Fixing the Tax Code Will Not Be Easy

The flat tax proposals that are currently being circulated have great appeal to some. According to flat tax advocates not only would a flat tax be fair, it would simplify the nearly impossible to comprehend tax system currently in place. It would be fair in that everyone pay the same rate. But it is a peculiar sense of fairness that drives the idea. Many would miss 20% (or whatever the final rate would be) of their income far more than than others would. At 20%, if you make $1,000,00 you are left with $800,000. You can live pretty easy on that. If you make $50,000 you are left with $40,000. The guy making $50,000 will miss that $10,000 a lot more than the rich guy would miss that $200,000. That is the problem with a flat tax. Even if that flat tax is adjusted by income bracket, depending on how large the brackets were, inequity would remain. An 8% tax rate would be felt more keenly by a person making $35,000 a year than a 10% tax on someone making $50,000.The same with sales taxes. Wealthy people have no trouble paying and extra eight or ten percent on a purchase. If you are middle class and out shopping to get your kids new clothes, that eight or ten percent can really hurt. As it stands, rich people pay more in taxes, in principle any way, because they can afford to do so.

A concise, simple, and streamlined graduated income tax would increase revenue while maintaining  fairness, depending on how you define "fair". Some people do not think it is fair to pay more in taxes simply because they have a lot of money. But, then again, "a lot of money" is a matter of perspective too. I think $75,000 a year would be a lot of money. To some people, that is a pauper's wage.

Much more radical than simply flattening tax rates are the proposals to get rid of, or at least radically curtail tax deductions and exemptions, sometimes referred to as "loopholes". Gone would be all the back alleys in the tax code through which clever and motivated people navigate in order to reduce, and sometimes avoid completely, their tax burden. If you make $100, 000 in a year and your tax rate is 25% you pay $25,000. That certainly seems fair but in reality it isn't. A single person renting an apartment with no children making $75,000 can live well. The head of a household with four children making $75,000 a year, not so well. Tax deductions are simply one way to try and even things out. That, is sometimes equated with fairness.

The flat tax idea is heralded as a plain and simple approach to the U.S. tax code. But government, like life, is never plain and simple except, perhaps, to the plain and simple. Government influences both the economy and society through a byzantine array of financial incentives, write offs, and penalties. On activities or behaviors it wants to encourage it bestows tax breaks and write offs. If the government wants to encourage investment it lowers the capital gains tax. If it wants to encourage college education it allows individuals to write off college related expenses. If it wants to encourage consumption, it lowers the sales tax rates. If it wants to encourage home ownership it allows mortgage deductions. Tax codes contain a laundry list of such items to encourage activity government desires and discourage activities it disapproves of. To rid the tax code of breaks, or incentives if you prefer, would hinder the federal government's ability to manipulate economic activity. Gone would be write offs for getting rid of old, inefficient machinery or automobiles. Gone would be write offs for college education. Gone would be deductions for making your house more energy efficient.

Certainly there is much in the tax code that can be adjusted. How could there not be? That is what politics is for. What those adjustments should be is what elections are for. To rid the federal tax code of all breaks, deductions, and penalties would be a large blow to the government's ability to direct and manipulate the economy and, indeed, life in the U.S. Perhaps that is the real goal. If that is the goal, the idea has merit. If the goal is fairness, the flat tax idea needs a lot of work.

There is an allure to a simple and easily understandable tax system. Many envision a day when the average person will be able, and willing, to sit down at home and figure out their taxes with a calculator. It is difficult to envision that day ever arriving. For that day to happen Washington will have to resist the temptation to manipulate the tax code. Odds are no one will ever see that day either. For to give up the power to manipulate the tax code would be to give up one of the government's best tools to manipulate society and garner favor. Then there is always the matter of what is "fair". If there is a definition of "fair" that can last for more than two years in Washington, that would be remarkable.

One Trick Pony

President Obama suffered a set back yesterday when the U.S. Senate rejected his proposal for $35 billion in additional stimulus spending. Last week, Obama failed to get a larger $447 billion plan through the Senate. According to the White House, the spending would have funded over 400,000 education jobs for one year. The funds would have gone to state and local school districts to allay budget shortfalls and thereby avoid layoffs. While publicly disappointed, there are those in the administration who welcome the opportunity that the GOP rejection provides. Democrats will certainly seek to use the rejection to portray republicans as a party of obstructionists that are indifferent to those in need. It is no doubt hoped that the GOP's new found commitment to fiscal sobriety will cost it with an electorate that is getting accustomed to having money thrown at it whenever things go bad.

