Category: Taxes

D.C. gets the government it deserves

I’d planned to go into more detail about Wednesday’s hearing weighing the merits of a proposed flat tax experiment in D.C. I would’ve discussed Delegate Eleanor Holmes Norton’s simple-minded objections and the progressive taxation double-standard she wants to perpetuate. Now that I’m writing the post, I’m unmotivated by the specifics of the issue. All sides are interested in ideological sound bites more than intelligent reform.

Instead, I wish Congress would “experiment” with a flat tax for the whole nation, but I’m paying attention enough to see that Congress has shown no will in recent years to address serious tax reform. If it wants to talk a big game about trying an optional flat tax experiment in the District, that’s wonderful. Maybe then we can see some progress back to common sense. Initially, though, it’s not going to affect me because even the flat tax isn’t enough to make me move into the District, to be governed by its incompetent local politicians.

Instead, this quote is interesting:

Shadow senator Paul Strauss (D), who sat in the audience, said, “They think of us as a state when it comes to federal liabilities.”

“When it comes to federal rights,” he added, “they think of us as a laboratory rat.”

Apart from being the first time I realized D.C. has a shadow senator, I’m amused that Mr. Strauss seems not to have read the Constitution. The Constitution says what it says about D.C. and its treatment. And to think Congress will do anything other than treat all of us the District as more than laboratory rats with deep pockets is simply laughable.

But here’s the key point in this debate. If you don’t like it, move. It’s that simple. Like the residents of D.C., I have a choice of where to live in this region. I choose to live in Virginia. I understand there are good and bad aspects of that. I’ve concluded that the benefits outweigh the costs. Unless there’s some nefarious force enslaving people in the District, I fail to see the causal link.

Work to change the Constitution or move.

Not only larger government … complex, too

I don’t much care for it for so many reasons, but even I’m becoming a little concerned about Virginia’s Republican Party. They’re clearly mental, as shown by this tax oddity from the General Assembly:

State senators in Virginia have come up with an unusual new tax increase. People who don’t like it don’t have to pay it.

But here’s the catch: They must be especially well organized.

The Senate, which hopes to raise about a billion dollars a year to spend on transportation, is seeking a 5 percent increase in the wholesale gas tax to help raise the revenue.

Even though the tax is on wholesalers, it could well be passed along to motorists as they pump their gas.

So many points pop out, but I’ll hit the most obvious. The tax could be passed along? What version of free-market economics states otherwise, other than the version politicians believe? Every penny of the tax would get passed along and the Senate knows this. Otherwise, what’s the point of having consumers being able to “opt-out” of the tax? Of course, when reading further into the details it becomes clear what’s really going on:

So under a bill that the Senate Finance Committee passed this week, they could get some money back. That is, they could get it back if they saved all those flimsy little gas purchase receipts littering their car floors and spilling from their glove compartments and sent them in to the state Department of Motor Vehicles.

Twice a year, motorists could ship off a bundle of receipts and, weeks later, receive a check in the mail representing a rebate of the new gasoline tax. Based on today’s gas price, the refund would amount to about 8 cents a gallon.

“No one would have to pay this tax if they didn’t want to,” said Sen. Kenneth W. Stolle (R-Virginia Beach), whom colleagues credit with coming up with the idea.

I can only imagine Sen. Stolle’s colleagues credit him with the idea because they don’t want it’s stink permeating their offices. More importantly, no state’s DMV is competent enough to handle processing driver’s license applications, much less a detailed, paper-trail heavy tax rebate program. It’ll do little more than create jobs for vindictive paper-pushers.

Obviously, though, the real purpose behind this tax plan is to generate revenue from those who won’t be bothered by potentially trivial savings recouped from an investment in record keeping and paperwork. I also doubt the program would be advertised too well if it passes. That would create rebate requests from those less likely to pay attention to the news. Much like product manufacturers and retailers who now offer rebates instead of sales, the state would be offering something it doesn’t want anyone to participate in. Of course, we can all be reasonably assured that “glitches” will never occur and everyone legitimately asking will get the appropriate refund. Uh-huh.

