Don't Bogart that Revenue Stream, My Friend

The Rhode Island Senate has ordered a study of the legalization of marijuana. Would that the goal was merely to adjust our illicit drug use ranking by reclassifying one of the drugs. Alas, they specifically voted

to explore how much Rhode Island might collect in revenue if it were to make all sales of marijuana legal and impose a “sin tax” of $35 per ounce.

The main problem, of course, is big picture. Rather than looking for extreme sources of revenue, the General Assembly needs to continue focusing on the reduction of expenditures on the state and local levels. Two areas most urgently, though not exclusively, requiring attention are mandates for cities and towns and public pensions. (Pension reform measures included in the 2010 budget were a good step but by no means the end of the journey.)

Secondly, however, think of the proposed revenue source itself. More specifically, consider the health risks associated with it.

Shouldn't it raise a red flag about our budgeting and mandate policies that we are now looking to expand revenue opportunities in the area of behavior that is physically harmful to human beings?

All-Around Revenue-Per-Resident for Rhode Island Cities and Towns

By adding in a few other sources to the figures for residential, commercial and industrial tax levies from the previous post, it's possible to come up with a meaningful estimate of total local revenue-per-resident available to each Rhode Island city and town.

The set of sources included in the table below are...

1. Residential Property Tax Levy
2. Commercial and Industrial Property Tax Levy
3. State Education Aid (with money for regional districts apportioned by population)
4. State "Payments in lieu of taxes" (which are different from General Revenue Sharing)
5. Fire district levies for the towns that have them (derived from Municipal Affairs data available here and here).

One again, the floor is open to those who would like to offer local insight into how well they think their community is or is not doing. Where are the problems with revenue, and where are they with spending...

Commercial Property Tax Revenue By City and Town (And an Inquiry into Providence's Complaints About Tax-Exempt Properties)

Nothing says it's the new fiscal year quite like the presentation of new fiscal data, to help provide context for the major local decisions on taxing and spending being made all across Rhode Island.

This compilation actually began as an analysis of Providence city government's claim that it is handicapped in its ability to raise sufficient revenues by the large amount of tax-exempt property within its borders -- a claim that, at least according to two basic initial indicators, doesn't seem to be particularly strong.

On an annual basis, the Municipal Affairs office within the state government’s Department of Administration compiles data on the property tax levies, broken down by residential versus commercial/industrial classifications, for each Rhode Island municipality. The latest results available from valuations done at the end of 2007 show that, despite its quantity of tax-exempt property, Providence still receives the 4th-highest amount of commercial and industrial property tax revenue per-resident of any city in Rhode Island. Here's the entire list...

And in terms of the ratio of commercial/industrial collections versus residential taxes collected, it's not even close who the biggest beneficiary of commercial property taxes is...

(The population data is from Census Bureau estimates, via the state's department of labor and training).

Taken together, these two rankings make it very difficult to sustain a claim that Providence is somehow being shorted in property taxes -- especially when Providence is doing so much better in commercial and industrial property tax revenue than Rhode Island's other densely populated urban areas like Pawtucket and Woonsocket -- if Providence's problems are rooted in too much property not on the tax rolls, then shouldn't it actually be doing noticably worse in commercial tax collections than Rhode Island's other cities?

Now, the point here is not to pick on the people Providence. It's to pick on their city government. At some point when a city government's major explanations for its financial problems are that 1) people inside the city aren't giving the government enough money and 2) people outside of the city aren't giving the government enough money, it's time to consider that the problem might not be with the people, but with the government. Clutching and grabbing for every dollar that can be taken from everyone associated with a city is not a winning formula for cultivating the balance of activities needed to make an urban area vibrant.

One final point about the overall list: I suspect that the success of Middletown and Warwick at rasing commercial and industrial revenue is going to give the smart-growth folks of Rhode Island fits, as when it's combined with a bit of knowledge of local commercial geography, it sure looks like a strip-mall dominated retail sector is a great way to raise property tax revenue in a municipality.

The floor is now open, for who have insight into the meaning of these figures in different communities...

The Cap and Trade Scam

OK, what's this "cap and trade" thing all about? Well, first its a bid to massively change some fundamentals of our economy all for the sake of reducing global warming (by a few tenths of a degree Celsius in a few decades). Although the powerless House GOP has offered arguments against its passage, Democratic leaders have had more problems with their own rank-and-file (especially blue dog and farm-state Dems) and have been forced to make deals in hopes of pushing the Waxman-Markey bill through today (though no one will have a chance to read it--kinda sounds like RI).

The reason for the resistance is simple: no matter how you slice it, American's are going to pay more for everything for the sake of "feeling better" about "doing our part" to help reduce global warming. Or something. Its a redistributive tax increase, plain and simple, and it affects that 95% of the people President Obama claims to want to leave alone.

The Congressional Budget Office review of the bill explains the basics:

H.R. 2454 would establish two cap-and-trade programs, one for six GHGs
(mostly CO2) {GHG= "green house gas"--ed.} and one for a seventh GHG, hydrofluorocarbons (HFCs). The first program, the focus of this analysis, is generally referred to as the GHG cap-and-trade program. H.R. 2454 would set limits on GHG emissions for each year. Regulated entities could comply with the policy in some combination of three ways:

■ By reducing their emissions,
■ By holding an allowance for each ton of GHGs that they emitted, or
■ By acquiring an “offset credit” for their emissions.

Offset credits would be generated by firms that were not covered by the cap but that reduced their emissions or took actions to store emissions in trees and soil, using methods that would be approved by the Environmental Protection Agency. The bill would allow firms to use a significant quantity of offset credits—generated in the United States and overseas, with a maximum quantity for each specified in the legislation—toward compliance with the cap. Most of those offset credits would be generated by changes in agricultural and forestry practices. To the extent that acquiring offset credits was cheaper than undertaking more emission reductions, allowing firms to comply with offset credits would lower compliance costs overall.

Congressional Budget Office (CBO) estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household. That figure includes the cost of restructuring the production and use of energy and of payments made to foreign entities under the program, but it does not include the economic benefits and other benefits of the reduction in GHG emissions and the associated slowing of climate change. CBO could not determine the incidence of certain pieces (including both costs and benefits) that represent, on net, about 8 percent of the total. For the remaining portion of the net cost, households in the lowest income quintile would see an average net benefit of about $40 in 2020, while households in the highest income quintile would see a net cost of $245. Added costs for households in the second lowest quintile would be about $40 that year; in the middle quintile, about $235; and in the fourth quintile, about $340. Overall net costs would average 0.2 percent of households’ after-tax income.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions....

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

Under this more comprehensive scenario, [Heritage] found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Cap and trade, in other words, is a scheme to redistribute income and wealth -- but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street "green tech" investors who know how to leverage the political class.

Flat Tax Good, but Not Enough

As you may have heard, the gradually decreasing flat tax in Rhode Island has survived attempts to freeze or repeal it (so far). I'd note, though, an excellent point that Matt Allen made during the six o'clock hour: It's foolish to think that the flat tax decrease is sufficient. For two things: Rhode Island's tax advantage for capital gains is evaporating with this budget, and new savings for businesses have been left on the cutting room floor.

The tendency of disputants to break the big questions into their constituent parts goes a long way toward explaining the condition of our state. It's all patchwork policy, with no overarching principle. We trade this tax break for that union concession and that welfare adjustment, with the result being incoherence and inadequate counterbalance to the special interests that have infested the State House and town halls. Any potential reform candidates loitering about the edges of public consciousness should come up with a holistic plan and insist that it only works as an irreducible machine — as I've been suggesting that the governor do by disowning the budget if the General Assembly made any substantial changes.

We need responses to such statements as the following example, from Matt Jerzyk, of why I'm nostalgic for the previous iteration of RI Future:

What should be more important in a recession in Rhode Island? Just think about it.

If you are recently unemployed in Rhode Island or facing tough times at work, can you afford a jump in your property tax bills?

Alternatively, would a Rhode Island millionaire even know if their accountant paid a little more on their tax returns.

Even a few hundred dollars of increase or decrease in a given tax bill is not what unemployed Rhode Islanders need. They need jobs. They need businesses that find their state to be an attractive place to open up shop and expand — without special deals or credits, merely because that's the way the state is structured. They need the sorts of people who have money to burn no matter the overall economy renovating homes, buying goods, dining out... being present and living their lives among us.

As for the millionaires and their accountants, the premise that we can slip tax increases by them is (I'll euphemize) poorly considered. Even so, an accountant will inform his clients if a move — often an on-paper affair, when it comes down to it — to Rhode Island would cost them thousands or millions over a certain period of time or from Rhode Island would save them the same.

Dirigo, Indeed

From the Wall Street Journal

At last, there's a place in America where tax cutting to promote growth and attract jobs is back in fashion. Who would have thought it would be Maine?

This month the Democratic legislature and Governor John Baldacci broke with Obamanomics and enacted a sweeping tax reform that is almost, but not quite, a flat tax. The new law junks the state's graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat rate tax on almost everyone. Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a 6.85% rate. Maine's tax rate will fall to 20th from seventh highest among the states. To offset the lower rates and a larger family deduction, the plan cuts the state budget by some $300 million to $5.8 billion, closes tax loopholes and expands the 5% state sales tax to services that have been exempt, such as ski lift tickets.

(snip)

One question is how Democrats in Augusta were able to withstand the cries by interest groups of "tax cuts for the rich?" Mr. Baldacci's snappy reply: "Without employers, you don't have employees." He adds: "The best social services program is a job." Wise and timely advice for both Democrats and Republicans as the recession rolls on and budgets get squeezed.

A Simplistic Reaction to the Flat Tax Will Hurt the State and Cities and Towns

Everybody wants to nix the flat tax in Rhode Island:

The dispute has drawn the interest of a host of powerful players — labor unions, mayors, and a coalition of elected officials — who hope to repeal the high-profile tax break that benefits 2,267 Rhode Island taxpayers. Supporters want to funnel the savings to the cash-strapped cities and towns, which are slated to lose more than $55 million in state aid for the budget year that begins in seven days.

Municipalities think it's an easy way to get a few million more dollars. Union members think it's a way to ensure that the local and state governments that employ them will be able to make payroll. Elected officials think they'll pick up a good talking point about looking after the majority against the narrow interests of a wealthy minority. I'd suggest that all of these groups would do well to be wary of short-term thinking.

As I've followed long-term trends from both Census and IRS data, the conclusion has emerged that one area in which Rhode Island has seen positive developments is among wealthier residents. Indeed, the state income that taxpayers with incomes over $200,000 per year are claiming on their federal tax returns was up more than 50% from 2002 to 2006 — the period during which our state's tax reforms began to kick into effect. That is why Steve Peoples and Cynthia Needham's characterization is woefully incomplete:

The state will forgo an estimated $34.7 million in tax revenue next year because of the flat-tax option, according to an analysis by the State Budget Office.

In tax year 2009, the rate is scheduled to drop from 7 to 6.5 percent. If frozen at the current rate, the state could recover $12.2 million in tax revenue for the coming fiscal year, according to the governor’s budget office.

One cannot calculate the "cost" of the flat tax by recalculating returns as if it did not exist, because some percentage of returns would not exist if it were not for the flat tax option. With residents with household incomes over $200,000 contributing about $400 million in income and alternative minimum taxes every year, we're talking a huge amount of money.

Unfortunately, the relevant data from the state ranges only from 2005 to 2007, and the presentation of resident and non-resident taxes is not uniform. Nonetheless, looking at the resident returns (which are parallel to federal data addressing Rhode Islanders), one can observe that, over that period, the total income and alternative minimum tax collected by the state was up more than $5.12 million from those earning over $200,000 and up a total of $40.33 million from those earning over $100,000. The actual number of state tax returns filed by those earning between $100,000 and $200,000 increased 20.8%, and those showing income over $200,000 increased 14.2%.

This is where advocates for repealing the flat tax will point out that, while actual taxes paid by the $100,000-199,999 group increased $13.5 million (5.5%) from 2006 to 2007, those earning over $200,000 — who benefit most from the flat tax option — contributed $37.4 million (8.6%) less. Given the close proximity of the dollar amounts, one might presume that the flat tax simply gave that money away (as Rep. Scott J. Guthrie, D-Coventry, would put it). That would be incorrect.

Of that year-to-year loss, the capital gains tax accounted for $30.1 million. In other words, non-capital gains income taxes among the wealthiest group decreased only $6.5 million (1.9%) in 2007 from 2006. More importantly, the average adjusted gross income per return fell 4.3%. (I'm not sure whether that includes capital gains.) Although there were more of them, the rich, that is, earned less money to tax.

All such aggregate analyses are tricky, of course, because so many factors and considerations come into play. Advocates making the journey from their municipalities to the State House to demand those dollars that the flat tax "gives away" should recall that these are residents. They are paying property taxes on homes and vehicles. They are paying fees for everything from dog registrations to construction permits. If they leave, they take not only the income tax dollars that the state may (or may not) filter down to the local level, but also all of the revenue that cities and towns currently procure directly. Moreover, they take the money that they pay to other residents as part of the private-sector economy.

For some general and rough perspective, consider this: The number of tax returns showing income over $200,000 increased 14% from 2005 to 2007. It will only have to decrease by about 7% for repeal of the flat tax to be a revenue wash for state income tax alone. If we broaden the group to those over $100,000, the increase from 2005 to 2007 was 19%, and only a 3% loss of the current number would cancel out the estimated tax revenue gain.

Rhode Island is already turning away from the path toward a vibrant economy in a vain attempt to ease short-term pain — which is to say that it is continuing on its path to collapse. Let's not expedite the process.

It's Almost as if There's Only a Real Interest in the Problems of One Community…

Over at RI Future, Pat Crowley doesn't seem quite up to speed on the public budgeting process occurring in most Rhode Island cities and towns. Mr. Crowley assumes that last week's announcement that there will be no general revenue sharing in FY2009-2010 means that city and town governments will have to "re-raise" taxes.…

If the State does not repeal the flat tax and continues the elimination of general revenue sharing, this is how much towns would have to re-raise their property taxes to make up the difference.

For example...take a look at North Providence....

Mayor David N. Cicilline says his administration will need to resubmit his plan for the fiscal year beginning July 1 if the General Assembly votes to end the $55-million general revenue-sharing program that Providence and other Rhode Island communities have enjoyed for two decades….Providence appears to have taken a gamble that few other communities were willing to make in assuming it would get anything at all from the state from the program.

Actually, the 3.46% for Lincoln is obviously the result of a second layer of faulty analysis, where Mr. Crowley tries to calculate the percentage tax-increase that replacing general revenue sharing would require, but presents inflated figures as the result of considering only the municipal side of the local spending, neglecting the fact that property taxes also are used to pay for schools. (Is this error maybe corrected between the two posts?) That error notwithstanding, however, any "re-raising" of taxes in most municipalities, as a result of the official announcement on general revenue sharing, will amount to 0%, because most city and town governments budgeted responsibly and assumed that no aid was coming.

The major exception, of course, is Providence, where the administration of Mayor David Cicilline assumed that the city would receive 6 million dollars in state aid, and now has to re-budget assuming the loss. The total lesson from all of this, as always, is that progressives and public finance don't mix.

Gauging Effectiveness of Tax Policy

In any kind of system--computers, manufacturing, planned maintenance, what have you--the importance of a "feedback loop" is recognized. Basically, you have a process or method in place and you want input as to how well it is working. "Good" feedback often necessitates a change in operating process or, possibly, system design. In yesterday's ProJo, John Kostrzewa essentially asks that our corporate tax policy--specifically targeted tax credits for certain businesses--be put in a feedback loop. The question: are we getting the benefits we hoped for (more jobs) when we let companies pay the state less in corporate taxes?

This is the way economic development gets done across the country. A corporation has jobs. The government has giveaways or tax breaks. They woo each other, get married and everybody lives happily ever after.

Except nobody checks back to see if the incentives really accomplished what they set out to achieve.

But now, Rhode Island has started to take a peek.

When he ran the Rhode Island Public Expenditure Council, he advocated tax breaks that are accountable, transparent and targeted toward specific types of jobs. As head of the state Department of Revenue, he pushed forward the collection of data. He also headed the tax reform panel created by Governor Carcieri that advocated a study of job-creation tax credit and questioned why they shouldn’t be reserved for higher-paying jobs with benefits.

But now, in his additional role as head of the Department of Administration, he seems less aggressive.

Legislators Making Up Taxes as They Go

One must laugh out loud, if only to keep from crying. Here go Rhode Island legislators toying with making tax code more complicated and less beneficial to taxpaying corporations, with a tinge of state tinkering with the shape of the economy (i.e., what sorts of businesses it rewards):

Current law generally allows the tax break only if a business creates jobs that pay at least $11 an hour or so (about $22,900 or so a year, based on a 40-hour workweek).

The proposed legislation would allow the break only if a business creates jobs that pay at least $18.50 an hour or so (about $38,500 a year).

State Rep. Steven M. Costantino, D-Providence, chairman of the powerful House Finance Committee, and chief sponsor of the bill (H 6164), said, "I think we all want [more] jobs. But in order to get a credit, I think you have to have a higher threshold."

Businesses would continue to be free to create jobs at various pay levels, Costantino stressed.

But in order to claim the tax break, they would have to create jobs that pay more money than the law currently requires — and also carry health insurance and retirement benefits, according to the bill.

And yet:

The state thus far has not studied in detail the benefits that the job-creation or other such tax breaks provide to the state, cities and towns, such as tax payments made by the job holders or other economic benefits.

As far as I can tell, there's not even any sort of governing philosophy behind vague expectations about what the actual results of such legislation will be. That is, legislators don't even appear to consider whether, in broad terms, more companies will benefit, fewer will benefit, more will create jobs, or fewer will create the jobs that apply to their business models (because they don't qualify for incentives).

Of course, the whole issue is colored by the fact that this tax break is largely enjoyed by a single company — CVS. That being the case, the General Assembly should just make things simpler and boost business activity period by lowering the taxes and trimming the fees, regulations, and mandates on people and organizations that contribute to Rhode Island's economy.

Using the Same Story Everywhere to Push for Budgets

There's a familiar sound to status-quo argumentation that Matt Welch's highlights among those who lament that "petulant voters failed to heed the weary wisdom of their betters" in California:

Calfornia lawmakers, and the unions who put them into office, will do everything in their power to cut services first, employees last. That is indeed a crucial reason why we got here in the first place. Any analysis that doesn't explore how a higher-than-inflation-plus-immigration budget has failed to deliver on any increase in services, is not an analysis worth taking more seriously than common propaganda.

When special interests are done soaking up new money, the not-so-paradoxical result seems to be even less money for such basic government functions as infrastructure. And whether the government in question is local or state, the repeated talking points hardly stand up to a moment's display of reality:

California companies would then find it harder to attract high-value employees who might be dubious about moving to a state with sub-par schools. Here is the fundamental point behind every California budget story: The state has increased spending on K-12 education by 40 percent under Schwarzenegger (it has to; by dumb law, 40 cents on every state dollar has to go to education). The main drain on the California economy is that these massive increases in spending are producing ZERO noticeable improvements. Because the union-run school districts are infamous laboratories for inefficiency, job protection, and corruption, the state spends and spends, with nothing to show for it. Teachers unions are literally running out of other people's money, and now they warn us about "sub-par schools"? That par got done subbed a long time ago. If politicians, journalists, and other "experts" want to defend the status quo (of constant spending increases), then they need to explain why Californians need to keep throwing more and more good money after bad on a K-12 system that is showing no results.

(via Instapundut)

Telling Reasons to Object to Tax Cuts

I've got my reservations about Governor Carcieri's tax proposals on the grounds that they don't go far enough, especially in extending their effects to middle and working class residents. But some of the objections from the other side should inadvertently direct Rhode Islanders' attention to the underlying problems of the state:

Karen Malcolm, executive director of Ocean State Action, a coalition of labor unions and advocacy groups, said previous state tax cuts have not worked. "The policies we've been following have not brought the promised jobs," she said.

Instead of phasing out the corporate income tax, for example, Rhode Island should instead seek changes to local property taxes, which represent the single greatest tax burden for business, she said.

Of course, local property taxes are so high in part because the unions — especially the teachers' unions — have been more successful at pumping up their members' remuneration packages from that stream. Witness:

Malcolm goes on:

And to improve Rhode Island’s overall business climate, the state should focus on other areas, such as fixing crumbling roads and bridges, she said.

Of course, infrastructure repairs are more expensive than they would be absent union rule and the related regulations. (It's quite a thing to drive by a roadwork site and witness the two flag-bearing women standing next to each other, flags down, chatting while the mandatory police officer chats on his cell phone, back to the scene.) Moreover, the fact that the state typically allocates 0.0% of its General Revenue to transportation suggests that Malcolm is seeking to raise additional taxes to direct toward labor.

Then there's the other side of the problem:

Rick Harris, executive director of the Rhode Island chapter of the National Association of Social Workers, said Carcieri's proposals would drain away tax revenue at a time when it is most needed for education, health care and other programs. "If you're taking more money out of the system, how are we going to meet this need?" he said.

Directing the wealth of productive, working Rhode Islanders to those who are otherwise — even if the intention is to make them more productive — is part of what created our current hole. If we're to have any hope of turning things around, we must reverse our focus and increase activities that create revenue, rather than expend it.

Turning Up the Heat on Smokers

Laws should be enforced (or stricken or modified if they will not be), but there's something unseemly — extortionate — about this:

The state in April increased the excise tax on cigarettes by $1, to $3.46 a pack, the highest in the country. The move has obvious health benefits, but it also aims to generate millions more dollars for the financially strapped state.

Now, state taxation and law-enforcement officials are poised to do their part. They are cracking down on the illegal sale of out-of-state cigarettes to make sure that the state collects as much money as possible from smokers who now plunk down some $8.35 for a pack. ...

Under state law, Rhode Island residents can have up to a carton of out-of-state cigarettes in their possession. Anything more and they are subject to arrest.

Violators face up to three years in prison and a $5,000 fine.

For reasons unrelated to money, I quit smoking about a decade ago, and it's increasingly difficult to comprehend what drives people to continue with the practice, but reading today's article, I found myself surprised to recall that it's about a legal product. The state government is facing tough financial times, so it has arbitrarily decided to collect more money from a population of residents who have a chemical and psychological dependency on a particular item.

Here's a clue that something isn't right with the current government attitude: Resident smokers' doing the right thing by their health would do more harm to the state revenue than does the illicit behavior on which the state police are so focused. If only for that reason alone, Rhode Island's smokers should kick the habit.

Do what they will, however, I'll still predict that revenue from this tax is going to go down, even if the number of smokers stays exactly the same. Unfortunately, Rhode Island businesses are likely to take a hit, as well, and not only on sales of cigarettes, but also on sales of such goods as smokers will pick up when they're out of state shopping.

Migratory Food for Thought

Tom Golisano puts high local taxation in perspective — the individual's perspective, that is:

Last week I spent 90 minutes doing a couple of simple things -- registering to vote, changing my driver's license, filling out a domicile certificate and signing a homestead certificate -- in Florida. Combined with spending 184 days a year outside New York, these simple procedures will save me over $5 million in New York taxes annually.

By moving to Florida, I can spend that $5 million on worthy causes, like better hospitals, improving education or the Clinton Global Initiative. Or maybe I'll continue to invest it in fighting the status quo in Albany. One thing's certain: That money won't continue to fund Albany's bloated bureaucracy, corrupt politicians and regular special-interest handouts.

Have I mentioned, recently, that the state and local taxes that wealthy folks are paying in Rhode Island has been going up even as their rates go down?

(via Michelle Malkin)

A New Proposed Income Tax Structure for Rhode Island

Here are the details of the new income tax brackets contained in the state budget that Governor Carcieri submitted to the General Assembly (Article 38)...

