Stupid Tax Breaks

Oh, joy.... The Senate wants to reinflate the housing bubble.

The Senate on Wednesday voted to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000, a provision championed by Republicans as addressing a root cause of the recession.

The downside is, it has to be used to buy your primary residence. The upside is, maybe I can sell "my" house to my wife - I purchased it before we married - and get $15,000 in free money. I'll have to read the fine print.

This one should be fun, as well:

On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

Would this work: I sell you a car at 25% interest. At the end of the year if you've made all your payments on time, I give you 15% of your interest as a credit toward your remaining principal balance and adjust your future interest to market rates. I end up with a great rate of return on the loan, you end up with a 15% discount on your car, and the government picks up the entire tab!

What other genius ideas are coming down the pike?

Entrepreneurship and Taxes

Although there are some valid points buried within, it is hard to discern why ABC News deemed this editorial by Michael Malone worthy of publication. Although I agree with him, that entrepreneurship plays an enormous role in the success of our economy, and that laws and government regulations are nonetheless constructed in a manner that is favorable to large businesses, and in many ways unfavorable to small businesses and start-ups. I don't think that it can be reasonably disputed that this has become worse under G.W., who right now is trying to gut antitrust regulations on his way out the door.

But a lot of what he claims is just plain stupid. Platitudes like, "Sen. Barack Obama, being a Democrat, seems to have very little idea of how the economy actually works" and "Sen. John McCain, being a Republican, has a marginally better understanding of the economy and the role of business - but his attention, as usual with GOP elders, is focused upon established companies, which undergird our economy, but do little to create new jobs or new wealth" - as if McCain's expressions about the limits of his understanding of economics are reduced to vapor by his party affiliation, or as if Obama would have an economic epiphany if he switched parties. Facts? Evidence? Who needs those when you have stereotypes and caricatures.

Malone's observations about entrepreneurship are similarly trite,

Meanwhile, established and big companies understandably hate entrepreneurship and will do almost anything to slow the progress of entrepreneurs - like all of those onerous regulations described above. And it has worked: This year has seen almost no high tech company IPOs, traditionally that moment when entrepreneurs gained their freedom and rewarded their teams.

A low level of high tech IPO's can, it seems, only result from start-ups being stifled and crushed by the iron fist of established companies. It has nothing to do with, for example, their number, the economy, or their state of readiness for going public. Malone also forgets how rare it is for a company to go public, and glosses over the fact that, once public, they're well on their way to being one of the "established and big companies" that supposedly "hate entrepreneurship".

These days, the only recourse for a hot start-up company is to sell out to an established company - further consolidating power and wealth. And meanwhile, of course, those older companies find it much more pleasant to buy these new competitors than compete with them.

It's not the only recourse, but obviously when the economy is bad it can become a superior alternative to trying to ride out a recession - not every company is Google. But really, prior to the original dot-com bubble, how many software companies dreamed of an IPO rather than, for example, being purchased by Microsoft? How many V.C.'s, investing in these companies, expect every company in their portfolio to end up going public as opposed to accepting favorable buy-outs from established companies? And sometimes a buyout is the best option for a company that has no viable stand-alone business model. How many start-ups like YouTube can afford to operate at an extremely high cost indefinitely, while their owners struggle to come up with a way to monetize their content? For that matter, what's so bad about being purchased by a major player, whether pre-IPO or post-IPO?

Nothing in McCain's campaign suggests that he understands any of this, or will change the status quo. To look more hip and in-the-know about the tech world, the senator likes to point to the fact that eBay's Meg Whitman is his campaign's advisor on business.

She is, in fact, one of the finest business executives I know, but Meg is not an entrepreneur.

Wait - didn't Malone just tell us that an understanding of the economy can be inferred party affiliation alone? Okay, so even he knows that's bunk. But to attack McCain's association with Meg Whitman, as an attempt to "look more hip" because, although one of the best business executives in the nation who helped elevate eBay from a start-up to a titan, she didn't personally start eBay? Of all of the companies that have rapidly risen from start-up to multi-billion dollar enterprises, how many have done so without bringing in professional management? How many entrepreneurs are their who are considered to be word-class, great, or dare I say even good CEO's once their businesses went public? (I'm only half-joking here - Ford, Jobs (in the latter part of his career), Ellison... Do I need both hands to count them?) For the most part, professional managers don't start businesses, and entrepreneurs reach a point where they need to bring in professional management.

And this suggests that a McCain presidency is not going to come to the aid of America's entrepreneurs - and that the best we can hope for is that it will get out of the way, at least when it comes to taxes. That may work, but it will be a long, slow recovery.

So we've switched back from high tech to the more generic category of "entrepreneur", with a lot of entrepreneurs being decidedly low tech, most employing only themselves, and almost none earning so much as to not benefit from Obama's tax cut. But no, neither candidate is going to give the type of tax relief that would make a typical entrepreneur smile - relief from self-employment taxes, or (something that could benefit all wage earners) eliminating the double- and triple-taxation of income that results from payroll taxes.

Surely here Malone is focusing solely on capital gains taxes, something that would be a pressing issue for a minority of entrepreneurs - those seeking venture capital, with capital gains taxes figuring into the V.C.'s calculation of return on investment, and those giving out stock options and intending to go public. (I'm not overlooking other circumstances where capital gains taxes can arise; but most small businesses aren't actively looking for investors or buyers, and they typically don't fall from the sky.)

As for Obama, leaving aside all of his other proposals for massive social change, the single most frightening plank in his platform is his plan to increase the capital gains tax. If there is one single factor in the U.S. economy that defines the rate of new company creation, it is taxation on capital gains - in particular, the differential between the capital gains and regular tax rates. To understand the long Reagan/Bush/Clinton boom of 1980-2000, you need only look at Reagan's slashing of that differential.

Leaving aside for the moment the "sheer terror" of a 20% capital gains tax, did it occur to Malone that he should actually read Obama's tax proposal before attacking it?

The Obama plan will ... Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of healthcare and to reward investments in innovation.

Truly terrifying.

Assuming that his comments about "corporate greed," etc. indicate that he has no intention of getting rid of Sarbanes-Oxley or any other crippling corporate regulation, then Obama's plan to raise the capital gains tax will all but kill creation of new companies - especially new tech companies - in America.

