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.

 

 

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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.

 

Carbon Tax Again

There has been some discussion if the CNN Climate Change Town Hall was more boring that the Bears-Packers game that opened the 100th season of the NFL.  The game had 17 punts, 20 penalties, and one touchdown.  Holman W. Jenkins, Jr. at the WSJ watched enough of the Town Hall to weigh in.  He ties it to a Harvard professor and some science stuff that the Town Hall folks allege they worship:

It comes just days after the shocking suicide of Harvard climate economist Martin Weitzman, rightly praised in obituaries for an insight lacking in the CNN town hall: A climate disaster is far from guaranteed. It’s the low but not insignificant chance of a “fat tail” worst-case disaster that we should worry about. (Mr. Weitzman put the odds at 3% to 10%.)

We had not heard mention of it before but it appears that one of MWG favorite topics came up briefly at the Town Hall.  Holman tells us

As the New York Times also noted, “For the first time, Ms. Warren explicitly embraced a carbon tax before quickly pivoting away . . .”
What’s Ms. Warren afraid of? A carbon tax would hardly be prohibitive. Weitzman advocated $40 a ton—the equivalent of 36 cents per gallon of gasoline. Such a tax could be implemented without raising the overall tax burden; it could be used to trim taxes on work, saving and investment, improving the economy overall. It could be embraced and copied by other nations out of self-interest rather than self-abnegation (unlike the absurd Green New Deal). [Emphasis added]

A carbon tax of $40 is twice what we have suggested but it is on the upper end of modest range.

Sidebar: We are really pleased that our back-of-the-envelope computations agreed with Holman and, perhaps, Martin.  We estimated that $20 per ton would be equal to the current federal gas tax of 18.4 cents per gallon.  The part in bold shows that we had the relationship right.  Wheeee!  End Sidebar.

It also matters what else is done.  We like Holman’s suggestions.  The gas tax goes and then there would be some negotiation.  We would like to see alternative energy subsidies go too.  At $40 a ton we might be able to eliminate all tariffs but that would require a new administration.  An alternative could be a permanent reduction in FICA taxes so the tax burden for low income folks does not increase.

Why didn’t all the Democrats embrace a carbon tax?  Why weren’t they asked?  And asked to provide specifics?  The answer, as many suspect including Mario Loyola at NRO, seems to be that attacking capitalism is the real goal.  A carbon tax would be part of a capitalistic solution.  It is an idea that conservatives should seriously consider.

A Ray Of Sunshine

We are depressed with The Donald raising taxes (tariffs – Hokey smokes, Pete is right) on Americans to show the Chinese.  We are with the editors at NRO:

Trump responded to the setback in talks by raising tariffs, and China reciprocated. The escalation of the trade war poses increasing risk to our economy, as stocks have been signaling. The best course for the U.S. now would be to reach a swift resolution in the current talks — getting back to the deal that seemed to be on the table before China miscalculated — and then switch to a strategy for changing Chinese behavior that does not depend so thoroughly on possibly backfiring tariffs.

Meanwhile, here was a ray of sunshine from Mark Perry at Carpe Diem:

RelatedCNBC reported today that “Walmart’s U.S. store managers earn an average of $175,000 per year and receive benefits including parental leave, health benefits and 401(k) contributions. That’s higher than the average salary of some of the country’s best paying jobs, including dentists, who make an average $174,110 a year, according to U.S. News & World Report, and lawyers, who make an average of $141,890.”

Who-d a-Thunk It? Walmart managers make more than dentists and lawyers on average? And I’d bet [we were sure before the update] many of them started as hourly associates and worked their way up to store manager…. but, but, but I always heard those retail jobs at Walmart were dead end jobs….??

Update: According to Walmart “75% of its Walmart U.S. store operations management team members started as hourly employees.”

It is the natural financial life cycle of humans in our age of abundance.  Folks build skills while working low paid (and often menial) jobs and fighting financial challenges while they are young.  They use these skills to manage their finances and build a career.  There are lots of individual exceptions.  Some folks like Bill Gates go for it and make it big early.  Other folks go for it and fail.  Check out the restaurant turnover in your hometown.  Some folks fail to build skills because of chemical dependency or other issues. Still it is what most people do and a good plan for most folks.

This is why increasing the minimum wage is such an insidious idea.  It doesn’t just throw people out of work but it can ruin their lives.  The ray of sunshine from Mark reminds how well the natural financial cycle does work.

 

Bigger Fool Theory

Paul Mirengoff over at Powerline is discussing the dance of The Donald and the Chinese over tariffs.  It appears that The Donald is going to slap a substantial tariff on Chinese goods coming into the US.  We are not convinced by Paul’s arguments but read it all and see what you think.  We are most concerned when Paul says:

China is notorious for its bad faith in international relations, so we shouldn’t be surprised that it apparently has reneged on commitments made during negotiations. The proper response is to do exactly what Trump plans to do — inflict more pain on China. [Emphasis added.]

We are OK with the first two sentences but not the third.  As we have said, we don’t like being The Donald’s human shields.  Paul is wrong because The Donald is not inflicting pain on China.  He is inflicting pain on us by raising the prices we pay.

Now it is possible that there are rational rationales for The Donald’s behavior.  First, it might play well in his upcoming election.  Second, it might be a good negotiating strategy for both this round of talks and upcoming issues with the Chinese.  There are sure to be some of those.  Third, it will provide a little revenue to finance the government.  The first is surely a version of the bigger fool theory.  The third is a variant of it.  The Donald implements a regressive tax (tariffs) and the folks taxed love it.  We hope the second is the reason but we are not convinced.

Shoot The ******

We need Mel Brooks.  He would have the Donald and Xi each holding himself at gunpoint and, like Cleavon Little in Blazing Saddles, threatening to shoot themselves and using some racist name to make it even more silly.  Kevin D. Williamson is on it at NRO and Mark Perry is all over it at Carpe Diem but we really need Mel because this situation needs humor rather than logic.

It is too silly.  The Chinese harm their folks by raising taxes and raising prices for their citizens.  The Donald says he will harm Americans [we don’t really understand why] perhaps to get even with the Chinese for harming their people.

Sidebar: One almost rational rationale is that The Donald is using bluster to negotiate.  The problem is: what is he negotiating?  He is trying to get the Chinese to lower their taxes and help out the Chinese.  That is nice but we don’t like being a human shield.  End Sidebar.

The Marx Brothers were good on this topic but Mel would be great. Unfortunately if The Donald raises our taxes (tariffs) then as Mel has Slim Pickens say, “We’re gonna need a sh*tload of dimes.”