Category: Taxes

This is a bogus trade.

Sebastian Mallaby uncorked a doozy today on the intersection of trade and tax policy. He seems to grudgingly concede that free trade is inevitable, so governments shouldn’t get in the way. Right conclusion, poor reasoning. For example:

Paradoxically, the changes that have made globalization less popular have rendered resistance to it less fruitful. Back in the 1980s, trade put pressure on big, vertically integrated industries: cars, electronics. In the new world of outsourcing and global supply chains, vertically integrated enterprises have been sliced into discreet processes; trade now puts pressure on tasks rather than on industries. Back-office administration and phone-based customer support may shift to India, and this shift may affect industries from banking to medical services. The manufacturing and assembly of components may be outsourced to Mexico or Asia, and this change may affect everything from toys to telephones.

The reasonable question is how much longer such a shift took as government interfered in the process. If your output is protected from competition, you’re also protected from pressure to cut expenses as far as they can be cut. The only problem is that the need to innovate doesn’t change, only the damage from not doing so. Compare the lobster tossed into boiling water and the lobster brought to a gradual boil. Which one fights back while he still can?

So trade now threatens workers in more industries. Even if it still causes less dislocation than technological change, we shouldn’t be surprised that anti-globalization sentiment has sharpened. But the advent of competition in tasks also renders protectionist remedies less sensible than ever.

Preposterous. Companies now better focus on their true business. This is beneficial. The reality that some will perform better does not constitute a flaw in the trade process.

At least Mr. Mallaby comes to the right conclusion. The same can’t be said of his tax analysis:

Consider the work of Peter Lindert of the University of California at Davis. In a magisterial work published three years ago, Lindert analyzed tax-financed transfers across rich economies and found no correlation with the rate of growth or with gross domestic product per person. This, Lindert continued, should not be surprising. What matters for growth is less the quantity of tax and spending programs than their quality.

We know who gets to decide what constitutes quality. That same central planner also decides the quantity, which reduces the incentive to tie the two together. It’s most frustrating that the trade policies mentioned above are the perfect example of such incentive disconnect.

Lindert is no party-line liberal. He argues that high taxes in Europe don’t damage growth because they hit consumption and labor rather than savings and capital: This is an uncomfortable point for those who want the tax system to be progressive. But Lindert also argues that high taxes are compatible with growth if the revenue is spent well. Investments in education and public infrastructure boost a country’s growth rate. Programs that break the link between employment and health insurance enhance the flexibility of workers. Subsidized child care keeps women in the workforce, encouraging employers to invest in training them.

How is a belief that high taxes don’t damage growth not party-line liberal? But that’s less the point here than the notion that high taxes are “compatible” with growth if the revenue is well spent. Again, we know who gets to determine how to spend tax receipts. It’s fine to say that investment in education and public infrastructure boost a country’s growth rate. I’m not going to argue against that. I just find it absurd that the possibility that the private sector might provide even better quality than the public sector is never considered. Any honest look at our public education system would demonstrate that we could improve, to be kind, and money is not the lacking aspect.

Basically, Mr. Mallaby says he’ll give us economic freedom if we’ll agree to give up economic freedom. No thanks.

“Soak the rich” is not shared responsibility.

I haven’t had time to work my way through John Edwards’ proposed health plan (pdf), but I’ve read enough to know that it’s a preposterous joke that would end in fully socialized health care. No thanks. But instead of summarizing such a silly idea, I’d rather briefly explore Ezra Klein’s analysis of the plan. (Link courtesy of Balloon Juice.) I suspect it’s a fair representation of a good swath of left-leaning liberals who buy into the economically unsound view sold by most prominent Democrats. Consider:

In other words, the public sector will finally be allowed to compete with the private sector, and consumers will be able to decide which style they prefer. For Democrats, this is a significant step forward. From there, the plan offers the usual mix of sliding subsidies to ensure affordability, individual mandate to universalize coverage, pay-for-performance promises, and public health fixes. You’ve heard those bits before. What’s new, and what’s important, are the community rated health markets that include public insurance. Indeed, the plan satisfied every plank of my progressive health reform test from last week.

