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An Alternative Vision, Part III: Specific Recommendations
Posted by: Bryan Pick on Saturday, December 27, 2008

This is the third in a series: see the introduction and the basics

So, through what specific means can we execute the broad policies in Part II?
 
The Big Shift: Consumption to Production
The first specific reform I have in mind would be something like Canada’s “Green Shift” (bear with me), which aimed to make a revenue-neutral trade of carbon taxes in place of income taxes. It’s not an altogether bad idea, although for the United States, we should do things a little differently.

Specifically, the GOP should propose to eliminate payroll taxes entirely and roll Social Security, Medicare and the other federal programs into the general budget, while making up the fiscal difference with a carbon tax combined with a broader-based set of consumption taxes (which would also hit waste/emissions).
  • We may not be able to eliminate the income tax this way, because when consumption taxes get too high, tax evasion ramps up quickly. But payroll taxes are just about the right size.
  • This would eliminate the accounting fiction that SocSec and Medicare exist separately from the rest of the budget; as many already know, Congress is spending the annual surplus on general budget items and leaving us with IOUs—promises of future taxation.
  • Best of all, Democrats don’t have solid ground to stand on to resist this change. They’ve courted the Green Lobby and owned this issue, and Democrats have long favored progressive taxation, but payroll taxes are all flat or regressive.
I know some on the Right will balk at this because they’re convinced that the Greens are out of their minds with this Climate Change business. But coalition politics is not about perfectly shared beliefs. It’s about aligned interests, and in this case, we can cooperate to pursue our respective goals.

At the same time we make that trade—and more controversially—the federal government could cut or eliminate the cherished mortgage interest deduction (among other housing subsidies), and perform a revenue-neutral reduction in business and investment taxes. Similarly, state and local governments should increase taxes on consumption (such as property taxes, parking costs, tourism-related taxes and the like) relative to taxes on production (such as income taxes), which are often beggar-thy-neighbor policies anyway.

I know: the mortgage interest deduction is politically popular, property taxes are unpopular, lots of people have lots of money locked into their homes, and this change would further undercut housing prices that are already falling.

But first of all, the other proposals compensate for this, by increasing returns to labor, savings and investment. Housing prices are undermined under current policies as people have trouble making payments and are forced into foreclosures, after all.

And second, it’s time to face the facts: Bush’s “Ownership Society” approach to housing policy has failed, not because ownership is bad but because favoring the purchase of one form of property over the means necessary to produce that property is doomed to fail.

Real estate is not the long-term key to a competitive economy, and since shelter is a staple of life, propping up its price isn’t doing us all, on balance, any favors. Creating real estate bubbles with favorable tax treatment only rewards incumbent homeowners (and house-flippers) at the expense of new home-buyers, and even that only lasts until the bubble inevitably pops.

These home prices are going to fall further; how far they fall depends on who pays to install the (price) floor. I don’t think that floor should be built by taxpayers, but by people who actually end up owning those homes.

Incidentally, a moderate cut in general capital gains taxes would help soften the blow to those who have overinvested in assets that they need to sell to make the transition. Cutting business and investment taxes would free up credit again in no time.

And when people take money out of their houses, at least this way they’ll have somewhere to put it. Whether they invest directly in a new business, or they invest in stocks (and the like), or they pay off consumer debt, or they put it in the bank, it all ends up performing essentially the same function: putting capital back to work. That’s how R&D gets done; that’s how jobs are created and sustained; that’s how new industries and products are created.

Bubbles in these types of investment happen too, of course, but over the long term, it’s still much better to reward production than consumption.

A Balancing Adjustment
Some voters may worry that consumption taxes will be regressive (though payroll taxes as a whole are regressive too), since the poor consume a greater proportion of their income than the wealthy. Now, consumption taxes can be structured to not be regressive, but is there some way we can make fewer trade-offs in a consumption tax shift?

As it happens, there’s one set of execrable policies that we can target to partially remedy this problem, and at the same time accomplish some political goals to be discussed in Part IV.

I’m talking about our agricultural policy. The government pays some people (generally wealthy individuals and corporations) to farm, it pays other people not to farm, it destroys surpluses of some goods to keep the price up, and it uses a variety of means keep cheaper foreign products out. And yet, as consumers we all want food and clothing (and fuel) to be cheap. Do the math: our policies are contradictory and occasionally quixotic.

