Dispatches from District 48
Archive for the ‘Taxes’ Category.
Forcing people to pay money or pay a fine on their tax return to buy a product they currently don't buy is a tax. Particularly when that product will likely be over-priced to the young and healthy not buying it today to subsidize the older folks.
I have been trying to find a word to describe the legislative style we have seen prominently over the last 9 months (though it was used long before this administration -- the Patriot Act comes to mind). Unable to think of any other name, an in homage to "murder-death-kill" in "Demolition Man," I am going to call it Crisis-Emergency-Rush.
TARP was a Crisis-Emergency-Rush. As was the Stimulus bill, Waxman-Markey, and now Health Care. (The last two are particularly hilarious when one needs to evaluate the need to rush. Waxman-Markey is implemented over decades, and the health care bills as currently written don't really begin to take effect until 2013).
So here is my prediction for the next Crisis-Emergency-Rush: Raising taxes. Obama already has his boys out sending trial balloons about new taxes, even beyond those required in Waxman-Markey and to fund the health care bill. Having spent over a trillion dollars on useless spending to support favored political constituencies, Obama will now declare a fiscal crisis that can only be solved by increased taxes on his non-favored constituencies.
Let's put another tax on employment, making it more costly for companies to hire people. That's the ticket out of the recession!
Employers who do not provide health insurance to workers would generally have to pay a fee or penalty to the government. The fee would be equal to 8 percent of wages for an employer with an annual payroll of more than $400,000.
Disclosure: This has a personal impact on me and my business. Wages in our company are 50% of revenues, we earn a 6-8% profit as a percentage of sales, and this will increase our wages by 8%. You do the math. The good news, I guess, is that this will gaurantee that I will not be subject to the new surcharge on high incomes.
The entire Pacific coast is vying to become the next rust belt. Only the nice climate and beautiful scenery will keep anyone there.
The Labor Department reported yesterday that Oregon's unemployment rate soared to 12.4% in May, the nation's second highest after Michigan's 14.1%. What to do? If you're the geniuses in the state legislature in Salem, you naturally raise taxes.
Last week the legislature approved a $2 billion tax hike on personal income and small businesses that haven't already left the state. The highest tax rate on income above $500,000 would climb to 11% -- up from an already high 9%. Oregon will soon boast the second highest income tax rate in the nation, moving ahead of California (10.55%), and only slightly behind New York City (12.6%). Corporations will pay a 7.9% tax on gross receipts, up from 6.6%.
To be fair, Oregon does not really have a sales tax, so it is hard to compare apples and oranges on taxes. But missing from the article is another factor in their unemployment, and the reason our company ultimately had to leave the state: Oregon has the second highest minimum wage in the country (just behind Washington State and just ahead of California), and it is getting higher every year as it is automatically indexed to something or other that seems to be rising faster than inflation.
From the CBO via the Washington Post:
Now comes the CBO with yet more news of the sort that neither Capitol Hill nor the White House is likely to welcome: its freshly released report on the federal government's long-term financial situation. To put it bluntly, the fiscal policy of the United States is unsustainable. Debt is growing faster than gross domestic product. Under the CBO's most realistic scenario, the publicly held debt of the U.S. government will reach 82 percent of GDP by 2019 -- roughly double what it was in 2008. By 2026, spiraling interest payments would push the debt above its all-time peak (set just after World War II) of 113 percent of GDP. It would reach 200 percent of GDP in 2038.
This huge mass of debt, which would stifle economic growth and reduce the American standard of living, can be avoided only through spending cuts, tax increases or some combination of the two. And the longer government waits to get its financial house in order, the more it will cost to do so, the CBO says.
Unfortunately, the answer to the question of when Obama will take ownership of the debt crisis he is causing is likely "never." The most likely scenario is that Obama demands that we taxpayers, many of us who opposed his actions that led to this run-up of debt, take ownership for this debt via substantially higher taxes.
Having lobbied hard for the stimulus bill with the expectation they could get some extra local spending without the political cost of having to tax the locals more to pay for it, Americas mayors find they in turn got played:
President Barack Obama is facing complaints from big-city mayors and county politicians that parts of the economic stimulus package are shortchanging their constituents.
Vice President Joe Biden has been holding private conference calls on the stimulus with elected officials from around the country, some of whom have been telling him that metropolitan regions are losing out to rural areas in the competition for stimulus money.
That argument tracks a report released by the U.S. Conference of Mayors that concluded that cities have gotten a disproportionately small share of stimulus money set aside for road and other transportation improvements.
I thought the following was particularly hilarious. It appears that the mayors have abandoned progressive tax policy in favor of a more classical notion of fairness:
The mayors commissioned a report looking at a pot of $18 billion set aside for transportation. When the report was released this month, the 85 most populous metropolitan areas had received $8.8 billion - or 48 percent of the total. Yet those same areas account for 63 percent of the U.S. population and 73 percent of the gross domestic product, the report said.
Chicago would need to get another $250 million in stimulus transportation funds to reach a level that reflects its contribution to the Illinois economy, the report calculated. In Ohio, Cleveland and Cincinnati account for 40 percent of the total economy yet received less than 5 percent of the transportation stimulus funds earmarked for the state.
