Monday, September 29, 2008

Election FUD: About Money

The Jaded Consumer predicted FUD this election season, and it's upon us. Since Obama will win the election (as called here and here), it seems appropriate to focus on the FUD offered by his victorious campaign.

Rather than discuss serious differences the candidates might have, Obama in the first Presidential debate pretended that McCain intended directing tax relief solely to "the rich" and to "corporations". McCain plainly endorses doubling the tax exemption that can be claimed for each child, which has the effect of raising the income at which the lowest-income persons must pay any tax. In a family of four, the taxable income would be reduced $7,000 -- with attendant decreases both in taxes owed and in the tax rate applied to the family's marginal income.

Households that now must pay tax on income starting at $17,700 per year (the married-filing-jointly standard deduction of $10,700 plus two child exemptions at $3500 each) would -- with a doubled child exemption -- face no tax at all until their income reached $24,700 per year. A family of four with a gross income of $45,000 per year -- not a wealthy family -- would have their taxable income reduced from $27,300 to $20,300 per year. The family's income tax reduction (the federal government will still collect a variety of other taxes, which are income taxes, but are not called income taxes -- such Medicare and federal unemployment tax contributions) from $3312.50 to $2262.50 is more than a 31% reduction in income taxes, driving down the household's effective tax rate from 7.3% to 5.0% (excluding Social Security and FUTA). Since the federal government is collecting approximately another 15% in taxes from employees for social security and unemployment taxes (twice that for self-employed people, such as most small businesspersons, due to "self-employment tax" that mimics the employer's federal payroll taxes), these aren't the total tax rates, and many states impose income taxes atop the federal taxes. However, dropping income tax 30% on a working family of four is hardly "doing nothing" for the not-rich.

(Lowering taxable income by $7000 on a super-rich family of four might have more dollar impact due to marginal tax rates increasing with income; the tax on the last $7000 is more at $1,000,000 of income than it is at $45,000 in income. However, the sum involved won't move the needle on the family's effective tax rate for such a family , meaning the break won't materially change their tax rates. The materiality of the impact of the tax break McCain has proposed actually increases with lower incomes. The proportional benefit will simply not be material for the so-called super-rich. By contrast, people whose incomes are low enough the tax reduction amounts to a nearly one-third tax cut will really notice the difference in the amount of disposable income they have. The $1050 savings of the $45,000-earning hypothetical family of four will really be appreciated when the holidays come around. Heck, I'd like some of it myself.)

Obama, by contrast, plans increasing taxes on working people, with special emphasis on the lowest earners: he expressly calls for a new employment tax from which employers offering no health benefits will be unable to find an exemption. (The fact that this will add fuel to population risk segmentation and drive up the cost of health care for people not in employee benefit plans is bad it itself, and requires separate treatment in another article.) The impact on super-low-wage earners will be significant: businesses barely able to meet their payroll will find current payrolls unaffordable, and dump jobs. In an era of raised payroll taxes, manpower requirements couldbe satisfied by self-employed contractors (looking at the economic relationships created with exotic dancers, it's clear anything is possible to avoid employment status) who will either not participate in funding the Obama plan, or who will personally shoulder the payroll tax in the form of an increased self-employment tax. The incentive to hire workers illegally -- and without payroll taxes, and perhaps without status documentation -- will only increase as the cost of lawful employment grows.

Basic economic modeling demonstrates that playing games with the identity of the player the government requires to deliver payment for a new tax does not change the identity of the end-consumers who ultimately bear the tax, or the ultimate behavior of the market participants. If employment's cost is driven up by non-wage components, it will depress wages or (particularly near the minimum wage, where employees' financial situation is most vulnerable) cause job cuts. It is hard to understand how a candidate can, straightfaced, announce a plan to create a new tax on working people -- whether nominally borne by their employers or by someone else -- while saying that he's reducing taxes on working people and it's his opponent who neglects them.

Obama is guilty of tax FUD.

Obama claims that McCain overstates the importance of earmarks. I submit that earmarks are a much larger concern than Obama admits. The fact that earmarks are an epidemic are underscored by the Senate's apparent need to take a bill already commanding 75/25 support for passage and to add pork to it. All this time, I thought pork was horse-trading between members of congress to get votes; apparently, it's not the desert used to lure people to the table at all, but the cocaine they snort coming and going. Or perhaps this is Senate pork to attract House votes, which is a new trade for me to notice, though probably not new to the Beltway Bunch and the heartless desperados with whom they routinely loot the Treasury.