One thing we can do right away to bring the deficit down by tens of billions of dollars and lower the cost of staple consumer goods like food, clothing and (for those who use ethanol) fuel is to unilaterally end all agricultural subsidies and other protectionist measures (quotas, tariffs, etc.).

New Zealand proved that agriculture can not only survive, but do quite well for itself without subsidies. As for the idea that we depend strategically on producing all our own food, we may ask:
  1. How bad would a war (or trade war) have to be to cut us off from all the people who trade food with us? Is somebody going to cut us off from Canada, Latin America, Europe, Australia and New Zealand? All at once?
  2. If the war gets that bad, how are we going to import the petrochemicals we use to grow so much of our food now?
  3. Are you aware we’re already a net food importer? We became an importer during the second Bush administration, and most Americans felt no difference at all.

If European governments want to heavily subsidize their food before exporting it to the USA, then we should accept the cheap food and eat their tax money. Call it a return on our subsidizing their defense for all these decades.
And why should we not accept cheap foreign cotton that could save us so much on clothing, rather than spend billions of tax dollars inefficiently growing it here?

The perverse incentives of taxpayer-funded agricultural subsidies have our farmers growing in places that don’t make sense (in the desert, where it exacerbates water scarcity problems), causing unnecessary environmental damage (subsidies promote the use of land and pesticides), making things we could get cheaper elsewhere (like growing corn for ethanol when we could import the ethanol from Brazil).

And on top of that, these policies contribute to food riots in neighboring countries and put farmers in the Third World (where farming may be the only thing they’re qualified for) out of work. Overturning these policies would be humanitarian.

Add it up, and the GOP could be promoting policies that lower the cost-per-labor-hour of shelter, food, water, clothing and fuel—all the staples of life—while helping get people back to work with higher salaries.

Three Policies for Reaching Out
My final suggestions are old libertarian hobby-horses, but I’m going to briefly argue for them anyway, starting with the most electorally viable. I include them because they are means of peeling back government intervention, and they positively impact groups that have been shy of Republicans.
  1. School vouchers and related education reform should be central to the party platform.
  2. Republicans should focus on border security, not restricting immigration.
  3. Marijuana prohibition is costing us, as a country and perhaps as a party.

School Choice
First, the GOP should immediately play full-court press on school choice.
  • In every school district, there should be no reason to oppose vouchers at least equal to the variable cost of an extra public school student. The Left claims to believe in smaller class sizes, and they have demonstrated in federal, state and local elections that they are willing to pay extra money to achieve that goal; we should calculate that value in each district and accordingly increase the value of the voucher. You can see how this creates a Catch-22 for defenders of public education.
  • Additionally, to combat the argument that private and charter schools simply skim the best students out of public schools, Republicans should advocate pilot programs targeting children in the bottom half of the test score and grade distribution*, children with histories of disciplinary problems, and other special needs children. While we’re at it, why not target kids who have already dropped out of school?
  • The GOP should be especially aggressive with pilot programs in urban areas and especially in districts where minorities* and the poor are worst served by the current public school system.
  • Where opponents of school choice argue successfully against vouchers for church-founded schools (like Catholic schools), Republicans should press for pilot vouchers only redeemable at secular schools. Something is better than nothing—and if the pilot program brings enough parents around, who’s to say they won’t vote to expand vouchers later?
  • To help sell pilot programs, Republicans should push for needs-based vouchers or needs-based bonuses to voucher value.
  • To add another degree of flexibility, Republicans could advocate extending subsidized student loans to students of private schools below the college level.
* The evidence I’ve seen from existing school choice experiments shows that black students and students in the bottom half of the test score distribution gain the most from vouchers.

Once the success of charter schools and vouchers has been established by widespread, ongoing experiments along these lines, there will be greater potential for spreading them elsewhere. Once it is established, it will be exceedingly difficult to overturn: even in Sweden, the voucherized school system remains too popular to kill. And until we have very widespread experiments, there will be few market forces operating on the system, so the more gains we make, the better it will work.

This would be nothing less than a direct wedge into the heart of the Democrat Party’s base, and an assault on their premise that they care more about disadvantaged children. We should own the kitchen-table issue of education, and be moving the ball in our direction.

And again, this would help to soften the impact of higher consumption taxes on the poor.

