Browsing the blog archives for November, 2011.

The NHTSA and the Chevy Volt

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After years of promoting the development of electric cars, the federal government now finds itself in the position of investigating a key safety risk. Batteries in the Chevy Volt caught fire in three recent crash tests, prompting the NHTSA to investigate.

http://online.wsj.com/article/SB10001424052970203935604577064663206681538.html

But don’t worry. Both the NHTSA and GM stress that everything is OK. Instead of just focusing on the Volt, the NHTSA is also asking all electric car producers for information on steps recommended to ensure safety after a crash. The inference is that any problems are both minor and linked to the technology, not GM.

I’m not suggesting that the batteries are problematic; I don’t know. But it’s interesting to note that GM is not getting the Toyota treatment here. Ray LaHood hasn’t advised Volt owners to stay off the roads. Neither LaHood nor Congressional Democrats are demanding hearings. Nobody is accusing GM of scoffing at safety in an effort to produce a cheap car.

The reason that the NHTSA and GM are merely going through the motions is simple. Neither can afford to cross the other. With huge government stakes in GM and the “green” economy—not to mention the UAW’s ownership position—Washington can’t afford to damage GM. In need of tax credits, electric car purchase write-offs and other taxpayer giveaways, GM can’t afford to challenge Washington’s authority. In the end, investigators must be seen as thorough and GM must be seen as responsive. Both sides will work together to ensure this outcome.

The charade we are witnessing now is just another outgrowth of crony capitalism.

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The Debt Reduction Super Committee

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The debt reduction super committee must decide by Wednesday how to cut $1.2 trillion over the next ten years or face automatic reductions that include a hefty cut in defense. However this turns out, the upcoming week will remind us that the Democrats are simply unwilling to address the spending problem and the Republicans aren’t willing to go deep enough

The current impasse is largely about taxes. The Democrats want the “rich” to pay more as a big part of the package while the Republicans want to cut spending, mostly in non-defense areas. The Republicans are essentially correct here. The current debt is a result of profligate spending, not tax cuts for the wealthy. Nonetheless, there are two deeper problems here.

First, this committee only exists because Obama and the Congress couldn’t get the job done in the first place. Boehner blinked and both sides agreed to kick the can down the road once again.

Second, $1.2 trillion over ten years is only $120 billion a year. Not only is this much less than Obama wants to spend in his recent “jobs” proposal, but it represents less than 10% of the projected deficit anyway. Besides, the only cuts that matter are those that are in the present.

The key point here is a simple one. If the best negotiators in the Congress and Senate can’t agree on $120 billion in annual reductions, then any real cuts will be impossible without a strong shift to the right. Bi-partisanship won’t get the job done, and the problem is too big to grow our way out of. Keep this in mind as you sort through the group of Republicans seeking the nomination.

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Alan Blinder and the flat tax

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The flat tax idea must be gaining traction. Just take a look at former Fed vice chairman Alan Blinder’s op ed piece in Monday’s (November 14) Wall Street Journal. Blinder is a heavy hitter for the left-of-center Keynesians and he doesn’t waste time attacking ideas that don’t seem to be going anywhere. His piece, “The Folly of the Flat Tax,” contains everything we expect from the left. Blinder is right on several points, however, so let’s give him his due at the outset.

  1. Blinder argues that “the flat tax alone” won’t simplify the tax system. Technically he’s correct, but I’ve never heard a flat tax proposal that hasn’t been attached to an overhaul of deductions and exemptions that will make the entire system much simpler.
  2. He argues that a flat tax would make the system “far less progressive.” He’s correct again, at least to a point. The major problem with the tax system now is that it’s too progressive. I’ll return to this point in a minute.
  3. Blinder also notes that every tax “gimmick”—like mortgage interest, state income tax, and other deductions—has a constituency that will fight it’s proposed elimination tooth and nail, making any real simplification of the system all but impossible. Again, he’s somewhat correct here, although I think a real overhaul is possible.

The problem with Blinder’s piece, however, is the leftist foundation on which it’s built. When I read op eds from the left, I always skip to the last couple of paragraphs where the logical flaws usually reside.  There, Blinder attacks conservatives for emphasizing that 47% of American households don’t pay income taxes. “They pay sales taxes, payroll taxes, and many others. The income tax and the estate tax are virtually the only progressive elements in our tax system. If you take away progressivity there, precious little remains.”

Since when is a progressive tax considered to be “precious?” Herein lies Blinder’s moral code—wealth redistribution.

And since when is a flat tax not progressive? I have never heard a flat tax proposal that doesn’t include a hefty standard deduction. Do the math. If you exempt a certain amount of income from a flat tax, then the system is progressive by definition.

When taxpayers pay the same dollar amount regardless of income—such as with a vehicle registration tax—we call that system regressive because the amount paid represents a lower percentage of earnings as incomes rise. You could argue the fairness of such a plan because everyone pays the same amount. It’s like a general admission ticket to a concert. You pay the ticket price and you get in.

The progressive tax is the opposite of the regressive tax. Here, those with higher incomes not only pay proportionally more in taxes, but they also pay a higher percentage of their incomes in taxes. The federal tax system is progressive in that higher wage earners move into higher tax brackets. In my view, however, confiscating a higher percentage of one’s earned income simply because one earns more of it is Marxism pure and simple. Most Americans accept this type of system because they envy the wealthy, and besides, the rich can afford it.

