Tax simplification - Capital Gains

All the talk of tax simplification makes me lift an eyebrow a little.  Sure the tax code is full of gimmicks and needless complexity, but much of the tax code needs to be complex. Much of what has been sold as tax simplification in the past has simply allowed sharp operators (with clever accountants or lawyers) to avoid paying their fair share of taxes.  For every tax provisions we need to balance:


1.  The need for complexity to avoid tax avoidance with


2.  Fairness and simplicity for those who don't want to hire professionals to handle their taxes.


Income from Capital Gain has been treated better than other kinds of "ordinary income" since Republican tax cuts in 1921.  There is good reason to treat it somewhat differently.  Different kinds of capital gain can have significantly different characteristics.  If you bought $50 worth of stock two months ago and sold it for $100 you probably have $50 in real profit.  Why should that be taxed lower than $50 earned in wages?


But if Uncle Joe bought a farm 30 years ago for $50 and sells it this year for $100 he may not in fact have any profit, since $50 today is worth far less than $50 was 30 years ago.


The tax code used to reflect the difference in the types of capital gain to a much greater extent, but after frequent lowering of Capital Gains tax rates over the last 30 years currently people who profit from selling assets now pay far less tax than people living on wages or rents or other ordinary income.


Why should capital gains get much better tax treatment than a paycheck?  The big argument for lowering Capital Gains taxes is that it spurs investment.  Proponents of tax cuts have thrown that argument to support tax cuts for 30 years but the data over the last 30 years contradicts that claim.  History shows when there is a dearth of money available for investment, a lower tax rate on capital gain may spur productive investment.  But that situation is long gone in the United States.  We have huge institutions, banks, investment businesses, pension funds and Unions with trillions of dollars they need to invest, all scrambling to try to find someplace to put their money to make a decent return.  As evidence I note that since the Capital Gains tax cuts in the 1980's and 1990's we have had bubbles in virtually every possible asset someone could invest in (currently gold - it was around $30 an ounce 30 years ago, is up around $1600 an ounce today).  We have a glut of investment capital looking for return.  We do not need a special capital gains tax rate to spur investments and in fact the low rates have contributed to instability in the economy.


I think tax simplification should treat capital gains just like any other kind of income.  But in determining the amount of the sale price that is "gain" we should reduce the amount of the proceeds by:


1.  The amount that was paid for the asset.


2.  A standardized inflation factor that adds an amount to what was paid for the asset to offset the impact of inflation over the years the asset was owned.


This will be a tough sell in Washington as a lot of wealthy folk who will want to keep the special tax benefit they have enjoyed for the last couple decades.  But if fairness and appropriate complexity are our goal, this is one step toward that goal.

Curious Coincidences

 As our economy limps along every single Republican running for political office offers a prescription of tax cuts, regulatory cuts and cuts in the size of Government to bring our economy back to health.  Their unanimity is impressive, and their policy beliefs are easy to produce as wonderful sound bites.  Democrats have no such unanimity in economic policy, and certainly no specific policy so easily shaped into an appealing slogan.

A little bit a research reveals that this prescription has been the Republican position for the last 100 years.   From party platforms in the 1920’s through the Republican Presidential debates of this current electoral season, Republicans are the epitome of policy constancy over the last 100 years.

The research also reveals some curious coincidences.

 Imagine this scenario - Republican's promising to cut taxes, cut regulations and reduce the size of government win a sweeping electoral victory and take over both houses of Congress.  They restructure the tax law to make selling real estate or other assets more rewarding.  They begin chipping away at regulatory law to free up financial markets.  House prices begin to rise as do prices of stocks and other assets.   With Republican hands at the Congressional wheel the country goes through the better part of a decade with rising asset prices. Sounds wonderful, no?

 But if we continue with what actually happened we find income inequality rises as the rich get richer through complex financial dealings but working people make little gain.  Overall economic growth is pretty ordinary.  Then financial markets implode plunging the economy into a catastrophic collapse.  Millions of Americans lose their homes to foreclosure, stock prices collapse, banks collapse and the country limps along with a crippled economy for years.

You might think I am talking about recent history.  I could be.  But here is the first curious coincidence.  I could also be talking about the 1920's.

