Archive for the ‘taxes’ category

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.

The Republican Titanic?

April 29, 2016

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.

The Tourniquet Syndrome

April 25, 2016

What policy positions do you associate with Republicans and with Democrats. The Republicans might be “tax cuts” and Democrats might be “entitlements”. For sure there are other policies each party pursues but taxes and entitlements separate the parties, one is for, and the other against.

The tax issue is socially complex. Most everyone, members of both parties, would prefer to pay no taxes at all if that were possible. Yet most people know that government services require a source of revenue to cover the expenditures. Hence, taxes are necessary. So when Republicans call for tax cuts, they are in fact seeking to shift the tax burden to be carried more and more by lower income individuals. Conversely, when Democrats seek tax increases, they are happiest when the “progressive” tax formula shifts the burden upstream to the very rich. Both parties agree the “other guy” should pay more, whether it is an increase or a cut.

Entitlements, however, represent a real conundrum.  The government is obligated to make entitlement payments even if it has to borrow money to over the costs.

Here is a list

  • 529 or Coverdell
  • Home Mortgage Interest Deduction
  • Hope or Lifetime Learning Tax Credit
  • Student Loans
  • Child and Dependent Care Tax Credit
  • Earned Income Tax Credit
  • Social Security–Retirement & Survivors
  • Pell Grants
  • Unemployment Insurance
  • Veterans Benefits
  • G.I. Bill
  • Medicare
  • Head Start
  • Social Security Disability
  • SSI–Supplemental Security Income
  • Medicaid
  • Welfare/Public Assistance
  • Government Subsidized Housing
  • Food Stamps

(Source –

Each of the entitlements was once justified as an emergency fix to a social problem, sort of like applying a tourniquet. Hmmm.

Looking at this list, one must first remove Social Security – Retirement and Survivors. The entitlement is designed to provide supplemental retirement income and is funded from wage taxes workers pay during their working lives. There is no reason that this form of Social Security should represent an on-going drain on the Federal Budget since revenues received can easily be adjusted to match future liabilities.

Medicare also should be removed. Medicare is healthcare insurance also supported by wage taxes and the rate of these taxes could be set to match payouts.

For the remainder, some social situation was deemed an emergency and a government payment (including tax credits, exemptions, or deferments) were thought necessary.

So, Republicans seek to cut entitlements are in effect seeking to remove the “tourniquet” and do nothing. In real life this almost always results in a serious deterioration in health and often death. Democrats seem just as content to leave the “tourniquet” in place and continue the status quo. Removing a “tourniquet” in real life must be accompanied with some other medical action of health deteriorates. Doing nothing, that is leaving the “tourniquet” in place does nothing to alleviate the underlying conditions which made the entitlement necessary in the first place, and maintains the long term “at risk” status of those receiving the benefit. Hmmm.

Candidates or political parties which advocate for tax cuts must be called out quickly and asked (1) who specifically would receive the cuts, and (2) how would the cuts be offset (especially now that there are already deficit budgets) The answer will reveal a naked attempt at lowering income taxes for the wealthy (even if it also lowers middle or low income tax rates), or the tax cut is advertised as a result of reducing entitlements (without any review of the underlying problems which lead to the entitlement in the first place).

Candidates who are content with the “entitlement status quo” or rise to fight the first hint of “entitlement reform” or “entitlement reduction” are guilty of a different but almost as cynical sin. Emergencies by definition cannot be allowed to go on forever, otherwise they wouldn’t be an emergency. Even more significant, the conditions which lead to an entitlement in the first place will almost certainly evolve over time. Sometimes the social situation can get even worse (like with Medicaid for those who cannot afford health insurance). Other times the need for an entitlement might be better served by an entirely different method of government assistance. One might suspect the “don’t touch entitlement” politician is someone more interested in a constituent’s vote than their wellbeing.

At first it probably seems discouraging that the all too familiar political rhetoric “I’m for cutting taxes” and “I’m against cutting entitlements” are words from someone only interested in attracting a voter’s preference. Political speeches are highly crafted, purposed to attract money and votes, that it often never occurs that there is more to taxes and entitlements than cutting or raising.

The candidacies of Donald Trump and Bernie Sanders have attracted a significant number of voters who for various reasons are rejecting the mainstream political message. These candidacies will have been successful if voters who once having rejected the “establishment” rhetoric, begin to ask questions of the “anti-establishment” about how and why their policies are wise and appropriate.

Will Americans find a way end the Tourniquet Syndrome?

Hillary’s Free College Flyer

August 11, 2015

Democrat Presidential candidate Hillary Clinton has proposed that college education should be free, or at least no one should incur debt when pursuing the first four years. Hmmm.

