Monday, November 14, 2011

Obama: A President For the Big Guys

By his own account, Obama is a protector of the little guy. However, when you look at who has actually benefited the most during his administration, the exact opposite becomes true. The two clear winners of the Obama presidency have been big government and Wall Street. The losers? Workers, small businesses, and small banks.

While Obama may denigrate Wall Street as "fat cat bankers," according to the Washington Post he has raised more from Wall Street than all of the Republican candidates combined. Not only that, Wall Street firms have earned more in the first 2 1/2 years of the Obama administration than they did during the eight years of the Bush administration. Think about that for a second. Under Obama, Wall Street has made three times as much money per year in a historically bad economy than they did under Bush in a generally good economy.

Smaller banks? They haven't fared as well. Regulations like Dodd-Frank are far too watered-down to prevent the problems that caused the 2008 financial crisis, but they are complex enough to force small banks to spend inordinate amounts of money on compliance.

And then there's big government, which now employs 140,800 more people than at the beginning of Obama's tenure. Obamacare has given unprecedented power to government officials--however, its passage in March 2010 was followed by a sudden halt in private-sector hiring. I don't see this as a coincidence. Again, big businesses have the resources to give government-approved health insurance to all their workers. But small businesses--the country's top job creators--often do not. The thing is, small businesses are only exempted from Obamacare cost burdens if they have less than 50 workers. So basically, Obama's message to small companies with 30-40 workers is "Don't expand, and stop hiring." Interesting message coming from a president who claims his top priority is jobs.

Speaking of jobs, a Canadian company wants to build a pipeline from Alberta to Texas that would employ over 20,000 workers. Obama, however, announced that he is delaying approval until 2013--after the elections. It seems that appeasing environmental activists in an election year is actually more important to Obama than jobs. I would almost understand it if he killed the project because he truly thought that a pipeline would do too much damage to the environment. But punting until 2013 just gives the impression that he is too cowardly to make a decision that might offend special interest groups. Winner? The environmental lobby. Loser? Once again, American workers.

Thursday, November 10, 2011

Supercommittee proposal would raise $500 billion in new revenue--but Democrats reject it

According to the Wall Street Journal, Pat Toomey and the five other Republicans on the Congressional "deficit supercommittee" recently proposed a plan with $750 billion in spending cuts and $300-500 billion in new revenue over 10 years. Under the plan, tax rates would be cut--the top rate would fall from 35% to 28%, and rates from other brackets would be lowered proportionally. However, the plan more than makes up for it by severely limiting deductions, very similar to a bipartisan tax reform measure that was enacted in 1986. The Joint Tax Committee determined that even with no economic growth, the tax changes would raise $300 billion in tax revenue over the next decade. (An additional $100-200 billion would come from changing the way tax brackets are adjusted for inflation.)

Democrats, however, rejected the proposal. And one can only wonder why. There were no cuts to Medicare or Medicaid. The 1.5 to 1 ratio of spending cuts to revenue increases is better for the Dems than the 3 to 1 ratio promised by the Simpson-Bowles plan.

It could be that Democrats see lower tax rates as symbolically intolerable, even if the rich (who reap most of the benefits from tax deductions) would actually pay more under the new plan. Or, it could be that they see "compromise" as a 1 to 1 ratio of spending cuts to revenue increases. In that case, it seems the Democrats would have rejected Simpson-Bowles as well, unless (as some conservative critics claim) it was a bluff containing spending cuts that would never materialize.

Either way, Democrats have just defeated a plan that provided the "balanced approach" to deficit reduction that they keep clamoring for. And by eliminating deductions, it would have made the tax code more fair and helped to curb special interest power as well.

Wednesday, November 9, 2011

More Government Ridiculousness: A Christmas Tree Tax!

Yep. That's right. President Obama’s Agriculture Department today announced that it will impose a new 15-cent tax on all fresh Christmas trees to support a new Federal program to improve the image and marketing of Christmas trees.

Honestly, this sounds like something Jon Stewart or Stephen Colbert would make up to parody the White House. How, exactly, will this help anyone? What is currently wrong with the image or marketing of Christmas trees, anyway?

Monday, November 7, 2011

Occupy Wall Street and the Tea Party need to work together

Yes, that's right. What we need is some form of collaboration between the Occupy movement and the Tea Party. That seems to me to be the best way--perhaps the only way--to have a good chance of fixing the status quo of dysfunctional partisan politics.

At first glance, Occupy Wall Street and the Tea Party seem like the Hatfields and the McCoys--no way would they ever work together. But they actually have quite a lot in common. Both are vehemently against the status quo. Both argue that the American people are being screwed over by a small minority of powerful people at the top. Both have widespread popular support. And in my view, both of their main points are extremely valid.

For the Occupiers, the enemy is the so called "1 percent," Wall Street in particular. For the Tea Party, the enemy is a different 1 percent: politicians and lobbyists and their ilk. They're both kind of right. Wall Street took lots of foolish risks that led to the 2008 financial crisis--but did so in large part because government gave them huge incentives to do just that. The government gave Wall Street massive bailouts and refuses to pass meaningful financial regulation, in large part because so many people in Congress and in the Obama cabinet are either bankrolled by Wall Street or former Wall Street employees.

