Coyote Blog

As a capitalist and believer in individual rights, one of the things I notice a lot today is just how many people do not trust individual decision-making.  Now, I do not mean that they criticize other people's decisions or disagree with them -- in a free society, you can disagree with anybody about anything.  I mean that they distrust other people's free, private decision-making so much that they want the government to intervene.

Interestingly, most people don't think of themselves as advocating government interference with people's private decisions.  However, if you ask them the right questions, you will find that they tend to fall into one of several categories that all want the government to intervene in individual decision-making in some way:  nannies, moralists, technocrats, and progressive/socialists.  Though the categories tend to overlap, they are useful in thinking about some of the reasons people want to call in the government to take over parts of people's lives.

By the way, before I get started, just to avoid straw-man arguments like "well, you just want 12-year-olds to have sex with dogs", there are three philosophical limitations that apply to decisions made by individuals or between individuals:

• The decisions or agreements are made without fraud or physical coersion
• The decisions are made by adults (the very definition of adulthood is the legal ability to make decisions for oneself)
• Decisions and areements don't violate the constitutional rights of others

That being said, here are examples of the government interventionism of  nannies, moralists, technocrats, and progressive/socialists.

Continue reading ‘Respecting Individual Decision-Making’ »

I am willing to make a bet.  I will bet that at least 90% and probably 100% of US Senators have money invested in equities.  Why?  Because, for long term investments, you would be insane not too.  Even with substantial drops in the market form time to time, equities outperform bonds and government securities by miles and miles.  From this chart, you can see that even if you had the misfortune at age 30 to invest all you savings in stocks the day before the 1929 stock market crash, you STILL would be better off by age 45 having invested in stocks than bonds and your investment would be worth 10 times more at age 65 than if it had been in bonds.  And remember, that is the case of investing on the worst possible day of the last century.  Any other comparison is even more favorable for stocks.  The difference in wealth between stocks and government securities at retirement age is staggering.  Any financial adviser who told a person under 50 saving for retirement not to invest some of their money in stocks should be fired on the spot for malpractice.

However, just like Senators who put their kids in private school but oppose school choice for the rest of us, Senators do not think the rest of us are mature or smart enough to invest in stocks.  Quoting Senator Specter:

On the issue of privatization, I had some time ago considered an idea to place a relatively small portion of benefits in an investment account, providing that the "security" aspect of Social Security was retained and the investment was under professional management. However, with the severe fluctuations of the stock market, I have since rejected that idea.

Men like John Kerry get most of their wealth from stocks, and would fire any financial adviser who did not invest a good portion of his wealth in equities. He understands that stocks will fluctuate from time to time, but that over decades (which is how one invests for retirement) they are the best choice. How hypocritical is it that he and others are saying "Stocks are great for me, they make me wealthy, but trust me, they're not right for you".  More on distrust of individual decision-making here.

I don't know whether it warrants the "crisis" moniker (to me, government is always in a disastrous state), but Social Security is indeed facing an enormous cash flow shortfall in just a few years.  Those who use bogus government accounting to say that there is no problem until 2042 are either disingenuous or delusional.  People making this argument are saying that yes, cash flow will be negative, but those negative cash flows will come out of the huge Social Security trust fund, which won't be depleted until 2042.

Um, the only problem with this is that... there is no Social Security trust fund.  I mean yes, there is such a thing on paper with a large number next to it, but there is no actual pool of cash or investments to draw on.  The "trust fund" is full of government IOU's to itself - the actual cash was spent for general budget needs over the years.  As a result, in just a few years, Social Security will require:

• Massive new taxes
• Large benefits cuts
• A complete restructuring of all parts of the program
• More government borrowing

Good post at Assymetrical Information goes into it in more depth.

Recently, the government announced that it would take over the United Airlines pilots pensions in the government-funded Pension Benefit Guaranty Corp.  This move is irritating pilots, because their pensions get reduced, and it is annoying to me as a taxpayer, that I have to bail out a company that was too screwed-up to fully fund its pension obligations. 

This points up the biggest danger of government guarantees -- it causes companies to be more reckless.  Back in the 80's, banks and S&L's made insanely risky investments with bank deposits.  The people who should have been most interested in this problem - bank depositors - ignored it because they felt safe that the government had guaranteed their deposits.  In the same way, airlines and other ailing businesses with defined benefit pensions cut back on pension funding when times were bad, and the very group that should have been crying foul - the company unions - did not, because they again counted on a bail-out.

