Browsing the blog archives for April, 2010.

Ending bailouts once and for all

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In his weekly radio address today, the President asserted that his proposed financial regulation scheme would end taxpayer-funded bailouts “once and for all,” adding that it would put an end to the “cycles of boom and bust” that have plagued our economy. I would concede that a certain amount of government involvement in the financial system is a necessary evil. Given the complexities of financial transactions, government can play a role in ensuring that all parties to a transaction are fully informed of the obligations they agree to incur and that remedies are available when contractual obligations are not met. I’m all for transparency. But the problem goes much deeper.

The President is arguing that unbridled capitalism results in booms and busts, requiring Washington to fix the mess and save “average Americans” with taxpayer-funded bailouts. He’s got it backwards. Booms and busts are facilitated by government intervention into the capitalist framework, and the very notion of a bailout denies a fundamental principle of a free society, personal responsibility. I have NO OBLIGATION to bail out a bank, an auto manufacturer or any other firm to promote the so-called common good. The “average Americans” he seeks to save are the taxpayers, or at least some of them still are.

Consider the housing market. The free market did not create an oversupply of homes, Washington did. Artificially low interest rates promoted by the Fed, manipulation of lending practices through legislation like the Community Reinvestment Act, and the very existence of Freddie and Fannie have muddled the market. Simply stated, many people bought homes before they were ready financially, or bought more expensive homes than they could afford. Everything went well as long as home prices continued to appreciate. Eventually the bubble burst, prices fell, and the crisis ensued. Washington blamed the evil bankers, but the root of the problem was a fundamental lack of understanding of and respect for markets. Subsidized housing through the Fed, the tax code, or banking regulations artificially increases supply, thereby increasing prices. Sooner or later the house of cards must tumble, which it did. In an effort to fix the problem, central planners in Washington continue to do more of the same. Another bust is inevitable.  

Obama doesn’t see the pivotal role government plays in causing economic problems in the first place. His view of economic progress includes massive government intervention that promotes booms and busts. During the booms, successful firms and wealth in general is demonized; the rich just aren’t paying their fair share. During the busts, the left excoriates the evils of capitalism and more government intervention is proposed as a counterbalance. In the end, Washington not only creates a cycle of boom and bust, but also a cycle of ever-increasing regulation, deficits, taxes, and class warfare.

There is a much simpler way to end taxpayer-funded bailouts and substantially reduce the severity of economic cycles. The answer is less government involvement in business activity, not more. Washington should limit intervention into markets to the promotion of transparency in transactions and providing an appropriate legal infrastructure to addressing grievances. If Washington would JUST SAY NO to bailouts, then private investors would take greater steps necessary to protect their own capital and taxpayers would not be on the hook anyway.

The problem here is one of worldview, not just of regulatory specifics. The President either does not understand how the economy functions or is more concerned with social or political objectives than economic growth.

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Here comes the VAT (again)

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A Value-Added Tax (VAT) is a levy that is factored into the prices of goods and services at every stage of production. By the time a product hits the shelf at your local store, its price already includes the tax. The VAT is popular in many other nations, especially those in Europe where the typical rate is around 20%. At such a rate, a $100 product would actually cost $120. While some products (often certain food essentials) might be excluded from the VAT, this varies by country. The cumbersome, arbitrary, and political nature of these exclusions is no small matter, but I will not delve into this topic at the moment (see Irwin Stelzer’s April 5 piece in the Wall Street Journal for more on this).

Ben Bernanke, Paul Volker and others have floated the VAT as part of a long term solution for the left’s current spending spree. Obama created a so-called “bipartisan fiscal commission” to examine the tax-and-spend problem instead of tackling it himself. I believe he favors a VAT but wants the idea to come from this (left-leaning) commission after the midterm elections.

When it comes to taxes, I favor a national sales tax (i.e., the “fair tax”) IN LIEU OF an income tax. Some view a VAT as a form of sales tax, so I am frequently asked why I so vigorously oppose it. There are many reasons, but I’ll cove the top three here.

First, the VAT is being suggested as AN ADDITION to the present tax system, not a replacement. During the 2008 elections, some shameless democrats charged that their republican opponents who favored REPLACING the income tax with a national sales tax were “supporting new taxes.” Of course, replacing one tax with another is quite different from adding a new one. We don’t need any new taxes.

