Category: Taxes

Politicians should get merit-based pay.

Andrew Sullivan links to discussion about Barack Obama floating the idea of merit pay for teachers. I wonder if the idea has any staying power. In the system we have, it’s necessary and there should be no resistance to such common sense. Of course, debating this distracts from the need to get government out of the provision of education, but we may need to try smaller market-based reforms first. So be it.

It won’t make me vote for Sen. Obama, though. I have a hard time getting excited about a politician wanting to give some people a pay raise when all he intends to do with that raise is tax it more than it’s already being taxed. That’s nothing more than a shell game. I’m not interested.

Stirring Incomplete Information from Michael Moore

I touched on this yesterday, especially in the comments, but Michael Moore has trouble with facts. I wouldn’t call him a liar, because he’s a skilled propagandist. The facts, out of context, are still the facts. Forget that such abuse of context fails to reveal anything intelligent about policy. As long as it’s a fact, it can be defended.

That’s his tactic today in challenging CNN’s reporting on Sicko, with the requisite omission of any context. For example, Moore praises Cuba’s health system, although the WHO ranks Cuba 39th compared to the U.S. ranking at 37. Moore rebuts this “gotcha” moment from CNN by stating that he put this figure in the movie. Fair enough; I don’t doubt that he did. He’s generally guilty of omission, not commission. He’s a propagandist, so no surprises.

What he fails to do is provide any context for those rankings. The latest link I can find describes it’s methodology in determining that ranking:

In designing the framework for health system performance, WHO broke new methodological ground, employing a technique not previously used for health systems. It compares each country’s system to what the experts estimate to be the upper limit of what can be done with the level of resources available in that country. It also measures what each country’s system has accomplished in comparison with those of other countries.

WHO’s assessment system was based on five indicators: overall level of population health; health inequalities (or disparities) within the population; overall level of health system responsiveness (a combination of patient satisfaction and how well the system acts); distribution of responsiveness within the population (how well people of varying economic status find that they are served by the health system); and the distribution of the health system’s financial burden within the population (who pays the costs).

Broke new methodological ground. Oh, and employing a technique not previously used for health systems. Don’t forget comparing to what the experts estimate. Is it possible to have methodological flaws, or to at least draw irrelevant conclusions based on estimates?

But let’s get to the last two measures. For distribution of responsiveness, how many people in the United States are denied adequate health care, a question independent of whether or not they’ll face an economic burden from that health care? In the answer, would you rather be the average American or the average Cuban? I suppose if you believe that Moore’s visit to Cuba first-rate hospitals was more honest than mere propaganda from a Communist state, the answer isn’t obvious. But any answer other than the U.S. is wrong.

Of course, that doesn’t mean we have the financial burdens perfectly figured out, which is the last measure from the WHO. Again, no one is denied medical care, which should matter. Moore ignores that when he (apparently¹) fails to mention long waits and rationing for essential services in countries with single-payer health care. But specifically to funding, it’s not objective to decide that too many people face economic ruin (not a percentage of bankruptcies, as Moore states, but how many people?) from the system we have, so we should place the burden exclusively on taxpayers. That’s a pre-determined solution without concern for the actual problem, which is economic burden.

If we’re looking to reduce the economic burden from a health crisis, insurance to cover catastrophic medical care is the way to go. Have people pay for their own preventive care, or buy separate insurance for that, if they choose. But disentangle coverage for catastrophic events from coverage for routine care. The current situation we have where the two are co-mingled is largely a government-created problem. Fix the broken government incentive problem by removing improperly targeted incentives, such as tax-subsidized employer health insurance.

Instead we’re left with disingenuous framing of the problem while ignoring what would actually resolve the issues we face. This quote exemplifies focusing on wrong assumptions:

“It is especially beneficial to make sure that as large a percentage as possible of the poorest people in each country can get insurance,” says [Dr Julio Frenk, Executive Director for Evidence and Information for Policy at WHO]. “Insurance protects people against the catastrophic effects of poor health. What we are seeing is that in many countries, the poor pay a higher percentage of their income on health care than the rich.”

