The assumption that the private sector can do everything better than government is basic to Republicans. They don't even think about whether the assumption is correct. Democrats, on the other hand sometimes seem to think that Government can do everything.
Someday I think that science will have precisely identified the mix of personality traits that make some people inclined toward the private sector and others inclined toward government. Government and the private sector should be a team.
The strengths of the private sector are energy, imagination, creative problem solving and willingness to take risks. But the nature of the private sector can allow ambitious, self centered people that are greedy, monopolistic and exploitative to be enormously successful.
The strengths of the government are consistency, focus on public good. But measuring productivity and cost effectiveness in government work is very difficult which can allow self centered people with good people skills who care little about their mission to build little fiefdoms at taxpayer expense.
I wouldn't want to buy a car made by the government, but I would be happy to put my money in a government bank or get a mortgage from a government entity (without private investors) dedicated to making home loans.
I certainly wouldn't want to buy a cell phone made by the Government, but I wish the government would do more to insure a few companies don't control the market. Why do I have to go with Verizon if I want to realistically get cell phone reception in Montana?
I wouldn't give my money to government to invest, but I am very happy that government has trained regulators to keep an eye on the companies that are offering investment services, and I wish the government could be even better at it.
I want a house built by the private sector, but I think it is important for government to regulate construction to insure that the house I live in is safe. I am not so keen on government regulating how my house looks.
I definitely would rather go to a Doctor, Dentist or other health care professional who is paid a salary that is independent of how many tests or procedures he/she performs. I want them thinking about what I need, not what they need to pay the bills, or buy a new car.
I don't want to buy my tomatoes from a government run farm. But I want the government to keep an eye on the safety of the products grown by the farmers I buy from, because I have no way to do it.
Every time we as voters have bought into the notion of private sector perfection we end up paying for it, most glaringly with the Great Depression and the Great Recession. We bought into the notion about the wonders of private sector health care after WW II and 60 years later we pay twice as much for health care (per person) as any other country in the world (even before Obama care) yet many other countries are statistically much healthier than we are.
We as voters need to view the private sector and government as tools we can use to build a strong nation. We need to understand the strengths and weaknesses of both of these tools, and realize it is a mistake to try to do everything with either one.
Friday, April 27, 2012
Monday, April 23, 2012
Corporate taxes- what is a sensible and fair approach
The question of how much to tax corporate profits is a source of eternal political debate where the opposing sides talk past each other without effectively addressing the other sides legitimate points, or attempting to link their position to historical or economic data.
Inevitably the debate is limited to whether the taxes will cause corporations to hire fewer people, or move elsewhere. I think that the debate ought to address some much more fundamental questions that go beyond speculative guesses about how the tax rate will affect corporations and the economy.
First, I think it is a mistake to treat all corporations the same. It is rather like trying to make a size 6 shoe fit everyone in the world. We could create categories of taxation that look at two factors:
1. How much does the corporation benefit from government spending?
2. To what extent do the corporations activities imposed costs on society?
Some corporations unquestionably provide necessary and beneficial services to society. Medical corporations for example, or farmers. Other corporations engage in activities that dump major costs on society. Corporations that manufacture alcohol, or tobacco, or make their money off of gambling encourage activities that cause social disruption and mental and physical health problems. Strip mining or other industrial activities often create major environmental problems.
Other corporations are pretty neutral, they don't provide a necessity but they also don't engage in activities that that dump major costs on society.
Seems to me the logical way to tax corporations is by creating catagories. Low taxes on activities that are necessities and don't impose costs on socieity, moderate taxes on nuetral corporations, and high taxes on corporations that engage in activities that impose costs on society.
Inevitably the debate is limited to whether the taxes will cause corporations to hire fewer people, or move elsewhere. I think that the debate ought to address some much more fundamental questions that go beyond speculative guesses about how the tax rate will affect corporations and the economy.
First, I think it is a mistake to treat all corporations the same. It is rather like trying to make a size 6 shoe fit everyone in the world. We could create categories of taxation that look at two factors:
1. How much does the corporation benefit from government spending?
2. To what extent do the corporations activities imposed costs on society?
Some corporations unquestionably provide necessary and beneficial services to society. Medical corporations for example, or farmers. Other corporations engage in activities that dump major costs on society. Corporations that manufacture alcohol, or tobacco, or make their money off of gambling encourage activities that cause social disruption and mental and physical health problems. Strip mining or other industrial activities often create major environmental problems.
Other corporations are pretty neutral, they don't provide a necessity but they also don't engage in activities that that dump major costs on society.
Seems to me the logical way to tax corporations is by creating catagories. Low taxes on activities that are necessities and don't impose costs on socieity, moderate taxes on nuetral corporations, and high taxes on corporations that engage in activities that impose costs on society.
Wednesday, April 18, 2012
The product liabilty problem
Republicans have identified a lot of legitimate problems in the way our society functions. My problem with Republicans is that most of time the problems they identify are with laws that are imperfect solutions to bigger problems, and the Republican solution is generally to repeal the law and go back to the earlier bigger problem.
