down from the year's previous low of 5.47 percent, set last week.

Jobs data from the government, while better than expected, was still sobering. The Labor Department on Thursday said its tally of initial jobless benefit claims fell to a seasonally adjusted 554,000 from an upwardly revised figure of 575,000 the previous week. The new tally was slightly below economists' expectations of 558,000 claims.

Another slight improvement was seen in the number of people who continue to receive jobless benefits, which declined to 4.38 million from 4.43 million the previous week. Economists expected a slight increase to 4.45 million.

Still, claims remain near the highest level since 1982, though the labor force has grown by about half since then.

And the cuts continue. Water treatment and storage systems maker Pentair Inc. (nyse: PNR - news - people ) said Thursday that it will cut more than 10 percent of its work force, or about 1,600 jobs, due to a faster-than-expected drop-off in demand and consumer spending. One day earlier, hard drive maker Western Digital Corp. (nyse: WDC - news - people ), managed-care company Aetna Inc. (nyse: AET - news - people ), and Newell Rubbermaid Inc. (nyse: NWL - news - people ), maker of products including Rubbermaid storage containers and Sharpie pens, announced mass job cuts.

Meanwhile, President-elect Barack Obama is laying the groundwork for a giant economic stimulus package, worth possibly $850 billion over two years, which Democratic congressional leaders say could be passed within two weeks of Obama taking office.

With the country spiraling deeper into recession, the Federal Reserve is ready to slash its key interest rate -- perhaps to an all-time low-- in hopes of cushioning some of the economic fallout felt by many struggling Americans.

To battle the worst financial crisis since the 1930s, Fed Chairman Ben Bernanke and his colleagues already have ratcheted down their main lever for influencing the economy -- the federal funds rate -- to 1 percent, a level seen only once before in the last half-century.

The Fed opens a two-day meeting Monday to assess to economy and decide its next move on rates. Another reduction to the funds rate, the interest banks charge each other on overnight loans, is all but certain to be announced Tuesday.

Many economists predict the Fed will cut its rate in half -- to just 0.50 percent. A few think the Fed could opt for an even more forceful action -- lowering rates by a whopping three-quarters percentage point or more. If that larger cut occurs, it would be the lowest on records that track the monthly average of the targeted funds rate going back to 1954.

Even an aggressive rate reduction won't turn the economy around, analysts said.

"It is not so much going to give the economy a big push forward. It's more a case of trying to help the economy from being pushed further backward by all these negative events," said Stuart Hoffman, chief economist at PNC Financial Services Group.

However deeply the Fed decides to cut rates, the prime rate -- now at 4 percent -- for many consumer and small-business loans would drop by a corresponding amount. The prime lending rate is used to peg rates on home equity loans, certain credit cards and other consumer loans. Cheaper rates could give pinched borrowers a dose of relief.

The goal of lower borrowing costs is to entice people and businesses to spend more, which would revive the flat-lined economy. So far, though, the Fed's aggressive rate reductions have failed to lift the country out of a recession that started last December.

Clobbered by the financial crisis, worried banks have hoarded their cash and been extremely reluctant to lend money to customers. Fearful consumers, watching jobs vanish and their investments tank, have sharply cut back their spending, including big-ticket purchases like homes and cars that typically involve financing.

The negative forces have fed off each other, creating a vicious cycle that Bernanke and Treasury Secretary Henry Paulson have been desperately trying to break.

To unlock lending and get financial markets to operate more normally, the U.S. has resorted to a string of radical actions, including a $700 billion financial bailout where the government is making cash injections in banks in return for partial ownership stakes.

In terms of rate cuts, the Fed is getting ever closer to running out of ammunition.

It can lower the funds rate only so far -- to zero. Even if that were to happen -- a point of debate among economists -- the prime rate would fall to 3 percent but no lower.

Against that backdrop, Bernanke says the central bank is exploring other ways to stimulate the economy.

The Fed could buy longer-term Treasury or agency securities on the open market in substantial quantities, Bernanke says. This might lower rates on these securities and help spur buying appetites.

Another option the Fed has mulled: issuing its own debt, which would give the central bank cash and more flexibility to battle the financial crisis. To do that, however, the Fed would need new powers from Congress.

"The Fed wants to show that it has tools and options and is not out of tricks because interest rates are very low," said Michael Feroli, economist at JPMorgan Economics. "The problems holding back the economy are fairly long lived in nature."

To combat the financial crisis, the Fed already has created first-of-its-kind programs, such as getting cash directly to companies by buying up mounds of "commercial paper," the short-term debt firms use to pay everyday expenses such as payroll and supplies.