Yeah, "raising" the capital gains tax to zero will do that.... But let's pretend that Malone has a point - let's pretend that we're entering a business environment where the capital gains tax rate will be 20% instead of fifteen percent:

No new Apples or Facebooks or Twitters, no explosive new industries spinning off endless amounts of money and jobs, no new competitive advantages in the global economy.

That first example is fascinating. Apple, Inc., of course, was founded in 1976. You know, when the maximum capital gains tax rate was 49%. And yet Jobs and Wozniak still started their company? Amazing. Well, they reportedly incorporated on April Fool's day, so maybe they just didn't "get" that they were supposed to wring their hands and fret about their eventual capital gains tax exposure instead of starting their company.

Then Reagan came along and saved the world by cutting capital gains taxes to... fifteen percent? You're joking, right?

The late 1970s and early 1980s brought decreases to the top rates for both ordinary income and capital gains. The top tax rate on ordinary income dropped 20 percentage points to 50 percent in 1982. The capital gains exclusion increased from 50 percent to 60 percent in 1979. As a result of the exclusion and rate cut, capital gains tax rates fell from a maximum of 39.875 percent including an add-on minimum tax, which was widely applicable in 1978, to 20 percent in 1982.

The tax rate differential was eliminated by the Tax Reform Act of 1986 (TRA86) at the same time that top ordinary income tax rates were slashed to 28 percent. When tax rates on ordinary income increased in 1991, the top capital gains tax rate was held fixed at 28 percent. It was subsequently cut to 20 percent in 1997 and to 15 percent in 2003. In comparison, the top tax rate on ordinary income is now 35 percent.

Well there you have it - and don't go believing your lying eyes - we had no boom in tech start-ups, tech IPO's, or flood of so much money into tech businesses that we created a dot-com bubble, because the capital gains tax rate was at or above 20% until 2003. And we've had a boom in tech start-ups, IPO's, etc., since that time because... no, wait, Malone insists we haven't, and that it's a real problem. How is that possible? Maybe he's looking for his answers in the wrong place?

Now about those new Facebooks and Twitters? Those are Malone's best examples of businesses that might not have been started under a 20% capital gains tax, that should go public, or where it would be somehow a tragic loss if they were purchased by an established company? It sounds like Malone is trapped in a time warp - it's 1999, and all a tech company needs to justify a multi-billion dollar valuation and an IPO is a large user base. A business model? A path to profit? An ability to so much as break even? That's so old-school.

Facebook reminds me of the housing bubble. Back when things looked good, people were talking about its being worth $15 billion, and it was spurning proposals for acquisition by companies like Yahoo!, reportedly in the $billion range. Various companies wanted to buy in; Microsoft purchased a 1.6% share of Facebook for $246 million, suggesting a market value in excess of $15 billion. And it tried, and tried, and tried to turn its huge volume of user eyeballs into profit, and the result of those efforts?

As most of Facebook’s growth is outside the US, you’d expect that most of their revenue comes from advertisers targeting international audiences, as well. But that’s not the case. As TechCrunch pointed out months ago, many, many countries generate little to no advertising revenue per user.

* * *

Despite raising probably over half a billion in cash over the last two years, cash reserves are quickly depleting the future may be even more grim for Facebook as the economy slows. Advertising dollars may be one of the first things to be cut. However, as TC points out, Facebook CFO Gideon Yu is in Dubai, looking for more funding for the company.

Facebook grew quickly upon fantastic speculation about its possible future value, spent investor money like a drunken sailor, and is looking at a future where it may not be able to raise enough cash to sustain its operations. So are you thinking, "Why isn't this company going public", or are you thinking, "It needs to be bought out by somebody who has deep pockets and a way to either turn it into a money-maker or to use it to augment their existing money-making operations"?

Twitter is a clever concept, and it has a devoted user base, but it has no obvious path to profitability. Meanwhile, dare I say "established" companies like Facebook have added Twitter-like features to their user interface, to keep those eyeballs on their own sites. And they're having trouble with reliability - with their bandwidth exceeding their capacity - forcing the implementation of policies that may alienate some of their users.

Malone may have a point, that investors paying capital gains taxes at 20% won't invest in companies like pets.com, webvan, eToys.com, kozmo.com, Flooz.com, boo.com, mvp.com, kibu.com, Go.com, Twitter and Facebook, because the marginally lower potential return on investment makes it less desirable to invest in a company that may never develop a viable business model. He may also see companies like Twitter and Facebook as those most likely to turn into corporate giants after an IPO, rather than crashing and burning when they can't even hit a break-even point and run out of money. But let's not pretend that history supports him.

Basicaly, Malone misdirects uninformed attacks at both candidates, gets basic facts wrong, has no clue about the history of the capital gains tax, and seems to know just about nothing about, well, anything. And you know what? If you read the parts of Malone's piece I didn't discuss, you may conclude that I'm being too easy on him.

Aren't People Embarrassed To Make This Argument?

... Yet it inevitably comes:

If rewards for America's entrepreneurs and firms are reduced through higher marginal tax rates, their incentives to earn, invest and create jobs will be diminished. Americans will have less incentive to save, and firms will have less incentive to pay dividends. Tax avoidance will become more profitable. A smaller capital stock will mean a less productive economy and lower wages for middle-class and other workers. These disincentive effects also mean that the revenue gain is likely to be smaller than Obama envisions.

Even assuming it ever becomes reality, where in recorded human history have the wealthy thrown up their hands and stopped trying to make money because they faced a 4.6% income tax increase? When in recorded history did a <40% tax on a nation's highest income earners (before deductions) cause entrepreneurs to close up shop?

Despite the authors' effort to offshift the notion onto Obama, there's also a huge element of "Who is Obama to interfere with our free lunch" in this type of argument. Obama's tax and spending proposals are not consistent with what I would do. I wouldn't struggle to slash spending or balance the budget during a recession, but my long-term view would be toward fiscal responsibility. Yet by all accounts, McCain's proposals are even worse for our long-term fiscal picture - the Tax Policy Center estimates that McCain's tax plan will add $5 trillion to the national debt while Obama's plan will add $3.4 trillion.

