The Common Man Quandary

“Americans want… (fill in the blank)”, Senator Leader Mitch McConnell and House Speaker Paul Ryan are prone to say.  “Americans have spoken and we are listening”, McConnell and Ryan chirp.  I often wonder just who those Americans are?

“Americans” is a clever way to mask who ever is the object of McConnell and Ryan’s words.  If you are informed and following Congressional debate, then it is clear “you” are the “Americans” McConnell and Ryan are speaking to.  The best part is that even if you have no idea what the debate is about, for example, you are just a “common man”, “Americans” means you for sure.  Most of America’s population resides in the common man category.

A Federal District Court Judge in Texas issued a ruling yesterday pronouncing the Affordable Care Act was now un-Constitutional, null and void.  What Constitution was he referring to since the ACA had already withstood two Supreme Court challanges?

McConnell and Ryan think the 2017 tax cut was just what “Americans” were looking for. The tax cut, however. gave most of its tax reductions to corporations and the very wealthy, and in effect, most “Americans” (who ever they are) were being played for suckers. I guess the notion that corporations and very wealthy people who were getting the tax breaks must be the “Americans” Mitch and Paul were talking about. 

But what about the “common man”?

The “Common Man” for the most part does not pay income taxes.  The “Common Man” earns too little to pay income tax although he pays other taxes like social security, Medicare, and sales and property taxes.  But the “common man” is in for a surprise.

The 2017 tax reductions zeroed out the tax on those who do not have health insurance.  Unbelievably, “Americans” who choose not to buy health insurance (even though they could afford to), and instead game the system by using the Emergency Rooms when they get sick, thereby allowing the rest of their fellow Americans to pick up the cost, have been encouraged and rewarded by the 2017 tax cut.  This bill contained language which eliminated penalty taxes on those who did not have health insurance.

But there is more. The “common man” is in for another treat.  The 2017 tax bill is unfunded.  That means the tax cuts are bringing in too little tax revenue to cover government spending.  Hmmm.  That means the government must borrow money and thereby increase the Federal debt level which at some time in the future, the “common man” or his children must pay back.  Oh, and as the debt grows, interest payments will squeeze out other government spending like fixing roads, bridges, etc and if Republicans have their way, the “common man” will receive less Medicare, Social Security, or any other government safety net benefits.

One need only look to France and the “yellow vest” demonstrations to observe what “Americans” might be in for given the current Republicans views on taxes.

Americans are mostly composed of “common men”.  The wealthy are few, so tax breaks for the wealthy means problems for others.  This makes it imperative that tax policies are carefully considered.  The wealthy can’t pay for everything but paying less than their fair share, especially in an environment of income inequality, catches the “common man” in a vice of rising costs and fixed income.  The “common man” is our society, and when our society breaks, bad things happen.

I wonder whether McConnell and Ryan are thinking this way?

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The Other Side Of The Coin

House Republicans have just released their proposed tax code rewrite. Experts are rushing to digest the proposal and perform the difficult task of assessing how this Republican bill will impact Americans. Wait, wait… if you are wealthy, you do not need to worry. This Republican plan will treat you well and provide opportunities for clever tax advisors to find new ways to save you tax payments.

The bill provides most (but not all) the gifts the rich have been expecting. The top bracket of 39.5% remains although the income threshold has been raised to $1,000,000 allegedly in deference to the “gift to the wealthy” optics.  Carried interest, estate tax elimination, and reduction of corporate taxes (35% to 20%) for private owner businesses will provide the wealthy with plenty of tax relief opportunities while the tax burden is shifted to lower income Americans.  And, for those unfortunate Americans earning $500,000 to $999,999, you will just have to pay in a lower bracket.

The deal is not set yet. Republicans from high tax States will argue for sweeteners in the restoration of State and local tax deductions and full credit for mortgage interest. Lobbyists representing all sorts of industries will go into full court press to preserve other deductions and credits. It is entirely possible that this attempt at tax code changes will stall or fail outright.

But it is entirely possible that this proposal or something substantially the same will pass. What then?

For sure it is maddening that very wealthy people like the Koch Brothers and Robert Mercer will pay less taxes.  It is maddening that as a consequence, the tax burden will shift to less wealthy people (like the Middle Class), or the cost of this tax cut will flow to the national debt, or both.

But that is not the real damage that this tax code change will bring.

A coin has two sides. On one side, heads, is the smiling faces of Americans paying less in taxes. The other side, tails, however, means there will be less government revenue to cover already approved government spending. Let there be no mistake, with lower tax revenues there must be less government spending sooner or later.

Republicans will be quick to assert that there are all sorts of waste and corruption in government spending. Why, Republicans will point out that there are able bodied Americans drawing social security disability benefits who could be working. And look at Medicaid excesses associated with the Affordable Care Act. And, with their faces now reddened, Republicans will bluster about spending in all sorts of other areas. Surely, cutting wasted money can be made.