I put the blame squarely on the company's management, who made a commitment to employees and then failed to keep it, and now are using government pension gaurantees as a subsidy to close their cash flow gap.  However, it is interesting to look at the role of unions too.  For decades, unions have demanded defined benefit pensions (ones that promise a fixed amount per month at retirement) and have opposed defined-contribution pensions (ones where the company promised to contribute a fixed amount today into an investment fund).  I assume the main reason for this is that unions do not want workers to bear the market risks on investments.

Over time, though, defined benefit plans have, despite this opposition, gone the way of the dinosaur (at least in private companies - most government jobs still have them).  This is for a number of reasons:

• 401-K accounts now offer much of the same tax-deferral benefits for defined contribution programs that defined-benefit plans had
• Defined-benefit plans turn out to have market risk too.  One is inflation - benefits levels may be guaranteed, but unexpectedly high inflation can effectively reduce them, while defined contribution plans, if invested correctly, will likely produce returns to offset these inflation losses.  In addition, during go-go stock markets, holders of defined-benefit plans found out that they did not enjoy the benefits of higher investment returns - their employers pocketed them (by the way, may Americans are discovering the same about their Social Security benefits).
• As employees move around more, workers have found that defined benefit plans are not very portable, and tend to punish workers who do not stay for decades.  401-K plans are much more beneficial to workers who do not stay their whole career, or at least 20 years, in one place.
• As United pilots have found, defined benefit pension plans are hard to police by current employees- there are just too many variables that allow companies to argue that the pensions are OK.  On the other hand, defined contribution plans are very easy to police- one can check the amount of contribution each month against the amount promised.
• Finally, defined benefit plans rely on their company staying in business and fiscally sound for decades into the future.  This may have seemed a good bet at US Steel or United Airlines in 1950, but would anyone make that bet today?  For any company?

In this post on Social Security reform at Powerline (Time blog of the year, congrats guys) they take as a starting point a Sabastian Mallaby article in the WaPo who says:

Privatizing social security would increase stress levels, says Mallaby, because determining where to invest one's retirement money entails making tough choices and taking risks. Thus, Mallaby believes that many, perhaps even most, people would prefer to have the government handle their social security funds as it does now than to "agonize over health stocks vs. Asian bonds."

In this we see two things that characterize liberals and progressives:  "1) distrust of individual decision-making and 2) willingness to accept much less wealth in return for more certainty.  By the way, I have no particular problem with #2 when this decision is made on an individual level.  However, I do have a problem when politicians make this decision at a societal level.  As regards Social Security, I have no problem with people being offered the "let the government continue to keep your money" option as long as it is voluntary.  The Powerline guys have other good comments, read the whole thing.

By the way, I will take a moment for a bit of "I told you so" here.  This "capitalism is too stressful for us dude" attitude is entirely consistent with what I said about progressives and capitalism here.

UPDATE:

Here is a nice post on the same topic at Cafe Hayek.

New, via Reason, comes this excerpt from an article by Milton Friedman:

After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas; we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course. We are still far from bringing practice into conformity with opinion. That is the overriding non-defense task for the second Bush term. It will not be an easy task, particularly with Iraq threatening to consume Bush's political capital.

Reason links to the whole article.  I have said on a number of occasions that as a libertarian, one of the downsides of the Iraq war that does not get discussed much is that it diverted Bush II from promised market reforms, including tort reform and social security.  There appears to be some hope that these can be addressed in the second term.

Many in the left to far-left eschew the liberal title nowadays (since they consider liberals now to be wimps and too moderate, like that Clinton guy) in favor of the term "progressive".  This term has gone in and out of favor for over a century, from the populists of the early 1900's to the socialists of the more modern era.

Most "progressives" (meaning those on the left to far left who prefer that term) would freak if they were called conservative, but what I mean by conservative in this context is not donate-to-Jesse-Helms capital-C Conservative but fearful of change and uncomfortable with uncertainty conservative. 

OK, most of you are looking at this askance - aren't progressives always trying to overthrow the government or something?  Aren't they out starting riots at G7 talks?  The answer is yes, sure, but what motivates many of them, at least where it comes to capitalism, is a deep-seated conservatism. 

