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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SNAP cuts would hurt the economy?

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President Trump’s proposed budget seeks to rein in federal expenditures for the Supplemental Nutrition Assistance Program (SNAP). It’s fair for progressives to debate the merits of SNAP, but many on the left and their media surrogates argue that spending less on SNAP would hurt the broader economy. See, for example:

https://www.nytimes.com/aponline/2017/05/24/us/ap-us-food-stamps-cuts-economy.html

The argument goes something like this. If you cut SNAP, its recipients wouldn’t be able to spend as much on food, or they would have to spend money on food that might have been spent on something else. Either way, the ripple effect would hurt grocers and other retailers, and then farmers and manufacturers, resulting in a broad slowdown in the economy. They invoke an economic term, the multiplier effect, to legitimize their claim. But there is one major question they don’t ask.

Where does Washington get the funds to pay for SNAP? There are three options. First, if taxes are used, then any increase in economic activity promoted by SNAP is automatically balanced by a decrease in economic activity for taxpayers who have less to spend or invest. Second, if we borrow to pay for SNAP, then the economic activity it promotes will be balanced by a decline when future generations have to pay it back. Finally, if we “print money” to pay for it, then the purchasing power of the dollar declines proportionally, thereby creating an invisible tax on all wealth.

Economists like to say that there is no such thing as a free lunch, and that’s certainly the case here. There are different ways to break down SNAP expenditures, but they must come from a combination of these three options. There’s no other alternative. Claiming that SNAP—or any other social program—helps the economy by injecting money that gets “multiplied” is ignoring this reality. While it is true that SNAP changes could help or hurt certain industries, the net effect must balance.

So why do progressives make this claim whenever “cuts” are proposed to social programs? Some are pandering for votes, but others just don’t understand basic economics. They’ve been overloaded with Keynesian thinking for so long that they believe government spending is always required to “jumpstart” a weak economy. They overlook free enterprise, the stifling effect of regulations, harmful incentives created by government programs, and real people who have to pay the bills. This is why our national debt has risen to $20 trillion, with no end in sight.

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President Trump, the baby killer…

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President Trump’s proposed budget has been released and the left is already attacking it for the “deep cuts” it makes to social programs. In reality, the budget does not reduce social spending, but rather proposes a 10-year rate of growth slightly lower than the current projections. In the socialist lexicon, any attempt to rein in costs is a “deep” or “draconian” cut. This is politics and to be expected.

But some on the left aren’t stopping there. NYC major De Blasio claims children will die if Trump’s cuts to children’s health programs are enacted. This isn’t the first time such charges have been launched at Republicans, but it’s still shameful discourse. It’s tempting to laugh and move on, but this argument can easily be turned on the Democrats.

Their reasoning is simple: Spending “less” on government healthcare for children means that some will die because they won’t get the care they need. The evidence for this is debatable at best, but let’s take it at face value. If spending less would kill kids, then wouldn’t spending more save some who are currently dying from a lack of care? If no, then the current, arbitrary level of spending must be the perfect amount, benefitting all children and harming none. Few if any would make this claim, as there’s simply no way to verify this.

Most progressives would respond with a resounding YES, but herein lies the intellectual dishonesty. Since current spending levels were endorsed by President Obama, then he must have also killed kids by not spending even more. Perhaps Obama “did the best he could” in negotiations with a Republican Congress, but the current level of spending on children’s health programs is higher than what Democrats endorsed when they controlled both the House and Senate in 2008 and 2009. That lower amount didn’t seem to kill any kids then. If their argument today is accurate, then we must also indict Democrats for supporting substandard spending in the past.

Of course, progressives always want to spend more on social programs, claiming that people will starve or die if their demands are not met. The current level—if previously endorsed by the left—is always the bare minimum, just enough to keep from doing harm. Even when they get the increase they want, progressives refer to the expansion as a mere “move in the right direction.” While some progressives attempt to debate the issue in a reasonable fashion, those like De Blasio who resort to scare tactics and hyperbole are appealing to ignorance.

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Who pays for health care?

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There’s an elephant in the room on the health care issue—who pays for it.

This problem is illustrated in an exchange, a version of which I’ve heard several times this week:

Democrat: The health care plan passed by Congress doesn’t protect those with preexisting conditions.

Republican: It certainly does. The plan provides $100+ billion for high-risk pools so the insurance companies won’t have to cover these folks in the same plans with everyone else. That way, everyone else won’t have to pay for those with preexisting conditions.

Excuse me? Where does the $100+ billion come from? Republicans and Democrats alike talk as if such “pools” are created out of thin air. This approach is probably a modest improvement over the status quo, but someone must pay the bill.

