Archive for the ‘tax reform’ category

Up Next, Tax Reform

August 7, 2017

The President and the Republican controlled Congress agree (for now) that “tax reform” is the next target for action. Tax reform is a umbrella term, and like any good umbrella, tax reform could mean many different things. Soon Americans will know what Republicans have in mind.

There will be two parts to the reform, corporate and individual tax codes. For corporate taxes, there is a rich world of exceptions, exemptions, and deductions which could make anyone dizzy trying to figure out which ones apply to which businesses. Not surprisingly, President Trump has promised to lower corporate rates from 35% to 15% claiming the current US tax rate of 35% is the highest in the world and puts American businesses at a significant competitive disadvantage. Hmmm. (I wonder what the President will propose about the existing dog’s breakfast of loopholes, deductions, exemptions etc which contribute to the current average business tax rate of 14%, far below the starting point of 35%. Which buasinesses will be winners and which one will not?)

An important aspect of corporate tax deals with pass through taxes and carried interest taxes. Both of these options create tax favorable situations for certain wealthy business owners (lowering their overall tax liability). What will the GOP propose for these during tax reform considerations?

For the individual tax code, it is hard to imagine a more complicated set of rules. The individual tax code is used to generate tax revenue on earned income after certain exemptions and deductions are taken into account. When the adjusted income level is determined, individuals fall into tax brackets and the tax is calculated. For many tax payers (but still a minority over all), pass through and carried interest income plays a role in lower the overall bracket.

Some very wealthy Republicans want a straight “flat” tax of say 10% on all income, no exceptions, and no deductions of any kind. Others argue for less deductions and lower bracket rates but, of course, argue certain deductions are still important. Hmmm.

What is normally never discussed under the heading “tax reform” is what would be the consequences. On the plus side, tax reform is often argued as a route to stimulating the economy.  Some even say a tax cut (their idea of a reform) would pay for itself by growing the tax revenue even at lower tax rates.  Yes, believe it or not, a free lunch.

And unmistakably, there are those who plead for tax reform for various purposefully sounding reasons, in truth only seek a tax cut for themselves.

The more insidious consequence resides in what the government will not be able to afford on lower tax revenues.  Will a GOP controlled Congress lobby for healthcare and entitlements cuts too?

The current tax code has something for everyone to find wanting. The tax code seems to complex. There must be something wrong when an average person needs the help of tax experts to file ones income tax.  Corporate taxes are too high we are told yet American business, on average pay about the same tax rate as foreign businesses.  And, the tax code seems unfair to both the wealthy and the average person.  So “reform” seems a reasonable goal.

The mystery is what will the GOP think constitutes reform?

Tax Reform On The High Wire

April 28, 2017

With a one page, 200-ish word handout, President Trump presented his outline for revamping the Federal Tax code, and in one fell swoop, jump starting US economic growth. The Trump Administration announced the largest tax cuts “in history” and with a straight face assured listeners that these cuts would pay for themselves by boosting current 2% annual growth to 3+%. Hmmm.

The supply side argument is that lower taxes puts money in Americans pockets and with the extra cash, Americans will spend more. More spending, in turn, stimulates industry which adds more capacity, employing more Americans. The increased employment then ignites another round of investment and job hiring. If nothing else, it is an exciting story.

Regrettably, supply side economics (George H W Bush called it VooDoo economics) has been tried before and has been discredited by most economists. Arguably if most Americans received a big positive hit from a tax cut, one might feel President Trump’s outline was worth a shot.  Unfortunately most of President Trump’s tax savings proposal would flow to the already wealthy.  Hmmm.

Progressive economists (Keynesian followers) would prefer outright government spending if the desired policy is to stimulate growth. In practice tax cuts have tended to find their way into the already wealthy’s pockets and not into business investment. Surprised?