It also gets into the pie-eyed wishful thinking that we can deficit spend, in increasing amounts, forever. If we're to support McCain's larger deficits because Obama will impose a modest tax increase on the wealthy, this argument isn't, "We can't raise taxes on the rich." It's, "We can never raise taxes at all, and we should deficit spend until the end of time." They argue that middle class tax cuts must be accompanied by spending cuts - but leaving aside the short-sightedness of that notion as we enter what appears to be a serious recession, haven't they notices the giant hole that their boy, G.W., burned in our pocket? Or the even bigger hole McCain is eagerly proposing to burn? You don't even get into Grover Norquist-style nonsense about drowning the government in a bath tub - the authors aren't even pretending to oppose McCain's out-of-control spending proposals and massive deficits.

Funny... it took three people from the American Enterprise Institute, a fount of low-quality anti-Obama hit pieces, to write this claptrap. Three? And this is the best they can do? Well, if it's good enough for Fred Hiatt and the Washington Post, it should be good enough for everybody. Right?

Good Health Insurance? That's for Rich People

John McCain opines,

[McCain a]ppeared to concede that his health care plan would result in higher taxes for some. McCain favors a $5,000 annual tax credit to help individuals and families afford health insurance, but that could leader employers to drop their current plans, including some that could not be replaced for $5,000.

"It depends on, on, on what plan they have," McCain said. "But that's usually the wealthiest people. Ordinary working Americans have the kind of, or an overwhelming majority have the health insurance plans that this tax credit, refundable tax credit, will actually put more money in their pockets for the purchase of health care than what they had before."

So as McCain sees it, most people have crappy insurance and thus would profit from McCain's proposal?

No offense, John, and conceding that you're a rich person who doesn't have to care, but how much would cost you to obtain insurance - even crappy insurance - on the private market? How much would the coverage you receive as a Senator cost if you had to purchase equivalent coverage as an individual? The official McCain campaign position:

While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance.

A dose of reality:

In 2007, employer health insurance premiums increased by 6.1 percent - two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $12,100. The annual premium for single coverage averaged over $4,400.

Even if we assume that the cost of insurance won't rise for individuals purchasing coverage as individuals, as opposed to at group rates through an employer-sponsored plan, and even if we assume that the average cost of health care is misleading with a median cost of insurance considerably below the average, this doesn't sound like a good deal for working people or their families. If the goal is to lock working people into policies with minimal coverage, though, it sounds like a heckuva plan.

Discouraging Candidates From Presenting "Tough Choices"

Anybody who reads the Washington Post's editorials knows that they're a huge advocate of Social Security reform, approaching the subject like Chicken Little - they'll run pretty much any piece about how the entire system is about to collapse on our heads. And Post readers also know that their unsigned editorials often appear to be unsigned because nobody with any sense of self-respect would want to attach their name to the piece.

Today, we get a twofer. Commencing with a whine about how candidates aren't willing to talk about fixing Social Security during a presidential election campaign, the Post devotes a paragraph to McCain's plan - or lack thereof. How he made a "no new taxes" pledge, followed by stating in specific relation to a possible payroll tax increase, "There is nothing I would take off the table," followed by a full retreat through a spokesperson:

"There is no imaginable circumstance where John McCain would raise payroll taxes," said spokesman Tucker Bounds. "It's absolutely out of the question." Except that it might not be. "Sen. McCain believes you can solve Social Security without raising taxes, but he also believes you can't start a negotiation with an ultimatum," said spokesman Taylor Griffin.

So what does the Post have to say about McCain's flip-flops on taxes, his complete lack of ideas, and his belief that you can fix deficits of all sorts with magic without raising taxes? Absolutely nothing.

Then then move to Obama, who actually has proposed measures to improve the future of Social Security. Yes, he's committed to increasing payroll taxes, but the tax won't be put into effect until the date of a projected shortfall between what Social Security takes in and what it pays out. Oh, the horror. The Post whines,

But surely President Obama could find some way to bring in money sooner without letting Congress fritter it away on other needs.

So they want Obama to start talking about... a Social Security lockbox? Right....

The Post then expresses that the additional Social Security taxes Obama would impose on the wealthiest taxpayers would be modest, describing that choice as "only sensible". They then complain that if imposed on all income as opposed to earned income it would be too high. Then they complain that even if the new tax is too high, it needs to be higher. No, wait, let's read between the lines: They're complaining that taxes also need to be raised on the middle class, but aren't honest enough to say that directly. Incredibly, they then offer these rhetorical questions:

So does Mr. Obama get credit for being brave - or foolhardy - enough to put out a tax proposal that is sure to be used against him? Does he get demerits for failing to be more specific, and more honest, about what will be required?

If you took the Post at face value, Obama would get credit for being brave. But if you read the Post's analysis, McCain gets kid gloves treatment for flip-flopping on payroll taxes and pretending that all budget woes can be fixed without tax increases. (If the author of this piece were more honest he might have noted that McCain's claiming to be able to do this while promising additional tax cuts.) Obama gets savaged for proposing a tax increase the Post deems inadequate.

Meanwhile, beyond the Post's lack of candor in relation to the new taxes it wants to impose on the middle class, the Post lacks the courage to share any specifics of what it believes to be necessary. The Post wants higher taxes? Who will pay them? What tax rates does it advocate? How will the "lockbox" work? The Post wants the new taxes to be implemented soon. When?

Or does it turn out, sadly, that the "textbook Washington campaign" he derided Clinton for running, in which "you don't present tough choices directly to the American people for fear that your answers might not be popular, you might make yourself a target for Republicans in the general election," has something to recommend it after all.

Republicans, nothing. If the Post's conduct is any indication, proposing any sort of tough choice makes you a target for mendacious unsigned editorials.

The Problem Wasn't The Joke....

It was the serious stuff. I read that McCain defined "rich" as having an income of $5 million or more per year, and decided to check it out. That number was tossed out both as a joke and as a means of evading the question. McCain took great pains not to attach a dollar figure to the concept of "rich". But in evading a very simple question about the amount of wealth somebody should have before being deemed "rich", starting with his platitudinous opening, he did manage to say quite a lot:

Some of the richest people I've ever known in my life are the most unhappy.