People are simply demanding health care without a mechanism to pay for it. It’s time to call the bluff. Republicans should propose no frills, bare bones universal coverage to be financed entirely with a payroll tax (perhaps 5%) from all Americans—not employers—on personal income up to $100,000. If you opt for private insurance instead, 80% of the amount you pay in this new tax would be credited toward your premiums. While those who earn more would have to pay more, everyone would have skin the game.  Nobody would be excluded. Coverage, deductibles, and copays would be rationed accordingly.

I know my proposal is simplistic, but here’s the point: Democrats (and some Republicans) would run from this type of proposal because it removes the illusion that undisclosed parties—corporations, the top 1%, or government printing presses—would pay the freight. It would change the conversation from health care as an entitlement to health care as a transaction. Everyone would get basic coverage. Those who trust government to manage the process would get their wish, but they still must pay the tax. The rest of us can opt out and stay in the private system.

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The President’s Tax Proposal

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President Trump’s draft tax proposal is a clear improvement over the status quo, but it falls short of the type of overhaul we really need. It’s a long way from fruition and as I noted in a previous post, the greatest opposition to even moderate change in the tax code will come from the special interests.

Everyone in the housing industry, from contractors to roofers to realtors, benefits from the mortgage interest deduction in the current tax code. By passing along part of the cost of your new home to other taxpayers, this provision subsidizes an entire industry and artificially increases home values, all in the name of “making housing affordable” and pursuing the “American dream.” President Trump’s draft proposal did not eliminate this deduction, but it increases the standard deduction. You must itemize to deduct mortgage interest, so increasing the standard deduction means that homeowners with modest home payments would not enjoy the same tax benefit as they did previously, thereby reducing the net effect of the mortgage interest deduction, at least on paper.

The National Association of Realtors wasted no time in its response. NAR president William Brown referred to the proposal as a “nonstarter,” noting:

For over a century, America has committed itself to homeownership with targeted tax incentives that help lower- and middle-class families purchase what is likely their largest asset. No surprise, real estate now accounts for over 19 percent of America’s gross domestic product, or more than $3 trillion in investment. But for roughly 75 million homeowners across the country, their home is more than just a number. It represents their ambitions, their nest egg, and the place where memories are made with family and friends. Targeted tax incentives are in place to help people get there. The mortgage interest deduction and the state and local tax deduction make homeownership more affordable.

Brown is protecting industry’s his turf by wrapping the mortgage interest subsidy in the American flag. His defense of the current system cites America’s alleged commitment to home ownership with an emotional appeal—homes are about ambitions and memories. Of course, one need not own a piece of real estate to amass great memories, and the “targeted tax incentives” about which he speaks penalizes renters.

It’s ironic that the President is getting stiff opposition while proposing to retain the subsidy. Increasing the standard deduction might reduce the number of Americans who itemize their taxes, but the accompanying tax cuts would likely spur demand for housing anyway. That’s just not good enough for the industry, which like most, will lobby for government support at every turn. The NAR has tons of resources to trumpet this argument. When traditional media outlets opposing anything and everything Trump offers, it’s not clear who will fight the realtors and other special interests. Achieving even modest tax reform won’t be easy.

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Why consumers like (some) regulations

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There’s a lot to learn from the video depicting airport security dragging a passenger from an overbooked United flight earlier this week. The airline had the right to (humanely) remove the passenger, but dragging him from the plane was a horrible decision that only fuels demands for more regulation.

Airlines overbook flights because some passengers won’t show up at the gate. When everyone is present, they offer payoffs to passengers willing to take a later flight instead. It’s usually easy to find passengers willing to take the payoff—in this case, $800—but once in a while everyone shows up and nobody is willing to give up their seat. When this occurs, the airline is permitted to identify passengers for removal, and remove them physically if they do not leave voluntarily. It’s not a common situation, but it happens.

United made obvious mistakes here. The airline could have sweetened the pot to obtain the necessary volunteers. This is a reasonable expectation and would have satisfied everyone. Overbooking is more efficient and reduces costs and fares, so the airline should be able to compensate inconvenienced passengers at a higher level if necessary. Removing the passenger was permissible, but United should not have done so, even if it could have been accomplished without the optics.

There’s a larger concern here. Consumers who don’t understand overbooking or the contract they accept when they purchase a ticket see this incident as a massive abuse of power. They feel helpless, and predictably, many are asking the government to intervene so this doesn’t happen again. If airlines don’t overbook flights, there will be more empty seats on the typical flight, raising costs and fares for all of us. Governor Christie has already suggested that airlines be restricted from overbooking flights until more regulations can be developed. Be careful what you ask for; you might get it.