When one examines the current state of higher education, there are some glaring short comings which smack you right away, For example,

  • Many Americans are racking up $100,000+ personal debt to attain undergraduate and graduate degrees.
  • On top of that, many of these debt loaded graduates are unable to land jobs and if successful, too often these jobs do not pay enough to live and make debt payments.
  • And worst of all, many students run up huge amounts of debt only to drop out of school without a degree.

Not a pretty picture.

The Progressive answer seems to hinge upon the Government somehow shielding students from the debt burden. Advertised as “free” education, we are once again pursuing the preverbal free lunch. Nothing is going to happen with this proposal.

Free college education is certainly a government service which voters could decide was a good thing. Free public schools and universal health care (single payer) are two other government services voters have or could decide were essential. Reality, however, will demand that “government” deal with four associated issues,

  • nothing is free
  • tax revenues must be raised to cover the actual costs.
  • there needs to be a control method to keep the costs of these services from skyrocketing. (Any business will seek to expand its offering and the selling price that goes with the offering. When the government is the “payor”, there is often little reason not to raise the price as much as possible.)
  • It should not be overlooked that any such “free education” system also needs some method to ensure the product delivered is “as advertised”.

Hillary’s “campaign appealing” suggestion has the potential to (1) tax a minority of Americans to help educate many Americans, (2) unintentionally increase the cost of education for all Americans, and (3) still deliver a substandard product or one simply unsuited for gaining “good” paying jobs in real life. Is that a trifecta?

Hillary’s “free college education” pledge may have long term benefits but not without provisions that control the prices college charge and ensure the education product is both appropriate and of consistent quality necessary to obtain a “good” job.

Pragmatically, it seems funding must ultimately involve a broadly based tax base where each person using government funded education pays too (taxes or maybe community service) so they know they are covering the “free education” for the next person.

Sadly, a GOP proposal for “free college” education would be suspected as disingenuous (probably a proposal never meant for implementation or if sincere, meant only for certain groups).  On the other hand, a Democrat proposal would be (should be) suspected of being naively formulated (good in intent, poorly thought through for unintended consequences).  Hmmm.

That’s politics, I guess.

Zero Sum Tax Increase

June 3, 2015

Today I read an article in the Baltimore Sun on the subject of tax incentives.  Tax policy, especially how much citizens pay, is a controversial issue these days.  “Taxes are too high, I pay too much.”  So, it’s important to hear what your State or local government is proposing just in case they are quietly taking money from your pocket.

Here’s an example of finding out there is no free lunch.  It seems HBO’s show “VEEP” has qualified for California tax incentives if it elected to switch its production site from Maryland.  According to the article, the prize is $6 million dollars in business income taxes less “VEEP” would pay in California. Maryland has yet to respond to the challenge and the shows future shooting location remains in question.

So what?

In the past, newspapers have reported bidding wars between various cities and states over where automobile factories would be built. Cities have bid against each other for conventions or attracting new employers. Some cities, like Philadelphia, offer developers tax breaks (abatements) to encourage the building of new condos and apartments. Each taxing authority thinks they can garner the advantage and be immune to anyone trying to poach the new business from them. Hmmm.

The taxing authority’s incentives seem to be, in exchange for lower taxes, the new business (or convention etc) will bring new jobs and spending to the community, and these new jobs and spending will be produce other tax revenue in the long haul. In a world where everyone slept, this would be a fool proof strategy. Hmmm.

What often happens, however, is the original host community finds out about the lower tax offer and matches the incentive.  Consequently the business remains put, and the host community simply receives less tax revenue. Nice.

In a tax war between similar size States, the contest seems fair even if mutually destructive. Between huge States like California and much small States like Maryland, this tax fight seems unfair.

California might argue that the filming industry was originally based largely in California.  States like Maryland used incentives to first lure movies and TV programs away from California. Hmmm.

The free lunch theorem, however, predicts tax driven competitive action has only one real victim and that is the existing tax payer.

With a show like VEEP, there is just so much production costs regardless of whether the show is filmed in Maryland or California. The zero sum says that if Maryland host the show, California get zero, and vice versa.  If either State offers tax incentives and attracts the show’s production, it receives less business tax revenue than might be possible (it must forego the incentive value) and the other State receives no tax revenues. If the first State fails to attract because the original State matched the offer, then the first State gets no new tax revenue and the second State (host) gets less. Hmmm.

Competition between States on non-tax issues is healthy. Roads, schools, and work force quality are all characteristics which promote stronger State economies. Good roads, great schools, and a qualified work force require prior State investment and are useful for a wide range of applications.  In essence these States have used tax revenue to produce competitive advantages.

Using the tax code as a tool to “steal” business from some other State seems unfair because (1) richer States can spend more, and (2) unwise because in the end the average tax payers in one State or the other gets pays more.