Maybe. The problem usually boils down to which programs are viewed as wasted spending and what justification makes those expenditures “wasted”.

For example, Republicans have attacked the Affordable Care Act (train wreck, a jobs disaster) even though there were some 20 million more Americans insured with Obamacare than before. And, what have Republicans offered? Their best proposals offer less coverage and insure 10-15 million fewer Americans.

So, when it comes time to submit “post tax cut” Federal Budgets, what makes anyone think Republicans won’t feel that reducing programs which benefit all but the rich will be perfect targets?

The theme which comes up time and again is that there are no free lunches. Republicans are breathlessly trying to sell this tax code change as great for the middle class and the key to unlocking our economy, and best of all, there will be no cost to average Americans.

Really?

Hand In The Cookie (Tax) Jar?

This past weekend, Republican talking heads shared with Americans their absolute guarantee that Republicans would work “hard” trying to deliver middle class tax cuts. Americans found out that not every tax return was the same and so officials such as Steven Mnuchen, Treasury Secretary, and Gary Cohn, Chief Economic Advisor simply could not predict that every middle class American would receive a tax cut.

These leaders did emphasize that corporate tax relief would bust open the dam holding back job creation and that was a good thing they said. Interestingly the leaders were silent over whether there would be cookies for America’s wealthiest in their Christmas basket. A drop in the top bracket from 39 1/2% to 35% should reward these wealthy Americans handsomely.

One of the cute features of the Republican tax reform would be the elimination of deductions for State and local taxes along with mortgage interest deductions. (Surprisingly, it just happens that “blue” States use these deductions more than “red” States).

In the concept stage, Republicans had thought lower tax brackets and larger personal deductions would offset State, local, and mortgage deductions and allow the middle class to see a tax savings. Ironically, at this time the details (you know where the devil lives) are not set and Republicans are unable to categorically say one way or the other. Just as with the repeal and replace Obamacare, Republicans are beginning to realize how bad the “optics” will look if the middle class gets nothing and the wealthy get a lot.

Regrettably, truly simplifying the tax code and adjusting corporate taxes more in line with global competition could be useful efforts. The big money funding so many Republican legislators, however, does not think that way unless they get their cut first and right off the top.

As it stands now, the “repeal and replace” fiasco will make Republicans look good compared to how they are setting out to “reform” the tax code.

Up Next, Tax Reform

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?

Heated Rhetoric

Following the baseball field shooting of Republican legislators, bi-partisan cries have gone out calling for an end to heated (often misguided and misinformed) rhetoric. “Enough”, cry some of the most practiced in the art of partisan politics. Does anyone really mean those words? Doubtful.

Why doubtful?

While those words calling for a return to civility were echoing through Congressional halls, Senate Republicans were huddling behind closed doors attempting to cobble together a healthcare plan which met the test of reducing healthcare coverage and still keeping a Republican majority to pass the bill. No public hearings, no open discussion, no Democrat input. Do you think that is bipartisan behavior?

Like climate change and the abdication of the Paris Agreement, or the pending “huge” tax cut for the wealthy, or the private sector infrastructure proposal designed to put money is special pockets, Republicans are stacking the deck with intentions favorable to a few, neutral to a few more, and dangerous to the many.

Criticism opposing legislation kept in secret is called heated rhetoric by some. One wonders why?

Special interests?

Our elected officials are called politicians for a reason. Congress members first must convince enough citizens in their districts to choose them over their opposition. Promises are usually part of the bargain and in that lies the seeds for the problems we see today.

Instead of advocating for rebuilding the infrastructure, it is preferred to call for tax cuts. Instead of warning about global warming and taken specific steps towards control, it is easier to question the science and play for time. Instead of calling for basic healthcare availability, it seems wiser to claim (falsely) that America is exceptional and has the world’s greatest healthcare system.

Heated rhetoric could be a “generation thing”. In other words, current public officials inherited a wealthy country have done little or nothing themselves to create national wealth. With no practical experience in what it takes to build a nation, it should not be a surprise that Congress members’ sphere of vision is simply themselves. The role of today is to survive and worry about the future tomorrow. Hmmm.

While there are plenty of examples to support this theory, there is also a more sinister hypothesis. Americans are people. People are by nature greedy. Politicians are people and therefore without adequate checks, are greedy too.

Share that realization with clever and also greedy wealthy citizens and in not too much time, politicians learn to promise one thing but do another (and what they do is what their financial backers want).

Heated rhetoric may simply be the natural end which occurs when politicians make one false claim after another, long enough. Explaining behavior which leads no where can only be done so long before citizens sense dishonesty or incompetence. Raising the tempo, going negative, and if necessary, using “dog whistles” of race, religious, or national origin helps mold the electorate into “we” and “them”. Hmmm.

