Jon Stewart’s view on taxes

While flipping channels tonight, I came across a segment of the Jon Stewart Show where Mr. Stewart claims John Boehner referring to taxation as theft showed a lack of understanding of the United States Constitution.

Here’s a link to the full clip.

I’d be open for Mr. Stewart, or the writer of that joke, to point me to the part of the Constitution he believes Mr. Boehner doesn’t understand.

Article I, Section 8 of the CoTUS gives Congress the power to ‘lay and collect’ taxes. However, it does not say that taxes are not theft.

I’ll give Mr. Stewart the benefit of the doubt that he is referring to meaning of theft as the unlawful taking of another person’s property without their permission. Since the Constitution makes taxing power lawful, then (I’m guessing) Stewart believes taxes are not theft.

However, some folks believe the more salient meaning of theft is the part where another person’s property is taken without their permission. In that view, many taxes are theft.

I’d rather have elected officials who see taxes the way Speaker Boehner sees them than the way Mr. Stewart sees them.

Stewart was miffed that Boehner’s (what he thought was a) “mistake” didn’t get media attention, while President Obama’s lack of understanding of Star Wars and Star Trek did.

Maybe others in the media were concerned that Mr. Boehner’s view on taxes would make sense to people, especially folks fresh off their 2% payroll tax holiday.

“I think we should…”

On Twitter, Jeff Brown asks:

If democrats/liberals like the idea of taxing everyone, do they themselves take any exemptions?

Of course they do.

I’ve had this discussion with folks who always think taxing more is a good idea.

My first frustration with them: They rarely acknowledge that government spending is a problem.

My second: They aren’t willing to voluntarily give more money to government and lead by example, which I take to be a revealed preference. It reveals that they don’t truly believe the government is the best place to put their marginal dollars. But, it cost them nothing to demand that others pay more to gain adoration.

I have heard a few claim that they aren’t “as aggressive as they could be” when it comes to claiming deductions. Bless their hearts. It’s for the greater good that they don’t bend the tax laws.

My third: They don’t think ahead. What do they think happens if tax rates are raised and that actually results in more tax revenue (which is a big if, at least over multiple years)?  Do they believe government, with its long history of irresponsible spending, is going to put that extra revenue toward cutting the deficit?

Government will find a way to spend that, too, and continue to run deficits.

Which, gets us back to my first frustration and demonstrates to me that these folks really don’t think much. Rather, they only parrot what sounds good.

It’s easy to spot these folks. They liberally use the phrase “I think we should…” to lead off the edicts they feel they are entitled to impose on the rest of us without ever giving due consideration to chance that they may just be wrong.

They made their own pies

Wealth redistribution is often discussed in terms of “divvying up the pie fairly.” Nobody seems too interested in where exactly the pie came from.

Recently, I saw this on Twitter from the Ayn Rand Bot (thanks to @downtownjeff for RT that one):

When great industrialists made fortunes on a free market…they created new wealth—they did not take it from those who had not created it.

Great point.

‘Government is overhead’ follow-up

Last August, I wrote this post about how I think we should view government as an overhead expense. Yesterday, Edward wrote the following response to that post:

A very interesting post. I agree with your premise that government is overhead. However, if you look at government expenditures relative to GDP, they are lower than the average overhead rates of successful companies. Currently this rate is 19 percent or so (gov/gdp) and for companies this number is in the high twenties. Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

This is my response to Edward.

The Federal government is not the only overhead in the economy. It’s a piece of it. Comparing Federal government spending to all business overhead is an apples-to-oranges comparison.

For example, all government — Federal, state and local — is part of overhead. According to this graph, all government spending makes up nearly 40% of GDP, which is more than ten percentage points higher than Edward’s ‘high twenties’ benchmark.

And still, all government is only a part of the economic overhead. For example, all the overhead tied to successful companies that Edward mentions, is also economic overhead.

Also, anything we do to comply with the government is overhead. For example, the time and money you and the companies you deal with spend to keep records and prepare your taxes — at all levels — is economic overhead that does not show up in government spending.  That’s time or money that we could have spent doing something productive, like cleaning our toilets.

Edward then asked a question that I’m really glad he asked:

Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

First, as I pointed out above, economic overhead is higher than the ‘faultless private sector’.

Second, and more important, folks of my political persuasion don’t believe the private sector is faultless, as Edward suggests. Far from it. I’d guess the failure rate of government and private sector is about the same. Why wouldn’t it be? Both are run by humans after all.  Are the humans in government less fallible than the humans in the private sector, or vice versa? No.

