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Obama, the European Left, and US Global Leadership

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“The Broken Jug” is one of the most frequently performed plays in German theater. With the village judge Adam, who passes judgment on a crime he committed himself, Heinrich von Kleist created one of the classic comedic figures of world literature.

US President Barack Obama currently seems to be portraying a modern version of Kleist’s village judge. He is increasingly vocal in his criticism of Europeans for supposedly having exacerbated the ongoing economic crisis with their caution. His audience, however, seems to sense that the plight Obama is lamenting originated in his own country.

Some banks were forced to accept TARP bailout funds even when they didn’t want, or need, the money.  Wells Fargo is one such bank reportedly so ordered.  The rationale for this was that the more banks who took the bailout lucre, the less stigmatized, or embarrassed, would be the banks who took the money because they really had messed up and “needed” the government handout.  Now, with the debt-based monetizing effort in the US having disastrously failed to stimulate our economy, the Obama team is lecturing the Europeans on the proper handling of their debt crisis: print more money, and lend it to the Greeks (and the Italians, the Spanish, and whoever else approaches with their tin cups) for the asking.  He’s hoping that with more nations following this US example, the humiliation of the failure will be masked by numbers of others doing the same thing.

Not only are the Europeans having none of this, they’re learning this lesson (though they may end up paying for southern Mediterranean irresponsibility on the backs of honest Germans, Finns, and Slovaks, anyway—responsibility is a hard political sell), and they are growing reluctant to keep the lending fire hose freely spraying.  Indeed, as the rest of the Der Spiegel Online article at the link above shows, the European Left simply views Obama with derision.  Notice the parallel the European Left draws in Der Spiegel Online‘s choice of parable.  The Judge did it, and tried enthusiastically to cover up his role in it by blaming another.  And Europeans know that Obama did it, and is now simply trying to cover his tracks, both by blaming others, and by trying to suck yet others into his error.

Like a doctor caught prescribing performance-enhancing drugs, Obama has not chosen to cease his activities. Rather he is trying to ensure that as many people as possible have access to his wares.

All this from the man who wowed the sycophants in Tiergarten Park in 2008 with his lofty phrases of peace and reconciliation.  With Obama now the laughing stock of the European Left, his erstwhile overseas base, how much influence can he expect to have for the United States on the world stage?  How much influence can we Americans expect our President to have on the world stage?

“The Broken Jug” ends with the judge having been found out and run out of town.  Obama has been found out in the US, and he’s being found out in Europe.

Tax Reform = Flat Tax

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Caution: long post….

President Obama and his Progressive Democratic Party insist that all of us should pay our “fair share” of the nation’s tax requirement.  I agree: all of us should pay our fair share.  The top 10% of Americans by income paid nearly 70% of the total personal income taxes collected by the Federal government in 2008, while the bottom 50% paid nearly 3% (that’s no typo) of the total in 2008.  Further, the rich may be getting richer, but they’re also paying more in income taxes.  In 1999, those top 10% paid a little over 66%, and the bottom 50% paid 4% of the total.

It’s time to reform the tax code and make it easy for all of us to pay our fair share.  In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on.  According to Government Accounting Office data for that year, Americans paid an aggregate of $1.15 trillion dollars in taxes on that income.  The present tax system is perceived as unfair by all participants, and they have arguments for their views.  Progressives view the rich, paying 70% of the total tax receipts, as not paying enough to be fair.  On the other hand, modern Conservatives consider that the bottom 50%, paying little to no taxes, also to be not paying enough.  Further, the complexity of our tax code is proverbial; not even professional tax accountants understand it well, and the IRS’ own advisors often provide erroneous help to inquiring taxpayers.

Our personal income tax code should be simplified, with the various filing statuses and tax brackets replaced with a single filing category and tax bracket.  Each household should pay a single, flat rate: all income above a level equal to half the then-current year Federal Poverty Income Guideline should be taxed at a rate of 10%.

Tax breaks, tax subsidized transfers, deductions for this or that expense—including the mortgage interest deduction and medical expense deduction—should be eliminated.  Note that this will include the standard deductions for family dependents; the Poverty Guideline includes an adjustment for family size.  Further, the elimination of all those deductions, credits, exceptions, and so on will greatly reduce the ability of special interest groups, and of politicians generally, to manipulate the tax code for their own ends.  The removal of the market distortions created by using tax policy for social engineering and wealth redistribution will lead to falling prices for those subsidized goods, and it will make it easier for all participants in the market—we Americans—to make our own decisions.  Finally, this equal percentage paid by all still leaves the actual dollars paid in taxes quite progressive: a man making $20,000 per year above that exempted income amount will pay $2,000 in Federal income tax.  A man making $200,000 per year above that same exempted income amount will pay $20,000 in Federal income tax.