Did I mention that motorists aren’t eligible for gas purchased for business use of cars and trucks? That seems like a significant little exemption to the opt out provision.

Also, notice how conveniently similar this is to the concept of income tax refunds. Offer the government money throughout the year, at zero percent interest, and get exactly 100% of your tax refunded. In the best case scenario, the General Assembly is demanding an interest-free loan from motorists every time their car needs gas. Applaud this innovation only if you have no idea what the time value of money is and don’t care to learn.

The correct policy is not complicated: tax me honestly or tell me I can’t have what you think I want.

A Tax Holiday but no Baseball Holiday? Shameful.

I don’t have an opinion either way on this proposal, although that’s mostly because I haven’t given it a lot of thought yet:

Virginians are likely to enjoy the state’s first sales tax holiday on clothes and school supplies as students ready for class this August.

A key Senate committee and the House of Delegates have passed bills that would give taxpayers a break from the state’s 5 percent sales tax for many purchases made the first weekend of each August, starting this year.

Supporters of the tax break say Virginia businesses lose money to stores across state borders in North Carolina, Maryland and the District, each of which lifts the sales tax for certain days each year.

Competition among states should be a good scenario, but since I have little doubt that states will act responsibly with spending cuts, I’m ambivalent. Given that Virginia has a budget surplus from recent tax increases, I suspect the harm will be minor and the benefit will be slightly less minor. All-in-all, this earns more of a “whatever” response. After all, for those in the Northern Virginia suburbs who would drive to Maryland or D.C. to save the sales tax probably aren’t saving as much as they think, since transportation costs (i.e. gas) matter. Saving sales tax on $200 in back-to-school spending would let shoppers keep $10. Two gallons of gas used to shop further away, as well as the extra hassle, seems mostly pointless to me.

What I think is significant about this idea is how well it illustrates the primary problems we’d face with a national sales tax, currently marketed as the Fair Tax. For instance:

Pat Wirth, whose son is a junior at Robinson Secondary School in Fairfax County, said she has considered going into the District to take advantage of the exemption but never was able to fit it into her calendar. But if it’s offered in Virginia, she’ll be there.

“I will definitely target those days,” Wirth said.

She never fit it into her schedule. In other words, she didn’t deem the tax-free shopping offered by neighboring states to be a sufficient enticement to not shop in Virginia. Legislative bodies, in this case the General Assembly, offer solutions in search of a problem. No justification is too inaccurate (was any cost-benefit analysis performed?) to not warrant some meddling with the tax structure. While it may be good, this is the next logical step:

The exemption also would be welcomed by teachers who stock their classrooms with extra supplies for students. And while most families in Northern Virginia can easily afford school supplies, the once-a-year expense is a significant burden for others.

If reporters are offering the qualification that “most families can easily afford” the tax bill, some face a significant burden. It’s good to address that burden, which means more meddling. Meddling means more complexity, with new, and likely hidden, taxes to boost tax revenue receipts. That meddling will inevitably mirror today’s progressive tax structure, which is not “fair”. No one should believe that we’ll implement a national sales tax and not exempt food, clothing, medicine, and whatever else gets deemed essential. Remember, changing the tax code would not mean that lobbyists suddenly move out of Washington.

For what it’s worth, I’m not too worried about that scenario because I have no faith that Congress has the leadership characteristics necessary to fix the tax structure.

Give us your money

There was a time among conservatives when tax cuts were intended to let people keep more of their money. Starve the beast and the government will necessarily do less damage. Vice President Cheney is no conservative:

“It’s time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,” Cheney said, explaining why Bush has proposed the new Treasury Department division. “The evidence is in, it’s time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.”

It’s useful to know that adding to the treasury is now more worthy of a public statement than adding to personal bank accounts for conservatives. Where Tom Delay pounded the last nail, Vice President Cheney is throwing roses on the coffin.

