The Debt Crisis And Selective Memory

With all the oxygen being sucked up by the Green New Deal (GND) scam, at least some folks are trying to talk about serious stuff like the debt crisis.  The problem is that there is more emphasis on score settling than serious solutions.  Steven Rattner from the administration of the 44th president lets us know in the NYT  that your grandchildren are already in debt.  Steve is right and we are delighted that a leftist mentions the entitlement problem but:

In a perfect world, those programs would function like insurance; each generation’s annual premiums would pay for support received during its golden years. That principle was abandoned long ago. Based on the current demographics of the American populationwe would need to set aside $49 trillion to make the Medicare and Social Security Trust Funds truly solvent. [Emphasis added]

The problem with the principle in bold is that it was never adopted.  Many a Facebook post suggest it is a principle but it is not.  W tried to get us there some years ago on Social Security but neither party bought his pitch.

John Phelan from the Center for the American Experiment lets us know in the Star Tribune that The US Is (Still) Heading For A Debt Crisis.  John is also right.  John and Steve are on opposite sides of the aisle so this seems great.

It is not.  Steve is all about taxes.  GOP tax cuts, according to Steve, are the cause of the deficits.  He wants higher taxes on the rich.  He has a neat chart of the deficit but he never mentions that the first four annual deficits of a trillion dollars happened under his watch.  And there are some spending issues related to his time in office.

John punctures Steve’s proposal:

A currently popular answer is to raise taxes, particularly on “the rich.” But historical evidence suggests that doing so will have little impact on federal government revenue.

So for John it is a spending problem and he also zeros in on entitlements:

The problem diagnosed by the CBO is not a shortage of revenue but an excess of spending. To avoid spiraling federal debt and all the problems this will bring, substantial entitlement reforms are necessary. Indeed, it will be hard to give the Trump administration a passing grade if it takes no action on this front. Without it, the nation has little hope of avoiding a fiscal crisis.

The 44th president got his second term, in part, because his opponent wanted to defuse the debt crisis and he didn’t.  In 2016, both candidates pledged to make the debt crisis worse.  Well, that is not what they said exactly but it is what they pledged.  We need to convince the electorate that the debt crisis is the most pressing problem for the US federal government.  Steve and John only help a little by agreeing that entitlements are part of the debt crisis.  We need bipartisan support to solve a real crisis.

We need a compromise that increases taxes and decreases spending to get real support.  We still advocate eliminating the gas tax and replacing it with a carbon tax that does not raise the price of gas.  Our estimate is about $20 a ton.  We eliminate all funding for alternative energy and means test Social Security.  It is not a complete solution to the debt crisis but it would be a significant step in the right direction.

 

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Carbon Tax Problems

We support a modest carbon tax that would be coupled with entitlement reform and eliminating subsidies for alternative energy.  Robert Bryce at NRO tries to harsh our Patriot buzz when he identifies three major problems with a carbon tax:

  1. It is regressive
  2. It will be lobbied heavily
  3. International stuff:
    1. Tariffs on imported carbon
    2. Free riders

We think that our proposal has taken care of the regressive issue.  By eliminating the gas tax it substitutes one regressive tax for another.  The exact rate for the carbon tax might be less than the current gas tax so there is little impact on lower income folks.  In addition by eliminating subsidies and requirements for alternative energy the net impact on heating bills will be small and in an uncertain direction.  Of course, an important part is to keep the carbon tax modest.

Robert is exactly right that any tax will be heavily lobbied.  The danger that worries us most is an onerous carbon tax.  We need to expect something from our Congress Critters on both sides of the aisle.  We agree with Robert that this is a big ask but they really need to earn their pay.

We don’t care about the free rider issue.  This is about US policy that would move in the right direction on climate change.  As Robert points out it is hard to get the world to agree.  We care about US policy.  At first glance tariffs on imported carbon make sense but we are open other views.  We are highly unimpressed with the argument that the arithmetic is too hard.  We think that the US government can find somebody to do the arithmetic if imported carbon is to be taxed. If we can figure out state taxes for people like Tom Brady, who played in nine different states (ten if preseason matters for taxes) this year, we can do carbon.  But Robert has broached the real question: can we get it passed?  We are pessimistic but we also remember that the Patriots were trounced in their only two Super Bowls in the last century but have won six this century.  We are not expecting Congress to become the Patriots of the current century but we can hope for improvement.