A suggestion McCain can pass along to his "poor little rich boy" friends: they can send me their money and see which of us ends up happier.

I think rich is, should be defined by a home, a good job, an education, and the ability to hand to our children a more prosperous and safer world than the one that we inherited.

See? "Rich" has nothing to do with money.

I don't want to take any money from the rich. I want everybody to get rich.

Particularly given that we're applying a definition of "rich" that doesn't necessarily involve having any money.

I don't believe in class warfare or redistribution of the wealth. But I can tell you, for example, there are small businessmen and women who are working 20, uh, 16 hours a day, 7 days a week, that some people would classify as, quote, rich.

For example, if in addition to their business they have "a home, an education, and the ability to hand to our children a more prosperous and safer world than the one that we inherited", John McCain would define them as "rich".

McCain, of course, is deliberately conflating two separate issues - hours worked and income. My guess is that some of the people to whom McCain alludes are rich by any reasonable definition, while some are trying to keep struggling businesses afloat. But I'm guessing that there aren't many of them. We can also consider that there are rich people don't work at all, work minimal hours, or host an occasional $1,000/plate fund-raiser and spend the rest of the time bragging of their devotion to "charitable work". Would McCain have them pay more taxes than the guy who works 112 hours each week? Oh, let's not discuss that... to do so is "class warfare".

My friends who want to raise their taxes, who want to raise their payroll taxes. Let's have, keep taxes low, let's give every family in America a $7,000 tax credit for every child they have.

How would that tax credit improve on our current system of deductions? How would we pay for it? What benefits would it return to the economy? Why would we give such a tax credit to people who don't need it? Oh, you only said it because you think it sounds good? Well then, on to the next point:

Let's give them a $5,000 refundable tax credit to go out and get the health insurance of their choice.

Let's do a direct comparison - how much would it cost McCain to drop his insurance coverage from his Senate gig, and pick up a comparable private policy? Assuming he could even get insurance with his health history. Would that $5,000 cover the first month?

Let's not have the government take over the healthcare system in America.

An idea endorsed by exactly... none of the candidates. A comment inserted to mislead voters.

And then the joke:

So, so, so, I think if you're just talking about income, how about, $5 million.

So, no, but seriously, I don't think you can, I don't think seriously, that, the point is that I'm trying to make here, seriously, and I'm sure that that comment will be distorted, but the point is, the point is, the point is that we want to keep people's taxes low and increase revenues.

Well, then, how do you "increase revenues" without taxation?

And my friend, it was not taxes that mattered to America in the last several years. It was spending, spending got completely out of control. We spent money in the ways that mortgaged our kids' future.

Wait - you just said that the problem was that we need to increase revenues. Now you're saying that the problem is out-of-control spending? Which is it?

My friends, we spent $3 million of your money to study the DNA of bears in Montana. Now, I don't know if that was a paternity issue or a criminal issue, but the point is, but the point is, it was $3 million of your money.

A joke well-delivered. It got a laugh. It deserved a laugh, or at least a good natured groan. But McCain is aware that, even if we assume that his caricature is accurate and it's something we shouldn't be funding, we're not going to balance the budget by cutting this type of scientific research funding out of the budget.

It was your money. And you know we laugh about it but we cry. And we should cry, because the Congress is supposed to be careful stewards of your tax dollars.

So what are McCain's actual ideas, whether for balancing the budget or making Congress budget more responsibly?

So what did they just do in the middle of an energy crisis, when in California we are paying $4 a gallon for gas? Went on vacation for five weeks. I guarantee you, two things they never miss: A pay raise and a vacation.

Okay... and McCain's been around Washington for a long time, voting himself pay raises and taking long vacations. But what does that have to do with either balancing the budget or making Congress more responsible? What does McCain imagine that Congress will do during the next five weeks, assuming everybody comes back from their vacation and campaign activities?

And we should stop that and call them back, and not raise your taxes.

So they should come back, vote not to raise taxes, and then go back on vacation? Seriously - what does McCain hope to accomplish, particularly given his own attendance record?

We should not and cannot raise taxes in tough economic times.

Back to platitudes. When can we raise taxes? If the answer is "never", don't layer on the B.S. - just say that "We can never raise taxes, even when we're rolling in dough."

So it doesn't matter really what my definition of "rich" is because I don't want to raise anybody's taxes. I really don't.

He's happy to increase the financial burden on working families by taking away employer-sponsored health care in favor of inadequate "tax credits", but that's different from raising taxes, so let's not get into what it would mean to "raise taxes on the rich."

In fact I want to give working Americans a better shot at having a better life.

Which again has nothing to do with "the rich". But let's hear him out:

And we all know the challenges, my friends, if I could be serious. Americans tonight in California and all over America are sitting at the kitchen table, recently and suddenly lost a job, can't afford to stay in their home, education for their kids, affordable health care.

Yes, I can almost picture John and Cindy having such a discussion. First they would have to pick a home in which to have the discussion. But not one of the homes on the beach that John doesn't like. And then hop on Cindy's private jet to go to that home. And then the could sit down at their kitchen table and talk about the plight, oh, let's say some of the workers at Cindy's family beer distributorship. But make no mistake: John knows exactly what you're going through. Which is why they come up with such good ideas:

These are tough problems. These are tough problems. You talk to them every day, every day.

Right. You come up with those great ideas by talking about these issues every day. And those ideas are?

My friends, we've got to give them hope and confidence in the future. That's what we need to give them.

Well, as Edison said, "Genius is one percent inspiration and ninety-nine percent perspiration." And McCain's been working hard on this, so let's see what he has to offer:

And I can inspire them.

Ah - he's got the first 1% of the job covered for you!

I can lead, and I know that our best days are ahead of us.

Who could argue with that....

Almost Seven Years Late....

You know what would have been a suitable time for the New York Times to advocate a gas tax? The months following 9/11. Instead we seemed to get what amounted to a quiet endorsement of Dick Cheney's position, "Conservation may be a personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy."