The plan will cost between $90 billion and $120 billion a year, and according to Edwards, taxes will have to be raised to pay for it. Readers should remember that this is the first full health reform plan from a major candidate in the 2008 election. As such, it has widened the field of the debate, and unless the other candidates want to explain why they lack the boldness of Edwards’ plan, they’ll have to offer similarly comprehensive proposals. What they will have to match is full community rating, a public insurance option, total universality, scaleability towards more public involvement, and a willingness to propose something comprehensive enough to require revenue increases to fund. In other words: The goalposts have been moved. To the left.

I don’t like this at all. The public sector has no business competing with the private sector. Aside from the centuries of data demonstrating that private markets work better, the public sector isn’t tasked with such endeavors. It must tackle public concerns like national defense. Individual choices of managing personal risk is entirely different. The public sector can’t know what my preference is for medical insurance. Inevitably, I will be forced to pay for something I don’t want or need, or I will be forced to pay for something for someone else that I don’t believe is appropriate. Why should a third-party be involved in that decision?

From what I’ve seen of Mr. Edwards’ tax plans with respect to health coverage, he believes that the rich should pay more and that the IRS can find unpaid taxes to minimize the new burden. Nonsense on both counts. The “rich” have no obligation to the “poor,” just as no man has any specific obligation to another man. That’s what individual, private sector transactions are for. People can create their own network of obligations and commitments. With such a radical shift, and massive increase in the tax burden of a few, those proposing such a change must prove why their new path is justified. If consumers can decide which version they prefer, why will some still get stuck with the bill for those who prefer the other? Using the barrel of a government gun to make me pay for someone else’s choices is wrong, regardless of how much money I make.

Of course, Mr. Klein’s entire premise is absurd, so everything preceding his final point adds little but easy counter-arguments. “Comprehensive enough to require revenue increases” is an ideological assumption, not a practical foundation. It shouldn’t be hard to see the byzantine mess that can evolve if bold vision requires only greater revenue. Too many supporting universal, taxpayer-funded health care seem confused that poor people receiving inadequate care and groups of people lacking health insurance are the same problem. They are not. You can solve one in this debate. Either everyone gets coverage and medical care becomes rationed, or people in need of medical care who can’t pay for it get the specific, immediate care they need, with the question of who pays being a separate discussion. If it’s the latter, this babble about universal health care is a utopian dream. If it’s the former, why do supporters believe that worse health care for most Americans is justifiable to give poor people what they’re generally already getting?

The short version is better. Wishing it so and making it so aren’t the same action.

Maryland will probably try to force Wal-Mart to subsidize this.

Maryland is really stepping into stupidity with its foray into addressing the current politically desirable hot potato health insurance crisis. I’m not sure which is worse, Gov. Martin O’Malley’s plan, or the naked defectiveness of politicians from a plan in the General Assembly. Consider:

Gov. Martin O’Malley (D) will call for expanded coverage of the state’s 780,000 uninsured — one in seven residents — in his State of the State address today, aides said, highlighting a proposal that would bring more of the poorest residents into public programs and require private insurers to allow young adults to remain on their parents’ plans until age 25.

What kind of nonsense is that last new regulation, other than an outright admission that politicians love to coddle people into ignoring reality and the consequences of their own choices. At what point will parents be allowed to kick their children off of their policy? If it’s so desirable for insurers to include young adults on their parents’ insurance, wouldn’t they have already offered such policies? Might current burdensome regulations and perverse incentives be the reason why those under 25 “can’t” purchase affordable health insurance? Making those worse will help? At some point, maybe people can leave the care of their parents and go directly to the care of the state. No one ever has to make any tough choices for himself. Even if he wants to make those choices.

General Assembly leaders are offering more ambitious plans that would add a $1 tax on cigarettes to pay for covering tens of thousands of low-income workers and offer subsidies to small businesses that provide coverage. Many workers who can afford insurance but choose not to pay for it would have to buy it or face penalties.
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The governor opposes a tobacco tax increase, and even if lawmakers approve it, there is some sentiment to use the revenue to cover other needs. And despite the momentum in the Democrat-controlled legislature, initiatives of this magnitude often take more than a single session to sell.
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A $1-a-pack increase in the tobacco tax also is the centerpiece of an effort by the Maryland Citizens’ Health Initiative to expand health care access through Medicaid and drug treatment. Although other states have approved tobacco tax increases to pay for health care, Senate President Thomas V. Mike Miller Jr. (D-Calvert) has expressed concern that if the tax acts as a deterrent to smoking, the revenue source could plummet.

