Two Cheers

Mike Lee and Marco Ruibio have a proposal in the WSJ for reforming the current hot, steaming pile of stuff that is the US tax code.  For individuals there would be two brackets, 15% and 35%.  The relatively high rates show that they are serious about reducing taxes on families (Ponnuru will be happy), reducing the marriage tax, reducing deductions and expanding the earned income credit.

Most importantly, they don’t skimp on reforming business taxation.  Business taxation is even more messed up than individual taxation.  They don’t just change the corporate rate but they propose eliminating the current system and having a single layer of business taxation.  They also propose taxing income in the country earned as MWG has often advocated.  Instead the current administration’s treasury department is issuing new regulation to stop inversions.  To paraphrase Dave Barry, “We are not making this up.”  We wish we were.

It sounds great.  Why not three cheers?  Haven’t we heard about grade inflation?  The proposal doesn’t get three cheers because it is very much a work in process with lots of negotiations on rates, what deductions get eliminated, and how to make it add up.  Those details matter.  We believe that the business side needs more reform than the individual side but politics will turn that upside down.  We hope we are wrong.

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Economic Growth

Ramesh Ponnuru is worried about Hillary’s pivot to economic growth and says:

Clinton also talked about raising the minimum wage and ensuring equal pay for women. Those policies would reduce inequality, but that isn’t their principal selling point. And they wouldn’t do anything to reduce the incomes of the highest-earning 1 percent.

It is unclear (what is their principal selling point?) if he or she thinks these will generate growth.  It seems more likely they will increase inequality without generating growth by distributing large sums to trial lawyers and making entry level jobs less plentiful.  No human capital means no future.  It seems that Hillary has the same old policies but is hoping for a different outcome.  They didn’t reduce inequality and now they will not produce growth.

Chutzpah

Yesterday the Challenger for the governor’s seat came into our TV set and said roughly, you know who had some good ideas about taxation?  Ronald Reagan.  Now the only logical thing to say next was, “I have decided to discontinue my campaign and support the incumbent.”  It is an impressive act of smirk avoidance when a class warrior can try to claim the mantle of Ronald Reagan.

Let’s go through the facts:

Reagan was a great president.
Reagan was a Republican.
Reagan’s dead.  He can’t testify to the astounding incorrectness of the assertion.
Voters don’t know that he is the antithesis of the challenger.
The press is going to ignore the challengers claims.

It will be an interesting six or seven weeks in Wisconsin.  The good news is that illegal voting has been restricted recently.  No doubt they will fight it into November because only winning matters.

Writer’s Envy

Envy is usually the least of MWG sins.  It is a badge of honor to be the most senior and lowest paid person in our class.  Bigger houses, faster cars, and nicer lawns do not move us.  But when we read this from Theodore Dalrymple at NRO:

Islamism is so stupid, so preposterous and intellectually nugatory, and so appallingly catastrophic in its actual effects, that it makes one almost nostalgic for the days of Marxism.

We were envious not to have said it first.  We must add two obvious points.  First, the author is talking about Islamism not Islam.  They are different.  Second, the author is not suggesting Islamism in not dangerous.  To reiterate his point, Islamism is nugatory only intellectually.  Read the whole thing.  It is a joy to behold.

Growth and Belief

A WSJ op-ed that appears to be by William Galston (there is no byline but his name is in the URL) from Brookings says that voters favor growth over redistribution and favor the following means to create growth:

The Global Strategy Group even found a substantial level of agreement about the way to promote growth. A majority of all Americans endorsed policies to make college more affordable, modernize our infrastructure, provide additional job training for workers, invest more in basic research, technological development and K-12 education, and reduce outsourcing by American companies. They favor policies that would raise wages and increase fairness—if those policies boost growth.

It is great news that the public favors growth over a zero sum game.  We know what works: predictable monetary and fiscal policy along with regulatory restraint.  We know the constraints.  We have a massive deficit on the federal level caused mainly by medicare/medicaid and FICA.  On the state and local level we have pensions and medical costs as a major constraint.  Other than a few states there isn’t much room for choices unless you take on the big battles that few have been willing to do.

