Bryan Pick
Against Obama’s Global Tax Hike
I’m not keen on many taxes to begin with, but as a practical matter, some are more destructive than others. Some are so bad that they’re a train wreck even by their proponents’ stated standards.
President Obama has proposed a package of tax hikes on the overseas operations of American firms. The supposed benefits sound like political winners: over the next decade the feds get $210 billion to shovel into the yawning budget hole, and at the same time discourage those companies from outsourcing jobs. Congressmen who promise more jobs but are wary of mounting deficits might think they’re hitting two birds with one stone.
But there are more appetizing birds than the goose that laid the golden egg.
See, there are just a few things that offer relief from the fact that the US is one of the few countries to tax its companies’ operations all over the globe. One is “deferral” – companies don’t pay taxes on most earnings until the money is returned to the US parent company, so they can delay getting slapped with the double tax by reinvesting their foreign earnings in foreign operations.
Another big relief is being able to claim credits on the taxes they pay to foreign governments.
Obama is proposing, among other things, to place new limits on deferral and clamp down on tax credits. These changes won’t work as advertised: they won’t reduce outsourcing (they may increase it) and won’t raise nearly as much revenue as originally claimed.
First, most American companies that expand overseas do it to get around trade barriers and get close to their customers. When a new KFC opens up in China, that’s not an outsourced American job; that’s an American business getting to expand into a growing market. The vast majority of sales made by foreign affiliates – think 90 to 94 percent – were to foreigners, not exports back to the US.
Second, the roughly 2,200 US-based corporations with overseas operations either employ or support the employment of 22 million Americans, and those companies create half of all American exports. Jobs here rely on providing direction to foreign workers (managers, engineers) and producing goods for affiliates to sell in foreign markets.
The growth of US foreign affiliates is “consistently accompanied” (PDF) by the growth of their parent companies, the opposite of what you would expect from a zero-sum perspective on “outsourcing”. More expansion abroad means more jobs, compensation and investment at home.
So making American firms uncompetitive abroad not only threatens jobs at home but even encourages businesses to headquarter themselves outside the US.
And as a result of that, the policy changes won’t raise nearly as much revenue as Obama claimed.
- The global downturn has been worse than Obama suspected back when that $210 billion figure was calculated.
- We’ve tried cutting back deferral before: in 1986, the government repealed deferral for the shipping industry, and consequently we lost half of our shipping capacity, taking a bunch of jobs and tax revenues with it.
- Even still, never underestimate the creativity and industriousness of tax lawyers.
That last part might not be such a problem if Obama’s proposals simplified the tax code, like he claims. But they make things worse on that score, not better.
As a note to my fellow Virginians: these companies with overseas operations are responsible for over half of the private sector jobs in the commonwealth (PDF source), and they tend to be the better-paying jobs (averaging over $70k compensation) like computer systems design and telecommunications. Is that going to sit well with the likes of Sen. Warner?
Bills that hurt this many people are loaded with political liabilities, yet I got word a few days ago that a bill with Obama’s proposals may come up for consideration in the House in September.
Get the word out. The more people know what this is going to cost them, the harder it will be to sell. By all rights, Obama’s Globo-Hike should fail politically before it has a chance to fail as policy.
The Green Shift, again
QandO founder Jon Henke posted at The Next Right yesterday with a suggestion for Republicans that I didn’t think would be very controversial: that they should propose swapping out the payroll tax in favor of a carbon tax. I’ve established that I’m all for that idea. Though I would go farther, it’s a good idea on its own, especially when unemployment is high and hours worked are very low.
Go over there and read his reasoning (please don’t comment unless you’ve read it). It makes a lot of sense, whether you believe in anthropogenic climate change or not. Well, unless you do believe in it, and think it’s such a good thing that it overwhelms the benefits of switching from a relatively destructive tax to a better one.
How many times do we have to tell you…
… that was then, this is now!
President Obama, to The New York Times, March 6, 2009, on how he’s not a socialist:
[I]t wasn’t on my watch that we passed a massive new entitlement… without a source of funding.
No sir. That wouldn’t be “entirely consistent with free-market principles.”