If it might not work, why are Maryland’s elected officials so ready to implement it? Because it might work? And even if it works, the outcome might be bad? What? Politicians can’t control themselves, even when they allegedly have good intentions. They will botch the implementation of the noblest of plans. They should not be allowed anywhere near such an important, vital aspect of individual life.

Forgive me if I can’t find my outrage.

I will not be upset by this story:

Citing the controversy surrounding the Dakota Fanning film Hounddog, the leader of the state Senate Republicans says he wants the government to review scripts before cameras start rolling in North Carolina.

I’m serious when I say I will not be upset. The headline – “Republican Scripts need reviewing” – is designed to outrage. Look at the First Amendment violation! I can buy into that. Except, I can’t.

That system, said state Sen. Phil Berger, R-Rockingham, would apply only to films seeking the state’s lucrative filmmaker incentive, which refunds as much as 15 percent of what productions spend in North Carolina from the state treasury.

“Why should North Carolina taxpayers pay for something they find objectionable?” said Berger, who is having proposed legislation drafted.

State Sen. Berger is correct. Why should North Carolina taxpayers pay for something they (might) find objectionable? I’d take him a step further, though, and ask why should North Carolina, or any taxpayer, pay for film production?

Berger pointed to South Carolina, which requires up-front applications from producers, who must attach a copy of their script.

Even so, said Jeff Monks, South Carolina’s film commissioner, the state does not assess the content of a proposed movie.

“Censorship is not part of our activity,” he said. The purpose of asking for the script is to see whether it conforms to the budget and schedule information producers are required to provide.

“We want to see if this film is doable and a good investment for the people of the state,” he said.

It’s not a legitimate government expense. Film producers will find cheap, quality locations without government help through competition. Movies are their investment. Taxpayer money spent to benefit producers is not an investment to the taxpayers. I’m sure North Carolina residents will not be sharing in the profits of Hounddog. This should be obvious.

With this story, the familiar refrain is always that he who pays gets to decide. This is true whether it’s customers buying vegan cookies instead of non-vegan cookies or a government buying film production instead of commissioning paintings. If you don’t want censorship, don’t take someone else’s money. The First Amendment protection against censorship only applies to your own dime.

(Source: Fark)

Fix it where it’s broken.

I doubt I’ll watch tonight’s State of the Union speech. The posturing and applause and general pomp is unappealing. I’m content to read the speech and grab the important bits out of it. I can add some Xbox 360 into the time I’d spend watching nothing happening. That’s always a winner.

One important indication in the pre-speech buildup is this story about President Bush’s proposed approach to the alleged health care insurance crisis in America. He’s correct to address this situation because there is a flaw. And although he’s not proposing the optimal solution, what he’s suggesting beats any other idea going. (Massachusetts and California) Consider:

President Bush will propose a deep tax break for Americans who purchase their own medical insurance and would finance it with an unprecedented tax on a portion of high-priced health-care plans that workers receive from their employers, according to the White House.

The initiative, which the president briefly previewed in his radio address yesterday [Saturday], has a dual purpose: It would create a financial incentive for the estimated 46 million to 48 million Americans who lack health insurance to buy it. And it would rein in the soaring cost of health insurance by encouraging workers in high-priced plans to seek more modest coverage.

“Today, the tax code unfairly penalizes people who do not get health insurance through their job,” Bush said. “It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise and many Americans cannot afford the coverage they need.”

That grasps the true problem. People want “everything under the sun” coverage, which is not surprising because perverse tax incentives have taught Americans to expect that. Like much in our society, we’ve hidden the costs and focused solely on the benefits. This should go away. We must understand that there are consequences to our choices that can’t be wished away through government involvement or incentive.

There are details to be worked out if Congress (Democrats) agree, but I don’t know that we’ll have quick agreement since the president’s plan isn’t socialistic enough. As such, I won’t comment until there are firmer reactions. But it might be useful to look at an editorial in today’s Washington Post about President Bush’s plan.

