Tag: Tax reform

They Don’t Want a Welfare State; They Want a Plunder State

The strange thing about the 2014 election is that Obama seems to have taken it as a mandate … for more liberal polices. In addition to unilateral immigration “reform”, he has just released his budget proposal, which has massive tax hikes and spending hikes, no hint of entitlement reform and claims it will find $640 billion in deficit reduction (a paltry amount over the time frame) from tax hikes, immigration reform and, I believe, money imported from Narnia. It’s a fantasy budget that is making the hard-core liberals at Vox swoon but has connection to reality. And it puts the lie to the idea that Obama is a “conservative” as one newly-retired blogger has argued.

Here’s the thing, though. Liberals have long said that what they favor is a European-style welfare state (such as the one that imploded in Greece). Obama says this and his budget makes noises in this direction and is being praised as a step in that direction.

But the Democrats do not want a European welfare state. As much as they claim they do, that’s not what they want and not what they are advocating. If they really wanted a welfare state, they would be proposing something very different: huge tax hikes on the middle class.

The United States has one of the most progressive tax systems in the world, being very reliant on the wealthy for revenue. The European welfare states, by contrast, are more regressive, having flatter taxes and relying on VATs and sales taxes that are regressive. They have to be that way because you simply can’t finance a welfare state by taxing the 1%.

A welfare state financed by the rich doesn’t even work politically. When everyone is paying taxes, there is more support for a welfare state because everyone is pitching in. The perception is that you’re getting out something related to what you paid in, which is why Social Security and Medicare are popular in this country (both financed by a regressive tax that is denounced by Democrats for not soaking the rich enough). But a system that is dependent on taxing the rich isn’t a welfare state, it’s a plunder state. And as I’ve pointed out before, most people don’t want that. They don’t want to feel like they’re living on someone else’s dime or on stolen property. The Communists discovered this 70 years ago when they tried to “redistribute” estates to the commoners only to discover that the commoners didn’t want that wealth if it was stolen.

The gripping hand, of course, is that there isn’t any support for a huge middle-class-funded welfare state either, which Vermont discovered when they had to abandon their experiment in single-payer healthcare. And so the Democrats keep trying to sneak their welfare state through the backdoor. First it was taxes on the savings in 529 plans, which was quickly killed. Now it’s a tax on overseas earnings. Tomorrow, it will be more sin taxes.

(And if that fails, I expect them to embrace Modern Monetary Theory, currently being pushed by Bernie Sanders. This theory says that government shouldn’t worry about deficits; it can just print money. Taxes only exist to keep the rich from getting too rich. Seriously, that’s what it says. It’s like a politician’s wet dream: spend whatever you like and never worry about the bills.)

Thankfully, none of this is going to fly with the Republican Congress. But Obama’s absurd tax-and-spend proposal is a sign that we are still running out of other people’s money.

What Now?

So now that the Republicans have taken back both houses of Congress, what should they do for the next two years? Nothing, argues National Review:

The desire to prove Republicans can govern also makes them hostage to their opponents in the Democratic party and the media. It empowers Senator Harry Reid, whose dethroning was in large measure the point of the election. If Republicans proclaim that they have to govern now that they run Congress, they maximize the incentive for the Democrats to filibuster everything they can — and for President Obama to veto the remainder. Then the Democrats will explain that the Republicans are too extreme to get anything done.

They’ll say that anyway. If the Republicans proposed poached eggs for breakfast, the Democrats would denounce them as dangerous extremists. And I don’t think NRO actually believes this argument because they later say Republicans should force the Democrats to filibuster/veto popular legislation.

Even if Republicans passed this foolish test, it would do little for them. If voters come to believe that a Republican Congress and a Democratic president are doing a fine job of governing together, why wouldn’t they vote to continue the arrangement in 2016?

Which brings us to the alternative course: building the case for Republican governance after 2016. That means being a responsible party, to be sure, just as the conventional wisdom has it. But part of that responsibility involves explaining what Republicans stand for — what, that is, they would do if they had the White House.

So the Republicans shouldn’t govern. Instead, they should gear up for 2016 to take the White House and Congress at which point they will … what? … concentrate on keeping power?

I’m sorry, but I really don’t care about the Republican Party one way or the other. Whether governing hurts or helps their prospects in 2016 is irrelevant to me and should be irrelevant to people who are not actual party operatives. We had a unified Republican government for six years and the result was the most massive expansion of government power since the New Deal.

No. What we want from the Republicans is progress. What we want is for them to turn back the tide of government expansion. What we want is for them to … what’s that word … govern? The Republicans are on probation right now. It’s up for them to prove themselves worthy of getting power back.

There is precedent for governing and winning elections at the same time: Republicans worked with President Clinton and kept Congress and won the White House twice as a result. But they didn’t win because they grandstanded. The won because the accomplished things — welfare reform, spending restraint, NAFTA — that made them worthy of winning all three branches of government.

Nick Gillespie:

Yet Republicans mistake the meaning of the midterms at their own peril. These elections were a particularly frank repudiation of Barack Obama and the past six years of failed stimulus, disastrous foreign policy, and rotten economic news. Even the president’s historic health-care reform remains a negative with voters. But if the GOP thinks it has a mandate to return to the equally unpopular bailout economics and social conservatism of the George W. Bush years, it too will be sent packing as early as the next election.

You should read Nick’s entire piece, which breaks down the polling to show a decisive shift against big-government, in every respect.

It’s not enough for the Republicans to not be Obama. “Not Obama” isn’t going to be a candidate in 2016. In fact, Obama won’t be a candidate in 2016 (savor that relief for a moment). If the Republicans want to earn our votes in 2016, they need to accomplish things. They need to prove themselves worthy. They need to show that they can get government out our hair, despite the man in the White House.