 

Tax Rates Versus Tax Paid

Mark J. Perry at Carpe Diem often points out the inefficiencies of high income tax rates.  He is at his best with his recent Chart Of The Day.  Click to read it all and see the chart.  Mark defines rich as the top one-half percent of tax payers.  He says:

As the chart above shows, the share of taxes collected from “the rich” increased over time from about 14-15% in the 1970s to almost double that amount by the late 1990s and was as high as 29% in 2005, during a period when the top marginal income tax declined from 91% in the early 1906s to 70% in the 1970s, and then to 50% and 28% under Reagan’s tax reforms, before increasing to between 35-40% from 1993 to 2013.

He then put it in a formula:

Tax Rate (%) x Tax Base (Activity Taxed) = Tax Revenue($)

His point (and ours) is that that tax base [Mark should have a $ there] responds inversely to changes in tax rates.  Some will just do something else.  Others will find ways to avoid the tax.  Then there will be a MAD rush by lawmakers to close those opportunities and tax advisors and their clients to find new ones.  It is MAD because it is so inefficient.  If you want high tax rates then you want to support accountants, lawyers, and so on.

Compromise And A Carbon Tax

Back in August, you can look it up as we don’t cite ourselves, we supported a US carbon tax to replace the gas tax and find some other compromises including means testing Social Security.  Holman W. Jenkins, jr, at the WSJ had some similar ideas.  Now Kevin Williamson at NRO is trending with us:

A modest carbon tax in exchange for meaningful entitlement reform and broader rationalization of the tax regime — a compromise whose components would together do a great deal to put the country on more-stable long-term fiscal footing? That looks to me like the beginning of a pretty good deal.

Kevin doesn’t mention killing the gas tax as part of the deal and we think that is crucial to gaining political support.  We are also unsure of what is broader rationalization of the tax regime.  We are willing to consider entitlement reform other than means testing for Social Security but we don’t see a deal anywhere else.  We would like to think that “rationalization of the tax regime” in concert with a carbon tax means eliminating the gas tax and the reduction and eventual elimination of subsidies for alternative energy.

Our rough estimate is that a carbon tax of $5 per ton and elimination of the federal gas tax would be revenue neutral.  A carbon tax of $20 per ton would leave the the price of gas unchanged.

Sidebar: Even if we have made some dreadful calculation error there is substantial space for negotiation.  End Sidebar.

We end up with a carbon tax of $20 or less, social security is fixed, a little infrastructure spending, reduction in alternative energy subsidies, and some deficit reduction.  What a great deal!  How come everyone isn’t on board?

It is a great deal for the left.  They tax the carbon emitters, eliminate the gas tax (perhaps the net price of gas goes down), and take Social Security money away from rich folks.  We could write the stump speech for the candidate.  It is such a good deal that there needs to be something given up by the left like a reduction in alternative energy subsidies.  Yes, there is a problem with changing their tune on Social Security but given their control of the press it really isn’t a problem.

It is a good deal for the right as it reduces the deficit immediately and long term.  It also gives reasonable (we are not sure they are correct) incentives based on the risk caused by carbon.  Kevin’s article is about risk and the political risk of this deal is largely borne by the right.  Some on the left would love an onerous carbon tax rather than the moderate one that is supported by Kevin, MWG, and others.  How can the right be sure that the carbon tax does not become onerous?  It is a risk and a reason to walk away from the deal.  One of the commenters on Kevin’s article pointed out the risk that the excess revenue would be wasted.  It is another risk.  It is highly likely that some new revenue will be wasted.  Saving some of the money now spent on subsidies for alternative energy would reduce that risk.

We agree with Kevin that the country is not on stable long-term fiscal footing.  We are open to other deals that move towards a stable long-term fiscal footing..  We think that this is the outline for a reasonable deal.  Expecting the other side to capitulate is not a reasonable deal and time is running out.  Folks might disagree on why time is running out but as long as everyone agrees that time is running out there might be a political compromise in the works.

 

We Can Only Hope

Mike Rappaport at Law and Liberty has a nice turn of phase on taxation and fringe benefits (h/t: Instapundit).  The title is: The Indefensibility Of US Fringe Benefit Tax Laws.  Mike is starting as series on indefensible policies and first off is:

One indefensible policy involves superior tax treatment for employee fringe benefits, such as health insurance and retirement benefits, which operates to harm lower income people.

Mike is exactly right to start with fringe benefits.  We have benefitted from such policies but we still support making the tax law defensible.

Sidebar: We have always supported making fringe benefits taxable.  It is true that the change wouldn’t cost us as much today as it would earlier.  End Sidebar.

One that Mike leaves out that was an enormous benefit to us is the conversion of sick days into health care benefits.  These exceptions lead to all kinds of strange behavior but because they benefit so many people it is hard to find support to go to defensible policies.  If we US dictator for a day, making fringe benefits taxable would be at the top of our list.  We would love to see a Democratic presidential candidate burnish his populist credentials by supporting such a change.  It would be way cool to have a Democrat to vote for but we don’t see it happening.  Nice job Mike.

