Tag Archives: taxes

A Thought on Tax Reform

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I don’t always disagree with Fox Business on tax reform, but when I do, I prefer smaller, flatter taxes.

They start with a bang (although I really couldn’t tell whether FB agreed with this), quoting NYU Law School Wayne Perry Professor of Taxation David Shaviro:

It’s hard to run an income tax properly because you have to know how assets change in value.  In theory, you should be taxed when assets go up and receive deductions when they go down.  But people come up with ways of getting around the rules.  It’s a cops and robbers game.

Nah.  There’s no economic or moral reason to tax income except as income.  Nor need there be differing treatments depending on whether “assets” or income go up or down.  You had an income last year?  You should have paid (let’s say) 10% of that to the Revenooers.  You had a larger income this year?  Pay 10%.  Period.

Here are a few more examples.

Should Go: Home mortgage interest deduction. Shaviro argues, “It’s a tricky proposition, but I say it needs to go,” he says.  “It creates a tax price that favors home ownership.”
[Personal finance expert Jordan ] Goodman says the deduction should stay, but be more limited.  As it stands currently, those with multimillion dollar homes can receive deductions on interest of up to $1 million on their first mortgage, and up to $100,000 for their second mortgages.
“It’s a reverse Robin hood tax,” he says.  “The bigger the house you have, the more of a tax deduction you get.  It would destroy the housing market entirely to take it away, but let’s cap it at $500,000 instead of $1 million.  This is subsidizing rich people getting a big house with a big mortgage.”

I’ll ignore the idiocy of punishing a disfavored group, as Goodman wants to do.  He’s plain wrong on the impact on housing markets.  Eliminating the deduction, as Shaviro correctly wants to do, would be disruptive only until the new equilibrium is reached; it wouldn’t destroy the housing market.

Needs to Go: Corporate debt buying. Our current tax code favors companies who are loading themselves up with debt instead of equity, Shaviro says.  “This gives companies the incentive to have debt,” he says.  “You deduct interest that you pay to shareholders but not the interest you pay on dividends.”

Correct, but for the wrong reasons.  Businesses shouldn’t be paying taxes in the first place.  They’re not the ones paying, in the end, we consumers are because those taxes get passed on as higher prices.

Should Go: Renewable energy tax credits. The credits the government offers for renewable energy items such as buying a hybrid car or installing solar panels is [well]-intentioned, not necessary, says Goodman.  “The actual results in the real world have been relatively minimal,” he says.  “The solar industry is in a depression now, but if the industry is ‘so big’ the government shouldn’t have to subsidize it.  If it’s that good, let people pay for it on their own.”

Again, correct, this time partly for the wrong reasons.  The tax credits—any tax credits or subsidies or deductions—distort the market and mitigate against rational, market-oriented solutions.  Regardless of the target, whether renewable energy, oil and gas, or mortgage interest, all credits, subsidies, deductions, and what-have-you should be purged from the tax code.

Another Unintended Consequence

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Here’s a pending “revenue saving” failure in which both parties are on track to be complicit.  President Barack Obama’s latest budget guess includes a measure purported to

improve the financial stability of Medicare by reducing taxpayer subsidies for retirees who can afford to pay a bigger share of costs. Congressional Republicans agree with the president on this one, making it highly likely the idea will become law if there’s a budget deal this year. … Obama’s budget would change Medicare’s upper-income premiums in several ways.  First, it would raise the monthly amounts for those currently paying.  Then, the plan would create five new income brackets to squeeze more revenue from the top tiers of retirees.

We’ll leave aside the dishonesty of pulling the rug out from under current retirees by changing the rules on them after they’re irrevocably committed to a retirement expense and income stream based on the original rules.  Instead, the unintended consequence, illustrated by the example of Sheila Pugach:

[S]he’s being penalized for prudence, dinged for saving diligently.

It was the government, she says, that pushed her into a higher income bracket where she’d have to pay additional Medicare premiums.

IRS rules require people age 70-and-a-half and older to make regular minimum withdrawals from tax-deferred retirement nest eggs like 401(k)s.  That was enough to nudge her over Medicare’s line.

