The Conservative Brand

Jonah Goldberg at The Dispatch is on about The Donald as is his wont. The headline is:

Does The Word “Conservative” Mean Anything Anymore?

Below it is:

Positions Aren’t Conservative Just Because The Republican President Holds Them.

You should read the rest of this before you read all of Jonah’s so you can evaluate what we have to say.  The second one isn’t a questions but we would say yes to both.  Conservatism has great meaning because so many people what to be one.  We don’t, however, think The Donald is a conservative and so his positions don’t determine conservatism.  We voted for him once and we will vote for him again but he is not, as we see it, a conservative.  The Donald holds some conservative positions but, as we see it, conservatism is largely about process and that is why The Donald is not a conservative.  We would prefer a more conservative option but one is not on offer.

What Jonah needs to recognize is that, unlike liberal, progressive, or libertarian, conservative is a great political brand.  People (lots of them but obviously not everyone) want to support and vote for conservatives.  Thus, there is a great battle to be anointed as a “true” conservative.  The Donald and his supporters want him to have the advantage of the conservative brand.  We agree with Jonah that he should not have the conservative brand but the nature and details of conservatism, and every other political designation change over time.  Some folks might find our “heresy” of supporting a modest carbon tax sufficient to be excommunicated as a conservative. We think economic freedom, political freedom, and due process should be high on the list for somebody to be considered a conservative.  The Donald supports economic and political freedom some of the time but he is a results guy rather than a process guy.

Sidebar: Of course the details get tricky.  When is the carbon tax no longer modest? What should we do about Venezuela?  How can we support economic an political freedom there and elsewhere?  End Sidebar.

Exactly what conservatism means beyond the great brand is a political and philosophical debate.  We need to continue the debate.  We need to recognize that few political candidates will be full conservatives.  If you are going to wait for a true conservative to support you won’t vote very often.

 

Go Big Or Go Home

Eric Boehm at Reason has a Reason-able position.  He says the next stimulus package should eliminate tariffs.  We agree it is a great idea.  It is never going to happen but lots of great ideas don’t get implemented.  It turns out Eric is asking for small potatoes:

In a new paper he’s authored, Young highlights the costs of the trade barriers erected by the Trump administration. He says repealing the tariffs, which have cost about half a percentage point of economic growth per year, according to estimates by the Congressional Budget Office, should be common sense.

Eric is talking about Ryan Young at CEI.  The Donald’s tariffs are a tiny part of our tariffs.  Since it is never going to happen, we think Eric should go big.  Why not eliminate all tariffs?  Ryan’s logic on The Donald’s tariffs apply to all tariffs.  Let’s start with our negotiating point being the elimination of all tariffs. Let’s have a serious discussion rather than arguing over peanuts.

Technically True?

Oil prices are down.  Bloomberg finds an unusual cloud in this silver lining: “The fight against climate change may suffer a setback as fossil fuels become more competitive versus renewable energy.”

Sidebar: Yes, we should have a link but this came up on our phone and we are writing on our computer.  Yes we should have better technical skills and we probably could find it but we have a handball game shortly.  End Sidebar.

Saying fossil fuels, really oil and natural gas, is more competitive is liking saying Liverpool would be more competitive in the Premiership if they signed Messi.  They currently lead the Premiership by what we expect is a record 25 points.  Currently taxpayers support rich folks buying fancy electric cars.  Alternative energy is generally not competitive and often not reliable.  So what Bloomberg said might be technically true but a more honest way of saying it is that renewable energy will be even less competitive with these prices.

It would be an especially good time to implement a modest carbon tax, eliminate the gas tax, and eliminate subsidies to renewable/alternative energy.  That way instead of the government trying to guess what “alternative energy” would work we could let the market do it.

Wealth Tax: Bombing The Rich

James Freeman at Best Of The Web on the WSJreports on a study by the Tax Foundation on proposed wealth taxes advocated by Liz and The Bernie.  Our access to the report was denied so we can only use what James reports:

Huaqun Li and Karl Smith of the Tax Foundation estimate today that Sen. Warren’s wealth tax would collect roughly $2.2 trillion and Sen. Sanders’ version would collect $2.6 trillion over the 10-year period from 2020-2029.

