Archive for the 'Taxes' Category

(I originally posted this in early 2010–today seems like an appropriate day for a re-post)

Chevy Chase, MD, is an affluent suburb of Washington DC. Median household income is over $200K, and a significant percentage of households have incomes that are much, much higher. Stores located in Chevy Chase include Tiffany & Co, Ralph Lauren, Christian Dior, Versace, Jimmy Choo, Nieman Marcus, Saks Fifth Avenue, and Saks-Jandel.

PowerLine observed that during the 2008 election season, yards in Chevy Chase were thick with Obama signs–and wonders how these people are now feeling about the prospect of sharp tax increases for people in their income brackets.

The PowerLine guys are very astute, but I think they’re missing a key point on this one. There are substantial groups of people who stand to benefit financially from the policies of the Obama/Pelosi/Reid triumvirate, and these benefits can greatly outweigh the costs of any additional taxes that these policies require them to pay. Many of the residents of Chevy Chase–a very high percentage of whom get their income directly or indirectly from government activities–fall into this category.

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FOR IMMEDIATE RELEASE
April 12, 2012

Contact: Eric Kohn
Communications Director, Chicago Tea Party
eric@chicagoteaparty.org
773-209-3435

TAX DAY TEA PARTY PLANNED FOR CHICAGO

CHICAGO – Concerned citizens are set to gather at noon on Monday, April 16 at Daley Plaza at 50 W. Washington to protest out of control spending, unsustainable deficits and the unprecedented growth of government. People will come together in downtown Chicago, where the tea party movement began, to hold politicians of both parties accountable, stop runaway spending and defend individual liberty and free markets.

“We are concerned with the direction of our country and our state,” said Chicago Tea Party Communications Director Eric Kohn. “The only solutions being offered from politicians in Washington and Springfield are higher taxes, more spending and massive debt. We will continue to fight for less government, more freedom and fiscal responsibility on tax day and every day through the November election.”

EVENT DETAILS

What: Chicago Tax Day Tea Party
Where: Daley Plaza, 50 W. Washington St., Chicago
When: Noon – 2PM, Monday, April 16

FEATURED SPEAKERS:
U.S. Conressman, Joe Walsh, IL-8th District
Wisconsin Lieutenant Governor Rebecca Kleefisch
Dana Loesch, CNN Contributor, Co-Founder St. Louis Tea Party
Denise Cattoni, State Director, Illinois Tea Party
Joel Pollak, Editor-in-Chief, Breitbart.com
Dan Proft, WLS-AM 890 Host
David From, State Director, Americans for Prosperity Illinois
Contact Eric Kohn at 773-209-3435 for press availability with the speakers.

There will be shirts for sale at the 4th annual Tax Day Tea Party Rally, including the above design from Bob Black.

Yes, the world is abuzz with the fuss that Irish homeowners are making over the Household Tax. To recap, the Household Tax is a precursor to a property tax, which hasn’t been charged until now. Homeowners are asked to pay EUR100 this year, with an eye towards bringing in a proper tax in 2013. The idea is to get homeowners to self-identify themselves to the government to create the database. (Many government (and indeed health and education) records still are very much on paper.) The deadline for paying this tax was this past Saturday – however, at last count less than half of the suspected 1.6 million households have ponied up.

In fact, there was a protest at the current ruling party’s annual planning conference (called an “Ard Fheis”). An estimated 5,000-plus people turned out to air their rancor against this tax. Indeed, a number of TDs (members of the Irish parliament) have taken to the airwaves to condemn this tax and at least in a couple of cases, hint broadly that people not should pay it. From an American conservative/libertarian point of view, this all looks promising…

…until you hear what the complaints are all about. Almost no one is calling for a cut in spending. A goodly number are piqued that they can’t pay for this bill at the post office. And other voters and government folk are calling for the property tax to be means-tested. Sinn Fein wants to scrap this tax altogether for a flat-out income tax rate hike (which is what a property tax based on income level would effectively become) . In other words, this is really a broad-based call for more soaking the rich. But let’s see where this tax is going to.

It’s being sent to the District Councils – local-based government at the city or county level. And what it’s paying for are parks. Swimming pools. Libraries. And streets (remind me what the Road Tax was supposed to be for?) Meanwhile, still no talk of councillors taking a pay cut. Just asking the homeowners to dig deep to pay for “leisure amenities”. Feh, “leisure amenities”. Let’s get this straight. This isn’t a principled fight over taxation. It’s a squabble over who pays for little Sinead’s swim lessons. As King James II exclaimed at the Battle of the Boyne, GMAFB.

The IRS has a proposed new regulation which would prohibit charter-school teachers from participating in state retirement plans. (At present, all of the states which authorize charter schools permit, and in some cases require, the charter-school teachers to participate in these plans.) Furthermore, the new regulation would apparently apply retroactively and would cause the teachers to lose the state contributions to their accounts which have been accrued, and on which they were no doubt relying, unless they give up their employment. More here.

