Don’t just cut taxes!

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I recently addressed the idea that Republicans should scale down their tax reform ideas and just push through a tax cut. This idea is gaining steam following frustration with the Obamacare repeal debacle, but it’s fraught with two major problems.

I’ve already discussed the first problem. We must get rid of the cronyism embedded in the tax code—or at least a big chunk of it—and just cutting rates will keep everything intact. This is why the corporate cronies are pushing the idea of kicking the tax reform can down the road. They benefit from the current system at taxpayer expense and they don’t want reform anyway.

Real reform and tax simplification means cutting social engineering from the tax code. Social engineering uses tax funds to promote or discourage certain types of business activity. The winners from the current system don’t want it to change. They usually claim to favor tax reform and simplification while adding a quick “but” that exempts them from the actual change.

The second problem is a political one. Individual tax cuts almost always favor lower- and middle-income brackets for political reasons; politicians don’t want to defend “tax breaks for the rich.” Likewise, tax hikes usually hit middle- and upper-income earners for the same reason. Over time, tax cuts and increases shift the tax burden disproportionately to middle and high earners. This has already happened, which is why about half of wage earners don’t even pay federal taxes and they don’t understand why their healthcare can’t be financed by those who do. The tax cut tax/hike cycle must be broken, and this requires a radically simple system, something close to a flat tax.

For these reasons, I implore real conservatives and libertarians to stand their ground and insist on real tax reform. Short cuts just won’t do.

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Tesla’s growth at taxpayer expense

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There’s a reason Tesla CEO Elon Musk departed the President’s advisory council when Trump withdrew the US from the Paris climate agreement. Tesla has been feeding at the government trough of alternative energy subsidies for years. Less government involvement in climate regulation means fewer goodies for Musk, which means the company might have to get most of its revenues directly from its customers.

The latest example of Tesla’s addiction to government is in Hong Kong, where a government tax break for electric vehicles ended on April 1. The subsidy essentially reduced the cost of a Tesla Model S from $130,000 to $75,000 at taxpayer expense. In March—after the forthcoming tax change was announced—2,939 Tesla vehicles were registered there. There were no Tesla vehicles registered in Hong Kong in April.

Proponents of the tax break argue that subsidies promote a cleaner environment. Even if this is true—and I’m not convinced—there’s no way that each Tesla makes a $55,000 improvement. To put this into perspective, 17.55 million vehicles were produced in the US in 2016. If the environmental impact of each new vehicle is $55,000, then the total environmental impact would be $965 trillion, and that only includes only a fraction of the 1 billion-plus vehicles on the roads worldwide.

It’s difficult to argue for a $55,000-per car electric subsidy with a straight face. The US electric vehicle tax credit ranges from $2500-7500, not including state credits. Considering only the low end of the federal range, the alleged annual environmental impact if everyone bought an electric car would be several times more than the national debt.

The US tax credit for electric vehicles is only one subsidy available to alternative energy firms, but it illustrates the point well. Musk knows that Tesla couldn’t sell as many cars without government help because electric vehicle technology isn’t strong enough to stand on its own. His grandstand in defense of the environment is really in defense of his company’s feeding spot at the government trough.

I have nothing against Tesla per se. The company builds a quality car, and electric vehicles may very well be the norm in the next decade. But taxpayer subsidies are not necessary to make this happen. As with all forms of alternative energy technology, the market is perfectly capable of sorting out the winners and losers without government intervention.

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Seattle’s $15 Minimum Wage

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Seattle’s minimum wage is now $15 per hour at large companies that do not provide health insurance. A recent study by scholars at the University of Washington calculated that the mandated hike has actually cost the average worker about $125 per month. There’s a lot of misinformation circulating about this and a competing study with different findings, so let’s break it down.