However, there are also proposed changes in allowed deductions, which a staff report from the Projo summarizes as...

• Treating capital gains as ordinary income. (In general, the state’s maximum capital-gains tax rate now is 1.67 percent, or 0.83 percent in some circumstances.)
• Ending the option to claim a variety of “itemized” deductions, such as those for mortgage interest, local property taxes and charitable contributions. Instead, all taxpayers would claim a standard deduction, the amount of which would be expanded.
• Eliminating most of the state’s tax credits and keeping four: the statewide property-tax relief credit; an expanded earned-income credit (essentially a tax break for the working poor); a credit for lead paint abatement; and a credit for income taxes paid to other states.

I'm Sorry, You Don't Get to Create a Problem

... and then sternly point to it like you're an uninvolved third party.

President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

Their Errors, Our Freedoms... and Taxes

So when the president's budget errs in its estimation to the tune $58 billion, why is a more invasive pursuit of taxes the obvious answer?

The Obama administration on Monday proposed $58 billion in additional taxes to offset budgeting errors that overstated revenues in the president's plan to finance health care reform.

The tax measures target a host of activities, including people who for tax purposes aggressively reduce the value of property received as gifts or in estates. To reduce fraud, other provisions would require investors, contractors and taxpayers to provide more information about certain transactions to the Internal Revenue Service.

The largest budgeting error overstated the amount of money that would be raised by limiting charitable and other deductions for high-income taxpayers. The limits would generate $267 billion over the next 10 years — $51 billion less than the administration projected in February.

It seems that, no matter what happens — even an incident of miscalculation on the administration's part — the government gets a little bit more power and control.

The Budget Hole Rhode Island's In

Sympathy is in order for the state's lawmakers, although not of the exculpatory kind. It must seem to them that, no matter what they do, the economic dirt keeps falling in on them in the economic hole that they've dug:

Rhode Island government's budget deficits have grown by $200 million over the last six months, a massive jump that exacerbates an already-staggering budget hole and intensifies pressure on the General Assembly to raise taxes or slash state spending across a host of popular programs.

Elected officials have less than two months to close combined budget holes totaling roughly $661 million, according to projections finalized Monday by the state's top budget officials on the final day of the semiannual Revenue and Caseload Estimating Conference. The shortfall includes an unanticipated current-year gap of $70 million and a $590-million deficit for the fiscal year that begins July 1. ...

Next year's hole amounts to approximately 19 percent of Rhode Island's current state budget, excluding federal dollars.

If you add in what's become a typical mid-year deficit in the hundreds of millions, the shortfall for fiscal 2010 hovers near a billion dollars. Upwards of a fifth of the working budget is money we don't have. But hey, it's not as if nobody's seen this coming. In fact, in considering an interviewer's question about the impetus behind Anchor Rising's founding back in 2004, I recalled that our prognostications for the state made action a civic imperative.

The state is reaping what it's sown, and those who've liked the policies that got us here just fine have but one scapegoat before they must begin battling each other for the trickle of satiating largess for their unhealthy dependency:

"We are paying the price not only for national and international economic factors, but also for years of misguided decisions by our policymakers that have cut taxes for those who need cuts the least, while increasing the pressure on the rest of us," Peter Asen, spokesman for the labor-backed advocacy group Ocean State Action, said in a statement.

As satisfying as some may find the class warfare angle, the reality is that income tax revenue from "those who need cuts the least" has gone up dramatically, with $228 million more paid by those with incomes over $100,000 in 2006 than in 2002, with $156 million more coming from those with incomes over $200,000.

Cut taxes. Trim mandates. Lighten regulations. And quick.

Big Brother Is Only Logical

Does anybody else pick up a willful naivete in Gerald Bastarache's advocacy for a mileage tax?

To measure these miles, the commission calls for "in-vehicle or after market Global Positioning System (GPS) devices" that would track the way we drive. The per-mile charge would depend on whether the driving is on crowded urban freeways during rush hour (higher charge) or lightly traveled rural roads (lower charge).

The goal of the mileage tax is still to collect the funds we need for good highways through user fees, but in a more logical way than we do now.

The report says the amount charged for cars could range from 0.9 cents per mile to match current trust fund revenues, or go up to 2.3 cents per mile to "maintain and improve" the annual investment level.

The levels of taxation require careful calibration to ensure fairness. But compared with the current system, fairness should be relatively easy to achieve. ...

Privacy is sometimes cited as a concern, but privacy is protected when the data is kept within the vehicle. The many tracking devices already in today’s vehicles, such as OnStar, E-ZPass and LoJack, are effective without compromising privacy.

"Careful calibration" in a system of taxation that varies by location and maintenance needs? Chilling.

Moreover, consumers can have some trust in private companies, because if they violate that trust, car owners can cancel their services and even rip the units right out of the cars. If the violation is sufficiently egregious, the entire business model could tank. Taxpayers, by contrast, would not be permitted to "cancel" the service, except via indirect application of the political process, even when bureaucrats and government officials find the excuses to violate trust far too compelling to ignore.

UPDATED: Correction on Property Taxes

Based on conversation here and here, it appears that I was wrong to state that "a new methodology will skew taxes toward waterfront properties." Several people who are typically more specifically knowledgeable about town financial matters made statements that I apparently took too literally.

That said, Tiverton Tax Assessor David Robert has strangely refused to answer, here, direct questions about the process, a decision that I attribute more to my local reputation than to his having anything to hide. (I suspect that, in certain circles, I'm taken to be much more of a conniver than I actually am.)

What I'm trying to determine is whether a decreasing pool of sales from which to determine trends has resulted in differing bases for different neighborhoods. I'd welcome feedback from folks familiar with the controversy in Barrington, especially if it might pertain to the varying results in Tiverton.

ADDENDUM 05/09/09 2:14 p.m.:

After conversation with Tax Assessor David Robert after today's financial town meeting, I'm persuaded that nothing different was done that unfairly skewed the revaluation results... at least any more than is always the case.

In essence, all sales forming the basis for the revaluation were in town. In cases in which a subsection of houses had insufficient sales to make reassessments valid, the assessor calculated based on overall sales and the typical ratio of that neighborhood to the overall. (I'm summarizing the effect, here, and may not be to-the-letter accurate about the procedure as implemented.)

I'd argue that this methodology is inherently unfair, inasmuch as a neighborhood with too few sales can't even be said to have kept up with the values of the rest of the town. If a dozen houses sell in my working class neighborhood at a 10% decrease from previous assessments, but no houses sell down the hill from me, closer to the water, one cannot infer that they would have sold at that 10% decrease. Indeed, they might well have sold only if offered at a 50% decrease, which means that their value is unfairly assessed to have held.

That said, it would be difficult (mathematically or politically) to come up with a number that adjusts for sales that didn't happen. The town could investigate the prices that the houses weren't getting, but that would only give one a maximum and, as a matter of principle, bases taxes on prima facie unrealistic home values.

Whatever the case, I was unequivocally wrong to assert a change in methodology.

Rob Coulter: Property Revaluation and Subjectivity

I had a very helpful conversation with a gentleman from the property revaluation vendor for Tiverton last night, and I learned quite a bit about the process. By the way, he was very patient and cordial, and I was very impressed with him, even if we may arrive a different conclusions. I agree with Justin that this should be an exploratory dialogue, and I do not pretend to have all the answers either.

The truth is somewhat in the middle of what I'm reading from comments here. As far as I can tell, they are using a multivariable regression computer model. It is susceptible to error because the sample sizes are not statistically robust enough for so many variables. When this happens, judgment calls have to necessarily be made. In a sense, the "methodology" has not changed, but there are still many, many variables calling for subjectivity on the appraiser's part.. I don't want to go so far as to call these judgment calls arbitrary, but there is definitely enough play between the joints for the appraiser to "skew" (if that's the right word) a result based on assumptions being made.

Although it sounds fancy and complicated, the idea of using multivariable regression is to let the computer try to find the impact of one variable while holding all others constant. It's like algebra on acid. This can't be done by hand when there are dozens and dozens of variables, as there are, here, so we let a computer do it.

I do not believe that it is incorrect to use this type of modeling, but there are two very important qualifiers:

1. The model only works if there are enough samples for each variable. I'm not sure there are here.
2. More importantly, this model and all models have assumptions built into them. These assumptions are necessary for any model but are at the end of the day subjective and subject to dispute. For example, I learned last night that (roughly speaking) all taxpayers are taxed at nearly one acre of land no matter how much less they have, and owners with additional acres are only taxed at a very low cost per acre. So if you own one-third of an acre or one full acre, you pay about the same tax on land. Do you think that's fair? Maybe yes, maybe no, but these are some of the assumptions that lurk behind the "methodology."

There are myriad assumptions and they have a major impact. They do not involve only objective things such as acreage and square footage, but multiplying factors applied based on the style of the house. These are very subject to debate. For example, I argued that a solar panel on a roof should add value to a house based on fuel costs. The vendor suggested that it might detract because of decreased curb appeal. I replied that a new buyer could simply remove the panel. And so on. You can see how very quickly a lot of error and assumptions can creep into a system that otherwise sounds so impressive.

Again, I want to stress that I don't think anyone is trying any funny business here. I was very impressed with the vendor, and I also very much respect David Robert, Tiverton's tax assessor. But I do have experience with multivariable regression, and if that is the model behind this, I can tell you that we can't trust it wholesale. I don't think the "methodology" has changed, but there are many assumptions under this methodology that can be adjusted and are essentially subjective.

Rob Coulter is a member of the Tiverton Budget Committee as well as Tiverton Citizens for Change.

Taxes and Incentives

Most Rhode Islanders are likely ambivalent about their state's status as background scenery for Hollywood movies. Yeah, it's neat to see familiar places on the big screen, as well as to spot famous people around town, but it remains a novelty, not a matter of economic import or civic identity. Still, this strikes me as a fitting allegory:

A year after lawmakers voted to cap the controversial movie and TV tax-credit program, Rhode Island Film & Television Office Director Steven Feinberg acknowledges it has been "a challenge" to continue to attract movies and other productions to the state.

Forget the historic charm and seaside vistas: without the tax breaks, Rhode Island loses a little of its luster.

One suspects that a similar dynamic exists with that much lauded "quality of life" by which certain players attempt to distract from the fact that scenery is of mere mild comfort when one can't pay the bills.

Property Tax Illusion

Because it works differently than most other taxes with which we're familiar, it surprised me when first I learned how property taxes are calculated, at least in Tiverton. In short, the rate is almost an irrelevant statistic. Confusion over that fact has led local Budget Committee and TCC member Tom Parker to pen the following explanation

2009 property revaluations have been mailed out in Tiverton, and if you listen carefully you can hear a collective sigh of relief across the town: "My property value has gone down, my taxes must be going down. Life is good, and I'm safe, at least for the time being, from the insatiable tax demands of the Tiverton government. For once, I can relax...right?" Actually, no. Unfortunately, things are not what they seem. There are two good reasons why you need to pay careful attention.

First, the letter we taxpayers got in the mail was our property revaluation, and, indeed, for many of us it is significantly lower than the previous assessment (my own decreased about $120,000). The tax RATE is the other key component in the final calculation of YOUR property tax bill. The FY2009 tax rate proposed by the Budget Committee is $14.73/1000. This is a $3.47/1000 increase (31%) over the current tax rate of $11.26/1000. So even if your assessment has gone down, your taxes could substantially increase. In my case, even though my assessment decreased $120,000 (14%), I estimate my tax bill will increase by over $1,100 (12%).

The town doesn't apply the rate to the property values to figure out how much money it has to work with. Rather, it figures out how much money it wants and then divvies the total up among all of the property in town. When property values go down, it doesn't figure out how to function with less revenue; it simply adjusts the rate to ensure the same revenue as a matter of course, with no votes or political risks necessary.

So the key question, when it comes to revaluations and taxes isn't whether your house is worth more or less; it's how it changed compared with all of the other properties in town. If they all decrease by the same percentage, everybody's taxes stay the same.

It's true that, in Tiverton, a new methodology will skew taxes toward waterfront properties, this year, which means that recalculations will hurt those homeowners more. But as Tom describes, the huge leap in the rate likely means increase for anybody whose house's value dropped less than 31%. And that's before tax-revenue beneficiaries have their whack at the budget during the upcoming financial town meeting this Saturday.

ADDENDUM 05/09/09 5:10 p.m.

The deleted sentence is incorrect. See here for explanation. Apologies for the error.

A Tax by Any Other Name

Maintaining infrastructure is one of the basic tasks appropriate to government, but for that very reason — its clear importance — politicians in the state of Rhode Island tend to seek money for it independently, as a sort of deliberate afterthought. Rhode Islanders' ultimately don't want any bridges to collapse, and if they don't get incensed over the fact that the money wasn't already apportioned from taxes, they'll accept toll hikes even though they are, in effect, taxes for programs and giveaways that they wouldn't approve given the option:

The state Turnpike and Bridge Authority needs to raise tolls to pay for $50 million worth of repairs to the Pell and Mount Hope Bridges, Chairman David Darlington told a legislative committee Thursday.

Darlington asked the House Finance Committee to approve borrowing the $50 million through a bond issue for the work, which would include repairing rusted steel and doing painting on both bridges. He said that a toll increase would be needed to cover the bond issue, but that the authority wants to avoid raising tolls for Rhode Island residents.

Darlington said it would be the first toll hike in the history of the Pell Bridge, which opened in 1969. And if tolls are reinstituted on the Mount Hope Bridge, it would be for the first time since they were eliminated in 1998. Maintenance on the Mount Hope Bridge is now paid for with tolls paid by drivers crossing the Pell Bridge.

Of course, even the bond and toll gimmicks are beginning to raise hairs, so the plan is at least to double EZPass charges on the Newport Bridge for out-of-state drivers only. Of course, those paying cash — the majority, at least the last time I went back and forth over the bridge, last Saturday — would not be distinguished by their license plates and would pay the out-of-state fee. (It'd be interesting to see the data related to cash and EZPass payments; it's not inconceivable that doubling the toll will spur more Rhode Islanders to get EZPass, thus decreasing revenue.)

Perhaps the most important point to absorb from the linked article is the ultimate cost of this $50 million bond:

According to the legislation before the committee, the bond issue could actually cost as much as $132 million when the cost of 8-percent interest is added in, assuming a 30-year maturity for the bonds.

I'll reach across the aisle, here, and note that even Tom Sgouros has raised an eyebrow over the fact that Rhode Island currently pays $100 million in interest on Department of Transportation borrowing every year. This game can't go on; our government is going to have to find ways to keep the roads and bridges in good repair with money already in its budgets.

Taxes and a Possible Taxer

Andrew briefed the audience of the Matt Allen show last night on the nature of Rhode Island taxes and fees, along with some notes on the bungling beginning of Lincoln Chafee's gubernatorial run. Stream by clicking here, or download it.

Taxes Plus Fees In Rhode Island

This past Monday, the Projo's Neil Downing concluded his story on the Rhode Island Public Expenditure Council's analysis of the state budget with this note…

RIPEC also urged that the state review the range of fees it charges. The group said that, when compared with other states, Rhode Island ranks near the bottom regarding income from charges and miscellaneous revenues.

The state should review fees and other such charges “to [ensure] the adequacy of charges for services, the need for the charges and whether the state can seek additional non-tax income,” the RIPEC report said.

However, ranking alone doesn't tell the entire story. For example, for a category like "Natural Resources, RI's lower-half ranking doesn't impact total revenue collected very much because no state collects very much in that category relative to its total budget. One way to evaluate the revenue impact from a state's policy in a particular fee area is add fees to the the total taxes collected, for each fee category in each state, then re-rank the totals and see how the results shift.

When only state and local taxes are considered, Rhode Island begins in the 2005-2006 Federal data from a rank of 8th from the top per $1,000 of income. The table below lists how inclusion of each individual fee category would change that rank...

In other words, Rhode Island's 8th place ranking in taxes drops to 24th when the sum of taxes plus hospital fees are considered, to 13th when the sum of taxes plus higher ed fees are considered, etc.

Obviously, whatever it is that makes hospitals in Rhode Island different from hospitals in most of the rest of the country (except maybe Vermont, who holds down the number 50 spot on the "hospitals" list) has to be determined, before anyone can advance a serious claim that our state's fees are too low.

Boats All Around

Or vacations. Or home remodeling. Or a down payment. Whatever a second home mortgage will buy.

Today's Washington Post reports that taxpayers will be picking up part of the cost of these goodies for distressed (second) mortgagors.

The Obama administration unveiled an expansion of its $75 billion foreclosure prevention plan yesterday, providing new subsidies to mortgage lenders and investors.

* * *

The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.

About 50 percent of at-risk borrowers have a second mortgage, which can make it difficult for them to afford their homes even after payments are cut on their primary mortgages. Second mortgages were popular during the housing boom for buyers who could not afford big down payments.

Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.

How will this expansion of an already bad program be funded, you ask? That part's okay.

The program ... will be paid for through bailout funds already allocated to the program, officials said.

See, if the money has already been allocated, it really doesn't count as public spending.

The point of this post is, what about undistressed mortgagors? This Congress, the Obama administration and many of their supporters are big on "fair". But not everyone who owns their home was stupid smart enough to take out a second mortgage and buy that big ticket item. Wouldn't it only be fair if all of those people got to do so now? Then they can jump into this program, too. (Eventually, of course, we have to figure out how to get us apartment rats in on the action. Why should we get left out of "fair" just because we don't own our homes?)

More Kids, Now

David Goldman (aka "Spengler") writes in First Things:

After a $15 trillion reduction in asset values, Americans are now saving as much as they can. Of course, if everyone saves and no one spends, the economy shuts down, which is precisely what is happening. The trouble is not that aging baby boomers need to save. The problem is that the families with children who need to spend never were formed in sufficient numbers to sustain growth.

In emphasizing the demographics, I do not mean to give Wall Street a free pass for prolonging the bubble. Without financial engineering, the crisis would have come sooner and in a milder form. But we would have been just as poor in consequence. The origin of the crisis is demographic, and its solution can only be demographic.

Mark Steyn has been making a similar argument, primarily about Europe, for a while. In his piece, Goldman argues that the current economic crisis can be directly tied to there being fewer nuclear families in the U.S.

The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still—no matter what economic policies we put in place.

We could put this another way: America’s housing market collapsed because conservatives lost the culture wars even back while they were prevailing in electoral politics. During the past half century America has changed from a nation in which most households had two parents with young children. We are now a mélange of alternative arrangements in which the nuclear family is merely a niche phenomenon. By 2025, single-person households may outnumber families with children.

Demographics & Depression
by David P. Goldman

Copyright (c) 2009 First Things (May 2009).

Three generations of economists immersed themselves in study of the Great Depression, determined to prevent a recurrence of the awful events of the 1930s. And as our current financial crisis began to unfold in 2008, policymakers did everything that those economists prescribed. Following John Maynard Keynes, President Bush and President Obama each offered a fiscal stimulus. The Federal Reserve maintained confidence in the financial system, increased the money supply, and lowered interest rates. The major industrial nations worked together, rather than at cross purposes as they had in the early 1930s.

In other words, the government tried to do everything right, but everything continues to go wrong. We labored hard and traveled long to avoid a new depression, but one seems to have found us, nonetheless.

So is this something outside the lesson book of the Great Depression? Most officials and economists argue that, until home prices stabilize, necrosis will continue to spread through the assets of the financial system, and consumers will continue to restrict spending. The sources of the present crisis reach into the capillary system of the economy: the most basic decisions and requirements of American households. All the apparatus of financial engineering is helpless beside the simple issue of household decisions about shelter. We are in the most democratic of economic crises, and it stems directly from the character of our people.

Part of the problem in seeing this may be that we are transfixed by the dense technicalities of credit flow, the new varieties of toxic assets, and the endless ­iterations of financial restructuring. Sometimes it helps to look at the world with a kind of simplicity. Think of it this way: Credit markets derive from the cycle of human life. Young people need to borrow capital to start families and businesses; old people need to earn income on the capital they have saved. We invest our retirement savings in the formation of new households. All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old.

To understand the bleeding in the housing market, then, we need to examine the population of prospective homebuyers whose millions of individual decisions determine whether the economy will recover. Families with children are the fulcrum of the housing market. Because single-parent families tend to be poor, the buying power is concentrated in two-parent families with children.

Now, consider this fact: America’s population has risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was when Richard Nixon took office, at 25 million. In 1973, the United States had 36 million housing units with three or more bedrooms, not many more than the number of two-parent families with children—which means that the supply of family homes was roughly in line with the number of families. By 2005, the number of housing units with three or more bedrooms had doubled to 72 million, though America had the same number of two-parent families with children.

The number of two-parent families with children, the kind of household that requires and can afford a large home, has remained essentially stagnant since 1963, according to the Census Bureau. Between 1963 and 2005, to be sure, the total number of what the Census Bureau categorizes as families grew from 47 million to 77 million. But most of the increase is due to families without children, including what are sometimes rather strangely called “one-person families.”

In place of traditional two-parent families with children, America has seen enormous growth in one-parent families and childless families. The number of one-parent families with children has tripled. Dependent children formed half the U.S. population in 1960, and they add up to only 30 percent today. The dependent elderly doubled as a proportion of the population, from 15 percent in 1960 to 30 percent today.

If capital markets derive from the cycle of human life, what happens if the cycle goes wrong? Investors may be unreasonably panicked about the future, and governments can allay this panic by guaranteeing bank deposits, increasing incentives to invest, and so forth. But something different is in play when investors are reasonably panicked. What if there really is something wrong with our future—if the next generation fails to appear in sufficient numbers? The answer is that we get poorer.

The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still—no matter what economic policies we put in place.

We could put this another way: America’s housing market collapsed because conservatives lost the culture wars even back while they were prevailing in electoral politics. During the past half century America has changed from a nation in which most households had two parents with young children. We are now a mélange of alternative arrangements in which the nuclear family is merely a niche phenomenon. By 2025, single-person households may outnumber families with children.

The collapse of home prices and the knock-on effects on the banking system stem from the shrinking count of families that require houses. It is no accident that the housing market—the economic sector most sensitive to demographics—was the epicenter of the economic crisis. In fact, demographers have been predicting a housing crash for years due to the demographics of diminishing demand. Wall Street and Washington merely succeeded in prolonging the housing bubble for a few additional years. The adverse demographics arising from cultural decay, though, portend far graver consequences for the funding of health and retirement systems.

Conservatives have indulged in self-congratulation over the quarter-century run of growth that began in 1984 with the Reagan administration’s tax reforms. A prosperity that fails to rear a new generation in sufficient number is hollow, as we have learned to our detriment during the past year. Compared to Japan and most European countries, which face demographic catastrophe, America’s position seems relatively strong, but that strength is only postponing the reckoning by keeping the world’s capital flowing into the U.S. mortgage market right up until the crash at the end of 2007.

As long as conservative leaders delivered economic growth, family issues were relegated to Sunday rhetoric. Of course, conservative thinkers never actually proposed to measure the movement’s success solely in units of gross domestic product, or square feet per home, or cubic displacement of the average automobile engine. But delivering consumer goods was what conservatives seemed to do well, and they rode the momentum of the Reagan boom.