When “W” is spelled “Hillary”

I’ve written about screwy incentives distorting health insurance before, but it’s apparently going to be in the news a lot in the next week as President Bush prepares to address the topic in his State of the Union address. As with most of his proposals over the last few years, I’m less than optimistic that he has the leadership fortitude to get real reform passed. At this point, I barely expect any reform to pass, even if it appeals to the misguided warm and fuzzy crowd. If this story is accurate, the president might test my least optimistic suspicion:

President Bush is weighing proposals for new tax breaks for health care costs, which will be a major topic of next week’s State of the Union address, a top economic adviser to the president said Tuesday.

“People are very, very frustrated about the cost of health care,” said Allan Hubbard, director of the National Economic Council.

Hubbard told reporters at USA TODAY and Gannett News Service that the tax code offers advantages when a company buys health coverage for its employees but doesn’t do the same for employees who have to buy coverage on their own.

Somehow I’m not surprised that the solution will be new tax breaks instead of fixing the underlying problem built into the tax code. One idea is to start taxing employer-provided health benefits, but President Bush and his economic team rejected that idea. But will the administration come up with a structural solution?

“The president’s very concerned about the unfairness of the tax code,” Hubbard said.
…

“Tax reform is not off the table,” Hubbard said. “At the same time, it doesn’t have the priority that health care does right now.”

The implied answer is clear: where it should be about tax reform, the answer is always targeted breaks. Apparently, President Bush has the courage to ease the symptoms. While it’s certainly possible that new tax breaks could alleviate the health care “crisis”, something new will appear in its place until the tax code is fixed. Remove the government from the pushing its “this is good for you” influence and let the free market decide.

Prior posts.

Congress is turning tricks again

Good news from Congress: we no longer need think that pressure from constituents or logic might influence them into some notion of sanity. Hooray! Just think of all the time we’ll save that would normally be spent bitching about how irresponsible they are. Again, hooray!

The House passed three separate tax cuts yesterday and plans to approve a fourth today, trimming the federal revenue by $94.5 billion over five years — nearly double the budget savings that Republicans muscled through the House last month.

GOP leaders portray the tax bills — for the hurricane-ravaged Gulf Coast, affluent investors, U.S. troops serving in Iraq and taxpayers who otherwise would be hit by the alternative minimum tax — as vital to keeping the economy rolling.

“Our economic policies have done the trick,” said Rep. Deborah Pryce (R-Ohio). “We are in the middle of one of the strongest economies this country has ever seen.”

In order: qualified yes, qualified yes, qualified yes, and absolutely. It might be surprising that I’d offer a qualified yes or absolutely to all proposals, yet still insist that it’s bad news. Allow me to explain.

Hurricane Katrina ravaged the Gulf Coast. A friend who visited New Orleans recently on business returned with a clear understanding that the devastation is far worse than it appears on television. Something must be done. But I don’t trust Congress to do it correctly, especially when its idiocy got us into the situation where only the Federal government could fix the problem. Destroy market forces (insurance, flood walls, etc.) that would make population and business decisions more in line with the inherent risk in the Gulf Coast and a federal response is all that’s left. My reservation stems from that. Congress doesn’t get to take credit for fixing a problem it created. Also, handing out gifts tax breaks to businesses, only to exclude less-favored, “sinful” businesses, is an awful form of central planning. Let the people of New Orleans decide. But I understand that goes against every belief Congress currently holds. In the end, a qualified yes because we have little choice.

Next, concerning affluent investors. I’ve already addressed this, so I won’t go much further with the issue. Congress needs to stop thinking in terms of poor vs. rich and start thinking in terms of smart economic policy and stupid economic policy. We’re nowhere close to smart policy, but this is a small step. I don’t pretend that this is being done for the right reasons, though, so it gets a qualified yes.

Next, U.S. troops serving in Iraq. I don’t have much information on this tax break, but it “would extend a provision allowing members of the military to use their combat pay to claim the earned income credit.” Fine. At a cost of $153 million, it’s a blip in our fiscal health. It’s qualified because it’s probably more to promote a warm fuzzy feeling of helping our troops. If I gave it a no, I’d probably be unpatriotic. I wouldn’t want that. Merry Christmas!