Dr. Frenk’s opening sentence is fine, if he understands the true problem. The rest of his quote suggests he does not. If he understood, he would’ve stated that insurance against catastrophic medical events protects people from the catastrophic financial effects. He didn’t, offering only the empty, obvious fact that the poor pay a higher percentage of their income on heath care than the rich. Of course they do, just like the poor pay a higher percentage of their income on food, housing, gasoline, clothing, and every other generally necessary expense. This is not news, nor is it specific cause for government intervention through economic redistribution² and health care financing and provision, contrary to what Moore believes.

Moore also thinks the 20 to 30 percent of Canadians who disapprove of their waiting times for health care don’t matter. The minority never matters to a populist, or the liberty lost to mob rule. Now ask yourself if Moore’s comparison of American and Cuban infant mortality rates, for example, might have a bit more nuance than he’s letting on.

Link to Moore’s rant via Boing Boing. Moore’s rant on CNN here.

¹ Full Disclosure: I still haven’t seen Sicko. Viewing it isn’t necessary for my analysis here. Also, I have no respect for the WHO, since it promotes a gender bias in unnecessary, forced genital cutting, and it’s incapable of understanding that circumcision to prevent HIV infection is better suited for sexually active adults who volunteer for the procedure based on their own evaluation, rather than forcing the surgery on infants who will not be sexually active for well over a decade.

² I wonder what Dr. Frenk’s position would be on taxes to pay for health care. Would he be as distressed that the rich pay a (much) higher percentage of their income in taxes than the poor? If it’s about fairness in percentage, a little fairness in analysis might be useful.

Warren Buffett wants to pay more taxes.

Have a look at what a flawed assumption looks like?

Warren E. Buffett was his usual folksy self Tuesday night at a fundraiser for Sen. Hillary Rodham Clinton (D-N.Y.) as he slammed a system that allows the very rich to pay taxes at a lower rate than the middle class.

I haven’t read or seen anything else about Mr. Buffet’s comments, so I’m going on the assumption that this version of events is fairly reported. Whatever the cause of the error, it would be just as easy to lament that the poor don’t pay taxes at the lower rate paid by rich people. Note, of course, that Mr. Buffet’s 17.7% tax rate and his secretary’s 30% rate are anecdotal. Is he incorrectly assuming that his tax situation fairly represents all “rich” Americans and that his secretary’s tax situation fairly represents all “poor” Americans? The tax code is far too complex for me to assume that is the case.

Buffett said that he and other privileged Americans must do more to help the less fortunate.
…

Clinton finished by asking Buffett, “Why are you a Democrat?”

Buffett said he thought Democrats would do a better job in evening out the field for those who had drawn the unlucky tickets in life.

Spare me the populist babble, please. “Privileged”? Being smarter and/or more productive does not make a person “privileged”. Yes, there is luck in life, but assuming that it is a key factor is hopelessly naive and dangerous. Such benevolence from on high is condescending.

Get the government out of people’s way and set up minimal safety nets where necessary. That will be more effective than simply spouting the incorrect notion the “privileged” aren’t doing enough, generally in the form of paying taxes. I thought Mr. Buffet was smarter than that.

Greg Mankiw has detailed analysis of Mr. Buffet’s likely tax scenario. Kip adds his thoughts.

*******

From a mini-editorial within the article:

The event comes as public frustration has grown over executive compensation and disparity in pay. It also comes as Congress debates changes to the tax code that would decrease take-home pay for managers of private-equity firms and hedge funds, pools of money for wealthy families and institutional investors. The rich can take advantage of tax loopholes, including one that allows those managers to pay the capital gains tax rate of 15 percent instead of the ordinary top income tax rate of 35 percent.

To put it bluntly, “the public” can go take a flying leap. Populist complaints that some people earn “too much money” deserve no consideration other than the time it takes to tell “the public” to mind its own business. If it wants to do something about this, boycott the companies that pay “excessive” compensation. Purchase stock in the company and propose resolutions to the board. Both are better than begging Congress to “fix” inequality by limiting the most successful. Even if the most successful don’t earn it, according to the self-serving criteria of an outside party.