Until now. Our children are our wealth. Too few of them are seated around America’s common table, and it is their absence that makes us poor. Not only the absolute count of children, to be sure, but also the shrinking proportion of children raised with the moral material advantages of two-parent families diminishes our prospects. The capital markets have reduced the value of homeowners’ equity by $8 trillion and of stocks by $7 trillion. Households with a provider aged 45 to 54 have lost half their net worth between 2004 and 2009, according to Dean Baker of the Center for Economic and Policy Research. There are ways to ameliorate the financial crisis, but none of them will replace the lives that should have been part of ­America and now are missed.
Illust : Population Age in (...), 75.3 kb, 436x289

This suggests that nothing economic policy can do will entirely reverse the great wave of wealth destruction. President Obama made hope the watchword of his campaign, but there is less for which to hope, largely because of the economic impact of the lifestyle choices favored by the same young people who were so enthusiastic for Obama. The Reagan reforms created new markets and financing techniques and put enormous amounts of leverage at the disposal of businesses and households. The 1980s saw the creation of a mortgage-backed securities market that turned the American home into a ready source of ­capital, the emergence of a high-yield bond market that allowed new companies to issue debt, and the expansion of private equity. These financing techniques contributed mightily to the great expansion of 1984–2008, and they were the same instruments that would wreak ruin on the financial system. During the 1980s the baby boomers were in their twenties and thirties, when families are supposed to take on debt; twenty years later, the baby boomers were in their fifties and sixties, when families are supposed to save for retirement. The elixir of youth turned toxic for the aging.

Unless we restore the traditional family to a central position in American life, we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s. Theoretically, we might recruit immigrants to replace the children we did not rear, or we might invest capital overseas with the children of other countries. From the standpoint of economic policy, neither of those possibilities can be dismissed. But the contributions of immigration or capital export will be marginal at best compared to the central issue of whether the demographics of America reverts to health.

Life is sacred for its own sake. It is not an instrument to provide us with fatter IRAs or better real-estate values. But it is fair to point out that wealth depends ultimately on the natural order of human life. Failing to rear a new generation in sufficient numbers to replace the present one violates that order, and it has consequences for wealth, among many other things. Americans who rejected the mild yoke of family responsibility in pursuit of atavistic enjoyment will find at last that this is not to be theirs, either.

It will be painful for conservatives to admit that things were not well with America under the Republican watch, at least not at the family level. From 1954 to 1970, for example, half or more of households contained two parents and one or more children under the age of eighteen. In fact as well as in popular culture, the two-parent nuclear family formed the normative American household. By 1981, when Ronald Reagan took office, two-parent households had fallen to just over two-fifths of the total. Today, less than a third of American households constitute a two-parent nuclear family with children.

Housing prices are collapsing in part because single-person households are replacing families with children. The Virginia Tech economist Arthur C. Nelson has noted that households with children would fall from half to a quarter of all households by 2025. The demand of Americans will then be urban apartments for empty nesters. Demand for large-lot single family homes, Nelson calculated, will slump from 56 million today to 34 million in 2025—a reduction of 40 percent. There never will be a housing price recovery in many parts of the country. Huge tracts will become uninhabited except by vandals and rodents.

All of these trends were evident for years, and duly noted by housing economists. Why did it take until 2007 for home prices to collapse? If America were a closed economy, the housing market would have crashed years ago. The paradox is that the rest of the industrial world, and much of the developing world, are aging faster than the United States.

In the industrial world, there are more than 400 million people in their peak savings years, 40 to 64 years of age, and the number is growing. There are fewer than 350 million young earners in the 19-to-40-year bracket, and their number is shrinking. If savers in Japan can’t find enough young people to lend to, they will lend to the young people of other countries. Japan’s median age will rise above 60 by mid-century, and Europe’s will rise to the mid-50s.

America is slightly better off. Countries with aging and shrinking populations must export and invest the proceeds. Japan’s households have hoarded $14 trillion in savings, which they will spend on geriatric care provided by Indonesian and Filipino nurses, as the country’s population falls to just 90 million in 2050 from 127 million today.

The graying of the industrial world creates an inexhaustible supply of savings and demand for assets in which to invest them—which is to say, for young people able to borrow and pay loans with interest. The tragedy is that most of the world’s young people live in countries without capital markets, enforcement of property rights, or reliable governments. Japanese investors will not buy mortgages from Africa or Latin America, or even China. A rich Chinese won’t lend money to a poor Chinese unless, of course, the poor Chinese first moves to the United States.

Until recently, that left the United States the main destination for the aging savers of the industrial world. America became the magnet for savings accumulated by aging Europeans and Japanese. To this must be added the rainy-day savings of the Chinese government, whose desire to accumulate large amounts of foreign-exchange reserves is more than justified in retrospect by the present crisis.

America has roughly 120 million adults in the 19-to-44 age bracket, the prime borrowing years. That is not a large number against the 420 million prospective savers in the aging developed world as a whole. There simply aren’t enough young Americans to absorb the savings of the rest of the world. In demographic terms, America is only the leper with the most fingers.

The rest of the world lent the United States vast sums, rising to almost $1 trillion in 2007. As the rest of the world thrust its savings on the United States, interest rates fell and home prices rose. To feed the inexhaustible demand for American assets, Wall Street connived with the ratings agencies to turn the sow’s ear of subprime mortgages into silk purses, in the form of supposedly default-proof securities with high credit ratings. Americans thought themselves charmed and came to expect indefinitely continuing rates of 10 percent annual appreciation of home prices (and correspondingly higher returns to homeowners with a great deal of leverage).

The baby boomers evidently concluded that one day they all would sell their houses to each other at exorbitant prices and retire on the proceeds. The national household savings rate fell to zero by 2007, as Americans came to believe that capital gains on residential real estate would substitute for savings.

After a $15 trillion reduction in asset values, Americans are now saving as much as they can. Of course, if everyone saves and no one spends, the economy shuts down, which is precisely what is happening. The trouble is not that aging baby boomers need to save. The problem is that the families with children who need to spend never were formed in sufficient numbers to sustain growth.

In emphasizing the demographics, I do not mean to give Wall Street a free pass for prolonging the bubble. Without financial engineering, the crisis would have come sooner and in a milder form. But we would have been just as poor in consequence. The origin of the crisis is demographic, and its solution can only be demographic.

America needs to find productive young people to whom to lend. The world abounds in young people, of course, but not young people who can productively use capital and are thus good credit risks. The trouble is to locate young people who are reared to the skill sets, work ethic, and social values required for a modern economy.

In theory, it is possible to match American capital to the requirements of young people in venues capable of great productivity growth. East Asia, for example, has almost 500 million people in the 19-to-40-year-old bracket, 50 percent more than that of the entire industrial world. The prospect of raising the productivity of Chinese, Indians, and other Asians opens up an ­entirely different horizon for the American economy. In theory, the opportunities for investment in Asia are limitless, but political trust, capital markets, regulatory institutions, and other preconditions for such investment have been inadequate. For aging Americans to trust their savings to young Asians, a generation’s worth of institutional reforms would be required.

It is also possible to improve America’s demographic profile through immigration, as Reuven Brenner of McGill University has proposed. Some years ago Cardinal Baffi of Bologna suggested that Europe seek Catholic immigrants from Latin America. In a small way, something like this is happening. Europe’s alternative is to accept more immigrants from the Middle East and Africa, with the attendant risks of cultural hollowing out and eventual Islamicization. America’s problem is more difficult, for what America requires are highly skilled immigrants.

Even so, efforts to export capital and import workers will at best mitigate America’s economic problems in a small way. We are going to be poorer for a generation and perhaps longer. We will drive smaller cars and live in smaller homes, vacation in cabins by the lake rather than at Disney World, and send our children to public universities rather than private liberal-arts colleges. The baby boomers on average will work five or ten years longer before retiring on less income than they had planned, and young people will work for less money at duller jobs than they had hoped.

In traditional societies, each extended family relied on its own children to care for its own elderly. The resources the community devoted to the destitute—gleaning the fields after harvest, for example—were quite limited. Modern society does not require every family to fund its retirement by rearing children; we may contribute to a pension fund and draw on the labor of the children of others. But if everyone were to retire on the same day, the pension fund would go bankrupt instantly, and we all would starve.

The distribution of rewards and penalties is manifestly unfair. The current crisis is particularly unfair to those who brought up children and contributed monthly to their pension fund, only to watch the value of their savings evaporate in the crisis. Tax and social-insurance policy should reflect the effort and cost of rearing children and require those who avoid such effort and cost to pay their fair share.

Numerous proposals for family-friendly tax policy are in circulation, including recent suggestions by Ramesh Ponnuru, Ross Douthat, and Reihan Salam. The core of a family-oriented economic program might include the following measures:

• Cut taxes on families. The personal exemption introduced with the Second World War’s Victory Tax was $624, reflecting the cost of “food and a little more.” In today’s dollars that would be about $7,600, while the current personal exemption stands at only $3,650. The personal exemption should be raised to $8,000 simply to restore the real value of the deduction, and the full personal exemption should apply to children.

• Shift part of the burden of social insurance to the childless. For most taxpayers, social-insurance deductions are almost as great a burden as income tax. Families that bring up children contribute to the future tax base; families that do not get a free ride. The base rate for social security and Medicare deductions should rise, with a significant exemption for families with children, so that a disproportionate share of the burden falls on the childless.

• Make child-related expenses tax deductible. Tuition and health care are the key expenses here with which parents need help.

• Change the immigration laws. The United States needs highly skilled, productive individuals in their prime years for earning and family formation.

We delude ourselves when we imagine that a few hundred dollars of tax incentives will persuade individuals to form families or keep them together. A generation of Americans has grown up with the belief that the traditional family is merely one lifestyle choice among many.

But it is among the young that such a conservative message could reverberate the loudest. The young know that the promise of sexual freedom has brought them nothing but emptiness and anomie. They suffer more than anyone from the breakup of families. They know that abortion has wrought psychic damage that never can be repaired. And they see that their own future was compromised by the poor choices of their parents.

It was always morally wrong for conservatives to attempt to segregate the emotionally charged issues of public morals from the conservative growth agenda. We know now that it was also incompetent from a purely economic point of view. Without life, there is no wealth; without families, there is no economic future.

Random Conversation at a Local Business

Conversation at a local gas station/convenience mart. {Sound of multiple police sirens in back ground}

Store Attendant: "Go get 'em, guys. Make some revenue!"
Customer:"They have to get it somehow."
Attendant:"Yup, they do. Wait 'til the road gets repaved. People will be going 90 mph down the road. They'll be stopping them then. They get them for going 1 mph over now. $75."
Customer:"Sheesh."
Attendant:"You read the paper?"
Customer:"Yup."
Attendant:"Did you see how they want to tax businesses because the unemployment fund is outta money?"
Customer:"I think I heard that on the radio."
Attendant:"That's a great move. Tax businesses more and drive 'em out. No wonder we can't grow this economy."
Customer:"No kidding. That's the kind of shortsightedness that's in this state."
Attendant:"Yeah. Never gets better. What are people thinking?"
Customer:"Just keep voting the same people in."
Attendant:"Ha ha ha. Yup. OK, take it easy."
Customer:"Have a good one."

Woonsocket Vote Proves Point of Tea Parties

In case you missed it, a Tea Party broke out in Woonsocket the other day (h/t).

As reported by WPRI:

Woonsocket's City Council has voted against a supplemental tax bill that would have raised property taxes by eight percent.

Councilors took the vote late Monday night, following testimony from dozens of residents. Council members said arguments against the bill changed their minds; it was originally expected to pass.

The bill was meant to close the school department's $3.7 million deficit. Councilors plan to meet Wednesday to decide on their next course of action, which could include a lawsuit against the state for more funding.

After some five hours of discussion, at just about midnight, the council...vot[ed] 4-3 against the measure. In the end, it was Councilwoman Suzanne Vadenais who tipped the balance. Early in the evening, she indicated a reluctant willingness to support supplemental taxes, but by the end of the night she had changed her mind.

“It was a very difficult decision,” she said. “After listening to all the people who spoke tonight, I can't vote for this.”

Vadenais joined Councilors Stella Brien, Christopher Beauchamp and Roger G. Jalette Jr. in opposing the measure. Council President Leo T. Fontaine, William Schneck and John Ward were in favor of it.

Tea Parties and Public Choice Theory

Put your wonk hat on. Economists Brian Wesbury and Robert Stein write:

While the theory of public choice can be broadly applied, it is the ideas of "special interests" and "rational ignorance" that are useful in understanding last week's tea parties.

Here's an example of public choice at work. Let's say teachers could benefit by $2,000 each per year (in higher pay or benefits, smaller classes, etc.) from a piece of legislation currently under debate. But the cost per taxpayer averages just $15 per year.

The "special interests" (teachers and politicians) have substantial personal incentive to see that the bill is passed. Teachers, who benefit directly, will use time and money to lobby for the bill. And lawmakers will expect campaign contributions, votes or both, in exchange for their support.

But the taxpayer will remain "rationally ignorant" of the whole process. Why spend time even thinking about an issue when the cost is only $15 per year?

....This is why government will tend to grow in excess of what a true democracy really wants. At least, it will grow until those $15 hits accumulate to such a level that people have finally had enough, and in a seemingly spontaneous eruption, the average voter finds the energy to fight back.

Apparently, this is what happened last week.

Here is an interesting set of facts. If the government increased the top tax rate from the current rate of 35% to 100% (yes, that's right 100%), it would only collect an extra $400 billion this year. In other words, confiscating all the income that is currently taxed at 35% would not raise enough revenue to cover any of the annual deficits projected in the next 10 years. There is no way that tax hikes on the rich alone can pay for proposed spending in the current budget.

Total Bailouts to Date: Quantifying Why We "Threw Tea Overboard"

Further to Justin's post "Don't Let Them Convince You ..." and in the spirit of non-partisanship, a quick review of the original impetus for the Tea Parties is in order:

Two administrations. Two Congresses. An incomprehensible level of spending.

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Bloomberg, March 31, 2009.

Two Tax Day Protests

From the Providence Business News:

From 10 a.m. to 8 p.m., a group of activists plan to greet tax filers at the Corliss Street post office to protest the cost of the war in Iraq and the defense budget. The groups that will be represented include the American Friends Service Committee, Ocean State Action, Declaration of Peace Campaign Rhode Island, and the Rhode Island Mobilization Committee to End War and Occupation.

“Rhode Islanders have spent billions of dollars on the war in Iraq and continue to do so,” Martha Yager of the Friends Service Committee said in a statement. “The military budget, bloated with funding outdated weapons systems and 300 percent cost overruns that would be completely unacceptable in any other part of government, continues to suck up over half of our nation’s discretionary spending.”

“With that money, we could have avoided the state’s deficit, funded Head Start, health care and education, and have been ready to help families hit hard by the state’s recession,” she added.

Fiscal conservatives plan to hold their own “Tax Day Tea Party” protest in front of the Statehouse in Providence from 3 to 6 p.m. The event will coincide with hundreds of other rallies that will be held today in as many as 2,000 cities nationwide, organizers said.

The event, which was organized by Pawtucket resident Colleen Conley and will be hosted by WHJJ-AM radio host Helen Glover, will feature more than a dozen speakers. They are scheduled to include the radio host John DePetro; Justin Katz, who writes the Anchor Rising blog; James Beale, president of the Rhode Island Statewide Coalition; and Robert Healey Jr., who ran for lieutenant governor in 2006.

The Tea Party protesters will call on politicians to reduce government spending and cut taxes. “On the part of both state and federal elected leaders, I think they need to take a hard look at what they’re spending our money on, and re-prioritize,” Conley told Providence Business News. “There’s a lot of wasteful spending out there.”

It's really not that nefarious or difficult to understand: the Tea Parties are an opportunity for people to advocate for reduced government spending and to rail against the professionalization of politics; all in an effort to exhort our government to spend our tax dollars more wisely.They're fed up with a political class that is increasingly out of touch with regular American tax payers.

For progressives, this was an opportunity to actually lend their support to a non-partisan, grass-roots movement aimed at doing what they claim they desire: democratizing the political system by "waking up" politicians to the needs of the common man. The truth is, these self-proclaimed progressive political insiders aren't really keen on changing the system. Instead, they devoted all their time trying to denigrate the effort and looking for George Soros-like conservative funders (I guess you assume what you know, eh?). Ah well, as the kids say, whatev.

Fiji, the Tax Man and Joe's Estate

Under "Fiji: Undemocracy in Action", commenter Joe B reminds us that Fiji is a tax haven for many, including the family of the senior senator from Massachusetts.

The Obama administration and some members of Congress would like to begin cracking down on tax havens by giving

... U.S. regulators the authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement.

When certain members of Congress decided to jack up the red herring of bonuses issued to some AIG staff members, they saw no problem with and vociferously advocated for an ex post facto law that would have retroactively taxed those bonuses at a rate of 90%+.

With that "precedent" in mind, if the tax status of Fiji is redefined under law, will Congress then pass an ex post facto law that would recover the many millions in estate taxes lost to trusts, including that of Joseph Kennedy, Sr., domiciled in Fiji rather than the United States?

Can We Afford to Do Everything?

Under Justin's post "Because They're Better than You" about the Chief Justice's nifty office renovation, commenter EMT points out that

... part of the cost was due to the historic status of the building.

Respectfully, regretfully, is it possible that we can't afford to keep or maintain historic buildings?

The renovation of Justice Williams' office highlights an unfortunate tendency when someone else's dollars are being spent. In the public sphere, when tax dollars are involved, the expenditure of certain budget dollars somehow doesn't count.

- It's a historic building so we had to overspend.

- We opened that new school/police station/fire station. That's why our budget went up that million dollars year over year. (Hello, Cranston.)

And the reaction too often is, "OOOH, okay." It's a one time expenditure that didn't go to salaries, benefits or supplies. The money to pay for it will come off the One Time Expenditure Money Tree.

Except, of course, that it doesn't. This is not to question the necessity of projects such as schools and public safety buildings. But in actuality, there is no money tree. However necessary the expenditure, additional tax dollars must be collected to cover this expenditure, whether it be up front or as a bond. (Bonds count as spending, too!)

The way it works in real life is that if an extraordinary expenditure comes up, either another item of an equal amount is cut from the budget or the extraordinary expenditure is not made. In the public sphere, there's a third option: hand the bill to someone else.

Case in point. The state has issued an RFP for the restoration of the exterior of the Statehouse Dome. All surfaces to be washed with a trisodium phosphate solution. Three coats of paint on some surfaces. Marble to be repointed, grouted and waterproofed. All seals checked and repaired. Et cetera. By the way, bidding contractor, the historic people will be looking over your shoulder.

We have the most beautiful capitol in the world. Design, construction, materials -- seriously, it's breath-taking. But how much is this restoration project going to cost? What will be cut from the state budget to fund it? Alternately, what has the state been spending money on that should have been set aside for this project or, even more expensively, to pay for the bond?

Some would say that it would have been wrong to save for such a project; the expenditures made were correct and should, indeed, come ahead of a historic renovation, which might be viewed as a luxury. Good, bring on the debate about priorities. The point is that there are a finite number of hard earned dollars in the kitty. And every reach-in counts.

Gotta Take a Dollar to Give a Dollar

Tom Sgouros has penned another missive explaining why Rhode Island's fiscal conservatism has spelled its doom, and why more progressive spending and a bigger state government is the solution. I know. I know. Such are the indications that, though we all breathe the same air, we live in the different realities of our preconceptions.

One side's obvious conclusions are the other side's insidious illusions. My first reaction is to see in Tom's rhetoric and in his sources a deliberate deception founded in financial and ideological motivation. His sympathizers will see in my response a desperate attempt to spin away the incontrovertible at the behest of the puppet masters who control my financial well-being (and at whose suggestion I suffer through those staged photo shoots on construction sites).

I'll give Tom this: He bases his argument on a persuasive table, which Economy.com's Mark Zandi has gone so far as to present to Congress (PDF):

My understanding of this data — although specifics aren't easily available — is that it derives from a macroeconomic model into which Zandi plugged the various instances of government spending. If that's correct, then the exercise is fatally skewed based on the simple fact that the government must take a dollar in order to give a dollar.

Actually, the government must take more than a dollar in order to give a dollar. In 2004, for example, the Food Stamp Program spent about $0.20 for every dollar that it gave away (PDF). That's not the whole story, of course, because there were expenses associated with collecting, allocating, and processing the program's budget. According to Charity Navigator, 9 out of 10 charities spend no more than $0.54 per dollar given away on administrative costs, and 7 out of 10 spend no more than $0.33. For the sake of consideration, then, let's assume that it costs the federal government no more than another five cents per dollar handed out to get that money from the taxpayer to the Food Stamp Program, so the total cost per food stamp dollar would be $0.25.

That means that, for every food stamp dollar given, the government must take $1.25 out of the economy at some other point. According to Zandi, an across-the-board tax cut would add $1.03 to the next year's GDP, so it follows that taking a dollar costs $1.03. Based on an across-the-board increase in taxation, the cost of every food stamp dollar is therefore $1.29, making the actual amount that the whole process adds to the next year's GDP only $0.44. Inasmuch as it does not cost any money not to take a dollar from somebody, a broad tax cut would actually add $0.59 more to GDP than would the food stamp.

The intuitive sense, here, is that it doesn't make any difference, economically, whether I spend a cash dollar on groceries or a welfare recipient spends a food stamp dollar on the same items. If the government largess is extracted from everybody, then the working poor and middle class don't have those dollars to spend. In fact, it appears that funding food stamps by taking a dollar from a family that must therefore reduce its grocery bill in response winds up costing the GDP $0.43.

The appeal of Sgouros's argument comes in the fact that those who don't have to spend will tend to save; those who take in more than they could possibly spend will save even more. Indeed, looking at the numbers on the table, it's tempting to observe that a one-dollar increase in the corporate tax rate would appear to cost the GDP only $0.30, so reprocessing that dollar into food stamps would provide a net GDP gain of $1.43. That possibility is an illusion for two reasons. The first is that the $0.70 difference must come from some theoretical savings account (or untapped credit); thought through in reverse, the reason a dollar of corporate tax cuts only results in a GDP gain of $0.30 is that the rest goes somewhere unproductive. If that tax rate becomes confiscatory in order to alleviate the tax burden on the poor and middle class, corporations and the proverbial rich will not for long watch their reserves being depleted without reacting.

The second reason is that, when heavily taxing the rich, a marker of single dollars no longer applies. Wealthy entities (whether families or organizations) work in different amounts than do the the rest of us. It's true that a rich man may be less productive with a free dollar than would a poor man, but take from him ten million dollars, and he won't invest in a company, donate to charity, build a house, and so on, and those activities all filter down to folks who'll spend their money in the same fashion as welfare recipients, but without the government processing fee. If a few percent of the society is going to pay most of the cost of government, the taxation dollar amounts are exponential.

To be sure, Sgouros whistles an enticing tune when he writes:

People routinely misunderstand the important points of policy that stem from Keynes's findings. Government spending and progressive taxation aren't good things because they support government workers or "punish" rich people. They are good things because they are how a government can help the economy grow. (Up to a point, of course, a detail Keynes made clear.) Government workers with money to spend will spend it, and that drives the economy. Progressive taxation keeps more money in the hands of the poor and people in the middle, both of whom are more likely to spend their income than rich people are.

But he loses the thread of his earlier wisdom. Private-sector workers funded via mutual agreement will also spend their money, but they have more reason to earn it efficiently than public-sector workers funded via compulsory taxation. They also can't hide their wealth as thoroughly. Tom notes that a "dollar saved is not a dollar invested" and that "people have different preferences for how they hold their money," but he doesn't acknowledge that unionized government workers save their money in the form of perks, accumulating benefits, and defined-benefit pensions. There must be some form of savings — actual or theoretical against future taxation and revenue — in order for somebody in his '40s or '50s to retire for the rest of his life. A person who lives for thirty years on an annual pension of $35,000 had stored away over a million dollars in some nook of the system.

For its larger projects and continued growth, a society needs people with financial reserves, but those reserves have to be accessible for spending. A society also needs people motivated to create, and capable of creating, wealth, and those (as I've argued here, here, and here) are the families that Rhode Island has been chasing out. Sgouros and Co. can flash all the statistical pictures they want, but what Rhode Island must do is to maintain the number of wealthy taxpayers while relieving the burden of (and thereby attracting) the productive class.

