Browsing the archives for the Uncategorized category.

Taxes: House vs. Senate

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Senate Republicans are now debating their own version of tax reform. As I write, the Senate bill entirely eliminates the deduction for state and local taxes, while the House retains a deduction for property taxes. This deduction is illogical, subsidizes state and local governments; it should be eliminated and balanced with a rate cut. But on the whole, the Senate is straying even further than the House from real reform.

Senator Cruz’s opposition to the bill is most curious: “There are some taxpayers in some high-tax states like New York and California that could conceivably be paying higher taxes. I think that is a mistake. I think tax reform needs to cut taxes for everybody.” But his argument is logically flawed.

The only way we can ensure that everyone gets a tax cut is to retain all of the complexity of the current system. To be blunt, real tax reform probably means that some people could pay more. Lower rates reduce the burden on everyone and should more than cover the elimination of deductions for most Americans, but the greatest beneficiaries of those deductions could see a net increase. This is precisely why the system needs to be reformed in the first place; it arbitrarily favors some taxpayers over others. It takes political courage to say this, but it’s the core argument for real reform.

It’s difficult to predict the outcome at this point, but it looks like anything that gets passed will constitute limited reform at best. To be fair, there are some positives on the corporate side. In the end, supporting an incremental improvement is worthwhile, but it’s a shame to pass on an opportunity for real reform that might not come again.

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What is a legitimate tax deduction?

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With this week’s passing of a budget blueprint, it looks like several contentious tax deductions could be potential sticking points as things move forward. I favor a flat or fair (sales) tax at a lower rate for everyone without deductions, but there’s a rational way to assess deductions if you must have some. Most of them don’t pass muster.

The first thing to keep in mind is that every deduction must be coupled with higher tax rates to generate the same revenue. Therefore, supporting a deduction means that you are also supporting a higher rate for those who cannot claim it.

For example, the mortgage interest deduction allows taxpayers who purchase homes to pay less in taxes at the expense of their neighbors who purchase cheaper homes or rent instead. Proponents claim that it promoted home ownership, but politicians should not be crafting tax codes to reward one group at the expense of another. We’re addicted to this one, but it should be phased out.

Consider the state and local income tax deduction, which reduces taxable income by the amount paid in state and local taxes. With this deduction, a taxpayer in a 30% federal bracket reduces his or her taxes by 30% of the amount paid locally, favoring those in high-tax locations like New York, New Jersey, and California, at the expense of Americans in other states. Like the mortgage interest deduction, there’s no rational basis for this one either.

There are a few rational deductions, however. Consider charitable contributions. When you contribute a dollar to charity, you are assigning the income to that organization. You receive no direct benefit from the dollar, so it’s reasonable that are not taxed for it. Likewise, 401(k) contributions assign your income today to a future period. It’s rational that you should be able to defer the taxes you pay into the future as well.

There are exceptions, but if you apply basic logic and rationality, most deductions in the tax code fall short. Unfortunately, the current debates focus on who’s losing what instead of the legitimacy of the deduction. For example, proponents of the state and local income tax deduction argue that taxpayers in certain states won’t get much of a tax cut if this deduction is eliminated. This artificial standard assumes that tax reform would reduce everyone’s taxes proportionally, but the only way to do this is to retain all of the deductions. This is why a tax cut is likely to pass, real reform is not, and a tax cut without meaningful reform would continue the ongoing back-and-forth shift that increases the burden on the most productive and creates a growing percentage of non-payers.

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Tax Reform vs. Tax Cuts

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Several weeks ago, I argued for the importance of tax reform, not just tax cuts. Since then, I’ve been listening closely to various politicians opine on the subject. When asked by reporters about their position on tax reform, many refer only to tax cuts in their response. The conversation usually goes something like this:

Reporter: Senator XXX, President Trump is calling for major tax reform. What is your position on this issue, and how likely is it that Congress will pass reform legislation?

Senator X: The American people need a tax cut and we need to get to work to make that happen. The focus should be on the middle class…

Perhaps I the only one who notices that many politicians discuss tax cuts when asked about tax reform. Are they using the terms interchangeably or are they trying to change the subject? Am I paranoid, or is something going on behind the scenes?

There is a real difference between tax reform and tax cuts. Most politicians know the difference and would rather steer clear of reform. And yes, I think something is going on behind the scenes. When asked specifically about tax reform—such as eliminating deductions for state and local income taxes—most Republicans get weak-kneed and refer to “many ideas on the table.”

Tax reform is about how the government collect taxes. It involves simplification of the system and eliminating deductions in exchange for lower rates across the board. It means standing up to special interest groups that beg for subsidies through the tax code for their industries, whether it be manufacturers of solar panels “promoting green energy” or realtors “pursuing the American dream of home ownership.” Real tax reform would reduce Washington’s influence in our lives, but passing it requires backbone. Every provision in the tax code benefits one group at another’s expense. Net losers from real reform won’t go down without a fight.

A tax cut is about how much the government collects. A broad tax cut is needed, but beware. Discussions about tax cuts pit one group against another. In order to pass political muster, cuts usually favor lower to middle income groups. Consider that tax increases usually hit upper income earners for the same reason and the cycle becomes clear. With alternating cuts and increases over time, the tax burden has shifted so that half of Americans don’t even pay federal income taxes any more, and many of the non-payers actually receive money through tax programs like EITC. This is why a tax cut without real tax reform is a mixed bag at best, and could be a net negative when a future Democratic Congress undoes the cut in a way that further shifts the burden.

Perhaps I’m just paranoid, but we will find out in the next few weeks.