Before I continue to support this argument, I must say that on a number of issues, particularly related to civil liberties and social issues, I call progressives my allies.  On social issues, progressives, like I do, generally support an individual's right to make decisions for themselves, as long as those decisions don't harm others. 

However, when we move to fields such as commerce, progressives stop trusting individual decision-making.  Progressives who support the right to a person making unfettered choices in sexual partners don't trust people to make their own choice on seat belt use.  Progressives who support the right of fifteen year old girls to make decisions about abortion without parental notification do not trust these same girls later in life to make their own investment choices with their Social Security funds.  And, Progressives who support the right of third worlders to strap on a backpack of TNT and explode themselves in the public market don't trust these same third worlders to make the right decision in choosing to work in the local Nike shoe plant.

Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.  Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.  Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.  They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.  I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it. 

This story of progressives trying to stop history has continued to repeat itself through the generations.  In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.  Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services.

In fact, here is a sure fire test for a progressive.  If given a choice between two worlds:

1. A capitalist society where the overall levels of wealth and technology continue to increase, though in a pattern that is dynamic, chaotic, generally unpredictable, and whose rewards are unevenly distributed, or...
2. A "progressive" society where everyone is poorer, but income is generally more evenly distributed.  In this society, jobs and pay and industries change only very slowly, and people have good assurances that they will continue to have what they have today, with little downside but also with very little upside.

Progressives will choose #2.  Even if it means everyone is poorer.  Even if it cuts off any future improvements we might gain in technology or wealth or lifespan or whatever.  They want to take what we have today, divide it up more equally, and then live to eternity with just that.   Progressives want #2 today, and they wanted it just as much in 1900 (just think about if they had been successful -- as just one example, if you are over 44, you would have a 50/50 chance of being dead now). 

Don't believe that this is what they would answer?  Well, first, this question has been asked and answered a number of times in surveys, and it always comes out this way.  Second, just look at any policy issue today.  Take prescription drugs in the US - isn't it pretty clear that the progressive position is that they would be willing to pretty much gut incentives for any future drug innovations in trade for having a system in place that guaranteed everyone minimum access to what exists today?  Or take the welfare state in Continental Europe -- isn't it clear that a generation of workers/voters chose certainty over growth and improvement?  That workers 30 years ago voted themselves jobs for life, but at the cost of tremendous unemployment amongst the succeeding generations?

More recently, progressives have turned their economic attention to lesser developed nations.  Progressives go nuts on the topic of Globalization.  Without tight security, G7 and IMF conferences have and would devolve into riots and destruction at the hands of progressives, as happened famously in Seattle.  Analyzing the Globalization movement is a bit hard, as rational discourse is not always a huge part of the "scene", and what is said is not always logical or internally consistent.  The one thing I can make of this is that progressives intensely dislike the change that is occurring rapidly in third world economies, particularly since these changes are often driven by commerce and capitalists.

Progressives do not like American factories appearing in third world countries, paying locals wages progressives feel are too low, and disrupting agrarian economies with which progressives were more comfortable.  But these changes are all the sum of actions by individuals, so it is illustrative to think about what is going on in these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.  He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings.  He can continue to see a large number of his children die young from malnutrition and disease.  He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life.  And you know what, many men (and women) in his position choose the Nike factory.  And progressives hate this.  They distrust this choice.  They distrust the change.  And, at its heart, that is what the opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.

In fact, over the last 20 or so years, progressives have become surprisingly mute on repression and totalitarianism the world over.  In the 1970's, progressives criticized the US (rightly, I think) for not doing more to challenge the totalitarian impulses of its allies (the Shah of Iran comes to mind in particular) and not doing enough to end totalitarianism and repression in other nations (e.g. South Africa, Guatemala, El Salvador, etc etc) 

Today, progressives have become oddly conservative about challenging totalitarian nations.  By embracing the "peace at any cost" mantra, they have essentially said that they can live with anything, reconcile anything, as long as things remain nominally peaceful (ie, no battles show up on the network news).  Beyond just a strong anti-Americanism, the peace movement today reflects a strong conservatism -- they want to just leave everyone alone, no matter how horrible or repressive, and hope that they will in turn leave us alone.  They fear any change that would stir things up.