Product Liability law is one good example. A free market often is really poor about punishing firms with dangerous, defective or unhealthy products. You usually have no way of knowing if a product is unhealthy, dangerous or defective when you buy the product, so it can't really be a factor in your purchase decision. If 5% of a particular products are dangerously defective most consumers will never know it unless they happen to know someone in that 5% that was injured, and the topic comes up in conversation. So businesses that put their money into marketing rather than careful design and testing will do just fine in the market, maybe better than the more safety oriented companies.
Congress years ago created a Consumer Product Safety Commission but they have always been relatively ineffective. There are millions of products and few regulators. So eventually the courts filled the void by creating the products liability action. When I was in Law School back in the 1970's product liability action were still a fairly hot new topic in the law.
I don't think there is any real question that products liability lawsuits have made the marketplace, and the world, a safer place. But Republicans have some legitimate complaints about product liability lawsuits. There is so much money to be made that marginal claims are worth pursuing vigorously. Not necessarily by the injured consumers but by the lawyers who can lump a group of injured consumers together. It is enormously lucrative for many law firms, some of who could care less if the claim is legitimate. In addition what often makes the suits so lucrative is the punitive damages. But instead of the money going to the broader public benefit - as normal fines imposed by government do - it is a windfall to the people who sued and their lawyers.
Our societal goal ought to be to make products liability lawsuits easy to bring to maximize public safety, but set limits on the return realized by the parties bringing the lawsuit, with the bulk of punitive damages going to the public benefit in some way.
Republican solutions generally involve limiting the lawsuits - in effect turning back to clock to remove impediments to companies careless pursuit of profit.
There is no question in my mind the Democrats have had little interest in refining the products liability law because of the financial support trial lawyers provide to the party.
I'm sure there is a middle ground where consumers and their lawyers can be compensated enough to make it worth their while to bring suits without making it so lucrative as to invite pursuit of the most marginal defects.
Product Liability law is one good example. A free market often is really poor about punishing firms with dangerous, defective or unhealthy products. You usually have no way of knowing if a product is unhealthy, dangerous or defective when you buy the product, so it can't really be a factor in your purchase decision. If 5% of a particular products are dangerously defective most consumers will never know it unless they happen to know someone in that 5% that was injured, and the topic comes up in conversation. So businesses that put their money into marketing rather than careful design and testing will do just fine in the market, maybe better than the more safety oriented companies.
Congress years ago created a Consumer Product Safety Commission but they have always been relatively ineffective. There are millions of products and few regulators. So eventually the courts filled the void by creating the products liability action. When I was in Law School back in the 1970's product liability action were still a fairly hot new topic in the law.
I don't think there is any real question that products liability lawsuits have made the marketplace, and the world, a safer place. But Republicans have some legitimate complaints about product liability lawsuits. There is so much money to be made that marginal claims are worth pursuing vigorously. Not necessarily by the injured consumers but by the lawyers who can lump a group of injured consumers together. It is enormously lucrative for many law firms, some of who could care less if the claim is legitimate. In addition what often makes the suits so lucrative is the punitive damages. But instead of the money going to the broader public benefit - as normal fines imposed by government do - it is a windfall to the people who sued and their lawyers.
Our societal goal ought to be to make products liability lawsuits easy to bring to maximize public safety, but set limits on the return realized by the parties bringing the lawsuit, with the bulk of punitive damages going to the public benefit in some way.
Republican solutions generally involve limiting the lawsuits - in effect turning back to clock to remove impediments to companies careless pursuit of profit.
There is no question in my mind the Democrats have had little interest in refining the products liability law because of the financial support trial lawyers provide to the party.
I'm sure there is a middle ground where consumers and their lawyers can be compensated enough to make it worth their while to bring suits without making it so lucrative as to invite pursuit of the most marginal defects.
Monday, April 16, 2012
Cost effective Government - Indexing taxes for inflation
Transparency is crucial to cost effective government. One of the primary drivers of increasing tax revenues are the hidden taxes that arise from bracket creep. Suppose you make $40,000 a year. Suppose the tax code taxes income up to $40,000 at the rate of 20% while income above $40,000 is taxed at 25%.
Now suppose 10 years later, after 10 years of inflation of 1%, you now make $44,000. In real dollars your income is unchanged, you just kept up with inflation. But you now are paying 25% tax on that additional $4,000 in income to make up for inflation. So in effect you have had your taxes raised by $200 a year although the politicans you vote for did nothing.
That's bracket creep. It was a huge problem back in the 1970's when inflation was rampant. Bracket creep undermines taxpayer confidence in government. No income based tax should be enacted that is not indexed to account for inflation.
Now suppose 10 years later, after 10 years of inflation of 1%, you now make $44,000. In real dollars your income is unchanged, you just kept up with inflation. But you now are paying 25% tax on that additional $4,000 in income to make up for inflation. So in effect you have had your taxes raised by $200 a year although the politicans you vote for did nothing.
That's bracket creep. It was a huge problem back in the 1970's when inflation was rampant. Bracket creep undermines taxpayer confidence in government. No income based tax should be enacted that is not indexed to account for inflation.
Saturday, April 14, 2012
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.
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.
Tuesday, April 10, 2012
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?
Monday, April 9, 2012
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.
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.
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