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Graham-Cassidy

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The Republicans are making a last-ditch effort to repeal Obamacare, at least some of it. I’m always suspicious of anything with Lindsey Graham’s name on it. This proposal has some merit, but not much. I’m undecided at the moment.

On the positive side, Graham-Cassidy removes the mandates and allows states to construct their own mechanisms for administering Obamacare’s expansion. Governments don’t do well at managing much of anything, but state and local governments do better than Washington. States would compete to design the best plans and we would learn a lot about what works and what doesn’t from the process.

On the negative side, Graham-Cassidy retains most of the Obamacare taxes and accepts its entitlement mentality, while merely shifting administration from Washington to the states. Its proponents call this shift federalism, but that’s a stretch. Real federalism means that each state can raise revenue from its own citizens and design unique programs to meet state needs. Graham-Cassidy confiscates revenues from all citizens and block grants the money to states with federal strings attached. This is marginally better than having Washington run the program, but it’s not federalism.

If Graham-Cassidy passes, its amalgamation with the House repeal would be a dogfight.  It’s unclear what the final legislation would actually say, so this might be a case of Pelosi’s “voting for a bill to find out what’s in it.” It could get better or worse, most likely the latter.

In the end, Graham-Cassidy will pass or fail for political reasons. Republican senators who fear voters will hold them accountable in 2018 for not passing anything and/or have concluded that a complete repeal is not possible will probably vote for it. Those like Collins and Murkowski who seem to like Obamacare anyway will probably vote against it. Senator Paul will probably vote against it as well, but because he thinks we can do better.

Getting to 50 will be difficult. This will be an interesting week.

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Business Response to Natural Disasters

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There’s a long list of American companies that have stepped up to help victims of Harvey. Inc. published a list of 25 (https://www.inc.com/john-rampton/25-companies-doing-their-part-to-help-with-hurrica.html) for starters. From cash to relief supplies, business is responding to the challenge. The mainstream business press is touting this as a great example of corporate social responsibility (CSR).

Most of my colleagues know that I’m suspicious of the entire notion of CSR—the idea that business has a responsibility to “give back” to society. Some has asked if my position has changed, or if I think these companies should not have responded to the need. They are missing the point.

CSR is about an obligation to spend company resources on initiatives that do not promote a firm’s financial interests. The choice to do so is a different matter, as long as the shareholders agree. But company contributions to relief efforts in response to a natural disaster are generally in their best interest. Bass Pro Shops is in a great position to offer boats, Home Depot can deliver emergency equipment, and Walgreens can provide medical supplies. These companies are showing off their talents, and others that simply contribute cash also look like good corporate citizens. You might not be a fan of Walmart, but it’s difficult to argue that the company is evil when management writes a $10 million check for Harvey victims.

Does this mean that company executives are not responding to the devastation out of genuine compassion? I’m sure many are, although one cannot tell for certain in any given situation. But my original point remains the same: these companies are not obligated to do anything. They might take action as a goodwill measure, as a sincere attempt to help those in need, or as some combination of the two. Their efforts should be applauded and will continue to be important with Irma, but they should not be confused with CSR.

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Racism & Liberty

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I have to hand it to the those on the left. They have succeeded in avoiding serious discussions about issues like health care, taxes, and the ecology by demonizing President Trump. Their latest attempt brands Trump as a racist for a less than perfect response to the Charlottesville tragedy. I’m not here to parse his words, but to provide some context to their argument.

First, the race card is nothing new. It’s not just a strategic part of the left’s playbook, but a philosophical one. They believe that all conservatives—and they include libertarians like me and populists like the President—are racist by default. They don’t call Trump a racist because of his response to Charlottesville. He was already deemed a racist because of his political views. Just read the playbook, Paul Krugman’s Conscience of a Liberal. Trump supporters must be ignorant or evil simply because opposition to the left’s agenda can have no intellectual basis.

Second, the President’s thesis that there are bad people on both political sides is undeniably true. As in all elections, there were despicable individuals and groups who claim to support every candidate. I’ve lost track of the number of leftist agitators I’ve seen “protesting” during the past year. The perpetrator in the Portland train stabbing earlier this year was an avid Bernie Sanders supporter, but it’s not his fault. The notion that President Trump “inspired” neo-Nazis in Virginia is a real stretch.

Third, there’s nothing “right wing” about white supremacy or neo-Nazi politics. This tag is tossed around freely to incriminate Republicans and conservatives, some of whom are apologizing profusely about Charlottesville as if they had something to do with it. Just read Paul Ryan’s response. Apparently, few commentators know that “Nazi” is short for the National Socialist German Workers Party. If anything, Nazis should be categorized as hard left, but I don’t think guilt by association is appropriate in either direction.

Finally, leftists are always telling us “it’s time we have a real conversation about ______.” But as I noted, anyone who disagrees with leftist orthodoxy is branded as either a bad person or ignorant. It’s hard to have a real dialogue if this is your starting point.

It should go without saying that I am speaking about the leadership of the political left, not all liberals, democrats, or progressives. While I strongly believe their ideology is misguided, many who identify themselves as such are nice people capable of reasonable dialogue. Unfortunately, this isn’t the case with their leaders in Washington.

If Trump is anything like me, he gets tired of having to preface every statement with obvious disclaimers about white supremacy, racism, neo-Nazis, or the like, lest he be accused of supporting their views. Despite CNN claims to the contrary, very few Americans—including those of us in the South—hold these views. Our country could benefit from some real conversations, but if you aren’t willing to grant some intellectual merit and a little grace to the other side, you can’t have one. This is why our society is so polarized.

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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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