There are any number of other examples of the strong conservative streak in the progressive movement.  Here are a few more that come to mind:

• Despite at least 40 years of failure in the public schools, progressives vociferously oppose any radical changes to the public education system.  In particular, they resist any program involving school choice, as they are totally condescending in their utter lack of faith in the average parent's ability to make the right choice for their family.
• Progressives refuse to even consider the possibility that individuals should be trusted to make their own decisions regarding some portion of their Social Security retirement funds.  They can couch their opposition in a lot of fear talk about benefit cuts, but at the end of the day (and take this from someone who has had this argument with numerous liberals and progressives)  the argument always boils down to "we don't trust people to make investment decisions that are as good as the ones we would make for them".

Well, I have again written too long, and I'm tired.  If you are not ready to rush to defend the barricades of capitalism, you might read my post from last week called "60 Second Refutation of Socialism, while Sitting at the Beach".  Most of what I have written here has been said far more eloquently by others.  Of recent writers, Virginia Postrel, in the Future and its Enemies, has written a whole book on not just capitalism but dynamism and progress in general, and why people of all political persuasions tend to be scared by it.  Brink Lindsey addressed many of these same issues as well in his book Against the Dead Hand.  Of course, the Godfather of individual choice and societal dynamism is Friedrich Hayek.

I am all for restructuring the whole social security system, but, as I have written before, we cannot let the government invest social security funds in private equities.  The potential for manipulation and creeping socialism are astronomical.  Its easy to picture fights over whether the social security funds should be invested in tobacco makers, gun makers, hospitals that conduct abortions, Domino's Pizza (that donates funds to oppose abortion), Haliburton, etc. etc. 

I have always used government-funding of universities as an example -- the government uses the leverage of this funding (and the threat of its withdrawal) to force all kinds of regulations on universities.  Today, we have a good case example that is even more directly applicable. 

Over the past several years, Calpers (the California state workers retirement fund) has been a great example of how government control of equity investments can be a disaster.  In the case of Calpers, their huge pension investments automatically make them one of the largest investors in each company in their portfolio.  Calpers has used that power wisely at times, promoting improvements in corporate governance, but has also used it astronomically poorly. 

Under Sean Harrigan, Calpers portfolio has been unbelievably politicized, up to and including having the portfolio use its ownership in several grocery chains to support striking members of the grocery union run by... Sean Harrigan.  Professor Bainbridge has a couple of good roundups here and here.

If we are change how social security funds are invested, let individuals make their own investment choices. 

Every year, between November and January, tens of thousands of modern nomads descend on the lower Colorado River.Spread out from Yuma to Lake Havasu City, but with their center in the normally small town of Quartzite Arizona, RVers will join together for a month or two in the Arizona desert.  Barren fields alont Interstate 10, totally desolate and empty for 9 months of the year, suddenly become a huge encampment.

One of the little talked about trends within the larger story of the aging of America and the growing population of retired people is the substantial number of people who have given up the traditional notion of a fixed home and neighborhood and headed for the open road. While some still own a home, and travel for many months of the year, an increasing number have sold their home, bought an RV, and live on the road -- with absolutely no attachment to any fixed location. They may spend a day or several months in any one location, but most tend to drift north during the summer and back south for the winter.  These are not people who take their RV out on vacation -- these are people who live on the road 365 days a year.

For reasons of weather and tradition, while you can find RVers in the summer months in every state, in the winter months a large number will converge on Quartzite. Friendships will be renewed. Business will be transacted. Jobs for the summer months will be solicited. A thousand and one vendors will pitch a tent in the desert to sell their wares. These gatherings remind me of how the old western trading posts may have looked during the winter, surrounded by wintering Indians and trappers. The only difference today is that most of the nomads are Caucasian, and many of the trading posts, in the form of Casinos, are run by the Indians.

Some of these new nomads are able to completely retire and live off their savings. Others need to work to bring in a bit of cash, or at least to pay for a place to park and hook up their RV to utilities. In our business, we hire over 400 of these folks a year, usually working the summer months in exchange for a free site for the RV and some money for relaxing in the winter. RVers are generally comfortable with fairly modest pay, but they won't stand still for very long if they don't like the job or their boss or their co-workers. After all, they all have wheels on their houses and can leave with little notice.

As you might imagine, in this Federalist country we live in where most government services occur at the state level, this nomadic lifestyle can lead to confusion. If you spend the entire year traveling around the country, where is your voting precinct? Where do friends send you mail? How do you get bills? Where is your bank? In which state do you pay taxes? If you think you have trouble getting W-2's out to your employees, trying tracking down 400 nomads with no permanent address!