Today, February 6, is the last day for public comments on this issue under IRS procedures.

Both our current administration and the New York Times appeared to have little or no understanding how the “real” economy worked or the impact of incentives on tax policy. In more recent years they grasped that changing tax policy can impact economic incentives, which in turn, can increase their chances of being re-elected.

Their first major foray was “cash for clunkers” which gave a tax deduction for turning in your old car for a new one. Like most one-time incentives, it accelerated purchases into the current period, giving a boost to auto manufacturers and car dealerships (and sticking the tax credit to the deficit). Lately the administration has gotten bolder, offering 100% deduction for capital purchases in the current year for tax purposes (which has the same effect as “cash for clunkers”, except on a wider scale as tax incentives for corporations and private companies), and then giving a 2% “payroll tax cut” which finally eliminates even the concept that social security is anything more than a “pay as you go” system and that there is nothing there waiting for you when you retire.

My view of tax policy is that the goal of a sound policy is to:

1) raise the revenue that you set out to achieve
2) minimize negative effects or dis-incentives of the policy

Examples abound of a failure of #1, including raising marginal taxes on the wealthy (they change their behavior or move to another jurisdiction) and the distortive effects of #2 are legendary, including over-investment in non-productive housing stock (due to the mortgage interest deduction) and the massive numbers of lawyers and accountants that make a living on the entrails of our bewildering and counter-productive tax system.

In recent years the NYT, as the sounding arm for the administration, has started to realize that the haphazard and counter-productive effects of our current tax system are legion, and that better core policies could improve revenues while minimizing negative behavior. This article called “A Better Tax System” (Instructions Included) laid our four principles that seem reasonable overall:

1) Broaden the base and lower rates
2) Tax consumption rather than income
3) Tax “bads” rather than “goods”
4) Keep it simple, stupid

I would say that their item 1 corresponds to my number 1, above, because a wider base with a less sloped marginal top is the core to a sustainable base of revenues that won’t fluctuate as much over time. Items 2-4 are under the negative minimization principle.

Of course part of the reason that this article seems to make sense is that it was written by a non NYT staffer who works for an opposition candidate. But I do think that the NYT and the administration are starting to realize that our current tax system is an unholy mess with huge dis-incentives (the highest corporate taxes in the world drive jobs overseas), that doesn’t raise revenue broadly, and has huge dis-incentives in terms of ability for companies and individuals to plan ahead.

Too bad it is too late in the game for them to do much more than talk about it. Also shame on the prior administration for never spending the political capital to attempt to change the system and reform it. They neglected to wield their power to make America more competitive.

Cross posted at LITGM

When I was in Norway at the tiny (and picturesque) town of Mundal, I noted what appeared to be an abandoned highway toll booth near the edge of town. Since the meticulous Norwegians would never leave behind something like this without good reason, I started looking more closely at this find.

Surely enough, the meticulous Norwegians had a sign on the booth (in English, no less) describing why this toll booth was historic in their eyes.

Per the sign:

This toll station was situated on rv5 (close to Nork Bremuseum) from November 1994 to November 2010. The toll financed the road between Fjaerland and Sogndal. For most of the period, this was the road with the highest toll in Norway. The Norwegian Booktown and Fjaerland’s Historical Society will use the house to document the history of Fjaerland’s struggle for road-connection with the outside world. Until 1986 you could only travel to Fjaerland by boat / ferry.

As they noted on the sign the toll was very expensive. From what I have been able to find the toll cost 180 kroner each way (approximately $20 USD) but cut a substantial amount of time out of the drive to Mundal. However, once the road was paid for, the Norwegians dismantled this toll booth and stopped charging drivers, which is why they now have plans to use it as part of the historical site.

On the other hand, you have the State of Illinois, whose toll authority plans to dramatically increase tolls starting January 1, 2012. Per this article – Illinois toll road increase:

The cost of a trip on the Tollway system for the average I-Pass driver would increase to $1.18, up from today’s average of 63 cents per trip

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James C. Bennett, author of The Anglosphere Challenge (Rowman & Littlefield, 2004), and Michael J. Lotus (who blogs at Chicagoboyz.net as “Lexington Green”), are proud to announce the signing of a contract with Encounter Books of New York to publish their forthcoming book America 3.0.

America 3.0 gives readers the real historical foundations of our liberty, free enterprise, and family life.  Based on a new understanding of our past, and on little known modern scholarship, America 3.0 offers long-term strategies to restore and strengthen American liberty, prosperity and security in the years ahead.

America 3.0 shows that our country was founded as a decentralized federation of communities, dominated by landowner-farmers, and based on a unique type of Anglo-American nuclear family.  This was America 1.0, as the Founders established it.  The Industrial Revolution brought progress, opportunity and undreamed-of mobility.  But, it also pushed the majority of American families into a new, urban, industrial life along with millions of unassimilated immigrants. After the Civil War, new problems of public health, crime, public order, and labor unrest, on top of the issues of Reconstruction, taxed the old Constitution.  Americans looked for new solutions to new problems, giving rise to Progressivism, the ancestor of modern liberalism.