There are weaknesses in the president’s proposal. Rather than embracing tax deductions, which are most valuable to people in high tax brackets, Mr. Bush could have made his proposal even more progressive by recommending a refundable tax credit that would be worth the same to everyone. Moreover, there’s a danger that ending the tax privilege for employer-provided insurance will cause companies to discontinue coverage, driving more buyers into the individual market, where it’s hard to buy insurance at a reasonable price, especially if you already have a medical problem. The administration promises to support state efforts to redeploy federal Medicaid dollars in ways that would make the individual insurance market work better. But success here will depend on the states, and the details are sketchy.

The problem with the current system is not that it’s regressive, although it is. The problem is that our current system of tax incentives disrupts the normal private market that individuals could participate in by pushing efforts to group plans. Groups require many different things, and most corporations offering group plans are not in the health insurance administration business, so we ended up with a few plans offering everything. This is ineffective and expensive. (I don’t need pregnancy coverage or mammograms, for example, yet I had it in my corporate-sponsored plan before I went independent.)

The solution, though, is not to make the tax incentives progressive. Punishing a new group instead of the old group is still punishment. That is not the government’s job. The market will do that reasonably well. If “the rich” want super-extra coverage, they’ll pay for it. Most people, when seeing the cost in the individual market, will demand more specific coverage. In this regard, driving more buyers into the individual market is exactly what we want. We’ll get better, cheaper solutions that way because needs and cost will remain in view. They’ll tend to balance to meet customer demands, rather than the current system of hiding everything but the coverage.

The answer is to get government out of the insurance/health business altogether, not to encourage government to create the “correct” incentives. It can’t know the perfect mix, so it will screw it up. President Bush is not there, but he’s found the map.

I know who’s carrying the oil can.

We knew this was coming, so only minor credit is warranted:

On its second day under Democratic management, the House yesterday overwhelmingly approved new rules aimed at reining in deficit spending and shedding more light on the murky world of special-interest projects known as earmarks.

Under the new provisions, the House will for the first time in years be required to pay for any proposal to cut taxes or increase spending on the most expensive federal programs by raising taxes or cutting spending elsewhere. And lawmakers will be required to disclose the sponsors of earmarks, which are attached in virtual secrecy to legislation to direct money to favored interests or home-district projects.

Admirable, although I don’t trust anyone in Congress to pick spending cuts in the equation. Balanced budgets are better than deficits, but barely under the principle-free government that’s emerged out of abandoned understanding of the Constitution. The only safeguard we have right now is the veto pen, and we know how well that isn’t working under the current administration.

In recent months, with revelations that lawmakers had earmarked funds for projects with little public benefit, earmarks had became a political embarrassment and a symbol of fiscal profligacy.

Revelations? Who didn’t know this was going on? That’s a bizarre way for a journalist to phrase the recent attention to the long-standing problem of reckless spending. But, in case anyone feels we need new evidence that Congress (i.e. Democrats) will botch the implementation of Pay-as-You-Go, consider:

So far, fiscal restraint appears to be gaining the upper hand. As he left the House chamber yesterday, [House Ways and Means Committee Chairman Charles B.] Rangel said he is scouring the tax code for tax breaks that benefit special interests. If the beneficiaries “don’t put their hands up, it’s out,” he said, suggesting that the money saved could go toward paying for the repeal of the alternative minimum tax.

Good grief. The squeaky wheel gets the oil is not wise fiscal policy. All Rep. Rangel is saying here is that he’s seeking political contributions for his re-election campaign. If you have a tax loophole that you’re fond of, it’s available for a price. The more things change…

Who should we blame for dereliction of duty?

