Tag Archives: political economy

Another Object Lesson

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…if we’re only willing to listen to it.  The Wall Street Journal‘s sub-headline says it all:

Borrowing Fueled Chongqing’s Infrastructure Projects, Highlighting National Problem of Reliance on Government Spending

“…10 major investment vehicles the city used to fuel its growth accumulated more than 346 billion yuan ($54 billion) in liabilities,” the WSJ reports.  Moreover, this is just the publicly acknowledged debts of the city.  The various national government-owned enterprises in Chongqing likely have their own debts, and these are not obligated to discuss them.  Northwestern University Associate Professor of Political Science and an expert on local government debt in the People’s Republic of China, Victor Shih, adds

I don’t think it would be a stretch to say that Chongqing local government, state-owned enterprises and state-owned developers collectively owed 1 trillion yuan [$156 billion] at the end of 2011[.]

What has Chongqing to show for this?  High risk, for one: a significant per centage of that debt is secured by land the city owns or controls.  To pick on Chongqing Yufu Assets Management Co., a city-owned investment vehicle established in 2004 as an example: the city loaded Yufu with land that then was used as collateral.  Now its 63% debt-to-asset ratio makes it one of the most heavily indebted financing vehicles sponsored by the Chongqing government.  Its 2010 profit of 1 billion yuan sounds good, however, asset sales now are likely to be necessary in order to service that debt—but Yufu’s assets are that land that’s bound up as collateral.  Moreover, that 2010 profit is down, sharply, from the prior year’s profit of 1.7 billion yuan, due to just as sharply falling revenue from its land holdings.

What happened the last time vast debt was secured by a land or housing market in a country near you and I?  At least in the US, our government can just print up all the money it needs….

Party and Taxes

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The argument over the House of Representatives’ just-passed Small Business Tax Cut Act demonstrates the stark contrasts between the Republican and Democratic Parties’ attitudes toward Americans and our money, even as the bill demonstrates a continued Republican failure—it’s a temporary measure, and so it has no economic value whatsoever.

The SBTC allows businesses with up to 500 employees to take a tax deduction equal to 20% of their profits, up to a maximum deduction equal to 50% of their employee wage bill.  This deduction is good for one year, only.

This bill plainly encourages hiring, with the size of the deduction driven by the company’s payroll cost.  Pay raises or intrinsically high wages are themselves unlikely to yield improvements in production or in productivity as efficiently as hiring new employees: a larger work force brings more working hours to a company than simply paying more for an existing number of working hours.

On the other hand, the deduction also can be put to uses other than hiring that are good for our economy.  Improved capital equipment improves the productivity of the existing work force, leading to lower prices to consumers.  Paying down existing debt strengthens the company against the uncertain future our present economy is inflicting on all of us.  Funding active R&D helps the company to stay ahead of evolving consumer demand.  Simply saving the money adds to the company’s strength by building its cash cushion for deployment in crisis or for use in an unexpected opportunity.

What the Republicans say about the bill:

…the one-year tax cut for businesses with fewer than 500 workers would boost job creation.  Only companies that pay wages would be eligible for the deduction of 20% of their domestic business income….

We need to let small-business owners keep more of their hard-earned money so they can start hiring again[.]

It treats every small business equally.  This bill does not pick winners and losers[.]

What the Democrats say about the bill:

…a giveaway to wealthy business owners since it includes no requirement that companies hire workers.

…the tax cut favor[s] richer small businesses, since the tax savings would be larger for firms with higher income.  Democratic aides cited a Joint Committee on Taxation report showing 125,000 business taxpayers with income of more than $1 million would receive $7.35 billion in tax cuts, or $58,500 a tax filer.

…the legislation would cost $46 billion and add to the deficit…. …Democrats said they backed Mr. Obama’s plan for an alternative minimum tax of 30% for people making more than $1 million.

The differences in attitude are clear.  Republicans view the money as our money, and with lower taxes they attempt to leave more of it in our hands and to leave the use of it up to us.  They plainly prefer the money to be used for hiring, but they do not presume to dictate to us how we must spend it.  Republicans trust the judgment of Americans, as effected both by individuals and through our free market, more than they trust the judgment of government.

On the other hand, Democrats have a real problem with Americans becoming rich.  Rather than helping all Americans to do better, as the SBTC could have a chance of doing, they much prefer holding back the wealthy to the level of the rest of us.  Anything that helps them along with the rest of us is anathema to Democrats.  This, of course, caps our own chances of bettering our lives.

The beef about the SBTC favoring the rich is plainly bogus.  It elides the fact that the businesses with the larger profits have the larger payrolls—the larger work forces—and it is the work force bill that is the limiter on the deduction, not the profit.

Democrats consider the “lost” revenue to be the government’s money, not us taxpayers’, and when forced to leave some to us, they want to dictate to us how we must use it: “You must spend our money on hiring.”  Democrats trust their own judgment more than they do that of individual Americans.