“We were good soldiers when we were young,” said Pugach….  “I was afraid of not having money for retirement, and I put in as much as I could.”

And now she gets to pay even more money to Uncle Sugar as her reward for her honoring her duty to herself and to her family.  Were this nonsense current law, Pugach would pay roughly $168/mo for outpatient coverage under Medicare Part B instead of her present $147/mo—a jump of more than $250 per year.

There are a lot of alternative uses for that kind of money for a person living on a fixed income and little to no job prospect.  Oh, wait—Pugach is an “upper income” retiree.  Well, we know Obama’s reaction to that, don’t we?

I do think at a certain point you’ve saved enough money.

Germany and Eurobonds

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George Soros says that Germany must either support Eurobonds or she must leave the euro.

Given this choice, Germany should leave the eurozone.  They’ll be far better off.

Soros began his op-ed with a false premise:

The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape.

The nations of Europe were never equal states, though, and a common currency cannot make them so.  All a common currency can do is facilitate trade—which is no mean thing, but equality it cannot create.  Proceeding from a false premise, the rest of his argument has no meaning, but let’s look at some of it, anyway.

Soros thought he had identified the problem underlying the current crisis thusly [emphasis added, italics in the original]:

By creating an independent central bank, member countries have become indebted in a currency that they do not control.   At first both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds.  When the Greek crisis raised the specter of default….  [D]ebtors were treated as if they were solely responsible for their misfortunes and the structural defects of the euro remained uncorrected.

However, these questions are separate from each other.  The one is true, regardless of Soros’ negative attitude.  No one stuck a gun in any national ear and forced that country’s government into their profligate, irresponsible spending and borrowing ways, no more than, say US states—or States under the Articles of Confederation—have been forced to borrow excessively in currencies [sic] which they do not and did not control.

Moreover, the common currency did, indeed, create those perverse incentives, but it did so by pretending that the member countries actually were the equals of each other—hence the perversity: those nations were not, and are not, equal in the relevant context, in the context of their credit worthiness.  Given that inequality, the interest rates demanded by the market were widely divergent, and of course market participants loaded up on the higher-return debt: the common currency created an unsatisfiable belief that repayment by all nations actually was equally assured.

Separately, the structural defects do, indeed, remain uncorrected.

Soros then offered his solution:

If countries that abide by the EU’s new Fiscal Compact were allowed but not required to convert their entire stock of government debt into eurobonds, the positive impact would be little short of miraculous.  The danger of default would disappear, as would risk premiums.  Banks’ balance sheets would receive an immediate boost as would the heavily indebted countries’ budgets.  …  Most of the seemingly intractable problems would vanish into thin air.

No.  A miraculous disaster is all that would result.  There is no moral—or economic—reason for the taxpayers of one country to be required to indemnify the citizens of another country for that second country’s spendthrift ways—ways that those citizens actively support with their elections.  Instead, lacking incentive to correct their behavior, they simply would drag down the responsible with them.

Also, a mandatory eurobond does nothing more than substitute a common debt instrument for a common currency, with the same built-in failure: it will not make equals out of unequal nations.

Soros went on:

If a member country ran up additional debts [in his eurobond régime] it could borrow only in its own name.

And

A tighter Fiscal Compact would practically eliminate the risk of default.

The borrowing restriction, though, is supposedly the present case—and certain nations still overborrowed.  His view of the Fiscal Compact shows a breathtaking misunderstanding by so successful investor.  If there’s no risk of default, there’s no incentive to behave responsibly, no danger to borrowing excessively, at least to the borrowing nation.

He also got into a German departure from the euro.

If a referendum were held today, the supporters of a German exit would win hands down.   But…[t]hey would discover that the cost to Germany of authorizing eurobonds has been greatly exaggerated, and the cost of leaving the euro understated.

No.  The cost of participating in eurobonds has not at all been exaggerated: there is no reason at all for German taxpayers to be held liable for another nation’s fiscal irresponsibility when those German taxpayers, in Soros’ words, do not control that nation’s behavior.  The existence of such a risk means that the cost has not at all been exaggerated.