America 3.0 shows that liberal-progressive solutions to the challenges of America 2.0 relieved some problems, and kicked others down the road.  But they also led to an overly powerful state and to an overly intrusive bureaucracy.  This was the beginning of America 2.0, the America we grew up with, which dominated the Twentieth Century.

America 3.0 argues that the liberal-progressive or “Blue State” social model has reached its natural limits.  Even as it continues to try to expand, it is now dying out before our eyes.   We are  now living in the closing years of the 20th Century “legacy state.”  Even so, it has taken the shock of the current Great Recession to make people see the need for change.  As a result, more and more Americans are calling for a return to our founding principles.  Freedom and individualism are on the rise after a century-long detour.

America 3.0 shows that our current problems can be and must be transcended with a transition to a new America 3.0, based on modern technology, decentralized communities, and self-reliant families, and a reassertion of fiscal responsibility, Constitutionally limited government and free market economics.   Ironically the future America 3.0 will in many ways be closer to the original vision of the Founders than the fading America 2.0.

America 3.0 gives readers an accurate, and hopeful, assessment of our current crisis.  It also spotlights the powerful forces arrayed in opposition to the needed reform.  These groups include ideological leftists in media and the academy, politically connected businesses, and the public employees unions.  However, as powerful as these groups are, they have become vulnerable as the external conditions change.  A correct understanding of our history and culture, which America 3.0 provides, shows their opposition will be futile.  The new, pro-freedom, mass political movement, which is aligned with the true needs and desires of Americans, is going to succeed.

America 3.0 provides readers a program of specific “maximalist” proposals to reform our government and liberate our economy.  America 3.0 shows readers that these reforms are consistent with our fundamental culture, and with our Constitution, and will make Americans freer and more prosperous in the years ahead.

America 3.0 provides a “software upgrade” for the Tea Party and for all activists on the Conservative and Libertarian Right.  It provides readers with historical evidence and intellectual coherence, to channel the energy and enthusiasm of the rising mass political movement to renew America.

America 3.0 shows that our capacity for regeneration is greater than most people realize.  Predictions of our doom are deeply mistaken.  We are now living just before the dawn of America’s greatest days.  Within a generation, positive changes beyond what we can currently imagine will have taken place.  That is the America 3.0 we are going to build together.

(Cross-posted from the America 3.0 blog.)

The recent edition of “Parade” magazine when I saw a list of things that you can do to help others in need. I was struck by their plea to “Feed Hungry Children in Oregon” where they said that

Oregon has the nation’s highest rate of “child food insecurity.” About 252,000 kids – or nearly 30% of the state’s youth – aren’t sure where their next meal is coming from.

This surprised me because I never thought of Oregon as a state that had this sort of poverty. The example they gave in the article was as follows:

My husband and I both work full-time, but we make minimum wage, and some months it’s either pay our bills or buy food, says his mom, Nichole (her child is featured in the photo, above).

While this is a sad and heart rending story, there is another connection as to why their parents are having a hard time finding higher wage work. Per the Tax Foundation:

Oregon’s personal income tax system consists of five separate brackets with a top rate of 11% kicking in at an income level of $250,000. That rate ranks the highest among all states levying an individual income tax.

While tax policy may seem arcane to individuals worrying about food security, it is important to realize the CRUCIAL impact that state income tax rates play in state competitiveness. Of all the components of a tax burden, the ONE element that can be most easily modified or avoided is the personal income tax levied by a particular state. For instance, if you earn $1M a year, you’d be paying about $75,000 more in tax in Oregon than you would in Texas, Florida, Nevada, or other states that don’t levy a personal income tax (it isn’t $1M times 11% because of the graduated nature of the tax up to $250,000 and the fact that state taxes are deductible on Federal returns, so the $75,000 is a rough estimate).

A high marginal personal income tax rate falls DIRECTLY on those most likely to invest in a business that would hire someone like the family in this photo. A high marginal tax is analogous to seeking out the very individuals that could bring a state jobs and economic prosperity and telling them to invest elsewhere. You could go door-to-door and punch them in the face, or just set the nation’s highest personal income tax rate, the net effect is exactly the same.

The biggest fallacy the high marginal tax crowd falls into is the “fixed pie” thinking – since businesses and high income earners are unlikely to move, if you tax them more they will just sit like sheep and take it and pay into the state to fund their myriad social programs. That may be true in the short run and for individuals that are tied to their community, but I guarantee that every wealthy person has an accountant who carefully tells them the negative impact of residing in such a high tax state and the benefits of moving elsewhere on their take-home pay. If they have a choice to invest more in Oregon or go elsewhere, other states look much more inviting. Over time, investment slows, and then there are more and more articles with the sad faced children just like this one, and pleas for the rich to pay their “fair share”.

The problem is, the rich aren’t stupid, and a high state income tax is basically pushing them to invest and live elsewhere, particularly somewhere warm with a tax friendly climate like Nevada, Florida or Texas.