I am sure the richest 10% who pay the vast majority of the taxes will be happy to know that the mayors are now advocating that stimulus money be spent in proportion to how people contribute to the economy. Yeah, you can hold your breath for that. It turns out that progressive redistribution is only a good thing if you are on the recieving end.
Via Matt Welch, in response to a Paul Krugman editorial lamenting that California's fiscal problems are all due to prop 13.
Here is where the traditional liberal argument loses me. The California budget "emergency" isn't a tax problem, it's a spending problem. State spending in the past two decades, as this Reason Foundation report [PDF] spells out, has increased 5.37 percent a year (and nearly 7 percent for the past decade), compared to a population-plus-inflation growth rate of 4.38 percent. If the budget growth rate had been limited to the population-inflation growth rate, the state would be sitting on a $15 billion surplus right now. Surely enough to dip into during a real emergency. What's more, despite this alleged tax straightjacket, Californians manage to still pay 21.9 percent in state and local taxes, compared to 14.5 percent for Texas.
One of the seldom discussed problems with government regulation is that typical regulation is aimed at the "mean" -- the mean worker, the mean industry participant, the mean driver, whatever. The problem is that there are 300 million of us with vastly different lives and different preferences. One-size-fits-all regulations are often a poor fit for many of those regulated.
Take the Fair Labor Standards Act (which includes minimum wages, maximum work weeks, record-keeping requirements, etc). The Fair Labor Standards Act is written for factory workers who come in the door at 9AM, punch a time clock, work under the direct supervision of management, and punch out at 5PM.
Many of my workers are running isolated campgrounds. They work out of their home (their RV). While they have scheduled tasks, like cleaning the bathrooms, many of their hours come in spurts (e.g. someone comes to their RV and asks them a question). The nearest manager from the company might be hundreds of miles away, and there may not even be electricity to power a timeclock. All of this adds up to a hugely awkward compliance problem for many of the details of the FLSA. But comply we must.
Yesterday's new proposed CAFE regulations on car fuel economy is another example. It appears that the average MPG requirement for new cars will increase from 27.5 today to 42MPG in 2016. The obvious question is -- of all the actions we could take to reduce CO2 emissions, is this the least costly and/or most efficient?
Well, nobody knows, and I don't think that anyone in the "science-based" Obama administration has even tried to put pen to paper on this question. And, even if they did, their answer would be largely irrelevant because they would likely, again, be regulating to the mean.
I am sure the folks passing this kind of stuff picture a mean commuter driving 25-30 miles each day each way to work. But what about me? I drive 2 (actually 1.9, but we will round up). That makes a 4 mile daily roundtrip commute. Assuming I drive a car at the CAFE standard, this new regulation will save me 0.05 gallons of gas per day, or ten cents per day at $2.00 gas prices.
Obviously, it makes zero economic sense for me to be regulated in this way. The fuel economy of my car for my daily commute is virtually irrelevant, because I chose to locate my house and my business within a few miles of each other. It is a terrible investment for me to pay, both in higher costs and lost features, for a car with higher MPG. Though my decision-making was not driven by gas consumption (it was driven by my time, which is way more valuable to me than a gallon of gas**) one could argue that I have already made a huge gas-use-reduction investment in terms of the location of my home, and thus a further investment in gas-use-reduction via my car is not necessary.
On Hidden Taxes
We can tease one other lesson from this regulation. In regulating CO2 in transportation, the Obama administration had another choice -- a carbon tax. A carbon tax on fuel would easily cause CO2 emissions to be reduced over time from cars (in fact, it probably would do a better job, as history has shown that higher MPG standards actually lead to increased driving and thus have equivocal impacts on CO2 emissions).
Further, a carbon tax would have the advantage of putting 300 million people to work figuring out the most productive ways to reduce emissions. Those who drive most, or have the greatest ability to cut back on driving and shift transportation modes, are going to be the ones to preferentially reduce emissions.
So why not a carbon tax? Well, the politicians have all explained this pretty directly -- because they do not want to pay the political cost of raising taxes, particularly on something like gas whose price gets so much media attention. Having demagogued oil companies as evil for so many years for raising gas prices, politicians were not able to bear the irony of themselves being responsible for higher gas prices.
So instead, they will force cars to be built more fuel efficiently, which will almost certainly raise the price of cars (as well as reduce choice and certain features). These higher costs and reductions in choice are most certainly a tax on consumers, but they are an indirect tax. They show up as rising prices and perhaps falling attractiveness of auto makers' product lines, which consumers will blame on auto makers, not the Congress or Obama.
So Obama will continue to say he has never raised taxes on the middle class, when in fact he has just made their cars $1500 more expensive. Some day, we may live in a world where politicians are called to task for this kind of bait and switch, but my guess is that Obama gets away with it.
** Postscript: The one constant of all leftish regulation is that it puts about zero value on my personal time. Every regulation seems to be about my spending more of my time in exchange for conserving some other supposedly scarce resource. But I have never panicked that we are going to run out of oil or tungsten or iridium or whatever. But I do know that I am going to run out of time, just like everyone else. It is the only commodity I am positive is zero sum.
The Republicans have lost the knack for being a minority party in opposition. Nowadays, they waste tremendous time and effort playing he-said-she-said with Nancy Pelosi or Jon Edwards, while blithely voting for more pork and trillions in new spending. Obama, after all, wouldn't have his favorite and best tool (TARP) for building a Mussolini-style corporate state without Republican votes.