Gas Taxes

Following the lead of Charmas Friedhammer, the New York Times opines,

Expensive gasoline is not good news for most American families. In some rural areas where people must drive long distances, and a pickup is more of a necessity than a lifestyle choice, filling up the tank can eat up nearly 15 percent of a worker’s take-home income. Pricey gasoline is acting as a brake on the economy and pushing up the price of food and other goods.

Still, Americans’ response to rising gasoline prices makes an excellent case for a gas tax. It proves that drivers will change their behavior in response to high fuel prices. And even if Detroit doesn’t buy global warming, drivers can help persuade it to embrace fuel efficiency.

Right. Because there's no better time for new, regressive taxation than when working Americans are already struggling.

Social Security Taxes

Obama's latest proposal:

Democrat Barack Obama said Friday he would apply the Social Security payroll tax to annual incomes above $250,000, which would affect the wealthiest 3 percent of Americans.

I've said it before and I'll say it again: it's dangerous to the future of Social Security to transform it from a system where your benefits correlate to your contributions, to one in which the wealthy (and, let's be honest, many of the most influential) citizens are asked to pay in significant disproportion to the benefits they will receive. Obama may believe that a "donut hole" tax plan won't endanger Social Security, but I suspect otherwise.

The Charmas Friedhammer Gas Tax

For years, Thomas Friedman has endorsed substantial increases in the gax tax. Recently he took a different tack, suggesting a tax to the level of $4/gallon, something that is perhaps best described as a "windfall profits protection tax" or a "price control". Today, Charles Krauthammer claims, "That's my idea":

For 25 years and with utter futility (starting with "The Oil-Bust Panic," the New Republic, February 1983), I have been advocating the cure: a U.S. energy tax as a way to curtail consumption and keep the money at home. On this page in May 2004 (and again in November 2005), I called for "the government - through a tax - to establish a new floor for gasoline," by fully taxing any drop in price below a certain benchmark. The point was to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123.

Sure, because (as with Friedman's version) no players in the market would notice that they could simply increase their profits to the amount of the tax, and all oil companies are based in the United States.

Krauthammer complains that instead of imposing his beloved price control, the federal government attempted various forms of regulation, such as CAFE standards, that he sees as having failed to achieve their goals. It's obviously not the case that Krauthammer opposes government meddling in the marketplace, as his tax proposals and price controls do just that. Perhaps he sees taxation as the best way for the government to mold individual behavior.

Krauthammer no longer sees price controls as sufficient - now he's incorporating Friedman's call for periodic, substantial increases in the gas tax:

Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.

Krauthammer believes that the price of oil on the world market is pegged to the U.S. gas tax, such that oil prices will stabilize if the U.S. imposes a $2/gallon gas tax? Really? And then by recycling the money back into the hands of consumers, they'll what? Buy televisions instead of filling up their cars? Or perhaps they'll notice that public transportation continues to be overwhelmed and underfunded and wonder why, despite their enormous common ground, Krauthammer parted with Friedman on the use of gas taxes to fund and expand public transportation.

Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand - and bring down world crude oil prices - the American consumer and the American economy reap all of the benefit.

Thank you Charmas Friedhammer. And once this fantasy comes true, and the public is "thanking" Congress for setting an effective price floor on gasoline at $6/gallon, demand for an overstretched public transportation system is way past its limits, and crude oil prices have continued to climb because (as it turns out) the price per barrel isn't defined exclusively by U.S. gasoline prices, what will Krauthammer say when his "conservative" peers are blasting President Obama (or, if McCain is elected, President Clinton) for for the weaknesses of his plan? That is to say, will Krauthammer join them or will he ignore them - I doubt he would even see a third potential approach.

And am I supposed to overlook Krauthammer's timing here? He didn't propose a $2 gallon gas tax back in 2001. Back then, he claims he "only" wanted a price control that would create windfall profits for gasoline refiners. He still doesn't favor providing states and local governments with the resources they need to upgrade and update their public transportation systems. People will still be stuck driving cars, because his policies don't involve the creation and expansion of alternatives. The poorest workers who are still stuck driving will be paying $75-$100/tank to fill up their cars, and we're supposed to believe that lower payroll taxes will put that back in their paychecks? Krauthammer has an amazing ability to make pretty much any idea regressive and retrograde.

No, We Don't Need Another Perot....

Michael O'Hanlon and a Alice Rivlin take on domestic politics and the budget.

We hear that Ralph Nader is running again, but the third-party candidate we need is Ross Perot. In 1992, with his squeaky voice and endless charts, Perot focused attention on the rising federal deficit. His warnings helped keep the major-party candidates from talking budgetary nonsense.

Well, whatever credit we can extent to Perot for bringing attention to the budget, it's not like the deficit and massive national debt are a state secret.

For now, let's play along and assume that the Perot candidacy was truly about balanced budgets, and not about dissatisfaction with the major parties. We can overlook the fact that the poorly articulated Perot platform allowed voters to project their own wishes and desires for the country onto Perot, as evidenced by the collapse of the "Reform Party" pretty much the moment it tried to form a coherent platform. And of course, we'll overlook the fact that Perot didn't win.

For all of their impressive qualities, this year's presidential candidates are woefully short on fiscal prudence. And the next president will face two daunting budget problems. The winner will inherit a large deficit resulting from a weak economy, an expensive war and the persistent political inclination to spend more and tax less. The bigger challenge? Promises made to the growing population of retirees as health-care spending continues to soar.

So they want to resurrect a 1992-era candidacy that promised health care reforms and could lead to a balanced budget? That (despite the failure of his attempt at health care reforms) was Bill Clinton, not Ross Perot. As for promising tax increases, how did Alice Rivlin, view tax increases back in 2001? She saw George H.W. Bush's tax increases as having constituted "political suicide". That's political suicide after being elected, in contrast with Walter Mondale's politically suicidal promise to raise taxes during an election. Like it or not, the odds of having a viable candidate emerge and promise tax increases to cover O'Hanlon's favorite expenditure, the military, plus the cost of trying to stabilize health care cost and (for the two of three candidates who care about the issue) broadening health insurance coverage to most or all Americans? About zero percent.