Cross posted at LITGM

The linked article is, IMO, an important read for all of us in the think tank/free market movement. I’ve often started feeble attempts to write a nearly exact commentary, and thankfully, some one wrote it for me.

It encompasses many of the things I’ve attempted to communicate in various debates/discussions with colleagues at Heartland and out on the Free Market Rubber Chicken circuit. It applies to libertarians as much as conservatives.

MODERNIZING CONSERVATISM cogently lays out exactly why the conservative movement is heading toward rough waters.

While I don’t agree with every aspect of prescribed remedies, the need for a reformation of the movement is 100% accurate, IMO.

Some titillating excerpts…

“Long-term evidence indicates that the starve-the-beast strategy not only fails, but may make the problem of unrestrained spending growth worse, suggesting that a “serve the check” strategy might be a more effective means of curbing the growth of government spending. The simple explanation for this seeming paradox is that the starve-the-beast strategy currently allows Americans to receive a dollar in government services while only having to pay 60 cents for it.”

Read the rest of this entry »

This article was featured on Drudge today (do you really have to hat tip Drudge anymore?). It is about the library staff all mad at Mayor Rahm for cutting the budget to the libraries.

In the comments, one guy (I think smartly) said the title of this post.

I think he is partially right. The new Kindle Fire (which I have an order in for and will review when it gets to me sometime later this month) is only $199. The cheap Kindles are only $79 now. Kindles come with tens of thousands of free titles of classic books that everyone should be reading anyways. That is the most exciting part of getting a Kindle Fire for me, the ability to have this immense database at my fingertips, for free (after the initial cost).

I imagine if you took the list of “frequent flyers” who actually USE the library (not just hang out there, I mean those who really check out books and return them) and bought them ALL Kindles for $79, or even the nice new version for $199, that you would be WAY ahead of the budget it costs to run all of those brick and mortar relics, the staff, and all the rest.

This way, a library would still be partially subsidized, but part user fee as well (if you don’t like the classic titles, buy your own), so folks like me, who haven’t set foot in a real life library in decades would perhaps feel a bit better about paying for libraries.

I like writing about things I know little about, because typically I learn a lot from the commenters, and get humbled at times. I am sure that the following will be one of those types of posts.

I have had this thought rolling around in my head for quite some time, and wanted to air it out to see what type of play it will get.

Our entitlement programs steam ahead into oblivion here in the US. In particular Social Security, while not exactly a Ponzi Scheme (but close enough), is on the Highway to Hell, if something isn’t done to fix it.

The only time I remember that something was honestly tried to fix SS was when GW Bush attempted to let a tiny portion (was it 4%?) of new inputs be allowed to be managed in a private account. Not many will remember that debate, but it was ridiculous. Literally, I heard over and over that the OLD PEOPLE WERE GOING TO BE THROWN OUT INTO THE STREETS AND FREEZING COLD. The noise was incredible, and very little logical, well thought out debate was presented. I am still disgusted when I think of how that debate was framed.

Every time that I get my pay stub I look at those numbers leaving my net pay and cringe knowing that MY PROMISE will be broken. This is a system that will most likely be insolvent by the time I get to the age of collecting. I have taken it for granted, and so have many of the folks I have talked to that are my age. My age – Generation X.

Loosely, Gen X is described as the post Boomer generation, the 13th to be raised under the flag of the good ‘ol USA. The birth years (again, loosely) are said to vary from definition to definition, but center between 1961 and 1981. I fall almost smack dab in the middle of it. So does my wife. And most of my friends. We talk about things like this.

This time period saw some of the lowest birth rates in the US. We don’t have enough of us to support all of you (I’m talkin’ to you, Boomers!). We are paying into a system (Social Security) that is designed, mathematically, to fail. Of course SS is just one of our many entitlement programs that are going to be under intense pressure in the future – if nothing changes. That is a big if.

The thrust of my thinking here is that it will be up to my g-g-g-Generation to fix this mess. As I look at all the grey hairs in the Senate and House (there are exceptions, of course) my thinking is that these things aren’t about political parties, they are age and culture differences. The folks I hang around with – Democrat, Republican, Tea, whataver, want things fixed, and done right. This isn’t universal, of course, but I hear a lot more common sense out of younger people and younger CongressCritters than the Old Guard.

Paul Ryan is a Gen X’er. I think the guy is fantastic and a breath of fresh air, and I firmly believe that his message and belief system is held in check a LOT by the Old Guard (I am pointing that finger at you again, Boomers). Sarah Palin is also a Gen X’er. Have you heard anyone else in politics say things like this? Again, this isn’t a party thing, it is a generational thing. I sort of feel like in a lot of respects, we have our own old person combine in Washington DC.

If we stay on the current course there will be hell to pay for anyone who hasn’t saved their dough, as far as retirement goes. But most of us (at least the people my age that I talk to) aren’t that stupid. Some of us are.

