America Economics Obama Taxation

All those things you hope the GOP will do? They can’t do them

Ben Howe says today’s GOP is different from GOP circa 2006–that we should stop holding the budget-busting, war-mongering actions of Bush-era Republicans against today’s fiscally responsible, TEA party Republicans. This is not your father’s GOP. This idea is getting some traction. There is some wishful thinking out there that this time your vote for Republicans will mean smaller government despite the fact that the last Republican President to reduce either federal spending (adjusted for inflation and population) or the budget deficit was Eisenhower.

There’s a part of me that would like to believe in the sincerity of GOP rhetoric. I do worry about a government that allocates fully a quarter of everything produced in the country. But, I’m skeptical not just because the faces at the top of the GOP have not changed. I believe people can change. The problems is the incentives for GOP legislators have changed very little since 2006. When a politician (of any persuasion) pays lip service to a policy you like, it’s important to consider how the stake holders feel about it and how they’re liable to react politically. Here are three good conservative ideas which the GOP has no chance, or indeed intention, of accomplishing.

Raising the retirement age (or other Social Security fixes). You know and I know that it’s ridiculous to pretend people aren’t staying healthy longer or that Social Security isn’t approaching a precipice. Without any changes, the trust fund (i.e. the surplus accumulated by payments into Social Security, also the money loaned to the treasury to fund our government these 20 years) is predicted to be exhausted in 2033. At that point (or some time before), Social Security must either cut benefits by an average of 23% or begin collecting more money. To listen to them, you’d think the GOP were making this top priority. But today’s Republicans have no hope, or even inclination to make substantive changes to the Social Security. The reason for this is that Republican electoral success increasingly relies on strong majorities among retirees to compensate for their poor showing among younger age groups. The Democrats enjoy an advantage among registered voters in every age category except the over 65 crowd. Candidates on the Left who openly advocate raising the retirement age or trimming benefits regularly face attacks from the Right. Most of us remember Mitt Romney’s criticism of the President’s 700 billion dollar reduction in Medicare spending. The Washington Post highlighted more such attacks against Democratic candidates by Karl Rove’s American Crossroads. Until Republicans find a demographic to replace retirees, all Republican entitlement reform is dead on arrival. You heard it here first, when it comes to fixing Social Security, the GOP will sell you, hard-working taxpayer, out to their AARP base in a heartbeat.

Eliminating mortgage interest deductions. This is a great Republican idea. The mortgage interest deduction is a giveaway to home owners and shifts the tax burden to poorer renters. It drives up home prices, complicates tax filing and distorts the market unnecessarily. But the GOP can’t do it. They take too much money from the people most harmed by this policy. The third largest individual donor to Mitt Romney, post TEA party revolution candidate for President, was Texas real estate developer, Bob J. Perry. He gave $15 million to the Romney campaign. Real estate interests gave three times more money to the Romney campaign than to the Obama campaign. Aside from investment professionals, real estate was the industry most supportive of Romney’s candidacy. The National Association of Realtors is a powerful organization which spends $40 million on lobbying every year. They support candidates on both sides including GOP House Candidate Mia Love and Democratic Senate candidate Mary Landrieu. Until money no longer rules politics, the mortgage interest deduction is here to stay.

Reducing agricultural subsidies. No one but the recipients of farm subsidies thinks they’re a good idea. The Department of Agriculture directly pay about $19 billion each year to American farmers, large and small, in the form of subsidies to crop insurance premiums and direct crop price support. Recipients include Jon bon Jovi, Rockefeller heirs and 1500 residents of New York City. Subsidies to US farmers harm third world agrarian economies which could be lifting themselves out of poverty while providing cheaper groceries for American consumers. Countries around the world hold this up as an example of the US’s protectionist trade policy and our hypocrisy as we ask countries like China to open their markets to foreign goods. Cutting these subsidies gets some play on conservative talk radio and in conservative think tanks. But it’s a non-starter among Republicans who actually govern. President Obama’s 2014 budget includes some cuts to these which Republican lawmakers have resisted. The Republican Study Committee recently uninvited the influential conservative Heritage Foundation to its meetings over Heritage’s support for reducing farm payments. Again, Republicans have both a demographic and a fund-raising problem. They enjoy broad support from rural communities and states whose voters, even when they don’t receive subsidies themselves, identify with the image of the struggling Midwest farmer. It also brings in the dollars. Campaign contributions by agribusiness has increased five-fold since 1990 with 71% of contributions going to Republicans. An estimated $150 million is spent on lobbyists for agricultural industries every year. In 2007, facing reductions to farm subsidies spearheaded by Democrats, 3000 lobbyists flew to Washington and killed changes to the farm bill. The farm lobby has even helped write provisions that enable US farmers to trade with embargoed countries like Iran.

