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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The Intellectual Debate- part 2

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I addressed the comments of CSU-Dominguez Hills professor Terry McGlynn in my last post. While arguing for the “open exchange of ideas,” McGlynn castigated Trump and his supporters as, among other things, racists and deniers of science. I believe McGlynn’s view is mainstream in academe. Not all academics are progressives or are hostile to those who don’t share their ideology, but McGlynn speaks for far too many when he just doesn’t recognize a genuine, legitimate basis for a non-progressive point of view. If you still think McGlynn is atypical, consider economist Paul Krugman.

I’ve commented on Krugman’s work over the years and I’ve always tried to give him the benefit of the doubt, but his well-publicized tweet on Friday just went too far. Krugman inferred that Trump might instigate a terrorist attack against the US to solidify his legitimacy, noting that he (Trump) “will surely use [the] patriotism card to distract from tainted election and effects of his anti-populist policies.”

The overlap between economics and politics is obvious. Economic policy doesn’t occur in a vacuum; it is implemented by politicians with various motives and incentives. It’s okay for economists to mix some politics with their economic analysis, but I’m hearing less and less economics from Krugman with each passing year. He’s become more of a progressive apologist who rests on his Ivy League laurels. Krugman rarely makes a strong case for anything anymore. He mostly rants and attacks.

Of course, I disagree with Krugman on most issues. I believe less regulation, a simple tax code, and a smaller government is both constitutional and good for our economy. The arguments I present on issues like these are based in evidence and logic, not superior intellect. I don’t presume my detractors to be racists, ignorant, and uneducated. In fact, I enjoy reading clear arguments on the other side, as they help me sharpen my own views. But most of them—especially during the past six weeks—have been political, emotional, and downright insulting. Krugman’s recent tirade is just more of the same.

There’s still a lot left to be resolved in Washington. Will the Republicans have the courage to pull the plug on Obamacare, and if so, what will replace it? How will Trump and the Congress deal with trade policy? How will they deal with the Paris accord on climate change? Will Congress balk at Trump’s infrastructure plans? How will Trump address issues with China and Russia? Calling Trump names and attempting to delegitimize his election won’t help.

There are real disagreements among Republicans, so serious Democrats could play a greater role than minority Republicans could when Obama controlled both the House and the Senate in 2008. But if they fall in line behind Krugman and others who refuse to at least recognize the case for liberty, then Washington will continue to be completely divided, but with a new sheriff instead.

Merry Christmas!

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Serious Debate

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I understand why progressives feel disdain for the recent election. While President-elect Trump has some progressive tendencies, he’s a far cry from President Obama or Secretary Clinton. But what frustrates me the most is the complete lack of understanding of anyone or anything in disagreement to the progressive agenda. This frustration can be seen clearly in CSU-Dominguez Hills biology professor Terry McGlynn’s recent piece in the Chronicle of Higher Education, the industry’s legacy publication in terms of both news and opinion:

Like free speech and freedom of the press, scholarly inquiry is an ingredient of a functional democracy. With our federal government careening toward an anti-intellectual autocracy — led by a science-denying president who panders to white male insecurities and prejudices — the open exchange of ideas is as essential as ever.

https://chroniclevitae.com/news/1635-being-a-scholar-in-trumpian-times?cid=pm&utm_source=pm&utm_medium=en&elqTrackId=08b2a1c3ffeb4b67814506df7e0bbbf6&elq=96bea95fbd5a470ca463db0b24bb51fb&elqaid=11749&elqat=1&elqCampaignId=4682

The entire article is a window into the progressive academic view of Trump and the Republican party. The hypocrisy seems evident at first glance. In the same breath that he defends the “open exchange of ideas,” McGlynn expresses personal contempt for Trump and his ideas. McGlynn doesn’t explain why his ideas are superior, but instead tags Trump as racist, reckless, and hostile to science and academe. Perhaps this qualifies as the open exchange of ideas, but McGlynn’s article is riddled with contempt and scorn, and displays no intellectual curiosity.

But after reading McGlynn’s article a couple of times, I’ve reconsidered. McGlynn might not be a hypocrite after all. Maybe he’s just ignorant of the opposition. His article reminds me of a young man I saw on CNN the day after the election. His name escapes me, but he was affiliated with a religious tolerance group and seemed to be a nice guy. He said he walked over to Trump Tower on election night “to try to understand what Trump supporters were all about.” Really? Apparently, he assumed they were all idiots or malcontents unworthy of his time when he thought Trump was going to lose anyway. I guess he spent the previous year as an avid Clinton supporter who never stopped to wonder why so many people between New York and Los Angeles were not going to vote for her.