Ultimately, that leaves only one broad category to which to turn to balance the state's budget: Those who represent a net cost to the government.

RISC Winter Meeting: Gary Sasse Talks Taxes

Giving the first speech at the Rhode Island Statewide Coalition's Winter Meeting, Gary Sasse, Governor Carcieri's Director of the Department of Administration, spoke about tax policy (stream entire speech):

• RISC Chairman Harry Staley's introduction: stream, download
• Sasse's opening remarks — we compete for capital and labor, and tax policy affects our success: stream, download
• The reason for a Tax Policy Workgroup was our lack of competitiveness — we were "taking money out of the private sector and putting it in the public sector in a very uncompetitive way": stream, download
• The need for reform to prepare for the end of the recession: stream, download
• The tax reform in the governor's current budget — increase exemption of estate tax, phase out and eliminate the corporate tax ("That is the perception change we need. That is a bold step."), decrease personal income taxes ("Every income group, up to a half million dollars, pays lower average income taxes under the proposed system."): stream, download
• Closing remarks: stream, download

Governor Patrick's Trivialities

Amidst a billion dollar state deficit, a flagging economy, a state hiring freeze and a raging debate about whether to raise tolls or jack up the gas tax (with the smart money on a compromise - "what the heck, let's do both"), Massachusetts Governor Deval Patrick has been focusing on the important things.

- Appointment of a senator to a long-dormant $175,000 job;

- Hiring of a heavy campaign contributor to the newly created post of director of real estate services; annual salary: $120,000. (Did I mention the state's hiring freeze?)

- Hefty raises for a couple of sheriffs.

Add to that his Turnpike Authority which has implemented his campaign promise to lay off toll takers by hiring two staffers at a nifty $100,000 per annum.

I said these items are important, didn't I? My mistake. They are not important.

A dismissive Gov. Deval Patrick yesterday belittled as “trivial” recent exposes detailing plum jobs and fat raises to the politically connected under his watch, saying the controversies won’t distract him from “meaningful” issues.

“One of the challenges in life is concentrating on the meaningful and letting the trivial take a back seat,” Patrick said in the Senate reading room, after a reporter asked him whether patronage-packed Beacon Hill still has credibility with the public.

“I sometimes feel like I’m in a profession now where that is completely upside-down,” he added.

Funny, we feel that way, too, Governor. It might have been better to have skipped the trivialities altogether.

Good Night, Sweet Tiverton

I hadn't planned to attend the Tiverton Budget Committee meeting on Wednesday night, so when my eyelids became heavy around 9:30, and with the meeting looking as if it had settled into a series of unanimous votes on heavily debated dollar amounts, it was easy to talk myself into heading home. I wish I'd stayed:

All but one voting member of Tiverton's Budget Committee supported a proposal to move the town's financial town meeting to a later date, when more concrete state aid figures are available.

The vote came at the end of a long budget meeting Wednesday night, and just days before the Town Council is scheduled to meet and discuss whether to ask the General Assembly for the ability to postpone the meeting, which the town charter states is to take place the second Saturday of May. ...

Budget Committee Chairman Jeff Caron did not vote on the motion, and Vice Chairman Robert Coulter voted against it. The chairman usually votes only as a tiebreaker. ...

Sanford Mantell, a newly elected member of the Budget Committee, said he didn't have a problem with a request by Town Council President Donald Bollin for "unified" support from the Budget Committee to move the financial town meeting to a later date.

Some committee members made it clear that they would not want the meeting to open on May 9 only to be recessed to a later date. That would disenfranchise voters and cost the town additional money, they said.

Caron said the committee will continue to work on its budget recommendations and have a docket ready for May 9 if the meeting does end up convening on that date.

I very much hope I'm wrong about this, but it appears to me that the powers of Tiverton are in the midst of another scheme. Facing unexpected push-back from the budget committee, the town council and school committee squeezed their budgets as hard as they could even pretend to be doing. (Recall statements from the town side that the draft budget that they approved is "too low," even presenting a danger to residents.) Between that, some likely fudging of probable contract terms, and a very deep dip into reserve funds, the town brought the expected tax increase below the state cap.

That will depressurize some of the incentive for citizen activism, and a postponement of the financial town meeting will push actual decisions into the lazy summer, perhaps after municipal and school contracts are a done deal. No doubt, town officials are still hoping for the magic Obama money to save the day, but I suspect they're already planning methods of peeling the facades from the budgets and coming on strong with the message that "we must raise taxes" because we're awash in "obligations."

Business as usual may be in the middle of a hiccup, but it remains the paradigm, and when our eyes clear, we'll see whether the town's gamble that the world will go back to the way it was has paid off. Me, I think Tiverton's future gets a little bit darker every week.

As I said, I hope I'm wrong.

Talking About Bonuses

On last night's Matt Allen show, Monique and Matt shared disbelief at the disbelief that Congress (particularly one marble-mouthed representative) has expressed regarding AIG's bonus handouts. Stream by clicking here, or download it.

Latest on the Bonus Sideshow

The BBC reported last night that the US Treasury Department will hold back the amount of the bonuses from the next round of bailout money to AIG.

Ailing insurer AIG will pay back the hugely controversial bonuses it awarded after taking public bail-out money, the US treasury secretary says.

In a letter to congressmen, Timothy Geithner also said $165m (£116m) would be taken from $30bn the firm is due to get as part of its government bail-out.

While it will hopefully quell foolish suggestions to create highly targeted (and therefore highly illegal) income tax brackets of 100%, this resolution has not derailed today's AIG hearing before Congress, where relieved outrage has not abated

The remarks did not assuage the anger expressed by both Democrats and Republicans in response to the bonus payments to workers at AIG's financial products unit. Frank called the payouts "wholly unjustified," while other lawmakers took aim at the firm's management

and clever new names for the firm were presented.

"AIG now stands for arrogance, incompetence and greed," Rep. Paul Hodes, D- N.H., said.

Congressman, you've made it awfully tempting to fill in the acronym CONGRESS.

The real outrage, of course, is Congress placing AIG (and other private corporations) in a position to hand out tax dollars to begin with as part of a very expensive and highly quizzical effort to stop or shorten the fiscal slide created in 1995 by Congress itself, along with the Executive Branch. Every indignant word spoken at that hearing today to the hapless Mr. Liddy should be reserved instead by that congressperson for a quiet session with a mirror.

UPDATE

Question for Congressman Frank: in view of the death threats received by AIG management and employees, is it altogether prudent to be requesting the names of those who received bonuses?

UPDATE 2

And a follow up, sir. Will you also be requesting the names of those employees at Fannie and Freddie due to receive bonuses? [H/T Drudge.]

Who Is Outraged?

So let's understand this.

The government precipitates a fiscal crisis by

1.) Authorizing/encouraging banks to make bad real estate loans: President Clinton with the help of both Repubs and Dems in Congress;

2.) Repealing Glass Steagall: President Clinton, egged on by Senator Phil Gramm and with the help of both Repubs and Dems in Congress;

3.) Fending off all oversight and regulation of taxpayer-backed Fannie and Freddie: Congressman Barney Frank, all by his little self.

[Other/overlooked failures cheerfully appended.]

The government - one Republican president, one Democrat president and lots of Repubs and Dems in Congresss - then tries to fix the problem it created by shoveling massive amounts of our tax dollars out the door, much of it without strings or conditions (by the way, why didn't regulation-adoring Democrats scream bloody murder about this at the time? but this is intended to be a bi-partisan/anti-partisan post), in an effort to correct market and other forces that need to work themselves out "naturally". Side note: painful as that would be, it would be much less painful in the long run than dismantling what remained of a capitalist economy and converting to ... something else, whatever that would be.

Yet for the last couple of days, Congressman Frank, the junior Senator from Rhode Island and other federal officials have been very indignantly directing outrage at the private corporations involved for distributing bonuses that they (our elected officials) facilitated?

Getting out the calculator here ... Hang on ... Yup, trillions of dollars wasted on bailouts and stimuli is a larger amount than $165 million wasted on unearned bonuses.

I agree it is outrageous that hard earned (and not yet earned) tax dollars have been distributed in this and other irresponsible fashions. But with their high dudgeon pronouncements, aren't our elected officials really saying,

Pay no attention to the trillions we've spent like sailors on shore leave. Look! Look at those millions being spent over there!

In short, how can this dramatic reaction by our elected officials be viewed as anything other than a vigorous attempt to distract us and deflect blame from themselves?

Business Tax via Sales Tax

An article in last week's Sakonnet Times (not online) informs the reader that my representative in the State House, Jay Edwards, has submitted legislation reducing the sales tax:

"This legislation would stem the tide of consumers who leave Rhode Island to shop in Massachusetts just to save on the sales tax," said Rep. Edwards. "We must start thinking of ways to make our state more competitive instead of accepting the status quo and allowing Massachusetts and Connecticut to reap the additional sales."

The bill does not spread the tax to everything — as previous efforts have seemed to attempt — but there is some curious broadening, considering that the name of the game is competition. Taxes on computer software and floral business equipment are one thing, but adding a tax on the necessary supplies of the jewelry industry and greatly expanding the net that would catch commercial fishing boats in the sales-tax Web from 5-ton vessels to 50-ton vessels seems a bit like circling around ailing bison.

Why can't we just cut the sales tax, period? Maybe when our state economy has rocketed to the forefront of the nation we could think about broadening it, but desperate times call for bolder measures.

Twenty Percent of Massachusetts Stimulus Dollars Directed to Honor One Family

Who would that be? You guessed it.

H/T Howie Carr. From the American Thinker:

According to an AP article , Massachusetts is receiving 126 million stimulus dollars; of that amount more than 1 out of 5 of those dollars "is going to help preserve the legacy of the Kennedys."

1) $5.8 million to plan and design the new Senator Edward M. Kennnedy (D-MA) Institute for the Senate plus, perhaps, an endowment for said institute. (Quietly insert your own free Senator Edward Kennedy Senatorial Institute joke here.)

2) $22 million for expanding the John F. Kennedy Presidential Library and Museum.

3) $5 million for a downtown Boston park; a new gateway to Boston Harbor Island on the Rose Kennedy Greenway.

A caller to Howie correctly pointed out that the honorable thing for the Kennedy family to do would be to decline these projects and suggest that the funds be directed to more urgent and practical projects.

Governor's Tax Policy Workgroup Report

Governor Carcieri's Tax Policy Strategy Workgroup has released it's report (short version; long version). The ProJo has a story on the report and another on the impact that tax cuts will have on the budget deficit. They even have a poll asking, "Can Rhode Island afford to cut taxes now?" Funny, I don't recall any polls over the last decade or so asking, "Can Rhode Island afford to continually increase spending and grow government?" Anyway, here are the highlights of the committee's recommendations.

{All text taken directly from the summary report}

INDIVIDUAL TAXES

The starting point for the state’s personal income tax system be Federal Adjusted Gross Income (AGI) but that the number of modifications to Federal AGI that are made to determine Rhode Island Adjusted Gross Income be reduced.

The personal income tax system allow a state determined standard deduction and state determined personal and dependent exemptions, both indexed for inflation, as the only deductions from Rhode Island AGI in determining Rhode Island taxable income.
The personal income tax system consist of four taxable income brackets with a top marginal tax rate of 5.5 percent.

The personal income tax system tax income from capital gains at ordinary income tax rates regardless of how long an asset has been held before sale or what type of asset is being sold.

The personal income tax system allow only four tax credits: a refundable Earned Income Tax Credit, a Property Tax Relief Credit, a Lead Paint Abatement Credit, and Credit for Income Taxes Paid to Other States.

The Rhode Island estate tax exemption be raised immediately to $1.0 million and be gradually increased to match the federal estate tax exemption which in 2009 is $3.5 million.

Any expansion in the state’s sales tax base must be accompanied by a reduction in Rhode Island’s sales tax rate and a thorough assessment of the impact of such an expansion on small business.

BUSINESS TAXES

The Tax Policy Strategy Workgroup offers two options for consideration in the reform of the Business Corporation Tax. The first option would:

Eliminate the Business Corporation Tax and replace the current Franchise Tax system with a tiered system according to corporations’ net income.

Reduce the Business Corporation Tax rate to 8.0 percent, eliminate all but three tax credits, and maintain the current Franchise Tax system.

The restructuring of the tax appeals process by moving tax appeals to a tax calendar in Superior Court. Also, the requirement to pay the tax assessment in full prior to the appeal would be eliminated.

PROPERTY TAXES

Move toward standardization of tangible property tax rates, commercial and industrial property tax rates and maximum tangible property and commercial property tax rates in every municipality. Tangible property tax rates should be capped at no more than double residential property tax rates while commercial property tax rates should be capped at no more than 50.0 percent greater than owner-occupied residential property tax rates.

Move toward standardization of motor vehicle excise rates among municipalities while maintaining or expanding the current state $6,000 vehicle exemption. The standard rate would be $25 per thousand.

Limit personal property tax exemptions to a fixed 2.0 percent of the total municipal levy. These exemptions will also be limited by a statewide personal income and a residency qualifier.

Retain current statutory tax exempt standards, however, give tax assessors the authority to limit or eliminate the exemption based upon substantial and material unrelated business taxable income, as defined by the Internal Revenue Code, associated with any particular parcel owned by a tax exempt organization.

Guarantee state involvement in the assessment of certain types of property such as public utility or affordable housing property.

Develop statutory incentives that encourage municipalities to comply with state property tax policy.

Expedite the tax appeal dispute resolution process within municipalities before going to court and establish a state tax court or special calendar in Superior Court to hear commercial real estate and residential property appeals which exceed a certain threshold. Fine tune the appeal process in other ways to expedite the process.

Tweaking the Pork Position: Aged is Fine, Fresh is Bad

As Congress successfully fends off attempts to reduce the considerable pork in an omnibus spending bill, President Obama has indicated that he will not veto the bill. Defending an apparent flip-flop on a campaign promise,

The White House says this bill is just last year's unfinished business -- and next time, it will be different.

"We'll change the rules going forward," White House Press Secretary Robert Gibbs said Wednesday when asked about the legislation.

For the record, Senator John McCain lists... make that, tweets the "Top 10 Porkiest Projects" in the bill.

And Conn Carroll over at the Foundry points out that the costly aspect of pork is not so much its own price tag but what it buys.

The problem with earmarks is not $16 million for water-taxis and manure management. All 9,287 earmarks in the omnibus bill come to a total of $12.8 billion, or 3% of the total package. The problem with earmarks is the other spending that 3% buys. As data from the Office of Management and Budget shows, the rise in the number of earmarks tracks closely with the rise in overall spending by the federal government. Sen. Jim DeMint explained the link to Politico last year: “I talked to colleagues who would say, ‘DeMint, I gotta vote for this bill because it has my project in it,’ even though the bill was way over budget.” The evil of earmarks goes far beyond their nominal price tag. The real damage they do to our country is the votes they buy for ever higher levels of spending.

Flipping that around, every serving of pork, earmarked as much for a reelection campaign as for a specific district, comes with a three thousand percent surcharge. On the bright side, it all ends next year ...

Taxing the Rich and Hurting the Poor

Apparently we are all well aware that the rich can afford to pay more taxes--"their fair share." But can the poor afford it?

The administration’s recently released budget will limit tax deductions on gifts made to charities by those earning over $250,000 a year, raising (we are told) almost $180 billion over the next ten years. It’s an extraordinary grab for money — money given to private charities by private citizens as private donations. These donations directly fund programs that (among other things) feed, clothe, and house the poor, deliver after-school programs to disadvantaged children, build new facilities for colleges and other schools, and generally enrich everyone’s lives through education and the arts.

The way this will work in practice goes like this: Assume someone in the top tax bracket wants to make a $1,000 donation to a local homeless shelter. Currently they would be eligible for a deduction at the top 35 percent rate, so the donation costs them only $650. This proposal would allow deductions at only the 28 percent rate, meaning the donation will now cost $720, an increase of over 11 percent. In other words, $70 that could have gone to the homeless shelter will now go to the government. In the aggregate, then, charities can expect to lose about 7 percent of their contributions from givers in the higher tax brackets. The new top tax rate of 39.6 percent in 2011 makes the math even more punitive, making the cost of donations 19 percent higher.

A study released Friday by the Center on Philanthropy at Indiana University shows that if the provision had been in place in 2006, charities would have lost almost $4 billion in donations in the intervening period. With the incomes of the so-called wealthy dropping, at the same time that their taxes are going up, it’s hard to see how limiting the deduction will not have a significant impact on charitable giving. The dollars taken away from private donations and directed into government coffers are not going to be magically replaced.

The drop in giving is less stark when looked at in the context of how it would affect all Americans who itemize on their tax forms and claim charitable deductions. Total giving by people who itemize would have dropped just 2.1 percent if the Obama plan had been in effect in 2006, the center estimated. Itemized charitable contributions totaled nearly $187-billion that year.

But the center cautioned that giving is far more likely to be affected by the condition of the stock market than by President Obama’s tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion. Charitable donations rise by that same amount when the stock market increases.

Patrick M. Rooney, interim director of the Indiana center, said he worried about the effect of the tax change at a time when the downturn in the economy has put a squeeze on many donors and the charities they support.

“Tax incentives do stimulate more giving,” Mr. Rooney said, “and the challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional incentives, rather than reduce the value of the tax deduction for high-income households, so that the donors with the greatest capacity to give have more reasons to do so.”

12:30 PM | Comments (1) | TrackBack (0)

Obama Versus Tax Dodgers

President Obama is going to go after international tax dodgers (h/t):

President Barack Obama's Treasury secretary says the administration will unveil a series of rules and measures in the coming months to limit the ability of international companies to avoid U.S. taxes.

Treasury Secretary Timothy Geithner told the House Ways and Means Committee on Tuesday that Obama will propose legislation to limit U.S. companies' ability to shelter foreign earnings from taxation in the U.S. He also said the administration will try to limit wealthy Americans' ability to use tax havens to avoid taxation.

Ka-Boom! Tiverton Residents Sue for Refund of Illegal Tax Increase

Things are going to get even a leetle more interesting in our sleepy corner of the state:

Danielle Coulter, a chiropractor and Tiverton School Committee member just elected to office last November, has filed a lawsuit against the Tiverton’s tax assessor.

She claims that last year’s property tax levy in excess of the tax cap was excessive and unlawful, and she asks the court for relief from paying the taxes on property at 34 Lawton Avenue which she and her husband Robert D. Coulter are listed as owners.

Their property is assessed for tax purposes at $395,700 and they pay, according to tax assessor records, $4,455 in taxes.

Mr. Coulter is a lawyer with a Providence law firm and was elected last November to the town Budget Committee, on which he serves as vice-chairman.

Explaining the process that "has brought about this suit," Ms. Coulter said "I am simply appealing my tax bill, everyone has that right."

"The suit is not about money," she said. "The overall amount in question is $193. If returned to us it will be donated to the Tiverton Land Trust. The Financial Town Meeting process is in question. This is about fairness and following the law. It is my belief that the town was lied to in the initial FTM, regarding the timing needed to reconvene the next FTM." ...

Ms. Coulter made other allegations in her complaint about last year's town meeting that she said was "fraught with irregularities ... (that) amounted to a deprivation of due process."

I can't promise to give my refund to charity, but I might donate some of it to a joint Coulter reelection fund.

High Taxes Coming

From ABC News:

President Obama's budget proposes $989 billion in new taxes over the course of the next 10 years, starting fiscal year 2011, most of which are tax increases on individuals.

1) On people making more than $250,000.

$338 billion - Bush tax cuts expire
$179 billlion - eliminate itemized deduction
$118 billion - capital gains tax hike

Total: $636 billion/10 years

2) Businesses:

$17 billion - Reinstate Superfund taxes
$24 billion - tax carried-interest as income
$5 billion - codify "economic substance doctrine"
$61 billion - repeal LIFO
$210 billion - international enforcement, reform deferral, other tax reform
$4 billion - information reporting for rental payments
$5.3 billion - excise tax on Gulf of Mexico oil and gas
$3.4 billion - repeal expensing of tangible drilling costs
$62 million - repeal deduction for tertiary injectants
$49 million - repeal passive loss exception for working interests in oil and natural gas properties
$13 billion - repeal manufacturing tax deduction for oil and natural gas companies
$1 billion - increase to 7 years geological and geophysical amortization period for independent producers
$882 million - eliminate advanced earned income tax credit

Total: $353 billion/10 years

If the government took 100% of earnings from those making more than a half-million dollars a year, it would add only $1.3 trilion to federal tax receipts. Even the most ardent demand-side economists who usually scoff at the Laffer Curve, will have to admit a 100% tax rate is going to yield significantly smaller receipts.

Barack Obama’s plans to hyper-inflate the government bubble while he taxes the rich at confiscatory levels, is so certain to collapse the economy that I can only conclude that he is a brilliant Rovian plant whose purpose is to finally drive a stake into the heart of the era of big government.

Hammering the Tax-Cut = Pay-Increase Principle

Those seeking some reason for optimism may find it (in small measure) in Neil Downing's language:

More than 400,000 Rhode Island workers will soon receive what amounts to a pay raise.

Employers by April 1 must begin withholding less federal income tax from paychecks.

Thus, workers will soon be taking home more than they are now — about $10 more a week for someone who is single, about $15 more a week for someone who is married.

If taxpayers begin to think in those terms, maybe they'll start to wake up. The federal, state, and municipal governments could all give us raises — which would be more substantial than a few cents per hour — in these hard times by cutting spending.

Another RI Newcomer Speaks Truth to Insanity

Gary Smith, of Newport, has come to a conclusion that will be familiar to Anchor Rising readers:

So I asked myself: What is keeping companies away, especially those for whom shipping is not an issue? The answer is and has long been obvious — taxes. CEOs won't relocate to places where their high incomes get hit hard. Companies won't relocate to a state where corporate taxes exceed those of neighboring states. So it would appear that the recommendations of the governor's panel are right on target — and the key part of the panel's findings is that the changes, if enacted, will be revenue-neutral.

It's time for our legislature to wake up and move forward expeditiously and get this state on the move again; it has much to offer. Maybe it takes an outsider to see it. With competitive taxes I think Rhode Island is an easy sell.

Welcome to the battle, Gary. I regret to inform you, however, that the project is much more daunting than you realize.

Exercise your Constituent "Franking" Right

Can't find any web reports but I heard a news report that the House has just passed the non-economic stimulus bill and the Senate was expected to act on it later today.

Do you support or oppose this bill? Let your voice be heard. Senatorial contact information below.

Senator Jack Reed: (202)224-4642. Website.

Senator Sheldon Whitehouse: (202)224-2921. Website.

No More Political Cover

This is an instructive episode:

A House vote to raise the state's cigarette tax by $1 a pack — to what would be the highest level in the nation — was aborted at the last minute yesterday after Republican Governor Carcieri yanked his support from his own tax-raising proposal.

Carcieri's eleventh-hour move was announced by a visibly annoyed House Finance Committee Chairman Steven Costantino on the House floor, the unexpected development punctuated by this uncharacteristic utterance by House Speaker William J. Murphy: "Get it out of here!"

Earlier in the day, Murphy had said raising the cigarette tax "doesn't bother me" because people choose to smoke.

It appears that the General Assembly Democrats would very much like to raise taxes as a way out of their personal-special-interest-debt conundrum... but not without cover. I say that the governor should finally learn this lesson: Go for the conservative gold and declare that anything less is the full property of the legislature. Make them wear it. Make them fight for every ounce of political cover that he's willing to give as part of negotiations.

Meanwhile, remind them that the clock is ticking and that the bomb is on their desk.

