Browsing the blog archives for January, 2009.

A Primer on Taxes


I’m not an economist, but you don’t have to be one to understand taxes. I am frequently asked about tax policy, so it might be useful to go through the basics here. We’ll cover three tax categories—the capital gains tax, the corporate tax, and the income tax.


Before we start, I should comment on the Laffer Curve, popularized by Reagan economic advisor Arthur Laffer. The underlying concept of the Laffer Curve is that every tax has an optimal rate for maximizing government revenues. Decrease the tax rate below this optimal rate and government revenues will decline as a result because of the lower rate. Increase the tax rate above the optimal rate and government revenues will also decline because of the adverse effect the higher rate has on incentives. Of course, it is not easy to identify the optimal rate and the objective of a tax system is not necessarily to generate maximum government revenues anyway. However, the take-home point is simple: When the tax rate is too high, neither the taxpayer not the government wins. It is a great political irony that big-spending politicians seem preoccupied with raising taxes when cutting them might generate the funds necessary to pay for their programs!


A CAPITAL GAINS tax is imposed on profit from investments. The mere existence of such a tax is dubious because the amount originally invested was presumably already taxed as income. Perhaps the most serious problem with the capital gains tax is the fact that some of the “gains” it taxes are the result of inflation. Let’s say you invested $1000 ten years ago and you cash it in today for $1400. You are responsible for a capital gains tax based on the $400 profit. If the annual inflation rate was 5% during the ten years, however, then the spending power of your $1400 today is actually less today than $1000 was when you made the initial investment. In other words, you really lost money on your investment, but you will be required to pay a tax anyway. 


I won’t detail the numbers here, but historical data provided by the Tax Foundation ( demonstrates that increases in the capital gains tax rate have been followed by decreases in government revenues. Likewise, capital gains tax cuts have increased government revenues. Although there are other factors involved, the evidence is compelling. A low capital gains tax not only encourages investments that create private sector jobs, but can also increase government tax revenues.  MY ASSESSMENT: THE CAPITAL GAINS TAX SHOULD BE SUBSTANTIALLY REDUCED, IF NOT ELIMINATED ALTOGETHER.


A CORPORATE TAX assesses business profits. The top US rate is currently 35%, resulting in an average top rate of 39.27% when state rates are added. The US is second highest among developed nations only to Japan (39.54%). Ireland has the lowest rate, 12.5% (again, see the data at the Tax Foundation site, ( Leaders of multinational firms consider a number of factors when establishing headquarters for their companies. The tax rate is a key consideration. The high US corporate tax rate encourages companies that might otherwise locate in the US to do so abroad. This not only reduces government tax receipts, but sends jobs overseas as well.


Of course, corporations don’t really pay taxes; shareholders do. This means that individual investors are taxed twice for profits generated by companies they own stock in, first at the corporate level and again at the individual level when dividends are declared. Taxing corporations for the benefits associated with corporate status makes sense, but punitive taxation doesn’t. Compliance costs associated with the current system are staggering, especially at the corporate level. MY ASSESSMENT: REDUCING THE TOP US CORPORATE TAX RATE FROM 35% TO AROUND 20-25% WOULD DO WONDERS FOR US COMPETITIVENESS.


An INCOME TAX assesses personal income. As with the capital gains tax, history tells us that lower tax rates often increase government tax receipts by spurring economic activity.


Who pays individual income taxes? Collectively, the top 10% of wage earners pay about 70% of the income taxes, while the bottom 40% pay nothing. Obama campaigned on increasing the earned income tax credit, thereby using the tax system to redistribute income from wage earners to those who don’t pay income taxes. He calls this a “tax cut,” but you can’t give an income tax cut to someone who doesn’t pay income taxes. Such a plan is preposterous, to say the least.


The current redistribution scheme was call the tax system has emerged from the various tax cuts and hikes over the years. To be politically expedient, tax cuts must favor those with lower incomes and tax hikes must soak the rich. Collectively, these cuts and hikes have transformed our tax system into one whose central purpose is to redistribute income, promoting a welfare state and stifling the American work ethic.  While I favor tax cuts, a complete overhaul of the system is sorely needed. MY ASSESSMENT: SCRAP THE CURRENT SYSTEM IN FAVOR OF A LOW FLAT TAX RATE, WITH A STANDARD DEDUCTION WELL ABOVE THE CURRENT “POVERTY LINE.” Some phasing in would be necessary with such a change, but the sooner we start moving in this direction the better. For the record, I prefer a national sales tax (AKA, the “fair tax”) to an income tax, but I will leave that discussion for another day.


Where do we go from there? Taxes are a necessary evil, but our tax system should be SIMPLE, FAIR, AS LOW AS POSSIBLE, AND SHOULD NOT SEEK TO REDISTRIBUTE INCOME. Of course, SPENDING CUTS that reduce the size of government to a level consistent with the spirit of the Constitution are also necessary. We’ll discuss this topic later.





The Fairness Doctrine


The so-called fairness doctrine just won’t go away. With Obama’s election, the democrats controlling both houses, and much of the informed, effective opposition to socialism coming from talk radio, those who wish to silence opposing points of view could get their way. The fairness doctrine is the idea that (radio) broadcasters should be required to air “both sides” of a political issue. It might sound reasonable at first glance, but it amounts to government censorship of free speech and must be resisted.