Coincidence #1:

In 1919 Republicans took over both houses of Congress, and in 1923 they also won the Presidency so they controlled all three branches of government for the next 10 years, until 1933.  Remarkably similar to recent history.  Republicans took over both houses of Congress in 1995 and added the Presidency in 2001, for a complete monopoly on public policy up until 2007.

Coincidence #2:

Between 1919 and 1933 the Republican Congress followed their belief that tax cuts, cutting regulations and cutting the size of government would lead to a strong economy.  In 1921 they cut income taxes on the wealthy.  They also created the first lower tax rate for Capital Gains, so for the first time selling an asset (such as your house) produced income that got better tax treatment than working at a job. 

In a like manner between 1995 and 2007 the Republicans followed their belief that tax cuts, cutting regulations and cutting the size of government would lead to a strong America.  They cut the marginal tax rates, particularly on the wealthy, cut the Capital Gains tax rate, cut regulations on the financial markets and changed the tax code to make selling Real Estate incredibly lucrative. 

Coincidence #3:

During both periods of long term Republican control the Republican era began with balanced Federal budgets, both era’s saw the budget dip into the red after the tax cuts and within a few years the Federal Government began spiraling into massive debt when the economy collapsed.

Coincidence #4 – the consequences:

Both periods of Republican control resulted in millions of home foreclosures as the housing market collapsed.  Both periods resulted in banks collapsing all over the country.  Both periods were marked by extraordinarily high unemployment that stayed at those high levels for longer than any other time in modern history.  Both periods saw millions of people lose all or most of their life savings.

Coincidence #5 - the most curious coincidence of all: 

1919 to 1933 and 1995 to 2007 were the only times in the last 100 years Republicans controlled both houses of Congress for more than one two-year session.  During he same 100 years Democrats controlled both houses of Congress for 14 years from 1933 to 1947, then for 24 years from 1955 to 1981, and another 8 years from 1987 to 1995.  Yet the two biggest economic collapses in modern history both followed the only two lengthy periods of Republican control of the Federal Government.

Just coincidence?

Things Republicans could do - Whistle blower laws

One of the cover stories in the April 1, 2012 San Francisco Chronicle is about the sorry history of California State University (CSUS) employee's who blow the whistle on abuses by other employees.  Often the abusive employees keep their job, the whistle-blower loses their job, and the whole episode is swept under the rug after millions of dollars in settlements to the fired employees.

The same thing happens in business of course, but usually for different reasons.  In business usually whistle-blowers get dumped on because the company is doing something that endangers the public or employees, and the managers of the company want to protect the enterprise's ability to generate money to pay their salary and position.  In government the whistle blowers get dumped on because they upset the complex web of political relationships we allow to flourish in government employment which allows public employee's to protect their own position at the expense of efficiency in achieving the goals of the enterprise.

It is pretty clear the problem with whistle-blower laws is they require the whistle-blower to report the impropriety to the organization first.  The idea is to give the organization an opportunity to correct the problem, but the reality is it just gives the enterprise an opportunity to start marginalizing the whistle blower and building a cover-up.

Republicans complain about government all the time.  Why aren't Republicans taking up this problem?  Why aren't Republicans taking the lead in setting up an independent auditing agency that could investigate allegations of business or government impropriety without revealing the source?  Why aren't Republicans advocating enacting laws to make it a crime for a public employee to impede an investigation into allegations of fraud or abuse in public employment?

Not to let the democrats off the hook, they should also be advocating these changes.  But based on past history I expect they will.  The problem will be the Republicans because they are obsessed with the notion the only thing to do with government is to take an ax to it.  Even though history and economic data demonstrate the taking an ax to government generally cripples the countries economy for decades.

The real problem is Republicans are lazy.  Making government work well is hard work.  It requires research to gather data and ideas, study of options, testing of different ideas.  Advocating swinging an ax is easy, and you don't even actually have to do it if you hand out some tax cuts to placate enough voters.

At least that has been the history of the Republican party for the last 30 years.

Are Universities full of Democratic professors because of discriminatory hiring?

A recent study makes this claim (focusing on UC Berkeley in particular).  Here is a link to the study: http://www.nas.org/images/documents/A_Crisis_of_Competence.pdf )

At one point the study states "The most plausible explanation....(for the predominance of democrats on university faculties) ...is the result of discrimination in the hiring process"

I beg to differ.