Whenever a study reinforces an element of free enterprise, the leftists immediately begin to criticize the methods. See http://fortune.com/2017/06/27/seattle-minimum-wage-study-results-impact-15-dollar-uw/ for an example. Of course, economic studies like this are not easy to design. Identifying the job and income effects of a minimum wage increase in a single city is difficult given all of the other possible influences. Critics can reasonably question the results of this or any study of its type and scope, but to really understand what’s going on, you have to blend the findings from multiple academic studies with a healthy dose of common sense.

Research on the effects of a higher minimum wage is mixed, but few scholars dispute its negative effect on employment. The socialist’s best argument is to acknowledge the reality that some workers will be laid off or won’t get hired in the first place, but that others benefit by earning more. But we know that when the cost of labor or any other “raw material” increases, companies have several long-term options. They can pass the increase on to buyers, try to get by with fewer workers or fewer hours, or replace workers with automation where feasible. Those who don’t understand economics often assume that companies will simply absorb the higher costs and earn less, but this simply doesn’t happen over the long haul.

Companies often pursue a combination of these alternatives. For example, a restaurant faced with mandated higher wages might trim hours overall, not replace the next few departing workers, purchase pre-cut vegetables that require less labor in the store, and raise drink prices. Inevitably, some workers will retain their jobs and benefit from the increase, but there are serious, negative, unintended consequences. Marginal, inexperienced, and less qualified workers will struggle to find work and maintain sufficient hours because the value of their labor does not align with the mandated wage. Customers might forego dessert or even eat at home, and those who are willing to pay more to eat out will have less to spend elsewhere. Companies struggling to break even might call it quits altogether, and individuals planning to start a new business might delay or reconsider. It’s difficult to determine the extent to which each of these alternatives is pursued because nobody knows exactly what would have happened otherwise. But we do know the options, and most of them are destructive to individuals and the economy.

We also know that individual lives improve and economies grow when people are more productive, and this is less likely to happen when employers are required to pay more for the same quality of labor. There’s no such thing as a free lunch.

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Just cut taxes?

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Having lost the House, the Senate, and the Presidency, most on the left simply want to obstruct government, slow things down, and keep from talking about big issues like the economy, tax reform, and health care. Six months into the Trump presidency, I’d stay they are doing a good job, and the corporate wing of the Republican party doesn’t seem too concerned about it. Twice I’ve heard their pundits argue that “with healthcare and all of the other issues on the table, reforming the tax code is just too complicated in the current environment, so Trump should just go for a simple tax cut.” To this I say absolutely not.

There’s no question middle and upper income Americans are overtaxed. An across-the-board cut would help, but the real problem is cronyism embedded deep in the tax code. Corporate leaders benefit from the complexity of the code, moving their money around to minimize their tax obligations. Individuals do the same thing. There’s nothing wrong with playing by the rules of the game, but it’s time to change the rules.

In a word, this means simplification. It’s neither moral nor productive to create artificially high tax rates, and then offer “deductions” or “tax credits” to businesses or individuals willing to spend as Washington directs. These tax incentives encourage us to spend our money in ways we otherwise would not; if this were not true, then the incentives wouldn’t be necessary. For individuals, this includes putting solar panels on your roof, buying an electric car, or taking out a mortgage. Engaging in these activities lower our taxes nd pass the burden on to our neighbors.

But there are winners in the current system, manufacturers of solar panels, electric cars, home builders, and real estate agents to name a few. Industry groups seek refuge in the tax system and would be happy to see President Trump give up on tax reform in favor of “just cutting taxes.” The reform threatens the benefits they receive from the current system. Productivity is the key to real economic growth, and we are most productive when our decisions are guided by what we believe is in our best interest, not what government has prodded us to do. This is why tax cuts alone are not sufficient. We need real tax reform.

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SNAP cuts would hurt the economy?