While it strikes me that a capable opposition would certainly know how to turn a knife in a political scandal, it also should be ready to introduce principled alternatives to key legislation. The best such proposals are ones that attempt to achieve the stated goals of the majority party better and faster than the majority's own legislative efforts.
Which brings us to Jeff Flake, who is becoming a master of this. When Nancy Pelosi and Barack Obama spouted platitudes about openness in government (without really taking any steps to achieve it) Flake came along and introduced bill after bill challenging the Democrats put their money where their mouth is on earmarks and transparency. I have always been a big fan of Congressman Jeff Flake, who represents a district not far away from my home. Though we don't agree on every issue, there are few, if any, politicians whose judgment I trust more.
Flake's most recent initiative is one close to my heart. As readers know, I have good scientific reasons for believing the threat of CO2 emissions has been grossly overstated. However, if we are going to commit to reducing CO2, we might as well do it intelligently, and Flake's proposal is very close to one I have been pushing for some time:
Conservative House members Jeff Flake (R-AZ) and Bob Inglis (R-SC), along with Rep. Dan Lipinski (D-IL), have introduced an alternative to the cap-and-trade proposal developed by House Democrats: HR 2380, the "Raise Wages, Cut Carbon" Act of 2009. Their proposal is for a carbon tax that will gradually increase over time, offset by a reduction in payroll taxes.
Of course I think this is brilliant, because it is my idea as well. But it is also a brilliant opposition strategy. Flake's approach is far better than the cap-and-trade mess the Democrats have gotten themselves in -- not just because it would work better, but because it actually hits key supposedly liberal objectives better than does the Democrat's bill. Specifically:
- Fairness. Sure, everyone is correct that a carbon tax can be politicized, but I do not think it can be gamed nearly as much as cap-and-trade. For evidence, I turn to California. California has both a cap-and-trade legislation, rule-making for which has been thrown to the California Air Resources Board (CARB); and it has carbon-tax-like excise taxes, which we generally call sales taxes. Sure, there are some special case sales tax categories aimed a politically connected groups, but in general the sales tax system in California is simple and mostly fair. More importantly, it is a layup to administer. Contrast that to CARB, which has been slogging away in cap-and-trade related rule-making for years, and has everybody both pissed off and panicked. Should cow flatulence be counted? Should National Forests be able to sell offsets? How do you create any kind of fair offset accounting given the shenanigans in Europe? Should we allow Californians to have black cars? (seriously) This is a perfect A-B test, as the legislators are the same in both cases -- sales taxes are simple and fair, cap-and-trade is a mess.
- Openness and transparency. It is clear that Obama's stated commitment to openness and transparency was all so much BS. But why not nail him to that cross anyway? Few if any of the general public understand cap-and-trade. It is a tax, but it is inherently hidden from view, and passed through to consumers buried in rates in a way that offers politicians maximum deniability. Everyone understands a sales tax, or the gas tax. The system and its costs will be right out front (which is exactly what Democrats secretly DON'T want, which is what makes this a clever opposition tactic).
- Progressiveness. For all their talks about the common man and being progressives, the advocates of cap-and-trade are pushing what is possibly the most regressive tax increase of all time. Again, there is a kind of political money laundering that hides the tax, but it is a tax none-the-less, and will hit the poor the hardest when electricity and fuel prices inevitably increase. Flake's proposal to take the proceeds of the tax and use them to reduce the payroll tax is a great one -- offset one regressive tax with another, while at the same time putting in place incentives for job creation.
Postscript: My 2007 energy plan was as follows (assuming the need to do something about CO2)
- large federal carbon tax, offset by reduction in income and/or payroll taxes
- streamlined program for licensing new nuclear reactors
- get out of the way
I like TJIC's analogy for explaining the staggering depths to which the Obama administration is going to look for budget cuts:
Lots of folks are having fun pointing out that Obama's "$100 million budget cut" on a $3.69 trillion budget is pretty small potatoes.
Speaking of small potatoes, here's my analogy:
A Big Mac has 540 calories.
A small McDonalds French Fries has 230. Looking at the picture at the McDonalds website, I could believe that there are maybe 42 fries in there, so call it perhaps 5.4 calories per individual fry.
So, Obama's budget is like saying
"Please give me 370 Big Macs "¦ and one french fry. No, not "a small order of fries." Just a single, lone french fry.
Wait.
Actually, I'm trying to lose weight.Cancel that french fry - I'll just have the 370 Big Macs.
I am just flabbergasted that so many commentators have so much trouble understanding this.
I would have liked to have checked out our Phoenix Tea Party the other day, but I had another event at the same time I could not miss. I find the reaction to these protests kind of funny, especially from the left. I get a sense that they feel like large protest rally's are their particular mileau, and are reacting as if someone has violated their copyright.
But I thought this type of reaction was especially telling:
Rep. Jan Schakowsky (D-Ill.) blasted "tea party" protests yesterday, labeling the activities "despicable" and shameful."
"The "˜tea parties' being held today by groups of right-wing activists, and fueled by FOX News Channel, are an effort to mislead the public about the Obama economic plan that cuts taxes for 95 percent of Americans and creates 3.5 million jobs," Schakowsky said in a statement.
