When conservatives call it a Fair Tax, it's no good...

But when liberals call it a Value-Added Tax then it's ok? Hey, a VAT is so European! How could it not be good!?

I'm willing to listen if a VAT will replace the income tax entirely - including a repeal of the 16th amendment, but not if it's lumped on top. That's not reform, it's just double taxation.

I'll know Tuesday if I should buy stocks

My friend Ania twittered recently that she bought her first stock. I thought, Good for her. I also got a little jealous because I hadn't done that yet (except for the ol' 401k). Given the bargain price of so many stocks, it's an enticing time to start investing. My plan has been to see where I sit at the end of the year and consider investing a bit of money in a few carefully selected stocks.

A thought occurred to me today, though, that says I'll probably know if I want to invest after the election on Tuesday. Barack Obama joked at one of the debates, in response to John McCain noting that Obama plans to raise capital gains tax, that no one was going to have capital gains this year. Cute, and true. For people who bought high, they probably won't have capital gains for a while. But for those of buying now, capital gains are going to come quickly if the stock market begins to rebound.

So should I put my money into a stock market when I know that, if I want to pull it out in a few years, I'm going to get hit with the government taking an even bigger portion than they already do? And for those who make more than $250,000 a year, the ones who would have to pay whatever the new top rate is (possibly as high as 28%, versus 15% now) and actually have the money to invest, won't this create either a disincentive for investment or a disincentive to trade?

By the way, if those realizing gains are not actively trading but instead sit on their gains to wait for a more favorable tax climate, the government isn't going to get the tax revenue anyway. And then you have to wonder where an Obama administration will go looking for funds...

The Bailout

The more I read about this bailout, the more terrified I become. I mean, this is a lot of money and not a lot of accountability. Obviously no one fully understands this thing, but from various things I have read, the bill:

• allows for spending about $150 billion above what is actually necessary,
• allows for $700 billion in spending at any given time - but that is not the total cap on all cumulative spending, and
• places the undetermined (uncreated?) agency administering the bailout above the law and not answerable to anyone.

All this for a bill that may or may not be necessary (see the various discussions on Marginal Revolution and Cafe Hayek about current lending continuing to go strong).

I do commend the GOP for finally getting up gumption to ask some questions about this bill and to slow the process down some. And I do commend Barack Obama for admitting that if this deal goes through it may cause him to limit or delay some of his own far-reaching proposals (which ought to give you some idea of just how much strain those big-government proposals will put on the American economy and should make any thinking person ponder the economic sense of voting for Obama).

Into the mix I throw an idea - instead of all of us bailing out a few companies, how about we let all companies give less to the government? Let's pass a two-year suspension of the corporate tax, which is currently either the highest or the second-highest in the industrialized world - take it to 0% effective immediately and retroactive for all of 2008 and through 2009. Then corporations can then use the money to grow and bail themselves out instead of being given a handout and tacit assurance that no matter how bad it gets, they'll be ok.

I'm not a tax expert so I don't know how much that actually goes toward the $700 billion mark, but I feel like it's a much more practical way to help corporate America. It helps everyone and allows an unaccountable government to touch less hard-earned money.

NB: My friend tells me that this really doesn't do much for the liquidity problem the banks are facing. Fair point. My hesitation here remains the government buying all those assets is a risky bet in the short term and a dangerous precedent for our free-market economy in the long term.

Today's news...oh the humanity

Bush admin and Congress team up to put taxpayers on the hook for other people's mistakes. The Wall Street Journal notes, "President George W. Bush warned that a "significant" amount of taxpayer funds will be put at risk with the government's plan to bolster shaky markets." At least he's being honest.

Voters would rather watch football with Obama. Women prefer Obama, likely assuming he wouldn't be watching the football game either. Hope he'll bring chip in for the arugula tray.

"Redistribution of wealth - it's the American way!" - Joe Biden

Economy troubles force...FORCE...people to cook for themselves. Cookbooks appear on shelfs as though guided by some invisible hand...

News on Global Warming, Election '08 and Taxes

Here are a few interesting clips I've come across today:

Utah has implemented a flat income tax of 5%. Interestingly, despite cutting taxes for most people, the new tax is actually more progressive based on the elimination of some deductions. More states should experiment with major changes to the tax code. Let's see what works best.