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President Trump’s proposed budget seeks to rein in federal expenditures for the Supplemental Nutrition Assistance Program (SNAP). It’s fair for progressives to debate the merits of SNAP, but many on the left and their media surrogates argue that spending less on SNAP would hurt the broader economy. See, for example:

https://www.nytimes.com/aponline/2017/05/24/us/ap-us-food-stamps-cuts-economy.html

The argument goes something like this. If you cut SNAP, its recipients wouldn’t be able to spend as much on food, or they would have to spend money on food that might have been spent on something else. Either way, the ripple effect would hurt grocers and other retailers, and then farmers and manufacturers, resulting in a broad slowdown in the economy. They invoke an economic term, the multiplier effect, to legitimize their claim. But there is one major question they don’t ask.

Where does Washington get the funds to pay for SNAP? There are three options. First, if taxes are used, then any increase in economic activity promoted by SNAP is automatically balanced by a decrease in economic activity for taxpayers who have less to spend or invest. Second, if we borrow to pay for SNAP, then the economic activity it promotes will be balanced by a decline when future generations have to pay it back. Finally, if we “print money” to pay for it, then the purchasing power of the dollar declines proportionally, thereby creating an invisible tax on all wealth.

Economists like to say that there is no such thing as a free lunch, and that’s certainly the case here. There are different ways to break down SNAP expenditures, but they must come from a combination of these three options. There’s no other alternative. Claiming that SNAP—or any other social program—helps the economy by injecting money that gets “multiplied” is ignoring this reality. While it is true that SNAP changes could help or hurt certain industries, the net effect must balance.

So why do progressives make this claim whenever “cuts” are proposed to social programs? Some are pandering for votes, but others just don’t understand basic economics. They’ve been overloaded with Keynesian thinking for so long that they believe government spending is always required to “jumpstart” a weak economy. They overlook free enterprise, the stifling effect of regulations, harmful incentives created by government programs, and real people who have to pay the bills. This is why our national debt has risen to $20 trillion, with no end in sight.

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President Trump, the baby killer…

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President Trump’s proposed budget has been released and the left is already attacking it for the “deep cuts” it makes to social programs. In reality, the budget does not reduce social spending, but rather proposes a 10-year rate of growth slightly lower than the current projections. In the socialist lexicon, any attempt to rein in costs is a “deep” or “draconian” cut. This is politics and to be expected.

But some on the left aren’t stopping there. NYC major De Blasio claims children will die if Trump’s cuts to children’s health programs are enacted. This isn’t the first time such charges have been launched at Republicans, but it’s still shameful discourse. It’s tempting to laugh and move on, but this argument can easily be turned on the Democrats.

Their reasoning is simple: Spending “less” on government healthcare for children means that some will die because they won’t get the care they need. The evidence for this is debatable at best, but let’s take it at face value. If spending less would kill kids, then wouldn’t spending more save some who are currently dying from a lack of care? If no, then the current, arbitrary level of spending must be the perfect amount, benefitting all children and harming none. Few if any would make this claim, as there’s simply no way to verify this.

Most progressives would respond with a resounding YES, but herein lies the intellectual dishonesty. Since current spending levels were endorsed by President Obama, then he must have also killed kids by not spending even more. Perhaps Obama “did the best he could” in negotiations with a Republican Congress, but the current level of spending on children’s health programs is higher than what Democrats endorsed when they controlled both the House and Senate in 2008 and 2009. That lower amount didn’t seem to kill any kids then. If their argument today is accurate, then we must also indict Democrats for supporting substandard spending in the past.

Of course, progressives always want to spend more on social programs, claiming that people will starve or die if their demands are not met. The current level—if previously endorsed by the left—is always the bare minimum, just enough to keep from doing harm. Even when they get the increase they want, progressives refer to the expansion as a mere “move in the right direction.” While some progressives attempt to debate the issue in a reasonable fashion, those like De Blasio who resort to scare tactics and hyperbole are appealing to ignorance.

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Who pays for health care?

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There’s an elephant in the room on the health care issue—who pays for it.

This problem is illustrated in an exchange, a version of which I’ve heard several times this week:

Democrat: The health care plan passed by Congress doesn’t protect those with preexisting conditions.