Don’t misunderstand me. Democrats also are crazy to oppose these sensible proposals and electing Democrats is only slightly more likely to make these reality. But they have other policy objectives that are both possible and sensible like immigration reform, expanded infrastructure spending and health care reform. In the GOP playbook, I see only stupid ideas (aggressive foreign policy, balanced budget amendments, etc.) or smart but impossible ideas like those above. A realist must confront the fact that America can expect more of 2003 from today’s GOP. What Republicans can do is start wars. It’s a thing they believe in and that their base can get behind. It plays well with their demographics and brings in campaign contributions from military contractors. As previously discussed, in Republicanland, the Law of Unintended Consequences doesn’t apply to foreign policy, so there’s very little downside.

Meet the new boss…



Tax those corporations?

The Left is excited about this idea. Corporate taxes used to generate a much larger share of taxes, but since the 1980s, corporations pay only about 10% of taxes. To the liberal mind, this is inexcusable. This is what liberals thinks corporations look like.

Greed is GoodFinding and taxing that guy is a notoriously hard problem. But, taxing corporations is not the way to do it. The reason is that people like Gordon Gekko do not own the majority of corporations. When you think of corporations, put this image in your mind instead.


Most of American corporations is owned by American retirees. Corporations and their profits are the thing that allows people to retire. American retirement plans were valued at $17.5 trillion last year. Some of this is in government bonds and other assets, but the entire value of the US stock market is only $20 trillion. The total wealth of the over 65 crowd in the US is about $33 trillion. Make no mistake, American retirees own this country. And that’s fine by me. They built it.

Now, picture your hard-working grandparents as I propose the following:

1. Don’t tax corporations

2. Tax dividends and capital gains exactly like income

3. Increase tax rates for high incomes

For your grandparents, this means they are taxed on the entirety of their corporate profits as if they were wages. If they get $40,000/year, they’ll pay very little in taxes. If they make $350,000, they’ll be taxed a lot. With a small bump to tax rates for high income, this could be a nicely progressive system.

Compare this with the current system. Today, Apple sells an iPad and makes a profit. The government takes 35%, then Apple disburses some to your grandparents and some to Gordon Gekko. On that dividend, Gekko pays a 15% individual income tax rate, but your Gran gets taxed as if her retirement disbursements were wages. For Gekko, that’s an overall tax rate of about 45% (1-0.65*0.85). But, if your grandparents make, for example, $100,000, they’ll end up paying a further 28% for a total tax rate of 53%. Terrible!

Of course, none of the above considers the reality of transfer pricing. In today’s world, Apple doesn’t pay nearly 35%. Instead, they transfer profits to an Ireland-based subsidiary and pay about 7% overall. Then the strategy is to wait patiently for Republicans to gain control of the Senate, when they’ll announce a “temporary” tax holiday for repatriated capital avoiding taxes altogether (but your Gran still pays her 28%). More about tax avoidance here. It’s time for a better system. Trying to tax the wealthy via corporate tax rates is like playing piano through boxing gloves. We don’t have the precision to tax the right people, and in the process, manage to create a whole lot of havoc in the markets.

So, the next time Bernie Sanders says (with indignation),

In 1952, 32% of all the revenue generated in this country came from large corporations. Today, just 9% of federal revenue comes from corporate America.

take a deep breath, compute how much of your own retirement is invested in “corporate America” and call your Gran.

Economics Taxation

This Week In Stupid: Electing Republicans shrinks the government

In 2003, I was a Republican and yet the idea of the Republicans controlling both houses of Congress and the Presidency made my blood run cold. At that time, George W. Bush had inherited a budget surplus. Liberals are fond of pointing this out claiming it as proof of the efficacy of Bill Clinton’s Presidency, but it was mostly due to the dot-com bubble revving up the economy. When the bubble burst in 2001, two things happened. First, expenses for things like unemployment payments rose suddenly. Second, tax revenue dropped as business started generating less revenue. But George W. had been elected on the promise of a tax cut to give Americans back the surplus. Would the Bush administration and the Republican Congress change course when facing budget deficits? In the midst of this debate, the Heritage Foundation published this gem of a rationalization for the deficit spending planned by Republicans. Their argument opposes completely the position of today’s conservatives: Deficit spending by governments has a very small effect on inflation.