Finally, the Alternative Minimum Tax is a travesty. Anything that reduces its impact is a bonus. Congress should abolish it immediately. No member has the brains to that, so I’ll settle for this. It doesn’t change the reality that an indiscriminate tax on taxpayers who have no intention of evading taxes (illegally), without any sense behind it, is wrong. And the rich paying their fair share is obscene. Just one more soak the rich policy, which is not soaking the not-really-rich. Get rid of it. This is a small positive step.

None of that changes my original idea that this is bad news from Congress. Cutting taxes by almost $100 billion is wonderful, but without an equal or greater reduction in spending, the deficit will grow. It’s insanity and this doesn’t make me think differently:

“By cutting taxes, you grow the economy, and you generate an enhanced flow of revenues to the Treasury,” said Rep. David Dreier (R-Calif.), chairman of the House Rules Committee.

I like that argument as much as anyone, but it’s not generating an enhanced flow of revenues to the Treasury I’m interested in. I want more money left with the people who earn it. The government should get what it needs, not what it wants. Does anyone believe that Rep. Dreier intends to use that enhanced revenue only on necessary, appropriate expenditures? Our tax policies should be adjusted to meet that criteria, while spending according to the revenue we’re generating, not what we hope to generate through more targeted central planning. Congress doesn’t understand that, even though it’s simple. Cut taxes. Cut spending. Reduce the government’s size and reach.

For anyone who thinks I only hate Republicans

I’ve written about our need for tax reform, but I realize I haven’t catered to everyone who might be interested in the subject. I’ve argued from a pro-individual, pro-business, pro-responsibility foundation. If you don’t like that, and prefer your tax reform to include tax increases, anti-investment incentives, and heightened class warfare, advocating poverty for all, I’ve found the plan for you, courtesy of Oregon Sen. Ron Wyden. Behold:

Wyden’s plan, the Fair Flat Tax Act of 2005, would replace the six current personal income tax rates with three – 15 percent, 25 percent and 35 percent. Corporate income would be taxed at a single flat rate of 35 percent. The proposal would eliminate many of the personal and corporate tax breaks that encrust the existing tax code, and would allow all taxpayers, not just those who itemize, to deduct state and local taxes from their federal income tax forms.

Most significantly, Wyden calls for taxing all income equally, regardless of its source. Interest and dividends would be taxed at the same rate as wages and salaries, eliminating the preferential treatment for investors over workers.

That’s brilliant. Instead of ending extra punishment for wage income, Sen. Wyden wants to punish investing. Not a moment too soon, of course, because we know only the wealthiest, greediest individuals invest their money in financial instruments generating interest and dividends. The bastards deserve to be punished for their capitalism hatred of poor people.

Simplicity is a virtue of any tax system; fairness is another. Wyden’s idea of equalizing the tax treatment of all income – whether it comes in the form of a paycheck or a stock dividend – has powerful appeal. The preferential tax treatment of investment income clearly favors the richest taxpayers. In Oregon, according to the state Department of Revenue, the richest 5 percent of taxpayers received 40 percent of all income from interest and dividends, and 79 percent of all income from capital gains.

Here’s an angle these editorial writers might like to pursue: what percentage of Oregon’s tax payments come from the richest 5 percent? Might that reveal a useful understanding, as well? But it’s about helping the poor, not punishing the rich. The use of “clearly favors the richest taxpayers” is all the analysis I need, so never mind.

Tax rates on interest, dividends and capital gains were cut during the Clinton administration, and again under President Bush, as a means of encouraging investment and savings. The resulting disparity in tax rates is manifestly unfair to those who rely on income from salaries and wages. A middle-class taxpayer who gets a $1,000 raise will forfeit 25 percent of it in federal income taxes, plus Social Security taxes. The same amount paid in dividends, interest or capital gains is taxed at a rate of no more than 15 percent, with no Social Security bite.