The Politics of Money

February 10, 2015

Last evening, David Gergen spoke at the Philadelphia Speakers Series. Gergen is currently a Harvard professor and CNN commentator, and joins the speakers circuit as a paid raconteur. His talk was entertaining as well as informative.

Gergen recounted his years with President Nixon, Reagan, the Bushes, and Clinton.  He pointed out how much things have changed since the post World War II era statesmen. In short, Gergen felt the current crop of national leaders fall far short of their post WWII predecessors. Hmmm.

It was, however, Gergen’s answer to a question which has stuck in my mind.

When asked about tax reform, he said, as if quoting from a “Big Money playbook”, the next President would have to deal with the growing income inequality. (So far, so good). Gergen then went on to say that President Obama’s proposal to increase taxes on capital gains was a mistake. “Taxing the rich to give more to the poor”, or “putting a ceiling on top earners while trying to push up the bottom” would not work.

Gergen felt that by “growing the entire American economy” both the rich and the less rich could gain more wealth. In other words, a stronger American economy sets the table so every one wins. Hmmm.

I do not doubt Gergen may feel that. And for sure, this approach could work and did work in the 50’s and 60’s. The problem that Gergen (and a host of other GOP playbook carriers) fail to recognize is that since the 70’s the average worker has seen stagnate wages while the top earners have experienced a 400+% increase in income.

Saying this differently, during the period from 1975 or so until 2015, economic productivity increases have gone entirely into the pockets of the already wealthy. Why should anyone think that in 2016, productivity increases will begin to flow to the average worker?

Words like “taxing the rich to give to the poor” are specifically chosen to inflame American sensibilities and values. Shouldn’t we reap what we sow?

Life has become much more complicated than the days of the American frontier. Increasing the capital gains tax to levels seem only 25 years ago is hardly threatening the livelihoods of the wealthy.  And on what basis is it unfair?

Also, President Obama’s proposal related to funding the massive infrastructure crisis facing the country. While I would support a gas tax increase in preference, increasing capital gains tax is just a worthy.

No one enjoys riding on pothole cratered roads.   The major beneficiary of infrastructure repair are businesses and their owners. Hmmm.

David Gergen is not a candidate for office this year or in 2016. Never the less, I am sure we are going to hear the same phrases and wrongheaded arguments during the Presidential primaries and campaign.

Conflict Of Interest?

October 9, 2014

President Obama’s announced plans to combat the militant group ISIS presents a potential conflict of interest to top military leaders.  The plans call for “no boots on the ground”.   Should the military manage the “police action” so that ISIS advances slowly? Or, should the military try its best (and most creatively) to both stop and degrade ISIS? Hmmm.

An example worth remembering is the now famous “Iraq surge” where former President Bush opted to increase the US Iraq military presence in order to end the Iraq civil war underway. While Bush Administration officials beat their chest over the gutsy decision to scale up US forces, we subsequently learned that coincident with the troop increases was “buying off” Sunni militias and turning them against the al Qaeda insurgents. That was creative.

The current conflict of interest arises from the question of what determines the size of the Defense Budget. Most Americans are “war weary” and would prefer to see America less involved with global conflicts. And, when Federal budget discussion take place, Americans would overwhelmingly prefer to see less Defense spending than an increase in taxes.

Americans, however, are not that simple. Many fall for the free lunch (we can win this war easily and there is no need for new taxes). Others are influenced by being on the winning team (how can we let ISIS or the Taliban win?). And when these two message do not work, there is always the “ISIS is coming to America” to raise American’s blood pressure (and fears) and make their thought processes a bit cloudy.

There is clearly a disconnect between our politicians who are advocating all sorts of global goals and what they are willing to support with adequate funding. The Joint Chiefs are acutely aware of this and from time to time throw cold water on some Representative or Senator’s proposals. Disregarding human nature, this is a serious issue.

Regarding human nature, however, Defense Spending invites a conflict of interests.

Politicians want to appear relevant and most certainly want to maintain defense jobs in their districts. The military brass are also conflicted with the simple fact that “bigger is better”. The greater the Defense budget, the more resources the military will have and the more ability it will have to achieve military goals, especially when national goals are fuzzy. Oh yes, and the greater the Defense Budget, the more Generals and Admirals can be appointed. That’s just human nature. Hmmm.

President Obama is fighting a lonely battle. Keeping American presence to a minimum is just not crystal clear in the eyes of Congress’ political interest.  This puts the top military leaders in a bind. They know their job is to do what the President asks but with Congressional dysfunction boiling over, it would easy for the military to over commit versus what the Congress will actually do to fund them.

Let’s hope the President can keep his powder dry and give the military enough time to use its creativity in the ISIS mess.