Republicans bought this easy idea and spend they did. Not only did the GOP significantly cut taxes, but they began spending at an impressive pace by any standards. Bush pushed through the expansion of Medicare called Medicare Part D at an annual cost of $50 billion. They started two wars and dramatically increased spending for national security, creating the brand new Department of Homeland Security. That was all deficit spending.

The Gipper

Reagan is another fine example of a big spending Republican. Although Reagan is heralded as a champion of small government, the fact is that, during his tenure, the size of the federal budget expanded by more than a third, the number of government employees increased by the same amount and the deficit doubled. In the early 90s, the effects of a TRILLION DOLLAR deficit kept voters up nights. Further, even as the federal government expanded, less of that spending was transfers to states. Federal money for state education and health care programs was reduced. States increased their contribution to those programs, boosting spending even more.

What’s worse, Reagan, consistent critic of the stifling effects of government bureaucracy, actually (and dramatically) boosted government payrolls. In the Republican universe, this is the worst kind of government spending.

Now, I don’t fault Reagan. He followed exactly the path I (or Paul Krugman) would have in pulling the country out of a recession–borrow and spend. I, myself, would have spent less on big bombs and more on education, but I have the benefit of hindsight. Who knew the USSR would be kaput before his Vice President left office?

As an aside, many on the Right will lay the blame for this increase under Reagan at the feet of Democratic Congress at the time. I think that’s fine as long as they don’t simultaneously give Reagan credit for the recovery.

So, don’t buy it. Recent history demonstrates that Republicans are only critical of spending by Democrats. They know, just like you do, that spending during a recession is the right idea. They just wish they got to do it.

Economics Obama

Liberal Schizophrenia

Obama’s first 6 years have been characterized by government gridlock, budget deficits and, depending on your perspective, steady but slow economic recovery. Democrats, as the Party that still believes public policy should be tied to objective reality, need to get our collective head straight concerning what this experience tells us about deficit spending and economics. Most people, by now, are aware that there are Austrian, Keynesian and Monetarist schools of economic thought. In summary which is sure to keep me out of any institution that studies economics, Austrians favor almost no government intervention to smooth the business cycle, Keynesians advise running deficits during a recession and surpluses during a boom and monetarists (like Milton Friedman) focus on monetary policy, striving to preserve the supply of money in the economy by printing money during a recession (when the money supply naturally shrinks) and taking it out of circulation during a boom. For a much clearer summary, watch Tyler Cowen’s videos on the topic.

Now, from the Republicans I hear two assertions which are consistent with each other, although tenuously tethered to reality.

  1. Obama’s Presidency has been marked by runaway spending and debt and
  2. Recovery has been tepid

For Republicans, who don’t pay much attention to economics (“ivory tower eggheads”), this all makes lots of sense. Government spending hurts the economy by crowding out private investment (except for military spending, because how better to boost recovery than by blowing stuff up?). So, Obama’s tax-and-spend liberalism is responsible for our current “malaise.”

Liberals, on the other hand, try to challenge both points, contending that

  1. Obama is not a big spender and
  2. Recovery is robust

But, taken together, these are entirely inconsistent with our Keynesian perspective. To Keynesians like Greg Mankiw, Paul Krugman and ThisWeekInStupid, cutting spending during a recession is exactly the wrong idea. If Obama and his mixed Congress had been cutting spending, we would expect it to slow the recovery. So, to claim both of the above is playing right into Republican hands.

It’s also not reality. A clear-eyed assessment reveals that spending has been unprecedented. US national debt as a fraction of GDP reached levels not seen since World War II  reaching 122% of GDP in 2012. We at ThisWeekInStupid are not deficit hawks, but this is a lot of money by any accounting. Often I see liberals pointing out that big spending had begun by the time Barack Obama took office. After all, the debt-busting 2009 budget was signed by George W. Bush, based on his recommendations in February 2008 and, since fiscal 2009 begins in October 2008, almost one-third of the budget was spent before Barack Obama was inaugurated. Some even use this fact to claim that Obama has been reigning in the runaway spending of the Bush administration. This is cynical and transparently false. The 2009 budget should only be used to demonstrate that bipartisan economists agree that a boost in government spending, even deficit spending, was the right prescription in 2008.