"It's despicable that right-wing Republicans would attempt to cheapen a significant, honorable moment of American history with a shameful political stunt," she added. "Not a single American household or business will be taxed at a higher rate this year. Made to look like a grassroots uprising, this is an Obama bashing party promoted by corporate interests, as well as Republican lobbyists and politicians."
I am not particularly surprised that an elected official would be upset at a populist movement to limit the power and scope of government. In a real sense, these rallies are about limiting Schakowsky's power, so her opposition is to be expected.
HOWEVER, typically in the past American politicians of both parties would at least pay lip service to low taxes and individual freedom. But apparently no longer. What is scary to me is that politicians no longer seem to feel the need even to put lipstick on the pig.
On tax day today, we should remember a key reason why taxes keep going up: Taxes equate to power for elected officials. The more money they have to spend, the more power they have. The more money they have to spend, the more people have to kowtow to them and send campaign contributions either to 1) score a share of the loot or 2) get a special deal or treatment on their own taxes.
We have a sense that there is more corruption than ever in politics, but I think its demonstrably true that people and politicians are not any more or less evil than they were 100 years ago. The only difference is that the sums in play from political influence are so much larger. Its a concept I try to explain to people all the time. The way to fix corruption in politics is not through campaign finance reform, it is through reducing the size of government. Because no matter what restrictions one puts in place, if we set up a system where it pays to invest in politicians, then people will find a way to do so:
In a remarkable illustration of the power of lobbying in Washington, a study released last week found that a single tax break in 2004 earned companies $220 for every dollar they spent on the issue "” a 22,000 percent rate of return on their investment.
The study by researchers at the University of Kansas underscores the central reason that lobbying has become a $3 billion-a-year industry in Washington: It pays. The $787 billion stimulus act and major spending proposals have ratcheted up the lobbying frenzy further this year, even as President Obama and public-interest groups press for sharper restrictions on the practice.
The paper by three Kansas professors examined the impact of a one-time tax break approved by Congress in 2004 that allowed multinational corporations to "repatriate" profits earned overseas....The researchers calculated an average rate of return of 22,000 percent for those companies that helped lobby for the tax break. Eli Lilly, for example, reported in disclosure documents that it spent $8.5 million in 2003 and 2004 to lobby for the provision "” and eventually gained tax savings of more than $2 billion.
These returns rival those in the narcotics trade, and you know how well we have performed in stopping that. We are seeing this effect right now in Arizona, where the County Commissioners of Pima County (centered on Tucson) are under investigation for rigging electronic voting machines to pass a recent tax increase.
Under the scrutiny of criminal investigators, election workers in Phoenix have spent the past week in a painstaking recount of 120,821 ballots that were cast three years ago for a Pima County transit tax.
The primary objective is to determine whether someone rigged the election by tampering with the optical-scan polling machines in Pima County, transforming "no" votes into "yes" votes.
The ballot measures wound up securing a half-cent increase in sales tax to provide cash for roads, buses and other transportation projects.
The reason -- taxes are power, and more taxes are more power.
This post from Kevin Drum didn't start auspiciously, repeating the leftish meme that the tax day protests were all Astroturf events. But I must admit I had a real double-take on his last paragraph, wherein he points out something about tax polls that most people seem to be missing:
With Tax Day coming up, and astroturf tea parties being organized around the country, a lot of people have been linking to polls showing that most Americans aren't, in fact, actually unhappy with the amount of income tax they have to pay. Gallup, for example, reports that 61% of Americans think the amount they're paying this year is fair. Or there's this one, also from Gallup, that asks directly whether the amount you're paying is too high or not:
Not bad! 49% think their income taxes are just fine or even a bit low. Except for one thing: this chart shows exactly the opposite of what it seems. Consider this: about 40-50% of Americans pay no federal income tax at all1. That's zero dollars. I think we can safely assume that these are the people who think that their taxes are about right. What this means, then, is that virtually every American who pays any income tax at all thinks they're paying too much. There are various reasons why this might be so (a sense of unfairness regardless of amount paid, a fuzzy sense of how much they're paying in the first place, simple bloody-mindedness, etc.) but overall it's not exactly a testament to our collective willingness to fund the machinery of state.
Outstanding. Which only leads me to wonder why, if he realizes this, does he believe that people might not spontaneously organize protests, rather than it having to be a Rove-Fox News plot. I think the answer to that is the Left just can't shake their own perception that protest marches belong to them in the same way the Right feels that AM Radio is their media to rule. (What, by the way, does that leave for libertarians, other than Rush, Ayn Rand, and Firefly reruns?)
Almost three-quarters of Americans think it is a good idea to raise taxes on people making more than $250,000 per year, according to the latest CBS News/New York Times poll.
In fact, two-thirds of Americans think the tax code should be changed so that middle-class Americans pay less than they do now, while "upper income" people pay more.
Imagine three quarters of the diners in a restaurant suddenly standing up and walking out the door. As they leave, they announce that the remaining patrons should pay their tabs for them. Fair?
The Liberty Papers thinks we have become a lawless Banana Republic. George Will is thinking along the same lines, snarkily observing that Sweden, China, and Mexico have all observed in one way or another that the Feds seem to be acting outside the rule of law.