Notice, too, how the reporter uses the unspoken assumption that income from a private-equity and hedge pool is not an investment and should be taxed ordinary income. Maybe I need to revisit my analysis of the article’s opening paragraph.

It’s the lack of protein.

PETA is often absurd and ridiculous, more interested in publicity – no matter how negative the result – than actually furthering its cause. For example:

Citing the need to reduce greenhouse-gas emissions, People for the Ethical Treatment of Animals is calling on congressional leaders to give vegetarians a tax break.

In a letter sent Wednesday to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.), PETA President Ingrid Newkirk stated, “[V]egetarians are responsible for far fewer greenhouse-gas emissions and other kinds of environmental degradation than meat-eaters.”

The letter added that vegetarians should receive a tax break “just as people who purchase a hybrid vehicle enjoy a tax break.”

The flaws are many and obvious, so I won’t bother with them here. What’s important to remember is that, while every member of PETA is a vegan or vegetarian¹, not every vegan and vegetarian is a member of PETA or agrees with its tactics. Assuming that a dietary choice would automatically align someone with a specific group is intellectually shallow. Just so that’s clear, since some commentary doesn’t.

Link via To The People, with additional commentary at Hit & Run.

¹ The vegetarian/vegan debate is sometimes abbreviated to veg*n to include both without the cumbersome use of both words. I don’t know if PETA has any vegetarian employees or activists, or if everyone is vegan. I assume there are a few vegetarians, which is why I included them.

History will wonder why all businesses employ 14 people.

Sen. Barack Obama hates liberty. And economics. And jobs. And health care. There’s no other way to describe the eventual outcome of his fantasy world where wishes lead to outcome.

Mr. Obama would pay for his plan by allowing President Bush’s tax cuts for the most affluent Americans — those making over $250,000 a year — to expire. Officials estimated that the net cost of the plan to the federal government would be $50 billion to $65 billion a year, when fully phased in.

The Obama proposal includes a new requirement that employers either provide coverage to their employees or pay the government a set proportion of their payroll to provide it. …

Obama advisers said the smallest businesses would be exempt from this requirement. The advisers said that those business might have under 15 employees, but that no number has been set.

And on it goes with the make-believe. Soak the rich. Corporations are evil. Government can solve every problem if given enough money. Why can’t progressives make some progress in understanding economics?

I’m sure I’ll have more later on this. For now, it’s late, so let it stand that this is a bad idea and will lead to reduced employment, less health care, and lower quality. That’s not a perfect trifecta for a man who wants to lead our country.

I can excuse a lot in voting, but I don’t let ignorance slide. Sen. Obama will not receive my vote in 2008.

Government cares with our money.

Here’s the fundamental flaw in how politician’s think, summed up in the course of discussing the $2,900,000,000,000 budget proposed by Congressional Democrats:

… said House Appropriations Chairman David R. Obey (D-Wis.). “I haven’t had too many people grab me back home and say, ‘Obey, why don’t you come to your senses and cut cancer research?’ That’s what the president’s budget has done for the past two years, and that’s what it would do again.”

Rep. Obey deceives. Accept this budget or you hate cancer research. That’s an unfair assessment. Everyone wants to find cures for cancer. It’s an undeniably “good” cause. But Rep. Obey makes the assumption that something everyone wants will not happen without the point of the government’s gun commandeering money from Americans and spending it on cancer research. He doesn’t trust people to spend their money on the things he wants they want.

UnFair Tax Assumptions and Goals

Since the recent debates involving declared presidential candidates, much buzz follows (former) Senator Mike Gravel, a Democrat. I didn’t watch the debates, so I haven’t followed him. But with the Internets being excited about him, I looked into his positions. I figured I wouldn’t need to look very far to dismiss him. I was right.