Immigration
Benjamin Franklin used to warn those who aspired to immigrate to America that they weren't going to be handed prosperity on a platter when they arrived:
With regard to encouragements for strangers from government, they are really only what are derived from good laws and liberty. Strangers are welcome, because there is room enough for them all, and therefore the old inhabitants are not jealous of them; the laws protect them sufficiently, so that they have no need of the patronage of great men; and every one will enjoy securely the profits of his industry. But, if he does not bring a fortune with him, he must work and be industrious to live. One or two years’ residence gives him all the rights of a citizen […]. In short, America is the land of labor, and by no means [a land] where the streets are said to be paved with half-peck loaves, the houses tiled with pancakes, and where the fowls fly about ready roasted, crying, Come eat me!
Over 200 years later, Ronald Reagan said in his farewell address,
I've spoken of the shining city [on a hill] all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace, a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it and see it still.
I see nothing in the words of either man that the Republican Party cannot claim as its vision tomorrow. With welfare reform accomplished, and with taxation landing a great deal more on consumption, we can say to any immigrant: “If you’re here to work, and you can observe a basic civic peace, welcome home.”

That is, we should screen people for obvious security threats, but otherwise expedite the process of getting people (and their assets) into this country.

Will the extra labor competition initially dull the positive income effects of lowering taxes on labor? Yes, I imagine so, although it will also allow America to attract people with skills, capital and the willingness to work. Moreover, it’s a fundamentally American, optimistic, welcoming policy.

Ending Prohibition
Lastly, alcohol prohibition ended not because people in government recognized it was a destructive and fruitless policy (that happened long before the policy was overturned), but because they needed the tax revenue. Never has this argument for ending marijuana prohibition been as compelling as it is now, with a trillion-dollar deficit headed our way.

We can immediately cut costs and increase revenues with a very simple change in federal policy, and if it costs the GOP the votes of some concerned people, it will also end a policy that has been needlessly destructive, especially to urbanites and minorities, targeting a drug that most of the young have tried anyway.

More Democrat voters than Republican voters favor relaxing drug laws; Republicans should swallow hard and ask themselves if marijuana prohibition is so important that they would rather endure a higher deficit and all the other negative effects of prohibition than reach out to Democrats and Libertarians, some of whom are admittedly hippies.

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What would be the political implications of these policies? That’s the subject of Part IV.
 
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Similarly, state and local governments should increase taxes on consumption (such as property taxes, parking costs, tourism-related taxes and the like) relative to taxes on production (such as income taxes), which are often beggar-thy-neighbor policies anyway.

You may need to refine that some, to account for those states (like Florida) which don’t have income taxes and therefore rely on consumption taxes for all their revenue.

Incidentally, a moderate cut in general capital gains taxes would help soften the blow to those who have overinvested in assets that they need to sell to make the transition.

Only if those assets have a market value above the price paid for those assets. Otherwise, cutting them is a disincentive, because it reduces the benefits from claiming capital losses—and given the stock market and real estate markets at the moment, that "otherwise" probably applies a lot more than it usually does.

Finally, re property taxes—remember that everyone pays them—home owners directly, and renters indirectly (since the tax is one of the expenses landlords must figure in when setting rents)—and that they are 1) often fairly high because local governments often rely on them as their main revenue source and 2)in reaction to 1) many states have built in restrictions on how high property taxes can go (again, Florida is a good example of this).
 
Written By: kishnevi
URL: http://kishnevi.wordpress.com
Similarly, state and local governments should increase taxes on consumption (such as property taxes, parking costs, tourism-related taxes and the like) relative to taxes on production (such as income taxes), which are often beggar-thy-neighbor policies anyway.

You may need to refine that some, to account for those states (like Florida) which don’t have income taxes and therefore rely on consumption taxes for all their revenue.
If they’ve already made the transition, so much the better for them. No need for refinement.
Incidentally, a moderate cut in general capital gains taxes would help soften the blow to those who have overinvested in assets that they need to sell to make the transition.