The present corporate tax structure leads to the following distortions (among others) of business incentives in the United States: because it is imposed on income from capital, it biases decisions about how much to save and therefore influences overall capital investment and business growth.  It also creates a bias in favor of financing through the use of debt.  Further, because the law treats a corporation as a separate taxable entity, from which shareholders subsequently receive a portion of their income in the form of dividends or capital gains, the relatively beneficial tax treatment of capital gains under the personal income tax code creates a bias against paying dividends.  Finally, because the corporate tax code also uses schedules for depreciation that do not correspond to real wear and tear on equipment, it creates a bias in investment and production toward those capital assets more lightly taxed.

From these high, complex, and in some cases unrelated to reality, tax requirements, we can see that our corporate tax code discourages foreign companies from investing in the US or from setting up branches of their operations in the United States (known as “insourcing” in the same way American companies sending work outside the US is known as “outsourcing”).  Our tax code also creates incentives for American companies to build their new branches in other nations with lower corporate tax rates (Ireland, for instance, before it was dragooned into accepting an unneeded European Union bailout, taxed corporations at 15%).  Both of these incentives tend to reduce employment in the US, since the companies involved opt for foreign locales.

It’s time to apply a flat tax to corporations, also, and that corporate rate also should be 10% of all income (note that, even though the government and the Courts have said that corporations are “persons,” there are no Federal Poverty Income Guidelines for corporations, thus there is no income exemption here), both domestically earned and foreign-earned.  Tax subsidies, deductions, credits, and so on should be eliminated.  The elimination of these will have the same decision-making outcomes and economic effects as their elimination from personal income questions: the biases will disappear, and free market participants will make their own decisions.

To be sure, there will be disruptions in various markets while the changes ripple through the economy, but with the simplified code, compliance will increase (an increase in revenue for the government), and more importantly, the net result of the elimination of the market distortions will be a small decrease in overall prices that will go along with wages and salaries that have not dropped commensurately (wages do not fall at all as rapidly or as easily as do market prices).

There have been suggestions of having a national sales tax in lieu of any sort of income tax.  A tax on consumption would amount to everyone paying “their fair share,” and it would represent a great simplification of the Federal tax code.  The simplification argument could certainly be true.  However, a consumption tax would hit the poor much harder than it would anyone else.  Some consumption is absolutely necessary and cannot be avoided.  Everyone must buy food, everyone must make rent or mortgage payments, everyone must pay transportation costs of some sort.  A tax on these necessities would be a cost to the poor disproportionate to the costs others are paying: a consumption tax is regressive; there is nothing flat about it at all, in any way.

Some will argue that the poor could get a tax refund at the end of the year, based on some rule for refunds, just as income tax refunds are available now.  This, though, does not address the current tax burden that they would have to suffer for an entire year before they could get that refund.  Their cash flow would suffer, and later remediation would do nothing to eliminate the ongoing pain.

Others will argue for not taxing food, or fuel, or rent payments.  Making such exceptions, though, would only be the camel’s nose in the tent.  There are always worthy causes that should receive special tax treatment.  If we start making such exceptions, we will very shortly have a consumption tax code every bit as Byzantine as our present income tax code.

Yet others will argue that a flat income tax is itself regressive, and more so than a consumption tax.  However.  A tax on income does not hit those who do not work, but must still buy necessities.  A tax on income, in fact, is completely independent of the market choices anyone makes.  Compare, also, the amount of consumption taxes paid by the two men in our example above.  Let’s assume, for the sake of argument, that actual necessities—food, housing, and transportation, for instance—cost $18,000 per year.  Let’s assume, further, that comfort-level expenses—dining in restaurants, a better house, a fancier car, a better entertainment system, music and movie DVDs, for instance—cost an additional $18,000 per year.  Finally, let’s assume a consumption tax rate of 10%.  Our man making those $20,000 above the exempted amount is going to pay all of those $18,000 for necessities—those expenditures are unavoidable.  Let’s assume that, as a responsible adult, planning for his family’s future, he splits his remaining $2,000 of income between savings and comfort-level expenses.  His sales tax bill, then, will be 10% of $19,000, or $1,900: a slight reduction in his tax bill compared to his flat tax bill.  Let’s say our man making those $200,000 above the exempted amount buys all of those comfort-level items in addition to the necessities; his consumption expenditures, then, are $36,000, and he has a consumption tax bill of $3,600.  He’s paying less than a fifth of his flat income tax bill.  Indeed, our “rich” man would have to spend, voluntarily, 95% of his income on consumption alone—as our “poor” man had to do—in order to have the same relative consumption tax bill.

Tax reform is a flat tax.

Another Reason to Privatize Social Security

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You can’t have your disability benefits whenever it’s inconvenient to the Federal bureaucrats who control SSA in your name to act promptly.