I have opined in the past that what really extended the Great Depression was not any real underlying economic issue, or even vast increases in government spending per se. It was that arbitrariness with which the Roosevelt administration dealt with economic matters. With nutty programs like the Mussolini-inspired National Industrial Recovery Act coming and going, investors and businesses never knew from day to day what the rules of the game would be next year, or even next week.
I fear that this is exactly the climate Obama and Congress are creating today.
As of two months ago, my company was still investing. We were still getting bank credit, particularly for equipment financing, though it took more work than in the past to secure it. We still saw opportunity in our business, and in fact saw increased opportunity in the recession for low-cost recreation options and outsourcing of public recreation facilities.
But today, I am reluctant to make any new investments. Investing $5000 now for $8,000 a year from now normally sounds good, but what happens now that the Feds have more than doubled the money supply? How much will $8,000 really be worth a year from now? What will my taxes be on the increase?** What new costs or liabilities might be retroactively placed on me for making the investment? What happens if beltway pundits start thinking I am making too much money?
All this commotion of government intervention started when Paulson and other Bush appointees started screaming that the banking system was going to shut down and therefore crash the whole economy. As my readers know, I believe to this day that this was all sky-is-falling over-reaction and panic-mongering, and most of the credit crunch resulted from uncertainty about the Treasury and its statements, not due to realities on the ground. However, whatever tightening of credit we might or might not have avoided by government action, it pales in its effect on investment in comparison to the arbitrariness and trillion-dollar-plan-of-the-day that has been the first 60 days of the Obama administration.
** footnote: For those of you who have not lived through high inflation times, taxes and inflation are a deadly combination. That is because the Federal Government, after creating inflation, then taxes each of us on its effects. Here is an example: Invest $5000 now at a fixed 10% a year. Suddenly, inflation goes up to 8% a year. In five years, I now have a bit over $8000. In economic terms I have made a small profit of, since $8000 in five years at 8% inflation is worth $5,445 today.
But the IRS thinks I have made $3000, not just $445, and will tax me on the full $3000. If they take a third, I only have $7000 at the end, or $4,764 in current dollars, meaning that after taxes, I actually lost money.
I often discuss government actions in terms of one's theory of government. Here is a good example: What does one's theory of government have to be to justify this:
The American Jobs Creation act of 2004, passed by the Republican-controlled government, amended section 877 of the Internal Revenue Code. Under the new law, any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to some rather unbelievable tax laws.
Any individual who is declared to have expatriated for tax reasons is forced to pay US income taxes on all US based income for 10 years following expatriation, regardless of the country in which the individual resides. Additionally, in the 10 years following expatriation, if a qualifying individual spends 30 days in the United States during any year, he or she is taxed as a US citizen on all income derived from any place in the world. To make matters worse, if an individual happens to die in a year in which he or she spent at least 30 days in the United States, the entire estate is subject to US income tax law.
The only relationship I can think of that justifies this is master to slave. When slaves run away, the master feels that he has suffered a financial loss that deserves recompense. I guess it is somewhat comforting to see Republicans consistent on this issue -- they typically are strong supporters of having to get government permission to enter this country, so I guess it is no suprise they want to assert government rights on individuals when they exit as well.
Apparently there is some debate about the true cost of Obama's proposed cap-and-trade system - is it $646 billion? it is $2 trillion. My sense is that it doesn't matter, because these costs are to the total cost of a full Co2 abatement program what shooting the first monkey into space was to the moon-landing program.
Just to get this out of the way, it is absurd to argue this is anything but a tax on individuals. It HAS to result in a price increase to individuals, for things like electricity, or it is not working. Price increases are a core feature of the program, not a bug. The whole point is to reduce fossil fuel use, and in the near term, with infrastructure fairly fixed, this can only be achieved via reduced electricity consumption. And, unless you are a fan of rolling brown-outs, this in turn will only be achieved by raising the price. Long-term this reduction might come from shifts in the mix of electricity producing facilities (ie from coal to gas or nukes) but this takes time, and never-the-less the wholesale replacement of perfectly serviceable electrical generation infrastructure will certainly have a cost as well.
Further, now matter what the initial cost is, the costs will almost certainly have to increase by orders of magnitude over the next decades, if the programs is to have its desired benefits of substantially reducing CO2 production (currently targeted by the administration as an 80-85% reduction). How much of a price increase is it going to take for you to reduce your home's electrical use by 80%? We have examples of parts of the country where electricity rates have doubled in a short period of time, and electrical consumption changed by far less than 80% (the EPA apparently uses near-term price elasticities around 16%, meaning that a doubling of prices might result in a 16% reduction in demand).
It is probably easier to think about gasoline use (though this initial system will not apply to most transportation uses). Last year, gas prices doubled. Did your driving go down by 80%? Probably not, since a doubling of gas prices reduced driving and demand by about 5-10%. How high would the price of gas have to go to get you to really cut back your driving by 80%? Europeans have $8-$9 a gallon gas, and much more onerous regulations on fuel economy in cars, and their per capita consumption has not fallen 80% over the last decades (Germany's per capita gas consumption, for example, has dropped about 20% since 1990). How high will our gas prices have to go?
According to climate alarmists, Co2 levels in the atmosphere have already passed a point of no return leading us to a tipping point and rapidly accelerating temperatures. As a result, again according to alarmists, incremental reduction steps that slightly slow the rate of increase of Co2 are useless -- only enormous reductions in Co2 output that result in declining world Co2 levels will suffice to save us from doom.