“Warren’s wealth tax would reduce long-run GDP by 0.37 percent, while Sanders’ plan would decrease it by 0.43 percent,” according to the Tax Foundation report.

Wealth taxes aren’t rational.  They hurt the economy and they don’t produce all that much money for the government.  And, of course, by punishing wealth they will produce less money in the future.  They are interesting to economists because of the opportunity to study the “unintended” consequences.  We used quotes because we are not sure exactly what Liz and The Bernie intend other than punishing wealthy people but it is a pretty indiscriminate method of bombing the rich.

Economists will be happy about the research opportunities.  Wealth taxes are great news for accountants too.  There will be lots of compliance work but even more avoidance work.  But almost everyone else will lose.

One of the things that James doesn’t bring up is that they will need to build a wall to keep the wealthy from leaving the USA.  This wall will actually be analogous to the one formerly in Berlin because it is designed to keep people in.

Another problem is that wealth tax will reduce the returns on assets.  That will reduce the value of those assets.  That will make retirement more difficult for the middle class who have either defined benefit plans or financial assets in IRAs or other vehicles.

Sidebar: Why will it hurt folks on defined benefit plans?  We will use the State of Wisconsin as an example.  Initial payments to retirees are a floor.  When the stock market goes up the payments goes up.  If it goes up and then down, the minimum payment is the floor established at retirement.  These defined benefit retirees would then be truly living on a fixed income.  End Sidebar.

It is hard to imagine folks near to or in retirement would support a wealth tax.  They may not hit the minimum for the wealth tax but they will be hard hit when the value of financial assets goes down.  They will just be collateral damage in bombing the rich.

Government Success

We are often skeptical of government initiatives.  There is a good reason for that as so few work the way they are supposed.  We have an exception: the IRS has come out with Form 1040-SR, US Tax Returns for Seniors.  If you were born before January 2, 1955 you should use it for your 2019 return.

It even came through normal legislative order:

Then, on February 9, 2018, the Bipartisan Budget Act was signed into law by President Donald Trump. The BBA required that the Internal Revenue Service create and publish Form 1040-SR.

The article the excerpt above comes from saysincorrectly that:

The tax form for seniors also disallows itemized deductions. You must claim the standard deduction for your filing status if you choose Form 1040-SR,

This is not true.  Form 1040-SR says on line 9, Standard deduction or itemized deductions (from schedule A [where you have always put them]).  So you can still itemize with SR in the normal way you did before.  There are some limits to 1040-SR but itemizing isn’t one.

One of the innovations that makes 1040-SR so much better than 1040 is that the increased standard deduction for seniors is easy to find.  On the regular 1040 you check the box for age but there is no mention of what the impact of checking that box is.  You could lose a substantial deduction ($2,600 this year) if you don’t hunt through the instructions.

Another reason 1040-SR is much easier because it is in larger print that regular 1040.  We don’t know the font sizes but the differences are substantial.

Hurray for the Congress, President, and the IRS.  Form 1040-SR is a good idea properly implemented.  Almost all seniors should use it.

Climate And A Carbon Tax

We written less recently because all of the oxygen seems to go to discussions of impeachment that bore us to tears.  The good news is that we read more books and reviews will be coming shortly.  We needed something optimistic to start the political and economic juices flowing like the always interesting Holman W. Jenkins, jr. at the WSJ.  Of course, you should read the whole thing.  He is discussing the Australian wildfires when he says:

And yet the zeitgeist, I think, is changing (and I like to think this column played a role). “Denier” is getting a last go-round in Australia at the hands of some whose wrong-footedness is their most salient quality, but the term is increasingly recognized as a sleazy way to refer to people whose views are perfectly compatible with the lower-end estimates of the U.N.’s Intergovernmental Panel on Climate Change.

We hope Holman is right.  We are not convinced as we see the silliness of impeachment, the behavior of the folks seeking the Democrat nomination for president (especially their statements on climate change), and The Donald’s rhetoric as evidence that the zeitgeist is, at best, changing very slowly.

Later on Holman comes to agree with us on a modest carbon tax:

It may take five more years, but you probably won’t even notice the debate that eventually spawns a U.S. carbon tax. A carbon tax equivalent to 13 cents per gallon of gasoline would have let Republicans in 2017 realize their fondest tax-reform hopes.