One reason we favor the private sector is the difference in how it and government naturally respond to failure. The private sector is better in this regard, though not perfect.

The private sector — you, Edward and I — reward organizations that provide us with stuff we value by buying that stuff and we punish the others by not buying their stuff.

When it comes to government, that success/fail feedback isn’t quite as strong, and sometimes it’s the opposite of what it should be.

For example, for years the answer to “Public schools are failing!” was “Public schools need more money!”

This sounded reasonable to a lot of folks. I bet those same folks would scoff if “Public schools” was  replaced in those two sentences with “Enron”.

We realize that giving more money to the corrupt leaders of Enron so it could try to “fix its problems” and save some jobs would have made no sense.  Those corrupt leaders would have blown that money on themselves.

The market clobbered Enron’s stock and put it out of business long before the government even figured out what was going on.

We realized that the best thing was for Enron to go out of business. The market naturally stripped the fraudsters running Enron of their power. Its failure caused some painful collateral damage to people down the totem pole, but it also taught a generation of people valuable lessons in prudence, investment diversification and ‘if it sounds too good to be true…”  And, all this happened without taking the whole economy with it. Markets naturally isolated the disturbance.

This wouldn’t be the case a few years later when government actually encouraged fraudulent practices in home lending.

I also believe that the success/feedback loop is weak in overhead functions, whether those functions are in private companies or government.

I’ve been a part of overhead of private organizations most of my career. I’ve witnessed this from the inside. Strong underlying businesses can feed crony, corrupt and political bureaucracies in the overhead departments, precisely because the success/fail feedback loop is weak.

It wasn’t a stretch for me to recognize that government also had this success/fail feedback problem.

Again, that is precisely the reason government tends to grow in good times and bad and is one reason why anti-tax folks would like to minimize government and overhead.

Politicians tell you they can solve your problems if you vote for them and allow them to spend your money (or the rich guy’s money) and too many people believe them.

Bottoms-up experimentation

The nice thing about having 50 states is that we get to experiment with policies and see what works and what doesn’t.

As individuals, it’s nice to have choices, too. If you’re not happy with your state, rather than struggle to convince more people to vote with you, you can just choose to move to another state that has more attractive policies.

In the Wall Street Journal today, Arthur Laffer and Stephen Moore take advantage of the information we have from the 50 experiments on tax policies to build a persuasive case that lower taxes is good for everyone. I recommend reading, A 50-State Tax Lesson for the President.  Here’s a good snippet:

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Then there’s the question of in-migration from state to state—or how people vote with their feet. As common sense would dictate, people try to move from anti-growth states and cities to more welcoming climates. There are relevant factors other than tax policy, of course (as in North Dakota today, where the oil boom has brought about the lowest unemployment rate in the nation), but in general the most popular destination states don’t have income taxes. That’s as true recently as it was 40 years ago.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. Such interstate migration left Texas with four new congressional seats this year and spanked New York and Ohio with a loss of two seats each.

Happy Tax Day

A family member recently complained about the high cost to have her taxes prepared.

I said:

Well, taxes are complicated. If you want simpler taxes and a lower cost to prepare your tax return, vote for different people. Congress designs the tax code.

It was a rare occasion where this person didn’t have a comeback and, judging by the look on her face, hadn’t considered that connection before.

That reminds me of something else I read in the last couple days, but can’t remember where: We should move election day closer to tax filing day. We might see different results.

Headlines that make you go, hmmm….

#1: A local NBC affiliate reports: Zuckerberg Joins Buffett, Asks for Higher Taxes

#2: Forbes magazine reports: How Facebook Billionaires Dodge Mega-Millions In Taxes

From the Forbes article:

Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Granted, Zuckerberg may not have had his tax epiphany yet in 2008. I’m assuming he’s moving swiftly now to dissolve this tax dodge trust.

#3: Buffett writes: Stop Coddling the Super Rich in the New York Times about how the super wealthy should pay more in taxes, inspiring Obama’s Buffett rule proposal.

#4: Reuters reports: Government sues Buffett’s NetJets Unit for Unpaid Taxes

I have no problem with folks legally minimizing their tax bill.

I do have a problem when these same folks get the positive glow from voicing their opinion that their tax bill should be higher, without putting their money where their mouths are.

Of course, what really annoys me about this thread is that the whole thing is a giant red herring that misses the key issue: government spending.

Let’s say we do raise taxes on the super rich or that Buffett and Zuckerberg stop talking out of both sides of their mouths and decide to voluntarily pay more in taxes. Let’s go even further and assume that either of these efforts actually increase government revenue.

