The Corporate Response to Tax Reform

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Firms are starting to respond to tax reform. A recent report in the Washington Examiner chronicles 164 companies that have announced employee bonuses in response to tax changes (http://www.washingtonexaminer.com/boom-164-companies-give-bonuses-lower-fees-to-millions-citing-trump-tax-cuts/article/2645900). A number of companies have also announced increases in wages; Walmart is increasing the minimum wage for its employees from $10 to $11 per hour, although it’s being criticized—no surprise—for some store closures.

The takeaway point here is clear: Employers in a vibrant economy will raise wages without government mandates. Walmart must increase its own minimum wage or risk losing valuable employees. Companies don’t wait for politicians to act; they analyze the market and take action on their own. In fact, minimum wage laws only raise actual employee compensation when they forces an employer to pay more than the employee’s work is worth, and even then, for fewer employees (see earlier posts for a detailed discussion on this topic). Cut business owners and managers loose of burdensome regulations and excessive taxes, and most will look for opportunities to grow.

Progressives struggle to accept this reality. They typically claim that corporate tax cuts will end up in the pockets of rich shareholders. Rather than free businesses to grow the economy, they try to control them through taxes and regulations. Their approach leads to stagnation. Just look at the Obama years.

But while business response to corporate tax reform will be positive, many politicians and analysts—including Republicans and self-proclaimed economic conservatives—are falling into a trap. They claim to support tax and regulatory reform not because it’s inherently the right thing to do, but because businesses will respond in a way that benefits everyone else. They maintain that firms will do “the right thing” when taxes are cut, as if companies have an obligation to hire more employees. This line of reasoning reinforces the left’s argument that government has a lien on corporate profits, and tax rates and regulations should be manipulated to achieve the social and economic outcomes politicians desire.

To the extent that this can be measured, some firms will likely use the tax savings to raise dividends and/or buy back some of their own shares instead of hiring more employees and expanding their businesses. Opponents will cry foul when this happens because they did not do “the right thing.” These alternatives are good for the economy anyway, but that’s not the point. It’s their money. How individuals choose to spend it—as consumers, investors, or shareholders—is up to them, not Washington.

It’s exciting to see how these changes will spur the economy, but let’s remember…Capitalism, including minimal taxes and regulations, is the best economic system because it’s moral. The benefits it creates for society are welcome, but not the best argument for free enterprise.

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4 Takeaways From Tax Reform

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The tax reform package just passed is a mixed bag, but it’s a clear improvement over the current system. Amidst all of the details, there are 4 takeaways that will be good for the country.

First, the $10,000 limit for state and local taxes means that tax increases for upper (and some moderate) income earners at the state level will no longer be subsidized by the federal government. As a simple example, with unlimited SALT deductions, a $1000 tax increase at the state level would reduce the federal tax burden of an itemizer with a 35% marginal rate by $350. States will be under greater pressure to manage their own fiscal houses without indirect federal subsidies.

Second, the increased standard deduction means that many middle-income Americans will be able to reduce their taxable income without itemizing, thereby weakening the effect of political intervention through subsidies and deductions. This could make the transition to a flat tax—or something close—easier one day.

Third, reducing the corporate tax rate from 35% to 21% will level the business playing field for firms. Companies will invest a significant part of the savings, which will drive economic growth in the near term. The actual benefits of this change are hard to calculate, but it’s a definite plus for the economy and jobs.

Finally, the tax plan eliminates the individual mandate for health insurance. The left’s contention that Trump is “taking healthcare away from millions of Americans” is a lie. Eliminating the mandate only gives them a choice without a tax penalty. The ACA is built on the mandate, so this simple change will bring Obamacare back to the forefront. The ball is now in the Democrats’ court, because the program will struggle even more without increased subsidies.

The reform package didn’t go far enough, but compromise was inevitable.

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What we learned from Alabama

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We learned several things from yesterday’s Alabama Senate election. Roy Moore’s defeat was not an “upset” and it does not signal “a turn against Trump.” Although Moore was not an ideal candidate on the issues, sexual misconduct claims translated an easy win into a close loss. Had Moore prevailed, it would have been just as incorrect to suggest “a win for Trump” either, as he didn’t endorse Moore in the primary anyway.  But if you step back, there is a bigger issue that we must confront.