Holman’s carbon tax of 13 cents is particularly modest as we would support a carbon tax almost 50 percent higher.  We support eliminating the federal gas tax (18.4 cents) and replacing with an equivalent tax on all carbon.   Taxing carbon should lead to a reduction in government support for non-carbon based energy sources.  That is, less crony capitalism.

Holman doesn’t explain why he picked it but his time frame of five years is interesting.  Five years would mean 2025 after The Donald has finished his second term.  We are not convinced that The Donald riding into the sunset will help change the zeitgeist but we hope Holman is right.

Income Inequality Part ???

Income inequality is a bogus issue.  If you want to help the poor then you need to look at serious issues including how to keep families intact, how to get folks to move to economic opportunities like the fracking boom in North Dakota, and reduce barriers like regulations on jobs or minimum wage increases.  The other thing you want to do is pay homage to the growth fairy.  The growth fairy has made us all rich.  Whether you call it Jonah’s Miracle or Deirdre’s Great Enrichment, growth is the key element to why we are all better off.

Robert Verbruggen at NRO has a nice article on how folks are trying to repackage income inequality to gin up the politics of envy.  He is reacting to a NYT article touting The Triumph Of Injustice by Emmanuel Saez and Gabriel Zucman.  Robert starts out with the book’s claims:

Per Saez and Zucman, while the rich have been pulling in more and more of the nation’s income — grabbing about a fifth of it now, double what they got a few decades back — they’re paying lower and lower tax rates. Indeed, in 2018, the richest 400 Americans paid the lowest overall tax rate (including state, local, and federal taxes) of any income group. While the very richest Americans in 1950 paid two-thirds of their income in taxes, in 2018 it was down below a quarter; even the full top 0.1 percent barely pay more than the bottom 90 percent these days. It’s not that much of an exaggeration to say we have a flat tax system, not a progressive one.

These claims seem silly when compared to the data on federal tax returns from the Tax Foundation:

The share of reported income earned by the top 1 percent of taxpayers fell slightly to 19.7 percent in 2016. Their share of federal individual income taxes fell slightly, to 37.3 percent.

The rich are making less than 20 percent of taxable income but paying over 37 percent of federal income taxes.  What the book is doing is making an invalid comparison between taxes computed on one basis and income computed on another basis.

Robert tell us measuring income is complicated:

As the JEC report details, this is only the first of many technical decisions researchers must make that affect the results. Should we worry about income inequality before or after taxes are taken out? Should we include governmental transfers as income? Should we analyze married couples together or separately, bearing in mind the decline of marriage in recent decades, especially among the poor? How to handle corporate profits that are retained rather than given out to shareholders? How to handle stocks that have grown in value but have not been sold?  [Emphasis added]

Yup, computing income is complicated.  We would like to give an example of the last item that we have made bold.  Income, as accountants and especially PhD students know, can be measured in a variety of ways.  Taxable income would be one and financial accounting income (GAAP) would be another but there are others.  When measuring the income, what accountants call unrealized holding gains (UHG) become a big issue especially for individuals. An UHR happens when an asset owned by an entity or individual goes up in value.  Taxes are not paid on the UHG until the asset is sold or in the case of your house not paid at all.  This is one of the reasons that the individuals in top one percent of taxable income varies so much from year to year.  Individuals (generally) only pay taxes on your cash income as your start up company prospers but when the individual sells it to a bigger company, depending on how it is structure, it might cause a big income year.

Let’s take a plausible example to help you understand.  Bill Gates is estimated currently to own over 400 million shares of Microsoft.  He doesn’t pay taxes on the UHG unless he sell the stock.  So let’s say (this is total guess) Bill has cash income of $100 million.  Microsoft is up almost $40 per share this year.  It is a bit of an over estimate but it keeps the math simple.  Bill has an UHG of $16 billion versus taxable income of $100 million and taxes of less than $37 million.  Of course in 2000 when Microsoft decreased in value by over $30 per share and Bill owned many more shares then his tax rate would be astronomical.

Sidebar: It makes good policy sense to tax on a mostly tax basis because taxes must be paid in cash.  End Sidebar.