The proposed tax cut is a shameless attempt to steal from the average person and give to the wealthy. Hillary Clinton had proposed somewhat the opposite when she proposed new taxes on the wealthiest of Americans. While it is fair to question why the very wealthiest should pay more in taxes (as oppose to everyone paying more), the Trump proposal, as outlined, could increase the taxes of average Americans living in States with high State taxes (which are deductible now on Federal returns). But more than anything, the Trump proposal promised the lower income Americans nothing, question marks to middle income, and a bountiful gift to the wealthiest. For what?

First quarter GDP growth numbers were announced this morning.  The 0.7% growth underlines the problem America’s economy is facing.  Consumers aren’t spending nor are they choosing to save instead.  The average American does not feel flush with money and is choosing to wait on discretionary purchases.  A small increase in most consumer’s discretionary income (via a tax cut) will likely have only a small impact compared to an equal sized increase in direct Government spending.

There is another and important part to the tax cut announcement. Trump Administration is proposing to lower the “corporate” tax rate from 35% to 15%. This is worth listening too. Why? The stated objective is to make our corporation globally competitive and in the process encourage (and not discourage as in now the case) American corporations to repatriate their overseas earnings. (One report estimated that there may be over 2 trillion dollars in overseas banks.) Corporations claim that the 35% tax on repatriated earnings is too onerous compared to their alternatives.

The reasoning goes that repatriated overseas earnings could be used to invest and stimulate the economy, and once taxed, provides the Government a means to increase spending without increasing the debt.

As with many well intended objectives, lowering the corporate tax rate across the board could bring handsome savings to many who do not compete with foreign companies or have hoarded money in far away places. Lawyers, doctors, and hedge funds, to name a few, could spin this lower rate and change their tax paying status for income taxed at 35% to the new lower !5% corporate rate. And why would that be a wise use of the tax code?

There is precious little known about the exact tax code reform but what is implied in the one page press release, the rationale (stimulating growth) for implementing this reform is highly doubtful.

What seems not doubtful is that the very wealthiest Americans will take home a bundle. Hmmm.

Public Option?

April 21, 2017

The GOP and the Trump White House are beating the healthcare drum again. The President promises a really good plan for replacing Obamacare. According to a report in the Washington Post, Trump said, “We’re doing very well on health care.” “The plan gets better and better and better, and it’s gotten really good, and a lot of people are liking it a lot.”  “We have a good chance of getting it soon. I’d like to say next week, but we will get it.” Hmmm.

I suspect those Americans who loose their coverage or those who subsequently find out their coverage covers a lot less will not think their health plan got “better and better”.

Republicans are now debating behind closed doors a plan which seeks to bring together conservatives (Freedom Caucus who do not want any hint of entitlements in healthcare and would prefer for the government to not be involved at all), and moderates (The Tuesday Group who fear sharp political retribution if the benefits of Obamacare are rescinded). The Tuesday crowd are offering weasel words that would allow States to opt out of certain Obamacare services. Hmmm.

The overall facts appear unchanged. The American Health Care Act, even as amended, will provide less coverages to fewer Americans than Obamacare and will provide huge tax savings for the wealthiest Americans. The GOP’s embrace of “the best healthcare money can buy” is a sad replacement for the Affordable Care Act (Obamacare). Is that the best we can hope for?

Here’s a dream.  “Medicare for all” could be a next step in healthcare. Compared to the “oh so many” for-profit insurance companies today (which stand between you and your doctor), Medicare, which insures post 65 year old Americans, and fits seamlessly into existing doctors, hospitals, and pharmacies, could offer “a ready to go” alternative.

Of course Medicare is not without some problems, namely how it is funded. Republicans will decry the expansion of government and seek ways to defund Medicare. Cooler minds, however, might see Medicare as the ideal vehicle to determine what is basic healthcare and how to pay for it, especially if Medicare became the standard package for employer provided healthcare.

No sane discussion of healthcare reform should avoid the obvious elephant in the room. Americans spend more on healthcare than any other country in the world and receive mediocre healthcare outcomes in return. The difference in cost is significant (greater than two times).