I saw his support for the Fair Tax, which is not quite enough for me to discount him outright. The details of his tax plan did that. For example:

There is only one one [sic] entity in the U.S. that pays taxes: the individual. Businesses and corporations do not, they merely collect taxes from consumers of their products and pass on the taxes to the government. The Fair Tax proposal calls for eliminating the IRS and the Income Tax and replacing it with a progressive national Sales Tax on new products and services. To compensate for necessities, such as food, lodging, clothing, etc there would be a “prebate” to reimburse taxpayers for the taxes paid on necessities.

I can’t figure out why he includes the (true) statement that businesses merely collect taxes. How will this help him in promoting a national sales tax? Who will collect taxes on products sold, if not businesses? But I didn’t want to get too distracted by that. “Prebate” spooked me more. So I followed his links to his more detailed explanation:

But the U.S. Income Tax system is unfair and regressive because Americans earning less than $97,400 pay a larger portion of their income in taxes than those who earn more than $97,400.

I’m not sure the data support that, or his later claim that Americans “with low or moderate incomes will automatically pay less in taxes”. But that’s a minor quibble in a sea of issues.

What sales tax rate will be applied to all new products and services?

The goal is to keep tax reform revenue-neutral. It is not a tax-cut program. Whatever the tax rate on new goods and services that will produce the same amount of money currently raised by the income tax is the sales tax rate. Best estimates indicate that the rate would be somewhere between 20 and 25%. Also, best estimates indicate that it would take a year to transition from one system to the other.

I really hate the phrase “revenue-neutral.” It’s an open (and incorrect) admission from Sen. Gravel that he’s content with the size of government. He’s wrong. And that sort of nonsense also implies that the sales tax rate will have to fluctuate to hit a target for tax-receipts. I doubt that will simplify the tax process.

Here are a few of Sen. Gravel’s basic Fair Tax facts:

Dramatically reduces the price of new products and services, estimated at 20-25%, because corporations no longer need to hide these costs in the retail prices that are now passed on to consumers. This reduction equals the present income taxes being paid.

I don’t care if the price of a book decreases from $25 to $20 if I’m still going to pay $25 after sales tax. That’s marketing, pure and simple. I suspect it isn’t particularly logical or effective marketing, either, because if I owned a retail store, I might advertise after-tax price so customers didn’t get a surprise at the register.

Businesses, and state and local governments collecting the sales tax will keep a small percentage to reimburse themselves for the cost of collecting and forwarding the funds to the U.S. Treasury.

There’s our answer to the statement about businesses collecting taxes. Not only will they continue, but they’ll interact with now-conscripted state and local governments in the collection of sales taxes. That should simplify the process none, as expected.

Encourages the re-use products [sic] and the purchase of tax-free, pre-owned products.

This will, of course, reduce the purchase of new, taxable products. That should do well for the bottom line for businesses, as well as the revenue-neutral mandate. Elsewhere, Sen. Gravel also talks about how bad “exceptions” are in the tax code, because they allow “wealth” to game the system. Isn’t zero tax on pre-owned items an exception?

Eliminates corporate taxes and the costs of compliance. These costs are currently hidden in the price consumers pay for the company’s product or services [sic]

Again, won’t there be compliance costs with state and local governments, as well as compliance costs with tracking the sales tax? Will they not be “hidden” in the price shown to consumers?

All that’s enough to induce fits of laughter, but we must look at the Prebate:

One of the most exciting features of the Fair Tax is the monthly payments to individuals and/or families to reimburse them for the tax they pay on the essentials of life (food, shelter, clothing, medicine). The amount of the Prebate is calculated by multiplying the cost of essentials by the tax rate. The resulting tax is divided into 12 equal payments and sent on the first of each month to consumers who have registered annually for the program. The progressiveness of the Fair Tax can be determined by adjusting the amounts selected for the prices paid for essentials, which should not be taxed in the first place. However, giving these essentials an exception from the sales tax opens the door for wealth to game the system and we are back with the problems we have in the income tax system.