The argument is all about timing.  When you measure income one way by including UHG and taxable income another way then trying to make a ratio is …  [we pause here as we try to find a word other than crazy or insane] … bad methodology [as we retreat to jargon].

Don’t listen to the envy lobby.  Income inequality isn’t important even if we could agree on how to measure it.  Regulations (generally anti-incentives) and incentives are important.  Let’s worry about those.

 

Full Employment: Accountants Only

We love accountants.  We spent the majority of our life educating them.  Unfortunately, we cannot support the plan for a massive expansion of the opportunities for accountants.  Veronique De Rugy at the NRO Corner has the details on Elizabeth Warren’s proposed wealth tax.  You should, of course, read the whole thing.  The tax is loosely justified as a response to income inequality but as we have often said the issue is really envy.  Finding the levers to adjust income inequality and agreeing on the right level of inequality are akin to trying to predict climate change.

The one sure thing is the wealth tax will provide lots of opportunities for accountants. Veronique right when she tells us:

That’s why wealth taxes are always so hard to administer and so easy to avoid. It makes them a terrible vehicle for raising money. [and later]

But apparently the senator thinks she can avoid any problems by implementing anti-avoidance measures such as a repressive 40 percent exit tax on any targeted household that attempts to emigrate, minimum audit rates, and increased funding for IRS enforcement.  [Emphasis added]

Because it is off her topic she has left out is all the opportunities for the accountants in the private sector to avoid or reduce the tax.  She mentions that a wealth tax might be unconstitutional.  There is also the issue in bold above.  Can we really tax people that want to leave such a repressive regime?  On both those questions it is wise to reject the proposal rather than count on the courage of the Supreme Court.  Especially when the left wants to pack the court.

One issue we would like to see discussed is the impact of the wealth tax on wealth.  We don’t have a complete model but when wealth produces about eight percent returns and you tax it at two or three percent then the returns on assets are substantially reduced.  That, it seems to us, would reduce the value of assets.  The folks that pay the tax own lots of assets and lots of them are equities.  Equities won’t have two prices.  Will the wealth tax reduce the value of equities?

A wealth tax is at least a really bad idea for everybody but accountants.  It might be absolutely terrible if it has a major negative impact on equity prices.

 

 

Bad Evidence Leads To Wrong Conclusion

We have some longer or deeper things we are trying to work on but folks keep writing foolish things that need to be dealt with.  In this case it is Jeff Spross at The Week.  The Week appears to be a serious publication with, one would think, editors. How, then, did Jeff’s “How The Democrats Can Raise Taxes Without Technically Raising Taxes” end up on The Week?  We don’t know.

Jeff sets up the article by discussing that the The Donald’s administration decided not to index capital gains for inflation.  Then he says:

But Democrats — or anyone, really — should take a hint from Trump’s decision. It’s not just that capital gains shouldn’t be indexed to inflation; income taxes shouldn’t be either.

Doing away with that indexing would raise plenty of new revenue for the government. But more fundamentally, it would fix a basic misunderstanding about good macroeconomic policy.  [Emphasis added]

Jeff is serious.  And he is seriously wrong.

Sidebar One: Jeff has no comment on the standard deduction which is also currently adjusted for inflation.  End Sidebar One.

It doesn’t seem to us that “You are paying more taxes but we didn’t really raise your taxes” is much of a rallying cry for any party.  The more serious problem is Jeff’s understanding inflation.  Here is Milton Friedman explaining that inflation is a monetary phenomenon.  In the United States, Milton tells us, inflation is made in Washington DC.

Sidebar Two: If you want you can now discuss the extent to which the Federal Reserve, which controls the money supply and hence inflation is independent within the government.  You can come back to that discussion later as it might take a really long time.  End Sidebar Two.