An additional revelation is that balancing the Federal Budget can not be achieved unless there is a fix for Medicare and Medicaid, both of which collect less in tax revenues than they spend on healthcare benefits. With “Medicare for All” there is one program providing basic coverage with significant negotiating power with healthcare providers. Existing insurance companies could continue to “administer” Medicare benefits but would be unable to set different conditions around services.

Most likely efficiencies associated with a single payer would be insufficient to assure Medicare would be solvent. Consequently tax reform coupled with healthcare reform could be seen as reforms aimed at serving all Americans and not as ploys to pass on huge tax breaks to the already very wealthy.

Despite wrong headed GOP motivation on both tax reform and healthcare, Democrats, unfortunately, appear willing to simply play for a tie (defined as thwarting the American Health Care Act thereby keeping Obamacare) and rejecting tax reform unless the proposal is revenue neutral or positive.  Hmmm.

The can is poise for another kick down the road.

Trump’s Thanks To The Rust Belt States

November 19, 2016

Donald Trump lost the popular vote by about 2 million, but was able to win the electoral college tally by flipping normally blue “rust belt” States to red.  His victory, in no small measure is thanks to a disheartened core of blue collar workers.  These voters were seeking someone who could offer them hope.

Now there is much speculation about how President-elect Donald Trump’s Administration will begin its first term. What will President Trump attempt to accomplish in the first 100 days? What legislation will signal America is going the “right” way again?  Will the “rust belt” supporters receive their just reward?

There is plenty of chatter about repealing Obamacare (and little talk about what will replace it). There is stealthy talk about who Trump will nominate for the Supreme Court. And lots of talk about Trump’s bold front attack on taxes and regulations. For the voters who pushed the electoral college total over the top for Trump (dislocated workers in rust belt States), they may not realize it but there is little to be optimistic about.

Obamacare addressed a shameful and hurtful aspect of the American healthcare delivery system, namely the notion that an insurer could reject (outright or through prohibitively high premiums) a customer based upon some pre-existing condition. Obamacare also made it much easier (read affordable) for many low earning Americans to gain coverage. Short of a universal healthcare (single payer) system, Obamacare marked a clear step towards human dignity and, for a country which considers itself “exceptional”, closer to where the rest of America’s peer countries already are with healthcare.

Obamacare insures more Americans in every State. Repealing Obamacare will hurt many of these rust belt State voters, not help them. Hmmm.

Trump’a Supreme Court nominee will represent the worst of American exceptionalism. The process of denying President Obama the time honored (and Constitutionally founded) practice of appointing someone to fill a vacancy has blackened the reputation of the Republican Party and will lessen the honor of Trump’s nomination. The actual nominee, himself (little chance of herself) will only tangentially be the issue.

Someone in the Scalia mold should be expected to rule conservatively and in a way unhelpful to rust belt State voters.

For the bread and butter task of “making America Great Again”, the Trump team is proposing “tax reform”and regulations roll back. Tax reform is said to feature lower tax rates coupled with elimination of tax loopholes and deductions. Most pundits say that, at a minimum, this will include sharp reductions in corporate tax rates and for individuals, lowering the top income tax rate reduction (39% to 33%). So, what’s in it for those rust belt State supporters?

The Trump team says those receiving tax cuts (corporations and high earners) will turn around and re-invest this new found money creating a sea of jobs. Regrettably there is no recent experience (like with the George W Bush tax cuts) to support this belief. Wealthy people spend or save any new found wealth and corporations tend to give the money back to share holder rather than actually invest. Sadly, the tax reform is unlikely to stimulate the economy and almost certainly is not going to benefit the rust belt State crowd.

The plan to roll back regulations must have more specifics. Which regulations and what does the roll back look like. This same type of Republican thinking, however, produced the “Katrina effect” and in 2008, a sleeping Republican Government woke up to find the precipice overlooking a world depression. Capitalism and free market policies may help but they can bring harm just as well.