Only if those assets have a market value above the price paid for those assets. Otherwise, cutting them is a disincentive, because it reduces the benefits from claiming capital losses—and given the stock market and real estate markets at the moment, that "otherwise" probably applies a lot more than it usually does.
Good point. I’m not familiar with how the capital gains tax rate influences claims of capital losses, so I’d appreciate more info on that.
Finally, re property taxes—remember that everyone pays them—home owners directly, and renters indirectly (since the tax is one of the expenses landlords must figure in when setting rents)—and that they are 1) often fairly high because local governments often rely on them as their main revenue source and 2)in reaction to 1) many states have built in restrictions on how high property taxes can go (again, Florida is a good example of this).
Again, good point—but it’s the mortgage interest deduction and other targeted tax breaks and subsidies that are the mechanism operating against mobility.

I favor property taxes over taxes on more purely productive activities because they’re less distortionary.

In both cases, I think we should try to discourage quite so much investment in real estate. Some of the reasons for each policy shift overlap, and some don’t.
 
Written By: Bryan Pick
URL: http://www.QandO.net
re—capital losses
They are treated almost literally as negative capital gains. So if the capital gains tax is cut by x percent, the tax shelter effect is diminished by x percent.

This can be particularly noticeable when dealing with mutual funds or any other assets on which one has already paid capital gains tax when they were appreciating on paper. Just to give a real life example (and this is why it’s an issue I’m a little more sensitive on)—I had a mutual fund for several years, and had to pay capital gains tax at the rates applicable during the Clinton years on the on-paper capital gains taxes, but kept the money in the fund (it was a one time investment, not one in which I kept buying new shares). Then, as the market started to slide in 2001, I sold out, just in time avoid a loss on the principal. (I invested $10,000; the check I got back when I cashed out was $10,086, or something very close to that.) On paper, I had capital losses which mostly canceled out the on paper gains from the prior years. However, that was the year that Bush’s tax cuts went into effect. Had Clinton’s tax rates stayed in effect, I would have been able to recapture everything I had paid in previous years as capital gains tax. Thanks to the Bush tax cuts, I only recaptured part of those taxes; as I recall, I lost about $100; that $100 was the difference betwen the old and new tax rates. I’ve probably made up the $100 dollars in the years since because of lower tax rates in general, but it sticks in my mind since it came all at once in one distinctive amount.
 
Written By: kishnevi
URL: http://kishnevi.wordpress.com
The idea that property taxes should be raised means NO ONE will ever be able to own their property. There will always be a continuing cost. There would be no respite for those weary of paying more for less.

I disagree that this (owning property) is a Consumptive issue. It is a basic necessity. And at some point it should be allowed to be free andclear of anyone’s greedy paws.

I’m still looking for the overriding drive by government to eliminate spending in all areas. Quit trying to rationalize a way to pay for this and that instead of just limiting how much is spent.

 
Written By: Mark Cancemi
URL: http://
Mark -
The idea that property taxes should be raised means NO ONE will ever be able to own their property. There will always be a continuing cost. There would be no respite for those weary of paying more for less.
Property taxes already exist; I’m not inventing them. And I’m not just proposing to raise property taxes — I’m also proposing to cut taxes on a host of other things (labor, savings/investment, business income). So there’s some respite to be had.
I disagree that this (owning property) is a Consumptive issue. It is a basic necessity.
Basic necessities tend to involve consumption.
And at some point it should be allowed to be free andclear of anyone’s greedy paws.
That’s a great moral argument. If you can make it electorally successful, more power to you.
I’m still looking for the overriding drive by government to eliminate spending in all areas.
I can’t wait for Hell to freeze over.
Quit trying to rationalize a way to pay for this and that instead of just limiting how much is spent.
First of all, I did propose a spending cut on the order of tens of billions of dollars.
Second, whether or not you agree with how the money is being spent, you should be interested in how it’s collected. That has an effect on your life, and on the lives of those you care about.
 
Written By: Bryan Pick
URL: http://www.QandO.net
kishnevi - A correction on what I said earlier.
Finally, re property taxes—remember that everyone pays them—home owners directly, and renters indirectly (since the tax is one of the expenses landlords must figure in when setting rents)—and that they are 1) often fairly high because local governments often rely on them as their main revenue source and 2)in reaction to 1) many states have built in restrictions on how high property taxes can go (again, Florida is a good example of this).
Again, good point—but it’s the mortgage interest deduction and other targeted tax breaks and subsidies that are the mechanism operating against mobility.
I don’t know what I was thinking when I wrote that... the deduction and other targeted tax breaks would also tend to be passed on in a price-competitive market. You’re right.
 
Written By: Bryan Pick
URL: http://www.QandO.net

 
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