Moreover, Democrats insist on raising taxes even further, particularly on disfavored groups, while refusing the obvious alternative: reducing their spending to make up for the reduction in the amount of our money government gets to collect.

As I said at the outset, though, this bill has a serious problem: it’s temporary.  No business is going to do anything of a long-term nature—like permanent hires—on a temporary measure.  To properly impact our economy and have the advertised effect, it needs to be made permanent.

Taxes and a Do-Nothing President

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“At the end of the year, some $500 billion in tax breaks expire all at once, hitting American households with an average tax increase of $3,800—if Congress doesn’t act,” reports Jim Angle of Fox News.

Here are, to channel the late Jack Brickhouse, the unhappy totals:

  • $165 billion increase from the expiration of the Bush tax cuts, pushing tax rates from a bottom rate and top rate of 10% and 35% to 15% and 39.6%, respectively,
  • cut the child tax credit by fully half, from $1,000 a child to $500,
  • the marriage penalty returns,
  • tax on dividends, which many seniors rely on, would soar from 15% to as high as 39.6%,
  • a temporary fix to the alternative minimum tax disappears/expires.  The AMT originally was aimed at millionaires, but now it would hit 34 million taxpayers,
  • separate $124 billion cut in the payroll tax would end.

Moreover, as Curtis Dubay of the Heritage Foundation points out,

Taxmageddon falls 70 percent on middle and low income families.  That’s because 60% of the Bush tax cuts were for middle- and low-income taxpayers.

Thus, the Reid/Obama tax increases are set to hammer all Americans, but especially President Obama’s “non-rich.”

Yet this could have been avoided.  During the debt limit ceiling raise kerfuffle of last summer, President Obama had a golden opportunity to fix these things, but in a Chicago shuffle, he tried to steamroll the Republicans with a last minute (literally) demand for an additional $1 trillion tax increase, and he blew up the negotiations altogether.  Obama and Majority Leader Reid (D, UT) had a chance to fix these things later in the fall, but they demanded tax increases as a quid pro quo for extending an expiring payroll tax reduction.  This winter, Obama and Reid got tax increases in exchange for extending an expiring (again!) payroll tax reduction—the one set to expire at the end of this year along with all those other items.

Obama and Reid have spent all of these last three years demanding tax increases to “pay for” tax reductions elsewhere, and spending cuts anywhere—in the name of “fairness.”

What’s also galling, though, is that payroll tax reduction for which the Republicans held out so zealously.  This is the same gang that insists (rightly) that our Social Security system is bankrupt and desperately needs reform—yet they’re insistent on reducing even further that system’s funding with this payroll tax reduction of theirs.  Ignoring the fact that the Democrats were on record as agreeing that a 2% reduction in (payroll) tax rates was good for Americans, ignoring further that Obama had proposed a 3% reduction for both individual Americans and businesses in those payroll taxes, the Republicans chose not to insist, instead, on a 3% (or even a 2%) income tax reduction for all Americans and our businesses.  They just held out for gutting Social Security.

Now Obama is set to get his tax increases in the name of his concept of fairness.  Happy New Year.

One Can Hope

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My post today comes almost entirely from an opinion supporting the DC Circuit Court of Appeals’ opinion upholding a lower court ruling denying a dairy farmer’s objection to milk price regulation as applied to his farms.  From the per curiam (i.e., from the court itself—the majority opinion is unsigned, although dissents and concurrences, if they exist, are signed) opinion in Hettinga v United States comes the summary of the farmer’s beef:

Plaintiff-appellants Hein and Ellen Hettinga appeal the dismissal of their constitutional challenges to two provisions of the Milk Regulatory Equity Act of 2005 (“MREA”), Pub. L. No. 109-215, 120 Stat. 328 (2006) (codified at 7 U.S.C. § 608c). The Hettingas alleged that the provisions, which subjected certain large producer-handlers of milk to contribution requirements applicable to all milk handlers, constituted a bill of attainder and violated the Equal Protection and Due Process Clauses.

The Hettingas’ dairy farms were the only farms in the United States that were affected by the MREA; however, the Appellate Court upheld the application of MREA over the Hettingas’ constitutionally grounded objections.

From Circuit Judge Janice Rogers Brown’s, with whom Chief Judge David B Sentelle agreed (forced) concurrence:

…their consternation at being confronted with the gap between the rhetoric of free markets and the reality of ubiquitous regulation. The Hettingas’ collision with the MREA—the latest iteration of the venerable AMAA—reveals an ugly truth: America’s cowboy capitalism was long ago disarmed by a democratic process increasingly dominated by powerful groups with economic interests antithetical to competitors and consumers. And the courts, from which the victims of burdensome regulation sought protection, have been negotiating the terms of surrender since the 1930s.

