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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Why Ryancare Failed

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Health care reform is a complicated topic, but explaining why Ryan’s health care proposal failed is not.

With all its flaws, Obamacare has forever changed public expectations about healthcare. It’s now unconscionable to expect average Americans to take financial responsibility for their own coverage. Insurance companies are expected to eat losses from consumers with preexisting conditions. Older pre-Medicare Americans shouldn’t have to shoulder the burden of additional health care costs associated with age. Somehow government is supposed to subsidize all of this with a magic wand and additional taxes on “the rich.”

The current mess can only be fixed with a strong dose of free enterprise that requires consumers to budget, make choices, and accept personal responsibility. Many Republicans are too squeamish to back this type of serious reform, so Paul Ryan developed a package of marginal improvements that he thought would placate the moderates. He didn’t figure there would be enough principled Republicans unwilling to accept a dubious promise about more serious changes in phases 2 and 3. He miscalculated.

President Trump had little to do with Ryancare’s failure. It’s just a numbers game. Democrats will oppose any repeal, so the Republicans need to stick together. Moderate Republicans will likely reject a strong market-oriented plan like the one Rand Paul developed. Liberty-minded Republicans have already demonstrated their unwillingness to support a proposal and tweaks the current system. Threading the needle with a compromise acceptable to both ends of the party is not impossible, but it will be very difficult. For the time being, letting the ACA die on the vine is the only option.

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Navigating Health Care

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Senator Paul’s caricature of Ryan’s health care bill as Obama Light seems to be accurate. As the debate ensues, several realities must remain front and center.

As I’ve reminded readers in the past, those of us who warned in 2009 that it would be almost impossible to overturn the ACA were correct. The reason is political. Ending or limiting an entitlement is presented by Democrats and the press as “taking something away from the poor,” and few Republicans have the conviction or the stomach to make the argument. Leftists continue to ask Republicans how they will ensure that anyone who benefitted from Obamacare won’t lose their benefits with a reform. Most Republicans accept the ACA entitlement as a starting point and suggest limited modifications, such as ending the mandate and allowing purchases across state lines. When Representative Jason Chaffetz politely suggested that it might be necessary to forego purchasing a new iPhone to pay for healthcare, the left went crazy. While he is obviously correct, we must accept political reality. Undoing the entire Obamacare entitlement simply will not happen.

While healthcare is not a right because proclaiming it as such creates obligations on others to pay for it, EMTALA requires ERs to provide care to anyone to enters regardless of ability (or willingness) to pay. As a result, basic care at public expense is already encoded in federal law. Conservatives and pragmatic libertarians would be wise to recognize this reality and attack the left’s inconsistency. While Democrats claim to favor the type of “universal access” to healthcare found in other developed countries, but they aren’t willing to tax everyone to pay for it. Granted, wealthier Canadians and Brits pay more that low wage earners to support socialized medicine, but everyone who’s working pays a significant amount into the system. The real issue for the Democrats is not access, but who pays the tab, which is why Chaffetz’s comment struck a nerve.

Most Republicans agree that Americans should not be required to purchase health insurance, but requiring insurance companies to accept applicants with preexisting conditions is equally wrong. This policy cocktail encourages healthy Americans to use EMTALA when they get sick and wait until they need coverage to buy it, thereby creating losses for insurance companies that must be covered by government subsidies, higher premiums, or some combination of the two. The “free rider” reality must be faced head on.

There are sound, free-market ideas that should be a part of healthcare reform. If Republicans are going to unite around a bill that makes a real difference-not just Obamacare Light—they must insist on individual accountability. Quality healthcare will be cheaper in a free market, but it won’t be free. Anyone unwilling to forego an iPhone upgrade to pay medical expenses should be ashamed.

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Illegal Immigration 101

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I’d like to revisit the issue of illegal immigration, but let me make two points at the outset:

First, I am addressing illegal immigration. Like most Americans, I believe immigration is a good thing when managed properly. We can debate issues around legal immigration, but that’s a different topic.

Second, opposing illegal immigration has nothing to do with racism. The idea that anyone who supports immigration law enforcement doesn’t like people of a certain racial or ethnic background is nonsense. It’s a charge designed to gin up fervor on the left and avoid the real discussion. the You could just as easily argue that those who favor open borders are racist because they want to create an ethnic underclass in American society. I’m sure there are a few racists on both sides of this and any issue, but it doesn’t mean that one’s position on the issue is based in racial, ethnic, or religious ideology.If you are not willing to accept these points, then we can’t have a conversation. If you are, let’s talk.