How does this break down into nuts and bolts? On the day after the election, John Boehner and Mitch McConnell laid out an agenda for the next two years. It includes approving the Keystone XL pipeline, tax reform and fast track trade authority. It also includes three changes to Obamacare: raising to 40 the hours needed to qualify as a full-time employee for the employer mandate, exempting veterans from counting toward the 50-employee mark that triggers the coverage mandate and repealing the medical device tax.

These are all OK ideas and some of them — like fast track trade authority — are supported by the President. But it’s kind of small potatoes. It’ll make a nice first month, but it’s not exactly the Contract with America. I would prefer something a bit bolder.

This would involved finding things that the Democrats or the President will support. There’s a strain of thought among conservatives, exemplified by the NRO piece above, that working with Democrats will give “legitimacy” to Obama. Nuts to that. The country needs things done. And if we can the President on board, great.

But the Republicans should also pass legislation they know will be filibustered or vetoed. This could give the Democrats something to talk about in 2016 (“look at the extreme legislation we blocked!”). But I think it more likely, if Republicans are smart … OK, if they’re not too dumb … OK, if they’re not completely stupid … that it would give the Republicans something to run on in 2016. It would give the American people something to vote for, not just something to vote against. When the Republicans have run on a positive agenda — Reagan in 1980, Newt in 1994 — they have done well.

As for specific issues: the first on that list would be entitlement reform. The President has indicated that he is open to it. It’s time to call his bluff. The deficit has been shrinking in recent years but will soon begin to blow up as the bill for Baby Boomer retirees comes do. The time to act is now, before we are back in the land of trillion dollar deficits.

A lot of Republicans worry that overhauling Medicare and Social Security will open them up to attack from the Democrats. But here’s the thing: that’s going to happen anyway. The number of elections that have not included a Democrat “mediscare” campaign over the last forty years is precisely zero. The Democrats are going to demonize Republicans anyway. At the very least we could get something out of it. And if it costs the Republicans some seats, so be it. It would be worth it to slice trillions off our debt.

The counter-argument is they should wait until the Republicans have the White House as well. That way, they won’t have to compromise with Democrats and accept a tax hike or defense spending cuts in return for entitlement reform. I find that hope ridiculously optimistic. It assumes that Republicans will take the White House and keep the Senate. And it assumes that they will take the political risk of entitlement reform once they have full power, which I find unlikely.

Act now. At the very least, call the President’s bluff. Then you’ll have something to run on in 2016.

The second priority should be regulatory reform, which is sucking a couple of trillion dollars out of the economy. Probably the most important regulatory reform is the repeal of Sarbanes-Oxley, which is strangling our economy, halting IPOs and a nightmare for businesses. It’s the poisonous spider at the center of the web of economic malaise. President Obama will probably oppose this. Good! Make him stand with the bureaucrats and trial lawyers! Over 60% of the American people think regulation is too onerous, including many independents. This is a winning issue for Republicans.

Third would be an overhaul of the patent and copyright laws which are strangling innovation. The Republicans are open to this and the President is too, despite fierce opposition from trial lawyers. Reform could be passed in the first few months of 2015.

Fourth, an overhaul of our drug policy, specifically a recognition of state laws on medical and recreational marijuana. The President has occasionally made noises on this and a majority of Americans now favor pot legalization. The Republicans can get ahead of the Democrats on this by embracing a federalist approach: states that keep pot illegal will still have the aide of the DEA in keeping it illegal; states that make it legal will be left alone. I have little hope the Republicans will do this, but it would be a great step for them.

Fifth, an overhaul of Obama’s anti-terror powers. Justin Amash and Rand Paul give me hope that the GOP may be open to this. The best thing about reigning in Obama’s police state would be exposing the lie that the Democrats are the party of civil liberties and personal freedom.

That’s just for starters. There are other things: more spending cuts, reigning in Obama’s foreign policy and executive power excesses, a symbolic repeal of Obamacare (symbolic because it will be vetoed). But I see the above as doable and I see it as proving the GOP’s supposed small-government bona fides. If they’re serious, they will do something along these lines.

I have no doubt that the Republicans will run into opposition from the President. In fact, his petulant press conference seemed to promise that he would do what he wants on issues like immigration and only invite cooperation on his agenda. We’ll see what happens behind closed doors. This President has, on occasion, compromised with Republicans. But he has also been willing to take a my-way-or-the-highway approach, particularly when he had Congress for the first two years (Republicans were invited only to tweak details of Democratic legislation; kind of like being asked which arm you want the shark to bite off).

But if the President is determined to pursue his agenda and won’t cooperate, then pass the legislation anyway. Force him to veto it. Force him to oppose. Force his party to go on record as the party of bigger taxes, more government and no reform. Force him to tie his former Secretary of State and Heir Apparent to his unpopular agenda.

That’s something you can run in 2016. That’s something that might bring my vote in 2016. Until then, I will remain skeptical of the GOP and their commitment to small government.

The Apple Of His Eye

All the congressional hearings of late, it’s difficult to keep track of events without a scorecard. I have long held the belief that bureaucrats in general (and legislators specifically) hold public hearings to throw the folks back home a bone, to show them that their expensive/bloated/dysfunctional government, and the functionaries that they the voters put in place, are on the job and doing the people’s business, yea for the democratic process. Too bad these weasels (Jefferson’s idea of the citizen representative, that accomplished businessman who would devote a few years to serve out of a patriotic duty, then remove himself voluntarily and go back to being a productive citizen and allow another to take his place, that idea is so dead and buried) all subscribe to the Jess Unruh school of politics. To the uninitiated, Unruh is a particular hero of mine {tongue firmly planted against cheek}, an old school politician from California that famously said ,”If you can’t take their money, drink their liquor, screw their women, and still vote against them, then you got no business here in Washington”.