It also recently launched massive programs to boost the availability of consumer credit, including that for cars, student loans, homes and credit cards. The Fed also is making loans to banks, is providing a financial backstop to the mutual fund industry, and has injected billions of dollars in financial markets here and abroad.

The Fed could opt to expand programs by enlarging loans it's now making, providing loans to other types of companies, or buying more and different types of debt. The Fed's balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting some of those other activities to get credit flowing again.

Even with all the bold moves, the economy continues to sink deeper into despair.

Skittish employers axed 533,000 jobs in November alone. That drove the unemployment rate up to 6.7 percent, a 15-year high.

Since the start of the recession, the economy has shed nearly 2 million jobs. Analysts predict another 3 million more will be lost between now and the spring of 2010.

Last week alone, Bank of America Corp., tool maker Stanley Works and Sara Lee Corp., known for food brands such as Jimmy Dean and Hillshire Farm, announced job cuts.

General Motors Corp., Chrysler LLC and Ford Motor Co., meanwhile, are fighting for their survival. GM and Chrysler have said they're in danger of running out of money within weeks. The White House is exploring new ways to help Detroit after rescue efforts collapsed in Congress.

With the employment market eroding and consumers retrenching, the economy could stagger backward at a shocking 6 percent rate in the current October-December quarter, analysts predict. It shrank at a 0.5 percent pace in the third quarter.

President-elect Barack Obama is advocating an economic recovery plan that includes spending on big public works projects to bolster jobs. His plan also includes tax cuts to spur consumers to spend more and businesses to step up investment and hiring.

Americans are sorely feeling the toll of the housing, credit and financial crises.

Households' net worth fell 4.7 percent in the third quarter to $56.5 trillion as people watched the value of their homes and investments tank. It marked the fourth straight quarterly decline, the Fed said.

I recently spent a few days in Moscow meeting with a variety of economic and financial officials and analysts, both in the public and private sector.

Until July of this year, Russia was rosy: It was growing at an annual rate close to 8%; oil prices were peaking at $140 a barrel; the country was running a large fiscal and current account surplus; it had a war chest of $600 billion-plus of foreign reserves; and its stock market, bond markets and currency values were strong. Policy makers were thinking of turning the ruble into a major reserve currency, at least for the CIS bloc.

This economic and financial success led Russia to flex its geopolitical muscle, challenging the U.S. on a number of political and military issues and using its energy power as an instrument of foreign policy in its relations with the Eurozone and its former Soviet neighbors. The peak of this resurgence of the Russian bear came during the August war with Georgia, when Russia flaunted its military power as the U.S. looked impotent in its inability to defend an ally.

But what a difference a short time makes. Six months later, Russia is in deep economic and financial trouble.

The S&P has just announced that it has lowered Russia's foreign-currency credit rating by one notch from BBB+ to BBB. In less than six months, oil prices have fallen to under $50 a barrel (from the $140-plus peak of July). The stock market has fallen by over 60%, and on some days it has been shut down to prevent a free-fall. The current account surplus has turned into a near deficit and a sure deficit by 2009. The country has experienced a capital flight of over $100 billion and has lost about $150 billion of foreign reserves (now down to about a $450 billion level). It is facing massive external debt-financing problems as its banks financed their lending with foreign currency borrowings and its corporate firms financed massive expansion with foreign currency debt. It is now desperately trying to prevent a sharp depreciation of its currency by aggressive foreign exchange intervention. It may face a large fiscal deficit (2% of GDP) next year, and its GDP growth rate is sharply slowing down, leading the World Bank to predict a rate of only 3% in 2009--with leading local analysts predicting an actual recession (negative growth of as much as -2%) in 2009. (See the recent analysis by RGE's Rachel Ziemba for more on the risks of a hard landing in Russia.)

Given this sudden change in Russian fortunes, there are several key policy issues that the authorities need to deal with. Of course, given the external shocks (terms of trade worsening and a sudden stop of capital and credit), it was important to use the buffer of foreign reserves to avoid a bank run by providing liquidity and capital to banks--and by providing a fiscal stimulus to a country that is sharply slowing down.

But the key unresolved policy issue is what to do with the exchange rate. Until recently, Russia was on an effective basket peg (with 55% for the dollar and a 45% weight for the euro). But with oil prices now down over 60% from the peak of the summer, and with incipient current account and fiscal deficits and a likely recession in 2009, the currency is obviously overvalued. A reasonable estimate of the needed exchange-rate depreciation--with oil at about $50 a barrel in 2009--is 25%. But until recently, the authorities resisted the needed depreciation through aggressive foreign exchange intervention.