I'm not entirely clear on what O'Hanlon and Rivlin see as the solution, other than a massive tax increase. It's reasonable to assume that O'Hanlon, a leading cheerleader of the Iraq war and a long-time proponent of military spending, would oppose saving money by ending the war or limiting military spending. They don't say, "candidates should promise to slash Social Security, Medicare and Medicaid, and continue to decline to invest in the nation's crumbling infrastructure", another platform pretty much guaranteed to bring about a crushing defeat in November. What effect do they believe a new Perot would have on this election?

As for trying to elicit a promise not to make the deficits worse, Rivlin has previously noted that deficit spending can boost a troubled economy - I'll grant that she's been arguing that the Bush Administration has been fiscally irresponsible, but is it truly best to demand restraint now, such that yet again we see a Reagan/Bush/Bush-style massive deficit coupled with massive accumulation of wealth among the richest Americans, followed by the tired excuse the minute the Democrats take power, "We can't afford to help you."

I'll also share an annoyance about analysts like O'Hanlon, who seem to want fiscal responsibility only when their own budgetary priorities are not at stake. He's happy to tell us that we can't afford health care reform without a massive boost in tax revenues, but where's his column explaining how we similarly can't afford to toss $120+ billion per year into the fiscal black hole commonly known as the Iraq War?

Robert Samuelson On Truth Serum

Oh boy.... Robert Samuelson imagines a world where we put politicians on "truth serum" and suddenly everything the have to say coincides 100% with (you probably guessed it) Samuelson's personal political agenda. Let's supplement some of these remarks, such that they're actually truthful.

"What we can do is preserve an economic climate that favors long-term growth. That means holding down the tax burden to maintain incentives for work and investments. We're already running a $400 billion or so deficit; some broad-based tax increases may be needed. This will disappoint conservatives, who think no one should pay taxes, and liberals, who think only the rich should pay them. But we must also cut spending, because, unless we do, the future tax increases will be crushing.

"Taxes may need to be raised, but only broad-based taxes. Should we need to raise taxes, we need not concern ourselves with progressive taxation or the impact of higher taxes on working families. We should caricature both conservatives (in a somewhat flattering way) and liberals (in a somewhat nonsensical way).

"To cut to the chase - while taxes may need to be raised that's something to be avoided. What we must do is cut spending. And by cutting spending, of course, I mean programs that help the poor and (primarily) the middle class. I have no interest in examining other major expenses, such as the cost of the Iraq War, so don't even go there.

"Of necessity, spending cuts should focus on Social Security, Medicare and Medicaid. These programs are projected to grow from about 45 percent of the present budget to 70 percent over a couple of decades. Paying for that exclusively with taxes would be devastating for the economy and our children. Paying exclusively by cutting other programs would gut vital government services. I admit that raising eligibility ages for baby boomers and cutting some benefits are unfair. People should have received more warning. But our politicians have so dawdled that there's no warning time left.

"Yes, I'm one of those politicians who happily advances the right-wing canard that because we "spent" the money we borrowed from Social Security, even though Social Security owns treasury notes that if repaid would carry it for decades, those taxes you paid to support your retirement are gone and now we need to cut your benefits. We won't pause to reflect on what this means for the oft-heard line, 'the poor and lower middle class don't pay income taxes,' as if we divert your Social Security taxes into the general fund what are they other than just another income tax.

"And no, don't ask me the financial specifics of the Social Security crisis, because the facts hurt my argument. I want you scared that if you don't give up some benefits now, even though we can afford them, the entire system will soon collapse. The truth about Social Security? Not so scary. We have some work to do, sure, but it's dishonest of me to suggest that the sky is falling.

"Now Medicare and Medicaid are a different story, and we do need to find a way to reign in costs. I'm going to start by ignoring how implementation of universal health care could affect this financial picture, because I'm busy pretending that nobody is addressing these issues. While universality of health insurance doesn't directly address the problems of Medicare and Medicaid, it could keep people off the Medicaid rolls who currently intentionally reduce their earnings and assets in order to qualify for benefits.

"My opponent sees a future where the working poor can hold jobs despite having chronic, costly illnesses and still have good health coverage. My vision involves keeping them poor and dependent - then cutting their Medicaid benefits. Let's face it - that's better for wealthy taxpayers like me. We can pay for our own health care - although our ability really isn't the issue, as most of us also have really good insurance and we don't need to worry about the consequences of Medicare and Medicaid cuts.

"Take for example candidate John McCain. His wife could open him his own private medical clinic, staffed with personal physicians and nurses to cater to his every need. She could afford this without even having to sell her private jet or mortgage one of her vacation homes - they have so much money, it wouldn't affect their lifestyle at all. But he and I still want to cut your medical benefits and your medical safety net, because let's face it. We're more important than you.

"And because we're more important to you, when I talk about cutting Social Security and the medical care safety net, I'm not talking about cutting retirement benefits for members of the Senate, or eliminating the generous health insurance packages available to Senators at taxpayer expense. You may notice that while I'm talking about surprising you with less income and more medical expenses in your retirement, I have no interest in sharing your pain. I would prefer it if you didn't notice that, but no matter how hard I wish it weren't the case, not all of you are stupid.

"We've also dawdled on energy. No one likes $125-a-barrel oil. Last year, we paid an average price of $64 a barrel for imports. Some blame the oil companies, but the truth is that we're all to blame. Americans like cheap gasoline and big vehicles. Nothing was done to dampen consumption. Meanwhile, Congress restricted new oil and gas exploration on environmental grounds. So, demand rose and supply fell. In 1985, we imported 4 million barrels of oil a day; now that's 12 million

"Now when I say 'nothing was done', I don't really mean that. I mean that once Ronald Reagan was elected President and energy self-sufficiency and conservation no longer seemed like pressing concerns, those quaint notions were quickly relegated to the status of exhibits at the Jimmy Carter Presidential Library. I'm also going to pretend that the only issue causing a rise in oil prices is our domestic inability to get more oil out of the ground right now. That it has nothing to do with increased demand for oil around the world, and perhaps especially in China and India.

"I'm also going to pretend that other oil-producing nations would not step down their production in response to any domestic increase, so as to maximize their own profits. I will happily ignore the fact that if we drained ANWR dry, odds are we will get at most a four year domestic supply of oil - then it's gone and we're back where we started. And I'll ignore the very concept of the word "reserves" - because I think it's better that we completely tap out domestic sources of oil sooner rather than later, so we can become even more dependent on foreign oil.