My message to the guy on CNN, McGlynn, or any other progressive is simple: There are other legitimate ways to view society, the economy, and national security. In fact, there’s a lot of diversity in the Republican party, from Trump’s populism to traditional conservatives to neo-cons to quasi-libertarians. Each perspective has a serious intellectual basis if you’re willing to open your minds, treat people with respect, drop the blanket bigot claims, and engage in real dialogue. You’ll learn something. You’ll probably find some common ground and meet some nice people while you’re at it.

Or you can continue to label all non-progressives as bigots who just don’t know better. So much for tolerance.

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Undoing Obamacare

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There’s a reason why Marxism in practice is often called creeping socialism. It’s built one entitlement—or entitlement enhancement—at a time. Once in place, entitlements are difficult to undo because reformers must survive a siege of charges that they are taking something away from someone. The “something” can be food on the table, unemployment benefits, social security, or just about anything the left has decided should be provided by government. In this instance, it’s healthcare.

The left’s narrative on repealing Obamacare is that Republicans must figure out how to improve the system while not affecting those who are currently covered, including millions who received heavily subsidized plans through the so-called Affordable Care Act. The average monthly subsidy for new enrollees was almost $300 for a plan with an average premium of less than $400. In effect, this means that newly covered Americans are paying about $100 per month for a $400 plan. The upper limit for subsidy eligibility is 4 times the poverty level, or about $100,000 a year for a family of 4. Obamacare proponents consider existing subsidies to be cemented, so any rollback would just be heartless.

The Republicans I’ve heard are playing along. Nobody will lose their plan because of reform, they say. To be frank, real reform isn’t possible if healthcare—including routine trips to the doctor—is considered an entitlement. Quality care costs money, and it’s time that Americans who can afford iPhones, Netflix, Body art, and lottery tickets accept responsibility for paying the piper.

I don’t want to be an early Grinch, but we must face facts. When government pays for something, we all pay for it indirectly. It’s direct payments that give us control over the grocery stores, gas stations, auto repair facilities, and restaurants we deal with every day. If they don’t meet our needs, we find another provider who can. But with healthcare, government and insurance companies pay most of the bills, so they call most of the shots. It’s no surprise that doctors and hospitals don’t post prices for their services and most people involved in their delivery have no clue what they actually cost. The only way to regain control is to limit subsidies to catastrophic care for the truly poor, while unleashing the market and demanding control of our own healthcare expenses.

A predominantly market-based healthcare system would be a paradigm shift for most. If you get the flu, you should decide if a trip to the doctor is worth $100. Instead, if you have coverage with a modest copay, you are more likely to go and pass the additional cost along to others in the pool, who are, of course, doing the same. Economists refer to this as perverse incentives and it drives up costs for everyone.

I’m saying what Trump, Ryan, and other Republicans are hesitant to say. Yes, some Americans should lose their subsidies. Some assistance for those in poverty makes sense, but the rest of use need to regain control of our choices. That means no mandated plans, the ability to purchase coverage across state lines, and no expectation that insurance companies will accept us as new customers after we get sick.

Here’s to a complete overhaul of the system. Unfortunately, I doubt the Republicans have the fortitude to go as far as we need to go.

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Trump & Mexico

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On Monday I addressed a group of business leaders in Mexico City. We covered a lot, including global trade. I wasn’t surprised that Trump, NAFTA, and the wall were hot topics in the Q&A. Essentially, I was asked to explain the Trump-trade phenomenon by Mexican managers who have benefitted over the years from the growth in US-Mexico trade.

For the record, I’ve been to Mexico dozens of times to lecture, conduct research, and speak to business groups. Their managers are talented and engaging, and they always express frustration with government corruption and infrastructure problems. My address on Monday was scheduled before the election when most Mexicans expected Hillary Clinton to win. The focal point changed when she was defeated. There is some uneasiness there about Trump, but they seem to understand the issues pretty well.