I guess I am tired of the Old Guard who screwed up the system telling me and others like Ryan how bad it could get screwed up if attempts are made to fix it. To me, it isn’t about parties, it is about generations. Generation X might end up being the folks that have to fix…everything.

I say “I learn something new every day” all the time. Because I do.

With skyrocketing fuel costs, I have begun to do research on more fuel efficient ways to deliver product to my customers. I live in a rural area, so we are forced to reach out and get the business. I work about a sixty mile radius.

I came upon the Ford Transit Connect. This is an interesting vehicle because of the relatively low initial cost and the 27 mpg on the highway. I did a bit of cocktail napkin math and this vehicle would pay for itself in fuel savings alone in about two years when comparing it against some of my gas guzzling diesel trucks.

While doing research on this vehicle, I discovered what the Chicken Tax was. I read about it on wiki.

To circumvent the 25% tariff on imported light trucks, Ford imports all Transit Connects as passenger vehicles with rear windows, rear seats and rear seatbelts.[9] The vehicles are exported from Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics, arrive in Baltimore, and are converted into commercial vehicles at WWL Vehicle Services Americas Inc. facility: rear windows are replaced with metal panels and rear seats removed (except on wagons).[9] The removed parts are then recycled.[9] The process exploits a loophole in the customs definition of a commercial vehicle. As cargo does not need seats with seat belts or rear windows, presence of those items exempts the vehicle from commercial vehicle status. The conversion process costs Ford hundreds of dollars per van, but saves thousands over having to pay the chicken tax.[9] Partly because of this, only the long-wheelbase, high roof configuration is exported to North America. In most places, the high-roof Transit Connect, like most Ford Econoline vans, is unable to access multi-story parking because of its height (6′-6″).

I understand what was written, but was baffled as to why on earth a tariff on light trucks would be called a Chicken Tax.

I got curious, so I ran the wiki on the Chicken Tax.

The Chicken tax was a 25% tariff on potato starch, dextrin, brandy, and light trucks imposed in 1963 by the United States under President Lyndon B. Johnson as a response to tariffs placed by France and West Germany on importation of U.S. chicken.[1] The period from 1961–1964[2] of tensions and negotiations surrounding the issue, which took place at the height of Cold War politics, was known as the “Chicken War”.[3]
 
Eventually, the tariffs on potato starch, dextrin, and brandy were lifted,[4] but over the next 48 years the light truck tax ossified, remaining in place to protect U.S. domestic automakers from foreign light truck production (e.g., from Japan and Thailand).[5] Though concern remains about its repeal,[6][7] a 2003 Cato Institute study called the tariff “a policy in search of a rationale.”[4]
 
As an unintended consequence, several importers of light trucks have circumvented the tariff via loopholes—including Ford (ostensibly a company the tax was designed to protect), which currently imports the Transit Connect light trucks as “passenger vehicles” to the U.S. from Turkey and immediately shreds portions of their interiors in a warehouse outside Baltimore.[1]

I guess there is no real point of this post, other than to point out that yesterday’s thing that I learned was an interesting one. I now know what the Chicken War is, and also know what the Chicken Tax is.

The US Social Security system consists of a tax on employees and on employers. The main components are 1) Social Security 2) Medicare.

How Social Security Taxes are Calculated:

The social security tax rate on individuals is 6.2% up to $106,800 (this amount has been increasing annually, that is the 2011 “cap”) and this rate was reduced to 4.2% in 2011.

The social security tax on employers is also 6.2% up to $106,800. The employer tax percentage was not reduced in the 2011 “payroll tax holiday” that was put in place as part of the grand budget compromise last year.

For medicare – it is 1.45% on employees with no limit, and for employers it is also 1.45% with no limit.

In total – if you are self employed, it is (6.2+6.2 less 2% tax holiday) or 10.4% FICA up to $106,800 and a medicare tax of 2.9% up to your total income.

The Social Security “Trust Fund”

The revenues from social security go into Federal government coffers. Then benefits are paid out of Federal funds. Technically the “surplus” of social security revenues over amounts paid out goes into a trust fund but there is essentially nothing “saved” in a real sense, just an “IOU” from the Federal government promising to use their taxing (and more likely, their borrowing) power in the future to meet this obligation.

While many people have been skeptical about social security’s ability to pay out benefits in the past (including a recent candidate who called it a “Ponzi scheme“), there was at least a logical smidgen of truth to the fact that the US government attempts to tax in a clear fashion from workers that will someday benefit from social security and then pay out benefits in a consistent manner.

Recent Tax Proposals

Recent tax proposals, however, start to remove the last fabric of the lies that allowed social security to be seen as anything other than another government entitlement program, funded by a mix of taxes with a lot of borrowing thrown in (at an unsustainable rate). The new proposals cut the individual rate to 3.1% (and the employer percentage down to 3.1% for smaller payrolls), a reduction from the pre-holiday combined rate of 12.4% down to 6.2% (for smaller companies). There is a separate $50M holiday for companies increasing payroll that makes this calculation more complex, and the medicare portion stays the same at 1.45% for employer and employee to total 2.9%.