More from her opinion:

As the dissent predicted in Nebbia, the judiciary’s refusal to consider the wisdom of legislative acts—at least to inquire whether its purpose and the means proposed are “within legislative power”—would lead to only one result: “[R]ights guaranteed by the Constitution [would] exist only so long as supposed public interest does not require their extinction.” In short order that baleful prophecy received the court’s imprimatur. In Carolene Products (yet another case involving protectionist legislation), the court ratified minimalist review of economic regulations, holding that a rational basis for economic legislation would be presumed and more searching inquiry would be reserved for intrusions on political rights.

The practical effect of rational basis review of economic regulation is the absence of any check on the group interests that all too often control the democratic process. It allows the legislature free rein to subjugate the common good and individual liberty to the electoral calculus of politicians, the whim of majorities, or the self-interest of factions.

She adds [her emphasis]:

…the Constitution created the countermajoritarian difficulty in order to thwart more potent threats to the Republic: the political temptation to exploit the public appetite for other people’s money—either by buying consent with broad-based entitlements or selling subsidies, licensing restrictions, tariffs, or price fixing regimes to benefit narrow special interests.

And

As another court has noted, federal regulation of milk pricing “is premised on dissatisfaction with the results of competition.” Alto Dairy v. Veneman, 336 F.3d 560, 562 (7th Cir. 2003). “M]ilk price discrimination is intended to redistribute wealth from consumers to producers of milk.” Id.

In the end, Judge Brown is quite blunt:

Civil society, “once it grows addicted to redistribution, changes its character and comes to require the state to ‘feed its habit.'”

Are we seeing a pattern begin to emerge?  Is not the Patient Protection and Affordable Care Act the outcome of a similar political temptation to…buy consent with a broad-based entitlement and subsidy?  Is not PPACA a similar attempt to redistribute wealth from healthy consumers to the unhealthy—or those who are timorous about their future after a lifetime of their own health-related choices?

And by extension is not all New Deal and later Commerce Clause regulation similar pandering and playing on dissatisfaction with competitive outcomes in order to preserve the status of incumbents?  After all, the Commerce Clause was intended to regularize the commerce of the several states among each other and to give Federal control over international trade.  And nothing more.

And Judge Brown also is right about the legal argument of “rational basis review.”  There’s nothing at all rational about it.  Arguments for or against any regulation, or any law, must proceed from how well that regulation or law preserves individual liberties and responsibilities, not from how well the regulation or law asserts dominance of any group over the individual.

 

h/t Power Line, and both a hat tip and a bow to DC Circuit Judge Janice Rogers Brown.

Taxes, Fairness, and Equality

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President makes a big deal of his Progressive concept of “fairness,” and he makes no bones about his desire to use taxes to impose his fairness on the rest of us.  He also says plainly that his tax moves are “gimmicks” intended solely to impose his fairness, and they are not at all intended to be any sort of mechanism for improving our economy.  Fairness over growth—and he channels Theodore Roosevelt in the process.

Let’s explore this Progressive concept and an alternative concept of what is fair.

Candidate Obama said in a 2008 interview with Charlie Gibson,

Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

Last week, President Obama said,

There are others who are saying: “Well, this is just a gimmick. Just taxing millionaires and billionaires, just imposing the Buffett Rule, won’t do enough to close the deficit.”  Well, I agree. … I’d just point out that the Buffett Rule is something that will get us moving in the right direction towards fairness….

What the Progressives want is equal outcomes, all in the name of “fairness.”  Progressives insist that there comes a time when we’ve “made enough money,” and after that, we should “spread the wealth around.”  But is this truly fair?

What our Declaration of Independence talks about is

…all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness[.]

What John Adams talked about was

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

What Theodore Roosevelt talked about, what he opened his “New Nationalism” speech with, was a desire for

an economic system under which each man shall be guaranteed the opportunity to show the best that there is in him

These all add up to equal opportunity.

“Fair share” is President Obama’s refrain.  Everyone should pay it.  Yet the top 10% of Americans by income paid nearly 70% of the total personal income taxes collected by the Federal government in 2008.  The bottom 50% paid nearly 3% of the total that year.  Further, the rich may be getting richer, but they’re also paying increasingly more in income taxes.  In 1999, those top 10% paid a little over 66%, and the bottom 50% paid 4%, of the total.

Under what economic system, though, is it most possible for a man to “show the best that there is in him,” to fully realize the potential in the opportunities open to him: a system where the most successful have their success truncated by having a government-defined excess trimmed off and given to another man, a system where the less successful are given, without effort of their own, a part of the earnings of another?

Or a system where each man can, indeed, achieve his fullest potential independently of the possible outcomes for others, even when that results in unequal outcomes?  After all, unequal outcomes are inevitable since while each of us is equal in our rights, equal before our Creator, we are not at all equal in our innate talent, our work ethic, our degree of interest in this or that endeavor.