Increasing the Cigarette Tax: Will the GA Put Our Money Where Their Mouth is?

The extra financial burden of smoking to the health care system and, more specifically, the state has been put forward as one of the justifications for the proposed one dollar increase to the state cigarette tax being contemplated by the General Assembly even as we speak.

It was interesting and a little nauseating to read in today's ProJo that tobacco is a significant driver of customer traffic for certain stores and that making cigarettes sold in Rhode Island the highest taxed in the country might impact the overall business of those stores.

It also failed to take into account the impact on lawmakers of a hearing-room packed with convenience store owners begging them not to choke off a rich vein of business for them. Their warning: Fewer people will be able to afford cigarettes and those who can will look to the Internet and low-cost states such as New Hampshire for cheaper deals.

The feared result: Rhode Island’s sales will plummet and they’ll lose much-needed business. Manish Modi, who owns a small convenience store in West Warwick, told lawmakers at a recent hearing that he’s barely surviving as it is. “I cannot afford to lose any more business,” he said. “This tax increase is going to drive more and more people to close their stores and drive me almost to bankruptcy.”

Setting that concern aside for a moment and projecting that revenue to the state does increase, in view of one of the asserted reasons for this tax increase, will revenue derived by the state from this tax increase be segregated and directed not into the General Fund but towards the state's tobacco related health care expenses?

A Hidden Tax in the Middle of the Road

Rhode Islanders are beginning to catch on, I think, to the game whereby the state government spends our tax dollars on labor costs, entitlements, and other non-essential or excessive line items and then returns to the taxpayers requesting the passage of bonds for infrastructural basics, like roads. As has come up on Anchor Rising, before, the scheme contains a hidden tax, as well:

Gaping potholes have opened up in town and are snagging cars left and right.

All on Feb. 2, police received reports of eight incidents where drivers struck a pot hole and seriously damaged their vehicles — and many more strikes went unreported. All of these incidents occurred on state roads, and those with damage to a vehicle resulting may be able to recoup up to $300 from the state. ...

A Portsmouth man said he was at the Cumberland Farms on East Main Road, between Pine Tree Road and Schoolhouse Lane, when he noticed four drivers in the parking lot with "blown out tires." Twenty minutes later, he got a call from his daughter who needed help changing a tire that was popped by the pothole near Pine Tree Road.

When he arrived to help his daughter, he said "another six cars were changing their tires at that time."

"This is outrageous," the man wrote in the report he filed with police. "Because it is a state road, police cannot do anything. Shame on the R.I.D.O.T."

Police checked out the pothole on East Main Road near Pine Tree Road and measured it at one foot wide.

Department of Transportation Public Affairs Officer Dana Nolfe said on Tuesday that DOT's dispatch received six calls that day about potholes on state roads in Portsmouth. Now that DOT is aware of them, she said, workers will go out and patch the holes as soon as the weather permits.

Yes, in the extreme, direct circumstances, the motorist can recoup some or all of the repair expense, but note the declining number: One eyewitness observed a total of thirteen cars, while police received reports of eight, and the DOT heard from four people (who weren't necessarily among those experiencing damage).

One also must remember that the $300 doesn't cover the lost time, productivity, and peace of mind on the day of the incident or of the repair. More broadly, it doesn't cover the gradual accelerated wear on the vehicles of everybody who drives over the miles of rough roads every day nor the time and aggravation of those who face the roads' effects on traffic. The right-hand southbound lane of West Main in Portsmouth is a painful ride — just about undrivable in a work van — so drivers tend to stay in the left, congesting flow.

To avoid such outcomes is why we pay taxes in the first place.

More Tax Aversion from the Tax-and-Spend Left

I'm sure Tom Daschle had every intention of filing three years of amended tax returns (one for every year since he was bumped from public office, I believe) whether or not he'd been presented with the opportunity of joining the Obama administration:

Thomas A. Daschle recently filed amended tax returns for 2005, 2006 and 2007 reporting $128,203 in additional tax and $11,964 in interest. The adjustments resulted from additional income for consulting services and the use of a car service, and reductions in charitable contribution deductions. Senator Daschle filed the amended returns voluntarily after Barack Obama announced his intention to nominate the senator to be the Secretary of Health and Human Services. The Presidential Transition Team identified the charitable contribution issue and Senator Daschle self-identified the income adjustments.

If not, citizens of the United States of America — even those who support the current president — might have reason to question whether Mr. Daschle possesses the ethical fortitude to hold appointed office.

Discouraging Behavior

This quotation from the Providence Journal's latest story on Gov. Carcieri's tax panel pretty well highlights the philosophical differences at play:

... under proposals involving the personal income tax, lower-income and many higher-income taxpayers would generally pay less, but middle-income taxpayers — and the state’s highest-income taxpayers — would generally pay more.

This is partly because the proposals would eliminate most tax credits; end the favorable tax treatment of profit on the sale of stock and other such assets; and prohibit a taxpayer from deducting, for state tax purposes, such items as charitable contributions, mortgage interest and local property taxes.

So the disfavored demographic in this proposed tax rearrangement would be charitably inclined homeowners investing in the state. Somehow I have a difficult time believing that this particular panel is trying to edge the state even closer to socialism, but at some point effect must subsume intention.

Et Tu, Cusack?

Damien Baldino beat me to the punch, but the same thing jumped out at us both from this article about Massachusetts Governor Deval Patrick's consideration of toll booths at the border:

Robert Cusack, a member of the panel and an East Providence councilman, said that the Massachusetts governor has the right idea. As much as his own constituents would dislike paying fees and tolls, he said, he thinks they would rather pay a toll than live with a disruption to a state highway system in disrepair.

"We are the lowest state in the Union when it comes to our percentage of contribution to highway repairs. On average, states contribute 60 percent of the cost of repairing their highway infrastructure. We contribute somewhere between 20 to 30 percent, and have been relying on the federal government to pay the rest."

Cusack said people may complain about tolls, but New Hampshire has had tolls for a long time and no one complains. "New Hampshire has more severe weather, but their roads are in first-class condition because they have tolls to finance it."

Of course, tolls in New Hampshire are more of a use fee in lieu of taxes. Our taxes are already high — ostensibly with the roads included therein. Administrators and legislators throughout our state must get it into their heads that there is no viable long-term solution that involves squeezing more money out of Rhode Islanders.

Those Who Face Reality, Those Who Do Not

AR commenters and contributors have observed for some time that the source of the budget problem now facing the state and locals is not a lack, demonstrated by our high property and other taxes, of revenue but rather, many years of imprudent spending.

In Providence, Local 1033 of the Laborers’ International Union of North America representing 1,900 city workers has offered concessions, including an 18 month pay freeze.

In Cranston, Local 153 of the National Association of Government Employees representing one hundred school custodians and maintenance workers have agreed to forego raises for two years and to contribute more towards health coverage.

Both sides called the contract a compromise, one that saves money and puts people back to work.

“A job is a job,” said John F. Carbone, president of Local 153 of the National Association of Government Employees. “In layman’s terms, we were able to save five jobs.”

Tuesday night, East Providence City Councilors instructed legal counsel to research and report back on the option of municipal bankruptcy. By making such a request, it is clear that they are serious about their promise not to try to stick their taxpayers with a substantial budget shortfall. Quite simply, there is no more revenue to be had. Local 1033, Local 153 and the City of East Providence appear to be coming to grips with that fact.

As for "Those Who Do Not":

For Immediate Release

January 22, 2009

Statement from National Education Association Rhode Island (NEARI) President Larry Purtill in response to Judge Pfeiffer’s decision regarding East Providence:

We are disappointed in Judge Pfeiffer’s decision to deny the restraining order that would have stopped the East Providence School Committee from unilaterally rolling back teacher salaries and implementing a 20% co-share for health care. Teachers are being harmed by the loss of pay but we have confidence that the union has a good argument before the Rhode Island State Labor Board, who has initial jurisdiction in the case. At the moment, NEARI and East Providence teachers are considering all their options, based on the judge’s decision, including an appeal to the Rhode Island Supreme Court.

East Providence teachers, despite doing their job each day in teaching the students in their classrooms, are losing money and that will continue until we reach a resolution. With the anticipated increased revenue for education from President Obama’s Economic Recovery Package, the School Committee could put an end to this contract dispute by accepting the arbitrator’s award and or sitting down with the teachers in serious negotiations.

1:37 PM | Comments (25) | TrackBack (0)

Why Don't They See This?

In a press release announcing his nomination for Director of the Department of Administration, Governor Carcieri says of Gary Sasse that he has "more than 30 years of experience in crafting and analyzing sound fiscal policies and sustainability for government programs," but I'll risk exposing my ignorance to scratch my head at the proposal taking shape in Sasse's tax panel:

The changes, if adopted, would have far-reaching effects on thousands of taxpayers.

Middle-income taxpayers would generally pay more, while lower-income taxpayers and some higher-income taxpayers would generally pay less. ...

Broadly speaking, people with $30,000 or less in AGI would wind up paying less in tax than they do under the current system.

People with between $30,000 and $110,000 in AGI would end up paying more.

Most people with AGI above $110,000 would end up paying less. But those with the very highest incomes, above $5 million each in AGI, would pay more.

That "middle-income taxpayer" group describes pretty precisely the range of households from which Rhode Island is losing population every year, and such folks are crucial to economic recovery and growth. The rich have money to invest, yes, but they're not the ones who'll put in 80-hour workweeks to keep industries developing. What Rhode Island needs is to match the investment-ready dollars with people who can use them — people in the middle-income group who need reassurance that their efforts will bring them closer to six-figure salaries.

That makes these suggestions downright pernicious:

... taxpayers would no longer be able to obtain a state tax benefit by making a separate list of their deductions, a process known as itemizing. ...

Under the plan, favorable treatment would be eliminated and capital gains would be treated as ordinary income, the same as wages, for example.

As far as tax rate is concerned, the thousands of dollars that I've invested in tools each of the last four years are of little concern. In terms of both investments and income, the big-nose/big-toes tax regime draining the middle for the benefit of the edges would pound yet another nail in Rhode Island's chance for innovation and accelerated growth.

How is it that such apparently qualified panelists can miss this perspective?

Sitting Down with the Treasurer

RI General Treasurer Frank Caprio invited Anchor Rising for a sit-down chat in his office last night, centering on pension issues, but touching on various other matters.

In general, I think the four of us in attendance were reasonably impressed with the treasurer's explanations for economic policies and his knowledge of political history in Rhode Island. In specific, some of the more detailed material is going to take time for us to digest prior to comment, but a few clips might be of interest to readers right off the digital recorder:

• On complete financial transparency in his office, to be unrolled in a few weeks: stream, download
• In opposition to the use of state-owned vehicles: stream, download
• I got a chuckle out of the notion of fear among those in his office promoted beyond the union's bounds to become (scary music) at-will employees: stream, download
• Caprio's got a merit-based promotion system in place with his workers' union, and he thinks the practice is transferrable across government: stream, download
• Apparently, Rhode Island "only" pays 7% of its revenue toward debt service. I wasn't wholly satisfied with the Caprio's description of the comparative appearance of that statistic against a typical business and wonder whether it's fair to compare the government to a mortgage-paying household: stream, download
• On the possibility of municipal bankruptcy (or entry into "a process"): stream, download
• On his pension-plan thinking. Apparently, much of the cost of switching to 401k would come from accounting rules, but with the possible loophole of diminishing, rather than "closing" the defined benefit program: stream, download
• The reason that Rhode Island actually ranks pretty well when it comes to retiree healthcare costs: stream, download
• On abortion and same-sex marriage, neither of which would be his center of focus for any campaigns or offices: stream, download
• Running for governor?: stream, download
• Wherein I continue to strive for an answer on the social issues: stream, download
• On eVerify and immigration: stream, download
• On branding the state otherwise than with corruption and mob films: stream, download
• With regard to a port project and other initiatives, the treasurer agrees with me that a broadly attractive economic environment (tax cuts included) ought to be the focus of policies: stream, download
• An interesting response to my question about his thoughts on Republicans running as Democrats ("Why not the reverse?") and a discussion of the RIGOP: stream, download

The Intangibles of Rhode Island

With taxpayers — especially business taxpayers — beginning to get uppity, one often hears the invocation of Rhode Island's Political Knot. Nothing objectionable is anybody's fault; it's all a natural construct that can't be changed... at least by the person to whom one would turn for relief.

Take the "tangible tax." I know of at least one local business owner who complained that the "tangible property tax" collected by the town was doing palpable harm to his business and whom the Tiverton Tax Assessor informed that the town has no choice: State law compels him to assess and collect the tax. Presumably, he's referring to Rhode Island General Law 44-3-1:

Real and personal property subject to taxation. – All real property in the state, and all personal property belonging to the inhabitants of the state, whether individuals, partnerships or corporations, and all tangible personal property located in the state belonging to nonresidents, are liable to taxation unless otherwise specially provided.

The rest of Chapter 44-3 is essentially a list of exemptions, but I see no provision requiring "specially provided" to be an action of the General Assembly. Indeed, turning to 44-3-3.1:

Exemption of office equipment used for manufacturing or commercial purposes. – (a) The city or town council of any municipality may by ordinance wholly or partially exempt from taxation for a period of up to twenty-five (25) years any items of office equipment, which include, but are not limited to, computers, telephone equipment, and any other items of personal property used in an office and/or any leasehold improvements which are not exempt and are used for manufacturing or commercial purposes and may by ordinance establish the procedures for taxpayers to avail themselves of the benefit of any exemption permitted under this section.

In other words, the town could opt to gut the tangible property tax on business if it chose to do so. Note, also, that the law places no requirements or limits on the rate. My understanding is that a town or city could set its tangible property tax rate to 0%, effectively eliminating it.

Now that we've cleared up the confusion, town councils across Rhode Island can feel free embark on business-saving changes to local tax codes.

ADDENDUM:

According John, in the comments, RI law prevents a town from charging a greater than 50% higher rate for any class of tax than any other, so zeroing one rate would require zeroing them all.

That factor does not appear to affect the possibility of exempting businesses from tangible property taxes for a period of 25 years.

Dams Versus Waterslides

On Thursday, Glenn Beck took a skeptical look at some of the projects that would constitute the proposed economic stimulus plan of President-Elect Obama and the 111th Congress, contrasting them to the projects targeted by the last major federal spending spree intended to jump-start the economy. (Guess which state's polar bear exhibit made his list ...?)

" ... how much money are you spending and how exactly are you going to make it back?" "Well, just the way we did in World War II. We spent all that money in World War II. 11% of our GDP. That's more than we're spending now in relation to our GDP, so -- and look at what happened." "Okay, all right. Well, let's just compare a few things. Didn't we in World War II develop the jet engine?" "Well, yes, of course we did." "Didn't we also do something, I don't remember what -- oh, yeah, the Manhattan Project?" "Well, it was -- yeah, sure." "Didn't we also build dams?" "Well, yeah, of course we did." "Didn't we also build the first highway system?" "Of course we did." "Okay. What are you doing with the $1.2 trillion?"

* * *

... there's a BMX and dirt bike trail at Virginia Key Park. And then they are going to build a Miami Rowing Club building and then there will be the Virginia Key Beach museum. In Trenton, New Jersey they have got 34 requests. They are going to do the Trenton Club renovation project, the Port of Trenton, that is my favorite, people come from all over the world to see the Port of Trenton museum. Then, of course, there's the Eagle Tavern development. I mean, you gotta drink. Then the mayor of Providence, Rhode Island is going to be there. He's going to talk about the Roger Williams Park Zoo. Roger Williams, didn't he sell more albums than Elvis and Boxcar Willie combined? He's going to be in from Providence and he's going to talk about the new polar bear exhibit that they want to build and soccer field improvements. Then the mayor from Philadelphia, Michael Nutter, is talking about the Philadelphia zoo. They are going to -- oh... oh, I didn't know this! They're doing the Big Cat Falls? Yeah! Finally they are going to build a nice waterfall. Well, now I want to go to the Philadelphia zoo and so does everyone from planet Earth. So when I look at the water slide, the BMX dirt trails and the Big Cat Falls and I compare them to the invention of the jet engine and the Manhattan Project and cheap plentiful energy from falling water, hmmm.

The Economic Principle of Self Interest

URI economics professor Len Lardaro had a very disappointing piece in the Providence Journal on Saturday, advising a tax increase in order — curiously enough — to benefit schools and universities. Professor Lardaro states that "investment-related activities... by their nature entail sacrifice" and suggests the following:

I propose raising the state's sales-tax rate to 8 percent from 7 percent, not broadening its coverage to services (to help contain regressivity), and earmarking all of the resulting tax proceeds to K-12 public education and public higher education. Should the legislature try to move any of the resulting revenues to the General Fund (the God of current consumption), I expect Governor Carcieri to veto this measure and take his case to the people.

We should certainly devote resources to "investment-related activities," but layering on funds for education could prove to benefit other states if Rhode Island doesn't make its first goal attraction of businesses. (That's for higher education; when it comes to elementary and secondary education, the bulk of any increased "investment" in schools would simply be absorbed by the unions.) We can spend our last nickel educating young adults, but if we have no jobs to offer them upon graduation, we'll be lucky to get a thank you card from wherever they move.

I'd also mark it as a question whether we'd actually see any long-term increase from a raised sales tax. Lardaro — like Governor Carcieri — should recall that cigarette taxes offered one of the few increases in tax collections, which "the state's chief revenue analyst Paul Dion attributes to a hike this past summer in neighboring Massachusetts." In other words, ratcheting up our overall sales tax could prove to be a boon for neighboring states.

That means that Lardaro's suggested benefit of "contain[ing] property taxes" could very well be fanciful. Even if it were not, though, his rat-a-tat-tat of qualifiers hardly instills confidence. Observe (emphasis added):

Such property-tax containment can also be expected to benefit small business. Caps on property-tax rate hikes can be enforced in this type of environment, and the state might also consider imposing limits on allowable growth rates for local pay packages.

Lardaro has the emphasis precisely backwards. The state ought to begin where he drifts off into a series of maybes: contrive benefits for small businesses, enforce property caps, and impose limits on public sector remuneration. Such measures will protect Lardaro's employer more surely than will the deceptive balm of tax increases.

ADDENDUM:

Professor Lardaro claims that it was a joke to get people angry enough to become involved.

School Regionalization Does Not Save Money

The Ocean State Policy Research Institute has shot holes - on the basis of sound figures from the US Dept of Ed - in the well repeated and well intentioned suggestion to merge most of Rhode Island's thirty six school districts.

This from an OSPRI press release of today. [Emphasis added.]

As more towns and schools scramble for cost savings, the call for "regionalization" seems to be gaining momentum. However, new research by the Ocean State Policy Research Institute (OSPRI) shows that, at least with education, it would probably increase costs.

"It's a very easy pitch to say 36 school districts with 36 superintendents are more expensive than five regionalized districts with five superintendents. Unfortunately, it's not true," said OSPRI President William Felkner. "I bought it too, until I saw the data."

The U.S. Department of Education's National Center for Education Statistics' (NCES) latest published data (The 2007 Digest of Education Statistics that reports extensively on the 03-04 school year) show that Rhode Island school districts on average spend 7.9% of their current expenditure budgets on administration and supplies, the 2nd lowest of any state.

Administration and the "economies of scale" derived from combined purchasing are the two items touted to deliver savings from regionalization and Rhode Island already appears relatively lithe in these departments. Even on a per pupil basis, RI spending in these areas is lower than most of the nation and in the top 20 when looking only at "general administration" which are the costs for school district management including the superintendent's office.

"Using a business model, consolidation of services makes sense," Felkner said. "But when government mandates such actions and higher levels of governance are created, accountability suffers and costs rise."

Rhode Island has experience with regionalization and it has ballooned both administrative costs and per pupil costs. Taxpayers of regional districts have not seen savings nor has the state.

When comparing fully regionalized districts to similar size town districts we find that regionalized districts have the highest per pupil costs. One example is the Chariho Regional School District which was put together from three towns to make a school district whose student body is the same size as neighboring Westerly. But, the supposed economies of scale are nowhere on display in Chariho where administration costs per pupil are $825, forty percent more than the $589 spent in Westerly.

Indeed, when it comes to administration costs, the supposed venue for obvious savings, they are well above the median in ALL the regionalized districts.

"When it comes to schools, the solution is not 'streamlining, streamlining, streamlining,' it's 'salaries, salaries, salaries,' and the way to reform salary and benefits is through transparency. Give taxpayers a window on exactly how their money is spent, before, rather than after committing to the spending - as reflected in the East Providence School Committee's proposal for negotiating contracts in public."

The same NCES data source shows that 58.8 % of RI school budgets are devoted to teacher salaries and benefits, the nation's 6th highest. An evaluation of per pupil salary and benefit spending jumps that rank up to the 2nd highest in the nation. And if one wonders what methods might be effective at holding the line on teacher salaries, transparency or regionalizaton, just look at what teachers' unions say. They object to the former and embrace the latter.

Joe Trillo (and Amy Rice?) For Lowering the Corporate Income Tax Rate

A bill has already been introduced in the Rhode Island House (H5034) to lower the state's corporate income tax rate from 9.0% to 7.4%. As far as I can tell, there are no gimmicks in this particular bill, no lowering-but-broadening schemes or anything like that, just a permanent lowering of the corporate tax rate starting in 2010. State Representative Joseph Trillo (R-Warwick) is one of the bill's sponsors, further lending credence to the idea that it's for real.

What surprised me a bit is that Representative Amy Rice (D-Portsmouth/Middletown/Newport) is also a sponsor, along with Raymond Gallison (D-Bristol/Portsmouth) and Jack Savage (R-East Providence). Is it naive for me to think that this particular lineup could be the result of democracy actually working at the participatory level, and the East Bay reps listening to the concerns of the various taxpayer groups that have been active in that part of the state?

Governor Battles "Soak the Rich" on Newsmakers

Governor Carcieri's appearance on this weekend's Newsmakers is already online. He certainly makes me a lot less self-conscious about talking with my hands on television. Performances aside, Ian Donnis was responsible for an interesting exchange:

Ian Donnis: Governor, wealthy Rhode Islanders have received tax cuts over the last ten years, so how do you respond to those critics who say that it's unfair that middle class Rhode Islanders are paying a bigger share of the tax burden?

Governor Carcieri: They're not. Middle class Rhode Islanders actually are relatively low taxed. I mean, I'm not in favor of taxes, and I would like to reduce them for everybody, but if you compare the taxes that our citizens pay in the middle income with nearby Massachusetts, they're lower — income taxes.

Ian: But if the affluent residents are paying less, doesn't that raise the burden on other Rhode Islanders?

Carcieri: We've been actually bringing the costs down. We've been reducing the cost of government, if you will. That's my point. We've taken eighteen hundred people out of the workforce. The annualized savings, when you take benefits and that, it's almost $200 million a year, Ian. You can't tax people. What do they do? They leave. That's our basic problem — what I said at the beginning. We're driving away businesses; we're driving away people that have been successful. That's not smart economic policy. We ought to be welcoming them here and figuring out ways.

For some perspective from the House Revenues Tax Facts report (PDF), here's the change in tax liability — the amount of money from 2005 to 2006 to which the state government laid claim — for each income group:

Clearly, by this measure, "tax cuts for the rich" have not shifted any burden toward the middle class. Of course, as I pointed out the other day, tax credits actually shift ultimate tax payments into negative growth. But who benefits? Well, here's the same table with each group's % of the total income tax burden:

So, contrary to Ian's logical progression, taxing the rich less has not raised the burden on other residents. In fact, excluding the credits — which are given, in a sense, for spending money on things on which the government would like people to spend money — the actual tax value of the top tier went up. The reason is clear: The over $200,000 group saw an increase of overall adjusted gross income (AGI) of 14.38%, but the average AGI of such households increased by only 5.63%, which means that the number of households in this category, paying at the upper tax rate, increased — 8.29% by the numbers.

