This morning I read a news article about an Obama administration proposal to raise taxes on the wealthy. One of the mechanisms for doing this in the proposal is to cap deductions at the 28% tax bracket.
In other words, someone in the 28% tax bracket who makes a $100 donation would effectively get a full $100 reduction in their taxable income (and a corresponding $28 reduction in taxes owed), but someone who is in the 35% tax bracket who makes a $100 donation would effectively only be able to get an $80 reduction in their taxable income. (To help with the math here: they would get the same $28 reduction in taxes as the 28% tax bracket individual. Since they are in the 35% tax bracket, this is equivalent to a reduction in taxable income of $80, since 35% of $80 is $28.) In other words, people in high tax brackets could only deduct 80% of their donations.
The piece of the story that raised my hackles a bit was where they said "White House officials said it is unfair for high-income people to receive a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions."
This is twisting the notion of "fairness" into a pretzel, and it is an unfair (pardon my pun) characterization of how the tax deductions work.
The problem arises from the fact that we have a progressive tax system, which is by definition unfair. I don't say that as a judgment about progressive taxation - in fact, I am quite OK with it - but let's not kid ourselves by pretending that it is "fair." "Fair" means everyone gets treated equally, and progressive taxation explicitly makes a point of NOT treating everyone the same; only a flat tax would truly be "fair." We (generally) accept this unfairness, though, because it has pragmatic benefits for the country as a whole, among them (a) it allows for a lower rate of taxation for the poorest people than a flat tax would allow (for a particular level of revenue), since the wealthy effectively subsidize the poor; (b) the wealthy are presumably most able to contribute and have most benefited from societal infrastructure that made their wealth possible, so it is reasonable to ask them to pay more than others, and (c) even the higher tax rate on the wealthy consumes a smaller percentage of their required income for necessities like food and housing. It's certainly possible to have too much progressivity in the income tax (perhaps we do today, though I doubt it; it's less progressive now than it has throughout most of its history), which can amplify the differences in taxation, but the right level of progressivity is not something I feel competent to debate. My point is that if we as a nation agree to have progressive taxation, then we have thus decided that an intrinsically unfair system is something we're OK with.
Given that, to imply that people in the 35% tax bracket should not get the full deduction from charitable giving is not correcting an unfairness; rather, it is compounding unfairness upon unfairness. In particular, it conveniently forgets the fact that the high-income person seeking the deduction is already paying a higher rate of taxes. So it seems quite hypocritical to complain about them getting a bigger deduction than the 28% tax bracket donor without complaining that they are already paying more taxes on $100 of incremental income than that 28% tax bracket earner; one cannot occur without the other, after all.
So if one is to accept a progressive tax system, which has an inherent unfairness built-in, the only "fair" thing to do is to allow that wealthy individual to get the full write-off of a deduction.
As an aside, this is also precisely the reason that I get annoyed when people complain that "the wealthy" get all of the benefits of a tax cut. Well, duh - it's because of precisely this math. The wealthy pay the most in taxes, so if you cut their rates, it has the greatest dollar effect on the wealthy. It's another immutable attribute of a progressive tax system.
If all of the above sounds like a rant against progressive taxes or against taxing high-earners, please don't take it as such; I don't have a philosophical problem with either concept, and I don't think the practice has been carried beyond any appropriate boundaries. My problem is simply with the notion that the White House is advancing that somehow we should compound unfairness in the name of being fair.
As a policy matter, I'd also add that this is a bad idea for another reason. As a nation, I'd think we'd want to be encouraging high-earning individuals to be giving more to non-profits and similar, especially in tougher times when people at lower income levels are giving less. It's high-earners who are going to be providing a larger portion of non-profit budgets over the next few years. This tax proposal specifically provides a disincentive for that, which will undoubtedly lead to lower giving.
If the administration wants to tax the wealthy more, then right way to do it, frankly, is to be upfront and honest: raise the top tax bracket by some nominal amount, but let people continue to take deductions to reduce their income dollar for dollar.