Since social security can barely cover its current obligations now out of tax revenues, likely these changes will move it into the red immediately, and eliminate the fiction that the surplus is “saved” in a trust fund anywhere at all. Now social security looks like any other tax program, subject to the whims of the government and changing policy preferences, rather than a pension plan which it is made out to be.

Taxes and Behavior

The current administration is curious. On the topic of raising rates, they don’t think that it changes behavior. Specifically, they fought the prior administration’s tax reduction as “giveaways” to the rich who could afford to pay taxes, as if the rich would work just as hard in order to provide an ever increasing percentage of their income to the government.

But they DO believe that reducing rates can incent behavior other times, such as in “cash for clunkers” or the previous tax reduction holiday. More specifically, they take a myopic short-term view that putting a bit of extra cash into workers’ pockets will help their constituents, but making a more competitive tax policy overall (that will spur investment and growth) isn’t anything that is worth investing in or considering. I am frankly kind of surprised that it took the administration this long to consider a payroll tax holiday, since all they care about is the short term impact on their logical supporters, and this is the quickest way to reach them. I wouldn’t be surprised if the government tried to turn hiring into a tax INCENTIVE, and then just raised taxes everywhere else, or just borrowed more money. If your only goal is to put money in your supporters’ pockets in the short term, this is a (sad) way to do it.

At least these policy proposals put a lie to the myth that social security is anything other than an entitlement program supported by government tax revenues. If nothing else positive comes out of the debate, a little bit of more obvious truth is a small benefit.

Cross posted at LITGM

Warren Buffett has been talking virtually nonstop about how tax rates on “the wealthy” need to be increased, and of course the dinosaur media has been praising and amplifying this viewpoint. People who think this way are especially fond of citing the 15% capital tax gains rate and contrasting it with the considerably higher rates on ordinary income.

This simplistic comparison, though, ignores the effect of inflation, which acts to increase the effective tax rate–especially on assets which are held for a long period of time. Consider a simple example: let’s say you bought a stock in 2003 and sold it in 2011, with a 30% price increase. To make the numbers easy, you bought $10000 worth and sold it for $13000. But according to BLS data, the consumer price index has risen by 22% over the years 2003-2011. Thus, your $13000 is really only worth $10655 in 2003 dollars.

It gets worse. The IRS is going to tax you on the full $3000 of “gain,” even though it is largely illusory. At 15%, you will pay $450, which is a very big chunk of your true, inflation-adjusted gains. If you work through the calculations, you’ll find that your real capital gains tax rate for this example is not 15%, but more than 50%. (I’ll post the calculations if anyone wants to see them.) Indeed, if you buy and sell an asset whose value just keeps pace with inflation–ie, if you don’t make any money at all in real terms–you will still be paying capital gains taxes on wholly imaginary profits. If we get Jimmy-Carter-style inflation…say, 40% over the next decade…and you have an investment which just keeps pace with inflation, then federal taxes will take 6% of the value of your investment (15% times 40%) when you sell it. And that’s assuming that the current capital gains rate does not increase, and ignoring any state-level taxes on capital gains.

Warren Buffett is surely aware of the preceding considerations, and anyone who writes about finance and economic policy should be aware of them.

A good video by Christina Sochacki, for the Center for Freedom and Prosperity, about the problems with the capital gains tax, here.

Global transition points like this are so rare, it’s a great time to be alive.

John Robb

Right on. Yes. Yes.

More of this type of thinking, please.

If I could live at any time in history it would be now.

(If you are not a regular reader of Mr. Robb’s Global Guerrillas, get that way.)

(Also check out Mr. Robb’s way cool new Wiki MiiU, which is all about resilience. I eagerly await his book on resilient communities.)

(Here is an xcellent John Robb talk about open source ventures, but full disclosure, a lot of it sailed over my head.)

(And if you have not read his book, Brave New War: The Next Stage of Terrorism and the End of Globalization, go get it.)

Friends, please let me know in the comments, on a scale of 1 to 5, strongly disagree to strongly agree, how you respond to this quote. Put me down as a 5, obviously enough.

I watch the Sunday talk shows, usually flipping back and forth between them. I was struck today by a comment made by Cokie Roberts on ABC’s This Week. In the discussion of the downgrade of US Treasury bonds, she was arguing with a tea party affiliated Congressman from Utah named Chaffetz and she made the following statement: (The comment begins at 8:55)

The reason why they (S&P) like France and England is because they have parliamentary government,  because the majority gets what it wants. There is no divided government where both parties have to agree.

I thought that an astonishing but revealing statement. First, Britain and France have not been exemplars of fiscal probity the past 50 years, with the exception of Margaret Thatcher’s era. She even mentioned that England now has an austerity program. Also, she didn’t mention that Obama had undivided government for two years and spending increased 24%. In fact, there has been no national budget for two years, probably because the Democrats did not want to expose their plans prior to the 2010 election.

Her second comment was also revealing:

The problem is with the US Constitution.