The US dropped its carbon dioxide emissions 1.8% in 2006. Didn't hear about that one on the news? Total greenhouse gas emissions dropped 1.5%. The economy grew 2.9%. So, to be clear, the economy grew while naturally occurring innovation and lifestyle changes brought about through the free market achieved something that Europe has not been successful at doing over the past few years despite their mandatory rules to cut carbon. Isn't that the darnedest thing?

Anti-immigration madman - and erstwhile presidential contender - Tom Tancredo is said to be dropping out of the race. Good riddance.

Another reason the GOP brand is so tarnished

Jim Wooten of the Atlanta Journal-Constitution has a nice post today on AJC.com decrying Georgia's Republicans in the state House to lead like Republicans. The Speaker and the Governor are both playing with taxes, and not necessarily in beneficial ways. He very nicely sums up how me and many others are feeling:

The great frustration with the new majority under the Gold Dome is that, with rare exception — tort reform and special education vouchers, for example — they are largely indistinguishable from the Democrats who preceded them. The semantics game on taxes is right out of the Democratic playbook.

It was only a few years ago that Republicans climbed down power in Georgia after more than 140 years of Democrats holding all the reigns of power. Yet, just like we saw on the national level, the Republicans have squandered their majority. And unlike at the national level, where at least the GOP started with a clear set of goals, Glenn Richardson and the Republicans never really knew what they wanted to get accomplished. Wooten's assessment matches my own:

What this majority really needs to do is develop an agenda based on the state’s transportation, education, medical and water objectives — and then determine priorities and funding requirements. If a tax increase is warranted — and it may be — Perdue, Richardson and Lt. Gov. Casey Cagle should make the case, and explain to Georgians what we’re getting and why the additional money is needed.

Instead, we get tax shifts and new tax targets and tax semantics.

This frustration is something the GOP is going to have to deal with at the federal level and in many states during the 2008 election. Republicans are tired of unprincipled leadership from their own party. I don't think they'll go vote for Democrats, but I do wonder if they'll vote at all, and that's just as dangerous.

GOP - get it together. Limit spending, hold or cut taxes, find (and sell!) some creative approaches to social issues like health care, live your values instead of just claiming them, and rebuild this party.

So I can just....not pay....?

Charlie Rangel says that we have a "voluntary tax system." Isn't that exciting?! Donald Luskin discusses this in a neat op-ed in today's Wall Street Journal (and it's not just neat because I am, or at least was, linked at the bottom):

Perhaps from Mr. Rangel's perspective, our tax system is indeed voluntary. After all, he chooses who pays taxes, how much they pay and how their money gets spent. If he wants to raise our taxes to support a $2 million earmark to create a Charles B. Rangel Center for Public Service at the City College of New York, he can volunteer to do that -- but the rest of us have no such choice.

To be fair, our tax system is indeed voluntary in certain respects. For example, wealthy liberals like Warren Buffett, who call publicly for higher taxes on the rich in the name of fairness, can volunteer to pay more themselves any time they wish to do so. All Mr. Buffett has to do is send a check to Department G -- that's G for "gift" -- at the Bureau of the Public Debt in Parkersburg, W.Va.

But could it truly be a vountary system? Luskin says yes.

Why not try an experiment in which the tax system is made truly voluntary? Already 42 states (as well as the District of Columbia and Puerto Rico) raise revenues with lotteries, through which citizens voluntarily paid $57 billion last year. It's a long and noble tradition. Before the birth of Christ, the Han Dynasty ran lotteries to raise the revenues used to build the Great Wall of China.

Government could be entirely financed by voluntary taxation. Yes, the government would have to be small enough to make do, and citizens would have to be sufficiently public-minded about it. But all 13 original American colonies ran lotteries, and playing them was considered a civic duty. Proceeds from lotteries established Harvard, Yale, Columbia, Dartmouth, Princeton, and William and Mary -- and paid for the cannons that defeated England in the Revolutionary War.

It's that "small enough to make do" part that really throws some gunk in the works, though. Our elected officials are a bit allergic to that idea.


Read the whole thing here, and you should also check out Don Luskin's blog, The Conspiracy to Keep You Poor and Stupid.

Standing up to spending

At least one GOP leader gets the spending thing. John Boehner, the House Minority Leader, had an excellent letter to the editor in Monday's Washington Post arguing the same point I did in an earlier post - that the best way to "pay for" the elimination of the Alternative Minimum Tax isn't through new taxes, it's through spending restraint.

Congress doesn't have a revenue problem. Revenue is at an all-time high after the 2001 and 2003 tax cuts, which have triggered economic growth that is "paying for" an AMT patch many times over. Rather, Congress has a spending problem, and raising taxes to "pay for" an AMT patch is simply a backdoor way to feed its addiction to pork.