"As I said, I don't want you blaming the oil companies for any of this. It's not like they have intentionally limited refinery capacity so as to maximize gasoline prices in the summer. Well, actually it is like that, but I don't want you to remember that fact. Don't blame the auto industry either, because they made a lot of money off of selling SUV's, even as they ceded the technological advantage in fuel efficient technologies to the Japanese auto manufacturers. And I don't want you to bring up the environmental records of 'big oil' either, because, well, I don't think the environment is very important. And just so you know, if you disagree with me you're stupid.

" 'Energy independence' is a fraud. We simply use too much foreign oil. All we can do is limit our dependence by shifting to more-efficient vehicles and increasing domestic production. But these measures will take years and have only modest effects. The same is true of global warming. Without major technological breakthroughs, making big cuts in greenhouse gases will be impossible.

"And when I say 'Energy independence is a fraud', I mean I don't want to pay the political price of achieving it. I don't want to have to sell you on nuclear power, mass transportation, more energy-efficient living, and massive infrastructure investment - I don't even want to mention those things. I'm happy to pretend that if we get the average vehicle up to 30 or so MPG, everything will come up roses - and that we have no other ways to conserve energy. I'm going to pretend that only gasoline is made from a barrel of crude, and am not going to mention other gases or heating oil. I certainly don't want to ask businesses to ante up, and as you know I'm not going to raise taxes on the rich to pay for any of this.

"Similarly, when I say 'The same is true of global warming,' I'm again passing the buck. Obviously there are things we can do to reduce the emission of greenhouse gases. I'm not willing to increase taxes to pay for those things, and again I'm not interested in asking industry to bear the expense, so forget it. It's just not a priority to me. As far as I'm concerned, the whole "global warming" thing is overblown.

"By the way, did you notice that I didn't mention nuclear energy? It would take a courageous politician to bring up nuclear energy as a possible solution to some of our energy needs. Did you see the way I avoided mentioning coal, the environmental impact of coal mining and coal-burning power plants, and the greenhouse gases and environmental damage resulting from coal-burning plants? Because it would take a courageous politician to tackle those issues, and if you noticed that you're probably also noticing that I'm anything but courageous. You did notice? Drat.

"Finally, let's discuss poverty. Everyone's against it, but hardly anyone admits that most of the increase in the past 15 years reflects immigration -- new immigrants or children of recent immigrants. Unless we stop poor people from coming across our Southern border, legally and illegally, we won't reduce poverty. Period. That doesn't mean we should try to expel the 12 million illegal immigrants already here -- an impossible and morally dubious task. Many families have been here for years; many have American children. We need a pragmatic accommodation: assimilate most people now here; shift future immigration to the highly skilled.

"And here you'll note that I'm painting a picture of immigration and poverty that is so misleading that anybody who is conversant with the issues will think I'm lying. But I'm telling the truth, in a relative sort of way, by describing the world in a way that reflects my politics and personal prejudices.

"Now you're of course asking me, 'How are you going to keep those 'south of the border types' out'? I'm not. Oh, I might promise stepped up border patrols, fencing the entire U.S.-Mexican border, or other expensive forms of window-dressing, but at the end of the day I'm simply not the type of politician who is going to ask the agriculture industry to pay the type of wages that will draw citizens to pick our nation's fruits and vegetables, the hospitality or retail industry to pay that type of wage for maids and janitors, or the construction industry to pay that type of wage for workers.

"Heck - since I'm being honest, I'm not willing to pay that type of wage for the guy who mows my lawn and cleans my pool, or the woman who clean my house. So at most I'm talking about trying to shift them into a 'guest worker'-type system that maintains them as a steady supply of cheap labor. If I were to be honest about my hope, it would be that they come here to work they leave their children at home, and by 'home' I mean 'south of the border'.

"By pretending the poverty problem is driven by immigration, I also get to avoid addressing the more difficult aspects of poverty. If I admitted that immigrant populations assimilate, their children mostly speak English and hold jobs, and that their poverty is relatively transitory, you might turn around and ask me, 'What about those populations where poverty isn't a transitional stage? Where people or families are in poverty for years, or even generations? What can we do for them?' You might even argue, 'Can't we learn something from the successful assimilation of immigrants, even those with little or no education, that might help us learn how to move other populations out of poverty?' Truth be told, I don't care about people in poverty. My only solution for them is to cut their entitlements.

"Vote for me. I'll tell the truth."

"That is, the truth as I see it. Which may not be the truth. But that technicality aside, it's the truth."

Samuelson adds,

Of course, our hapless candidate would be dismissed as misinformed, offensive, possibly racist and, of course, unelectable.

No. A fair assessment would be that the hapless candidate is ill-informed, intentionally or unintentionally oversimplifies serious issues, responds to serious problems at best with clichéd non-solutions, and mostly offers no solution whatsoever to anything else he defines as a "critical" issue for the nation.

That isn't a good way to differentiate himself from the rest of the field.

Class Warfare

A couple of days ago I took apart a really bad editorial by Gary MacDougal, but I think something more needs to be said. MacDougal writes,

Each year the federal government spends hundreds of billions of dollars - specifically, more than $10,000 per poor person for welfare, Medicaid, the earned-income tax credit, job training and food stamps. Put another way, taxpayers are doing their share.

From a wealthy guy writing a mass market editorial, what does this really mean? To me, it's a reminder to his readers that if we pay more money to help the poor, "It's coming out of your pockets."

With Bush slashing taxes for the rich, we often hear it explained that "it's only fair" that the rich got tax cuts - they pay most of the nation's income taxes, and "if everybody else is getting a cut" why shouldn't the people at the top get one as well? On a superficial level, it's a reasonable position to take. But if you look at the economic realities faced by the middle class, it's actually an argument that defies an increasingly ugly reality. Middle class people, particularly middle class families, are financially squeezed. No, of course middle class people don't want to pay more taxes, and it's not because of "greed" or "anti-tax" sentiment - they're tapped out.