Night Is Still Night

Pat Crowley's been working diligently to prove that, when it comes to taxation in Rhode Island, night is day. Yesterday, he stated his starting point thus:

Maybe, just maybe, we are loosing population because we have a cash and carry tax structure that benefits the elite at the expense of the poor, not the other way around as Eddie wants us to believe.

That's kinda tough to square with the fact, gleaned from the RI House's Revenues Facts document (PDF), that the tax share of the lowest group (income under $30,000) decreased from 3.8% to 1.3% from tax year 2005 to tax year 2006, while the tax share of the highest group (income over $200,000) increased from 40.3% to 44.0% over the same period. Crowley notes part of the reason for the shift on the low end:

According to real numbers supplied by the State revenue department, the between 2005 and 2006, the latest number available, the only group to lose population was people earning less than $30,000 a year:

• Under 30k – (2356)
• 30k – 50k – 387
• 50k-75k – 157
• 75k-100k – 1700
• 100k – 200k – 4666
• 200k+ - 987

Of course, it's important to correct impressions by highlighting the fact that these numbers reflect state tax returns, not "population," so a decrease in the lowest group is just as apt to reflect a decrease in the number of households required to file returns as an increase in out-migration. That's especially true during a tax year that saw a 6,976 increase in the number of federal returns showing income under $50,000.

Crowley recently used this state return data to suggest that "before anyone goes crazy thinking our tax structure is what is driving folks out, based on the numbers, not just projections, folks, or at least tax payers, are moving in." IRS migration data, however, tracking taxpayers by Social Security Number, finds definitively a net 3,733 having left the state between filing their '05 to '06 taxes.

To play along, though, if we analyze RI tax returns as closely to adult people as possible (i.e., double-counting joint returns), we find the following:

• Under 30k – (4160)
• 30k – 50k – (1402)
• 50k-75k – (2313)
• 75k-100k – 2052
• 100k – 200k – 8502
• 200k+ - 1860

As I keep saying, the people who are actually leaving are from the upper-working to lower-middle classes. But let's stick with Crowley's collection of claims as he attempts to extrapolate a more specific lesson:

In 2006 there were 491,750 tax returns filed, an increase of 5,541 over the previous year. And even though our collective taxable income rose by $1,044,615,287, we collected $80,281,003 less in income taxes. More filers, more taxable income, less revenue? How is that possible? Well, maybe because of how we structured our taxes?

Neglecting to consider the decrease in low-end tax returns that he mentions elsewhere, Crowley proceeds to shuffle around some numbers that really don't address his own question: How is it possible to gain returns, showing an increase in taxable income, but still collect less in taxes? Well, the answer emerges if we observe that overall tax liability actually increased by $59,667,202. What accounts for the difference is tax credits, which benefited every income category, with increases across the board, growing from $23,255,997 to $163,204,202 from 2005 to 2006. (Albeit, the increases were less in the middle range of income groups.)

Now check this out:

One can say a lot of things about RI's tax structure. Probably not among them is the assertion that taxes are driving out people whose income group receives significantly more in tax credits than it pays pack to the state.

Re: Gas Tax Increases Are Coming Down the Road

I think what I find most distressing about the reports of potential transportation-related tax increases that Marc mentioned this afternoon is that nobody is even hinting at the possibility of increasing money for such a basic government function as transportation infrastructure by taking it from less fundamental government functions. (Pick your favorites.. or rather, your least favorites.)

Of course, I don't intend the above to detract from the plethora of other distressing factors. Take, for instance, the fact that a strategy of increasing taxes to compensate for revenue lost because of conservation shifts the burden directly to those who cannot conserve — namely, folks who must use gasoline directly or indirectly in support of their jobs. If a lowly carpenter like me must bear more of the burden of fixing our roads because I have no choice but to drive my van full of tools for at least an hour-and-a-half per day, then prices will go up across the economy, and competition will go down.

Then, of course, there's this:

According to a draft of the financing commission's recommendations, the nation needs to move to a new system that taxes motorists according to how much they use roads. While details have not been worked out, such a system would mean equipping every car and truck with a device that uses global positioning satellites and transponders to record how many miles the vehicle has been driven, and perhaps the type of roads and time of day.

That such a notion would make it beyond a mere thought spoken out loud during a meeting indicates the dangers that our freedoms face in the future. Just as there will always be an excuse not to shift government expenditures from extras back to essentials, there will always be a reason that our liberty — notably our liberty of movement — can be circumscribed just a little bit more tightly.

Gas Tax Increases are Coming Down the Road

Proving yet again that unintended consequences occur from government policies, we're hearing noise about increasing the gas tax at both the state and federal level. The reason? We're driving less, conserving fuel and helping the environment as we've been urged to do. But now we're not buying enough fuel to generate the "revenue" to pay for highways and the like. The innovative solution being carted out is more taxes. First, nationally:

The 15-member National Commission on Surface Transportation Infrastructure Financing is the second group in a year to call for increasing the current 18.4 cents-a-gallon federal tax on gasoline and the 24.4 cents-a-gallon tax on diesel. State fuel taxes vary.

In a report expected later this month, members of the infrastructure financing commission say they will urge Congress to raise the gas tax by 10 cents a gallon and the diesel tax by up to 15 cents a gallon. At the same time, the commission will recommend tying the fuel tax rates to inflation.

The commission will also recommend that states raise their fuel taxes and make greater use of toll roads and fees for rush-hour driving.

The proposals include increasing the gasoline tax, now 30 cents, by up to 15 cents per gallon by 2016, which would raise an estimated $64 million per year. They also include a new “petroleum products gross earning tax,” beginning with the equivalent of 10 cents per gallon of gasoline in 2010 and adding another 5 cents in 2014. That would affect all petroleum products, from gasoline and aviation fuel to those made from petroleum derivatives, such as plastics, paint and fertilizer. It would eventually raise about $66 million per year, the draft report says.

Taxes Even a Right Winger Could Love

Kathy Santos, of Riverside, proposes some new taxes to which I find it difficult to object:

Perhaps there are some new taxes that should be considered, though, ones that would not be such a burden to businesses and citizens:

Incumbent politician tax
Legislative grant tax
Union dues tax
Legislative slush fund fee
Campaign donation fee
Legislative leadership top-of-the-line vehicle tax
"Massage" parlor, prostitution, adult-entertainment tax
Gambling tax
Shady lobbyist fee
Corruption tax
Legislative license-plate tax
Kickback tax
Windfall tax on buybacks for vacation and sick time
Health insurance buyback fee

Perhaps we could add a "strategic public retirement tax" to cover those who retire because they want to get out before their unsustainable deals are modified. The list could go on (and on), I'm sure.

Beware Tax Tinkering

Efforts to "update," or otherwise change, Rhode Island's taxation regime give the unmistakable impression of tinkering. That impression is solidified under one insidious phrase, which I've italicized in the following paragraph:

"It may be in the '10 [fiscal year budget], not in the supplemental," Carcieri said [of a plan to broaden the sales tax]. "I think we need to bring the nominal rate down. And I would be supportive of that. It's a matter of how you do it so it's revenue neutral."

That misguided phrase, reformers will note, is much less often applied in the form of expenditure neutral, when spending programs are broadened. Moreover, the reality is that there's no such thing as "neutrality" when it comes to adjusting tax code. Consider:

The tax-policy workgroup found the state could generate more than $200 million by taxing goods and services that are currently exempt. They include non-prescription drugs, car washes, spectator sports, theater, dry cleaning, business-support services and travel arrangements.

The net impact of the sales tax expansion and rate reduction, according to the tax-policy workgroup, would be a $4.3-million increase in sales tax revenue for the state’s coffers. ...

Indeed, the tax policy workgroup determined that a sales-tax expansion could create a new burden for some taxpayers, but the vast majority of households would actually pay less sales tax over the course of the year because of the across-the-board reduction to 5 percent.

In other words, taxes would increase by $200 million, by these estimates, but decrease by $195.7 million. The question is who — excluded from "the vast majority of households" — would be contributing to that first number? If Greater Providence Chamber of Commerce President Laurie White intends to make the state "more tax competitive," even as total revenue remains statistically the same, for which taxpayers' inclusion are we competing, and to which are we going to hand the bill?

A look at the partial list of new sales/service taxes begins to create a picture. The various "repair" items are indicative of ownership. The self-improvement and leisure activities bespeak those who are progressing beyond subsistence and beginning to have financial room to focus on quality of life. And amazingly, such services as tax-return preparation, classified ads, and employment-agency fees will affect those seeking to generate economic activity (but without internal departments to handle such things). That is, precisely the critical group between the working and upper-middle classes that has been fleeing from the state for several years, now, will disproportionately bear the burden of this "neutrality."

One can expect many service providers to follow them across state lines.

Coming to a State Near You?

Could be that New York Governor David Paterson is offering a taste of things to come in Rhode Island:

Gov. Paterson's proposed $121 billion budget hits New Yorkers in their iPods - and nickels-and-dimes them in lots of other places, too.

Trying to close a $15.4 billion budget gap, Paterson called for 88 new fees and a host of other taxes, including an "iPod tax" that taxes the sale of downloaded music and other "digitally delivered entertainment services."

Two significant differences are that New York is a much bigger state than Rhode Island, making it more difficult for residents to skip state lines to make purchases and receive services, and that New York does not have the nation's highest unemployment, meaning that there's less incentive to stay in Rhode Island.

As a state, we can't afford mere attempts to weather this storm. We have to turn things around completely, and that's not going to happen unless the government pulls back. If, instead, Rhode Island officials attempt to get their hands into more pockets (or more deeply into the same pockets), they'll only exacerbate the problem.

Conclusion First, Analysis Second

It appears that Kate Brewster is fully back from hiatus, offering the Rhode Island College Poverty Institute response to every new suggestion for changing the state's oppressive and ill-considered tax structure. Her conclusions all translate into the principle of "take more from them, and give it to my preferred group":

The Poverty Institute, a think tank at the Rhode Island College School of Social Work, last week called for the [death] tax to be preserved.

Kate Brewster, executive director of institute, said in a statement that the tax "is the most fair tax that we have and must be preserved to maintain a balanced tax structure that requires those with the greatest ability to contribute their share towards public services and infrastructure."

A report issued last week by the Washington, D.C.-based liberal Citizens for Tax Justice, showed that comparatively few Rhode Islanders wind up paying the tax. The figures do not take into account those who escape the state's tax by using planning techniques or by moving to other states.

It's nice of Brewster to make it so nakedly clear that, in the progressive lexicon, "fairness" means little more than taking money from wealthy people — regardless of the event being taxed. Not so nice is the habitual refusal to consider how our government might be creating incentive for taxpayers to leave.

It's difficult to maintain civic optimism when the parasites of public funds offer reminders that they'll keep on sucking out that blood, even as the organism of state becomes anemic and dies.

Beware Advocates Looking to Take Advantage of Economic Doldrums

As Justin points out, The Poverty Institute's Kate Brewster seems to be basing much of her "more taxes, increase spending" argument on the work of Peter Orszag and Joseph Stiglitz. Brewster states that they've determined that "tax increases on high earners are less harmful than spending cuts." True enough and plausible, but that isn't exactly the whole story. Orszag and Stiglitz were talking short-term.

The conclusion is that, if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families. {Emphasis mine}.

Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5%. We also find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.

The Voice of Continued Decline

True to form, the Poverty Institute's Kate Brewster notes that "two-thirds of the [state budget] gap is due to declining corporate, income- and sales-tax collections, as well as shrinking lottery revenues," but her proposed response is not to find ways to increase the economic activity that drives such revenue. Rather, she'd simply like to jack up the rates (or broaden the shadow, in the case of the sales tax)

One needn't dig too deeply around the foundations of her conclusions to begin to see the crack:

According to leading economists, it is better to raise taxes on high earners than to cut spending during economic downturns. The Center on Budget and Policy Priorities cites two well-respected economists — Nobel Prize winner Joseph Stiglitz, of Columbia University, and Peter Orzag, the recently announced director of the Office of Management and Budget — who during the last recession asserted that tax increases on high earners are less harmful than spending cuts. Raising taxes may result in money not saved, but cutting programs for low-income families will result in money not spent which has a more dramatic impact on the economy.

One would hope that economists making such general statements would append a long list of circumstances that must be present in order for their conclusions to obtain. If they did so, in this case, then Brewster's printer must have run out of paper before it got to the caveats.

In a system as oppressive as Rhode Island's, money not taxed is not merely "money saved." It's money spent more productively. It's money spent creating jobs, investing in education, and improving property.

Rhode Island must prepare itself for the reality that its policies for surviving as a state will tend to drive out one group or another. What the leadership must do — now that the voters have abrogated the responsibility to make the call — is to decide whether it wants to tell the needy to seek services elsewhere or to tell the productive that they'll have to turn their eyes to other states for opportunity. If the latter, the likes of Brewster best begin developing their excuses and spin for the continued shrinkage of state revenue.

Reshuffling the Tax Deck

Neil Downing explored the governor's taxation panel, and beyond my complaint that it strove to remain essentially revenue neutral (rather than decreasin taxes), if we strip away the specifics, none of the proposals are very attractive in their predicted effects:

• The first solution would transfer the income tax burden from the top and the bottom to the middle and increase tax revenue by less than a million dollars.
• The second solution would also transfer the income tax burden from the top and the bottom to the middle, but it would decrease tax revenue by $3.4 million.
• The third solution would decrease income tax across the board, but the sales tax rate would remain the same and apply to more goods and services, bringing in an extra $38 million in revenue.

The direction of the shift in income tax for the two solutions that are effectively revenue neutral suggests that the tax panel didn't look closely at the demographics concerning the sorts of people who have been leaving the state. Middle-income families — the key for productivity and growth — have been fleeing the state for years, so increasing their share of the burden would likely prove counterproductive.

Broadening the sales tax will also be counterproductive. More people will simply move their shopping over the state border, and the more aggressively the state cracks down on that, the more contentiousness will exist between citizens and their government, and the more likely they'll be to throw in the towel and move.

Bottom line: there is no way out of this mess that doesn't require huge cuts to government spending.

Real Stimulus

I suspect that this idea from Congressman Louie Gohmert (R-TX) would have broad support among the Republican Assembly members and sympathizers with whom I'm spending time this evening:

Where the Pelosi-Paulson plan takes the taxpayers' money and puts it under the government's thumb so that predatory politicians and micromanaging bureaucrats have more and more control over the American economy, Congressman Gohmert's plan puts the money back into the pockets of the American people and allows them to choose. ...

For the $350 billion second bailout installment Treasury Secretary Henry Paulson is going to request, every American taxpayer could have a two-month tax holiday from both income tax and the Social Security-Medicare (FICA) tax.

That means that for all of January and all of February you would pay no federal income tax and no FICA tax, which—for most Americans—amounts to about 33 percent of your gross income.

Furthermore, House Speaker Nancy Pelosi has proposed an additional $700 billion as a stimulus package.

That would pay for an additional four months of a tax holiday.

Thus, if you combined the Pelosi and Paulson proposals, you could create a tax holiday through June.

That would mean no working American would pay a penny in income tax or a penny in FICA tax for the first six months of the year.

And that would mean no business would pay a penny in matching FICA tax for the first six months of the year.

As a pro-small business, pro-jobs creation, pro-market stimulation measure, imagine the power of that much extra money in the hands of the American workers and the American entrepreneur.

If the unalloyed objective of the political class were to effect economic recovery and set the nation on a course of greater opportunity, it would be talking more about such approaches. Cynic though it may mark me, I can't help but infer the strategy of using difficult times to advance ulterior goals — such as expanding and centralizing government influence. Sure it'll extend and deepen the hardships of average Americans, but the powers will make it up to us one day, when they've got this whole economy problem licked.

The Wrong Starting Point

Well, the governor's tax panel appears to be a bit more in line with the state's needs than his transportation panel, but we really have to turn this starting point around:

Overall, "The goal is to develop . . . alternatives that would be revenue neutral . . . but would present options that would increase tax competitiveness" compared with other states, said [Edward] Cooney, who also chairs the Greater Providence Chamber of Commerce.

Why "revenue neutral"? At least at the beginning of an actual recovery, our policies are going to have to be revenue negative.

Rhode Island to Hard-Working Taxpayers: You're Not Wanted

So I took a 14% reduction in my hourly pay rate this week. My other option was to quit and look for another job (without the benefit of a few months of unemployment insurance). Desperate times are here.

Meanwhile, the Sakonnet Times did run Richard Joslin's diatribe against the Tiverton taxpayers group with which I'm involved. The Providence Journal has also given Tom Sgouros's "Quit yer moanin'" rhetorical dreidle a bigger spin through the population, with Opinion Page Editor Bob Whitcomb offering Sgouros kudos for his "fact-filled and very thoughtful commentaries" (in general).

Then comes the broad list of possible new tax-the-people solutions for avoiding the necessity of paying for Rhode Island's transportation infrastructure out of the revenue pool that really ought to supply it. I'll tell you right now that just about any one of these options — except the higher gasoline tax, which won't affect me, except indirectly via higher costs passed on to customers — may be the final straw for my family.

It's possible they'll hit me with to-and-fro tolls just to get to work each day, and noises are that we're not talking the 35¢ that has been unchanged on New Jersey's Garden State Parkway for as long as I can remember. My wife could conceivably encounter four tolls, as she drops off the children at her mother's house three miles away and then heads to work in a part of Rhode Island more readily accessible via 195. Families in Portsmouth and Middletown could end up hitting six tolls on an evening trip to Providence. And then there are the other taxes and per-mile fees, no matter where one drives.

Of the half-dozen or so jobs that Monster.com emails to me each day that somewhat match my criteria (although rarely sufficiently), not a single one has been in Rhode Island for quite some time. And if I were to find another job in the state, chances are slim that I wouldn't have to deduct heavy transportation costs from my earnings. The question, therefore, is this: Do the state's leaders really intend to further weigh the "get out of here" side of the decision scale for the slice of the population that has been streaming out of the state in the thousands every year?

A Mileage Tax in Rhode Island?

Seriously?

A new mileage fee. The $150-million plan would not include it, but the $300-million plan would impose a half-cent-per-mile fee, raising an estimated $50 million per year. But officials said yesterday that they expect to eliminate the transfer of some sales tax revenue to the transportation system, proposed elsewhere in the report. Raising the mileage fee to 1 cent per mile would make up the difference.

At a half-cent per mile, driving 10,000 miles per year would cost $50 per vehicle. One cent would cost $100.

Also referred to as a VMT fee (for vehicle miles traveled), the mileage fee would be based on odometer readings reported by vehicle owners when they renew their registrations. The mileage could be verified during mandatory auto inspections, the study says. Robert A. Shawver, the DOT’s assistant director, said that although one state, Oregon, is pilot-testing a similar fee, Rhode Island’s would be the first of its kind in the country.

Seriously though, what about the miles traveled outside of the state? Why does Rhode Island have a right to tax people for miles not put on roads within RI borders--just because the car is registered in Rhode Island? Plus they'll be getting you as you come and go (via the tolls also mentioned in the article). What if Massachusetts wants to tax their drivers? Are we going to have cross-border "VMT" pissing matches? GPS tracking devices are next.

I understand these are tough times and can see the point in toll booths on bridges, etc. (though I'm not sure how much money will be raised vs. cost, especially initially) to help defray transportation infrastructure expenses. And I assume (heh) that the new tax revenue will be specifically designated for transportation and not General Revenue. But this VMT thing isn't the sort of "innovation" the state needs.

Embrace Your Inner Underfunded Pension!

According to RI Future contributor Pat Crowley, if your pension plan is underfunded don't think of it as a bug, think of it as a feature…

An unfunded liability may in fact enhance the security of the plan because it requires more caution, therefore, more long term thinking.

Anyway, back in the reality-based community, understanding why pension underfunding is a bad thing is straightforward. A pension plan is underfunded if, according to reasonable actuarial and design assumptions, it will run out of money before all obligations owed can be paid out. This situation should be avoided not only in pension plans but anywhere else in life. Claims from defined-benefit advocates that the current underfunding of Rhode Island's public pension system does not present a serious problem severely undercut the notion that defined benefit plans can be as cost-effective as defined contribution plans, if decades of total annual contributions equal to at least 25% of employee payroll are considered par-for-the-course for keeping a defined benefit system afloat.

In terms of present specifics, the underfunding of Rhode Island's state employee pension plan means that the state is required to contribute over 20% of employee payroll next year, to help get the pension plan to point where it will be self-sustaining by 2027, while still meeting all obligations until then. If the pension plan had been fully-funded (and never raided), the required state contribution would be much smaller, probably somewhere in the vicinity of 3% to 4% of total payroll per year. Given the current size of the state workforce, the difference between 4% and 20% of payroll is about $120 million, meaning that, if the state employee pension plan had been funded in accordance with its obligations assumed, $120 million more would be available to pay for existing programs or to reduce the deficit next year.

Finally, the pension study cited in Mr. Crowley's post takes a curious approach to the concept of "moral hazard". Here is the study's explanation of the concept…

If [pension plans’] investment decisions are being distorted by moral hazard, then we would expect to see less well-funded plans adopting more risky asset allocations.

"Everything is On the Table"

And not just because it's Thanksgiving.

In light of Speaker Murphy's comment in front of the Greater Providence Chamber of Commerce, a quick review of Rhode Island's current standing in certain tax categories is in order. [Data courtesy the Tax Foundation.]

> Business Tax Climate: 50th (worst)

> Cigarette Tax: 2nd highest nationally

> Corporate Income Taxes: 7th highest

> Property (local & state combined) Taxes: 5th highest

> Sales Tax: 2nd highest

Unless the Speaker intends to put forward only a token tax increase so as to provide political cover for implementing badly needed structural changes to the expenditure side of the budget, it is difficult to see any room for increase to this maxed out section of the budget.

Does anyone in Washington, D.C. believe in liberty?

Continuing the earlier discussion about the Detroit bailouts, there is a broader debate taking shape:

Obama Chief of Staff Hopes to Exploit the Economic Crisis to Expand the Growth of Government: In earlier posts I have emphasized the risk that the combination of economic crisis and unified Democratic control of Congress and the White House would lead to a vast expansion of government. It looks like key Obama advisers and congressional Democrats are thinking along the same lines. As Obama Chief of Staff Rahm Emanuel puts it, the crisis is "an opportunity to do things you could not do before...You never want a serious crisis to go to waste." The WSJ article from which the quote comes makes clear that the "things" Emanuel has in mind are government policies that "pick winners" by subsidizing particular industries on a massive scale - as Congress is already doing with the finance industry, auto industry and others

Given the serious flaws in this kind of central planning, it is highly unlikely that even a well-intentioned federal government could do a better job than the market in choosing which industries to fund. On this point, F.A. Hayek's critique of government planning is still relevant - even more so than I thought when I defended Hayek's continuing relevance earlier this year. In the real world, of course, it is highly unlikely that government planning decisions will be determined by experts whose only concern is the public good. Rather, politically powerful industries will use their influence to lobby for bailouts and other government assistance that will probably be denied to the politically weak - irrespective of the true merits of helping the industries in question.

Interest group pressure has already played a key role in the congressional vote on the finance industry bailout, and it is likely to be equally important in structuring the massive future bailouts to come. Once Obama takes office, we are likely to see some $500 billion to 1 trillion in additional bailout spending - and that may be just for starters. Interest groups will play a major role in allocating this money, and they are already ramping up their lobbying efforts.

The end result will probably be an enormous transfer of resources from taxpayers and wealth-producing industries to interest groups with political leverage. That is likely to serve the interests of those groups and of the political leaders in charge of doling out the government largesse. But it will also impede economic growth by transferring resources away from productive firms to those that are failing.