I’m not talking about sexual wrongdoings, but let me start by restating the obvious: If Judge Moore did everything he was alleged to have done, he should be held accountable. However, this analysis overlooks several facts:

Most importantly, we do not know what did or did not happen. Claims of behavior 40 years ago are almost impossible to unravel. Democrats and the mainstream media constantly referred to the charges as “credible.” Perhaps, but believable claims are not necessarily true. They referred to the number of allegations as evidence as well, but this, too, is flawed logic. The quantity of allegations does not constitute any evidence because different allegations represent different events. They claimed that this was not a partisan issue; the Democrats dispatched Al Franken, so they must be committed to reform in their own party. But this is not true either. Unlike Moore, Franken admitted wrongdoing, and because the Minnesota governor is a Democrat, his resignation paves the way for another liberal anyway, without a special election.

The most egregious intellectual mistake was made by Senator Shelby. “A lot of smoke, there’s got to be some fire there.” Wrong, Senator. The entire objective of this attack on Judge Moore was to create a lot of smoke. If this is your honest assessment, then we definitely need sharper minds in Washington. If not, then you owe the country an apology. Your opposition to Moore likely tipped the election to Jones.

Here’s what we know. These allegations emerged immediately following the Republican primary, when it was too late for voters to consider an alternative to Moore. Even if some of the allegations were true, the timing is no coincidence. We also know that some of details in the allegations just don’t add up. Does this mean none of the accusers were telling the truth? Not necessarily, but then again, we just don’t know.

Perhaps we will know the facts one day, but I doubt that the networks that pounded Moore for weeks will invest the time and resources necessary to sort out the truth in the coming months. Their goal was accomplished, so it’s time to move on to bigger fish now—President Trump.

I understand why voters could have concerns about Judge Moore. He’s not a gifted speaker and his denials didn’t have a convincing tone. But the same people who have been beating the Russia collusion drum for a year now just destroyed a man’s life and reputation with unsubstantiated 40-year-old allegations, and they don’t know what actually happened any more than the rest of us. What happened to the American value of innocent until proven guilty?

With Moore’s defeat, rest assured that the political lynch mob is here to stay. Just create “a lot of smoke,” and you can turn an election.

P.S. I received a couple of interesting emails asking if I supported Moore. He wasn’t the ideal candidate, but you ultimately choose between individuals on the ballot. I’ll trust Alabama on this one. My point was not about Moore per se, but about the willingness of many to jump on the anti-Moore bandwagon without seriously questioning the allegations. It’s not “anti-women” to insist on strong evidence for 40-year-old accusations. We should give respect and full consideration to women who come forward in situations like this, but without abandoning reasonable standards of evidence and judgment, especially regarding serious accusations like sexual assault. I welcome a reckoning for anyone guilty of workplace harassment or physical assault, but let’s avoid the lynch mob.

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Chris Cuomo on Government Responsiveness

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CNN’s morning programming is typically a non-stop attack on President Trump. Occasionally Chris Cuomo backs into the truth, which he did today in an exchange with Alisyn Camerota about sexual harassment:

CAMEROTA: I mean, it’s a tidal wave. Every day, we have breaking news. Every day, it feels like, we have breaking news on some sort of sexual harassment. It has been pointed out, look at the people being fired in our business, in the media, huge names, Bill O’Reilly, and Matt Lauer, being fired. And in Congress, it sort of lingers while ethics commissions form and people investigate it. And, you know, we heard a lawmaker say, but we are elected, the people are their bosses.

CUOMO: That’s exactly right.

CAMEROTA: They can be fired the next election day.

CUOMO: But that — that’s the difference. The difference is, if you work for a company, the company decides your fate, if it wants, almost instantaneously.

CAMEROTA: We’ve seen that.

CUOMO: Not true in government. We’re seeing that play out in real time.

Did you catch that? Cuomo conceded that business is more responsive than government when it comes to issues like sexual harassment. He’s right, but this responsiveness doesn’t end with workplace harassment. Businesses are under constant pressure to satisfy fickle customers, who are free to go elsewhere if they aren’t satisfied with the project, the service, or the organization in general.  The market enforces a certain level of responsiveness. Companies make mistakes, but there’s built-in immediate accountability.

The choices available with government are more limited or nonexistent. If you don’t like social security, you can’t choose another retirement option instead. If you don’t like the tax code, you still have to pay your taxes. Our representatives exempt themselves from many of the laws they pass and frequently hide behind the bureaucracy when expedient. They face elections every several years (depending on the office), but the bureaucrats who run the IRS, EPA, HHS, and other government agencies do not. Responsiveness is directly related to choice. When compared to the private sector, government gives us much less of each.

Our federal government must be more accountable, but it will always be less responsive and less efficient than the private sector. This is why government should be limited and empowered to do what it must, but no more. As Henry David Thoreau famously noted, “That government is best which governs least.”

I guess Chris Cuomo gets it right once in a while.

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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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