The Democrats are becoming more savvy. Gone are the days of massive, trillion dollar bills and bail outs. In their stead we have smaller, carefully targeted spending bills aimed at specific objectives such as education and infrastructure. The administration is adapting. In addition to the 400,000 education jobs it is claimed the bill would have created, the president's $35 billion proposal that was vetoed yesterday would, among other things, have provided  funds to help pay the salaries of local police and firefighters. We are not talking about abstract economics here. By carefully targeting spending proposals the president is doing his part to make budget negotiations intimate. Against the vague and undefined specter of Big Government, Obama is pitting the image of school teachers, fire fighters, and bridges. Now, when Republicans reject spending proposals, they are not simply rejecting run a way spending by a bloated government, they are rejecting something concrete. In this instance they are rejecting spending to pay for teachers and firemen.

Obama's continuing push for ever more money puts republicans in a tight spot.  If the economy doesn't improve he gets to point the finger at republicans and chastise them for their miserliness and intransigence. If the economy does improve he will get the credit. He can claim that it was due to his aggressive spending policies. On the other hand, if republicans yield and support more spending they will become complicit in Obama's policies. Worse still, if republicans become complicit the party could split. The pragmatists  in Washington who accede to more spending could easily face aggressive challenges in the primaries next Fall from the right. If nothing else, they will lose a powerful issue to run on. There is the possibility that the economy will take off in the next few months. In that case, everyone could take credit, but let's be realistic here.

Three years into Obama's administration and the economy is still foundering. The president has spent money like no one before him and has very little to show for it. Nevertheless, there are those in the administration who have concluded that the solution is to spend still more. I have come to suspect that the tide of spending is not simply due to a sincere belief in the efficacy of the federal government to solve our nation's troubles. There is more to it, not the least of which is to assure the public that the administration is on top of things. Obama's actions may be wasteful and ineffective but they are actions nevertheless. The public needs to believe that the administration has a plan, and it does. It may not be a good plan, but economics has never been one of the electorate's strong points. Americans want to turn on the news and hear that the administration moving aggressively to solve our problems.

Obama is not going to reduce regulation. He is not going to lower taxes. He is not going to trim government. He is going to spend money. That is the only trick he has. But there is another important reason he will not do so. Such an action would pose a serious risk to him and his party. If he lowers taxes or lightens the burden of government and the economy recovers, it would be a serious blow to the liberal doctrines of governmental supervision and intervention. Just as an economic recovery would vindicate Obama's policies, continued or worsening economic deterioration would refute them. If he acts to lighten the burden government places on the economy and it recovers, it would be a vindication of conservative principals. Obama ardently wants an economic recovery but if he wants to be reelected he needs it on his terms.

If we ever resolve the financial crisis that is threatening our nation I would like to see a discussion over how it happened that state and local governments have come to depend on Washington to make ends meet. As for stimulus spending, if creating jobs was simply a matter of government spending, everybody who wanted a job would have one. In any event, we are not really talking about spending money at all. The government has no money. We are talking about borrowing money.

The easiest way in politics to demonstrate commitment to an issue is to spend money on it. Compassion in Washington is usually measured in dollars.The more you care, the more you spend. Obama is determined to show the nation that he cares and the Republicans don't. It is a pretty good plan. If he gets the money he wants he gets to continue in his role as the nation's benefactor and the champion of the downtrodden. If he doesn't get the money, he gets to accuse republicans of indifference, if not callousness.

Obama may have only one trick, but it is a good one.

Who Was Gettysburg?

It was reported not long ago in the Dallas Morning News that only 12% of high school seniors nationally were able to demonstrate proficiency on the National Assessment of Education Progress. The government found it encouraging that 8th graders did a little better. 20% of them demonstrated proficiency. Students taking the test scored most poorly on the section dealing with history. "The history scores released today show that student performance is still too low" said Education Secretary Arne Duncan. Interestingly, perhaps in a reflection of the current obsession with the economy, students did best in economics, 42% of them were deemed proficient in the field.

Educators, with reason, blamed the system for the poor results. They assert that the No Child Left Behind program has compelled them to change emphasis from teaching history and science to focusing on reading and math. This is reasonable enough considering you cannot learn much about history if you cannot read and you would have a hard time making progress in science if you cannot do math. But what is neglected in all the measuring is the distinction between a necessary cause and a sufficient cause. Reading and math are necessary to a good education, but they are not sufficient. Other subjects are required. History is one of those subjects. History is also the subject students did most poorly on.