It appears to me the report is rooted in ideological belief rather than the logical conclusion from an entire body of data.  It doesn't help the studies case that it is constructed beginning with conclusion, then marshaling data to support the conclusion.  But more specifically, in my quick perusal, I found some glaring weaknesses in the data and logic they rely on:

1.  They don't seem to have any data to address how or why the discrimination occurs.  I don't think they are suggesting hiring committee's ask the candidates their political affiliation.  I imagine they would say the committee's figure out who is Republican and don't hire them.  Seems to me the study is pretty useless unless they have some theory with data to explain how Republicans are being singled out.   

2.  The don't seem to seriously address the problem of self selection - 

a.  How many Republicans study any of the various ethnic studies programs?    I suspect the number is close to 0.  So why is it a surprise the professors are Democrats?

b.  On the flip side, how many Democrats are professors at the typical School of Business?  I don't know, but I suspect it is not many.

c.  How many Republican art professors are there.  Or have there ever been?

d.  They in part are supporting their argument by the fact the number of Republican professors has been falling over the decades.  This doesn't surprise me.  When I was growing up in the 60's and 70's going into business was an immoral option for many, so people that might have done well in business went into academics.  Once that prejudice against business faded away I expect a lot of folks with Republican leanings turned to business rather than academics.

3.  The bigger question they gloss over is whether the university community has moved to the left, or is the university community more Democratic because the Republican party has moved to the right, so folks who once would have been moderate Republican's (like me) are now Democrats.

Republicans, please bear with me on this one -  Give it a read and think about it.   (As a preliminary note, the points I make below also apply to Democrats sometimes, but Republicans are far more serious and capable at enforcing ideological purity)

One of the primary purposes of a University is to teach people to value data over ideology.   When there is no data, ideology provides a mechanism for decision making.  But I believe the current Republican party, instead of adjusting ideology to fit all the data, picks and chooses data to support the ideology.  The result - in order to subscribe to Republican ideology you have to be willing to chose ideology over data.  So people (like me) who have learned to value making decisions based on data have abandoned the Republican party. 

Want an glaring example?

Only twice in the last 100 years have Republicans controlled both houses of Congress and the Presidency for half a decade or more (1919 to 1933 and 1995 to 2007).   Both times they have honored their ideological commitment to cut government, regulations and taxes.  These two are the only periods of Republican monopoly in the last 100 years, both ended in the two worst economic meltdowns in the last 100 years and both meltdowns were followed by long periods of economic weakness.  This seems to me like any person who cared about facts and data would start questioning whether cutting taxes, regulations and government as a primary economic policy is really a good idea.

On top of the common sense notion one doesn't keep doing what historically has ended in economic meltdown, in the last 20 or 30 years economic studies have developed large bodies of data making it almost incontrovertible that:

1.  The only time cutting government spending actually helps the economy is when interest rates are very high  In a low interest rate environment such as the present time cutting the size of government reduces both GDP and employment, aggravating the slowdown

2.  Trickle down economics through tax cuts to the wealthiest members of society has undermined the consumer base our economy needs to thrive, and aggravated the National debt.  

Yet in the face of overwhelming data every current Republican candidate offers a prescription of tax cuts, regulatory cuts and cuts in the size of government to cure our economic ills.

How about civil rights issues?  With race, women's rights and gay issues the Republican party fought a rear guard action against data and logic for decades after it became apparent  there was no moral support in data or logic for discrimination.

This plays into university hiring because in humanities such as economics, psychology or sociology where there has been an explosion of data in the last 50 years the Republican leaning students face a bit of cognitive dissonance - their  ideological inclinations are sometimes contradicted by data.  If they don't want to live with that cognitive dissonance they either dump Republican ideology or learn to filter out data that contradicts their ideology.  The ones who start filtering data to protect ideology then end up without the credentials to compete with students willing to accept that the data sometimes undermines deeply held beliefs.  (Don't worry about the filterers though, they make lots of money as political pundits).

I think our university system is deeply flawed.  But a significant level of bias in hiring against Republicans is not the problem. 