My views are fairly libertarian, so I generally favor individuals moving freely across borders. But several realities must be checked. First, the ongoing terrorist threat is real, and I expect my country to take action to restrict immigration that could create a threat. Doing so requires difficult judgment calls that might not always be the perfect ones, but we must be diligent and take this responsibility seriously.

Second, illegal immigration results in massive cost shifting. Businesses claim that illegal immigrants do the jobs that Americans won’t do, but they don’t finish the sentence—at the wages they are offered. Americans would be willing to do any job at the right wage. Illegals are willing to work for less because they lack job skills and their prospects for employment are not attractive in their native countries. For this reason, they will always be willing to undercut Americans for any jobs they can perform.

But here’s the problem. Businesses might save on wages when they hire illegals, but the additional medical, law enforcement, education, and other costs are passed on taxpayers. Robert Rector’s analysis concludes that the net cost to Americans is $54.5 billion per year (http://www.heritage.org/immigration/report/the-fiscal-cost-unlawful-immigrants-and-amnesty-the-us-taxpayer). Economist Milton Friedman encapsulated this problem in his famous retort, “You cannot simultaneously have free immigration and a welfare state.” If you support open immigration, you are supporting a constant fiscal drain to pay for it. The benefits of cheap labor and cheap prices are overshadowed by lower wages for American workers and higher taxes and deficits.

These two realities require that we address illegal immigration responsibility by enforcing the rule of law. President Trump’s proposals—a temporary ban from seven countries and building a wall on the southern border—are rarely evaluated seriously by the left. They constantly conflate immigration and illegal immigration, and simply tag anyone who thinks we should enforce federal law as racist or anti-Muslim. This is disconcerting to someone like me who cherishes people from all over the world. I don’t blame others for wanting to come to the U.S., I just love my country and want a common sense approach to illegal immigration enforcement.

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The Border Adjustment Tax

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Paul Ryan and leaders in the Republican House are proposing a border adjustment tax as part of their tax reform package. There is some merit to the idea, but problems as well.

What is a border tax anyway? I’ll borrow Investopedia’s definition: “A border adjustment tax is a short name for a destination-based cash flow tax (DBCFT). It is a value-added tax levied on imported goods. It’s It is also called a border-adjusted tax, border tax adjustment or destination tax. Exported goods are exempt from tax; imported goods sold domestically are subject to the tax.

If you just read the definition and find it too complicated, then you might understand why President Trump prefers a simple tariff. But the debate doesn’t end there.

The Republican House plan for a border tax seeks to reverse tax incentives for U.S. companies to import goods from other countries. A border tax is a quasi-tariff, and it will raise the price of the imported goods. The healthy, kneejerk response to any tax increase is to oppose it, but there are other reasons to be wary of a border tax as well.

A border tax would introduce a value-added tax (VAT) mechanism into our taxing regime. A VAT requires firms to remit taxes based on the value they add to raw materials, taxes that are eventually passed along to consumers, but are embedded in the price. For example, a TV that would cost $1000 without a VAT would cost $1200 with a $200 VAT. Consumers would only see the $1200 price and few would feel the tax. It’s like buying gasoline at the pump. The price includes federal and state taxes, but it doesn’t feel you’re paying a tax because you only see one price. In fact, most consumers have no idea how much they are paying in fuel taxes. Like the gas tax, a VAT at the border would quietly transfer higher prices to consumers.

But dismissing a border tax proposal on this basis alone is shortsighted. Proponents of a border tax argue that exports from other countries have an unfair tax advantage because their governments refund the VAT when products leave the country. The US tax system is not VAT-based, and corporate taxes are not reduced for exports. They have a point here. I do not support taxes or trade regulations designed to give US companies an export/import advantage because they force US consumers to buy inferior goods and services. Besides, tariffs and other import restrictions encourage our trading partners to respond in a like manner, which harms everyone. However, I do favor intervention that addresses legitimate trade unfairness, such as when foreign governments subsidize their companies or fail to enforce intellectual property protections for US companies. To the extent that a border tax addresses tax unfairness inherent in the US tax code, it’s worth vetting.