There, in a nutshell, is the Democrats’ complaint. The Constitution restricts the ability of one political party to spend at will without regard of the consequences. God knows we have had excessive spending since 1965 in this country under both parties and with the Constitution intact. But, for Democrats, that has not been enough. I don’t think I have seen a more revealing comment.

The debt ceiling debate has dragged on creating frustration and some anxiety about the economic consequences of default. President Obama has even threatened to withhold Social Security checks, claiming there would be no money for payment. Through most of this he has seemed to me to be unserious about the matter and using it chiefly to try to improve his chances for re-election. Fred Barnes has now come up with what I consider a good explanation for his behavior, including the last moment maneuvers yesterday.

First, the trade treaties:

The path to ratification by Congress was greased after President Obama renegotiated trade treaties with South Korea, Colombia, and Panama. Obama would supply Democratic votes. Republicans were already on board, President Bush having put together the treaties in the first place. It had the look of a done deal.

It wasn’t. In May, the White House suddenly insisted the treaties be accompanied by roughly $1 billion in Trade Adjustment Assistance, or TAA as it’s known in Washington. Organized labor was demanding TAA funds be set aside for workers whose jobs might be lost as a result of the treaties. Obama took up the cause.

Then there was the oil pipeline from Canada:

The Keystone XL pipeline from the oil sands in Canada to refineries on the Gulf Coast is another win-win issue for Obama, if only he’d embrace it. Canada is America’s leading foreign supplier of oil. The more Canada exports to the United States, the less we’re forced to rely on unfriendly folks in the Middle East and on Latin American countries (Mexico, Venezuela) whose oil production is declining. With the new pipeline, Canada would increase its exports by as much as 700,000 barrels a day. (The United States consumes 10-11 million barrels daily.)

A permit to build the pipeline was requested nearly three years ago by TransCanada. Because it would cross an international border, approval must be granted by the State Department. This was expected to be a snap, particularly after gasoline prices reached $4 a gallon. White House aides thought so, and Secretary of State Hillary Clinton indicated she was ready to approve it.

Then the environmental lobby, led by the Natural Resources Defense Council, began a campaign against approval, and the Environmental Protection Agency joined in. It criticized the State Department’s first environmental impact statement, which found the pipeline would have little effect on the environment. Clinton buckled, and a second impact statement was ordered. Last month, EPA said the new study was “inadequate.”

Both of these initiatives promised thousands of new jobs and would seem to be helpful to Obama in his quest for a second term. In both cases, a left wing member of his base intervened and his support collapsed.

Now, the debt ceiling:

The Speaker and the President had nearly agreed on a plan that included $800 billion in “revenue enhancements” but did not raise rates. What happened ?

House Speaker John Boehner’s (R., Ohio) office is pushing back against White House claims that the new revenue in the “framework” being discussed in the now defunct negotiations would have been generated by letting current tax rates expire. “That is simply false,” writes Boehner spokesman Michael Steel.

In reality, Steel writes, the White House offered a “ceiling” of $800 billion in new revenue over 10 years that would be achieved through comprehensive tax reform (e.g., eliminating loopholes, credits and deductions) in a way that would stimulate economic growth. This would not constitute a tax increase.

Following the release of the Gang of Six proposal, however, the White House then insisted on an additional $400 billion in actual tax increases, for a total of $1.2 trillion in revenue that would become the new “floor” for revenues. Additionally, the administration backed away from several aspects of the tax reform package they had already agreed to, including a protection against tax hikes on small businesses and a guarantee that they would only be three tiers of tax rates, the highest of which would be below 35 percent.

In regard to Social Security, the two sides had agreed on a change in the way the government calculates inflation (the so-called “chain CPI”) that would extend the program’s solvency. However, the White House reneged on a previously agreed-upon solvency target and offered a weaker target that would yield 25 percent less in savings.

What had happened was that the “Gang of Six” report was released and the revenue (tax) increases there looked better to Obama so he reneged on the pending deal with Boehner. There was also considerable discussion that Democrats were furious with him because he had not insisted on tax increases. Revenue from loophole closing was not enough.

No. I think what happened is Congressional Democrats got a whiff of a possible deal where you get entitlement cuts and tax reform, say, next year — which might increase revenue or might not — and they panicked because a) they have a religious belief in raising the taxes. If you don’t have that, you can’t have a deal, so it created a kind of a theological panic.

Obama, it seems, cannot stand up to the rest of his party. He will negotiate but once some interest group objects, he is gone. No deal.

It’s a good thing the Soviet Union is gone.

A few times Dan and I have joked that Wisconsin has the highest per-capita drinking in the USA. I’m sure that Minnesota isn’t far behind, with winters just as brutal as those in Wisconsin and not too much sunlight during those dark days and nights.

It is summer now in Minnesota and the state is shut down. As it turns out, apparently that isn’t a big deal. They don’t let all the prisoners out of jail, they just shut down the inessential services such as the annoying bureaucracy that requires you to get innumerable permits and papers to conduct your daily business. These not-so-essential state workers total 22,000 in Minnesota; probably a great batch of employees to cut next.