Yesterday Tim Cook got hauled up in front of the U.S. Senate’s Permanent Subcommittee on Investigations (What, nothing of late in the news on steroid use in Baseball you guys can exploit?) to explain why Apple is so good at tax accounting, specifically why Apple doesn’t pay taxes. In keelhauling CEO Cook on national television, for all 11 CSPAN viewers, they again called attention to the abortion that which is our tax code.

Senator Rand Paul, wasted no time in making some hay on the issue.

Paul mentions our corporate tax rate is double that of Canada, how about TRIPLE that of most successful European nations. Repatriating tax money at a 35% corporate rate? no wonder Cook has over $100 billion parked in overseas accounts.

Ireland has a corporate tax rate of 12.5%, conversely the world’s largest technology companies have decided to build factories there. Ireland negotiates that rate to further sweeten the pot, making foreign capital welcome thus bringing growth, jobs and prosperity.

Paul mentioned a bill that would repatriate this foreign money back to America at a 5% rate and use it to bolster infrastructure, there was an article in the WSJ last week floating the idea of bringing all foreign money owned by American corporations (well over $1 trillion)bak here tax free, then loaning this money to Uncle Sam interest free for a period of time, corporations keep more of their profits and the government gets interest free loans, (isn’t the US government too big to fail?) a win/win all the way around.

One consistent complaint from large U.S. companies is that our government taxes multinational companies on their global earnings, while other nations tax only profits earned within a country’s borders. That gives U.S. companies reason to park foreign earnings overseas, they are taxed only when brought back to the U.S.. The fix is obvious, tax U.S. companies only on profits realized here in America (allowing profits earned overseas to be taxed at that country’s tax rate), and lower the over all statutory corporate rate, making it more competitive with the global economy. But as these and other hearings have revealed, calling for a far simpler tax code is easier then producing one. And yes, criticizing our cumbersome tax code is the epitome of grabbing low hanging fruit.

But back to Paul, he is clearly taking a page out of the Obama bible for presidential campaigning, use both hands to finger point and highlight the current guy’s shortcomings, then run on being ”
Not That Guy”. His 13 hour filibuster was more show then substance (Ted Cruz already got Holder to admit, through a continuous application of head locks and full nelsons, that targeting an American citizen on American soil for assassination was clearly unconstitutional) but I liked his principled stance. As with most Libertarians, they lose sight of the fact that people cannot be counted on to do the right thing consistently and sometimes we do need the rule of law to smack them back into compliance, but as a starting point I like the “keep your nose out of my business” philosophy. Rand Paul is doing everything he can to be the Ungovernment government official, a smart move given what we have now.

Yes, it is early, and Rubio seems to be losing steam. Politics abhors a vacuum so Paul will accommodate. And with Christie and his stomach staple surgery, the horses are jockeying for position.

A Gold Medal in Pandering

There’s been a bit of a furor lately over Olympians having to pay taxes on cash bonuses they get for winning medals. Yglesias has the details:

In this particular case, the issue is that the U.S. Olympic Committee—the nonprofit group that organizes Team USA for the games—rewards athletes with cash bounties for medals won. Gold medalists receive $25,000, silver medalists get $15,000, and bronze medalists receive $10,000. That’s income, so come spring of 2013 when medalists are filling out their tax forms, it’ll be reported and taxed like any other income. Their after-tax income will be higher if they do win a medal than if they don’t. There’s no “extra tax bill” waiting for anyone. There’s simply extra income, and the income would be taxed.

Just to clear up a piece of misinformation: the bonuses will be taxed at the marginal rate. For athletes who are making a lot of money, that could be 35%. For most, it will be much lower. And it seems very unlikely that the medals themselves will be taxed; just the bonuses.

Marco Rubio has proposed and President Obama has indicated he will sign a bill that exempts the Olympian bonuses from income tax.

I think it’s a bad idea.

Look, I’ve loved watching the Olympics and our athletes have made me immensely proud. It’s not just the performances; it’s the way they have carried themselves. With a few notable exceptions, they go into interviews well-spoken, polite, enthusiastic and patriotic. They’ve been respectful of the sport and their fellow athletes. I was particularly impressed last night with Allyson Felix, who was gracious, winning and plans to become a school teacher when she retires.

But does this mean we should be exempting them from taxes? Yglesias again:

The underlying issue is that taxes aren’t supposed to be a cosmic judgment on the underlying worthiness of people’s activities. The earnings of a great artist and a reality TV show producer are taxed the same. That can seem a bit perverse at times, but having Congress try to assess which professions are important and which are bad would be much worse. The goal of the tax code should be to try to raise an adequate amount of money in a way that’s economically efficient and meets social equality goals. That tends to mean as broad a tax base as possible—few deductions or exemptions, in other words—to make it possible to raise revenue with relatively low tax rates. Exceptions should generally be justified in terms of broad benefits to society.

Now, to be fair, Olympic athletes in other countries tend to have public support. And prizes of any kind were not taxed until 1986 (the law was changed because companies were hiding salary in ‘prizes’ given to employees). It also should be noted that Olympians make tremendous sacrifices for our national pride. To take Gabby Douglas as an example: she basically hasn’t had a personal life, moved across the country to train and her training bills bankrupted her family. I recently saw an estimate that a typical Olympian spends $250,000 to get there. I believe it when I see parents spending thousands a month just for cheerleading.