Perhaps you didn’t expect this argument from someone with a strong libertarian bent. The truth is that ALL taxes raise prices or reduce income. Governments have legitimate expenses, so taxes cannot be avoided altogether. Our tax system should be as simple, transparent, and fair as possible, and sometimes it’s impossible to have all three. While I am not excited about a border tax, IF it is balanced with a much lower, simpler corporate tax regime, the overall package could be a step forward.

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Kim Strassel @ UNCP

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Kim Strassel was on the UNCP campus yesterday (https://youtu.be/OA5eOZse05Y) addressing threats to individual, corporate, and political speech. Strassel recently penned—and I just finished reading—The Intimidation Game: How the Left is Silencing Free Speech. It’s a great book that chronicles efforts to silence corporations, nonprofits, executives, board members, professors, and anyone else whose point of view challenges the left wing orthodoxy.

After the presentation, several students expressed surprise that the lives of individual Americans and their families can be destroyed by government bureaucrats and political activists simply because they dare to express the wrong point of view or choose to contribute financially to the wrong organization or candidate. This just shouldn’t happen here, but it does.

It’s difficult to hear Strassel speak or read her book without getting angry. I’m appalled at the IRS-nonprofit scandal, Brendan Eich’s demise at Mozilla, and Obama’s grilling of Frank VanderSloot. Rather than debate ideas on their merits, the abusers in these cases bullied, manipulated, and intimidated. This isn’t how America is supposed to work.

The implications of the intimidation game are legion, from politics to business to academe. As a university professor, I understand and cherish the importance of free expression without the threat of reprisal. While respect and a sense of humor go along way when discussing contentious topics, none of us have a right not to be offended. The college experience should teach us how to respond to different views directly. “Safe zones” may be well intended, but they shield students from intellectual development.

The past eight years have been filled with Obama and Democrat abuses, I’m sure there are some Republicans in Washington who would love to get even. Strassel’s book is a wakeup call for anyone who thinks our first amendment rights are eternally secure. Let down your guard at your own risk.

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Who really pays corporate taxes?

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When discussing Trump’s reference to a possible 20% tariff on goods from Mexico this morning, CNN anchor Chris Cuomo astutely pointed out that consumers would end up paying for it through higher prices. He’s basically correct. Of course, the higher prices would drive some consumers away, but let’s assume most would be willing to pay the difference.

This line of reasoning is hypocrisy at its finest. CNN (and most left wing) commentators have railed against cutting the corporate tax rate, arguing that corporate taxes come out of the pockets of the rich owners, not consumers. But you can’t have it both ways. A tariff is merely a corporate tax on exports. Firms don’t distinguish between tariffs and income taxes when setting prices. Either taxes are passed along to consumers in the form of higher prices or they are not.

I would like to think that this is real progress for CNN, but I’m convinced the network’s grasp of economic reality is only temporary. It’s all about opposing Trump. The next time they discuss the President’s corporate tax cut ideas, they’ll conveniently return to their original (flawed) position and argue that lower taxes would simply line the pockets of the rich shareholders.

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Undoing Obamacare- part 3

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In my last post, I questioned whether the Republicans have the courage to do what needs to be done with healthcare. Let’s talk specifics.

In an ideal world, everyone would purchase private health insurance to cover large, unforeseen medical expenses, and budget accordingly to pay for routine visits to the doctor. Those who genuinely cannot afford a basic policy would pay what they can, with government help in the equation. Insurance companies would be prohibited from dropping customers just because they get sick, so pre-existing issues would be a non-issue.

But we live in a different world. Healthcare is seen by many as a right without regard to cost. Unlike other forms of insurance that are purchased to protect against disasters, health “insurance” is considered insufficient if it doesn’t cover routine medical visits and prescriptions. This is a huge misnomer because insurance (by definition) is only intended to address the unexpected.

Our warped view of healthcare has created serious problems. EMTALA already guarantees “catastrophic care” for those who cannot pay for it, so why should low income Americans purchase their own? Over-regulation makes is almost impossible for consumers to handle routine medical issues efficiently. With co-pays embedded into every visit to the doctor, consumers have no incentive to shop around for the best deal. And billions are spent managing endless paperwork.

Obamacare has further distorted our collective notion of healthcare by over-subsidizing costs, requiring Americans to purchase insurance, while also requiring them to choose from a limited array of plans. Moreover, those who ignore the mandate and pay the “fine” instead need not worry; they can obtain coverage after they get sick from providers who cannot turn them away. Obamacare defenders demand that reform plans reinforce this monstrosity. Most Republicans aren’t addressing this head on.

