Hedgehog Party

Linking Spending with Taxation

Take a look at this piece by David Brooks, a columnist with The New York Times.  He describes a political culture in which entitlement spending is enacted without regard to seemingly dangerous costs.  According to Brooks, some politicians do try to make everyone aware of these dangers, but to no avail: 

"They bombard you with alarming statistics about unsustainable entitlements.  The U.S. government has $43 trillion in unfunded liabilities, or $350,000 for every taxpayer.  Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating."

Shouldn't statistics like these be enough to scare Congress into passing only entitlements whose costs are sustainable?  Alas, no.  Instead, Congress continues to enact plans, the latest being the expansion of the State Children's Health Insurance Program (S-Chip), that will consume vast resources today and unimaginable resources tomorrow.  To accomplish this, they engage in every trick they can to hide, obscure or defer the costs. 

The problem is that there is no strong mechanism in place to force a linkage between spending and taxation.  And the reason there isn't is that self-interested voters (who want expensive programs) and politicians (who want to attract votes by passing expensive programs) simply don't want the pain of higher taxes.  Who can blame them?  It's human nature. 

All of us - from ordinary citizens to the mightiest politicians - need to step back and recognize the seriousness of this problem.  Once we do, we will have the willpower to require that new spending be paid for by broad and obvious increases in taxation.  Once this happens, total spending will be limited by the amount of taxes the majority of voters will support.

Global Warming Tax

Rep John Dingell promotes a gasoline tax, carbon tax and a tax on some homeowners to pay for global cooling.  It seems like a lot of trouble.  Why not legislate the Hedge Tax.  Then you could simply raise the tax rate on everybody to pay for global warming programs.  These taxes should easily garner widespread support since "everybody" wants to do something about global warming.  Or could this just be selective taxation and selective spending?

http://www.washingtonpost.com/wp-yn/content/article/2007/09/26/AR2007092602127_pf.html

Two Kinds of Rich

From the recent 25th Anniversary issue of the Forbes 400...Other Comments.  This little quote sums it up.

"There is a gigantic difference between earning a great deal of money and being rich."  MARLENE DIETRICH

Without realizing it, she pegged the unfairness of the tax code.  The high income earners pay taxes, the asset rich do not...and they constantly get richer as a result of it.  To read more, check out the article "Two Kinds of Rich" in the Article section on the right side of this page.

Taxing Those that Work 80+ Hours per Week

Obama proposes raising the cap on the Social Security tax in this ABC news article.  http://www.abcnews.go.com/Politics/story?id=3638710&page=1  It is good politics because these people represent only 5% of the electorate, and probably most vote Republican anyway.  Both halves of Social Security and medical taxes plus the top income tax rate produce a marginal tax rate of over 50%.  Now when the cap of $97,000 is exceeded, the top marginal rate reverts to about 39%.  Removing the cap will raise the taxes of this group about 30%.  (Yes, Virginia, 30%).

It is class warfare with the tax code as the battlefield.  I wonder why we have such bitter political divisions in this country.

It is useful to remember that the asset rich that depend on various forms of investment income are completely unaffected by this change.  Hardest hit will be highly paid professionals that pay ordinary income taxes.  They will need to work 100 hours per week instead of the usual 80 to maintain their disposable income.

Balanced Budget Amendment - a good thing

A key proposal in The Rats are in the Cheese is the adoption of a Constitutional amendment requiring that spending be balanced with taxation.  I believe the most recent (unsuccessful) attempt to pass such an amendment in Congress was in 2004. 

An interesting perspective on the Balanced Budget amendment is offered here in an article posted on the Heritage Foundation web site.  The author, Brian M. Riedl, makes the following point at the end of his short article: 

"Still, because the Balanced Budget Amendment wrongly focuses on the budget deficit, rather than the larger problem of runaway federal spending, its delay is no tragedy. Lawmakers should instead implement spending controls that both reduce the budget deficit and avoid painful tax increases.”

We all know, of course, that Congress will never implement spending controls, so it's pointless to even recommend such a thing.  Instead, we need reform that makes use of what Mr. Riedl seeks to avoid:  "painful tax increases." 