What this means is that Obama's cap-and-trade scheme as currently configured is both expensive AND useless, as it will, by almost any estimation, make only a trivial dent in Co2 growth (similar to the Kyoto treaty, where even supporters admit that full compliance would have made an immeasurably small difference in global temperatures). A real plan that would actually hit the goals he has set for us would be so expensive as to make even $2 trillion seem cheap. This is just a toe in the water, to set up the infrastructure -- the real cost increases come later. Using a fairly crude analogy, Obama is merely grabbing the waistband of our underwear now -- he won't start to pull and twist until later.
Obama has promised that no family earning less than $250,000 per year will pay one dime in higher taxes. But the companies that have to pay for permits will pass that cost on to consumers in the form of higher prices for electricity and other products. So these families will pay $645 billion, only some of which will be returned in the form of lower income taxes, for a system that is terribly inefficient.
The solution, of course, would be a straight-forward tax on carbon, the proceeds to be refunded through the payroll tax system. But unlike the hidden tax of cap-and-trade, a carbon tax is out there for the voters to see. And given the choice between a stealthy tax and a visible tax, politicians will pick the former every time.
Why is this concept so hard to get across - averages do not reflect individuals. Individuals move up and down through the averages all the time, such that the "rich" and "poor" today are often circumstantially different people than they were 10 or 20 years ago. But Kevin Drum and the left will never get it
Over the past three decades, these families have seen their incomes double and triple while the rest of the country stagnated.
Repeat after me -- the families in the 1986 rich are NOT the same families in the 2006 rich. Some overlap, of course, but many do not.
Even if all the averages were stagnant, it could be very possible for every individual in the average to be doing better year over year but have the averages stagnate. For one, individuals typically gain income as they age and gain experience. The reason the averages don't move with them is that new workers, both teenagers and poor immigrants, move onto the list from outside, often at the bottom. If you look at the same group of people today and ten years ago (therefore leaving out new entrants into the work force over that period and what they do to the averages) you will find them doing much better.
And I thought this was funny:
by getting the centrist optics right, Obama has been able to move more boldly than he otherwise could have. Republicans who paint him as the second coming of Karl Marx just look like idiots these days.
Note that he is not arguing Obama is not acting like Karl Marx, just that he is successfully avoiding being percieved as such. Boy, that sure must be a real communications achievement for a man who gets so much tough scrutiny and skepticism from the media ;=)
By the way, does anyone else find it weird that the Democrats have decided to do battle with Ruch Limbaugh, rather than any actual, real Republic elected official. Is this a Democratic strategy, to find someone they can safely demonize without political power to strike back, or a Republican strategy to use Limbaugh as a stalking horse to save them from taking tough opposition positions?
Once upon a time, most entrepreneurs organized their business as what is called a C-Corporation. Most of the publicly traded corporations you can think of, from Avon to Zenith, are essentially C-Corporations. Such corporations had any number of advantages, but they had (and still have) one big, big disadvantage. C-Corporations paid federal income taxes at the corporate tax rates. And then, if after-tax profits were dividended to owners, those dividends would be taxed again. This double taxation of earnings is something Congress talks about all the time, but never does much about. And the implicit government tax subsidy for debt over equity does a lot to explain various waves of merger and LBO activity we have seen since the 1980's.
Now, entrepreneurs were not stupid. No one wants their hard-earned income taxed twice. So, entrepreneurs who owned C-corps would do one of two things. One approach was to have the owner pay himself a large salary, thus reducing corporate income and converting the dividends to more tax-advantaged wages. The other approach was to have the company issue the owner loans rather than dividends. I have seen many closely-held C-corps with huge accumulated corporate loans to their owners, which may only be unwound years or decades later when the company is sold or liquidated and profits can be taken out a lower capital gains rates.
Over the last 20 years or so, a new corporate vehicle called the sub-chapter S or S-corp has become popular. With a few limitations, the S-corp offers all the same liability protections as a C-corp, with a big tax advantage: S-corps are not subject to corporate taxes -- corporate profits of the owners flow straight through the corporation to the owners' 1040 personal returns, eliminating any double taxation (Limited Liability Corps or LLC's operate roughly the same, but with slightly different rules). For this reason they are also sometimes called pass-through entities.
It is interesting to note something I never hear mentioned when discussing aggregate personal income data, which is that the switch over time from entrepreneurs using the C-corp to the S-corp creates something of a discontinuity in the income data. Thirty years ago, much of the annual corporate earnings, and all of the retained earnings, of business owners would not show up in the IRS personal income data -- it shows up as corporate income, but not personal income. Today, nearly all of that corporate income of small business owners shows up as regular income on personal tax returns. Absent any other changes in income trends, business owners as a group will appear to have large increases in taxable income, when in fact economically nothing may have changed save the corporate structures of their businesses.