What’s the solution? Airlines should make higher payoffs when required to deal with overbookings. Every man has his price, and payoffs are a cost of doing business. United was not willing to pay more, and now it’s costing the airline dearly. If politicians get involved to “protect our rights,” it will cost all of us as well. More government intervention is unnecessary. The market is already extracting a heavy price on United, and other airlines are taking notice.

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Tax Reform

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Some type of tax reform will probably pass this year, but I expect the same philosophical debate we saw during the Ryancare debacle. Real tax reform requires 3 things: Lower taxes, less spending, and simplification of the system. Cutting taxes is not too difficult politically. Spending reductions are feasible because a better tax code can enhance revenue anyway, while real “cuts” are delayed into the future. But simplifying the system is a real problem.

A simplified tax code is easy to understand and keeps the government out of one’s personal business. You would think simplification would be a no-brainer, but each carve-out in the existing system benefits certain individuals and interest groups at the expense of everyone else. Most taxpayers don’t realize how these arduous rules and “tax breaks” hurt all of us.

Take the home mortgage interest deduction as an example. If you itemize on your return—another needless complication of the code—then you can typically deduct from your income the interest you pay on your mortgage. Proponents of this policy claim that it “makes housing more affordable.” Who could oppose home ownership?

The mortgage interest deduction essentially reduces monthly payments, encouraging Americans to purchase homes, and to purchase larger ones. Almost everyone connected to housing from realtors to contractors will fight to the end to keep this deduction in the code because it affects their pocketbooks, at least in the short term. It’s a bad deal in the long run, as a subsidy always increases prices and encourages people to spend more than they would otherwise. In fact, this and other government (and Fed) support for housing set the table for the Great Recession.

But convincing Americans that subsidized housing hurts the economy is not easy. Many think they’re getting something out of the deal. What they don’t realize is that tax rates for everyone must be increased to compensate for the $70 billion in annual mortgage interest deductions. That’s more than $200 per American citizen, most of whom don’t file or pay income taxes anyway.

Mortgage interest is only the tip of the iceberg. There’s health care, the earned income tax credit (EITC), and solar energy, to mention a few others. Each special deduction or tax credit has its own constituency that lobbies and donates to campaigns. Try to abolish all of them at once, the insiders tell us, and you’ll have too many battles to wage. They suggest that we eliminate some of them, avoid the bloodiest fights, provide a modest tax cut, and call it a day.

I take the opposite view. I favor attacking all deductions simultaneously to allow for the greatest reduction in tax rates. Start with your income, subtract an individual deduction, multiple what’s left by a flat tax rate, and you’re done. I realize that my plan would be deemed “too radical” by most, but I’m negotiable. A few deductions like charitable contributions (which is logical) and health care (which is practical) might remain to get a bill passed, but we can eliminate most of the social engineering in the tax code if we have the courage. Unfortunately, I’m doubtful that enough Republicans do.

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Why Ryancare Failed

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Health care reform is a complicated topic, but explaining why Ryan’s health care proposal failed is not.

With all its flaws, Obamacare has forever changed public expectations about healthcare. It’s now unconscionable to expect average Americans to take financial responsibility for their own coverage. Insurance companies are expected to eat losses from consumers with preexisting conditions. Older pre-Medicare Americans shouldn’t have to shoulder the burden of additional health care costs associated with age. Somehow government is supposed to subsidize all of this with a magic wand and additional taxes on “the rich.”

The current mess can only be fixed with a strong dose of free enterprise that requires consumers to budget, make choices, and accept personal responsibility. Many Republicans are too squeamish to back this type of serious reform, so Paul Ryan developed a package of marginal improvements that he thought would placate the moderates. He didn’t figure there would be enough principled Republicans unwilling to accept a dubious promise about more serious changes in phases 2 and 3. He miscalculated.

President Trump had little to do with Ryancare’s failure. It’s just a numbers game. Democrats will oppose any repeal, so the Republicans need to stick together. Moderate Republicans will likely reject a strong market-oriented plan like the one Rand Paul developed. Liberty-minded Republicans have already demonstrated their unwillingness to support a proposal and tweaks the current system. Threading the needle with a compromise acceptable to both ends of the party is not impossible, but it will be very difficult. For the time being, letting the ACA die on the vine is the only option.

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Navigating Health Care

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Senator Paul’s caricature of Ryan’s health care bill as Obama Light seems to be accurate. As the debate ensues, several realities must remain front and center.