A dozen years of Republican power, yet if the Democrats perform even the fiscal cleanup reform necessary, they’ll be to blame for any of the pain involved. Consider:

So will the Democratic Congress be any better than the Republican Congress was? A look at half a dozen likely policy proposals makes clear the answer will probably be no:

  • Tax Increases…
  • Spending Increases…
  • Alternative Minimum Tax. A 1969 tax increase that was enacted to soak the rich is suddenly going to seriously soak the middle class. Some 3.5 million taxpayers paid the AMT this year. But unlike the regular tax, the AMT is not indexed to inflation, which means the number of taxpayers the AMT hits is expected to balloon–by some estimates to as many as 23 million in 2007. Less than 5% of families with incomes between $100,000 and $200,000 are now paying the AMT, but more than 80% may pay it in 2008. Almost no families with incomes of $50,000 to $100,000 pays the AMT today; but as many as 35% of such families will in 2008.

    To eliminate these very unpopular AMT increases would cost about $750 billion over the next 10 years. What taxes the new Congress will raise to solve this dilemma is unclear, but either AMT or other taxes will have to rise.

  • Protectionism…
  • Energy…
  • Social Security. Just 10 years from now Social Security benefits paid out will exceed taxes paid in, so something will have to be done to fix the system. Individually owned Social Security accounts would help by allowing workers to enjoy bigger returns. But Democrats are dead opposed to the idea of turning millions of Americans into owners of stocks and bonds, which will lead to the liberal solution of raising Social Security taxes and reducing benefits. The forthcoming plan will likely be to raise the cap on earnings subject to Social Security taxes ($97,500 in 2007). That would raise taxes on everyone earning more than this amount, especially the most productive wage earners. If the cap went up to $150,000, for example, it would mean a tax increase of $6,510 on a worker earning that amount.

The Alternative Minimum Tax and Social Security are absolutely problems that must be addressed. The longer we wait, the worse the pain will be. Obviously someone will take the blame. But it’s shameless to acknowledge that the Democrats will have to address the crisis and then blame the unpleasant reality on them.

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.

Both parties are to blame for creating the problem, and I’m certain the Democrats will come up with stupid non-solutions to both. But I know who to blame for letting the problem get this severe.

Who needs brains when we have other people’s money?

One sentence, three flaws:

Scottish parents who wish to have their male infants circumcised should have the procedure paid for by the NHS to prevent the transmission of AIDS, a World Health Organisation (WHO) expert said yesterday.

First, allow me to repeat the obvious counter-argument to this. Male infants are not sexually active and parents have more ability to teach their children safe sex practices and responsibility than ability to predict their child’s personal behavior 15 or more years into the future. So, unless their sons intend to have unprotected sex with HIV-positive women, something parents can’t know, circumcising male infants to protect them from HIV is unconscionable folly.

Second, the World Health Organization is strongly pro-male infant circumcision and strongly anti-female infant circumcision. I understand the reasoning depends on centuries of what’s socially acceptable, but I’ve already pointed out the hypocrisy in applying different rules to boys and girls when they apply equally. Specifically, human rights are subject to more than just a clean operating room and good intentions. The World Health Organization should read through its own literature with a keener eye.

Third, for those in the United States longing for socialized healthcare, this is the sort of quandary you’ll be in. Fanatics will seek to allow parents to chop off parts of their sons on the national dime. That’s absurd enough, since there is no medical need for the surgery, but it should be clear that national resources are not unlimited. Every penny unnecessarily removing a foreskin is a penny not spent curing disease. I suspect socialists don’t think this way. There’s always another rich person who can be forced to pay her fair share, right? That’s unjust, but also false. People will die now so that little boys might not die six or seven decades from now of diseases with causes not specific to their foreskins. It’s stupidity.

This has to be satirical.

I didn’t get to blog this yesterday, but it’s still worth a mention. It’s always wise to check your assumptions when promoting an idea, especially when that idea is that deficits are wonderful:

A reporter once asked President Reagan if he had anything to say in defense of his deficits. “No” answered Reagan, “they’re big enough to defend themselves.” Liberals howled, and conservatives chuckled, but no one questioned the premise of the question: that deficits are inherently a bad thing. The argument has always about whether the bad thing called deficits are too large and whether they will ever be paid off, not whether they can actually be good for our country. For the record the answers are: no, they’re not too big (see attached chart); no, they will never be paid off, and yes, they can be a good thing.

I actually like the premise of the question, because deficits involve politicians playing with other people’s money. Considering some of those other people haven’t been born yet, caution and responsibility seem to be key. But that’s not the flawed assumption I’m concerned with in this essay.