To a large extent, technology has helped solve a number of these problems over the last decade. Cell phones provide telephone service nearly everywhere in the country. DirecTV does the same for television. With a national ISP like EarthLink or AOL, email doesn't care where you RV is parked "“ it will get to you.

In addition, a whole cottage industry has arisen to serve the needs of full-time RVers. Despite advances in technology, most people still need an address for the mail to go, and the IRS still is kindof fussy about having a mailing address for folks. So, entrepreneurs, mainly in Texas and Florida, have created huge PO box operations to serve RVers, with flexible options for holding or forwarding mail. Full-time RVers, living 365 days in their vehicle, have demanded and gotten larger and more elaborate RV's from manufacturers, up to and including RV's built on bus frames. And, new, more elaborate and upscale RV parks are being built to accommodate the more affluent new RVers.

Other people, including, predictably, the government, have not caught up with this trend. For example, many RVers are living on retirement and social security payments. Most state revenue departments have laws in place that if you are a resident of that state for some number of days, then you have to pay income taxes on earnings, even retirement pay or investment earnings, in proportion to the time spent in the state. These laws are mainly put in place to snare some incremental taxes from wealthy athletes and traveling sales people, but they can can hurt RVers.

An RVer who is totally honest about the states they were a resident in during a year might end up having to fill out five, six, or more state income tax returns. No one wants to do that, especially for small sums, so very very few people observe these tax laws. In fact, that is why PO Box drops are in Texas and Florida, because neither have state income taxes. Their pension and investment and social security checks go to those states, and no one has to be any the wiser about what other states they may have parked their RV in for a while.

There are a number of places to get more information about full-time RVing. Web sites and magazines line the Roaming Times and Trailer Life cater to full-time RVers. Working RVers can find information about work camping jobs and camp hosting as well as the whole workamping lifestyle.  Finally, look for good places to camp at goRVing.com, at ReserveUSA, or of course at my company's directory of forest service campgrounds.

I had some links on Social Security reform here. 

One thing I forgot to mention -- No matter what we decide to do, please, please do not let the government invest social security funds in private equities.  I am all for giving individuals control of their social security funds and allowing these individuals to make their own investment choices.  But, allowing the government to invest in equities will lead to all sorts of problems:

1. The most obvious is creeping socialism and regulation, particularly of companies that are not well-loved by the intelligentsia.  Mad at Dick Cheney?  Pass a law that the trust fund can't invest in Haliburton.  Don't like Dan Rather?  Pass a law that the trust fund can't invest in CBS.  You get the idea.  The mere threat of disowning the company's equity from the trust fund investments portfolio would force companies to kowtow to the populist notion of the moment.
2. If you worry about private individuals manipulating the stock market, just wait until the government has the incentive to get in the game.  The government has all kinds of ways, from small (control of economics data) to large (interest rates and SEC regulations) to manipulate the market for short term gain. 

Marginal Revolution also has an interesting post on whether the historic equity premium would still exist if the government invested massively in equities.

One of the less remarked on casualties of 9/11 and the war on terror is any progress on a number of issues that GWB looked like he might tackle (e.g. social security and tort reform).    While the war is far from over, and I have had mixed feelings about some part of it (e.g. here), the infrastructure seems to be in place to fight the war while also tackling some new domestic issues.

Jane Galt, over at Asymmetrical Information, has a nice post about new momentum in the Bush administration to tackle social security.  It is unlikely that Bush could draw any more hatred than he already has, so he might be the right person to finally grab the third rail.

UPDATE #1

Marginal Revolution tackles social security and links to other good sources.

Yesterday, Florida apparently passed a new minimum wage $1.00 higher than the Federal minimum wage of $5.15 per hour.

This is actually an oddity - a red state with a higher minimum wage. Before the election, this Department of Labor map, showing the states with minimum wages higher than the Federal rate (shown in green) looked a lot like the presidential election map. With the exception of Alaska (which has price and wage levels so different from the lower 48 that it should have its own currency) all the states with higher than federal minimum wages are also strong Kerry states (e.g. Left Coast, New England and Illinois).

This is going to have huge implications for us. Camping is a low margin business, and most hosts are paid minimum wage. In fact, many of our hosts, who are retired, don't want to get paid at all, so they don't mess with their social security, but that of course is not possible. The total increase in wages will be higher than what we make in Florida, so we are going to be spending a lot of time evaluating price increases vs. cutting back on labor somehow.