Second, THE VAT IS A HIDDEN TAX. After a VAT is implemented, we would begin to think that things just cost more without realizing we are paying the tax every time we make a purchase. A VAT would be buried deeper than income, sales, and most other taxes because we would pay it indirectly. Even worse, it can (and will) be raised from year to year in a way that is less obvious to consumers than hiking income or sales taxes. It is no surprise that the VAT was introduced in Europe in the 1960s at a rate of around 5% and has risen ever since.

Finally, adding a VAT, like any tax hike, ignores the real problem—massive government spending. The need for any type of new taxes would be eliminated if Congress refused to feed the beast in the first place. We can address this problem in November.

I think Obama’s long term plan is to institute massive spending increases under the guise of a stimulus (already done) and then seek a “bipartisan compromise” that keeps most new spending in place while raising taxes, preferably with a VAT. However, adding a VAT to the present tax scheme legitimizes the current level of government spending through taxes that are higher, more complicated, and less visible. The alternative is clear—we should focus on SHARP SPENDING REDUCTIONS while CUTTING AND SIMPLIFYING TAXES.

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Watch out for your 401(k)

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The Service Employees International Union (SEIU) has formally proposed what some on the left have been hinting at in recent years, a government takeover of your 401(k) plan. Instead of investing your funds privately, your retirement contributions would be pooled with everyone else’s and “professionally managed” by government “experts” to ensure that you have adequate income in your retirement. There is some discussion that we could be required to rollover our 401(k) accounts into such a system.

My initial response to hearing the SEIU proposal was to laugh, but I’ve seen too much lately not to take this proposal seriously, so I went to the union’s “Retirement USA” website (www.retirement-usa.org) for a firsthand look.  These guys are serious. Apparently the current confiscation of 12.4% of your income to support the Ponzi scheme known as social security is not enough. They want the government to control your other retirement investments as well. There are so many things wrong with this idea, but I will focus on a few obvious problems.

Let me clarify a few things upfront. I am not a fan of social security. The tax rate is too high, the system is improperly managed, and we don’t have access to our own accounts. But you could argue that a basic social security system has some merit. Requiring everyone to contribute to a plan that provides a basic income upon requirement keeps society from picking up the tab if an individual fails to save anyone on his own. But retirement planning is my responsibility, and the government’s only possible legitimate interest here is the extent to which I might become a burden on society if I don’t save on my own. That’s debatable, but I’ll come back to this point another day.

I am also completely aware that the social security tax rate is 6.2%, with a matching contribution from your employer. If you’re buying the idea that you only contribute 6.2% and the employer’s part is not your money anyway, then you don’t understand how companies look at payrolls.

According to the website, “Retirement USA is a national initiative that is working for a new retirement system that, along with Social Security, will provide universal, secure, and adequate income for future retirees.” From this introduction, we can already see where this plan wants to go. There is no simply need to another universal retirement plan, especially when the first one is approaching insolvency. My retirement is my business, and I have a right to earn as much as I can, save as much as I choose, and live with the consequences. A 401(k) plan allows me to defer taxes on income that I won’t take as income until I retire. Besides, shouldn’t I be the one to decide what is “secure” and “adequate” when it comes to my financial planning?

Click on the “12 Principles for a New Retirement System” linked to the site. I urge you to read them for yourself, but they can be summed up in a single word, COLLECTIVISM. Their argument for “shared responsibility” stresses the idea that you are only PARTIALLY responsible for your retirement; the government and your employer(s) are also responsible. Their argument for “required contributions” means that companies should be forced to contribute to your account (remember—it’s really your money anyway) and government should subsidize the contributions of low income workers by taking others. Their argument for “pooled assets” with “professional management” means that the federal government would become major shareholders in more companies than just GM and Chrysler. Many states already assist in the management of retirement funds for state employees, but this would take this to another level altogether. Government control of private enterprise through regulation and intimidation is bad enough. Government control through ownership is a disaster.

It is clear that the SEIU and other unions (this proposal is also supported by the AFL-CIO) are interested in much more than fair labor negotiations. Like Obama, they also seek to fundamentally change America as we know it, replacing individual liberty and personal responsibility with collectivism anchored by wealth redistribution. They claim to favor a market economy, yet they constantly seek to redistribute wealth when the market does not value the economic contributions of everyone the same. This is a battle against socialism, and we better take it seriously.

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