Unfortunately, both movements have a tendency to go off the deep end as well. Occupiers tend to view government as the solution to the problem rather than a co-conspirator in the plot. In an era where trust in the government is as low as during Vietnam and Watergate, calls for more government are not going to be well-received by the majority of the people. Besides, given the government played a big part in causing the problem, more government will almost certainly make things worse. The Occupy movement also tends to have a negative view of business in general, also counterproductive during an unemployment crisis.

On the other hand, I am baffled and a bit disturbed by how often GOP candidates have railed against the so-called "47% of Americans who don't pay taxes," and by the continued support for Cain's 9-9-9 plan even though analysis has shown it will raise taxes significantly on lower-income people. I don't really know how much this is attributable to the Tea Party, but given the significant Tea Party influence in recent GOP politics, and the popularity of the 9-9-9 plan among GOP voters, I have to think there is a connection. Calling for more taxes on the poor is an almost surefire way to turn off large swaths of American voters. For two years I made less than $14,000, which put me among those despised 47% who paid no federal income tax. But payroll tax and sales tax still ate up about 7-8% of my income. That's quite a bit.

I really think that the Occupy movement and the Tea Party could find a common cause and become a considerable force for real reform in Washington that limits the power of both government and their Wall Street cronies. Given the polarized partisan nature of politics today, though, it probably won't happen.

Sunday, November 6, 2011

Fiscal Chicanery Fails: Obamacare's CLASS Program to be Suspended Indefinitely

During the debates on Obamacare, one of the major talking points for supporters was that "Obamacare will cut the deficit." The Congressional Budget Office (CBO) released estimates showing that Obamacare would cut the deficit over the period from 2010 to 2019. To me, however, this seemed to contradict common sense. How could a massive entitlement program actually cut the deficit without equally massive tax increases?

Well, one of Obamacare's gimmicks was exposed on October 14. The CLASS Act, a long-term care insurance program, was set up to charge participants for at least five years before they became eligible for benefits. It was estimated to create a $70 billion surplus for the first ten years, which could be used to pay for Obamacare and contribute to the program's so-called deficit savings. Conveniently, the CBO only projects the fiscal impact of legislation for the first ten years.

The problem is, of course, that after ten years or so, all of the people who had been paying into the system for five years would start receiving benefits. And healthy people would have no incentive to sign up for CLASS; it would only attract participants who expected to draw significant benefits. It was a budgetary time bomb. Democratic Senator Kent Conrad called it "a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of."

And it seems like the White House has been forced to admit that Conrad and other critics of the program were correct.

Saturday, November 5, 2011

9-9-9 solves some problems, but may create bigger ones

Herman Cain's "9-9-9" tax plan is an interesting and radical proposal. It would scrap the current federal tax code completely and replace it with a 9% income tax, a 9% national sales tax, and a 9% corporate tax. Since Cain continues to lead in the GOP polls, his plan clearly has some support at least among Republicans.

And it does make some major improvements on the current tax code.  The payroll tax discourages hiring, hurts small businesses and low-income workers, and is almost hidden from view. The current marginal rates are very high, including a confiscatory 35% on businesses, which discourage production.Worst of all, the tax code is loaded with deductions and loopholes, which (combined with high marginal rates) encourage the special-interest lobbying and economic sleight-of-hand that are poisoning the current system. Under the current tax system it is very easy for the government to pick winners and losers. By zapping most of the deductions and loopholes and eliminating the payroll tax, Cain's plan does well.

The problem, though, is that the 9-9-9 plan is simply not fair.

There are three kinds of taxes. In a progressive tax, the rich pay a higher percentage than the poor. In a flat tax, everyone pays the same percentage. In a regressive tax, the poor pay a higher percentage than the rich.

Clearly, a regressive tax system would not be fair. We would also not want a tax system that is overly progressive. A very good argument can be made for a flat tax, as long as there exists a reasonable individual deduction to prevent the tax from hitting the very poor. There is also a very good argument for a tax system that is somewhat (but not overly) progressive. In the words of Adam Smith:

"It is not very unreasonable that the rich should contribute to the public expen[s]e, not only in proportion to their revenue, but something more than in that proportion."

Where does the 9-9-9 plan fall? Well, there are two taxes for individuals, the 9% income tax and the 9% sales tax. The income tax, of course, is flat. The problem is the sales tax. Sales taxes are almost always regressive, because the poor need to spend a higher percentage of the money they make. So the 9-9-9 plan replaces the current progressive tax system with a combination of a flat tax and a regressive tax, which is overall regressive.

That's not to say a national sales tax is a bad idea. While sales taxes are regressive, they do not distort incentives nearly as much as income taxes, because they discourage consumption instead of production. However, a national sales tax would need to be combined with a progressive income tax in order for the system to not be regressive overall. If Cain proposed a four-tier income tax (say, 5-10-15-20) with no loopholes or deductions, combined with a 9% national sales tax, a 9% corporate profits tax and a 9% capital gains tax, I'd vote for that in a second.