In the clamor over national competitiveness, attention has been turned to scientific and technological knowledge. History, literature, art, and other such subjects are pushed aside in the effort to ensure America's technological "edge" in the 21st century. Learning history will not make us more competitive. Only science can do that. As a result, less than a third of the eighth graders tested could list one advantage the Colonial Army had over the British in the Revolutionary War. Only twenty two percent could identify China as a participant in the Korean War. Ignorance of history was pervasive. From colonial history through the Civil War to the Great Depression, students' lack of knowledge was on display. Where more recent events were involved, students were better able to demonstrate a basic knowledge of dates, locations, and events, although many frequently erred in placing them in context.

None of this is likely to change anytime soon. History is one of those subjects that is commonly agreed to be important to any good education. It is also a subject where there is little agreement over what should be taught and how it should be taught. Debate inevitably arises over what merits discussion, what merits mention, and what can or should be excluded. A lot has happened in North America over the last four hundred years. All of it cannot be brought up in a few high school history classes. It certainly cannot be discussed. What compounds the problem is that even the narrow and abbreviated history that is taught is not being learned.

Kids don't care about the French and Indian War. What possible advantage could come from knowing about such a thing? It is not as if a potential employer is ever going to ask an applicant about it. It would be a waste of time trying to explain how history can broaden one's horizons and thereby make the world more comprehensible or how literature can give one insight into what it means to be human. Education is a tough enough task. There is no need to make it any tougher by introducing fuzzy topics likely to bewilder students. It is much better, and easier, to abstract history into a matter of numbers, dates, and brief descriptions that can be memorized and repeated.

History and the humanities are just not seen as important as science and technology. After all, even if students knew when, where, and what was at stake at the Battle of Gettysburg would that make them more productive citizens? Or would such knowledge just take up valuable space?

It's Not That Simple

In the sometimes contentious debate over immigration, it is frequently asserted that all Americans in one way or another abet illegal immigration. The argument by those who support, or at least sympathize with illegal immigration, is that the majority of Americans participate in it one way or another. Americans eat vegetables picked by illegal immigrants. Americans make use of the cheap labor illegal immigrants provide to hold labor costs down. Americans eat at restaurants staffed by illegal immigrants. In many more such ways Americans utilize the cheap labor afforded by illegal immigrants. They are correct. But where they err is in confusing participation with complicity.

When someone buys a house, that person cannot check whether the house was built using illegal immigrant labor. When a person eats at a restaurant, she cannot verify the immigration status of the kitchen staff. Neither can a hotel guest know whether the maid is in the U.S. legally. There are no signs marking whether the road one drives on is tended to by legal or illegal labor. One cannot ask park workers for their documents.

It is true that Americans benefit in many ways from illegal immigrants. But that does not make Americans complicit. When customers are able to walk down an aisle at the grocery store and choose between items labeled as to whether they were harvested by legal or illegal immigrants or hire a contractor knowing whether those in his employ are here legally or illegally, we will have a better idea as to the degree to which Americans support or oppose illegal immigration. When Americans can buy a house or rent an apartment with knowledge of whether it was built using legal or illegal labor we can gain insight into their views on immigration.

Until that day arrives, we can only assume and speculate. It is likely that day will never arrive. And, if that day ever arrives, it will be greeted with howls of protest from those who would conflate the choice such information provided with an invitation to racism and prejudice.

Many Americans, but certainly not all, do benefit from cheap labor provided by illegal immigrants. But that does not make them accomplices.

Why Not? It's Good for the Economy

Florida State Representative Ritch Workman has introduced a bill in the state legislature that would legalize dwarf tossing. Dwarf tossing is an activity where bar patrons compete to see who can toss a dwarf the farthest. Even though the sport, if you can call it that, is considered offensive by many, it is not considered so by all.

Workman is on a quest to "seek and destroy unnecessary burdens on the freedom and liberties of people." The ban on dwarf tossing, in Workman's eyes, impinges on the freedom of bars to hold contests, the freedom of bar patrons to watch those contests, and the freedom of little people to participate in those contests. Moreover, Workman contends that the ban on dwarf tossing is archaic and just another example of "Big Brother government". In the battle over the ever increasing presence of the government in our daily lives, a line has been drawn. Workman also contends that to ban dwarf tossing would be an unnecessary hindrance to the local economy. In addition to those bar owners who welcome dwarf tossing competitions as a way to draw customers, at least some in the small person community welcome the bill for the employment opportunities it offers. Workman stated that the effect of the current ban is to "simply take away some employment from some little people."