Republican: It certainly does. The plan provides $100+ billion for high-risk pools so the insurance companies won’t have to cover these folks in the same plans with everyone else. That way, everyone else won’t have to pay for those with preexisting conditions.

Excuse me? Where does the $100+ billion come from? Republicans and Democrats alike talk as if such “pools” are created out of thin air. This approach is probably a modest improvement over the status quo, but someone must pay the bill.

People are simply demanding health care without a mechanism to pay for it. It’s time to call the bluff. Republicans should propose no frills, bare bones universal coverage to be financed entirely with a payroll tax (perhaps 5%) from all Americans—not employers—on personal income up to $100,000. If you opt for private insurance instead, 80% of the amount you pay in this new tax would be credited toward your premiums. While those who earn more would have to pay more, everyone would have skin the game.  Nobody would be excluded. Coverage, deductibles, and copays would be rationed accordingly.

I know my proposal is simplistic, but here’s the point: Democrats (and some Republicans) would run from this type of proposal because it removes the illusion that undisclosed parties—corporations, the top 1%, or government printing presses—would pay the freight. It would change the conversation from health care as an entitlement to health care as a transaction. Everyone would get basic coverage. Those who trust government to manage the process would get their wish, but they still must pay the tax. The rest of us can opt out and stay in the private system.

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The President’s Tax Proposal

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President Trump’s draft tax proposal is a clear improvement over the status quo, but it falls short of the type of overhaul we really need. It’s a long way from fruition and as I noted in a previous post, the greatest opposition to even moderate change in the tax code will come from the special interests.

Everyone in the housing industry, from contractors to roofers to realtors, benefits from the mortgage interest deduction in the current tax code. By passing along part of the cost of your new home to other taxpayers, this provision subsidizes an entire industry and artificially increases home values, all in the name of “making housing affordable” and pursuing the “American dream.” President Trump’s draft proposal did not eliminate this deduction, but it increases the standard deduction. You must itemize to deduct mortgage interest, so increasing the standard deduction means that homeowners with modest home payments would not enjoy the same tax benefit as they did previously, thereby reducing the net effect of the mortgage interest deduction, at least on paper.

The National Association of Realtors wasted no time in its response. NAR president William Brown referred to the proposal as a “nonstarter,” noting:

For over a century, America has committed itself to homeownership with targeted tax incentives that help lower- and middle-class families purchase what is likely their largest asset. No surprise, real estate now accounts for over 19 percent of America’s gross domestic product, or more than $3 trillion in investment. But for roughly 75 million homeowners across the country, their home is more than just a number. It represents their ambitions, their nest egg, and the place where memories are made with family and friends. Targeted tax incentives are in place to help people get there. The mortgage interest deduction and the state and local tax deduction make homeownership more affordable.

Brown is protecting industry’s his turf by wrapping the mortgage interest subsidy in the American flag. His defense of the current system cites America’s alleged commitment to home ownership with an emotional appeal—homes are about ambitions and memories. Of course, one need not own a piece of real estate to amass great memories, and the “targeted tax incentives” about which he speaks penalizes renters.

It’s ironic that the President is getting stiff opposition while proposing to retain the subsidy. Increasing the standard deduction might reduce the number of Americans who itemize their taxes, but the accompanying tax cuts would likely spur demand for housing anyway. That’s just not good enough for the industry, which like most, will lobby for government support at every turn. The NAR has tons of resources to trumpet this argument. When traditional media outlets opposing anything and everything Trump offers, it’s not clear who will fight the realtors and other special interests. Achieving even modest tax reform won’t be easy.

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Why consumers like (some) regulations

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There’s a lot to learn from the video depicting airport security dragging a passenger from an overbooked United flight earlier this week. The airline had the right to (humanely) remove the passenger, but dragging him from the plane was a horrible decision that only fuels demands for more regulation.