But the real point I want to make is that all of the retained income and potential investment capital of a small business using S-corps or LLCs (which is nearly everyone nowadays) shows up on the owner's personal income tax returns. Let's hypothesize an entrepreneur whose S-corp earns $250,000 in profits after-tax. Let's say he typically puts $150,000 of that to savings and living expenses, and the other $100,000 is reinvested in the growth and/or productivity of the business. Now let's look at proposed increases in upper income tax brackets. With these higher proposed rates, the business owner will have less than $250,000 in after tax income. Let's say it goes down to $220,000. Odds are that the owner will retain his lifestyle (he will as a minimum still have the same size mortgage and school and other payments). The slack, then, comes out of the retained earnings. Essentially, higher taxes result in less investment capital. In fact, we can see an increased tax rate on wealthier entrepreneurs and business owners could easily result in a dollar for dollar reduction in business investment among small businesses, acknowledged to be the place where most all new jobs are created.
I think readers know that I don't fully accept the Obama administration's analysis of this recession. However, let's take them at face value for a moment. They are concerned that savings of average people won't currently translate into more business investment, as they fear the credit crisis causes banks to hold the savings rather than re-lend it. If this were the case, then it would mean that as a policy, we would want to preferentially route tax savings to entrepreneurs and business owners who invest their own money directly, because their is no intermediary of a bank to interfere with the process. But in fact, this is exactly opposite of what the Obama administration is doing through tax policy, instead taking away the investment capital and retained earnings of entrepreneurs through higher taxes.
This is the European-style corporate state in a nutshell. In Europe, entrepreneurship is made extraordinarily difficult. This is part of the deal that the political elite have with the largest companies in their countries -- we will protect you from potential new competitors, we will bail you out when times get tough, and you in turn will support us politicians. One only has to look at the turnover of the top 30 companies in the US since 1970 vs. the top 30 in Germany or France to see this at work. Political turnover is even slower, as an elite group of ministers run the country, almost no matter the party voted in office. The economy as a whole suffers, but for the top 1000 or so men in power, the system works to protect their position, be it in government or in the largest industries.
And now we bring this system to the US. Small business owners and entrepreneurs are punished with higher taxes in order to bail out politically powerful but failing companies like GM or Citicorp. Welcome to America, the new corporate state.
Postscript: A lot of folks erroneously associate corporate states with right-wing governments, and certainly that was the case in Mussolini's Italy. But the closest brush the US has ever had with such a system (prior to today) was implemented by leftish FDR via the National Industrial Recovery Act, and governments of both left and right have supported the corporate state approach of France and Germany. In Britain, it was the left that built the corporate state and the right, under Thatcher, who tore it down.
I am starting to wonder if Barack Obama crossed the thin red line between traditional American liberalism and socialism yesterday. Traditionally, liberals in the US have taken pains to generally argue that the rich need to pay for their programs because theyare most able to pay. This differs a bit from socialists, who would argue that the rich should pay because they are guilty. For a libertarian like myself, it tends to be a pretty subtle difference, but I think it is important -- are taxes on the rich enforced charity, or are they reparations?
I woke up this morning profoundly depressed, which is unusual for me. I have a good friend who is having some personal problems, so it is hard for me to separate effects in my mind, but I really feel like Obama stepped over a line yesterday. TARP pissed me off, but we have bailed out companies before (though not for this much). The stimulus bill absolutely offended me, but we have seen stupid pork spending insanities before (though not for this much). But Obama's plan to remake tax law and the budget began with this paragraph:
This crisis is neither the result of a normal turn of the business cycle nor an accident of history, we arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C.
From the rest of the rhetoric in this document, and that of Obama and his supporters, the overriding message is that "the rich are being taxed more because they have sinned. This is pennance." This is all the more amazing to me because Obama (and to be fair, his predecesors in the Bush administration) have gone out of their way to interrupt the normal market processes that punish failed behavior. Normally, if you take out a mortgage you can't afford, you default and lose your home, and are hopefully wiser the next time. If you lend to someone who can't pay, you lose your principal. If you make products no one wants to buy, you go bankrupt.
But every one of these market mechanisms are being interrupted. Its as if Obama and the feds not only want to hand out penance, they want to have a monopoly on the process. No longer will the market dictate winners and losers -- we in Washington will. It's thoroughly depressing.
Postscript: I guess I am the last person in America to believe it, but I DO believe that this is "a normal turn of the business cycle," or at least that it started out that way until everyone from Paulson to Obama worked to convince folks otherwise. It is clear that there was an international over-exuberance of lending that goes far beyond just CDO's as the culprit, or even mortgages in general. And such bubbles do occur from time to time.
PPS: It will be interesting to see which race is tighter -- Obama's race to spend money so he can take credit for a third quarter recovery which is going to happen anyway, or Obama's race to put in CO2 limits in time to take credit for the global cooling cycle many solar observers are starting to predict.
PPPS: I really didn't want to open global warming discussions in general with the last bit of snark. I have a whole website for that. I have a subtle enough understanding of the issue to know both that 1) CO2 is causing some warming 2) warming estimates are likely way overblown, for a variety of reasons that include feedback assumptions and 3) behaviors of temperatures over decade-long periods are not necesarily indicative on long-term trends. If we want to talk about climate modeling and model accuracy vs. current trends, see this post or this post.
I try to never use "lie" or "liar" when discussing politics. They have become perhaps the most abused and overused words in political discourse, and seldom do they add much to a discussion.
But I simply have no other way to reconcile Obama's promise that he is not raising taxes on 98% of Americans with his imposition of a cap-and-trade system for CO2.