Freedom of speech is a highly cherished American value. Free speech on the airwaves, however, has been under attack since KDKA became the first licensed radio station in the United States in 1920. By 1940 there were almost 3000 stations, and the Federal Communications Commission (FCC) instituted the Mayflower Doctrine to prohibit radio and television stations from broadcasting editorial content. In 1949, the FCC instituted the “fairness doctrine” to ensure that broadcasters provide “balanced and fair” presentations of controversial issues. The policy remained in force for 38 years. Viewed as restrictive, cumbersome, and outdated, the FCC scrapped the fairness doctrine in 1987.


Various attempts have been made to revive the fairness doctrine over the past two decades. Just last month, Rep. Anna Eshoo (D-Cal) went one step further, calling not only for its return but also for its expansion to cable and satellite. Even if one assumes that the intent of Eshoo and others is “fairness”—which I don’t—such a move would be unduly restrictive and completely unnecessary today for several reasons. 


The relative influence of radio in the dissemination of news had declined considerably since the introduction of the fairness doctrine. In 1949, AM radio was the broadcast medium of choice and radios were common fixtures in American households. Although the number of stations was growing rapidly, many smaller markets had only access to only one or two. With only 98 television stations and a TV in fewer than 9 percent of U.S. homes, many Americans routinely turned to a few local stations for their news and information.


The situation is totally different today, however. There are about 14,000 radio and 2,000 television stations in the U.S. Television is the preferred medium for news and information, with cable and satellite bringing hundreds of stations into U.S. households. Due to the scope of FCC authority, the fairness doctrine applies only to broadcast stations and does not affect such entities as cable TV or satellite radio, not to mention the Internet. Even those who see merit in the fairness doctrine must concede that its relative influence today—unlike the post-World War II era—would be minimal.


The nature of competition in broadcasting has also changed dramatically since the inception of the fairness doctrine. With most markets dominated by one or a few stations, it was necessary for each to air a variety of programs tailored to different market segments. Today, the number of stations has increased dramatically, FM dominates music programming, and many AM students struggle to survive by serving smaller, less profitable segments abandoned by their FM counterparts.


The attacks on talk radio are ironic when one considers that the format helped revive news and information stations throughout the country, effectively saving AM radio from virtual extinction. FM listeners first outnumbered their AM counterparts in 1978. By the early 1980s, many AM broadcasters were scrambling to pursue non-music formats. In 1988—one year following the repeal of the fairness doctrine—the Rush Limbaugh program was syndicated and launched the rebirth of talk radio. Without Limbaugh and those who followed, most stations with talk formats would not provide any commentary.


Today, Limbaugh, Sean Hannity, Mark Levin, Neal Boortz, and other syndicated talk radio hosts have been joined by the likes of Mike Church and Andrew Wilkow on Sirius/XM, a format whereby consumers PAY for the service in order to listen to programs of their choice. The fact that Rep. Eshoo desires to control the political speech of any broadcasters—even those on satellite radio—should send a chill down the spine of any freedom-cherishing American.


The fairness doctrine is neither fair nor necessary. The wealth of information outlets ensures that Americans are free to access diverse points of view on any topic. Rather, the current move to revive the fairness doctrine is an affront to free speech rooted in a dislike for talk radio. Most popular talk radio personalities happen to be conservative/libertarian because the pro-freedom point of view attracts listeners. It’s market-driven.


It is ironic that many of the same politicians who remind us to change the channel on the TV if we are offended by what we see or hear do not offer the same remedy when their political views are challenged. To his credit, even liberal commentator Alan Colmes opposes the fairness doctrine. Although I disagree with him on most issues, I respect the fact that he’s not afraid of free and open discourse from those who oppose his ideas.


Americans should be encouraged to consider multiple sources as they see fit—including newscasters, blogs, and talk radio hosts—and form their opinions accordingly. A return to the fairness doctrine would restrict not only the free speech rights of radio broadcasters, but also the ability of Americans to access multiple points of view and make informed decisions.


Bailout 102- Bailing out the states


Now that the auto industry has received its dose of federal life support, bailout attention has shifted to the states. One such request is for $1 trillion over two years, while other proposals approach $3 trillion over ten years. There are a number of reasons why “bailing out” states for their budget shortfalls is a bad idea, but I will focus on two. The first and most obvious is that it rewards fiscal irresponsibility. States that cannot manage their resources effectively get the most money from the federal government. What a concept.


The second reason is the most hideous. STATES HAVE TAXING AUTHORITY, which begs the question, why shouldn’t states raise their own taxes to pay for their own programs instead of asking the federal government to tax everyone and redistribute the revenues to the states? The problem is that fiscally irresponsible states cannot easily raise taxes to pay for all of their programs because doing so will drive out the producers—individual and business tax-payers—to other states. Moreover, states cannot print money, nor can they defer debt to future generations as easily as the federal government can.


Here’s the key point: SOCIALISM REQUIRES CENTRALIZED AUTHORITY. Because socialism drives out the producers (i.e., the taxpayers), it must be administered centrally so they cannot leave. A state bailout represents a transfer of wealth from more productive states to less productive ones. In this regard, leaving one state for another makes little sense if the taxes you pay will be redistributed across the board anyway. Hence, a “state bailout” is an egregious violation of the STATES RIGHTS principle so deeply imbedded in our Constitution and should be vigorously opposed.


For what it’s worth, my guess is that Obama will eventually give the states less than what they ask for and demand “future accountability” in an effort to appear moderate. Even entertaining such an idea in the first place, however, should place him on the far left, somewhere in Marx’s neighborhood.