Hedgehog Party

Eureka!

Eureka! Eureka!....an academic has proposed the Hedge Tax.  It is an idea that could catch on!

I, however, would not describe the Hedge Tax as a government initiative.  It will never happen.  Everybody in the current power structure gets a lot of benefits from the current tax code.  It will happen only as a broad voter initiative....those that have zero to $300,000 W2 income.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1033902

Tax Challenges for the Next President - a Response

To the Editor: 

For me, a key quote from the editorial "Tax Challenges for the Next President" by Bill Archer and James Carter was this:   

"Unless Congress is willing to slow the growth of entitlements, future taxpayers will be saddled with unsustainable budget deficits or massive tax increases." 

Growth in entitlements is driven by the absence of a clear and broadly distributed linkage between taxation and spending.   We see this when Congress regularly creates or enhances entitlements (the recently enacted Medicare Prescription Drug Benefit comes to mind) while obscuring, dismissing or underestimating the true cost.  The result is an insatiable public appetite for more entitlements, with citizens increasingly obsessed in asking themselves, "what's in it for me?"

Instead, they should be asking, "how much will this cost me?"  Imagine for a moment that we could phase in a system with a single rate tax on all income that applies to the top 85% of income earners, along with a balanced budget requirement.  Under such a system, the single tax rate that all taxpayers must pay would automatically rise whenever politicians spent more, eventually creating a powerful constituency for entitlement and other spending reform. 

Only by implementing a system that effectively links spending and taxing, whereby the political pressure to spend is matched by the political pressure not to raise taxes, will we ever achieve entitlement reform.

More on Tax Exempts

This article at American Thinker is a good extension of our previous post.  It is a better example of gaming the tax code at Tax Exempts.  http://www.americanthinker.com/2008/01/nonprofits_escaping_tax_on_unr.html

As always, our antidote is the Hedge Tax.  Instead of gaming the tax code, they could spend that effort on fund raising.

Middle Class Taxpayers

Our tax code redistributes "taxes on the rich" to the middle class.  In this case it is pass through of the taxes to consumers.  In other cases it is simply price inflation.

http://gregmankiw.blogspot.com/2008/01/taxes-dont-stay-where-you-put-them.html

New York Times wants to End Tax Deductions for Charitable Giving!

Check out this New York Times editorial.  The editors praise charitable giving and the support it provides to countless worthy causes.  At the same time, they condemn what they perceive as stinginess on the part of the US government, which they believe underfunds vital infrastructure and other investments. 

Consistent with their worldview, they would like to see vastly higher government spending paired with Finland-like (i.e., near 50 percent) levels of taxation.  Consistent with my world-view, I would invite them to put such a scheme to a clear up-or-down vote. 

Actually, my main reason for writing about this editorial was to point out the next-to-last paragraph:

"Philanthropic contributions are usually tax-free. They directly reduce the government’s ability to engage in public spending. Perhaps the government should demand a role in charities’ allocation of resources in exchange for the tax deduction. Or maybe the deduction should go altogether. Experts estimate that tax breaks motivate 25 percent to 30 percent of contributions."  (bold is my emphasis)

Said another way, 70 to 75 percent of charitable contributions are NOT motivated by tax breaks, so most givers will continue giving whether their contributions are deductible or not. 

In addition, those who can deduct charitable giving are likely "itemizers" at the top end of the income scale.  In other words, the government provides a tax break to the rich for charitable giving, but not to the poor.  What's fair about that?   

Seems like the Times might be right.  Let's end deductions for charitable giving altogether. 

Tax Exempts March Forward

The TaxProf blog reviews some of the "extra" advantages that tax exempt organizations enjoy.  Business income unrelated to tax exempt activites that these organizations generate are legally shielded from income tax.  A number of prominent institutions are named...   http://taxprof.typepad.com/taxprof_blog/2008/01/chronicle-nonpr.html

An interesting question....how can these advantages be used by corrupt tax exempts?  Is the whole idea unfair?  It looks like a good way to game the tax code...by private interests and the politicians.  "Doing good" can be good cover for "doing bad."  In the meantime, regular taxpayers foot a bigger bill.  The Hedge Tax puts an end to these games.

New Jersey Toll Tax

Check out this New York Times editorial, which describes a plan by New Jersey Governor John Corzine to balance his state's finances.  The plan envisions dramatic increases in New Jersey road tolls - from $5.85 for the length of the New Jersey Turnpike to $48 by 2022.   

The editorial further mentions that New Jersey will get the money up front, through bonds that will be repaid by the tolls.  Mr. Corzine wants to use the funds for debt retirement (New Jersey owes creditors some $32 billion) and public transportation.  How terribly inconvenient for the bondholders if future governors, under pressure from strapped voters, decided to lower the tolls, so...

"Mr. Corzine says the legislation, which has yet to be unveiled, would prohibit governors from meddling in operations or reducing the toll increases."

I don't know (and don't care to know) much about New Jersey's politics and finances.  But consider what this legislation will do:  about half of the $38 billion to be raised will go to debt reduction, leaving the remaining $19 billion available for immediate new spending and job creation.  Current voters will get the benefit, while future voters will be saddled with a huge toll burden to retire the bonds. 

Since current voters win, political support for the proposal is all but assured.  But doesn't this sound like "borrow to spend now, but pay later" - just what New Jersey has done all along?  What's different?  Sure the editorial says that legislators should "work with Mr. Corzine on the other part of his proposal: putting in place measures to end the irresponsible spending that produced this financial mess."  Where's the political pressure going to come from to ensure that this happens?  We all know the answer. 

Fiscal restraint and responsibility will only come when the political pressure to spend more is matched by the political pressure not to raise taxes.  This proposal does nothing to help establish this, and in fact it makes matters worse.  Mark my words - New Jersey per capita spending and its debt burden will be higher in real terms by 2022 than it is today.