So I’m sure Pres. Obama will come up with something better than (a.) letting the Bush tax cuts expire and (b.) ending the Iraq War as a means of funding his massive new entitlement. Because those things won’t even handle the existing structural deficit, much less a new program.
Embracing Paygo
Republicans and some allies are criticizing President Obama’s proposal for “pay as you go” rules that only cover new and expanded entitlement spending. They rightly point out that legislators can get around these new rules with budgetary tricks like relabeling spending so that “PAYGO” rules don’t apply.
But some on the Right have also warned that paygo will just lead Democrats to pass higher taxes. I’m not convinced that that’s a bad thing.
Don’t get me wrong: I don’t like taxes. But deficit spending is taxation — deferred taxation, with interest. If the government is going to spend a bunch of our wealth on things other than emergencies, enlightened fiscal conservatives should want the American people to see the price tag, the sooner the better.
Otherwise we’re going to continue this business of borrowing from our children to pay for our reckless spending today – that’s what a lot of those tea partiers were protesting against, wasn’t it?
So fiscal conservatives should propose even more comprehensive and stringent paygo legislation than the Democrats have. Force the Democrats to put it all on the table – lock in tax hikes or spending cuts, now.
We’re going to have to do pay the piper at some point, so how does it help to wait until a real fiscal emergency is upon us?
The longer we wait to pay for it through direct taxation, the more time we give the spenders to come up with clever ways to conceal the cost – whether through inflation, or carefully targeted taxes designed to create as little political backlash as possible. Paygo creates forced errors.
If the Democrats decide to cover the gap with tax increases, that’s an issue for 2010 and beyond. Every new big spending plan, like the Obama health care plan, comes with a surefire tax increase in the near future. And as Californians recently showed the country, even Lefty voters don’t like the prospect of actually paying for all those neat programs for which they voted.
Sure, it’s self-serving for Republicans who engaged in no small amount of deficit spending themselves to suddenly find religion on the need for a balanced budget.
But there are good reasons to suspect that this level of deficit spending (and the necessary money-printing that has followed) is going to hit us in all kinds of unpleasant ways. If we don’t commit now to eventually paying off these debts, the problems will get even worse.
So let’s do something about it – or turn the heat up on the Democrats until they do something about it. Let’s give them all the paygo and fiscal discipline they can handle, and then some.
The Threshold for Political Violence
Here’s a question for readers of all political stripes:
How big would a moral outrage have to be before you turned to violence?
Imagine that you live in a place in which what you perceive as a grave moral injustice–specifically violence against innocents–is enshrined in law. You may perceive your opponents as anywhere from mean-spirited to perfectly well-meaning, but either way they are determined to continue, and your prospects for overturning this outrage through the normal legal process any time soon are scarce or nil. In the meantime, you believe something horrific is happening on a massive scale.
For our purposes, try to think of different governments — direct democracy, representative democracy, oligarchy, monarchy, whatever.
At what point do you decide to act against law, by an alternative code? And specifically, I mean turning to violence: threats, destruction of property, assault, assassination, even terrorism* and revolution.
What prevents you from acting violently up to that point?
- The high personal cost?
- The low probability of success?
- The fear that things will turn out worse than simply allowing the grave injustice to continue?
- Simple aversion to personally engaging in violence, despite your belief that the status quo is violence under color of law?
I’m trying to get at what flips a switch in someone to get them to turn to political violence. Can you imagine a situation in which you would turn to such violence?
I suppose this turned into more of a thought experiment than a question. But your input is welcome.
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* I prefer Philip Bobbitt’s definition of terrorism in Terror and Consent as “the pursuit of political goals through the use of violence against noncombatants in order to dissuade them from doing what they have a lawful right to do,” so remember, you oppose these noncombatants for supporting laws.
Right Policies: Opting Out
Yesterday Jon Henke challenged the Right to come up with policies that are popular, viable, workable, transformational and sustainable. (Follow the link to see what he means by each of those.) I’ve previously suggested a broad-based agenda that I thought could be sold as an alternative to the Democrats’ agenda, but I think a few of the specific policies are particularly strong, and they stick to a consistent theme.