So on top of their notion that it's "unfair" to give tax cuts based upon need rather than tax bracket, wealthy class warriors frame these issues as "any help to the poor will increase the tax burdens on working people." And that's before noting the misrepresentation and sleights of hand in the budgetary projections that supposedly justified the tax cuts, or the Bush Administration's dogmatic insistence (apparently now joined by McCain) that the proper response to every economic situation (a strong economy, a sluggish economy, a stagnant economy, a weak economy or a recession) is to cut taxes (particularly for the rich). What they seem to intend, and the Grover Norquist types explicitly advocate - is a collapse of the government's ability to pay for more than "basic" services - and if they're not personally driving over the bridge that's on the verge of collapse, repairing or replacing the nation's crumbling infrastructure simply doesn't interest them. The express line for first class passengers through airport security, on the other hand... That's a good use of your tax dollars.

Clinton Makes It Hard....

You know, with Obama's association with Wright, and with his "bitter/cling" comments, even with full consideration of her own errors and misstatements I sometimes start to think, "Maybe Clinton really is the better candidate." But for some reason she has to make it hard.

Clinton, who toured the Miller Veneers wood manufacturing company in Indianapolis, said "there are a lot of people in Indiana who would really benefit from a gas tax holiday.

"That might not mean much to my opponent, but I think it means a lot to people who are struggling here, people who commute a long way to work, farmers and truckers," Clinton said. She has called for a windfall tax on oil companies to pay for a gas tax holiday.

Clinton has to know the realities of her proposal. Here, she's in the world of President Bush, with his prevarications that drilling in ANWR would lower gas prices, capping it off with innuendo that Obama doesn't care about working people.

Clinton is lucky that there are other issues in the race, because on the issue of the "gas tax holiday", Obama's the only candidate who is acting like a grown-up. (But then I'm still disenfranchised, so I guess neither of them have to care what I think.)

John McCain - Stupid or Dishonest?

Incredible.

Republican presidential candidate John McCain on Sunday called Democratic rival Barack Obama insensitive to poor people and out of touch on economic issues.

The GOP nominee-in-waiting rapped his Democratic rival for opposing his idea to suspend the tax on fuel during the summer, a proposal that McCain believes will particularly help low-income people who usually have older cars that guzzle more gas.

What a brilliant idea. Create a "tax holiday" that will probably simply result in higher margins for the oil industry, in order to help people owning the least efficient cars drive more miles. Let's not, say, consider subsidizing their transition into newer, more reliable, more efficient vehicles. Let's not offer them a rebate, such that the oil industry doesn't simply raise gas prices ("supply and demand") to turn the "tax holiday" into additional profits.

Hey - here's an idea. Let's not diminish the highway fund at all, but instead suspend subsidies to the energy industry over the summer, and pass the savings along to Americans in the form of an increased "rebate check". Oh... you say that's a "no go" if it involves taking taxpayer money away from wealthy, profitable corporations? Well, there's a surprise....

The Arizona senator deflected questions about his record on the Bush administration's tax cuts — he initially opposed them but now supports extending them — by again criticizing Obama.

"Sen. Obama wants to raise the capital gains tax, which would have a direct effect on 100 million Americans," McCain said. "That means he has no understanding of the economy and that he is totally insensitive to the hopes and dreams and ambitions of 100 million Americans who will be affected by his almost doubling of the capital gains tax."

A standard Republican lie. The suggestion that ordinary taxpayers pay capital gains taxes on their retirement funds. No, John. We pay income tax on our tax-deferred retirement savings when we make withdrawals. That is to say, most of us pay taxes well above the capital gains tax rate. That special rate is best enjoyed by filthy rich families - you know, like you and your wife.

Yes, I'm aware of McCain's many statements that he doesn't understand the economy, and I'm willing to concede that point. But these statements aren't emerging from a vacuum - he didn't create these policies or responses on his own. They're the product of his campaign team, and this is what his campaign stands for. You want to talk elitist - yes, voters, the McCain campaign thinks you're stupid. Worse, they're trusting that the media won't point this out.

(In relation to the title of this post, please note that I don't want to create a false dichotomy - he could be both. As for whether it's impolite to suggest that McCain is stupid? Well, that's apparently his assumption about me, so let's just say "turnabout is fair play.")

Defunding Social Security As An Election Strategy

Okay, I understand why Novak is arguing that we should slash FICA taxes and tell younger workers, "In return for your reduced tax burden you will get little to nothing from Social Security when you retire." Demolishing Social Security fits with his world view. But what I can't understand is why he believes McCain should make that part of his platform. I grant that McCain has been promising to cut pretty much every tax under the sun, but even he would probably recognize that "this one is different".

Novak has a hard time keeping his lines straight. First, it's:

Moreover, Republicans talk about offsetting losses in payroll tax revenue by cutting future Social Security benefits, which contains seeds of electoral catastrophe.

This later becomes,

Even Republican advocates of cutting the payroll tax talk about offsetting it with reduced future benefits. That's a bargain young workers would buy in a minute, and current Social Security recipients would be assured that their pensions would not be reduced one penny.

The distinction, apparently, is that you hammer the theme, "Younger workers, you're not going to get Social Security anyway, so let's reduce your taxes and phase it out," reassuring current recipients, "You're still going to get every cent of what was promised to you," and telling everybody else... er, Novak left that part out. Yet that block of "everybody else" is an important group to address, as putting their future benefits at risk "contains seeds of electoral catastrophe".

The perceived need to offset losses in payroll tax revenue stems from a belief that the Social Security trust fund must be replenished. The truth is that there is no such fund, and the heavy payroll tax revenue resulting from the Greenspan Commission's 1983 "reform" not only provides enough money for Social Security but funds other programs, as well.

Wow. So in Novak's mind, Social Security is so "rich" that even if we pretend that the treasury notes comprising its "trust fund" are worthless, it can continue to pay not only for itself but for a host of other programs. And it could thus pay for itself even after a tax cut. What a compelling case for a "reform" that slashes benefits.

McCain says that he doesn't really understand economics. Novak appears to either be in the same club, or to be trying to take advantage of McCain's weaknesses. Either way, taking Novak's advice seems like a surefire way for McCain to blow a hole in his own foot.