Go to the article itself and follow the links.

Here are excerpts from one of them:

Jesse Larner has an interesting and much talked-about article on F.A. Hayek in the left-liberal journal Dissent...Larner gives Hayek credit for his pathbreaking critique of socialist central planning. But he argues that Hayek's thought is largely irrelevant today.

To very briefly summarize Hayek's two most important ideas, he argued that socialism can't work as an effective system for producing and distributing goods because it has no way of aggregating the necessary information about people's wants and needs. By contrast, the price system of the market is a very effective method for collecting and using information about people's preferences and the relative value of different goods. Hayek's 1945 article "The Use of Knowledge in Society" is the best short statement of this argument. Hayek also argued that government control of the economy under socialism necessarily leads to the destruction of democracy and personal freedom. The central planners' control of the economy enables them to crush potential opposition and strangle civil society. This, of course, was the main argument of Hayek's most famous book, The Road to Serfdom (1944).

Larner concedes the validity of both of these Hayekian claims. But he suggests that they are largely irrelevant today because the modern left has mostly abandoned central planning and because Hayek failed to recognize that "collectivism" could be a "spontaneous, nongovernmental, egalitarian phenomenon," not just a totalitarian order imposed by the state. He also suggests that "Hayek doesn’t seem to grasp that human beings can exist both as individuals and as members of a society, without necessarily subordinating them to the needs of an imposed social plan (although he acknowledges that the state can legitimately serve social needs, he contradictorily views collective benefits as incompatible with individual freedom)."

Larner makes some defensible points. For example, he is right to imply that Hayek's arguments are more compelling as a critique of full-blown central planning than of more modest forms of government intervention. It is also true that full-blown economic central planning has a lot less support among left-wing intellectuals today than fifty or sixty years ago. Nonetheless, Hayek's ideas are far more relevant to our time than Larner thinks.

I. The Persistence of Central Planning in Left-Wing Thought.

Although the modern mainstream left no longer favors central planning of the entire economy, many left-wingers do favor government control of large parts of the economic system. Most European leftists and a good many American ones favor government control of the health care industry, which constitutes some 10-15% of the economy in advanced industrialized society. Some forms of government planning are favored not only by left-wingers but also by many moderates and conservatives. For example, government owns and operates some 90% of the schools in Western Europe and the United States. However much we take public education for granted, it still represents the socialization of a vast swathe of the economy.

In addition, many mainstream liberals such as Cass Sunstein and Supreme Court Justice Stephen Breyer (as well as some conservatives and moderates) favor giving broad regulatory authority to "expert" government bureaucrats. This is not quite the same thing as government ownership of large enterprises. But it has important ideological affinities with it, to the extent that both policies rely on central planning by expert government bureaucrats. Hayek's arguments in "The Use of Knowledge in Society" are certainly relevant as potential critiques of these various forms of planning - both those that involve government ownership of large enterprises in health care and education and those that rely on regulations administered by expert bureaucrats. If Hayek is right, all these planners and experts don't know as much as they think they do, and certainly can't aggregate knowledge as effectively as the free market can.

Finally, it's worth noting that even full-blown socialism isn't as completely dead as Larner assumes. For details, see my September 2007 post on "Why the Debate Over Socialism Isn't Over."

Fundamentally, most liberals and leftists still look to the state to plan large portions of the economy and other aspects of our lives. So too do many conservatives and moderates, as witness the rise of "big government conservatism" under George W. Bush. Today's advocates of government planning are more modest in their ambitions than the mid-twentieth century socialists whom Hayek criticized. But they are not modest enough to make his arguments irrelevant.

II. Hayek and "Voluntary" Collectivism.

Larner also criticizes Hayek for ignoring the possibility that "collectivism" could be voluntary rather than imposed by the state. He suggests that Hayek was wrong to ignore the thought of socialist anarchists such as Proudhon and Kropotkin, who favored communal enterprise without state control.

Much depends on what is meant here by "collectivism." To the extent that it simply means voluntary cooperation between individuals and groups in civil society, Hayek not only didn't ignore it, he was a great advocate of it. Throughout nearly all his major works, Hayek stressed the importance of voluntary social cooperation and repeatedly emphasized that individuals can't progress or even survive for long without civil society institutions and traditions that are the product of cooperation. Hayek's famous theory of "spontaneous order" was of course based on the idea that society progresses through the development of social norms and customs produced by voluntary cooperation in civil society. Hayek favored free markets and strict limits on government power in large part because he thought that they fostered such voluntary cooperation better than government planning does. Far from denying that "human beings can exist both as individuals and as members of a society, without necessarily subordinating them to the needs of an imposed social plan," Hayek wrote that:

[T]rue individualism affirms the value of the family and all the common efforts of the small community and group . . . [and] believes in local autonomy and voluntary associations . . [I]ndeed, its case rest largely on the contention that much for which the coercive action of the state is usually invoked can be done better by voluntary collaboration.

Some relevant earlier writings can be found here:

"Who You Gonna Call?" The Little Platoons
Sometimes What is New is Old: Misguided Incentives Drive Public Sector Taxation
Thoughts on the Law & Social Order
On the meaning of social justice
Moving Beyond Loyalty to the Rule of Law Mixes Law & Politics
The Radically Different Visions of Tax-Eaters Versus Taxpayers

ADDENDUM

Obama's rewriting of history continues. It is smart politics and the media will comply with repeating the mantra, likely leading to myths becoming viewed as historical facts.

One Rhode Island Problem in Color

Joseph Henchman of The Tax Foundation "combine[d] state sales tax rates with the weighted average of local sales taxes" to produce the below map (h/t):

The Big Idea That Nobody's Having

Hey, Rhode Islanders: That deferred tax increase known as "transportation bonds" (and claiming all those wonderful federal tax dollars) to which you just assented? Not enough:

A special state panel yesterday discussed several ideas to raise money to fix the state's roads and bridges, from tolls on Route 95 and the Sakonnet River bridge to increases in the gas tax and higher traffic fines.

But none of the suggestions would come close to raising the $300 million a year the state Department of Transportation says it needs to catch up from years of neglect.

On a separate front, Jerome F. Williams, the governor's director of administration, offered the administration's first plan for covering the budget deficit that threatens to force major cutbacks in bus service or even a shutdown of the Rhode Island Public Transit Authority. ...

During the first year, the plan would impose a new wholesale tax on fuel for motor vehicles, raising $43 million per year. It would also increase vehicle registration fees by $10 per year,raising $22.9 million, and increase the penalties for traffic violations by 20 percent, raising $1.8 million per year. The difference would come from smaller increases in other fees. ...

In later years, Williams would add toll boothson Route 95 near the Connecticut border , raising another $40 million.

While reading the article, I saw a brief glimmer of hope that officials at least had brought some of the correct answers into the conversation — even if only to dismiss them:

Williams' plan avoids a number of politically difficult possibilities which the panel has talked about ....

But then I read on:

... such as imposing tolls on the planned new Sakonnet River Bridge and on the Mt. Hope Bridge, and raising the state sales tax.

Yes, the fatal thinking continues, including such bad old habits as setting government goals to merely "try and get through this year" and promising that tax increases would only be "for a short period of time."

How about this: Given the central importance of infrastructure and public transportation and the utter economic insanity of increasing Rhode Island's taxes and fees, let's redirect funds that are currently allocated for purposes that may help a few but are proving to harm us all over the long run. (I refer, of course, to the state's welfare and union sieves.) Hey, we can even promise that the cuts will only be "for a short period of time" — namely, until the state can actually afford to pay for the programs and benefits.

Real world consequences of Obama's taxation policies

Jennifer Rubin points out how this trend is not being covered by the MSM:

No President-elect in the postwar era has been greeted with a more audible hiss from Wall Street. The Dow has lost 1,342 points, or about 14%, since the election, with the S&P 500 and Nasdaq hitting similar skids. The Dow fell another 4.7% yesterday. Much of this is due to hedge fund deleveraging, as well as dreadful corporate earnings reports and pessimism that the recession will be deeper than many had hoped. We also don’t want to read too much into short-term market moves. But there’s little doubt that uncertainty, and some fear, over Barack Obama’s economic agenda is also contributing to the downdraft.

ADDENDUM

Some commentators to this post are in denial that Obama's stated taxation policies could have any correlation with the market's downward trend since his election. To which I respond:

The country elects a president who promises to raise tax rates on capital gains, dividends, and income taxes as well as take off the $102,000 earnings cap on social security taxes...and you think there will be no adverse consequences in the financial markets?

To argue otherwise is to believe that explicit wealth-reducing financial disincentives or, at a minimum, the uncertainty about such [prospective] disincentives has no impact on human behavior.

TomW's comment raises the additional adverse impact of "Employee Free Choice Act," where the prospect of greater unionization and forced mediation can only make companies less competitive in a global marketplace. Anybody compared lately the unprofitable performance of unionized car companies in Detroit with their profitable, non-unionized competitors elsewhere in America?

It is a long-time habit of the Left to ignore how incentives drive human behavior and changes in incentives modify existing human behavior. Which is why they think politicians and bureaucrats in far-away Washington, D.C. - most of whom, like Obama, have never had to manage anything or meet a payroll - can be better economic policy-makers than the entrepreneurial small business owners who run much of America's businesses. And why they perpetually ignore the intended and unintended consequences of the incentives created by their governmental actions.

To put it another way, who has the greater incentive to make better decisions for a business: The small business owner, who lives and breathes the business issues on a daily basis and whose personal wealth is directly invested in the business, or remote politicians and bureaucrats, who have nothing at risk and never have to live with the consequences of their actions?

A Question of How

In a comment to Marc's post mocking Obama's campaign wealth, Erik cites some data related to wealth and stock ownership and states the following:

Considering the USA has the widest gap between rich and poor in the entire industrialized world, the idea of "spreading the wealth" seems pretty realistic at this time. ...

Is it really fair or just that 80% of all stocks are owned by just 10% of Americans, and 60% of all Americans barely own any stock at all, especially considering that corporations have to harness the labor of huge numbers of workers, many of whom never get to equitably share in the fruits of their labors?

Let's stipulate that wealth disparity of massive proportions is unjust. Having spent many days toiling in the frigid ocean-side wind under the verbal equivalent of a whip for the benefit of clientele whose occupation seems mainly to be the extraction of every comfort and pleasure from life, I certainly believe it to be. The question — which many on the left find far too easy to answer — is how we go about salvaging justice from such a scenario. There are basically three options.

The first is to take wealth from the rich by disorganized force. In other words, those who want simply take. Where police authority to stop and to punish such activity has been subverted, inequity leans toward those of physical or martial strength. The stronger one is — however strength may be measured — the more one gets to keep, and the end result is likely to be that the public buys its way out of the bloody chaos by giving unprecedented power to whoever can restore order.

The second is to take wealth from the rich by organized force — that is, through the government. In order to avoid the pitfall of option 1, the government seeks to take via taxation, to filter the money through its bureaucracy, and to redistribute it more justly. But the government is, by definition, a playground of influence, and the wealthy are disproportionately influential. The innovation of such socialism is to create another layer of power for redistributionists in which interested individuals will vie for positions, the price of which will be the protection of those who already hold power. As Shannon Love puts it:

The ugly truth is that the really wealthy can manipulate the political system to their own ends better than ordinary people. They can lobby for specific tax breaks that only they can take advantage of. They can get government trade protection for their companies. They can get bailouts. If all else fails, the truly wealthy can simply relocate their wealth into whatever area the government policies du jour make the most profitable.

In the extremes, they can simple sit on their wealth and wait for the political winds to change.

The third option is to find ways to get the rich to give up their money voluntarily, whether through charity or commerce. The former requires the application of cultural pressure, and the latter requires freedom of trade with careful, principled regulation, such that those with disproportionate influence cannot rig the system — via the aforementioned government bureaucrats — to decrease the price to them.

Glenn Reynolds periodically posts a great quotation from science fiction writer Robert Heinlein:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as "bad luck."

The answer to the slippery "how" of economic justice is to allow the system to expand to the degree that very few at the low end have lives of true poverty, no matter the effect on the dollar amounts at the high end. Attempting to exert godlike power on what is essentially a natural system (rooted in human nature) will disproportionately harm those at the bottom, because they are so much closer to mere subsistence and because the ultra rich live upon a massive cushion from which they have a strategic high view of the playing field.

Any bids for $75,000?

You gotta love these pillaging Dems:

For the second time in a week, a prominent Democrat has downgraded Barack Obama's definition of the middle class -- leading Republicans to question whether he'll stick to his promise not to raise taxes on anyone making under $250,000.

The latest hiccup in the campaign message came Friday morning on KOA-AM, when New Mexico Gov. Bill Richardson pegged the middle class as those making $120,000 and under...

"What Obama wants to do is he is basically looking at $120,000 and under among those that are in the middle class, and there is a tax cut for those," Richardson said in the interview, according to a clip posted on YouTube.

Joe Biden caused headaches for the campaign Monday when he told a Scranton, Pa., TV station that Obama's tax break "should go to middle class people -- people making under $150,000 a year."...

Geez, these fools can't even keep their stories straight. And we haven't even gotten to the topic of whether the numbers work in the first place, something even AP is reporting as a problem. LOL.

ADDENDUM

Oh, for those of you who have the audacity to resist the One's call to let the government forcibly take more of your hard-earned monies because He thinks politicians and bureaucrats in government know how to spend it better than you and your family do, He has now scolded you:

"...The point is, though, that -- and it’s not just charity, it’s not just that I want to help the middle class and working people who are trying to get in the middle class -- it’s that when we actually make sure that everybody’s got a shot – when young people can all go to college, when everybody’s got decent health care, when everybody’s got a little more money at the end of the month – then guess what? Everybody starts spending that money, they decide maybe I can afford a new car, maybe I can afford a computer for my child. They can buy the products and services that businesses are selling and everybody is better off. All boats rise. That’s what happened in the 1990s, that’s what we need to restore. And that’s what I’m gonna do as president of the United States of America."

"John McCain and Sarah Palin they call this socialistic," Obama continued. "You know I don’t know when, when they decided they wanted to make a virtue out of selfishness."

Yep, you fools who don't willingly pony up are both unpatriotic and selfish. So there! Guess this is how things work on the corrupt streets of Chicago: Keeping your hard-earned monies is selfish.

Remember that the next time you think that liberty in America means having the freedom to work hard and build wealth by keeping what you earn.

Some related thoughts:

Misguided Incentives Drive Public Sector Taxation
"Who You Gonna Call?" The Little Platoons
The Radically Different Visions of Tax-Eaters Versus Taxpayers

ADDENDUM #2

A very telling story from John Hood:

Speaking in front of a huge audience at downtown Raleigh rally yesterday, Barack Obama threw off a humorous line about John McCain's accusation that the Obama tax plan is redistributionist:

McCain has "called me a socialist for wanting to roll back the Bush tax cuts for the wealthiest Americans so we can finally give tax relief to the middle class," Obama said. "I don’t know what’s next. By the end of the week he'll be accusing me of being a secret communist because I shared my toys in kindergarten."

Ha ha. [Well, actually, He was the first one to raise how He hung with Commies.]

Only, in this passage Obama revealed precisely why he is vulnerable to such charges: he can't seem to tell the difference between a gift and a theft. There is nothing remotely socialistic or communistic about sharing. If you have a toy that someone else wants, you have three choices in a free society. You can offer to trade it for something you value that is owned by the other. You can give the toy freely, as a sign of friendship or compassion. Or you can choose to do neither.

Collectivism in all its forms is about taking away your choice. Whether you wish to or not, the government compels you to surrender the toy, which it then redistributes to someone that government officials deem to be a more worthy owner. It won't even be someone you could ever know, in most cases. That's what makes the political philosophy unjust (by stripping you of control over yourself and the fruits of your labor) as well as counterproductive (by failing to give the recipient sufficient incentive to learn and work hard so he can earn his own toys in the future).

Government is not charity. It is not persuasion, or cooperation, or sharing. Government is a fist, a shove, a gun. Obama either doesn't understand this, or doesn't want voters to understand it.

Based on His and Biden's charitable giving history, He doesn't seem to understand charity either.

All of which is why Mona Charen offers this perspective:

Barack Obama is rallying his supporters with the words "One week until we change America." I find that creepy. Other politicians have talked of changing Washington, or hoping to "get this country moving again" or even promising to "come home America." Voters who think they're just being asked to change the party affiliation of one administration should take his words to heart.

And this man thinks He is qualified to lead the FREE world? I think not.

Admitting What Must Be Done

Even just a hint that Governor Carcieri likes the notion of eliminating the income tax, almost as a philosophical matter, is enough to induce the fury of Johnathan Berard (emphasis added):

As a taxpayer, I'm mad because the state decided to go more than $33 million dollars over budget, but as a student, I'm absolutely furious that the solution to make up some of that loss is to take funding from state schools, necessitating tuition increases. This makes some of us losers on both ends! Part of the reason students like me go to schools like URI, RIC, and CCRI is because of the affordability of the education provided. Now, because of these rate hikes, current students and their families, who have already received their financial aid award packets for the year, are forced to come up with even more money to fund their educations. This is especially tough on families on already restrictive budgets who now have to somehow cough up hundreds or thousands of extra dollars to continue their or their loved one's education. Unfortunately, unlike the executive branch of their state government, when Rhode Island families go over their budgets, they have no one to take funding away from in order to make up for the shortfall.

Following Berard's reasoning in principle ought to lead one to small-government conclusions. Take his thought another step: When citizens face a shortage of income, because they lack jobs, they can't just turn to wealthier neighbors and take the money from them. Instead, they tighten their belts and focus on improving their circumstances for the future.

There are two explanations on the table for the current state of our state's budget. The first, presumably Berard's, is that Rhode Island has been allowing its wealthier citizens to keep too much of their money. The second, the correct option, is that the government is spending money on things that it oughtn't be spending money on — from extravagant worker benefits to an imbalanced welfare industry. Reluctance to admit the second conclusion leads Berard to miss his rhetorical mark in two significant ways.

The first relates to his mistaken inference that the governor would intend to make up the full loss of revenue from the eliminated income tax through sales tax, "assuming that taxpayers will just spend their extra money on retail purchases":

Rhode Island is in a recession, has the highest unemployment rate in the country, and we rank 18th in home foreclosures. Besides that, a great majority of residents' retirement savings are in question due to the volatility on Wall Street and the instability of financial markets. What makes the Governor think that we'd choose to spend that extra income on a new car, iPod, or plasma TV, rather than paying our mortgages, purchasing groceries for our families, or saving for our retirements? Or paying our tuitions?

Note the implication that Rhode Islanders can't pay for mortgages, groceries, retirements, or tuitions as things stand. How then is it moral to take money from their paychecks? No, a shift in the state's method of taxation wouldn't likely be a wash as a matter of revenue, but more of its citizens would have more money in their pockets in order to support their families, save, and invest, whether by investing we mean purchasing stocks, investing in real estate (i.e., a home), or investing in their own educations. If, financially, they need to avoid taxes, they can do so by eliminating consumption.

The second assumes that the working and middle classes won't act out of self interest (ironically, because it is clearly in Berard's self interest to push this line):

What if, instead of gambling that business will take root in Rhode Island by abolishing taxes, Rhode Island instead decides to provide initiatives for and incentives to the students in its higher education system who aspire to help grow the statewide economy? What if, instead of allowing the lower and middle classes to bear a larger percentage of the tax burden, Rhode Island instead provided a way for those same people to increase their level of education, which induces economic growth? Instead of helping to better the lives of Rhode Islanders, though, the actions of the Carcieri administration have simply served as hindrance to our advancement, both financially and educationally.

So, it is a gamble to attract businesses by allowing them (and their employees) to keep more of the money that they make here in Rhode Island, but it is somehow not a gamble to hand cash to students in the hopes that they'll leap from the graduation stage to slay the state's economic demons with their diplomas. That's worse than a gamble; it's unrealistic. Newly credentialed citizens generally lack the resources, the experience, and the tolerance for risk to build businesses from the ground up. Graduates will go where the jobs are, and the jobs are currently more likely to be found anywhere in the United States other than Rhode Island. Any coins that the government plunks into the educational slots, in other words, just fall out the back of the machines.

The difficult reality that many of those who've read Berard's commentary on RI Future are ideologically disposed to deny is that a state so desperately in need of economic expansion must shave off all expenditures that do not serve that single-minded objective. That means paying less to keep the government operating. That means paying less for the education that its towns provide. That means regretfully admitting that those in need of assistance have to look elsewhere.

Because their constituencies rely on it, those on the left emphasize the health of the politcal entity, of the government. At this moment in history, Rhode Island needs to focus on the well-being of its people.

But Tax Policies Have no Impact on Behavior in the Real World

From the Orlando Sentinel.

Dolphins owner H. Wayne Huizenga said Sunday no date has been set for selling up to 45 percent more of the team to Stephen Ross, but the presidential election is among the issues weighing on his decision.

That's because a Barack Obama administration is expected to mean higher capital-gains taxes.

"He wants to double the capital gains tax, or almost double it," Huizenga said.

Ross purchased 50 percent of the team and Dolphin Stadium for $550 million earlier this year with the intention he would eventually become majority owner. NFL owners approved the eventual transfer this month, meaning it can take place anytime.

"If you do it this year or you do it next year, the difference is humongous because of the taxes," Huizenga said.

Let the Shrieking Commence...

From the Associated Press, via the Projo...

Governor Carcieri said today he supports abolishing the state income tax, which could drastically reduce tax revenue just as Rhode Island's state government faces large budget deficits.

Carcieri said this morning during an appearance on WPRO-AM that he would "love" to find a way to eliminate Rhode Island's income tax, which provides about a third of state revenue. He said the state should tax people on what they spend, not on what they earn.

To Democrats, "Cutting" Taxes Means Not Raising Them

Surprisingly, here's a point I haven't heard made:

One thing: the 95% number is fundamentally dishonest because I'm pretty sure it measures against the CBO baseline — which assumes all of the '01 and '03 tax cuts expire in 2010. Politically, that's nonsense. But it allows Obama to count extending the politically popular Bush tax laws as an "Obama tax cut."

Redistributing Your Own Earnings Back to You

Last night, Barack Obama stated:

I think Exxon Mobil, which made $12 billion, record profits over the last several quarters, they can afford to pay a little more so that ordinary families who are hurting out there, they are trying to figure out how they are going to afford food, how they are going to save for their kids' college education, they need a break.

Obama thinks businesses--and note how he uses a mega-corporation instead of a more typical small business as an example--"can afford" to pay higher taxes. But ExxonMobil isn't some benign entity that will fork over the money on it's own. It is owned by someone, many people in fact, and it is they who will be paying higher taxes to support Obama's plan. So who are the mysterious owners of oil companies, like ExxonMobil? Probably you.

Looking specifically at education, many of us are saving for college by putting money into a 529 savings plan, which is essentially a mutual fund designed to grow for the purpose of paying college tuition in the future. The same sort of mutual fund that has a stake in ExxonMobil, for instance.

So what's the effect of Obama's plan? He'll raise taxes on public companies, which will reduce their earnings, thereby reducing the amount that average people as individual investors can accumulate on their own as they try to save for college. Further, Obama's plan will then pass a portion of that corporate tax money--with all the efficiency of government--back to some of these same families as well as others who are not saving for college in this manner.

The net effect: people saving for college via a 529 will also be saving to put other people's kids through college. Same with those of you saving for retirement via a 401(k) or a pension fund. And here you thought only the rich were going to pay their fair share. Ain't redistribution grand?

Expanding Laffer

Close readers will have noted that I did not propose to prove the accuracy of the Laffer curve; rather, my stated intention was to dispute Tom Sgouros's argument that it can't be accurate.