Falling At The First Fence

Elizabeth Warren has proposed a wealth tax as part of her campaign for the Democrat presidential nomination in 2020.  Jeff Spross at The Week has tried to get the wealth tax over the lowest possible bar: This is not crazy.  Unfortunately, Jeff’s horse, Wealth Tax has not even cleared that bar.  Jeff has what he calls a moral argument:

Taxing the portfolios of the super-wealthy at 2 or 3 percent a year may seem small. But the effects would compound over time. “We think it could have a significant affect on wealth concentration in the long run,” Emmanuel Saez, a left-leaning economist who consulted on the proposal, told The Washington Post.

Really, two or three percent a year seems small?  You are going to tax their wealth that produces, say, eight to ten percent a year at two or three and then tax their income too?  Envy is not much of a moral argument.

Then Jeff tries an economic argument.  We think this is one:

To the extent investment by the wealthy does matter, the ultra-millionaire tax could create a “use it or lose it” dynamic that would actually spur job creation and wage growth. Right now, wealthy Americans can just sit on their wealth holdings, take no risks, and get interest and returns on it.

Umm, wealthy Americans can just sit on their wealth and take no risks.  Well, we suppose they can do that and get pitiful returns on risk free investments.  We are OK with that.

There are at least three reasons why the wealth tax fails Jeff’s test: Constitutional questions, implementation, and incentives.  James Freeman at the Best of the Web in the WSJ makes a strong case that it is not constitutional.  We would like to focus on the the impact of the legal battle.  We don’t know if Elizabeth’s proposal passes constitutional muster until the Supreme Court says so.  It is like the Saints-Rams game where it isn’t pass interference until the refs call it.  (Really, you need a cite?  OK).  Just like the football game, one side must lose and the losing side at the Supreme Court will never, ever forget it.  Most likely Elizabeth isn’t worried about this but we should be.  Forcing the Supreme Court to make such a decision is going to hamstring the nomination process for justices and the Court.

The Motley Fool article cited in the first paragraph asks: is the wealth tax practical?  They bring up some serious problems but leave out the big obvious problem.  Why won’t these folks leave?  The solution to that is discussed earlier:

The plan would also increase funding to the IRS to help combat tax evasion, especially by the wealthy, and would also provide for a one-time tax penalty on people who renounce their U.S. citizenship in order to avoid paying the wealth tax.

How good do we feel about expanding the IRS given their previous behavior, especially toward conservatives?  The good news is the Democrats have finally found a wall that they like, one that keeps folks in the US.  How East German.

The incentive question is: Do we want folks to spend their time avoiding taxes or leading and innovating.  Wouldn’t you have to be crazy to pick the former?  That’s how Wealth Tax fell at the first fence.

Fooling Fifth Graders

Eric Zorn, a writer for the Chicago Tribune, showed up in the La Crosse Tribune with an oddly title op-ed, A Lesson On How Progressive Taxes Really Work.  Our former governor, Scott Walker has taken the Media Darling (MD) to task for her suggestion a top marginal rate of 70 percent.  It is epically foolish for exactly the reason Scott states, it is not fair if you earn ten dollars and you parents take seven dollars.  Here is a more technical explanation.

Eric tries to make two points.  One is technically correct but only a distraction.  He says that marginal rates and average rates are different.  Yup.  The question Eric and the MD don’t address is why they want to give such bad incentives to anyone.

Eric’s second point is that rates in the US and elsewhere have been much higher. George Harrison, as part of the Beatles, sang as part of The Taxman:

There’s one for you, nineteen for me
Cause I’m the taxman

to point out the foolishness of the 95 percent margin rate in the UK.  JFK and Ronald Reagan revived the US economy and the UK was revived by Mrs. Thatcher who recognized the foolishness of such high marginal rates.

Why are such rates foolish?  Because they cause folks to spend their time figuring out ways to avoid such taxes.  Bjorn Borg and others moved to Monaco.  Lots of financial advisors got rich.  Flatter tax rates like we currently have eliminate lots of wasteful activity.  They are also extremely progressive because income is more likely to be reported.  Here is a 2014 report showing that the top one percent pay more in federal income taxes than the bottom 90 percent.

Near the end Eric comes to the real progressive point which is envy:

Conservatives who have pushed down top marginal tax rates and expressed nonchalance about the subsequent massive growth in the wage gap have so far kept such initiatives at bay.

Progressives want to attack the rich.  Conservatives want to enrich everyone.  The envy card has been effective for progressives.  We’ve recently seen that seventeen year-olds can be heroes.  Hopefully the fifth graders and everyone else can see through Eric and MD.