Does wealth inequality spawn economic meltdown?

The Economist surveyed the economic data in the issue of March 17, 2012 (p.87).

What I take away from the article is when the average worker is experiencing long term stagnant buying power while the rich are getting richer the likelyhood of deficit spending by the government and some sort of meltdown in financial markets is high.  But why is not yet completely clear.

One theory with some evidence shows that part of the problem is expectation - the old "keeping up with the Jones" syndrome.  As relative income of workers begins to fall in comparison with wealthier folks, they begin to try to keep up with the life style they see in their town and in the media which they regard as the norm.  To do so they have to borrow money to purchase things through credit cards or refinancing a home.  If the inequality continues to grow, the growth of debt increases until it hits a crisis point.

Another theory is that government plays a role by trying to make it easier for folks to obtain credit.  Researchers analyzing congressional votes on bills that expanded the availability of credit found that congressmen who represented districts with more inequality in income were more inclined to vote to loosen mortgage rules.

Another group of economist looked at 22 OECD countries and found evidence when inequality increases, governments seeking to keep growth on track pick up spending to make up for the falling consumer buying power of average workers.   A common OECD mechanism is increasing spending on social safety nets.  I would make the case that here in the US in the last thirty years we have been more inclined to use military spending, which actually exacerbates the income inequality.

Finally another group of researchers caution against assuming there is always a link between income inequality and financial meltdown.  They say they find a strong relationship between credit booms and financial meltdowns, but don't find a link between income inequality and credit booms.  They note that credit booms more often accompany rising real wages by the average worker.   I haven't seen the original research but the Economist article gives no indication this study considers the fact not all credit booms lead to busts, or the possibility credit booms based on inequality from falling real incomes lead to deficit spending and eventually a meltdown, while credit booms based on rising real incomes (which usually occur in developing countries pulling themselves up out of poverty) can correct themselves without deficit spending and a meltdown.  In short the meltdown hinges on whether the people in the country perceive their lives to be improving, or are trying to maintain a life they have become accustomed to in the facing of falling purchasing power.

Comparing countries with high income inequality

Here is some data relating to income inequality.  First, the top 10 most unequal from an article in the Huffington Post first posted in May of 2011 - search under income inequality) -

1.  Chile
2.  Mexico
3.  Turkey
4.  United States
5.  Isreal
6.  Portugul
7.  United Kingdom
8.  Italy
9.  Australia
10.  New Zealand

The Huffington Post article was based in part on a 2011 OECD study.  There seems to me to be some inconsistency between the Huff Post top 10 and what the OECD actually says.  So here is how the OECD summarizes their findings.  (The OECD stands for Organization for Economic Development - an organization consisting of 30 democracies) The OECD analyzed their findings by grouping countries into 5 categorys.

1.  Far below average - Denmark and Sweden have the least income inequality.

2.  Below average - Most of the rest of Northern Europe and Australia.

3.  Around average - Korea, Canada, Spain, Japan, Greece, Ireland, New Zealand and the UK.

4.  Above the average -  Italy, Poland, the US and Portugul.

5.  Way above average - Turkey and Mexico.

One can't help but notice that none of countries whose economic instability is rocking the global economic boat are in the below average category.

Was Ike was the most Responsible Republican President since Lincoln?

He was in my opinion.  He accomplished a number of things, but most astoundingly, when he swept into office in 1953 he brought so many Republicans on his coattails that Republicans had majorities in both houses of Congress for the only time between 1932 and 1995.  That situation only existed for two years, but during that two year session Congress enacted the 1954 Tax Code that had tax rates as high as 90% on the income of really wealthy people.  It solved the huge budget deficit problem that we had developed during the great depression and WW II.

In the two prior sessions of Congress Democrats had a majority and had first enacted many of the taxes on the income of the wealthiest Americans, but I don't think that diminishes Ike's leadership on the issue.  It would have been easy to have cut those high tax rates back to keep wealthy constituents happy as he looked forward to his reelection campaign, but he recognized we needed to deal with the debt and pushed the Republicans in Congress to act responsibly.

He still got reelected (although Republicans lost their majorities in both houses) and he left office with the country in pretty sound financial shape.  Certainly no Republican President since then can say that.