But making yet another wrinkle in the tax code is not a proper response to this. It’s merely a ridiculous bit of pandering to popular sentiment and the issue of the moment. We’ve heard all this bullshit from the Republicans and Democrats about how we need to overhaul the tax code to remove the hundreds of billions of dollars in deadweight loss it inflicts on the economy. Yet the second a pet issue comes up — Olympians having their bonuses taxed — that goes out the window.

The last thing we need is to be putting more complications into the tax code. We need to be streamlining it. If they can’t resist the outrage of the day, how the hell are they going to stand up to really powerful lobbies that want their special break protected?

If you want to subsidize Olympians, do it honestly like other countries do, with direct spending. That would actually be better, since it would support all Olympians, not just the tiny fraction that happen to win medals. (Think of the poor 4th place finishers who made as many sacrifices but don’t get the benefits). I’d be against that — we have plenty of private resources to support the Olympics — but at least it would be honest. At least it would be fair to all the athletes. And at least it wouldn’t clutter up our tax code with more bullshit.

Sunday Six Pack

NPR recently had group of economists discuss policies that they think are great for the country but that politicians consider radioactive. The group of economists was actually quite diverse, ranging from George Mason libertarian (and frequently linked Cafe Hayek blogger) Russ Roberts to Cornell liberal Robert Frank. What six policies could that group possibly agree on? And why wouldn’t politicians embrace policies that enjoy such a broad consensus?

One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

One thing they don’t talk about: the mortgage interest deduction is a lot smaller than most people think it is. People see they can deduct $10,000 off their taxable income and think that’s pretty big. But mortgage interest is deducted only if you throw out the standard deduction, which is $12000 for a married couple. For most people, if their home costs less than about $250,000, they are gaining little, if anything. The host says the deduction saves him $5000. Assuming he’s calculating that correctly (i.e,. what it gives him above the standard deduction), that means he’s paying off a half million dollar mortgage.

The home mortgage interest deduction has its destructive aspects, too, distorting the real estate market. As noted above, it mostly subsidizes the purchase of large and expensive homes, driving up that end of the market. But even worse is that by creating the perception that the government is paying up a third of your mortgage, in induces people to buy more home than they can afford. Ironically, this drives up the cost of housing for the poor and middle class.

I don’t think the market can take the shock of an immediate cessation. But phasing it out would be a great idea. Even better, as we’ll see later, would be to scrap the entire tax system.

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Have the tax deduction for all health insurance or have it for none. Encouraging people to get insurance through their employer has been one of the biggest drivers of healthcare cost over the last few decades, pushing consumers further and further away from the actual costs. The Wyden-Bennett bill, one of the things I hope becomes part of the “replace” part of “repeal and replace”, would have done this.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

The Fair Tax is one of the more coherent plans on this subject. I’ve detailed before why I oppose it. A VAT would work much better but only if it mostly replaced the existing system. A lot of libertarians oppose the VAT because they see it as a gateway to big government. My opinion is that we already have big government and, given our commitments to seniors, it’s not going to get small anytime soon. The question is how to pay for it without crippling the economy and a VAT has the minimum of deadweight loss.

I lived in Texas, which does not have an income tax, for four and a half years. It was awesome. You weren’t taxed until you spent money. I would love to see the entire nation enjoy that freedom and empowerment.

Note also something important in the broadcast: the most ardent advocate of eliminating the corporate tax? The two liberals on the panel. They know how destructive corporate taxes are to our economy.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

This is the one that will cause the most disagreement on the blog. I don’t want to open another global warming debate. I would support a carbon tax but if and only if it came with steps three and four of eliminating our current tax system. It is infinitely preferable to the cesspool that would be cap and trade.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

We’ve talked about this before. No need to rehash.

Here’s where the NPR segment falls on its face: they imagine a politician putting forward the above platform and being rejected by the public. There’s some validity to that. If you cornered politicians, they would probably agree that most of these ideas are sensible but fear the public backlash. However, I think that if you polled the American people on that platform, they wouldn’t be too opposed either. Oh, they might have reservations about one or two policies but they would probably accept it over the current system.

No, I don’t think the problem is necessarily one of marketing. I think the problem — a problem that NPR glosses over — is that our politicians and political class are simply too invested in the current mess. Part of it is special interests that would rather have a tax system tailored to them or a booming prison industry or a booming housing market. Part of it is simple inertia in favor of policies we have pursued for decades. Part of it is spinelessness — the unwillingness to propose policies that, as NPR noted, can be easily demagogued.

But the largest problem is that our politicians like the system we have. The system we have — especially the tax system — keeps titans of industry, atlases of production and prometheii of invention groveling to them. The system we have keeps special interests on bended knee, constantly asking for and getting favors from politicians. Remember how, earlier this year, Apple had to start ramping up their political contributions and lobbying under threat of regulation and lawsuit? Politicians love that.

The system outlined above isn’t actually libertarian. It sounds like it, because I’ve cast in libertarian terms. But steps 1-4 would be accomplished by replacing our tax system with a VAT — versions of which have propped up some of the most socialist countries in the world. That and step 5 just detail how taxes are collected, not how much are collected. It would create a tax system that was essentially “Dial a Revenue” — capable of supporting either an expansive welfare state or a limited federalist state. Opposing those changes and supporting the current system is not an issue of big government versus little government. It is an issue of just how much of our lives and our industry Washington can control.

Even step 6 isn’t a necessarily libertarian issue; it’s more a matter of common sense. I’ve heard support for marijuana legalization from all parts of the political spectrum. My mother has never voted Democrat. My best friend from college has never voted Republican. Both think marijuana should be legal.