IMO, Congress reflects middle and upper class American. Congress’ ineffectiveness and willingness to engage in “heated rhetoric” is what any of us would do if public life were our chosen field. Fortunately, most Americans do not seek public office and the power to change government lies in our hands.

Ask the simple question, “what is the problem awaiting a fix”?

The problem is not necessarily that the US is spending too much money as those who say “the Federal Government” is too large. Rather, if there is a problem, one must cite the problem first.

For example, Medicare is often cited as a major contributor to the growing federal debt. Why not collect more fees and taxes to eliminate the deficit? The problem, rather is not the spending amount, it is whether there a need for Medicare at all.

Once there is agreement on why some healthcare subsidy for those on fixed incomes is fair and warranted, then the discussion on how Medicare should be paid for should begin. The same applies to Medicaid, Social Security, and healthcare in general.

Each American can figure out whether the incumbent is interested in the problem or just some special interest outcome (like paying less in taxes). Term limits by voting the incumbent out of office is the fastest way to get Congress members’ attention and to begin to lessen this problem.

I bet, however, that “heated rhetoric” will rule the day until Americans use the ballot box to over come “dark money” and other special interests.

Tax Reform On The High Wire

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.

The Republican Titanic?

In the wake of the Acela Primaries, news reports are coalescing around the inevitability of Donald Trump’s nomination. This outcome has been reinforced by the apparent rejection of Ted Cruz’ VP selection of Carli Fiorina, and the seemingly unexplainable coalition with John Kasich. With Trump’s opponents self destructing in real time, who is there to oppose Trump?

Politicians are many things but normally brave, predictable, and principled are heard less and less these days. Republican leaders are in a tough spot. They do not like Trump (and predict bad things in the general election with the Donald at the top of the ticket) but Kasich has not caught American’s interest and Cruz is held in lower esteem than even Trump. So, GOP big whigs don’t want to get caught without a chair when the music finally does stop. QED, hold our noses and get behind Trump.

There are certainly elements of the GOP leadership, including big money, who hold hope that Trump can be defeated in a contested convention. It simply unclear who the GOP could put forward to unite the Party and have a chance to do better in November.

A thoughtful Republican must conclude, one would think, that the Grand Old Party is about to disintegrate. This is probably an exaggeration. But disintegration into two or three large pieces is not only possible but long over due.

The Freedom Coalition (Cruz and Tea Partiers) present an evangelical/fundamentalist, no compromise approach to social values and an austere fiscal policy. Since the rise of the Tea Party, this group has been trying to hijack the Republican Party by claiming to be more Republican than any other Republicans. The views they hold and policies they endorse are backward looking and are not where US demographics are heading. The GOP would be wise to let them go.

Donald Trump followers are people who feel let down by Democrats and assign their economic worries to the “handouts” Democrats call entitlements. This group is largely uninterested in social issues and believes in “live and let live”. For this group the future is all about sensible policy which puts the American dream back in play. The GOP would be wise to build upon this base.

Third largest segment might be the old fashion “establishment” characterized by Jeb Bush, Haley Barbour, and the Koch Brothers. This group knows best what is in Americans best interest. They also know what’s best for themselves and see any path forward as featuring a tax cut for the wealthy (no matter how a tax cut is packaged). Benign neglect and civility are the hallmarks of this segment.

How might this all play out?

If the world was perfect, the GOP would realize two things. (1) The Cruz followers have no place to go. Their world view is held by an ever decreasing number of people and their no compromise stand will prevent others from joining. (2) The GOP needs to take a drubbing again in the general election in order for it get real on its core beliefs and policies. (For example, person center healthcare (Paul Ryan’s proposal) in place of Obamacare is the same as “the best healthcare money can buy” and that will not fly.)

In this perfect world, the GOP would return bravely to the center (slightly right of center is ok). Repairing and improving the infrastructure which is necessary for jobs and commerce doesn’t know what a Democrat or Republican is. Income inequality is real but the idea that cutting taxes on the wealthy is somehow going to bring about high paying jobs is a cruel pipe dream. And, saber rattling (how the US is going to get tough with other countries) has no place in the real world of globalization, the US is either militarily strong or it isn’t, and oh by the way, that country the US just shook its saber at is a key trading partner).

If the GOP doesn’t think the middle is for them, then the GOP may need to receive a thrashing more than once.

America needs the GOP to regain its senses. There are important issues facing the country which needs a more diverse set of eyes and minds thinking about them. The budget is unbalanced and without more tax revenues, the only path to a balanced budget is by decreasing government spending… which moves quickly to reductions in entitlements as well as defense spending. Cutting entitlements and not defense spending at a time of income inequality is a prescription for social unrest.

There is a chance that the GOP can escape the Titanic’s fate but only if they move away from the destructive policies of the Freedom Coalition/Cruz faction. If the GOP doesn’t move, the majority of current GOP members will.