McCain's observation on the topic, that cost-plus contracts must end, offers a portal into a type of federal largesse -- of the sort that constituents imagine is intended to be included in the Congressional overspending represented by the anti-earmark campaign -- that can provide (a) industry-specific, (b) district-specific, and (c) entity-specific funding. Surely this, too, is a type of earmark -- and many DoD systems are vastly expensive and are paid for over decades. Congressional intervention on bidding arrangements decides whether work will be performed in Alabama or Washington. Whether the workers are unionized may become a factor. Whether the entity getting the contract has relationships with non-US defense-industry competitors may be a factor. Politicians sitting on oversight committees have an impact on this kind of thing, and the fact it doesn't show up on Obama's radar as an earmark doesn't mean that it isn't, or that if for some reason technically not an earmark it doesn't raise the exact same constituent concerns about government overspending that are raised by projects widely lampooned as earmarks.

I heard about an Air Force base that built its golf course first, so that it could approach Congress with the need of a barracks, instead of building the barracks first so that it'd be stuck approaching Congress with a request for funding for a golf course. The community where this base was situated got an earmark -- specifically-designated funding for work in a specific Congressional district. Locals got work, much more than if they hadn't gotten to build the barracks and the golf course. The fact that this pork was hiding in a DoD budget doesn't mean it's not just as much an earmark as the money the Senate seems interested in showering on Puerto Rican rum producers.

Without bothering to look, The Jaded Consumer can guess that both Obama and McCain voted for that one. Crazy.

An Aside: Selling Votes Is Good Business
Lobbyists spend a fortune feasting politicians, and it's not because they are such great conversationalists. Lobbyists are buying legislation, and they're spending money with the expectation of a good return. Indeed, they are choosing which legislators' invitations to accept. With legislators advertising for lobbyist contributions, it's no secret what's going on: both parties know how the courting game works and what its currencies are. Sweetheart legislation is part of the currency of this obscene market, and it's a market the public would like see shut down.

Legislation that can't pass without robbing the public to fund favors for politicians' re-election campaigns doesn't deserve to pass. Using the public fisk to conduct public relations among one's constituents should be illegal, but members of Congress have absolute immunity for the votes they make and Congress has no known limit on its spending power.

It might be nice to see a Congress that believes in the limited government provided by the Constitution. Failing that, it might be nice to see an Executive Office official willing to veto measures that threaten the principle of limited government articulated therein.

Simply claiming earmarks aren't important is bogus: they are at the heart of the corruption in the District of Columbia and have an impact vastly beyond that admitted by Obama in the debate.

Corporate Taxes
Corporations (and other legally-created entities) aren't physical things that can be seen or felt; they are legal fictions created to help separate ownership from management, and to enable investment while preventing chaos in business enterprises. None of these creations have life or breath outside that of the people who own them or are paid to make them seem to be doing work. Corporations' (and other created-only-by-law entities') ultimate owners and workers -- human beings -- are subject to taxes.

Obama stated the view that cutting taxes that apply to corporations somehow is a slight to the people who own and run them. The Jaded Consumer has difficulty reaching this view with open eyes. Inverstors and management seek a certain minimum net returns (this means the money that's made after expenses, including taxes, are charged), or they would not bother to enter (or continue) business. Increasing taxes on the entity leaves less money for employees and owners to earn while still allowing the entity to make the after-tax return needed to attract investment. (The same is true of increased payroll taxes; it leaves less on the table with which to increase hourly pay, or freinge benefits, or funding extended vacations or maternity or paternity leave or other things that improve workers' view that they are getting a good deal for their work.) This was exactly McCain's point when he stated that businesses, which are free to legally organize anyplace on the planet and under any jurisdiction they please, may be very attracted to Ireland's 11% rate, causing United States workers to miss out on jobs that weren't created here because the entity's tax rate would be more than three times higher, at 35%.