Social Security bureaucrats—and this includes the Social Security judges who must rule on the legitimacy of a disability application—in at least seven states are slow-walking social security disability applications.  The reason offered is that, in the Federal calendar, which is used for promotion and bonus assessment, the last week of September of this year is a 53rd week due to leap year effects.  Work done in the 53rd week doesn’t count toward meeting the numbers necessary for promotion or “thousands of dollars” of bonuses: they’ve been instructed to hold off on the work for a week so the work will count toward those numbers.  Of course it’s a simple programming task to include 53rd weeks….

Apparently, the Federal bureaucrats’ perks are more important than the disability payments for thousands of Americans.  Of course the SSA spokesman “regrets this occurrence.”  No word on whether Ms Jo Anne B Barnhart herself, the head of the Social Security Administration, “regrets this occurrence.”

Read the whole thing.

Bank Fees on the Rise

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Bank of America has announced that it’s going to raise, drastically, the monthly fees for debit card swipes made by its customers.  Why is this bad, though?  It’s certainly true that banking—and shopping—is going to get more expensive for all of us (Wells Fargo and JP Morgan Chase are expected to follow suit, and then the rest of the major banks, and the little banks, will do the same), but is this the real reason?

Big Government, via Dodd-Frank, is dictating limits on what banks can charge for debit card swipes and for a host of other fees.  Dodd-Frank uses the Federal Reserve Bank to cap debit card swipe fees, and the Fed has set this cap at a level that’s 50% of what the banks originally charged, at a cost to those banks of some $16 billion (based on 2009 revenues).  Those additional fee limits will cost still more revenue.  Yet these limits are set in the name of protecting the consumer—us.

Let’s look at the debit card fee limit for a bit.  We use our debit cards 16 times a month on average, for a $10 purchase each time, again on average, according to the Washington Post article at the link.  The merchants used to pay the banks some 4%-6% per debit swipe (depending on the merchant’s size and the size of the actual purchase—that’s the original 44 cent cap on the swipe fee).  Just doing some back of the envelope calculating, we’re buying $160 of goodies each month with our debit cards, and if Bank of America proves typical, we’re going to pay a $5 debit card use fee for that month.  That fee works out to a bit over 3% of our average monthly purchase.  The merchant is still paying 24 cents per transaction: 2.4% of the buy.  Debit card swipe costs now total, then, something like 5.4%.  There’s real change.

Here are some of the unintended consequences of Big Government looking out for the little folks.  In addition to the card swipe problem, for instance, Dodd-Frank makes it difficult for banks to charge for bounced checks—the customer has to agree to be charged beforehand (and there are those other fee caps).  The fees we pay generally will rise because, instead of banks charging those riskier customers higher fees, the Dodd-Frank limits force them to cover those high-risk costs by spreading them across all their customers—low-risk customers are now subsidizing those high-risk ones.

Small checking accounts, the kind held by consumers who aren’t so well off (and that’s a lot of us in this Obama economy) face higher fees to maintain those small balances.  How many of these consumers will be forced to turn to check cashing enterprises, or to prepaid credit cards (with their higher interest rates) and the like, because they cannot—or do not want to—pay the $60/year debit card “convenience” fee?

We’ll also pay more for our credit cards as the banks look to make up for their lost banking fee revenue where they can.  This means higher annual fees, higher interest rates on unpaid balances, and so on, on our credit cards.

Watch out for the results of this latest round of government price controls.  We saw their effectiveness when applied during the Nixon years: gasoline price caps, for instance, intended to fight inflation led to more inflation, gasoline shortages, and long lines at the pump.  We’re already seeing reduced availability of banking services: higher cost for our debit cards, reduced access to low cost checking accounts, harsher credit cards, and so on.

But there’s an additional problem to this government intervention, and it’s a moral one.  One of the most fundamental tenets of our social compact is that each of us is both free to transact our property—our labor, our goods, our money—with others for their property in any way we might mutually agree, and each of us is solely responsible for the outcomes of those transactions.  Government’s sole role under our social compact is to protect that freedom and responsibility.  Yet here we have government’s intervention utterly violating that tenet.  Big Government has determined that it cannot allow two men seeking to do business with each other in a free market to conduct that business unless Big Government is in the middle managing the relationship.  Banks (for instance) no longer can charge high risk customers higher fees: instead, they must, in order to make enough money to stay in business in this regulatory regime, spread those high risk costs across all of their customers.  On what basis should the rest of us be required to subsidize the riskiest?  On what basis does government transfer responsibility from parties to a transaction to others of us who are not involved?

“Bank of America is trying to find new ways to pad their profits by sticking it to their customers,” Senator Dick Durbin, Dem, IL claimed about that debit card fee adjustment.  This, though, is just a paraphrase of what our President has said: “I do think at a certain point you’ve made enough money.”  On what basis does government transfer responsibility from parties to a transaction to itself?

Finally, it’s a bit cheeky for Big Government to dictate to businessmen in the private economy how to handle their accounts, when Big Government has no understanding of the matter whatsoever when it comes to its own accounts.

Bad Moon Rising