So, no, it’s not that the above platform would necessarily be Republican or Democrat. Or conservative or liberal. Or libertarian, for that matter. The problem with it is not that it would produce smaller or bigger government but that it would produce less invasive government, less powerful government. It would disperse the groveling lackeys and toadies are politicians have grown used to. It would produce a government less besieged by special interests and lobbyists. It would produce a government that spends a lot less time looking over shoulder and poking through our underwear drawer.

And that’s the reason it can’t happen. Our establishment enjoys the genuflection too much.

The Other Way

As I’ve said before, I don’t think we can balance the budget without raising taxes. Of course, tax hikes have to be conditional on even larger spending cuts (a 3-1 ratio at least). And they should be real spending cuts, not phony-baloney baseline cuts or giving ourselves credit for ending the war in Afghanistan.

Given that, you might think I see Obama’s tax proposal — which mainly involves setting higher marginal rates for millionaires — as the beginning of a “Grand Bargain”. But I don’t. It’s a perfect example of how not to do tax policy. It’s built on the Warren Buffet complaint about not being taxed enough (even though Berkshire-Hathway owes hundreds of millions in back taxes). It then institutes a series of escalating marginal rates that, incidentally, will not tax Warren Buffet since his salary is actually small.

It’s crap. It’s the same mentality — we must tax X! — that gave us the abomination that is the Alternative Minimum Tax. That creature was started because of hysterical media reports about millionaires not paying any taxes because deductions wiped them out. The tax burden of the AMT is bad enough, but the deadweight loss — the time, energy and money burned to comply with it — is death.

Our hideous and destructive tax code has been built by bullshit like this. No one sat down and said, “What’s the best way to raise the money for our government while minimally impacting the economy?” Instead, it’s been built of a series of things we should subsidize (kids, home ownership, charity) and things we should punish (rich people). It’s been built on they hysteria-of-the-week. And it’s a simple fact that you will not create a good tax system this way.

Taxing Warren Buffet more is not the basis of good policy. Taxing Warren Buffet more should not be our goal (although it may be the result). Narrow aims like that are what have given us the current mess in which the IRS can’t tell you whether your tax return is right or not. Narrow aims like that distort markets and create unintended consequences. Narrow aims like that result in stories like this, where ex-pats in foreign countries are being threatened for not filing tax returns because someone got a bug up their butt about it.

There are a number of viable alternatives. Milton Friedman proposed a flat tax calibrated to provide negative tax to poor people, the negative tax replacing the welfare system. Simpson-Bowles outlined a number of proposals that the GOP is currently favoring that would eliminate most deductions in favor of a lower overall rate. The Value-Added Tax is a possibility and would be far better than the Fair Tax. One change I would like to see: eliminate the corporate tax completely but tax capital gains and stock income at normal income rates.

All of these are viable options. Any is preferable to the system we have now. And while none would stimulate the economy right away, the long term effects could be dramatic:

It will make U.S. multinationals more competitive and more likely to increase employment here in the U.S. It will shift employment away from the tax avoidance industry of lawyers and accountants to skilled workers who actually produce goods and services. It will cut down on the roughly $2 trillion U.S. multinationals have stashed overseas to avoid high U.S. taxes. It will stop rewarding U.S. multinationals for carrying debt and building financial services subsidiaries and will make them less vulnerable to financial crises. It will increase dividend payouts. It will lower the cost of capital and increase investment. These benefits only arise after firms change the way they operate, and that will take time, like many years.

On the individual side of the income tax, tax reform will reduce the excessive subsidies for housing and redress the disadvantage of renting. It will reduce health benefit subsidies which drive up health care costs. It will reduce the complexity which forces most taxpayers to use a tax preparer. With some extra effort, we could go to a return free system for most taxpayers.

Tax reform is the definition of long-term thinking. It will take years to do (Reagan had to fight for two years to get even mild reform) but will pay off over decades. If Obama were serious about both the deficit and the economy, this would have been the subject of his speech this week.

It wasn’t. Campaigning for 2012 was.

More Perspective..

During the comments discussion on one of our recent posts dealing with the effect of our current leaders on the economic and job situation in the US, the issue of what kind of impact the blatant hostility from the Obama administration towards business came up. Some people refused to accept that, in general, based on the laws and policies pushed over the last 3 years, this administration was exhibiting some serious and severe hostility towards business. Their absolute need to control the private sector, so they could use the power of big government to pick the winners and losers – under the guise of fairness or justice – was the biggest contributor to this hostility. And that hostility lead to massive lack of confidence which then drastically impacted the job market situation. When businesses feel they are under attack and they can not predict their costs and liabilities – to verify if they are financially viable and can turn a profit – they basically do not take risks.

Hiring new people these days is a huge risk. It’s also why no tax payer money spending plan the Keynesian-Marxist grieve mongering cabal comes up with, no matter how big the amount of money being flushed down the toilet may be, will ever make any kind of positive impact on hiring: they are not addressing the fundamental issues.

Today we find out that the jobless claims posted another “surprise” increase. I am more surprised that the usual suspects in the LSM still continue to be surprised that we have for months, even years, now seen the number of people filing after they lost their jobs stay steady, at scary levels, or go up, instead of realizing the trending is telling them something important.

NEW YORK (Reuters) – The number of Americans filing new claims for jobless benefits rose unexpectedly last week in a sign concerns about a weak economy were sapping an already beleaguered labor market, data showed on Thursday.

The inflation rate decelerated slightly in August as gasoline prices rose at a more modest pace and the cost of buying a new car held flat, the Labor Department said on Thursday.