But it serves no purpose to distort the concept of "fairness" to make something palatable that is wrongheaded.
Thursday, February 26, 2009
Tuesday, February 10, 2009
Wow, I sure hope it works
I have been learning a lot lately about Keynesian economics from all the economic news of late. The gist of this theory is that massive government spending can help pull a nation out of recession, in the same way that World War II is often credited with ending the Great Depression. Of course, this also has obvious impacts on interest rates, inflation, and the national debt; in fact, the Congressional Budget Office predicts that the stimulous plan could increase output by 1.4%-4.1% by the end of this year, but that it would actually lead to a shrinkage of 0.1-0.3% by 2019.
I've always been something of a deficit hawk. I don't mind carrying a small deficit: debt provides leverage, a little of which is a good thing. But the current crisis and collapse of so many financial institutions illustrates beautifully the problems of too much leverage when things turn sour. One should always have the cushion of being able to fairly easily take on more debt; if you're at your debt limit, you have little margin for error, and little maneuverability. But being a deficit hawk must also have its limits: attempts to balance the budget and tighten the money supply are widely blamed for exacerbating the great depression.
So what do I think of the Obama plan? Well, if Keynes was right, then it's probably the right thing to do, regardless of whatever warts it has. And if Keynes was wrong...well, I hope that the spending is at least productive and useful. Trouble is, I don't know which it is.
Either way: I'm very disappointed to see such lopsided voting. This is problematic for a few reasons. First of all, it suggests that for all the talk of bipartisanship, it isn't actually happening. Secondly, I want both parties to have skin in the game. When significant legislation passes with only one party's votes, then the other party can play blame-game and use it for political gain later. The Democrats did this during Bush's tenure, and the Republicans seem to be doing the same. If it's a more evenly distributed vote, then both parties are making a commitment to solving the problem and giving up the opportunity to use the vote as a political weapon. Finally, the lopsided vote certainly reinforces the suspicion that Democrats are more interested in pet spending projects or advancing other agendas than in a bill that is truly targeted to economic stimulus and only economic stimulus. I get that the Democrats won the election, but they are repeating Bush's mistake of confusing a victory with a mandate.
I've always been something of a deficit hawk. I don't mind carrying a small deficit: debt provides leverage, a little of which is a good thing. But the current crisis and collapse of so many financial institutions illustrates beautifully the problems of too much leverage when things turn sour. One should always have the cushion of being able to fairly easily take on more debt; if you're at your debt limit, you have little margin for error, and little maneuverability. But being a deficit hawk must also have its limits: attempts to balance the budget and tighten the money supply are widely blamed for exacerbating the great depression.
So what do I think of the Obama plan? Well, if Keynes was right, then it's probably the right thing to do, regardless of whatever warts it has. And if Keynes was wrong...well, I hope that the spending is at least productive and useful. Trouble is, I don't know which it is.
Either way: I'm very disappointed to see such lopsided voting. This is problematic for a few reasons. First of all, it suggests that for all the talk of bipartisanship, it isn't actually happening. Secondly, I want both parties to have skin in the game. When significant legislation passes with only one party's votes, then the other party can play blame-game and use it for political gain later. The Democrats did this during Bush's tenure, and the Republicans seem to be doing the same. If it's a more evenly distributed vote, then both parties are making a commitment to solving the problem and giving up the opportunity to use the vote as a political weapon. Finally, the lopsided vote certainly reinforces the suspicion that Democrats are more interested in pet spending projects or advancing other agendas than in a bill that is truly targeted to economic stimulus and only economic stimulus. I get that the Democrats won the election, but they are repeating Bush's mistake of confusing a victory with a mandate.
Wednesday, February 04, 2009
Taking DNA samples upon arrest
There is a somewhat controversial proposal in Washington State to take a DNA sample from people when they are arrested, regardless of whether or not they are charged with a crime (much less convicted).