If you a regular on this blog, then you know my position on trade. Free trade is undeniably positive, but it’s really just an academic concept. In practice, there are lots of issues to negotiate, including currency manipulation, intellectual property protections, differences in tax policies and regulatory environments, state-owned enterprises (SOEs) and “catch up” provisions that allow one country to protect “infant” industries. In practice, negotiators from each country must hammer out their differences before trade can occur. President-elect Trump widely criticized NAFTA and other trade deals during the campaign, threatening tariffs as a means of addressing inequities. The US is a huge market for Mexico, and this is what makes Mexican business leaders nervous.

And then there is the wall. Nations have recognized the need to control borders for millennia. Hillary Clinton even voted for constructing a fence in 2006 while in the Senate. Regardless of one’s view on immigration, making sure individuals have permission to enter the country is a sound part of any policy. But the US does not have control of its southern border, a problem that has actually been a boon to our southern neighbors, as Mexicans working in the US send an estimated $25-50 billion home every year, accounting for 2-4% of Mexico’s GDP.  There is no doubt that simply enforcing laws currently on the books—along with a structure that eliminates most of the free passage between nations—would negatively hit the Mexican economy.

I understand the Mexican concerns given their strong ties to the US economy. Unfortunately, their press seems to follow the lead of the US mainstream media, stoking fears that the President-elect wants to completely abolish trade with Mexico. Overall, they were respectful of the election process and seemed to understand the concerns of workers who drove the results in the rust belt. None of them expressed the kind of disdain for Trump that numerous HRC supporters continue to do, although it would have been easy to do given I was the only American in the room. Their primary concern is trade, not the wall. In fact, several executives told me that they fully understand the need to secure the border, and they complimented Trumps economic plan to business prowess. They also noted the widespread frustration with President Peña Nieto, something that I did not hear reported when the media criticized Trump’s trip to the DF during the campaign.

Mexican business leaders see these issues from the Mexican perspective, but I was impressed with their ability to empathize with Trump’s concerns and work with him as our nation’s duly elected leader. I wish those American protesting and rioting could display the same class.

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No matter who wins…

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Today we will decide who will be our next president. The winner will have a lot to do with immigration, trade, and the Supreme Court. Don’t get me wrong, this is a huge election. But I’d like to point out some very important issues that will remain on the table no matter who wins.

This election will be close. I’m always amazed that we refer to 5-point wins as “decisive” or “landslides.” The winner will claim vindication and some sort of mandate, but our country will be as divided as ever on November 9. The best case (realistic) scenario for Clinton includes a Republican House and ongoing investigations. A President Trump would face opposition in his own party and constant Senate filibusters. We can expect our government to be as divided as the voters. If divided means that less gets done, this isn’t the worst outcome.

Clinton may have promised “debt-free college” and Trump better trade deals, but Congress will have a lot to say about these issues. The President can wield a lot of influence, but his or her views will be tempered by the will of legislature. If you’re worried that Clinton might by-pass Congress with “a pen and a phone,” my guess is that she might not hesitate to anger the Republicans while her investigations are ongoing, which could be a while.

Regardless of the victor, the national debt will continue to rise. While Clinton seeks to expand entitlements, Trump wants to hold steady and is counting on economic growth to save the day. Trump’s prospects would be better given his tax proposals and the leanings of a Republican House, but both candidates have kicked the entitlement issue can down the road.

Win or lose, the Republican Civil War will begin on Wednesday. If Trump loses, he and his followers will likely blame the establishment for a close defeat and many will call for a new party. The Trumpsters would have a point. While Trump has made some errors along the way, never before has a presidential nominee had to battle so many within his own party. A Trump victory would mean an entirely new look for the Republican party, but don’t expect Romney, Bush, Kasich, Ryan, McCain, and the rest of the usual suspects to go down easy. There’s a lot of political blood left to be shed either way, and it will probably be a good thing over the long haul. The Republican party has been feckless for years now and needs a major overhaul.

Win or lose, we will still have a massively biased “mainstream” media. WikiLeaks continues to expose CNN’s corrupt ties to the DNC. While past GOP nominees seemed easily intimidated, Trump (to his credit) has kept this issue front and center. Imperfect though it may be, Fox News will continue to lean right to counter the herd. Kudos to Fox for its investigative work with WikiLeaks and the FBI investigations while others conveniently swept these issues under the rug.

There’s a lot riding on this election, but it’s only part of the equation. If you read this on November 8 and haven’t voted yet, your vote can make a difference. But no matter who wins, the battle for our liberties won’t end on Wednesday morning.

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