And I am sure the bleak unemployment numbers do not account for the countless people that have dropped off the radar and are not even bothering to look anymore, are working part time when they would love to get a full time job, or simply can’t report because they are ineligible to receive any kind of benefits. The numbers are frightening, there seems to be no end in sight to this situation, with many are thinking will get a lot worse, and last for a very long time, before it improves – if ever – and thus, it’s no coincidence that unemployment is now the top concern for most Americans. It also explains why after three years of anything but caring for the economy and the employment situation, the WH and the donkeys are now scrambling to make it look like they do and have a plan. The problem is that it’s just a lot more of the same crap from the last 3 years that has been disastrous.

As the WSJ reports in this article the current plan basically is doomed to failure, because it tries to fool employers into stimulating economic growth with some very short term cuts, paid for with backloaded taxes that would not just wipe out any benefit that these short term cuts would create, but increase the burden on these not just these businesses, but a whole bunch of Americans Obama previously told us where exempt from his wealth redistribution schemes, to a level that it will create an economic situation that looks far worse than it is now.

President Obama unveiled part two of his American Jobs Act on Monday, and it turns out to be another permanent increase in taxes to pay for more spending and another temporary tax cut. No surprise there. What might surprise Americans, however, is how the President is setting up the U.S. economy for one of the biggest tax increases in history in 2013.

Mr. Obama said last week that he wants $240 billion in new tax incentives for workers and small business, but the catch is that all of these tax breaks would expire at the end of next year. To pay for all this, White House budget director Jack Lew also proposed $467 billion in new taxes that would begin a mere 16 months from now. The tax list includes limiting deductions for those earning more than $200,000 ($250,000 for couples), limiting tax breaks for oil and gas companies, and a tax increase on carried interest earned by private equity firms. These tax increases would not be temporary.

And there you have it. Obama’s big plan is not going to do anything to create jobs because the short term “tax cuts” are short term, but the tax increases that follow it, to pay for it, are not. I can’t say that I am surprised. After all, Obama and the left have told us they want more taxes because the beast needs the cash, and everything before this that has happened in the last 3 years has been about them trying to make it so. Basically they are trying to fool people into thinking they are improving the economic incentives for small businesses to hire, but unless these small business owners are total twerps, they will quickly realize they are being had with those back end taxes basically punishing them whether they hire anyone or not, and they will do nothing of the sort.

In fact, I expect them, if they do anything, to downsize, considering they will be slammed with new taxes in 2013 regardless. The WSJ breaks down the facts as follows:

What this means is that millions of small-business owners had better enjoy the next 16 months, because come January 2013 they are going to get hit with a giant tax bill. Let’s call the expensive roll:

• First comes the new tax hikes that Mr. Obama proposed on Monday. Capping itemized deductions and exemptions for the rich would take $405 billion from the private economy for 10 years starting in 2013. Taxing carried interest would raise $18 billion, and repealing tax incentives for oil and gas production would get $41 billion.

• These increases would coincide with the expiration of the tax credits, 100% expensing provisions and payroll tax breaks in Mr. Obama’s new jobs program. This would mean a tax hit of $240 billion on small business and workers. That’s the downside of temporary tax breaks and other job-creation gimmicks: The incentives quickly vanish, and perhaps so do the jobs.

So even if the White House is right that its latest stimulus plan will create “millions of jobs” through 2012, by this logic a $240 billion tax hike on small businesses in 2013 would cost the economy jobs. This tax wallop would arrive when even the White House says the unemployment rate will still be 7.4%.

• January 2013 is also the same month that Mr. Obama wants the Bush-era tax rates to expire on Americans earning more than $200,000. That would raise the highest individual income tax rate to about 42%, including deduction phaseouts, from 35% today. Congress’s Joint Committee on Taxation found in 2009 that $437 billion of business income would be taxed at higher tax rates under the Obama plan. And since some 4.5 million small-business owners file their annual tax returns as subchapter S firms under the individual tax code, this tax increase would often apply to the same people who Mr. Obama is targeting with his new tax credits.

The capital gains and dividend taxes would also rise to an expected 20% rate from 15% today. The 10-year hit to the private economy for all of these expiring Bush rates: about $750 billion.

• Also starting in 2013 are two of ObamaCare’s biggest tax increases: an additional 0.9-percentage point levy on top of the 2.9% Medicare tax for those earning more than $200,000, and a new 2.9% surcharge on investment income, including interest income. This will further increase the top tax rate on capital gains and dividends to 23.8%, for a roughly 60% increase in investment taxes in one year.

It doesn’t look well for us tax payers, and it certainly looks like Obama’s jobs plan will not do anything. I could break all of this down and comment, but the article already did an awesome job of that. And the WSJ author puts it perfectly when they say:

The White House’s economic logic seems to be that its new spending and temporary tax cuts will so fire up investment and hiring in the next 16 months that the economy will be growing much faster in 2013 and could thus absorb a leap off the tax cliff. But this requires its own leap of faith.

The White House also predicted a similar economic takeoff from the 2009 stimulus that was supposed to make a tax hike possible in 2011. Then last December Mr. Obama proposed new tax incentives only for 2011 because the economy was supposed to be cooking by 2012. Now it wants to extend those tax breaks so the economy will be cruising in 2013.

Emphasis mine there. What again was the definition of insanity?

Huntsman Gets It

Too little, too late for a fading to irrelevance GOP contender, but the other day Jon Huntsman came out with his economic/job producing plan in the wake of the much anticipated Obama jobs speech next week. I’m surprised that he was first out of the gate on an issue that should be job one (tee hee) on every one’s resume, but here it is.