He calls out several irresponsible earmarks that would at least make a dent in paying for the AMT.

I'm so glad to see Boehner singing the song of less spending. He needs to push more of his colleagues in this direction.

HT: Poor and Stupid

The problems with Rangel's tax bill

Real Clear Politics has a good update on the Rangel tax bill, specifically focused on Republican plans to use the bill against Democrats in the 2008 elections. The article expands on some flaws that I didn't realize:

Mr. Rangel's plan would slap a hefty 4 percent surtax on single taxpayers who earn more than $150,000 and on married couples filing jointly who make more than $100,000 each. In effect, they are "putting a massive new marriage penalty into the tax code," Ways and Means Republicans charged. [emphasis added]

Moreover, under Mr. Rangel's bill "you can kiss your deductions goodbye," they add. The surtax would be levied on adjusted gross income before any deductions for charitable contributions, mortgage interest, medical costs, and other expenses.

But the new surtax Mr. Rangel wants to impose on working Americans would also affect an estimated 24 million small businesses who pay their taxes through individual tax returns. Many will lose deductions that lower their taxes on business income, while incorporated businesses will benefit from a rate cut, making it harder for small employers to compete with the Wal-Marts of this world. Mr. Rangel would also slap his surtax on capital gains, effectively raising the 15 percent long-term capgains rate by another 4 percent or more for millions of investors.

Jack Kemp offers some important advice to Republicans ready to pounce on this. Says Kemp:

"It isn't enough to be against Rangel's bill, we have to offer our own proposals. He has, to his credit, begun a debate over tax reform that lowers the corporate tax rate from 35 percent to 30 percent, but pays for it by raising taxes on capital gains and capital investment which is a bad idea."

Sounds familiar. But based on recent trends, such sound advice will, of course, be completely ignored.

Who's paying for whose mistake?

Professor Don Boudreaux makes a helpful observation about Representative Charlie Rangel's attempt to eliminate the Alternative Minimum Tax. Framing the mission creep of the AMT as a "mistake" that Congress appears ready to correct, he notes:

Given that the current operation of the AMT is a mistake, why do Rep. Charles Rangel and so many others talk of the need to "pay for" fixing the AMT? A merchant who mistakenly overcharges customers is obliged to refund the money and stop overcharging, period.

The problem, of course, is that Congress has already spent the money. But I guess they could just dip into those unsecured Social Security monies to pay for things like they did in the good ol' days.

Don't write off the Rangel tax bill yet

The good pieces of Charlie Rangel's (D-NY) proposed tax overhaul bill are good, and they're good for everyone. The bad parts are bad, but they're only bad for some people, and that's the cleverness behind the plan. What's missing is also bad for everyone. Let's look (and if this isn't enough detail for you, Money's website has a pretty good run-down of the bill).

Here are the good things about the bill:

• Full elimination of the Alternative Minimum Tax, which has slowly hit more and more middle-income Americans over the past few years. This is not what the Democratic authors of the bill intended 40 years ago but, because they didn't index it for inflation, that's what happened.
• Expanded credits for low-income couples without children
• 4.5 percentage point cut in the corporate tax rate

And the negatives:

• Hits high income earners ($200,000+) with a new, additional 4% tax
• Hits hedge fund and other money managers with a change in how part of their compensation is classified, resulting in as much as a 20% additional tax on them
• Closes some corporate tax breaks (while this one is unfortunate for the companies, I'm largely ok with this one as I generally view tax breaks as subsidies that you pay to yourself)

What's missing:

• Spending cuts. The money to pay for the good things has to come from somewhere - that's the rule - which is why the tax cuts are made with tax increases. Rather than simply shuffle the tax burden, we would be better served finding places where we can cut spending. Ending earmarks is one place, but that won't help all that much. Finding some bloated federal agencies to trim down would be a good start. Not expanding SCHIP would be a good idea, too. Because here's the magic of the market - tax cuts put more money out in the economy, providing more resources for private firms to fill the gaps where government is stepping back. But I digress. The point - cut spending instead of hiking taxes.