UPDATE

I see from our logs we are getting a lot of hits on this post from search engines.  For those of you looking for more information on the implementation of this increase, we still have not seen any enabling regulation to go along with it.  Will it have the same exemptions as the Federal law?  Anyway, the go-live date is apparently 6 months from approval, which I presume equates to early April, 2005.

In part 1, which you should read first, we discussed how the US has crossed a milestone where fewer than 50% of the taxpayers in this country pay about 100% of the personal income taxes. We also discussed how the recent tax cuts actually shifted personal income tax burden more onto the rich, rather than less.

However, John Kerry has cited the same CBO Report I used to make the points in the previous post to say just the opposite - i.e. that the recent tax cuts actually shifted the tax burden away from the rich to the middle class. Assuming he is reading the study correctly (which he is) how can this be?

The answer is in the difference between Federal income taxes and total federal taxes. The tables I used in part 1 were for income taxes only. It strikes me as reasonable to use income tax numbers for analyzing income tax changes. The total tax numbers Kerry uses includes not only income taxes but social security and Medicare taxes (including the employer contribution), federal excise taxes (such as the gasoline tax) and the corporate income tax. Lets look at who bears the brunt of these taxes.

1. Social security taxes are regressive. Very regressive. While your paycheck may show 6.2% FICA, the bill is really 12.4% because your employer matches this payment with funds they probably would otherwise pay you in wages. What makes this tax regressive is that it is a straight 12.4% of every dollar up to a limit, currently $87,900, after which the tax is zero. This kind of profile would never be tolerated in the income tax system. The reason for this is the carryover of the original idea that social security is not a tax and social benefit program but an insurance and retirement plan, a characterization that is becoming increasingly out of whack from reality. (If it was a private retirement plan, the managers would all be in jail right now for the terrible long term returns it pays out).

2. Gas and excise taxes are generally considered regressive as well, since gasoline is probably a much higher percentage of lower and middle class spending than for the rich (those rich who own Hummer H2's notwithstanding).

3. Its harder to pinpoint who pays corporate income taxes. The CBO report allocates corporate income taxes in proportion to dividends reported on income tax statements, which seems reasonable. Fifty years ago, one would have said that this meant the rich pay it, since we pictured the rich as owning all the stock. Today, in our mutual fund world, a lot is probably born by the middle class, particularly middle class retirees.

As a result, the sum of these non-income taxes are probably net regressive - i.e. they disproportionately hit the lower and middle classes. This means that an income neutral income tax cut, i.e. one that does not shift the tax burden but lowers it proportionately for everyone, will still shift the total tax burden to the middle class, because it reduces the amount paid in the progressive system (e.g. income taxes) in proportion to the amount paid in the regressive system (e.g. social security).

This leads me to a couple of thoughts. First, I think while he is quoting correct stats, Kerry is using the data a bit disingenuously. First, it implies to people that the middle class is paying more so the rich can pay less, which is untrue - everyone is paying less. Second, he is trying to use the data to show that personal income tax burden is shifting to the middle class, which we showed in post 1 that it is not - it is actually going the other way. Third, he uses it to justify a tax increase (or a tax cut rollback) on the richest Americans. We showed that already the Bush tax cuts shifted more of an already ridiculously high burden to the rich. This will shift even more.

However, there is a point here if Kerry wanted to latch on to it. Forget the class rhetoric about the income tax system - focus instead on social security. There are two good reasons for this: 1) Social Security is broken, and the financial reckoning is coming 2) unlike the income tax system, social security is truly indefensibly regressive. Yes, you can dig through Kerry's web site and find something on this, but he is for some reason so drawn to the income tax issue he never really hits it hard.

If John Kerry really wants to take up a populist tax banner, leave income taxes as they are (for all the fiscal deficit crisis talk, an economic recovery plus fewer new military invasions will bring the deficit back in line without tax increases). He should instead propose a reduction in the 12.4% FICA tax rate and then an elimination of the $87,900 wage cap. To make this palatable to Congressional Republicans (and me, if I were voting) it should be tied to a package of other reforms such as allowing some investment choice by individuals.

Of course, this is not going to happen. Politicians have used Social Security scare tactics with retired and older people so often that these folks have come to react negatively to any hint of change to Social Security. Reasonable discussion about the future of Social Security is just not possible in the last five weeks of an election, particularly with Florida in play.