If Congress were required to balance the budget by raising taxes, voters would directly feel the cost of higher spending.  At some point, the tax rates would increase to the point that a majority of voters would demand spending limits.  Isn't this a better way to get Congressional spending under control?

 

Conflicts and Challenges in the Tax Code

This another example of the complexity of the tax code ensnaring another set of victims.  Recently, forgiveness of debt by mortgage lenders and the subsequent income tax liability has made news.  Homeowners that lost (or are losing) their home to foreclosure are finding another formidable creditor kicking them when they are down...the IRS.   

This article http://taxprof.typepad.com/taxprof_blog/2007/09/why-should-cong.html in the Tax Prof reveals the Byzantine process, conflicting political interests, and consequences of related legislation that are brought to bear on a seemingly isolated problem....providing tax relief for foreclosure.

Lower capital gains tax rates enable tax avoidance

Supporters of differential tax rates can talk at length about why such differences are important - ensuring progressivity in the tax code, encouraging or discouraging certain activities, etc. 

But the plain fact is that income rich or asset rich individuals can structure their affairs to take advantage of lower rates in a way that regular people like us cannot.  Check out this discussion at The Economist, which tackles the issue of fund managers being taxed at the low capital gains rate rather than normal income tax rates. 

We need to put a stop to this.  All income or gains, by any individual or entity, from whatever source derived, should be taxed at the same rate.  Instead of using differential income tax rates to achieve progressivity, we should introduce an asset tax, which can be targeted against only large asset concentrations.  This way, the fairness of progressivity is achieved, but not at the expense of differential income tax rates that permit certain groups to avoid taxes.   

More interesting commentary on the Flat Tax

Check out this short Washington Monthly article on the Fair Tax, and the comments that follow, all of which can be found here.  Some of the commentary is pretty harsh, too harsh in places. 

A big concern about both a national sales tax and a flat tax is the perception that under both schemes, the rich somehow pay less, which is why in the end neither proposal will ever attract enough political support to pass. 

In our book, "The Rats are in the Cheese," (buy a copy here - what are you waiting for?), we propose combining a single rate tax with an asset tax, which if carefully structured could bring in significant revenue from currently untaxed pools of wealth.  The rich, who are either tax exempt (foundations, trusts, etc.) or who can avoid triggering taxable income, will begin contributing in a more meaningful way to the tax burden.  Including an asset tax in our proposal enables two important things:

1.  Voters will feel assured that the rich aren't getting a free pass
2.  The new revenue from the tax will make it possible to reduce taxes for the vast majority of voters

These two things will greatly enhance the political support needed to pass tax reform.

Mr. Buffett's Taxes

I wrote an editorial about Warren Buffett's tax situation, which was published this week by The Darien Times and can be found here.  Take a look!

A main objective of this editorial was to point out that the rich and powerful avoid taxes by taking advantage of the tax code's complexity.  Doing so allows them to keep their effective tax rate low, often much lower than what average taxpayers pay.  It also allows them to avoid triggering taxable income in the first place, something regular W-2 taxpayers like me just can't do. 

Another objective of this editorial was to recast the debate about "the rich."  Too often, editorial writers complaining about the rich do nothing more than condemn them for their greed, wealth, lifestyle, luxuries and excesses.  All of this makes for fun reading but in fact is nothing more than tired 19th century populism.

Instead of attacking the rich for being rich, we should be figuring out ways to ensure that they bear tax burdens in line with the average taxpayer.  Doing so will help restore the perception that our tax system is fair and strengthen our democracy. 

Tax breaks for charitable donations draw scrutiny...

You've probably seen it already, but if not, take a look at the front page of today's New York Times, where there is an article that explores charitable giving by the very rich. 

The columnist questions whether it's right for charitable donations by the rich, which don't go as much as she would like to organizations supporting the needy, should enjoy tax subsidies, many of which can't be used by ordinary taxpayers. 

This is yet another example of the problem we face with our tax code - too many preferences that are enjoyed by too few people.  Why can't the rich simply pay taxes then donate their money?  What about changing the tax code so that we can accomplish this?