When strong nations go to war, they borrow money. Weak nations, not so much. That’s because strong nations usually win, and winning nations usually repay their creditors. Rich and successful people don’t have any problem getting someone to loan them money. The same holds for wealthy and successful nations. That’s why, historically, the interest rate of a nation’s bonds is a pretty good inverse indicator of investor confidence in the war effort. The more trouble investors see on the horizon, the more compensation they demand for the added risk.
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This is the way the world works, some might say, but is it right? What about the children? Is it really fair for them to shoulder the burden of our wars? Heck yeah, it’s fair. Number one, they won’t be children when they start to share the burden of the national debt. Number two, they benefit.

Here’s the flawed assumption. The author expresses a selfish belief that we can have anything we want, and as long as the country survives, the children should just shut up. We’re wise, or at least rich. That’s enough, right?

The author concludes:

Defense is a sort of infrastructure, too. It provides benefits for future generations, just like roads and bridges do. Is it some kind of rip-off that my kid’s future tax bills will include interest payments from the war against Jihadists? Not if we win.

Good grief. Of course defense is vital, and the benefits of maintaining a strong nation carry over beyond just the immediate expenditure. (An assumption with some danger, but I can accept it.) No sane person believes that government shouldn’t protect its people. Defense is a legitimate expense for any government and should be made to the point that the nation remains safe. But that does not give a free pass for rampant spending elsewhere at the expense of future generations.

Look at the federal budget. The bulk of expenditures are in entitlements (Social Security, Medicare, etc.), not defense. To ignore these and believe that the war on Jihadists somehow excuses annual deficits of hundreds of billions of dollars is absurd. Eventually, the interest will absorb the entire budget, so the government will need further resources. At what point does this stop? (Hint: It begins with bank and ends with ruptcy.)

If the author wanted to make a case that the national debt is good, and shouldn’t be paid off, we can talk. He’d still be wrong, I believe, but there might be a case. But the deficit? Ridiculous. There is more than just interest rate signaling involved. Namely, interest payments.

If we want to do something for the children, we need to teach them economics. And the author of this essay should be last in line for the job.

“This is like déjà vu all over again.”

How to learn nothing:

That was fast. A mere two days after Democrats capture Congress claiming they wouldn’t raise taxes, former Treasury Secretary Robert Rubin tells them they should do so anyway.

“You cannot solve the nation’s fiscal problems without increased revenues,” declared Mr. Rubin, the Democratic Party’s leading economic spokesman, in a speech last Thursday. He also took a crack at economic forecasting by noting that “I think if you were to increase taxes right now, you would have probably about zero negative effect on the economy.” The economics and politics here are worth parsing.

It’s premature to assume that this is The Path&#153 for the next two years because much political wrangling has to happen before we see this implemented. My reaction is more exasperation than anything, which is to say that this is not “buyer’s remorse.” I’ve said many times that a (massive) spending cut is the way to fix our fiscal crisis. But politicians aren’t to be trusted, so I reasonably expected this. Democrats can’t comprehend that spending is too high rather than revenues tax receipts are too low. They’re stupid.¹

Aside from the ridiculous notion that Mr. Rubin believes tax increases would have zero negative effect on the economy, Mr. Rubin seems to be misreading the results of the Democratic victory last week. This is not 1992, when then-candidate Clinton ran on the promise to raise taxes. Everyone knew it was coming with a Clinton victory and still he won. However right or wrong the decision was, its inevitability was obvious. Clinton had the political capital to “encourage” Congress to increase taxes.

The 2006 election signaled no such preference from voters. Democrats could be expected to misinterpret their victory, as its lack of political leadership and foresight has been evident for many years. So, again, I think no one will be surprised if the 110th Congress attempts a tax increase. But they should not be surprised when they find themselves on the outside looking in at control of the 111th Congress.

The rest of the Opinion Journal editorial is reasonable, although it glosses over the deficit considerably more than it should.

¹ As further evidence:

“The middle class is being squeezed,” Mr. Reid said. “Squeezed. The rich are getting richer; the poor are getting poorer. We must do something about education. We must do something to relieve the tax burden on the middle class.”

It doesn’t take a genius to decipher that.