Airlines overbook flights because some passengers won’t show up at the gate. When everyone is present, they offer payoffs to passengers willing to take a later flight instead. It’s usually easy to find passengers willing to take the payoff—in this case, $800—but once in a while everyone shows up and nobody is willing to give up their seat. When this occurs, the airline is permitted to identify passengers for removal, and remove them physically if they do not leave voluntarily. It’s not a common situation, but it happens.

United made obvious mistakes here. The airline could have sweetened the pot to obtain the necessary volunteers. This is a reasonable expectation and would have satisfied everyone. Overbooking is more efficient and reduces costs and fares, so the airline should be able to compensate inconvenienced passengers at a higher level if necessary. Removing the passenger was permissible, but United should not have done so, even if it could have been accomplished without the optics.

There’s a larger concern here. Consumers who don’t understand overbooking or the contract they accept when they purchase a ticket see this incident as a massive abuse of power. They feel helpless, and predictably, many are asking the government to intervene so this doesn’t happen again. If airlines don’t overbook flights, there will be more empty seats on the typical flight, raising costs and fares for all of us. Governor Christie has already suggested that airlines be restricted from overbooking flights until more regulations can be developed. Be careful what you ask for; you might get it.

What’s the solution? Airlines should make higher payoffs when required to deal with overbookings. Every man has his price, and payoffs are a cost of doing business. United was not willing to pay more, and now it’s costing the airline dearly. If politicians get involved to “protect our rights,” it will cost all of us as well. More government intervention is unnecessary. The market is already extracting a heavy price on United, and other airlines are taking notice.

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Tax Reform

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Some type of tax reform will probably pass this year, but I expect the same philosophical debate we saw during the Ryancare debacle. Real tax reform requires 3 things: Lower taxes, less spending, and simplification of the system. Cutting taxes is not too difficult politically. Spending reductions are feasible because a better tax code can enhance revenue anyway, while real “cuts” are delayed into the future. But simplifying the system is a real problem.

A simplified tax code is easy to understand and keeps the government out of one’s personal business. You would think simplification would be a no-brainer, but each carve-out in the existing system benefits certain individuals and interest groups at the expense of everyone else. Most taxpayers don’t realize how these arduous rules and “tax breaks” hurt all of us.

Take the home mortgage interest deduction as an example. If you itemize on your return—another needless complication of the code—then you can typically deduct from your income the interest you pay on your mortgage. Proponents of this policy claim that it “makes housing more affordable.” Who could oppose home ownership?

The mortgage interest deduction essentially reduces monthly payments, encouraging Americans to purchase homes, and to purchase larger ones. Almost everyone connected to housing from realtors to contractors will fight to the end to keep this deduction in the code because it affects their pocketbooks, at least in the short term. It’s a bad deal in the long run, as a subsidy always increases prices and encourages people to spend more than they would otherwise. In fact, this and other government (and Fed) support for housing set the table for the Great Recession.

But convincing Americans that subsidized housing hurts the economy is not easy. Many think they’re getting something out of the deal. What they don’t realize is that tax rates for everyone must be increased to compensate for the $70 billion in annual mortgage interest deductions. That’s more than $200 per American citizen, most of whom don’t file or pay income taxes anyway.

Mortgage interest is only the tip of the iceberg. There’s health care, the earned income tax credit (EITC), and solar energy, to mention a few others. Each special deduction or tax credit has its own constituency that lobbies and donates to campaigns. Try to abolish all of them at once, the insiders tell us, and you’ll have too many battles to wage. They suggest that we eliminate some of them, avoid the bloodiest fights, provide a modest tax cut, and call it a day.

I take the opposite view. I favor attacking all deductions simultaneously to allow for the greatest reduction in tax rates. Start with your income, subtract an individual deduction, multiple what’s left by a flat tax rate, and you’re done. I realize that my plan would be deemed “too radical” by most, but I’m negotiable. A few deductions like charitable contributions (which is logical) and health care (which is practical) might remain to get a bill passed, but we can eliminate most of the social engineering in the tax code if we have the courage. Unfortunately, I’m doubtful that enough Republicans do.

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