The economy has become the paramount issue in U.S. politics. People need jobs. The nation and the economy need people with jobs. The government needs people with jobs. To be elected, politicians need to be perceived as capable of creating jobs.  To be reelected, politicians need to be perceived as having created jobs.  Things are becoming grim. Florida does not have hundreds of billions of dollars to throw at the issue. Like many states, it is strapped for cash. Because of this, Florida cannot simply spend money to keep people busy. It must take another approach. It is trying to stimulate its economy by, as conservatives like to say, getting government out of the way.

The economy in Florida as elsewhere is moribund. The more dire things become the more willing people and their legislators are to set aside their sensibilities and consider sources of revenue that would not have been entertained before. Dwarf tossing is a case in point. Some states have taken to charging inmates for room and board. Still other states have taken to gambling. Humans are an ingenious species. Many of them are hard at work looking for new sources of revenue. Decency, self respect, and propriety are falling prey to the ever growing desire for money.

This will only get worse so long as people rely on government spending for their well being. There are those who welcome the increasing dependency of the public upon government. Such dependency serves to further ensconce government at the very center of American society. This might not be so bad, or perhaps as bad, if the government could afford to do all those things it has taken upon itself to do for us and do them well, but it can't.  And so, as government tallies its expenses and income it almost inevitably concludes that when they do not match, revenue must be increased. But the traditional methods of raising income through taxes and fees are becoming increasingly perilous to politicians. Other methods must be found. It is that search for additional revenue that sometimes leads government to the point of absurdity.

Tradition and moral sensibilities are fine things, but they are no match for an avaricious government or a demanding public. As for the freedom and liberty to enjoy or participate in the spectacle of dwarf tossing, that is entirely relative to the need for revenue. In the quest for money and social progress, decency and decorum are too often seen today as unnecessary burdens to the freedom and liberties of people, as well as obstacles to economic and social progress. Humans have always been prey to their baser instincts. Rather than seek to discourage  those instincts, the government has decided to make money off them instead. Why shouldn't it? When it comes down to it, the economy is the only thing that matters.

We are told that a ban on dwarf tossing impinges on the freedom of bar patrons to enjoy a spectacle. Worse, it is a hindrance to the local economy and hampers the employment opportunities of little people. What more reason do we need?

Good News and Bad News

There was good news and bad news in Washington today. The good news is that the Congressional Budget Office predicted that over the next ten years annual budget deficits will shrink by $3.3 trillion. The bad news is that, despite the savings, those deficits are predicted to total roughly $3.5 trillion over that same span. The debt now stands at $14.6 trillion. Even if deficits shrink as the CBO predicts, they are not going to go away. The debt will continue to grow. It is expected that the debt will increase by $8.5 trillion over the next ten years. Deficits aren't really a problem. Borrowing money is painless. It is paying off debt that hurts.

Many in Washington, particularly those in the White House, are no doubt pleased by the news. It is proof that they are effectively addressing the situation. Their steps to reduce the deficit are working, or at least are predicted to work (you never know if you will need another bail out or stimulus package). Of course, the news is only good news if you ignore the larger situation and simply consider less of a deficit a good thing. It is predicted, I would say it is certain, that massive federal spending will continue unabated. Cuts will be made and savings will be found but they will in no way be sufficient to stop the financial bleeding. The debt will continue to go up. As the debt goes up the costs of carrying that debt will go up. Interest on the debt cost the U.S. $202 billion last year. Even in Washington that is a lot of money.

If the CBO predictions are borne out we are still looking at yearly deficits of nearly $350 billion over the next decade. That is not good news. The debt is the real problem, not deficits. Deficits can be easily, if painfully, taken care of. The government is perfectly capable of passing a balanced budget. They are simply unwilling to. The reason they are unwilling to is that it would amount to collective political suicide. That is why the debt will continue to go up.

There is a third way to address deficits apart from raising taxes or cutting spending. That is to hold government spending flat and wait for the economy to catch up. That option is nearly as bad to elected officials as the first two. While not quite as bad as cutting spending or raising taxes, it would mean saying no to interest groups and voters.