I confess that I don't understand why this is controversial. If it's OK to take fingerprints from arrested people (and it seems to be), then a DNA sample is really nothing more than a far more accurate (and more commonly left-behind at the scene of a crime) means of identification. As long as the DNA sample is, like fingerprints, used strictly for identification purposes (rather than, say, determining hereditary diseases or other genetic information, which absolutely would be a violation of privacy), I can't see how this would be legally distinguishable from fingerprinting.
After all, the taking of fingerprints upon arrest is to enable identification, so the legal underpinning for this practice must supports the notion of enabling future identification. If that's the case, then DNA samples meet the same bar in terms of what it accomplishes.
Conversely, if DNA samples are somehow unconstitutional as an identification mechanism (again, assuming that it isn't used for anything beyond that), then it seems to me that fingerprinting must also be unconstitutional.
I usually agree with the ACLU's point of view on things, and I'm certainly not wild about increasing the government's ability to keep tabs on citizens, but I don't understand the distinction the ACLU proposes between fingerprints and DNA samples in opposing this measure.
I confess that I don't understand why this is controversial. If it's OK to take fingerprints from arrested people (and it seems to be), then a DNA sample is really nothing more than a far more accurate (and more commonly left-behind at the scene of a crime) means of identification. As long as the DNA sample is, like fingerprints, used strictly for identification purposes (rather than, say, determining hereditary diseases or other genetic information, which absolutely would be a violation of privacy), I can't see how this would be legally distinguishable from fingerprinting.
After all, the taking of fingerprints upon arrest is to enable identification, so the legal underpinning for this practice must supports the notion of enabling future identification. If that's the case, then DNA samples meet the same bar in terms of what it accomplishes.
Conversely, if DNA samples are somehow unconstitutional as an identification mechanism (again, assuming that it isn't used for anything beyond that), then it seems to me that fingerprinting must also be unconstitutional.
I usually agree with the ACLU's point of view on things, and I'm certainly not wild about increasing the government's ability to keep tabs on citizens, but I don't understand the distinction the ACLU proposes between fingerprints and DNA samples in opposing this measure.
Stimulous problems
Two details related to the bailout and the proposed stimulus bill caught my attention.
The first is the proposal to limit executive pay to $500,000 at any company receiving bailout money. This is a classic illustration of something that is a great idea that is nevertheless a terrible idea to mandate. Should companies that are receiving taxpayer rescues be paying obscene compensation, flying fancy private jets, etc.? Of course not. So if it's such a bad idea to engage in such practices, why is it a bad idea to ban them in the strings tied to the money? The biggest reason is the classic law of unintended consequences.
In particular, companies today argue that if they don't pay a lot of money to their CEO, they will not be able to retain good CEO talent. They're half right about that, but not in the way that they think. They will be able to retain their lousy CEO that got them into the mess because THAT CEO has nowhere else to go in this economy. But think about what is undoubtedly the best course of action for many troubled companies: they should dump their existing overpaid CEO and bring in smart, proven turnaround talent CEOs. I suspect that good turnaround artists are in fact in high demand right now, and $500K seems like it could well be a small salary to dangle for such a high-stress and high-risk role. (Yes, turnaround CEOs should be taking equity compensation to align long-term interests, but there typically needs to be a strong salary component as well to recognize the risk). At the very least, it is an arbitrary number.
Another example: Corporate jets. A corporate jet that is used as an executive perk is obviously wasteful and not a good use of taxpayer dollars. But there are many companies that in fact use their jets for very productive purposes, and for which a corporate jet actually makes operational sense. (I think our own president provides an example of this. Do we really want the President flying commercial?) A fact of airplane economics is that the fixed costs are enormously high, so any additional flying actually lowers the overall cost-per-hour of flight, so - assuming that the company is properly compensated (i.e., reimbursed at appropriate market rates) - letting a business jet make additional flights for personal reasons can actually lower the cost of business for the company. I am not saying that many companies with corporate jets do in fact make economically sensible use of them; I'm simply saying that corporate jets are not a-priori wasteful and inappropriate.