The irony here is that common flat tax proposals are progressive because—as stated earlier—they exempt a certain amount of income from taxation. The problem for Blinder and the left is that they are not progressive enough. In fact, the left has taken the notion of a progressive system to new heights with programs such as the Earned Income Tax Credit (EITC) where low-income earners not only pay no taxes, but they actually receive money from other taxpayers. Consider that the budget deficit has ballooned in part because of programs specifically designed to assist this same group of individuals and you can see why conservatives are fed up.

There’s no question that getting a simple flat tax will be an uphill battle. The only hope is to propose a complete overhaul with a low tax rate. When Americans see that they pay for their deductions with higher rates many will favor ending the scam once and for all. This type of reform could happen, but only with the right leadership in Washington.

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Cut & Simplify

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Most of the economic proposals I’m hearing from the Republican pool have some merit, but they miss the mark. Simple plans like Cain’s 9-9-9 just don’t hold up to economic and political scrutiny. Complicated ones like Romney’s 59-point outline are too cumbersome.

For markets to be relatively free they must be relatively unencumbered, which means limited government intrusion. When government must be involved, it should do so in a simple and transparent fashion. The individual tax code is a prime example of failure in both respects; it’s overly confiscatory and impossible for most Americans to comprehend.

But a middle ground between simplicity and complexity is possible. Let’s start with a few basic facts:

  1. The national debt and ongoing large deficits represent a serious problem.
  2. Taxes are too high, so raising them to close the deficit isn’t a realistic option (even if this could work, which it couldn’t).
  3. The federal government must get smaller if spending is to be controlled.
  4. A serious reduction in the size of the federal government will not be painless.

Not surprisingly, the Republican candidates (save for Ron Paul) hesitate to address these head on lest they scare the presumed fragile middle-of-the-roaders. But real conservatives understand the nature of the problem and want real answers. They respect leaders who tell the truth. I’m convinced that most so-called independents recognize the seriousness of affairs as well, and they are willing to get behind articulate leader with real vision and solutions.

Fortunately, some of the necessary economic rebuilding doesn’t have to be painful. Obama has left two pieces of low-hanging fruit ripe for conservatives to pick

  1. Taxes are too complicated.
  2. American business is over-regulated.

Both of these represent win-win situations and must be leveraged as part of any economic recovery package. Revenue issues aside, a simpler tax system would save our economy billions of dollars in compliance costs alone. Cutting unnecessary regulations (i.e., most of them) would both reduce government spending and lift a heavy burden on the job creators.

This leads me to my economic proposal, which I’ll call CUT & SIMPLIFY:

  1. A flat income tax. Exempt income up to the 125% of the poverty line. Keep the deduction for charitable contributions, phase out the mortgage interest deduction, and eliminate the rest. Let the economists calculate the rate that keeps government income tax revenues at the same level, and then cut it by 10%. For example, if a 20% flat rate is needed to retain current revenue levels, set the new rate at 20% less 2%, or 18%.
  2. A flat corporate tax rate of 15%.
  3. Elimination of the capital gains tax.
  4. A pledge to veto any budget in the first year that doesn’t reduce federal expenditures by at least 20% from the previous year. This starts with overturning Obamacare and eliminating specific government agencies—like the EPA and the Department of Education— whose activities are inconsistent with the enumerated powers.

It’s my hope that the eventual Republican nominee will commit to and articulate this type of clear fundamental change to our economy, and that he can lead a tidal wave in House and Senate races that produces likeminded majorities in both bodies. Nibbling at the edges of leviathan just isn’t enough.

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Nader’s proposed tax on speculation

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Self-proclaimed consumer advocate Ralph Nader posted an interesting op ed in today’s (November 2) Wall Street Journal calling for a “tax on speculation.” This is necessary, as he puts it, to “break the corporate stranglehold on our country.”

The crux of his argument is that financial speculation is too risky and hence destructive to the U.S. economy. A tax in the neighborhood of 0.5% could raise billions while creating a disincentive to the fat cats’ “wheeling and dealing.” But once the clichés are removed and the facts are examined, we are left with another flawed proposal from the left.  The reasons why are many, so I’ll cover the most salient ones as briefly as I can.

  1. Nader’s definition of speculation includes all equity trades. Risk is a part of any private investment and is ultimately borne by the investor. Nader is—by definition—casting the entire private sector as destructive and in need of government oversight.
  2. Nader is correct when he says that financially punishing a behavior will reduce its frequency. In other words, we get more of what the government rewards (subsidizes) and less of what the government taxes. So why isn’t Nader calling for an end to the endless extensions of unemployment benefits or for reductions in welfare and social spending?
  3. Nader’s obsession with risk and speculation doesn’t appear to extend to government speculation, such as government-backed green energy or college student loans. Why is this form of speculation acceptable?
  4. Nader infers that speculation is a losing proposition. He fails to acknowledge the obvious—that every stock trade has both a winner and a loser.
  5. Any tax revenues produced from such a tax would come directly from private investment, the engine of the economy. Proposing to transfer this investment to the government in the name of job creation or economic development demonstrates Nader’s lack of understanding of economic growth.
  6. Most importantly, the federal government has no right or duty to restrict private, legal transactions such as stock trades. Taxing the capital gains generated from income that has already been earned and taxed is bad enough, but taxing the transaction is a front to individual liberty.

Tucked deep inside Nader’s argument is a fundamental flaw, the idea that government—not the private sector—has the moral authority and acumen to determine where the economy should “invest” its resources. It’s the same central planning argument that is constantly recycled to justify and leverage the ongoing class warfare.

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