Libertarian paternalism — which means that certain initial decisions are made for you, but you are left a way to opt out — can be a good or a bad thing, depending on the status quo. If the status quo is freedom, I’d just as soon not add in an element of paternalism in virtually any case. But if the status quo is paternalism, then libertarian paternalism is a step in the right direction. Fortunately, giving people more options is much more popular than changing their status quo decision.
I propose that the Right should target existing paternalism and offer as many opportunities to opt out as we can devise. My main two examples are education and entitlements.
Education
I consider education to be any political coalition’s #1 long-term priority. If your opponents control education, chances are you will eventually lose on everything else. So, what policies should the Right pursue on education?
Vouchers aren’t a new idea, but we on the Right could be pursuing them in much more creative ways than we are now, to build a broad working alternative to state schools. With variable-cost vouchers and pilot programs that target the “victim classes”, the Right can play full court press on vouchers in every school district.
Variable-Cost Vouchers
In every school district across the country, we should have vouchers at least equal to the variable cost of sending one extra child to public school. Democrats have argued for a long time that we need more spending per student to give kids smaller class sizes and better materials such as textbooks, and have used that to justify countless bond measures and tax increases to increase public school funding.
If a voucher just covers the variable cost of an extra student, then a voucher helps create smaller class sizes and increases the amount of money the public school can spend on each student.
You can see how a voucher for variable costs puts the Left in a Catch-22: Every extra dollar they want to spend per student is an argument for a bigger voucher, and an opportunity for the private sector to spend the dollar more efficiently than the public sector.
Make Friends in Low Places
We can do even better: pilot voucher programs should very openly target kids who are performing worst in the current system, in part because proposing vouchers for them undercuts the argument that vouchers just skim the cream of the crop.
Voucher proponents have already focused on several low-income and minority populations, using needs-based criteria and simple geography; the Right should be pushing this smart strategy much more aggressively – it undercuts Democrats’ arguments against vouchers beautifully, and makes a direct play for the Left’s base. The apparent success of the DC voucher system has made attempts to cut the program very embarrassing for Democrats; we need more of that.
Moreover, the Right should propose vouchers that help children who score on the bottom half of the test-score distribution. The research I’ve read indicates that these children show the greatest gains from voucher programs. For the same reason, target kids with histories of disciplinary problems and special-needs children (paging Sarah Palin).
It would be a bridge too far for the Democrats to argue that these kids enhance the performance of public schools after using the opposite argument to fight vouchers for so long.
And finally, the Right should propose voucher programs to target the many minors who have already dropped out of school. Kids who have outright given up on the public school system, or who rarely show up, aren’t doing anything to improve the performance of those schools. If Democrats want to keep up the pretense that they care about these kids, they shouldn’t have any problem with helping these kids become part of a new private education market.
Those are just a small number of ways we can turn the Left’s most popular arguments against them and start to build a real market in education. In the meantime, the Right would be demonstrating that markets can work better than state-administered programs, and help the “little guy” who’s been screwed by the public system.
Where necessary to make the policy viable, the Right could be flexible on the matter of vouchers for church-founded schools (like Catholic schools); the first priority is building a broad education market outside of the state.
Entitlements
Here’s another place where reform would be truly transformational. The Right should push for an opt-out for the major entitlements – Medicare and Social Security. A reform doesn’t have to be a full privatization to accomplish a great deal of good.
Many people are currently collecting benefits from Medicare and SocSec, and we can assume that they will turn out to vote against anything that takes away those benefits. The Right can start making progress on reducing our crushing long-term obligations by (once more for effect) giving everyone as many opportunities to opt out as possible.
Social Security
Why not allow people to adjust their expected benefits, with higher or lower individual taxes to compensate for the change from the “standard” level? The SSA could set a minimum level of contributions to guarantee its promised benefits, so that the legislation becomes non-threatening to beneficiaries, and thus politically viable. To get the greatest tax cut, you opt out of all retirement benefits; you can change your mind later, but your benefit and/or tax level must be adjusted appropriately. And the more people who opt out, the lower the minimum tax rate can go; that rate could be adjusted at periodic intervals, perhaps once a year.
Similarly, why not allow people to adjust their expected retirement age, again paying higher or lower taxes to compensate?