To be sure, rolling back environmental standards and green house gas regulations could enable, for example, the coal industry to hire back some former workers. While this might seem to help in the short term the rest of the world including developing countries will be watching. For rust belt State supporters, global warming long term impact could work against their children.

One must grant that large tax cuts could have a stimulating effect on the economy as predicted by Republicans. While this might be a cause for cheer, these rust belt State voters would do well to recognize three things before they celebrate too loudly. (1) Any overall tax cut driven economic boom would not necessarily flow to them or their States. (2) Over stimulation is almost always followed by a period of contraction and recession (which will adversely impact the rust belt). And, (3) for auto and industrial workers longing for a return to the great paying and benefit rich jobs of the past, while prohibitively improbable, such an occurrence would jack up the cost of what ever was produced and decrease their companies’ competitiveness. These higher cost items in turn would make the companies less competitive and initiate another round of outsourcing or severe downward pressure on wages and benefits.

Tax cuts and slashing regulations is a no win situation.

All is not doom and gloom. Obamacare could benefit from a number of modifications, most healthcare experts agree. A moderate, right of center jurist does not necessarily need to be the end of the world. And, a combination of government stimulus (tax cuts and spending) coupled with a careful review of unnecessary regulation could provide a better situation for American businesses to flourish and grow, helping everyone.

Since the GOP’s heart does not lie in these rust belt States, IMO, disappointment and maybe even resentment lies ahead for these voters who made Trump’s victory possible.

If Not Trump, Then Cruz?

March 6, 2016

Republicans are walking around with a dazed look. With Donald Trump polling between 35-40%, that means that a majority of Republicans support someone else. What will happen if Trump does not get the nomination? Who will?

Sitting in second place is Ted Cruz. And as much as many worry about what Donald Trump’s specific policies might be, there is no lack of clarity for Ted Cruz. Instead there should be major concerns about where Cruz wants to take America.

Go to Cruz’ home page (www.TedCruz.org) and see for yourself. Ted lists nine “issues” where what a Cruz Presidency would look like are explained. No surprise, Cruz lists issues which overlap and most are in part contradictory. And all of them leave the reader with a blank image of what America would be like after Cruz took over. For example:

  • Restore the Constitution. Even though Cruz cites later the numerous occasion he has defended (successfully) the Constitution, it becomes clear that Cruz really means “Restore the parts of the Constitution I agree with”.
  • 2nd Amendment. Probably the least ambiguous issue, Cruz is full square behind gun ownership and gun use. Ted apparently believes that the “old west” is what the new America should resemble.
  • Secure the Borders. Cruz asserts that America should be far more stringent with policies which keep immigrant and foreigners in general out of the US labor market. While a logical position one could hold, this exclusionary policy works both ways.  Consider when US companies attempt to operate globally and are told that senior executives are unwelcome in a foreign country. Cruz’ rhetoric also ignores the well documented need for seasonal agricultural labor.
  • Defend the Nation. Cruz raises a hawkish, military might flag not unlike many other previous Republican candidates and uses the current world stage as evidence that President Obama’s leadership has not worked. Cruz claims President Obama has made the world a less safe place. Strangely, Cruz is silent on the issue of who authorized the Iraq invasion and occupation which destabilized the entire Middle East.
  • Stand with Israel. On day one, a President Cruz would recognize Jerusalem as the rightful capital of Israel and move the US embassy to that city. Cruz’s decision would overturn US policy (by both Parties) and put the US finger back on the scales of the Israel-Arab conflict with nothing to gain but another black eye.
  • Religious Freedom. In essence, Cruz recommends discrimination as long as it is done under the name of religion. In Cruz’s world there is no situation which covers “freedom from religion” which the Constitution promises in the first Amendment. This single issue capsulizes the Cruz take on American life, the Constitution guarantees Americans the right to impose their views on others outside the election process.
  • Life, Marriage, Family. Cruz comes on strong with essentially religion driven views on family planning, human rights, and the role of religious freedom in denying gays and women the same opportunities that other Americans have.
  • Jobs and Opportunity. Cruz buries in this heading the repeal of Obamacare, and of course, offers no idea on what would replace the Affordable Care Act.
  • Rein In Washington. Cruz finishes strong with a declaration that he will eliminate five cabinet level departments. The crosshairs will be on the IRS (how will the tax code be enforced?), the Department of Education (education is no longer important?), the Department of Energy (separately Cruz says he wants to immediately approve the XL Pipeline and follow a policy of “energy independence”), the Department of Housing and Urban Development (is this a statement about the North and Northeast versus the more open South and Southwest?), and the Department of Commerce (in a globalized world, a Department of Commerce is not needed?) Apparently, Cruz believes that regulations emanating from these Departments are holding back America and contributing greatly to government spending.