To be honest, I find argumentation over Laffer to be somewhat of a distraction. Clearly, I'm ideologically predisposed to a preference for shrinking government revenue, not enlarging it, although economic growth is the best way in which to do the latter. Our larger concern ought to be the point at which government becomes a detriment to the society in question, and I'd argue that Rhode Island has far surpassed that point.

If cutting taxes only serves to increase the number of employment opportunities and generally raise the financial well-being of Rhode Islanders, then I'm inclined to take the result as good enough. It seems, unfortunately, that many on the progressive side fall into the trap of using government revenue as a gauge for the health of the society.

On Obama's economic and tax policies

From TaxProfBlog, with H/T to Instapundit:

Hundreds of economists (including Nobel Prize winners Gary Becker, James Buchanan, Robert Mundell, Edward Prescott, and Vernon Smith) have signed letters opposing Barack Obama's economic and tax plans (here, here, and here):

We are equally concerned with his proposals to increase tax rates on labor income and investment. His dividend and capital gains tax increases would reduce investment and cut into the savings of millions of Americans. His proposals to increase income and payroll tax rates would discourage the formation and expansion of small businesses and reduce employment and take-home pay, as would his mandates on firms to provide expensive health insurance.

After hearing such economic criticism of his proposals, Barack Obama has apparently suggested to some people that he might postpone his tax increases, perhaps to 2010. But it is a mistake to think that postponing such tax increases would prevent their harmful effect on the economy today. The prospect of such tax rate increases in 2010 is already a drag on the economy. Businesses considering whether to hire workers today and expand their operations have time horizons longer than a year or two, so the prospect of higher taxes starting in 2009 or 2010 reduces hiring and investment in 2008.

Seems like Obama needs to discover Economics 101. From an earlier series I did in 2006, excerpting thoughts from other leading economists:

Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
Part VI: More on the Relationship Between Economic Freedom and Political Freedom
Part VII: The Role of Government in a Free Society
Part VIII: The Unspoken, But Very Real, Incentives That Drive Governmental Actions
Part IX: More on the Coercive Role of Government
Part X: The Power of the Market
Part XI: Prices
Part XII: I, Pencil - A Story about the Free Market at Work
Part XIII: It is Individuals - Not the Society, Government or Market - Who Think & Act
Part XIV: On Equality
Part XV: Consequences of Price Controls
Part XVI: The Ethics of Redistribution
Part XVII: What Does "Social Justice" Mean?

ADDENDUM

The Wall Street Journal's editorial entitled Obama's 95% Illusion: It depends on what the meaning of a 'tax cut' is:

One of Barack Obama's most potent campaign claims is that he'll cut taxes for no less than 95% of "working families." He's even promising to cut taxes enough that the government's tax share of GDP will be no more than 18.2% -- which is lower than it is today. It's a clever pitch, because it lets him pose as a middle-class tax cutter while disguising that he's also proposing one of the largest tax increases ever on the other 5%. But how does he conjure this miracle, especially since more than a third of all Americans already pay no income taxes at all? There are several sleights of hand, but the most creative is to redefine the meaning of "tax cut."

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit." Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals...

Here's the political catch. All but the clean car credit would be "refundable," which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer -- a federal check -- from taxpayers to nontaxpayers. Once upon a time we called this "welfare"...

There's another catch: Because Mr. Obama's tax credits are phased out as incomes rise, they impose a huge "marginal" tax rate increase on low-income workers...the marginal rate for millions of low- and middle-income workers would spike as they earn more income.

Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of "making work pay," but in practice they can be a disincentive to working harder, especially if you're a lower-income couple getting raises of $1,000 or $2,000 a year. One mystery -- among many -- of the McCain campaign is why it has allowed Mr. Obama's 95% illusion to go unanswered.

From The Corner:

The Democrats want another round of tax-rebate checks, in addition to the $100 billion in tax-rebate checks that went out last spring. Democrats are essentially conceding that tax cuts are good for the economy, but they are opposed to the kind of long-term tax relief workers and businesses can count on. They'd rather confiscate your money first, so they can take credit for giving it back. Viewed in this light, it is appropriate that so much of Obama's tax plan consists of "tax credits."

Ed Morrissey writes, "Put it this way: does it cost more to take money from taxpayers and then pay bureaucrats to filter it back to us, or just leave it in our pockets in the first place?"

This is economic amateur hour, all at the expense of small businesses and American families.

ADDENDUM #2

Listen to this. It's called socialism.

More on Obama's exchange with the plumber here.

ADDENDUM #3

More on Obama's "spread the wealth" statement and a history of taxation in America, including who pays how much right now.

ADDENDUM #4

Philip Klein writes about Searching for Obama's 95%:

...It's a claim that the Wall Street Journal editorial board dubbed "Obama's 95% Illusion," noting that more than a third of Americans don't pay any income taxes, and that what Obama's plan does do is offer a raft of subsidies and government payments to individuals and families that he redefines as "tax cuts." His proposal looks more like a redistribution scheme than an honest effort to reduce taxes -- as he revealed on Monday when he told a now famous Ohio plumber that his plan aimed to "spread the wealth around."

So when Plouffe reiterated the 95 percent claim, I asked him a simple question aimed at clarifying whether Obama's tax plan was about cutting rates, or merely handing out government checks. "What rates would actually go down"? I asked.

"Middle class people are going to see, systemically, their taxes reduced, and small businesses," Plouffe responded.

"But what rate would go down for lower-income Americans?" I persisted, seeking more information.

"We'll have to get you the exact details on that," Obama's campaign manager told me.

I followed up, recapping the claim he had just made moments ago: "Well, you said that there's going to be a tax cut on 95 percent, so what rate would go down?"

He replied, "I'll have to get you the exact rate differential."

Given that he wasn't clear on the actual rate changes involved, I asked, "but which type of tax would go down?"

He insisted that under Obama's plan, income taxes would be lower, as well as capital gains taxes on start up businesses and small entrepreneurs (though the capital gains tax would otherwise increase)...

In fairness, politicians long ago began to use the tax code as a tool for crafting social policy rather than merely as a way to raise revenue. Republicans and Democrats alike have abused terms such as "tax credit" and "tax rebate" to make their policy goals more palatable. But Obama is getting away with defining tax cuts so broadly, that future candidates will simply claim any form of increased government spending as a tax cut...

If Barack Obama can effectively claim that his plan cuts taxes on 95 percent of Americans, then the term "tax cut" has no meaning.

Looking Too Closely to See the Reality

On one level, Tom Sgouros's attempted proof that the Laffer Curve can't be accurate is rhetorically ludicrous:

Let's go to the numbers. The corporate tax is 9% of income and is paid by about 2,500 corporations. Not counting the companies who pay the $500 minimum (44,000 of them!), this tax raised $134 million in 2007. Were we to trim it to 8%, we'd need to raise $14 million in new revenues to make the cut pay for itself. Counting income and corporate taxes, that's the equivalent of 130 new companies with income of around half a million each, and with an average payroll of more than $2 million. Do you think this is a likely outcome of a small cut in one tax?

What about the income tax? Rhode Islanders earn around $40 billion a year these days. Out of that, we pay about $1 billion in income tax each year. In order for a 5% cut in the income tax to pay for itself, it would have to cause a 5% rise in personal income, roughly equivalent to the growth rate in 2003 and 2004. But ask yourself: what effect would a 5% cut in your state income tax have on you?

If you're part of a family earning around $75,000, a 5% cut in your income tax will be worth around $100. That's going to net a lot of economic stimulus, isn't it? Maybe you expect more rich people to move in, or put your hopes on the merchants and tradespeople they pay to re-spend the money they receive (the "multiplier")? Well, if we were actually an island, if nobody put their tax cut in the bank, if everyone spent it all as fast as they could on local businesses and if five hundred really rich people moved in because of the cut, then there'd be a fighting chance of making it pay for itself. Maybe. A larger cut would require a larger effect. Applied to the real world of Rhode Island's taxes, the whole proposition is completely absurd, but it so often comes masked in economic gobbledy-gook that people are routinely taken in.

Regarding the first paragraph, on what experiential basis does Sgouros expect his readers to answer his question? Will a 1% lower tax rate generate specifically $14 million dollars? I don't know, but I'd remind Sgouros that not every source of additional revenue has to be "new companies"; that percentage decrease in taxation (although clearly too small, in my estimation) might be the determining factor for some multimillion-dollar businesses to shift or add operations in the state.

Regarding the second paragraph, note the inconsistency in Sgouros's handling: With the corporate tax, he wants us to consider the hugeness of aggregate amounts; with the income tax, he wants us to consider the smallness of effects on the individual family. Nice trick, but his mocking the amount of economic stimulus would seem less credible if stated in the context of a new $50 million in disposable income pumped into the state's economy.

On a related note, the fact that Sgouros ignores the sales tax points to the larger issue at hand — namely, the state's business and commerce environment:

According to the 2008 U.S. Economic Freedom Index from the Pacific Research Institute, which measures how friendly or unfriendly state government policies are toward free enterprise and consumer choice, the northeast region of the country continues to lag behind the rest of the United States. New York stood out as the most economically oppressive state for the third time in a row.

Rhode Island, New Jersey, Pennsylvania and Vermont all ranked in the bottom 10. Massachusetts, Maine and Connecticut came out slightly ahead, ranking 33, 35 and 39, respectively.

The lesson of the Laffer Curve is that taxation is an active force in the economy, not some disconnected stream, and when taxation discourages economic transactions, as it does in Rhode Island, it has counter-intuitive results

Effects of the Obama Tax Plan

From my liveblog of last night's Vice-Presidential debate…

[9:15] I don't believe the "no one under $250,000 will see a tax-increase" claim. Isn't the Obama tax plan based on a child tax-credit?

No one making less than $250,000 under Barack Obama's plan will see one single penny of their tax raised, whether it's their capital gains tax, their income tax, investment tax, any tax.

…The breaks are (in 2008 dollars): 20% $18,981, 40% $37,595, 60% $66,354, 80% $111,645, 90% $160,972, 95% $226,918...

Note the the entries in the column at the far-right are not all zeros, as Joe Biden and Barack Obama claim they should be except for the "top quintile" entry.

So should the claim of "no one under $250,000" be considered an exaggeration within the usual bounds of politics -- or should the standard that progressive bloggers have been applying to the McCain campaign be applied here also, and the statement that Barack Obama won't raise taxes on anyone making less than $250,000 be considered an outright lie?

A Coalition of One

On what grounds are the first two groups included on this list:

Health care workers, small-business owners and unions are especially concerned about that prospect. A new group, the Coalition for Our Communities, has raised $1.3 million, about $1 million of that from national teachers' unions, and plans television advertisements and direct mail campaigns against the repeal.

Karen White, director of campaigns and elections for the National Education Association, which has given $750,000, said the "reckless proposal" would have "dire consequences that will put education at risk, health care at risk, public safety at risk."

She added: "We're prepared to commit more money if we need to. We're going to do what we need to do to make sure that we win this one."

Coughing up a million bucks (77% of the financing for the "coalition") is certainly evidence of especial concern, but what have health care workers and small-business owners done? Particularly for the latter group, I imagine the explanation would require that one consider a subset of "small-business owners" to be decisive.

The whole thing does make me wonder, though, whether a coordinated state-by-state effort to end state income taxes mightn't bankrupt the teachers' unions as they attempted to protect their heard of cash cows.

Needlessly Amplifying the Price Tag of the Bailout

In the last hour of his show today, WPRO's Matt Allen discussed the shopping list [sorry, no link] of additional spending which Congressman Patrick Kennedy announced today that he wishes to attach to the seven hundred billion dollar bailout, a sentiment presumably shared by many other congresspersons.

Is the congressman's shopping list dwarfed by the size of the bailout? Undoubtedly, though it starts to add up to "real" money when up to five hundred and thirty four other shopping lists are thrown in. More troubling is the mindset revealed.

One is an obliviousness that the federal budget is - or ought to be! - finite. Vast though the budget has grown, seven hundred billion is still a lot of money. And while there is optimism that the federal government may break even or possibly profit many years down the road, the only certainty is that taxpayers would be on the hook for quite a large sum of money with no guarantee that it would all work out in the end, especially if the bailout began to experience mission creep.

Secondly, in view of the finite nature of the budget, individual congresspersons and Congress as a whole should be giving thought to "what are we cutting out of the budget going forward so we can write this gargantuan check" and even, "this is not our money so let's make the check as small as possible". The "what spending can I add to this gargantuan check that will get my vote and get me votes" approach taken early on by the congressman from Rhode Island's first district is entirely the wrong attitude when signing a sizeable check to be drawn on someone else's account.

Economics and Taxes

Last night, Andrew took up the topics of economics and taxation with Matt Allen on 630AM/99.7FM WPRO. Stream by clicking here, or download it.

ADDENDUM:

The audio links weren't working when I first posted this in the a.m. They're fixed.

Poverty Rate Versus Continuous Tax Burden

I've received several e-mails about possible distortions that can arise from plotting a true continuous variable (the relative poverty rate) versus an ordinal rank, and if it's possible to re-plot the data against the data used to create the ranks. Of concern is that ranks can have different meanings at different points on a scale; the difference between slots 1 and 2 might be much larger and much more significant, for instance, than the difference between slots 20 and 30.

Fortunately, with the data available on the Tax Foundation website, I can express the yearly tax-burden of Rhode Island residents using the same method applied to the poverty rate, in terms of a percentage of the national average. The correlation is as strong as in the continuous-versus-rank plot…

(Tax burden numbers are from the Tax Foundation, poverty numbers are from the U.S. Census Bureau)...

A Declining Poverty Rate Versus a Declining Tax Burden

With all indicators showing the Rhode Island economy tanking at the state level, as well as national and international-level factors like the banking crisis and energy prices squeezing Rhode Island families, it comes as something of a surprise to learn that the Federal Government says that the overall poverty situation in Rhode Island improved during the years 2006 and 2007.

According to the Annual Social and Economic Statistical Supplement put out by the U.S. Census Bureau and the Bureau of Labor Statistics, the poverty rate in Rhode Island in 2007 was 9.5%, its lowest absolute level since 1990. The figure of 9.5% was 76% of the national poverty rate, the lowest relative poverty rate seen in RI since 1994, and the period 2006-2007 was the first time that Rhode Island's relative poverty rate remained below 90% for two consecutive years since 1995-1996 -- probably not coincidentally, around the same time that RI's social services programs were redesigned in response to the Clinton administration's welfare reform initiative.

The new data lets us add two more points to the graph first presented by Anchor Rising last year of relative poverty rate versus Tax Foundation state tax-burden ranking. This graph also incorporates the changes that the Tax Foundation has made to its ranking methodology since last year (which seems to have reduced some of the year-to-year swings in the RI rankings). Here is the scatterplot of current year's relative poverty rate versus previous year's tax burden using the new numbers; the points in blue represent the two most recent years…

Fans of the Tax Foundation rankings may be interested to know that Rhode Island has fallen out of the top 5 in terms of the taxes paid by its residents. RI "dropped" to 9th place in 2007 and, according to the Tax Foundation's preliminary estimate, to 10th in 2008. It's too early to add a 2007 tax rank versus 2008 poverty rate point to the graph, as 2008 poverty data won't be released by the government until August 2009, but for a possible look ahead, the tax rank of current and previous years can be averaged together and compared to the current year's poverty rate -- for this data set at least, the averaging method produces a tighter fit to the data than by using the previous year's rank alone…

Obviously, there is more than one cause in play creating a result like this, but it is pretty clear from the most recent 25 years of Rhode Island history that creating of a high-tax state is not a great method for attacking the problem of poverty.

Ignoring Human Nature Once Again

Tom Sgouros's message must be mellifluous to public-sector ears. Everything's cause and effect (no poor decisions on officials' part), and vaguely unseemly of the citizens who initiated the latter.

The story, in summary, is that all was demographically golden in the world back in the '50s, until people started moving from Rhode Island's cities to join the "rubes" in the "sticks." Property values decreased in the cities, while it increased in the suburbs, and the latter expanded to accommodate the "demands" of citizens for city-quality public services. Urban governments are unfairly maligned for their deficit budgets, and suburban governments are unduly proud of their surpluses (or, presumably, were until recently). The next application of pain, however, will come as "high gasoline prices" send folks back to the city, and the trend will reverse.

What makes the piece worth some pondering, though, is the hint of Sgouros's solution to all this unfairness:

In the meantime, let's come up with a tax system that doesn't penalize us when people move.

That Sgouros leaves this dangling is suggestive of an invitation to speculate, but it would be a mistake to slide past a key question: Why shouldn't municipalities be "penalized" — so to speak — for the exodus of their residents? Isn't the discomfort a valuable impetus for change in a better direction? Take, for example, some facts that Sgouros cites from Providence:

Providence has only two-thirds the number of people it had in 1950, and a much smaller fraction of the property value, but it has the same number of blocks to police, about the same number of houses to burn, and more students in its schools.

In other words, Providence has been attracting poorer people who have more children. To the extent that its finances are insulated from its actual population, the city has less motivation to change the character of its citizenry. Or approach the matter from the other side:

The other big problem comes when suburban residents start demanding (and/or needing) the same level of services as the cities provide. When people move to the sticks and then demand fire response times comparable to what they'd have in Providence, you have a recipe for very high costs. When crime rates creeping upward make suburban residents demand policing like they'd get in Pawtucket, that's a problem.

If a suburb faces no consequences for too-rapid expansion, then it has less incentive to preserve its character or to ensure that those moving within its borders can afford to do so. Conversely, if it faces no penalty for driving citizens (or businesses) away, it can indulge in stagnationary policies that lock development and particular classes of people out. The non-penalizing tax system will ensure that the roads stay well kept and well patrolled whether there are fifty or five households per square mile.

Lurking behind these assessments is the dark political reality of human nature: If the leaders of a city, town, or region do not have to consider demographics' effects on their budgets, then they will be inclined to institute policies that attract residents who most benefit them — which is to say people who will justify requesting more dollars from whomever it is that doles them out and who will vote for candidates who promise to go after those dollars. As the taxing and policing body of government becomes more centralized, and the Gimme Vote more unified within particular districts, the dynamic will become such that those who receive will vote themselves an arm with which to reach into the pockets of those who provide.

Once that game is proven to be the order of things, those on the losing end of the tax-and-spend formula will find a way to extricate themselves.

Shopping Curiosity

Just wondering: how much money have people seen flowing out of Rhode Island, today, to take advantage of Massachusetts's tax-free weekend? I know of a flat-screen TV and a computer and have received witness accounts of both such items flying out the door of the Dartmouth BJ's. (Sadly, my budget remains much too tight to take advantage of the opportunity, although my list of like-to-haves continues to grow.)

An Invitation to Left-Right Harmony

Presumably such rhetoric is the result of having stopped somewhat short of full consideration of circumstances, so pointing out additional considerations should bring us at least to the point of admitting that we individually lack sufficient information to justify either vitriol or broad policy changes. Here's the basis for the hasty jibe:

Unlike the rest of us, most U.S. corporations and foreign companies doing business in the United States pay no federal income tax, according to a new report from Congress.

The study by the Government Accountability Office released Tuesday said two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, and about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Oddly, the very same article offers the major reasons for adjustment of such statements:

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called "S" corporations pay taxes under individual tax codes.

"Half of all business income in the United States now ends up going through the individual tax code," Edwards said.

The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

In other words, one-third of corporations do pay corporate income tax, around 50% are structured such that their profits are taxed through the individual tax system, not the corporate, and some percentage of the remaining 17% had no profits. That's not even getting to the argument about whether tax credits are justified.

Who's Got Our Back with Taxes

An interesting response from rasputinkhlyst to my rejoinder to Crowley:

Folks in those states have higher wage and benefit base due to less attacks on workers from right wing nut jobs. Therefore their workers can afford to live there. Salaries for their state workers are higher and the benefits are better in these states. Having a livable wage means discretionary income and therefore the multiplier effect works for these state. RI with a very corporate mentality is a leader in the race to the bottom via Dumb Dumb Disaster Don and the GA enablers. These RI misfits keep thinking that RI is their personal candy store where only they deserve the sweetness. The outcome of this kind of simplistic thinking is obvious. RI was better off when workers were better off. It is a strong middle class that makes the economy work best. Less greed means more for all in the long run.

Most interesting about this is the revelation that the lefty perspective treats the public labor force as the basic determining factor of a state's health. That's a broad topic, though, branching from psychology to socialist theory, so I'll leave it to the reader to speculate.

For my purposes, it's enough to point out that, according to IRS data, Rhode Island relies more heavily on its middle class, and less on its wealthy citizens, than do Massachusetts and Connecticut:

Now, progressives are free to decry this state of affairs in Rhode Island, but they can't have it both ways. They can't cite a healthy middle class as the reason that Massachusetts and Connecticut citizens paid more in income taxes per $1,000 of aggregate income even though both states have lower tax rates on "the rich" while lamenting that Rhode Island's middle class pays a larger percentage of the state's income tax revenue.

The plain summary is that Massachusetts and Connecticut both tax wealthier citizens less, yet wind up collecting a greater amount of the population's total income, largely from the upper brackets. What a mystery!

Lower Taxes and Higher per $1,000 Revenue... Go Figure

Although I'm loath to feed his attention addiction, via his recital of standard lefty rhetoric, Pat Crowley raises a point worth addressing:

... with the report basing its analysis on taxes as a percentage of personal income per $1000, it totally glosses over the point, which the quoted section above confirms, that our tax burden is regressive to the point of absurdity. See, by lumping in everyone, and then calculating the burden, the report assumes that we all pay the same rate on our taxes and that we all pay taxes on the same things. No, by relying more heavily on things like property tax, the distribution of the taxes is weighted more heavily on the bottom.

The report is from the RI Department of Revenue, and the following is that paragraph that he'd just cited:

Regarding state and local individual income tax burdens, Rhode Island ranked 24th nationally in FY 2006 with Rhode Islanders paying $26.10 per $1,000 of personal income. Both Connecticut and Massachusetts ranked higher than Rhode Island with each state ranking in the top 15 nationally in state and local individual income tax burden. For Connecticut, which ranked 11th nationally in FY 2006, taxpayers paid $33.42 per $1,000 of state personal income while for Massachusetts, which ranked 7th nationally, taxpayers paid $36.17 per $1,000 of state personal income.

It takes but a smidgen of intellectual curiosity to discern why Crowley's closer to an accurate statement when he complains of the report's "lumping in everyone, and then calculating the burden," and why the point for which that consideration argues is actually the opposite of what he intends. As Anchor Rising readers are aware, the progressives' argument is that the state has been giving away all of its revenue in the form of tax cuts for the rich, thus starving state labor and public services of funds. The bleedingly simple solution, of course, is to jack those taxes back up for the cruelly wealthy.

But here's the thing: With regard to income tax, Connecticut and Massachusetts may have collected more per $1,000 of their populations' aggregate income, but both states have lower taxes "on the rich." Any guesses as to how that apparent contradiction occurs, Mr. Crowley?

The answer, obviously, is that Massachusetts and Connecticut have greater percentages of their populations inhabiting higher tax brackets. In 2005 (the latest year for which I've gotten around to aggregating the relevant information for all three states), Rhode Island's average adjusted gross income was $50,790, compared with Massachusetts's $62,855 and Connecticut's $73,073. That year, 10.23% of Rhode Islanders' federal tax returns were on income greater than $100,000, while the percentages were 13.84% for Massachusetts and 15.54% for Connecticut.

The same considerations come into play with other forms of taxes — whereby our gauges might be deceptive. If Rhode Island were to cut its sales tax, for example, it might actually see its "sales tax burden" go up, yet the result would be more commerce, and more income, for Rhode Islanders.