Both of these adjustments would introduce flexibility along with a price mechanism.
Yes, this means that some people might choose to pay the minimum tax and find themselves at age 67 regretting their earlier decisions, but everyone would know that they made a conscious choice to change from the status quo. And in the meantime, those who opt out don’t feel like such direct stakeholders.
Medicare and other state medical benefits
To get more people off the rolls, allow them to opt out of Medicare eligibility and other state medical benefits in exchange for some mix of:
-
- lower payroll taxes
- tax-free health savings accounts
- a tax cut on their individual health insurance
- vouchers for private insurance and private disability coverage
… as long as the total cost of the mix is lower than the expected cost of Medicare benefits. This way, the Right can not only cut into the massive expected costs on the near horizon, but also get fewer people to feel like stakeholders in the future of the state-administered system.
Conclusion
The most effective arguments against reform are allegations that people will lose the benefits they have now. Psychologically, we regret losing a dollar more than we regret not acquiring that dollar in the first place. That’s a big part of how the Right beat universal health care under Clinton: by telling the American people that they would lose their current insurance, with which most of them were satisfied.
Whether we like it or not, it is stupid to do a frontal assault on a hardened position. Instead, we should apply libertarian paternalism to divide and conquer by giving our opponents as many chances to defect as possible.
Easy come, easy go
Today, Rep. Mike Pence and Rep. Cathy McMorris Rodgers, the Chair and Vice Chair of the House Republican Conference, led a blogger conference call. The representatives stayed on point throughout the call:
- On the economy generally and on the Democrats’ budget proposal specifically, they repeatedly said the Democrats are spending, borrowing and taxing too much.
- They hammered on the Democrats’ proposal as bad for families and small businesses, including family farms. They emphasized the role of small businesses in job creation.
- They said they believed in free markets, fiscal restraint and tax relief as the keys to growth.
- To that effect, they said Senate and House Republicans would be cooperating closely to promote those messages over the next several weeks and then unveil an alternative budget proposal of their own, which they promise will be a bold, clear contrast with that of the Democrats.
I expected something along these lines, and I don’t object to the sentiment or disagree with their diagnosis of the Democrats’ budget. They’ve identified what’s wrong with the Democrats’ plan, they’ve developed a strategy for responding with their own alternative, and they want to get everyone on record as either supporting the Democrats’ messy bill or the ideal Republican vision.
The first question went to Quin Hillyer over at AmSpec, who asked how unified we can expect the GOP response to be if a Republican leader like Lamar Alexander broke to vote for the omnibus spending bill. Pence acknowledged that he and Sen. Alexander had a difference of opinion on that one, but hastened to add that Sen. Alexander had voted for all the limiting amendments and had voted against the stimulus, etc.
For my part, I asked the representatives why, in light of Republicans’ so-far unsuccessful attempts to bring “clean” Republican versions of bills to the floor for debate, their alternative budget would be different.
Rep. Pence answered that Republicans would be given the opportunity on this one. The Republican House leadership is working closely with the budget committee, and specifically with Rep. Paul Ryan, the ranking Republican on that committee. There are some limitations on how quickly they can move their alternative and get a CBO estimate done on it, but they’re going to use the interim to expose problems with the Democrats’ budget before unveiling their alternative.
Rep. Morris Rodgers said that it was important that it goes to the House floor for debate, and that they wanted the difference in approach to be clear to the American people, too.
As I said earlier, this is about what I expected – when your party is some 70 seats down in the House and retains only the most meager leverage in the Senate, having lost all credibility, you need to remind people that you at least remember what a conservative is supposed to want.
I just hope that’s not all they have in their playbook. It’s much easier to present a principled image when you’re out of power and have no sway over whether a given bill will pass.
Assurances that the GOP will remain so principled when they regain a measure of power won’t carry a lot of weight without some kind of binding commitments – changing the structure and practices of the party rather than the short-term tactics. After all, misbehavior that receded smoothly when the majority last changed hands can come back just as readily. Easy come, easy go.