The new Democratic governor in Minnesota, Mark Dayton (wealthy heir who turned into a stone-redistributionist Dem) actually ran on a platform of taxing the top 1%, which is literally the stupidest thing in the world from a state tax perspective, since THOSE ARE THE PEOPLE THAT CREATE ALL THE JOBS IN MINNESOTA. As it is, you’d have to be nearly out of your mind to live in the darkness, snow and miserable mosquitoes (in summer) of Minnesota in the first place; but to put dis-incentives for the rich to live there is even more insane (note – I worked in Minnesota for many years and long winters and met some of the nicest, smartest people in that hard working state. But they are still insane for living in that weather).

As in Illinois, with our governor Quinn, the Democrat eked out a win (with 43% of the vote in the case of Minnesota) and then took this as a “mandate” to implement all of their programs as if they were Roosevelt trying to get the country out of the great depression (although that didn’t work so well, either). In the case of Quinn he raised Illinois taxes 67%, abolished the death penalty, appointed his cronies to state positions, and didn’t cut any spending. Awesome. In the case of Dayton, his plan was to raise taxes on the richest to 13.95%, on top of the Federal rates. Unclear in his plan is WHY anyone wealthy would intentionally stay in Minnesota to have all of their income taxed away while many other states with better climates (Florida, Texas) don’t have any state income tax AT ALL.

I think Dayton was crazy enough to hold out forever, as a populist. Unfortunately for him, the state was running out of booze. Apparently bars need to fill out a permit for $20 or so in order to buy booze and as they expired the bars would have to shut. Miller was going to have to shut down their operations for a clerical snafu (they overpaid so the state sent their permit back) and not distribute booze at all.

I really do think that the impending stopping of alcohol in the state of Minnesota helped precipitate a resolution to this budget standoff, where the governor gave in on his plan to drive all job-creators from the state.

Hats off to the Minnesota legislature for standing firm. Unlike Illinois, where not only do the dems run our legislature but our red representatives aren’t creative enough to flee the state at the prospect of a giant tax increase, like they did in Wisconsin to attempt to block Walker’s reforms.

Cross posted at LITGM

Fact #1: Obama has been giving many speeches about how much he values American manufacturing and also introducing various initiatives which he claims will be help manufacturing businesses

Face #2: In his recent budget proposal, Obama proposed the elimination of LIFO inventory accounting for tax purposes. This would generate additional business income tax revenues for the government of an estimated $72B by 2016.

In what universe do the above two things go together?

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The current administration has continually protested the lower rates signed into law by the previous administration and initially acted as if there was no impact on behavior based on the act of raising tax rates.

However, the administration IS interested in getting re-elected. Thus some new “incentives” have been put into place to incent economic activity, such as a tax credit for capital expenditures that makes them completely deductible in the current year. Since large capital expenditures are usually deducted over many years, this is a significant one-time tax holiday that major companies will consider seriously while planning for uses of their free cash flows (or available financing).

This tax credit, however, is diametrically at odds with the administration getting re-elected, because it provides FURTHER encouragement for companies to replace people with automation. And as the jobless rate remains high, the government starts casting about for more solutions to a problem that they really care about, which is getting people back to work so they aren’t disaffected voters (never mind the deficit, the total economy, or other factors).

While the government tried to make labor a bit less un-favorable with a social security tax holiday, the 2% is on the employee side (yes, yes, I know that this factors into wages in the long run, but not in the short or medium term), this type of change isn’t going to make businesses hire more in the short term.

Thus now the government has decided to look at other incentives to try to get companies to hire people, such as a more extensive payroll tax holiday, as they discuss in this NY Times op ed piece.

The administration apparently doesn’t feel any uneasiness with the blatant contradictions in their policies; officially they say that raising taxes “on the rich” doesn’t incent behavior, but here they are starting to see that businesses DO respond to incentives, and that in order to try to get businesses to hire they might want to use tax policies to further this end.

In fact, our tax policies are a complete mess. Not only do businesses want a fair tax climate, they want a PREDICTABLE tax climate. Since businesses are (all) run by high net worth individuals, it also makes sense to have a predictable tax climate for businesses as well as individuals. No one would have foreseen that we would go an entire year without an estate policy; think of all the years of lawyers and various “shifting” transactions that could have been avoided. Likewise, this one time tax break for capital is something that businesses will have to consider for years to come; perhaps the best bet is just to wait to invest until a better tax deal comes along.

I would love to hear the administration explain why taxes DO incent behavior sometimes (like when the administration wants you to hire people) but DON’T incent behaviors at other times (like when they raise rates and expect you to work just as hard as you did before and keep investing and hustling for years to come, knowing that a large chunk of it is going to go to the government in taxes). That would be a good you tube for Goolsbee. (also hilarious that when you put in his name the auto-correct in my computer comes up Goebbels).

Cross posted at LITGM