For years, Al Gore supported a carbon tax on fuels as a way to fight CO2. As I have written a number of times, if one really feels the need to reduce CO2 emissions (which I don't), then a carbon tax is far, far more efficient, fair, and effective than a cap-and-trade system. There are only two advantages to a cap-and-trade system over a carbon tax, and neither has anything to do with Co2 mitigation or program effectiveness:
Here is the basic economics, a topic on which it is rapidly becoming clear that Obama is completely ignorant**. First, we have to assume that whatever cap-and-trade system that is implemented is actually effective at reducing CO2 emissions. This is far from an absolute given, as it can be argued that the European system has done all of about nothing to reduce Co2 emissions (they will claim that it has been effective, but the majority of European CO2 emissions have come from a) British coal-replacement strategy, initiated for reasons other than Co2; b) fall of the inefficient Soviet economies and the shut down of their worst polluting industries; and c) unification of Germany.
But, assuming that cap-and-trade actually reduces CO2, then it HAS to increase costs for consumers. There is no way around it. It will do one or both of the following:
Recognize that this HAS to occur, especially #2, or the cap-and-trade system won't be working. Another way to put it is 1 and 2 above are what designers of the system want and expect to occur.
So how is this not a tax? Well, this is an old, old strategy. Rather than tax consumers directly, the government taxes business. When companies inevitably pass the cost on, it is not the government at fault, it is the business for being greedy and raising prices. Politicians insulate themselves from criticism.
Further, Obama and the environmental crowd have been laying the groundwork over this for years by arguing that such "green" initiatives actually help the economy and improve efficiency. They have no proof of this, but they repeat it A LOT. Repeat something enough, and some people believe it. This despite the fact that there is no way in the world that obsoleting perfectly good production capacity and requiring its replacement (e.g. coal plants) is a net positive for the economy. (It can be a net positive for human well-being, but to say it is net positive for the economy is to fall into the broken windows fallacy).
So expect that when power companies inevitably raise prices due to cap-and-trade, politicians will respond by saying that the companies are being greedy and simple minded, and if they were really smart, the cap-and-trade system would not have cost them anything. It would have made them more efficient. it would have been a net positive. And that this failure of theirs to see this probably will drive calls on the left for more government oversight and regulation of these industries.
Don't believe me? Think this last paragraph is exaggerated? Well, here are two things to think about. The first is from our former Arizona governor, arguing that she got a bunch of government employees into a bull session in a conference room for an hour or so, and they all decided that cap-and-trade would be a net benefit to the power industry:
Napolitano brushed aside questions of what effect the plan will have on utility rates.
"First of all, that it may increase electric bills doesn't mean it will increase them now," Napolitano said...
Napolitano said there is "lots of data" to suggest that utilities eventually will be able to save money "by moving to a system of "˜green' energy.""¦
on a long-term basis, there may be cost savings.
So if utilities raise their rates, its obviously because they are greedy profiteers, because all of us here in government think it's obvious that paying for carbon allowances should result in cost savings. If it doesn't, well, maybe we are smarter than they are, and have to provide more government leadership of the industry.
They would never go that far, you say? So why has Obama created a government commission to restructure the auto industry on the implicit assumption that a couple of smart government guys in a room can do what the industry itself has not been able to do for 30 years?
** This is not to say that Obama does not have highly educated economic ad visors. But the President's own knowledge, assumptions, comfort-level and outlook on a subject are critical, no matter what the quality of his advisers. For example, even if I were crazy enough to want the job, I would never run for President because I know, by outlook and knowledge, I am not qualified to manage foreign policy or be commander-in-chief of the military. Sure, I could surround myself with advisers, but there are proven limits to the "rely on advisers" approach. I might argue that Bush's foreign policy is an example of such limits.
Arthur Laffer and the ALEC have a report out with lots of economic, tax, and regulatory data about the individual states. This chart caught my eye:
They have a hundred pages explaining why these trends might be, but you and I already know, don't we, just from looking at the names of the states. It is fairly clear that the current Administration is emulating the policies of the bottom 10 in its recovery plans. Which brings me back to the question I have asked before: Where do we all migrate to for freedom when we have screwed up this country?
I remember Democrats scoffing at GWB's on-time tax refund checks last year. I agreed with them at the time, thought potentially for different reasons, saying that one-time rebates are far less attractive than permanent rate changes, and a rebate that just increased the national debt was robbing Peter to pay his dad.
So I am not sure how the Democrat's explain this any differently (from an email I got from the SSA)
Dear Colleague:
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This new legislation provides a one-time payment of $250 to Social Security and Supplemental Security Income beneficiaries.
Over 60 million beneficiaries will receive a one-time payment. We expect all payments to be delivered by late May 2009. To assist us in issuing these payments as quickly as possible, beneficiaries should not contact Social Security unless they do not receive their payment by June 4th. As we move to implement the new legislation, we will continue to provide updates to keep you informed of our efforts in this area.
You can learn more about these one-time payments at www.socialsecurity.gov.
We ask that you share information about these efforts with members, colleagues and any parties who would find them of interest.
I look forward to the opportunity to discuss this important legislation with you.
Sincerely,
Cheri Arnott
Associate Commissioner
for External Affairs
The only difference I see is 1) the rebate is going to a lot of people who do not even pay taxes and 2) by giving it to social security beneficiaries, the generational wealth transfer is all the more stark. Now we are robbing Peter to pay his grand-dad.