* Cross-posted from The Next Right
The American W-4 Party
Brad Warbiany at The Liberty Papers took note of my post about the “tea parties” and “going Galt”, specifically this passage:
I’d be more impressed if they fired a shot across the bow and coordinated a national day for cranking up their withholding allowances, just as high as they can. They’re planning their next party on Tax Day, right? One might think they’d be interested in ceasing to lend their earnings interest-free to the government. They might take some satisfaction in doing something that actually shows up on the government’s ledger.
Not knowing any accountants or tax professionals, I didn’t know just how far you could take that. But Brad decided it was worthwhile to find out. He did the legwork, consulted a tax preparer, and wrote up simple instructions for pushing it as far as you can without having to worry about incurring fees or other penalties.
And he has some suggestions for Tax Day:
So here’s my suggestion. April 15th, go to your HR department and change your W-4 claimed exemptions. Go with the maximum exemptions that you calculate will keep you from over-withholding, but small enough to avoid penalties. Budget (save or invest) the difference, so that you can pay the necessary tax next April, and don’t dare postmark the check to them before April 14, 2010.
It’s not a big difference. But if enough people do this, it will be big enough to be noticed. The federal government is expecting to spend your money as soon as it comes in; they’re not expecting to wait until next April to get your money. In fact, if they have to wait, they’re likely to get angry. That’s more money they have to borrow today. That’s more of a functional deficit on their books. In short, if you want to get noticed, a far more effective way than getting some friends together for a group protest is to hit them where it hurts: the balance sheet.
Fellow Americans, it’s time to stop being doormats. If you really want to show the government that you’re angry, it’s far better to show them than to tell them.
Tell your family, tell your friends, tell your blog readers, tell your coworkers. April 15th is the American W-4 Party.
For the full instructions, read the whole thing.
I like it. I especially like it because of the clarity of the message. If you email this around to all your relatives and peers, or post it on your blog for your readers, you’re not asking them to embrace the prisons or fire anyone that they employ. They don’t even have to take the day off of work, which should be a relief to anyone who needs the work to support themselves and their families.
For the price of filling out a W-4 form and turning it in on a Wednesday, they can keep more of their money out of the government’s hands for the next year. They can invest or save it, saying effectively, “I trust that I can handle my money better than the government would.”
It’s not a revolt. It’s just telling the government in terms they understand that we’re paying attention and we don’t want to lend them our wealth if they’re going to treat it like they have been lately. It’s a reminder of where their power comes from. And the more people who participate, the clearer the message.
36 days ’til April 15. In the age of social networking, I wonder how many people could get involved in this?
Dear Obama: Really?
The NYT’s White House reporters got an exclusive interview with Pres. Obama, and one of the pressing questions on their minds was what his ideology is. They asked if, given his spending priorities, he is a socialist, to which he said no, and when they asked if he was a “liberal” or a “progressive” or any other one-word answer, he declined to comment. I can understand him saying that.
But then, after the interview, the president called the reporters back, like he’d thought up a really good zinger after the fact:
It was hard for me to believe you were entirely serious about that socialist question. I did think it might be useful to point out that it wasn’t under me that we started buying a whole bunch of shares of banks. It wasn’t on my watch. And it wasn’t on my watch that we passed a massive new entitlement – the prescription drug plan – without a source of funding. And so I think it’s important just to note when you start hearing folks thro[w] these words around that we’ve actually been operating in a way that is entirely consistent with free-market principles and that some of the same folks who are throwing the word ‘socialist’ around can’t say the same.
Q. So who[se] watch are we talking about here?
A. [*Chuckle*] Well, I just think it’s clear by the time we got here, there already had been an enormous infusion of taxpayer money into the financial system. And the thing I constantly try to emphasize to people is that if, coming in, the market was doing fine, nobody would be happier than me to stay out of it. I have more than enough to do without having to worry the financial system. And the fact that we’ve had to take these extraordinary measures and intervene is not an indication of my ideological preferences, but an indication of the degree to which lax regulation and extravagant risk-taking has precipitated a crisis.
This is bittersweet, because on the one hand, he clears up any misconception that Bush was effectively conservative (or as John Kerry claimed, extreme libertarian). He says, to his credit, that buying up shares of banks and passing a massive new entitlement (or at least one financed by borrowing) are inconsistent with free-market principles.