Jeff doesn’t agree with Milton. Jeff thinks inflation is caused by supply-demand problems.   Jeff says that we need higher taxes as a brake on an overheated economy:

Here’s the problem with that logic: If your economy is experiencing high inflation, like what we went through in 1980, then it needs to slow down. Mainstream macroeconomics assumes that high inflation is evidence of an overheating economy: too much demand chasing too little supply. In which case, to cool inflation off, money needs to be taken out of the economy. And taxes are one tool for doing just that.  [Emphasis added]

There is a big problem with Jeff’s example.  We checked the economic data for 1980 at The Balance.com where they have unemployment at year end, GDP growth, and inflation by year on one page.   It was really easy to find and somebody at The Week should have checked.   At the end of 1980 the unemployment rate was 7.2 percent, GDP growth was negative signaling a recession, and inflation was 12.5 percent.  So Jeff’s example contradicts his theory.  Rather than the economy being overheated it was in recession.  How about Venezuela?  Nope.  Zimbabwe?  Nope and you can even use the same cite for that and more.

Few people have been more exactly wrong than Jeff when he says that indexing income tax brackets is pro-inflation:

By contrast, brackets that are indexed to rise with the price level are essentially pro-inflation. As the inflation rate increases, the rate at which the bracket thresholds rise increases as well. That’s a fiscal stimulus added to the economy right when it’s already running too hot. In fact, Russel Long, a Democratic senator from Louisiana at the time, made this exact point, arguing indexing would “make inflation worse by pumping more money into circulation at a time inflation is at its worst.” [Emphasis added}

Inflation is at best independent of real economic growth.  What makes Jeff so wrong is that the government (see Sidebar Two above) controls inflation.  To have the government benefit from inflation by increasing receipts from bracket creep is a really bad incentive for folks who want to avoid inflation.  Hint: that should be almost everyone.  Indexing brackets is strongly anti-inflation because the folks that control inflation, the government, have fewer incentives to inflate.  It is really important that inflation indexing for brackets and standard deductions stay.  It is also really important to check the data that you rely on.

 

 

Carbon Tax Analysis

It depends is the most reliable answer to almost any question other than is socialism a good idea?  It is particularly true as an answer to the following: should the US have a carbon tax?  Our starting points are that first, the left wants a carbon tax so there is space to negotiate with them.  Second, a carbon tax is conceptually a good idea because there is some relationship between carbon and global warming and we would, all other things being equal, like to reduce carbon emissions.  Third, a carbon tax is a good way to do that.

Paul Mirengoff at PowerLine has a discussion of carbon tax that we would like to review. We agree with much of his analysis but not his final decision.   Paul is correct that that the cost would be borne by consumers:

First, the cost of the carbon tax would be passed on to consumers:

While oil, natural gas, and coal companies would be responsible for paying the fee, they would likely pass a significant share of the associated cost on to their customers.

Yup, no doubt.  We are willing to agree that 100% will be passed on to consumers.  The GOP should see that low income folks are not sacrificed.  There are many ways to do this but the most obvious would be to reduce FICA, the biggest tax for most low income folks.  Make the first N thousand dollars of income not subject to FICA where N is the number that eliminates the impact of the carbon tax.

Sidebar: We could make this complicated and decide that only N at the first job applies.  We don’t think so.  If somebody works several different jobs we are OK with them benefitting from reduced FICA several times.  We think it is not exactly “fair” but the costs are not worth the benefits.  End Sidebar.

Like tariffs, sales taxes, and VATs it will fall more heavily on low income individuals:

Second, a carbon tax would have a disproportionate impact on low-income households:

As with the increase in energy costs, the increase in the cost of nonenergy goods and services would disproportionately impact low-income households.

Yup, no doubt.  Again, this can be fixed.  FICA is part of the solution.  Another part is to eliminate the gas tax that is currently 18.4 cents per gallon.

Paul might be right that is is not popular but we think presentation might matter:

Not surprisingly, the carbon tax is unpopular with voters. Indeed, Americans for Tax Reform notes that carbon tax advocates haven’t been able to get a carbon tax passed in a single blue state.

Two items are worth mentioning here.  First, carbon taxes by state are a really bad idea.  Second, in a purple USA, we can get a carbon tax that is modest and allows us to do good things like eliminate subsidies to alternative energy.  As our tweeter-in-chief might say, it all depends on the deal.

Again, in summary, a modest carbon tax, say, $20 per ton, that eliminates the gas tax and alternative energy subsidies while reducing low income FICA is a good idea.  We don’t know if the Democrats are willing to make the deal.  It might even be good politically even if they are not willing.