As is the want of the out-of-power party, the Republicans will likely say this whole proposal smells like moldy goat cheese, yell, stomp around, put their fingers in their ears, and then completely fail to offer a suitable counter proposal. I'd like to suggest a different tact:

1. Admit that there are good things in this bill, particularly the AMT elimination at the corporate tax cut. Our corporate taxes are the second highest in the industrialized world, and other governments (of all political persuasions) are cutting their rates, making us less competitive. This is a big deal. The average American will understand there are good things - if you say it stinks, it looks like you don't understand the concerns of Real People. Hint - that's a bad thing.
2. Be for fairness. The good things are good because they have the potential to help everyone, but that's done at the expense of a small number of people. Congress can't, or at least shouldn't, be in the business of picking winners and losers or deciding at what point someone becomes "too rich."
3. Don't whine about the fact that Democrats will get to have elimination of the AMT as a campaign issue. A friend of mine notes that Republicans have done a terrible job of pounding on the fact that Democrats created the AMT. It was also the Democrats who prevented the GOP's attempts to eliminate the AMT in the past decade. Instead of being mad about this, just have a consistent message of "We are glad the Democrats have decided to eliminate the tax they imposed on America 40 years ago, and we are glad they are now seeing things as we have seen them for years - that this tax needs to go. Republicans are happy to once again vote for the elimination of this tax."
4. Push for compromise. Use Rangel's bill as a jumping-off point, agree on the good things, and then offer spending cuts to make up for the tax increases. Remember, my Republican friends, tax cuts alone are not an end-game - our goal is smaller government. Tax cuts are a tactic - spending cuts are real progress.

This is a monumental opportunity, and there is some urgency to it, as the Tax Foundation points out:

The IRS sends the 1040 forms to be printed on November 7, and they need to finalize the rest of the forms by November 16. If Congress doesn't do something with the AMT by then, the updated forms will not be available to taxpayers until after the filing season has started and the original incorrect forms have already been issued. As if taxpayers needed any more confusion, they will then be stuck trying to figure out which set of forms is the correct set.

I'm not so delusional as to not think, given the above comment, that Rangel's not just playing politics by saying he will end the AMT while knowing there isn't enough time to do it. It could all be disingenuous. That's ok, because market-oriented leaders can force the issue. Take up this opportunity and run with it.

Cyber-tax

On November 1 of this year, the moratorium on taxation of the Internet will expire. Congress has the opportunity to renew this and avoid losing the (largely) untaxed free market that the Internet is today. The benefits of such a move are easy to see, as Phil Kerpin explains:

The Internet has been a remarkable engine of economic growth and innovation over the past decade, in large part because it has operated as a free market without undue taxes or regulation. A federal moratorium first put in place in 1998, and subsequently extended, has protected the Internet from access taxes and discriminatory or multiple taxation. That moratorium prevents state and local governments (with a handful of exceptions where taxes have been grandfathered in) from imposing a list of taxes and fees that would appear on the Internet portion of your cable and telephone bills.

If the moratorium is allowed to expire, states will likely impose new taxes on Internet access fees, bit-taxes on downloads, and perhaps even e-mail taxes. There would be unlimited potential for taxation, which would only impede the flow of commerce and information on the Internet and slow a great engine of economic growth.

Drop your representative a note and ask them to make sure to extend the moratorium - even to make it permanent.

Fair deal?

In principle, I really like the Fair Tax, not least because it theoretically eliminates the IRS, or at least significantly reduces its size and scope. The Fair Tax also eliminates many of the tax perks that reward government-approved behavior or government-approved friends. Such simplification of the tax process would be real nice and probably a net-positive for liberty.

However, the more I hear about the Fair Tax, the more questions come to my mind. A recent commentary ($) by Reagan/Bush deputy assistant secretary of Treasury Bruce Bartlett in the Wall Street Journal calls several facets of the Fair Tax into question, particularly the tax rate. (for an ungated version of most of the article, go to the Economist's View blog)

While the Fair Tax bill, authored and promoted by Georgia Representative John Linder (R), would add a sales tax of 23% to all items sold, you may have heard opponents argue that the tax is really an effective rate of 30%. Not being an economics major, I've never really understood this discrepancy, but Bartlett gives the clearest explanation I've ever seen:

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other sales tax is calculated, with the tax on top of the price, yields a rate of 30%. (This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

Hum....

Other criticisms are also raised in the commentary, such as the quirky facet of the bill that reimburses households below the poverty line for a piece of the tax to make it less regressive. Read the article for all valuable points. For some rebuttal, check out the comments at the Economist's View's post on the article.

More on the Fair Tax: http://www.fairtax.org/site/PageServer
More on the Flat Tax: http://www.ncpa.org/pi/taxes/tax7.html