I like how Obama says that the financial bailout wasn’t on his watch, when he voted for it as a Senator. But he’s right about Bush. With Obama’s help, a Republican president did dump mountains of wealth into the thermal boreholes of the most heavily regulated sector of the economy–that’s the financial sector, dear reader, although health care is way up there. And afterward, Bush was frank enough to admit that he had “abandoned free-market principles,” although he had the monumental cheek to say he had done so “to save the free-market system.”
But on the other hand, Obama claims that his team’s been operating in a way that is “entirely consistent with free-market principles“! I feel like launching into one of those “Really!?!” segments from SNL, only less funny and more desperate.
Really, Mr. President? And you’re not shoveling piles of taxpayer money into the financial system? You’re not planning any massive expansions of entitlement spending? Really? And you’re going to come up with a source of funding for all of this? Without taxing anyone but the top two five percent? Really.
Really, Mr. President, all you’ve talked about since this crisis started is how everyone in the private sector needs a regulatory cavity search deep enough to do a ventriloquist act. As if what we really need is more Sarbanes-Oxley, SEC and FASB rule changes – because it was our lax regulation that all those businesses ran overseas to escape.
And if I’m putting together a line-up of who caused the “extravagant risk-taking” like the massive overborrowing that inflated the residential real estate bubble, shouldn’t my first suspects be Fannie & Freddie, the Fed and government subsidies?
Your response to this crisis is to borrow more money to subsidize energy, public transportation, public education and state-mandated health care, and really, isn’t that what the free market is all about? Thanks for the assurances that you’re not in favor of bigger government.
Your budget, the stimulus, that second stimulus you hinted at, and rescuing all those giant institutions, some of them for the second and third time: these are all entirely consistent with free-market principles? I mean, really.
Someone help me out. Exactly which free-market principles has the president adhered to, either in his campaign promises or in his actions in office? Tell me why Obama is not mistaken or lying.
On the “tea parties” and “going Galt”
I don’t want to get off on a rant here, but…*
I don’t mind people protesting against massive government expansion and taxation. But do they have to call their protests “tea parties”?
Mailing bags of tea to Congress costs very little and risks nothing. It’s just one step up from sending a strongly worded email, which is only one step up from an online form letter or petition.
Do they know what the Boston Tea Party was about? And if so, what are they implying when they send tea to Congress? We have representation to go with our taxation, more direct representation than the American Revolution established. If the “tea party” protests of 2009 aren’t really related to the original Tea Party, why draw a comparison?
I’d be more impressed if they fired a shot across the bow and coordinated a national day for cranking up their withholding allowances, just as high as they can. They’re planning their next party on Tax Day, right? One might think they’d be interested in ceasing to lend their earnings interest-free to the government. They might take some satisfaction in doing something that actually shows up on the government’s ledger.
I’d be convinced of their sincerity if they subsequently considered actually not paying their taxes next year if the government didn’t change its policies. That would be civil disobedience, as opposed to loud-but-obedient. But still, hold the tea.
The “going Galt” thing has been a bit better — at least it involves refusing to produce — but “John Galt” is a rather radical standard, ladies and gentlemen. Reducing your income so that you don’t pay the higher marginal taxes in the next bracket; partially shutting down businesses and taking more leisure time; retiring early. These are nice, but it’s like “going Martin Luther King, Jr.” without risking jail or invoking the Alamo without risking death.
Galt refused to let the public seize his creations for their (immense) benefit. He led an illegal strike. He accepted nothing more than a night watchman state. He openly scorned all religion and mysticism. His opposition to government was not of the “vote the bums out 20 months from now” variety, or merely underperforming–although he did discuss underperformers in his marathon speech, much of which is dramatized here (note: videos spoil much of the book – the part about underperformers is at 7:20 or so in Part 14).
Not that radical? Not willing to take that kind of risk? Then don’t play dress-up.
Content yourself to call your actions by their proper names. If you know what the fictional character symbolizes, and that’s not a standard by which you judge yourself, it’s better that you don’t compare your actions to his.
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* This isn’t a Dennis Miller-style rant. Sorry. If I tried to emulate that, I’d just pale in comparison. Speaking of which…