The debt is an economic issue, but it above all else a political issue. It is the politics of spending that drive the problem. Politicians like to spend. Arguably, they need to spend if they want to be reelected. They are compelled to support spending desired by their constituents. It is the very nature of their job. They are also driven by ego. They want libraries with their name on it. The want the gratitude of their constituents. They want the grandeur of being responsible bridges, harbors, and highways. They want history to know who they were and what they have done. The rely on the largess of government to achieve those ends. Getting Johnny a recommendation to West Point or a smoothing over a constituent's social security problem is no longer enough. Projects are needed. Money must be distributed.

Any solution to the debt crisis will involve members of Congress telling their constituents how much more they will have to pay, what they cannot have, and worse, what they will lose. That is the real problem behind addressing the debt. The vanity and ego of politicians only contributes to it.

So, the good news out of Washington is that deficits are likely to decrease. The bad news is that they are not going to disappear. Even if the economy rebounds, unless there is a dramatic increase in revenue or a historical cut in spending, the debt is going to continue going up: just more slowly than anticipated. I suppose less of a bad thing can be a good thing if you look at it just the right way.

Traps and Snares

Unease is growing in the nation with the mounting national debt. Tension is Washington is rising as Republicans and Democrats try to find agreement on what to do about it. Democrats persist in arguing for the need to increase revenue, something they should have thought of before they went on a spending spree. Republicans insist on cutting spending. The zealous in both camps are reluctant to compromise even though, by most accounts, without a compromise nothing will be done. Meanwhile, the debt clock is ticking. If the debt limit is not raised by August the United States could go into default.

So badly have the talks gone so far that Republicans have walked out on negotiations. Their prospects are looking increasingly poor. They have refused to consider any tax increases. They are making a stand on cutting spending. The Democrats have expressed willingness to cut spending but only over the long term and in conjunction with increased revenue, i.e., higher taxes. Score one for the Democrats. Their willingness to "compromise" portrays them as pragmatic and flexible while the Republicans' principled opposition casts them as rigid and doctrinaire, even in the face of catastrophe. If the Republicans persist in their objections it is likely they will be seen as the ones responsible for any financial collapse. After all, if a deal is not reached it would be because the Republicans refused to budge. Should budget talks break down it is quite possible that the Republicans will be left holding the bag. That is the trap.

The Republicans came to victory in the last election largely due to their opposition to higher taxes and government spending. To give in to any tax increase or go soft on government spending would be to give up their single greatest weapon and undermine virtually everything they ran on. If they accede to a budget compromise that raises taxes or fails to reduce spending in any significant way what will they be able to run on in 2012? If government spending is firmly taken into hand republicans will be able to acquiesce to some tax increases. They might even burnish themselves and gain a touch of political responsibility for doing so. But in the absence of any significant cuts in spending the only result of a tax increase will be to allow the government to continue in its profligacy. In that event Republicans will have accomplished nothing. They will have abandoned their principals simply in order to buy some time. That is the snare Republicans face.

Democrats have few good options themselves. To unilaterally proceed to raise taxes would be to take the ire of voters upon themselves. To give in on spending would jeopardize their standing with the many millions of Americans who count upon government spending, not just to keep themselves above water, but for their livelihoods as well. There is also the more subtle threat reduced spending poses to progressives. To reduce federal spending is to hinder federal power. Without the velvet glove of money, only the iron gauntlet of law remains.

When it comes to raising taxes, republicans and democrats are in very different positions. Democrats can raise taxes without jeopardizing their political base. Republicans cannot. Because of this, democrats have more room to maneuver on the issue. Democrats can support increased taxes and keep their base content, as long as those taxes fall on the usual suspects. Republicans do not have that luxury. Most republicans oppose higher taxes of any kind. Unless a deal can be reached where only democrats will pay higher taxes, republicans will need something big to abandon their anti tax position. Simply keeping the government running will not be enough. If Congress cannot step up and do something to avert a train wreck perhaps Republicans should consider just getting out of the way.

The real test of the political resolve to address the debt will come in the fall of 2012. That is when we will learn how determined politicians are to tell the public the truth about spending and find out how willing the public is to accept what it will take to get the national debt under control.

Many years ago I learned the lesson that the first thing you should do if you find yourself in a hole is stop digging. Just digging more slowly won't help. That is a lesson that Congress and the president need to learn.