Exciting? Right there, I’m done with Sen. Gravel. But looking at the prebate, I can’t comprehend how anyone can honestly imply that politicians won’t game that system. Also, how can we define one equal amount for each person’s basic food, shelter, clothing, and medical needs? Just assessing food, will Sen. Gravel argue that a petite, 5’1″ woman has the same food need as a muscular, 6’6″ man? How will the government account for this? Not with exceptions, right? Those would be bad. So what is it? Everyone gets 4 steaks, 12 chicken breasts, 5 pounds of bacon, 24 eggs, 1 bunch of carrots, 4 heads of lettuce, 1 pound of broccoli, 2.5 gallons of milk, and 6 cookies? I wouldn’t like that “average basket”.

I dislike the Fair Tax already, but these details are horrendous and show that Sen. Gravel’s plan is little more than the same belief that individuals serve government.

Here’s video explanation from Sen. Gravel at YouTube.

I like not sending excess money to the government.

Catching up on tax-related news, from Monday’s Washington Post comes this column by Shankar Vedantam. Consider:

Economists have long known there are two reasons that people cheat on their taxes. One is that they are poor and need the extra cash so badly they are willing to risk getting caught. The other is that they are rich and have lots of “non-matchable” income — mostly investment income not directly reported to the government — which makes it less likely they will be caught.

Taxpayers in the middle class are the least likely to cheat: They are not struggling to make ends meet, and their income is mostly wages, which are directly reported to the Internal Revenue Service. If you measured the likelihood of tax evasion by income level, in other words, the graph would look like a giant U.

For reasons I don’t feel like delving into (the use of under-reported income estimates among them), he’s wrong. See Kip’s prior analysis here and here for evidence. Instead I want to focus on this “solution”:

Other experts are considering more creative ways to improve tax compliance. One idea is to take advantage of people’s desire to get a refund at the end of the year.

“What some people do when they are doing their taxes is they do a first draft and see how much they are getting back,” said Richard Thaler, a University of Chicago economist who studies how people think about money. “If they owe money, then they do a second draft. They keep finding deductions until the refund is positive.”

Thaler said mandatorily increasing withholding levels so more people get refunds could increase compliance because taxpayers would no longer have to go to great lengths to get a refund.

There are (at least) two problems here. First, the government shouldn’t be in the business of promoting people to engage in irrational behaviors offer interest-free loans. (And yes, by promoting, I mean forcing.) Of course it would help the government to implement this policy. But that assumes that the government is supreme over the people, granting reasonable income policies and so forth. That’s backwards.

Second, if people are willing to “keep finding deductions”, what’s to stop them from being greedy and seeking deductions to increase the positive refund? Does human nature recognize a limit to greed¹ and stop once it gets a little if it can get a lot? If most middle-class taxpayers get a refund, it seems there’s a built-in incentive to cheat. Most probably won’t do it, but that doesn’t mean it’s not there. Fix the incentives by fixing the tax code and the incentive to cheat diminishes.

¹ I’d argue it’s stupidity rather than greed if you’re scheming to figure out ways to get your own money back up to sixteen months later than necessary. But the point holds.

Voting to Bolster Political Egos

Residents of one New Mexico county voted to impose a tax on themselves to fund a commercial spaceport. (Two other counties will vote soon.) The usual bromides about economic development seem abundant, but I like this one:

Rick Homans, chairman of the New Mexico Spaceport Authority and the state’s secretary of economic development, said the referendum is sufficiently far ahead in the counting of provisional ballots to declare victory, although an official count has not yet been announced.

“This positive vote ignites the final design, engineering and construction of Spaceport America,” Homans said. “New Mexico is prepared to launch a whole new era of discovery, exploration and commercial activity in space, on the moon and beyond. We have nothing but beautiful black sky ahead of us.”

Any guesses who will be taking credit for such visionary brilliance? Does it matter that a commercial spaceport is not even distantly related to a legitimate government task? I don’t for a second believe that the commercial spaceport will be used for discovery and exploration beyond what space tourists seek. But still. Discovery! Exploration! Besides, there’s (allegedly) a market, so build it!