Germany would be the better off for departing the euro, if its only alternative is to accept responsibility for a share of eurobonds that are used to bail out the irresponsible without the structural changes—at a national level—that are necessary to correct the nation’s problems.  Especially since those necessary structural changes both are necessary in their own right, and their execution would eliminate the need for a common debt instrument.

In the end, as described in the first link above, the eurozone is itself founded on a false premise, and it would better function as a collection of smaller comities that honored the diversity of Europe.

Carbon Tax?

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Ex-Secretary of Labor, State, and Treasury George Schultz and Economics Professor Gary Becker say we should have one.  They even insist that it be revenue neutral.

The problem is, though, that they’re arguing from two false premises, and it’s unfortunate that two such well-educated men should be so caught up in drama rather than fact.

The first false premise is that any tax change (as the imposition of a carbon tax would be) must be revenue neutral.  This may, in fact, be needful for the politics surrounding imposing a new tax (or cutting old ones), but there’s no rational reason for revenue neutrality.  The economic necessity, given our exploding deficit (though President Barack Obama says his budget shrinks it, and, sure, he is an honorable man) and our even more explosive national debt, demands a reduction in spending with its associated reduction in borrowing.  Taxes need not be increased under any nearby circumstances, nor need the imposition of a new tax be “paid for” with an equal increase in spending or reduction in tax somewhere else.  With spending coming down to eliminate our deficit and further, taxes overall can be cut, too.

The second false premise is that carbon, or carbon dioxide, is a pollutant, the blatherings of the political bureaucrats at the EPA notwithstanding.  The climate facts here are that CO2—the primary product of, say, Schultz’ and Becker’s energy companies—is a lagging, a confirmatory, indicator.  The climate record demonstrates that CO2 increases in Earth’s atmosphere lags climate warming on a global scale by some hundreds of years.  Since CO2 “emissions” are primarily from plant and animal respiration—even adding in the output of those energy plants—that lag following planetary warming comes from increased plant and animal life on the warmer planet.  It’s a confirmation of the increasing health of the planet.  That’s not much of a pollutant.

We don’t need a carbon tax, though.  Come to that, we don’t need any tax at the levels at which they’re charged today.

They’re Missing the Point

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The editorialists of Spiegel International Online are complaining about the evils of international tax havens.  They say, for instance,

no one knows how much money is on deposit in anonymous bank accounts in countries that are euphemistically referred to as tax havens.  Estimates by the non-governmental organization Tax Justice Network put the figure at about €16 to €25 trillion ($21 to $33 trillion).  In this manner, the native countries of these individuals and companies are deprived of hundreds of millions in taxes, sometimes legally but often illegally.

And

The debt-ridden countries of the Western world can no longer afford to be deprived of such massive revenues.  In addition, the public is sharply critical of the fact that some wealthy people can escape their responsibility for their countries through tax flight….

They misunderstand the underlying problem, though.  Those countries don’t actually need the tax revenue that’s heading overseas—their governments are spending far too much of their people’s money, and spending it on things that rightfully belong to those people to spend on, or not, according to their own imperatives.  The governments are deprived of nothing.  The governments should think, instead, of the benefits of those trillions staying at home, in the countries’ private—nongovernmental—economies, because without the present usurious and special interest oriented tax plans, no one would have need to hide his money from the tax man.

As for the public’s disgruntlement over the wealthy being able to hide their money when they cannot, they should be upset.  With properly low taxes, though, there is, again, no need to hide.

The editorialists do raise a legitimate beef, though.

Drugs and other criminal funds are hidden and laundered there [in the tax havens], shady deals are arranged, and hedge funds whose speculative activities could shake the financial system once again use them as a base.

You bet.  All together, now: if the domestic tax policies were more intelligent and honest—that is to say, set to low rates—the tax havens would be hard put to stay in business—and there would be fewer resources for hiding and laundering criminal funds and fewer bases for Evil Hedge Funds.

There’s a pattern here.