So can anyone create a program that encourages growth and does some or most of these things?  There is much debate and many of the public’s recommendations seem unrelated or anti-growth.  Less free trade as indicated by reducing offshoring seems like a particularly bad idea.  Making college more affordable seems beyond the state and providing additional job training seems to be exactly the kind of thing the government does poorly.  It is not clear that any increase government predictability or reduce the regulatory burden.

In short, growth over redistribution is good news but it will be a real challenge to create growth that makes the public happy.  Unless everybody grows somebody is going to be unhappy.  Perhaps it is the first stage of a process.  Most people want growth but don’t know or aren’t willing to achieve it.  Will the second step be to learn or to reject growth?

Always Suspect English Major Math

Kevin Williamson has an excellent article on abolishing the corporate income tax at NRO today.  It is not because he mentions Greg Mankiw and not MWG as a supporter of the cause that we need to point out the following problem in his analysis.  We also offer a revenue solution at the bottom.  We agree with his conclusion to abolish the corporate income tax but he is wrong when he says:

A corporation could, in theory, reduce its taxable income to zero every year simply by giving its CEO a cash bonus equal to what would otherwise be its taxable income.

But in that case, the CEO would have to pay taxes on that money as personal income, presumably at the top rate of 39.6 percent, which is higher than the top corporate rate. And that is why it makes sense to scrap the corporate income tax entirely.

In fact, the IRS spends a great deal of time litigating that CEO salaries and “reasonable and necessary” because paying high salaries to owners is a form of tax avoidance that may become tax evasion.  It is tax avoidance because the CEO will pay individual taxes whether the corporate taxes are paid or not.  It is why Jacob Ruppert starting taking a salary from the New York Yankees in the early 1920.  It made economic sense when there was a corporate income tax.  It did not matter before.  Now the analysis can get complicated because of the impact of the time value of money.  For example, dividends might be distributed in a different year.  The analysis can also get complicated because of the different tax rates for corporations, earned income, dividends, and capital gains.  So we must start with the weasel word, generally Williamson is wrong because paying corporate and personal taxes on one income stream is worse than paying just personal rates even if the personal rate is higher.

So let’s abolish the corporate income tax.  It is likely to have large impact on the supply side.  It might have the pleasant side effect of reducing CEO salaries.  But let’s be safe and go for a static revenue neutral because corporate income taxes are generate a limited amount of revenue, $274 billion according to Williamson.  According to one estimate, a 10% VAT would raise $750 billion so a VAT of less than 4% (3.65%) would replace the entire proceeds from the corporate income tax, generate tax simplification, and lead to increased investment in the US.  

As you look for ideas to support, this seems like a really high impact one.  Messing about with the personal income tax might be great fun but there isn’t much to do there.  Unless you replace it with a VAT or sales tax there are winners and losers in every choice.  Abolishing the corporate income tax and replacing it with a VAT is something that provides lots of winners because the corporate income tax is already part of the cost of products.  Thus you get simplification and investment but trivial changes in prices because a 3.65% VAT is not going to be wildly different from the cost of corporate income taxes.  Yes it is complicated because corporate income taxes are distributed among customers, labor, and capital but the point still holds.

A Welcome Visitor

The president came to visit Wisconsin over the weekend.  He continued his call for throwing poor people out of work by limiting the wages they could accept.  It seemed very odd to us.  Here is a purple state where the polls show the Democrats have a chance to win the race for governor.  Economics are a big part of the debate.  Why would the challenger allow the suggestion that the current president speaks for her on economics?  Is it possible that she thinks he is doing a good job economically?

We are generally loath to wander far from economics but in this one circumstance we will.  We think the challenger will make the following implicit argument.  The President has not been successful but he has made progress [MWG would choke on this premise].  The Governor has made progress but has not been entirely successful.  Therefore, the challenger won’t be much worse than the Governor.  The intellectual bind that the Governor’s campaign put itself in by taking the challenger to task for outsourcing might help the challenger.  It makes it more difficult for the Governor to bring down the President.