Barack Obama could have recommended less spending in the years following. To his credit, he did not. Democrats should embrace the fiscal policies of Barack Obama, including his deliberate deficit spending, and continue to emphasize that a slow, steady recovery is exactly the kind that tends to last. Obama is a Keynesian big spender, which is exactly why we can expect better times ahead.

Class Taxation

Inversions and Rick Santorum

There’s been a recent rise in a tax-saving gimmick called “inversions.” An inversion is the purchase of a small international company by a large US-based company in order to transfer profits to another country with lower corporate taxes. After buying a smaller company based in a low-tax country, the large US-based company transfers patent ownership to, or borrows money from the smaller firm. Interest payments to the smaller company can be deducted from US-based income and interest received in a low-tax country is taxed at a lower rate. In the case of patents, the off-shore company can collect lucrative patent royalties while being taxed at a lower rate. The result of both is a lower overall tax rate for the company. It’s these kinds of strategies that allow large corporations like Boeing and GE to pay almost no taxes.

This is not a new phenomenon, but has stepped up in recent weeks with familiar companies like AbbVie and Walgreens contemplating such a move. So, the question is, why the sudden interest? Thisweekinstupid’s answer is that there’s a downside to hiding profits over seas. In order to pay those profits to share-holders as dividends, you have to bring that money back to the United States and in doing so, it will be taxed at US rates. This is why companies such as Apple and Google are accumulating large piles of cash in subsidiaries based in Ireland or the Cayman Islands. But what good does that cash do these companies? The answer is, not much. Periodically, you hear shareholders grumbling about these inaccessible profits, and calls for companies to “repatriate” the capital, pay the taxes, and give shareholders a dividend. So far, the companies have resisted. The critical question is why.

One possible answer is Republican electoral success. Companies are hoping that Republicans will, at some point, declare a tax discount or even a “holiday” for repatriated capital–that at some point in the future, Republicans will manage to shove through Congress, a law that (temporarily, probably) allows capital brought back to the US to be taxed at some lower rate. The last time this happened was in 2004. At that time, the argument was that this capital trapped in other countries could be used to revitalize the US economy. Yes, it not fair, we told ourselves, but if it’ll get American working again, we’ll do it. And so, we allowed foreign cash brought back to the United States to be taxed at just 5.75%, rather than the 35% corporate rate that the time.  The Congressional Research Service studied the effects of that policy and concluded that companies that repatriated capital did not hire more, did not devote more funds to research and development, but did give larger salaries and bonuses to CEOs and other high level executives. Even the conservative Heritage Foundation has dubbed that experiment a failure. And yet, in 2014, here’s Mitch McConnell calling for a “one-time” tax holiday to pay for highway repairs.

Now, ThisWeekInStupid is not stupid. We know that both parties are almost wholly-owned subsidiaries of corporations. But history seems to suggest that it’s most often Republicans who favor lower tax rates or tax holidays. Last election cycle, Rick Santorum mentioned this all around the country as part of his economic plan. There was a vast, untapped reservoir of money, he said, that could be channeled back into the US economy if we’d allow, just this once, another tax holiday. In recent years, the justification for an “extraordinary” measure like Santorum’s proposal has largely disappeared, but lower tax rates for corporations has been on the Republican agenda since Barry Goldwater and before.

It’s not accident that inversion mania coincides with improving Republican fortunes. The New York Times now gives the Republicans a 60% probability of controlling the Senate after the 2014 elections. With a 2016 Presidential election right around the corner, if you were a multinational corporation, now might be the time to start stockpiling your tax free profits in off-shore subsidiaries.

Now, perhaps paradoxically, ThisWeekInStupid is in favor of replacing our current system with very small corporate tax rates with dividends and capital gains taxed as ordinary income. This makes taxation of company profits more progressive since the dividends and capital gains of billionaires could be taxed at a higher rate than your granddad’s IRA or your family’s 10,000 nest egg. This would, of course, allow multinationals to avoid the taxes they would have paid under the current system unchanged. But, perhaps it’s best to reform the broken system in one swift stroke and let the capital flow to unhindered to where it’s most needed.

The key, in our opinion, is to avoid “extraordinary” measures. If it were made clear to companies and their stockholders that the same system will be in place for 30 years, you might see the boost in repatriation that McConnell and Santorum hope to create.