The Jaded Consumer touched on this point when discussing the relative capacity of banks and regulated business development companies to pay dividends: the entity with the higher tax rate must employ riskier strategies to achieve equivalant dividend-paying capacity. Do we want only high-risk jobs in boom-and-bust industries, or do we want stable employment and high wages? Given that Obama favors raising taxes (at least on anyone whose employer is subject to a payroll tax), one would think he would be excited to see earned incomes (and thus all taxes indexed to earned incomes) bloom. Pretending to "punish" entities that conduct foreign operations and are subject to foreign taxes instead of United States taxes seems like an invitation to repudiate the tax treaties the United States has with the scores of countries with which American firms do business -- treaties that keep them from being taxes in multiple jurisdictions for a combined rate that could in some cases exceed 100%. How Obama imagines that it is possible to sanction entities with foreign job creation in a way that would not simply cause complete departure from creating employment in the United States is one of those mysteries I hope someone will explain.

In this era of REITS, LLCs, LLPs, BDCs, not-for-profit corporations, and so many other entities that lawfully pay no tax at all at the federal level despite carrying on massive interstate and international operations, a vote to reduce entity taxes is not a vote against employees and their retirement savings that are invested in the public markets. If Congress thought that corporations had some moral "need" to be taxed, we'd not have a federal tax structure that enables limited liability partnerships, limited liability companies, corporations that elect to be treated as business development companies, and a host of other entities paying zero tax. The fact is that all the profit of these enterprises -- including the so-called not-for-profit enterprises -- gets taxed as it is pushed to stakeholders in the form of various kinds of income. If we want enterprises' stakeholders to do well, it's not unreasonable to decide not to tax the enterprises' income a second time before the stakeholders get the money; we can just tax the stakeholders.

Obama's claim that lowering entity taxes -- which increases retirement account returns and amplify's liquidity with which to increase jobs and wages -- is a blow against the middle class is pure FUD.

Obama's claim that McCain is raising taxes on the little people when Obama expressly admits doing the same, at a time McCain advocates clear tax cuts for low-income and middle-class families, is the kind of "Republicans Hate Little People" FUD meme we should expect near Election time. If Obama merely advocated eliminating the ceiling on Social Security taxes or Medicare taxes or the like, then he might have some credibility when he preaches against regressive taxation; however, his proposal for new taxes has an obvious and immediate result no-one would like materializing in their lifetimes, much less in the midst of a recession.

Obama's stance on entity taxes suggests he has no idea at all what human beings are the ultimate owners of entities. The Jaded Consumer suggests these ultimate owners include the beneficiaries of pension funds, the owners of 401(k) accounts, individuals with private savings, retirees, and job-creating small businesspersons risking their life savings to employ those in their communities to make an honest return on their labor and innovation. Obama's prescription to raise employment taxes reveals that instead of demonstrating a sophisticated grasp of economic policy he is simply keeping in line with his party's philosophy that a properly-sized government requires higher taxes.

The fact there's no clear math on how many cost-plus contracts are so overpriced they can only be understood as political plums makes it hard to assess the size of the earmarks problem, but since earmarks are one of the keys to the corruption of Congress by special interests, it's clear that they must be addressed before we can have a Congress that works for citizens rather than special interest entities that haven't even the power to vote. Obama's claim during the first debate that McCain was missing the big picture when looking at earmarks may reveal that he himself fails to understand the scope of their damage to the government Americans send to the Discrict of Columbia to govern in their name.

McCain's proposals on restoring accountability in Congress by interfering with the corruption enabled by uncontrolled spending bills isn't so absurd as to be lampooned. A comprehensive plan to end earmarks seems likely to rewire the logic on funding nearly everything Congress wants paid for, and to enable much better transparency (a prerequisite to accountability) than exists. It's much more ambitious than a plan to tax the top 1% or 2% of income-earners a bit more. (Unfortunately, I think accountability is doomed in D.C., but Obama didn't make this claim; he claimed that McCain missed the point, when it's clear McCain has a real problem in his sights, and that it's a problem McCain has some historic interest in addressing.)

Perhaps the most recurring meme that smacks of FUD in this election is the "third Bush term" allegation Obama and Biden have been directing at their opponents. Given NPR's difficulty discerning a difference between the candidates' stated policies, one might turn Biden's comment around: if we don't know the substantial, specific differences between Bush and McCain, or between McCain and Obama, then we may not know the real difference between Obama and Bush. Obama certainly isn't distinguishing himself as yet with bright ideas.

I'll unload on his silly health policy ideas in a later post. The Jaded Consumer gets so frothed and irritated thinking about that stew of sewage that it's hard to type, so the post has been delayed from its originally-promised order. Soon, though. Soon.

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