Once again, this plan just looks out for the poor(er) taxpayers. We wouldn’t want to bring that 25% tax hit on the $1,000 raise down as much as we want to hit the rich with an extra $100 tax for having the nerve to derive sources of income apart from direct labor. We shouldn’t care if they spent years building the wealth to invest. Hell, they should’ve donated the extra to the poor. Since they didn’t, we should take it from them.

If this is the best Democrats can do, they should just shut up and let Congressional Republicans continue to botch our nation’s economic well-being.

UPDATE: With a little research, I found this statistic from 1999. (I’ll look for a newer statistic, but I don’t think the result will change.)

For example, 38.1 percent of 1999 full-year taxpayers had an income of $20,000 or less but paid only 4.2 percent of all taxes. Conversely, those 1999 full-year taxpayers with income of at least $100,000 comprised only 6.8 percent of all taxpayers, yet they paid 42.8 percent of all taxes.

Spin that.

Can we return the favor next November?

Because flood insurance and pension guarantee failure aren’t enough, Congress wants to extend the Terrorism Risk Insurance Act (TRIA).

The version approved by the House Financial Services Committee contains several provisions that the Treasury Department opposes, such as the addition of group life insurance and the kinds of coverage eligible for the backstop. The bill also calls for different triggers for different types of coverage — a provision dubbed siloing — that critics say would lower the damage level at which the federal program could be invoked.
…

The Treasury Department has not favored extension of TRIA, but agreed last summer to accept it if it were more restrictive than the original program and designed to be temporary, leaving coverage eventually to private insurers.

Treasury Secretary John W. Snow endorsed the version approved by the Senate Banking Committee. [ed. note: The Senate version is less expansive.] The panel’s actions “recognize the temporary nature of the program and place terrorism insurance on the right path to full private market participation,” he said.
…

The Treasury Department and other critics say the private market is now able to resume insuring against terrorism but will not do so as long as the federal government provides the coverage at little or no cost.

I’ve left out the details because they don’t matter in the discussion of principle. They’re in the article if you want them. What’s important here is that the government is once again circumventing the private market and the Treasury Department tried to explain this. It’s nice to have the assurance that someone will pay for the damage should another attack occur, but it’s not at little or no cost.

An attack could occur anywhere, but no one expects it to be in Peoria. Those people shouldn’t pay for the risk inherent in building a new skyscraper in New York City. We should’ve learned this lesson with every hurricane that comes along. The private market would’ve compensated for the extra risk to lives and property along the Gulf Coast by making it (prohibitively?) expensive to live and work there, but our helpful friends in Congress crushed that. Taxpayers get the $200 billion bill, yet the undesirable fallacy of socialized risk management denial marches on.

Post Script: Thankfully we have someone in Congress to put it all in perspective.

“I do not regard TRIA as a favor to the insurance industry,” said Rep. Barney Frank (D-Mass.). “It’s a favor to the insureds.”

I think that (D-Mass.) should read (S-Mass.) “favor to the insureds” shows me that Rep. Frank prefers his capitalism with a large dose of socialist stupidity.

Who didn’t see this coming?

In what will likely be sold as fiscal sanity, but is in reality only a calculated political conclusion that eliminating tax cuts raising taxes is more acceptable than eliminating wasteful spending, the Senate Finance Committee decided not to extend dividend and capital gains tax cuts.

Facing a stalemate over one of President Bush’s top economic policy goals, the Senate Finance Committee yesterday gave up efforts to extend deep cuts to the tax rate on dividends and capital gains and approved a $60 billion tax measure largely devoted to hurricane relief and tax cuts with bipartisan appeal.

The measure, which could pass the Senate today, marks the latest in a string of legislative setbacks for Bush, who has repeatedly called on Congress to make his first-term tax cuts permanent and has taken particular pride in the 2003 dividends and capital gains tax cuts, which are set to expire in 2008.
…

“The fact is, these are a confluence of challenges that require a confluence of choices,” said Sen. Olympia J. Snowe (R-Maine), who forced Republican leaders to back down on the dividends and capital gains extensions when she argued such cuts would primarily benefit the wealthy as Congress was moving to cut programs for the poor.