Of course, we need to be realistic. There’s no way we will create an ideal system from where we are now. However, choosing the right kind of reform can be a huge step in that direction. Assuming we can’t rid ourselves of the income tax, here’s are a few basic steps that can be taken within the current system.

1. Repeal Obamacare but allow Healthcare.gov to continue without additional subsidies. It will die on its own as providers and consumers drop out.

2. Permit providers to offer catastrophic, “bare bones” plans, and permit consumers to purchase policies across state lines. Without co-pays governing every medical situation, costs and premiums for such plans will be much lower. This allows everyone to get a policy that does what insurance is supposed to do—take care of emergencies.

3. Replace the tax deduction for healthcare premiums with a direct write-off in an amount that would cover a catastrophic plan for most Americans. This creates an incentive for everyone to get a basic policy. There would be no mandate to purchase a policy, but not doing so means that you would forego the write-off.4. Create a high-risk pool to subsidize the cost of insurance for Americans whose current state of health prohibits them from purchasing a basic policy.

There are other good ideas as well, but by taking these steps, everyone will have access to a private, catastrophic health insurance plan. Those who do not purchase more extensive plans will be required to budget for routine health issues, with local health departments providing basic services to the poor.

Opponents would counter my argument by contending that the poor won’t have the same options as everyone else and simply won’t make routine trips to the doctor without low co-pays built into the policy. But insisting that policies cover regular doctor visits raises costs. If a large percentage of Americans had (catastrophic) insurance without co-pay features, then providers would respond by offering more basic, low-cost options. Changing the entire incentive structure for providers and patients is necessary to make this happen.

Government subsidies will be required if the truly needy are to obtain insurance, but this can be managed if we are willing to institute real reforms. I’m just not sure most Republicans are willing to do so.

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Undoing Obamacare- part 2

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Several weeks ago, I blogged on the need to face facts when repealing Obamacare. With this issue front and center this week, I’m returning to the topic to make a few more comments.

During the past several weeks, I’ve heard countless party strategists, Congressional representatives, and Senators explaining how the Republicans will repeal Obamacare. They are routinely asked how they will deal with Americans who have insurance now but did not before the law passed. Most change the subject and wax eloquently about the obvious misgivings of the ACA, and all of them claim to be committed to a new plan that retains coverage for everyone who is currently insured. In essence, they are recommitting the Republicans to maintaining the entitlements already granted by the ACA. Nobody seems to be acknowledging what was obvious six years ago: Obamacare is a massive redistribution scheme we cannot afford. It’s built on false expectations and a complete misunderstanding of economics.

Meanwhile, the Democrats have responded accordingly. “Obamacare repeal will be chaos,” they tell us. To those on the left, chaos is a synonym for markets, as it would require individuals to obtain their own insurance from “evil” providers free to price their services without guidance from Washington. It would be like much of what we do every day—buying groceries, changing cell phone plans, or eating at a restaurant. It would be “chaotic” in the sense that Americans would get back some of the control they use over exert their healthcare prior to the ACA.

Let’s turn back the clock for a minute. When Obamacare was on the docket in 2010, opponents argued vigorously that if passed, such an entitlement could NEVER be undone politically. For the last year, most of the same people are celebrating the impending repeal and replace. Were they right six years ago, or is it really possible to undo such a monstrosity?

For the most part, I think they were right six years ago, as demonstrated by the continued unwillingness to undo the entitlement. If coverage for all Americans is the goal, and if healthcare is such a great priority, then all Americans need to understand the financial reality. The current notion of healthcare—the idea that anyone should be able to pursue almost any treatment at almost any facility regardless of cost—is unworkable. Either individual consumers must be willing to make tough choices about what they need and are willing to pay for, or Washington will do it instead.

I do not favor a single payer plan, but most countries with universal healthcare tax everyone—not just “the rich”—to pay for it. Those who have more pay more, but average citizens have real skin in the game. When healthcare budgets run tight, politicians openly discuss rationing. The idea that government subsidies can magically “make healthcare affordable” is just ballooning the debt.

Is there hope? Yes, but only if we are willing to make bold changes. The idea of a three-year phase-in won’t get it done. Republicans have an opportunity to completely alter the role of government in healthcare, but doing so would require making some tough choices. I don’t see much evidence that they are willing to do so.

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