One must be struck with the simplicity of Cruz’s issues. If life were that simple, prosperity would be just around the corner. But there is a much larger danger lurking in the words on Cruz’s web site.

Cruz’s proposition around “Rein in Washington” is a fair position to hold.  Clearly times change and new organizations might do a better job of tackling issues on taxes, education, energy, housing and urban affairs, and commerce.  The rhetoric of “eliminating” sends a dangerous message that these activities are unnecessary rather than their tasks might be accomplished better some other way.

If one takes Cruz at his stated words, one should get ready for Cruz’ religious views to become the law of the land. On non-religious topics, Cruz wants the rules changed so that concentrations of power and wealth can grow without any implied or specific responsibilities to society as a whole.

Donald Trump might be a business person with big question marks on his emotional fitness as commander in chief, but Ted Cruz lacks any perspective on a greater society and the roles of social inclusion and globalization of the world economy.

If you are afraid of Donald Trump, you would be wise to petrified of a President Cruz.

Speaker Paul Ryan

October 31, 2015

Change always offers an opportunity for selecting a different path. Sometimes that path involves different goals or sometimes it is just a different approach to reaching the same goals. The election of Representative Paul Ryan as Speaker of the House begs the questions, which option will mark his time as Speaker?

Wouldn’t any meaningful reform of the tax code entail either raising taxes (a Republican no-no) or beg reducing government spending (read cutting entitlements) if marginal rates were lowered? An elimination of exemptions, deductions, and loop holes, without lowering tax rates, would necessarily increase tax revenues. Any revenue neutral tax code reform would, in addition to favoring some groups, still come with a deficit and in a spirit of change, would put pressure on Congress to lower spending, hence a reduction in entitlements.

If this were to play out under Speaker Ryan’s watch, it would represent the same goals (help the wealthy and decrease efforts on poverty or the needy). The Republican rhetoric, however, will sound nothing like that. This approach will be hailed as an attempt to eliminate tax code favoritism and improve the campaign over poverty reduction.

The GOP claim that current Government regulations undercut individuals’ efforts to climb out of poverty. According to conservatives, Government rules makes it too easy for an individual to accept government money and not join the work force. Hmmm.

As the GOP see it, Government subsidies and direct payments should instead flow to State Governments who are much closer to the situations in their States. The Federal Government should, Republicans say, provide “block grants” to States replacing direct payments to individuals. States could then decide eligibility rules “appropriate” for their specific situation (and could use any excess portion of the block grant as the State saw fit. Hmmm.

Republicans make no mention that this could have significant unintended consequences if their assumption “that people are just lazy and do not look for work if there is a government handout available”. For instance, why won’t these “lazy people” just migrate from State to State in search of more generous benefits? Why wouldn’t some States preferentially make it more difficult for groups or classes of residents thereby encouraging them to “self-migrate” to another State. And what would all the States do when the economy enters a recession or near depression?

To the GOP’s credit, this could be a plan.   There are no Democrat plans other than to spend more. The historic track record of spending more is not brilliant. Unemployment, single parent families continue to rise, and the US workforce seems to be becoming less able to take on higher tech, better paying jobs.