I won’t post an excerpts, it is a short piece and all good stuff, stuff incidentally that if you dissect it one by one, stuff that I have talked about and endorsed, maybe that is why I like it.

Bullet points:

Flatter fairer simpler tax bases, what’s not to like.
Getting rid of subsidies and deductions, about time. The government should not be in the business of rewarding some business (people) and penalizing others, tax people on their income, nothing else.
Getting rid of capital gains, removing the double taxation and providing some relief to the middle class and elderly, both of these classes rely on cap gains for their survival.
Lowering the corporate tax rate, self explanatory, private businesses are the real job creators, provide an atmosphere that is conducive to growth.
Repealing Obamacare, Dodd-Frank, and Sarbanes-Oxley, stuff that is necessary but will have to wait till after 2012.
Neutering the EPA, FDA and the NLRB, same as above, necessary but not feasible now.

His recommendations are also significant for what it leaves out, implementing a VAT. For those who haven’t heard much about VAT’s, stand by, you will. The Europeans discovered this handy new means of legal thievery years ago, amongst those Harvard academician types that populate Obama’s economic advisers, the VAT is gaining traction big time.

If nothing else, Huntsman threw some cold water on the genuines to put up something themselves. Folks want to know what they will do beyond the typical political bromides, some specifics are in order. The typical ,”I will just get out of the way and let the free market work” is so yesterday.

Jobs

I’ve been thinking a lot about the job problem in this country. Jobs are the problem right now. One in eleven Americans is unemployed, the knock-on economic effects are making a bad deficit situation worse and a long-term culture of dependence is being created. I am under no delusion that a blog post will change anything. But I thought I’d write up about 2000 words of thoughts on the subject so you’ll know where I’m coming from.

The fundamental problem with fixing the job situation is that we have two parties absolutely devoted to failed policy. On one side we have the Republicans insisting that just a few more rounds of Bush-style demand-side tax cuts will get things moving. However, there is very little evidence that these would help, even if we could afford them. We know what the Bush tax cuts did for jobs: jack.

The Bush tax cuts were followed by low GDP growth, negative median wage growth, and little job growth. Even before the Great Recession, growth in the Bush business cycle was the weakest since World War II. And the cuts cost about $2.6 trillion between 2001 and 2010, according to the Economic Policy Institute—adding to a debt future generations of taxpayers will pay for, plus interest.

To be fair, Sarbanes-Oxley played a role here as well. But the record is stark — one of the weakest economic booms since World War II and the tax cuts distinctly failing to “pay for themselves”. Tax cuts can pay for themselves when you’re cutting a marginal rate of 97% (Kennedy) or 70% (Reagan). The don’t pay for themselves when the marginal rate is in the 30’s or lower. No one is quite sure where the Laffer Curve turns over, but it’s not at 0.

On the other hand, we have a bunch of Democrats calling for more stimulus spending under the Keynsian theory that … actually I’m not sure what the Keynsians are on about. The stimulus failed and their response is to claim it wasn’t big enough — the equivalent of saying we’ll really really fly if we just jump off a taller building. Will Wilkinson called it a religion, a belief that government can create an infinite multiplier of loaves and fishes. Given the immunity of the Keynsians to fact, that’s a fair description.

So what do we need to do to get the economy moving?

Deficit Reduction: Bruce Bartlett:

Government mainly affects savings not so much through tax rates as through the budget deficit, which constitutes negative saving. When government borrows, it takes funds out of the economy that would otherwise be available to finance domestic investment. Alternatively, the U.S. must borrow more from foreigners, which increases the trade deficit. In the national income and product accounts, the trade deficit is subtracted from GDP, thus lowering growth.

The bottom line is that neither taxes nor spending by themselves are the most important government contribution to the investment climate; it’s the budget deficit. Consequently, a reduction in tax revenue which raises the deficit is unlikely to stimulate domestic investment because more money will have to be borrowed from abroad. Conversely, a tax increase dedicated to deficit reduction could well be stimulative, as was the case with the 1982 and 1993 tax increases. Contrary to Republican dogma, rapid growth followed on both occasions.

But, scream the Keynesians, austerity kills! Look at Ireland! Look at the UK!

OK, assholes. Let’s look at Ireland:

Ireland was the first of the debt-plagued European countries to cut government consumption significantly in 2009, mainly by reducing government paychecks from 12.3% of GDP in 2009 to 11.8% in 2010.

While such gestures toward fiscal frugality lasted, the country was rewarded with a tolerable risk premium on government bonds. The yield on 10-year Irish government bonds was still 5.3% as recently as last August, compared with 10.7% in Greece. This May, the interest on Irish bonds reached 17.6%. What went wrong?

Back in June 9, 2010, I wrote that “unlike Greece, the Irish economy is showing encouraging signs of recovery.” Ireland’s real GDP had increased by 1.7% in the first quarter, with an 11.7% quarterly rise in industrial production. Manufacturing output increased 29% from November 2009 to July 2010, thanks to growing exports.

Ireland tanked shortly after, which the Kenysians blame on austerity. To them, the logic is inescapable — Ireland cut spending, the economy crashed, QED. They leave out the intermediate step, when Ireland did was Iceland refused to do — bailed out foreign investors in their banks and quadrupled their debt overnight. It was an incredibly stupid move that the EU bullied them into. Claiming that austerity caused Ireland’s ongoing economic woes is like claiming that Mexico won World War II. Yeah, they contributed, a little. But let’s not ignore the bigger players.

OK, OK. But certainly the UK is fucked because of … what was that?