Which result do you think is likely?

A. Government maintains spending, so the extra revenue reduces the deficit.

B. Government increases spending, so the extra revenue leads to more government spending and does not reduce the deficit.

I would appreciate anyone who believes (A) is likely to provide evidence. Do we have any experience where higher government revenues were not accompanied by higher spending over a 2 – 5 year period?

I’d like to know which Buffett and Zuckerberg thinks is likely or if they’ve even given it much thought. If not, then they could do all us all a favor by 1) thinking about it and 2) using their voices to shine light on the real issue: government spending.

Government is an expense, not an income

I wrote here and here about why we should view government spending as an expense for the economy, rather than an income, as it is treated in the formula for Gross Domestic Product (GDP = Consumer Spending + Investment Spending + Government Spending).

In the latest issue of Forbes magazine, Amity Schlaes points to research that may confirm my view in her column, Tax Summit for Growth:

Scholars Andreas Bergh and Magnus Henrekson found a negative correlation between government size and economic growth. When government increases by 10%, annual growth decreases by up to one percentage point. So if the U.S. were to cut its income or dividend tax rates the cut might not take us all the way to a 5% growth rate, but it might get us to at least 3%.

I’m always skeptical of statistical studies, even those that confirm my own views. Here, my skepticism is in the magnitude of the correlation, where a 10% growth in government leads to only a 1% point reduction in economic growth.

But, then again, there’s a couple of things to consider here.

First, since government doesn’t usually make up the entire GDP of an economy, this effect may be larger than it appears at first glance.

For example, consider an economy of size 100, with government spending making up 20 of that. A 10% increase in government moves it from 20 to 22. A 1% reduction in the economy moves it from 100 to 99. So a 2 unit increase in government translates into a 1 unit decrease in the economy. That’s a big effect.

Second, the effect of government spending now is spread out over time, so Bergh and Henrekson’s study may only capture the cost in the current period . Government, like you and I, can only spend wealth that was created in the past or will be created in the future.

Governments that borrow heavily to fund their current spending, may reduce the economy by 1 unit now and more units in the future.

Schlaes makes some other great points in her column and I recommend reading the whole thing.

Warren Buffett just doesn’t get it

Last summer, Warren Buffett wrote an op-ed piece supporting higher taxes on the rich to reduce the deficit.

He's Bluffing

Many, including myself and Mitch McConnell, suggested that Warren put his money where his mouth is and make a voluntary contribution to the U.S. Treasury, since he thought so strongly that would help reduce the deficit.

Apparently, in response to our suggestions, Buffett is offering to match any contributions made by Republicans.  He’ll even match 3-to-1 anything contributed by Mitch McConnell.

The only problem is, it makes no sense.

Republicans, and others, who suggested that Buffett make a voluntary donation don’t believe that sending more money to Washington will reduce the deficit.

To believe otherwise ignores the well established record of government spending everything we send them and then some, which is documented by our government’s accumulated national debt and annual deficits.

When I suggested that Buffett make a voluntary donation, I was calling his bluff.  I don’t think Buffett really believes that giving more money to the government will reduce the deficit.

This would be like if I told you that I was 100% certain about the Broncos winning the Super Bowl.

You ask:   If you’re so sure, why don’t you place a big bet on it and make a lot of money?

Me, in my best Buffett impression:  I’ll match anything that you bet.

You:  Why would I bet anything?  I’m not the one who’s 100% confident.  You’re dumb!

Regarding Buffett, our whole point is that if Buffett truly believed his own nonsense, he would put his money where his mouth is.

In fact, he has quite an established record of putting his money where his mouth is.

That’s how he made his billions, by placing BIG bets on investments that he was reasonably confident would pay off.

That’s also what he has done with his philanthropy.  He decided to donate his wealth to charity and to have it spent relatively quickly so that it won’t just feed generations of charity foundation bureaucrats to come.

He is also trying to persuade other billionaires to voluntarily follow his philanthropic model.

So, given his established record of putting his money where his mouth is, why, when it comes to supporting getting more from the wealthy individuals, is his talk so cheap?

Incentives matter

Here’s a nice paragraph from Arthur Laffer’s opinion piece in the Wall Street Journal today:

Government taxes cigarettes to stop people from smoking, not to get them to smoke. Government fines speeders so they won’t speed, not to encourage them to drive faster. And yet contrary to common sense, it seems perfectly natural to some people that government would tax people who work or companies that are successful only to give that money to people who don’t work and to bail out losing companies. The thought never crosses their minds that these policies are the very reason why our economy is in such bad shape.