What a mess. America has Scrooge on one side and a foolish (good hearted) spender on the other. Hmmm.

There must be a middle ground. During Bill Clinton’s time, he supported an entitlement reform aimed at harnessing the “welfare queens”. Cutting back did increase the effort of many to find employment. Would it work again?

Maybe but maybe not.

Like so many social problems, the causes are complicated and demand more complex solutions. America’s unemployed include the unlucky (laid off for example), street people, mentally challenged, single family moms (who can’t afford child care), physically disabled, unskilled, along with those who just are lazy and willing to accept less in life. Globalization has outsourced a lot of low skill jobs and low entry wages make little incentive for many to join the work force. Hmmm.

The success of Paul Ryan will be tied to whether he really tries for change and if he connects these goals to comprehensive plans with step by step results testing. For example, select four States and test the approach. Does it work? Than if so, expand.
Hmmm.

Should I hold my breath.

Christie, Does He Believe What He’s Saying?

May 14, 2015

Governor Chris Christie is in a tough spot. In a potential field of two dozen GOP Presidential hopefuls, how does a New Jersey Governor make his candidacy relevant? Christie whose personality is a mixture of charismatic and bombastic qualities, thinks he needs to emphasize his conservative economic views to gain attention. Hmmm.

In a Wall Street Journal op-ed column, Christie outlined his plans to get America going again. Briefly his thoughts were:

  • Tax Code Reform involving lower across the board rates
  • Reduce Government regulations
  • Implement a National Energy strategy
  • Eliminate “counter productive laws and regulations like (you guessed it) Obamacare
  • Invest in R&D (increase the rate compared to entitlement growth)

Christie claimed that these steps will unleash pent up demand and help the middle class break out of the stagnation is has experienced for the last 20 years or so. Hmmm.

Christie’s dramatic speech make one wonder whether he realizes that these proposals were made 4 years ago and can be found in part in just about every other GOP hopefuls’ canned speeches. Even worse than a lack of originality, this prescription also hides some important misconceptions. For example:

  • Tax Code Reform – any proposal which calls for across the board tax rate reductions is in fact a plan to provide the wealthy with lower tax liability even when loop holes and exemptions are also eliminated. Tax Code Reform is certainly an important and worthwhile goal but it will be a herculean task to remove favorites like mortgage and health insurance deductions and not look the other way on all the big loop holes and exemptions that the wealthy and special interests have lobbied to get in the tax code.
  • Reduce Government Regulations – This is an inadequate proposal. Does Governor Christie want to reproduce the conditions that lead to the subprime/mortgage backed securities near melt down of the world’s banking system? Voters should be weary of this type of claim unless the candidate gives specifics.
  • Implement a National Energy strategy – This is an amazing statement which makes one wonder where Governor Christie has been for the last 4 years? “Energy Independence” has been a campaign pledge in past elections and to the extent Christie means to push a 25-50 year strategy which moves the US to renewable and environmentally friendly energy sources, this could be game changing proposal. But Christie in more in step with the “drill Baby drill crowd” and is speaking to big money and big oil interests.
  • Eliminate counterproductive regulations (like Obamacare) – This is probably the most shameful proposal of the lot. Modifying, improving, and replacing the Affordable Care Act should be a welcome proposal if it leads to good or better healthcare outcomes and lower total medical costs. Christie’s swipe at Obamacare is a crass politically hollow statement.
  • Invest in R&D – In principle this a worthwhile proposal. In practice this usually means another exemption or deduction to be added to the tax code. And where is the investing in our aging national infrastructure upon which the economy depends?

I have taken exception to Governor Christie’s proposals not because he is likely to become the nominee. I have taken exception because Christie’s proposals are a not so clever regurgitation of previous GOP proposals.  Added together. the GOP advocates that money be transferred from entitlement programs and spent upon defense and tax breaks for the wealthy. Voters must look beyond these carefully turned phrases and uncover the intended outcomes.