Unemployment is falling at its fastest pace in a decade, official figures reveal, in a boost for George Osborne as he prepares to deliver his Mansion House speech. The Office for National Statistics (ONS) said the number of people unemployed fell by 88,000 in the three months to April, to 2.43 million — the largest drop since the summer of 2000. The unemployment rate was 7.7%, down from 8% three months earlier.

The UK has gained 100,000 private sector jobs even as the government has cut 24,000. The recovery is still fragile and could crumble underneath them. But if we had similar numbers in the United States, the President would be turning cartwheels on the White House lawn and prank-calling Mitt Romney (“Hey Mitt, heard you’re unemployed, hahaha.”). Canada and Puerto Rico have followed this model as well.

The ultimate example here, of course, is Germany, which refused to engage in a stimulus despite pressure from the Administration. I’ll have more to say on them later. But I want you to savor this — at least two, possible more European welfare states have righted the ship while keeping their deficit under control. According to both the Keynsians and the Norquistians out there, this should be impossible. Without stimulus spending or tax cuts, you can’t get an economy moving. But the example of these countries belies this. Hell, the example of our own country in the 80’s and 90’s show this to be false. Both decades saw tax hikes; neither saw any stimulus (the GOP filibustered Clinton 1993 stimulus bill). And yet — miraculously — we recovered. Recovered enough that we could later ease the tax burden.

The Tax Code: Despite my aversion to yet more tax cuts, overhauling the tax code would help a great deal. The tax code, because of its complexities, imposes $200-300 billion of deadweight loss on our economy every year. Cutting that in half would be the equivalent of a permanent and massive tax cut. Reagan’s 1986 tax hike was eased by tax reform, which more than compensated for the economic hurt of higher rates. American corporations spend more time figuring out the tax implications of their business decisions than the business implications of their business decisions. Does this strike anyone as healthy?

The most important thing is to broaden the tax base. Our income tax has become highly dependent on the top earners, who now pay almost all of the tax. This is a problem because when the economy is doing well and the rich are getting seven figure bonuses, revenues boom and governments spend like mad. Then the economy stalls, the rich make less and revenues crash, creating a gaping budget hole. Coburn’s idea of increasing revenue by closing loopholes and tax credits is the right one. It’s not just that it bring in more revenue, it stabilizes the revenue by making it less dependent on a few key economic sectors.

The tax code has also contributed to numerous bubbles, especially the housing bubble through the mortgage interest deduction and the home buyer tax credit. The last thing we need is the government stimulating another bubble — this time in green tech — through either direct spending or tax breaks.

There are other anchors on American business as well — notably the failure of the Administration to enact free trade agreements and the hideously awful Sarbanes-Oxley law. Both need to be dealt with as well.

Our regulatory structure also needs help. How do we expect to build a green economy when it takes a decade just to get the paperwork done for a new power line? Congress should create an agency specifically designed to identify regulatory problems. The idea is that a business could go to this agency and say: “Here — this is the law that’s holding everything up. This is why it’s taking us two years to start a business instead of two minutes. This needs to be fixed.” And Congress would fix these not with waivers doled out to powerful industries but with a repeal that benefits everyone. The most important business to help are the ones that don’t have lobbyists.

The German Model: You can read here about what Germany did to make their economy healthy. It’s a long post, but the gist is that Germany made jobs their sole focus. They enacted provisions to make sure that people stayed working. This meant reforming their unemployment system so that people had to take any job they could find, even if it was “beneath” them. Their unemployment system focused on finding people jobs — any jobs. They also made it easier to hire and fire workers.

I’m not so sure how well this would work here. Our unemployment benefits aren’t as generous and a government job-matching service isn’t that useful in the internet era (and our government would inevitably find a way to fuck it up). But the philosophy — a focus on jobs — is the right one.

One thing we should do it make it easier and cheaper to hire people. The problem is that everything this Administration has done has made it more expensive to hire people. From health insurance mandates to supporting Davis-Bacon mandates to raising the federal minimum wage, they have made it more and more expensive to hire people. And they’re surprised that people aren’t hiring.

The solution seems simple. First, suspend Obamacare provisions or lighten them by allowing cheap high-deductible insurance and HSA’s to qualify (the latter, in my opinion, having the added benefit of fighting rising healthcare costs). Second, suspend Davis-Bacon provisions in federal spending. The Democrats seem to think that 100 jobs at union wages is better than 120 jobs as sub-union wages. I don’t see that. The other thing we could do is lower the “employer contribution” on Social Security and Medicare. Obama almost did this, but decided to cut the employee contribution instead — yet another failed supply-side tax cut.

If you make it easier to hire people, more people will be hired. Take it from a rocket scientist — this isn’t rocket science.

So to sum:

  • Close the deficit, even if it means broadening the tax base.
  • Overhaul the tax code.
  • Repeal Sarbanes-Oxley.
  • Sign the pending free trade agreements.
  • Create a process to identify and remove the most damaging regulatory provisions.
  • Suspend Obamacare or allow HSA’s to qualify.
  • Suspend Davis-Bacon provisions.
  • Reduce the employer contribution on payroll taxes.

I’m not a complete moron. I don’t expect all of the above to happen, certainly not on my suggestion. But we are moving on the first goal. There are rumblings on the second and fourth. And each goal we move on multiplies the effect of the others. If you close the deficit, signs the FTAs and overhaul the tax system, the combined effect will be greater than any of them.

Anyway, those are my thoughts. And I’m judging candidates based on them. Mindless anti-tax rhetoric doesn’t impress me — Pawlenty’s proposal is especially ridiculous. What impresses me is someone looking directly at the issue — thinking in terms of how we make it easier for jobs to be created. When one of our six hundred Presidential candidates gets there, I’ll let you know.

Update: Heh.