The $200 million spaceport is to be built in scrubland near the White Sands Missile Base and is expected to be open for business by early 2010.

British entrepreneur Richard Branson and his company Virgin Galactic have signed a long-term lease with the state to make New Mexico its international headquarters and the hub of a space-tourism business.

Those lease terms are favorable to Virgin Galactic, costing it $27.5 million total over the 20 years of the lease. Clearly that doesn’t recoup the $200 million “investment” approved by a majority of voters. I can’t help thinking that the same standard that applies to every other “private” business should apply here, vote or no vote. If it’s a viable commercial business, the business itself will fund the spaceport. If it can’t fund the spaceport, it’s not a viable business. That should be the end of the analysis from the state’s viewpoint.

Bill Clinton caused the Plague, too.

Once again, the editors at Opinion Journal are spinning a crisis to pretend that Republicans haven’t been complicit.

In reality, the AMT is one more liberal monster that was created in the name of soaking the rich but has now come back to swallow the middle class. Democrats created the AMT in 1969, amid a political frenzy to capture a mere 21 millionaires who had paid nothing. And the politician most responsible for the AMT’s relentless expansion in recent years is none other than William Jefferson Clinton.

Remember the 1993 tax hike that was supposed to fall only on the rich? In addition to raising gas taxes and Medicare payroll taxes and income tax rates, the Democratic Congress that year also raised the AMT: from a 24% flat rate to a dual tax rate of 26% on AMT income up to $175,000 and 28% on AMT income above that amount.

It’s true that the 1993 bill slightly increased the AMT’s family income exemption, but Democrats refused to index those exemptions for inflation. So the combination of the higher rates and the failure to index for inflation has caught more and more middle-class taxpayers in the AMT’s maw. From 1992 to 2002, this Clinton stealth tax hike increased sixfold the number of filers paying the AMT, to nearly two million from 300,000.

That’s fascinating, but it’s also irrelevant. Rather than waste brainpower on new words, I’ll quote myself from December, when this ploy last appeared:

I don’t seek to absolve the Democrats of any guilt, for they surely must share. Still, I have to come back to the reality that the allegedly fiscally conservative Republicans had six years of complete control over the two branches of government necessary to implement reform on these issues. They did nothing. When the weeds got thick, the party punted in favor of attacking gays and Janet Jackson’s breast.

That’s still the proper analysis. Politicians, no matter what letter follows their names, don’t care about leading, which is what solving this before it became a problem required. None of the blame matters. It would be just as easy for the Journal’s editors to start here rather than end up here:

All of which means that if Democrats really want to spare Joe Lunchbucket from the AMT, the cleanest solution is to repeal the Clinton AMT rate hikes. The nearby chart, prepared by the American Shareholders Association based on Joint Tax data, compares the number of filers who will be hit by the AMT under current law and what would happen if the AMT rate was moved back to the pre-Clinton 24% and the exemption was indexed for inflation at the 2005 level of $40,250 ($58,000 for a joint return). Going back to the pre-Clinton rates would leave only about 2.6 million tax filers subject to an AMT penalty next year instead of 23 million under current law.

The estimated “cost” of this fix to the Treasury over 10 years would be some $632 billion, which is money Democrats in Congress would prefer to spend. But as Senator Grassley notes: “This tax was never meant to tax the middle class, so why should we count it as a revenue loss when we make sure they don’t have to pay it?”

The AMT is a travesty, which is where I’d take the discussion. It should go. (I’d end with sweeping simplification to a flat tax.) But aside from including Clinton in that paragraph for historical fact and reference, there is no reason to sling blame. The debate isn’t lifted. Let’s try solutions and how to get them implemented so that we can begin the return to fiscal restraint and limited government.

P.S. I’m going to assume that the excerpt I quoted from myself will stand in as sufficient commentary to mock the nonsense that Democrats, and not politicians in general, would prefer to spend that estimated $632 billion.