There are more, but in general even with the best of intentions (and the intentions behind this provision are noble indeed!), government is not good at running businesses, and this is a one-size-fits-all approach that in practice will likely be one-size-fits none.
The second stimulus detail to catch my eye is the "buy American" restriction that is proposed. There's a great commentary on this in the Los Angeles Times, but this is another case of Great Idea/Bad Rule. Do I want money spent in America on American products and services? Heck, yes. But it has to be because the right products/services are here. And it is in our interests and the interests of our economy to have healthy trading partners who also prosper and become customers for American products. Protectionism has been shown time and again to reduce overall trade and raise prices, which are precisely two outcomes we do not want to have. In fact, there is a lot of evidence that the Smoot Hawley Act was a factor in prolonging, rather than relieving the depression. Why on earth would we do something that is likely to make things worse?
While I take points away from Obama for letting the whole stimulus bill get weighed down and lost, I give him credit on this one: he has signaled opposition to the Buy American provision. Good for him. As painful as it might be for stimulus money to go out of the country, that medicine is almost certainly less painful and more effective than protectionist restrictions.
The first is the proposal to limit executive pay to $500,000 at any company receiving bailout money. This is a classic illustration of something that is a great idea that is nevertheless a terrible idea to mandate. Should companies that are receiving taxpayer rescues be paying obscene compensation, flying fancy private jets, etc.? Of course not. So if it's such a bad idea to engage in such practices, why is it a bad idea to ban them in the strings tied to the money? The biggest reason is the classic law of unintended consequences.
In particular, companies today argue that if they don't pay a lot of money to their CEO, they will not be able to retain good CEO talent. They're half right about that, but not in the way that they think. They will be able to retain their lousy CEO that got them into the mess because THAT CEO has nowhere else to go in this economy. But think about what is undoubtedly the best course of action for many troubled companies: they should dump their existing overpaid CEO and bring in smart, proven turnaround talent CEOs. I suspect that good turnaround artists are in fact in high demand right now, and $500K seems like it could well be a small salary to dangle for such a high-stress and high-risk role. (Yes, turnaround CEOs should be taking equity compensation to align long-term interests, but there typically needs to be a strong salary component as well to recognize the risk). At the very least, it is an arbitrary number.
Another example: Corporate jets. A corporate jet that is used as an executive perk is obviously wasteful and not a good use of taxpayer dollars. But there are many companies that in fact use their jets for very productive purposes, and for which a corporate jet actually makes operational sense. (I think our own president provides an example of this. Do we really want the President flying commercial?) A fact of airplane economics is that the fixed costs are enormously high, so any additional flying actually lowers the overall cost-per-hour of flight, so - assuming that the company is properly compensated (i.e., reimbursed at appropriate market rates) - letting a business jet make additional flights for personal reasons can actually lower the cost of business for the company. I am not saying that many companies with corporate jets do in fact make economically sensible use of them; I'm simply saying that corporate jets are not a-priori wasteful and inappropriate.
There are more, but in general even with the best of intentions (and the intentions behind this provision are noble indeed!), government is not good at running businesses, and this is a one-size-fits-all approach that in practice will likely be one-size-fits none.
The second stimulus detail to catch my eye is the "buy American" restriction that is proposed. There's a great commentary on this in the Los Angeles Times, but this is another case of Great Idea/Bad Rule. Do I want money spent in America on American products and services? Heck, yes. But it has to be because the right products/services are here. And it is in our interests and the interests of our economy to have healthy trading partners who also prosper and become customers for American products. Protectionism has been shown time and again to reduce overall trade and raise prices, which are precisely two outcomes we do not want to have. In fact, there is a lot of evidence that the Smoot Hawley Act was a factor in prolonging, rather than relieving the depression. Why on earth would we do something that is likely to make things worse?
While I take points away from Obama for letting the whole stimulus bill get weighed down and lost, I give him credit on this one: he has signaled opposition to the Buy American provision. Good for him. As painful as it might be for stimulus money to go out of the country, that medicine is almost certainly less painful and more effective than protectionist restrictions.
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