As I’ve reminded readers in the past, those of us who warned in 2009 that it would be almost impossible to overturn the ACA were correct. The reason is political. Ending or limiting an entitlement is presented by Democrats and the press as “taking something away from the poor,” and few Republicans have the conviction or the stomach to make the argument. Leftists continue to ask Republicans how they will ensure that anyone who benefitted from Obamacare won’t lose their benefits with a reform. Most Republicans accept the ACA entitlement as a starting point and suggest limited modifications, such as ending the mandate and allowing purchases across state lines. When Representative Jason Chaffetz politely suggested that it might be necessary to forego purchasing a new iPhone to pay for healthcare, the left went crazy. While he is obviously correct, we must accept political reality. Undoing the entire Obamacare entitlement simply will not happen.

While healthcare is not a right because proclaiming it as such creates obligations on others to pay for it, EMTALA requires ERs to provide care to anyone to enters regardless of ability (or willingness) to pay. As a result, basic care at public expense is already encoded in federal law. Conservatives and pragmatic libertarians would be wise to recognize this reality and attack the left’s inconsistency. While Democrats claim to favor the type of “universal access” to healthcare found in other developed countries, but they aren’t willing to tax everyone to pay for it. Granted, wealthier Canadians and Brits pay more that low wage earners to support socialized medicine, but everyone who’s working pays a significant amount into the system. The real issue for the Democrats is not access, but who pays the tab, which is why Chaffetz’s comment struck a nerve.

Most Republicans agree that Americans should not be required to purchase health insurance, but requiring insurance companies to accept applicants with preexisting conditions is equally wrong. This policy cocktail encourages healthy Americans to use EMTALA when they get sick and wait until they need coverage to buy it, thereby creating losses for insurance companies that must be covered by government subsidies, higher premiums, or some combination of the two. The “free rider” reality must be faced head on.

There are sound, free-market ideas that should be a part of healthcare reform. If Republicans are going to unite around a bill that makes a real difference-not just Obamacare Light—they must insist on individual accountability. Quality healthcare will be cheaper in a free market, but it won’t be free. Anyone unwilling to forego an iPhone upgrade to pay medical expenses should be ashamed.

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Illegal Immigration 101

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I’d like to revisit the issue of illegal immigration, but let me make two points at the outset:

First, I am addressing illegal immigration. Like most Americans, I believe immigration is a good thing when managed properly. We can debate issues around legal immigration, but that’s a different topic.

Second, opposing illegal immigration has nothing to do with racism. The idea that anyone who supports immigration law enforcement doesn’t like people of a certain racial or ethnic background is nonsense. It’s a charge designed to gin up fervor on the left and avoid the real discussion. the You could just as easily argue that those who favor open borders are racist because they want to create an ethnic underclass in American society. I’m sure there are a few racists on both sides of this and any issue, but it doesn’t mean that one’s position on the issue is based in racial, ethnic, or religious ideology.If you are not willing to accept these points, then we can’t have a conversation. If you are, let’s talk.

My views are fairly libertarian, so I generally favor individuals moving freely across borders. But several realities must be checked. First, the ongoing terrorist threat is real, and I expect my country to take action to restrict immigration that could create a threat. Doing so requires difficult judgment calls that might not always be the perfect ones, but we must be diligent and take this responsibility seriously.

Second, illegal immigration results in massive cost shifting. Businesses claim that illegal immigrants do the jobs that Americans won’t do, but they don’t finish the sentence—at the wages they are offered. Americans would be willing to do any job at the right wage. Illegals are willing to work for less because they lack job skills and their prospects for employment are not attractive in their native countries. For this reason, they will always be willing to undercut Americans for any jobs they can perform.

But here’s the problem. Businesses might save on wages when they hire illegals, but the additional medical, law enforcement, education, and other costs are passed on taxpayers. Robert Rector’s analysis concludes that the net cost to Americans is $54.5 billion per year (http://www.heritage.org/immigration/report/the-fiscal-cost-unlawful-immigrants-and-amnesty-the-us-taxpayer). Economist Milton Friedman encapsulated this problem in his famous retort, “You cannot simultaneously have free immigration and a welfare state.” If you support open immigration, you are supporting a constant fiscal drain to pay for it. The benefits of cheap labor and cheap prices are overshadowed by lower wages for American workers and higher taxes and deficits.

These two realities require that we address illegal immigration responsibility by enforcing the rule of law. President Trump’s proposals—a temporary ban from seven countries and building a wall on the southern border—are rarely evaluated seriously by the left. They constantly conflate immigration and illegal immigration, and simply tag anyone who thinks we should enforce federal law as racist or anti-Muslim. This is disconcerting to someone like me who cherishes people from all over the world. I don’t blame others for wanting to come to the U.S., I just love my country and want a common sense approach to illegal immigration enforcement.

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