A confluence of challenges indeed. Perhaps she and her fellow Senators should look in the mirror to find the biggest source. But benefiting the wealthy? Sure, but they’re hardly alone. I’m not wealthy, yet those tax cuts affect me by helping me become wealthy. It’s might be helpful for the Senate to remember that I’m doing the work to make myself wealthy, not the multitude of spending nonsense they offer. Might it be better to start with spending than with taxes?

When Republicans start co-opting the economic language of Democrats, little hope remains.

From no textbook I remember

I had difficulty tracing backwards from this entry at TPM Cafe, so I couldn’t read the discussion preceding this entry. However, this entry provides enough information for me to know that the discussion is ridiculous. With economics so poorly misinformed, I’ll bother to offer only the obvious rebuttals. This is more interesting just to understand how some economic thinking can be accepted by so many, while still being so wrong. Consider these progressive economic solutions:

1. Raise the minimum wage. This is a proven winner for working Americans, especially women. Senator Kennedy has just introduced the Minimum Wage Act of 2005, to increase the minimum wage to $7.25. Let’s get behind it, shall we?

A proven winner? Politically, maybe, but not economically.

2. Support the right of workers to form a union. The AFL-CIO has a proposal for an Employee Free Choice Act. Check it out at http://www.aflcio.org/joinaunion/voiceatwork/efca/ I’m for it. …

I’ve never much cared for unions, although I understand the (foolish) reasons some people like them. Rather than a discourse here, I like how Kip at A Stitch in Haste describes unions as “a Twentieth-Century solution to a Nineteenth-Century problem and have little if any role in the Twenty-First Century.” That’s about right.

3. Increase Social Security benefits. Social security benefits are wealth! Social Security wealth is distributed to every working American on a truly progressive formula. It is by far the best means the country has ever devised to build wealth and security for working Americans and their surviving spouses and children. The Social Security System should of course be protected. But if you want additional wealth creation for working Americans, why not use this channel? Why not, say, credit a modestly restored estate tax to an expanded benefit? …

According to my last projected benefit statement from Social Security, I’d classify Social Security as an opportunity to buy french fries once a week in retirement. Primarily that arises from redistributing wealth, which I think I’m supposed to acknowledge as “good.” Of course, who can forget that gays and lesbians don’t get the full benefits of the “built wealth” that everyone else gets. I guess it’s very Progressive to support a system that continues to exclude gay partners but not a system allowing private ownership of retirement funds to be bestowed opon the recipient’s desired heirs. But we must remember that Social Security creates wealth, but we don’t want it to create too much, because wealth crossing from livable wage territory in to rich territory is so bad that we must tax it progressively. Schizophrenic Economic Policy 101.

4. Universal health insurance. Anyone awake during the debate over the recent bankruptcy bill knows that health crises cause bankruptcy. Want a win-win for the wealth of working Americans? Let’s protect them all from this source of disaster. …

Since there are no specifics, I can only speculate that this means government-funded insurance instead of privately-funded insurance. Better to bankrupt America than individuals, maybe, but the flood insurance system works so well, let’s replicate it. Correct me if I’m wrong.

5. Protect home equity. How do working Americans build wealth in the real world? As we all know, they do it by buying a home. If they are prudent, patient and lucky [ed. note: Huh?], they then keep their debt below the appreciation in their equity. It’s a great system, and it works pretty well. Any thoughts on how to improve it? How about steps to expand it to millions of others, including many minorities, who do not own their homes? …

If they’re too poor to save any income, as the earlier parts of the entry state, how are they buying houses? My personal experience says they’re not. And do I need to point out the implications in the last argument about minorities?

Surprisingly, the comments are worse than that. Read it if you’re interested in a little mental punishment.