Friday, December 30, 2016

Tax policy: all about the wealthy

Paul LePage and Hillary Clinton see one thing the same when it comes to taxes. For the Maine governor and the defeated Democratic presidential candidate, it’s about the wealthy.
How you treat people with lots of income is essential to tax reform.
For all the politicians’ talk about corporate taxes being too high, they only account for about 11 percent of federal government revenues. Individual taxes, the largest source, contribute almost half.
In Maine, property taxes are the biggest contributor, followed by the sales tax. Individual taxes are important, coming in third and accounting for almost a quarter of government revenues. Corporate taxes matter relatively little.
Where this gets interesting is who pays the individual income tax. More than half of federal income tax is paid by people with taxable incomes of $250,000 and higher. These people file less than three percent of all returns.
Willie Sutton, the charming criminal, was famously, if incorrectly, quoted as explaining why he robbed banks, “That’s where the money is.” The same philosophy is true for taxation.
If you want to cut income taxes, as Gov. LePage does, the wealthy are the people to help. Their average tax rate is much higher than everybody else’s. In Clinton’s view, the way to raise more revenue to support her proposals for new spending was to raise the tax rates on the rich.
Going for where the money is makes sense. It’s also where the politics are. With the majority of income earners paying less than two percent of federal taxes, they contribute little and have little to complain about. They say their biggest concern is that other people are not paying their “fair share.”
This attitude is probably driven by the belief that the growing income gap between the top and bottom results from the use of tax breaks available only to the wealthy. In theory, if the tax code treated everybody the same, the rich would then be forced to pay their “fair share.”
Tax policy, at least as it relates to the income tax, is really about what constitutes a “fair share” of taxes to be paid by the wealthy.
Here is where LePage and Clinton part company. The governor, like many other Republicans, believes that if taxes are reduced on the wealthy, they will invest the untaxed money in new and existing enterprises, creating more jobs to be filled by new taxpayers.
Perhaps the wealthy will make more money and pay more taxes, even at their lower rate. There’s no question that when the stock market is booming, tax revenues climb thanks to the increased income that mostly goes to wealthy investors.
But given the lower rates on average working people, even if more of them found good jobs, the amount of the new taxes from them might fall short of the revenues lost from lower rates for the wealthy. If the rich pay less, there’s no certainty that everybody else can make up the lost revenue.
The loss of government income may be part of the plan. Not only will the rich get lower taxes, but government could take in less revenue and have to be cut back. If you think government has grown too large, cutting levies on the major tax contributors may force spending reductions.
Clinton’s view was the mirror image of this conservative approach. Not only would government revenues increase if taxes on the wealthy went up, but the income gap could be reduced. And there would be more money for more government action, including basic spending on roads and hospitals.
In talking about the wealthy paying their “fair share,” she used the notion of fairness to respond to the income gap issue. Her approach would have been to hit the gap squarely, while the tax cutting approach would depend on the benefits of lower taxes filtering through the economy.
Of course, not all federal government revenues come from taxes. It borrows every year it has a budget deficit – meaning just about every year. Debt repayment becomes an increasing part of the cost of the federal government.
Donald Trump seems to favor increased spending for public works financed by added public debt, an approach more closely associated with Democrats than Republicans. If he goes that direction, it will be difficult to cut taxes. Will the Republican Congress support him?
In Maine, income tax cuts almost certainly require state spending cuts, boosting the already overburdened property tax, especially for schools. Can LePage induce the Legislature to accept more tax cuts?
It should be an interesting year.

Friday, December 23, 2016

America at yearend: the best of times or the worst?

“It was the best of times, it was the worst of times.”

So began “A Tale of Two Cities” by Dickens.  And so it is today.

The presidential and congressional elections left a still sharply divided American electorate.

For Republican conservatives, the federal elections meant a GOP president could allow the Republican Congress an almost unfettered chance to adopt their long-cherished policy proposals.  President Trump himself would be free from the limits of traditional policies.

For Democratic progressives, the Trump victory brought deep worries about the fate of a political system that had moved toward accepting greater diversity.  Not only must the Democrats fight to preserve their legacy, but also they must provide bold alternatives showing they are ready to govern.

Many are concerned that the Trump campaign gave racists the license to act out their prejudices.  For the objects of their threats and attacks, this is truly the worst of times.

If conservatism, now triumphant, succeeds, it may tip the political balance for the foreseeable future.  Popular success could mean a return to the limited government days before Franklin D. Roosevelt’s New Deal of the 1930s.  Its failure could mean voters would respond to a renewed Democratic Party and a larger role for government.

One obvious positive is the recovery from the Great Recession, already fading from memory.  A leading Washington Post economic analyst recently wrote, “There is no mystery about Barack Obama’s greatest presidential achievement: He stopped the Great Recession from becoming the second Great Depression.”

He calculated that while Obama is given credit for a $787 billion stimulus, the federal boost to the economy was really $2.6 trillion over four years.  Though about 8.7 million jobs were lost, the recovery added 15.6 million new jobs.  College enrollment has even declined as some jobless who had taken refuge in enhancing their educations, have found employment.

Prosperity has returned.  Housing prices have recovered.  Interest rates are beginning to return to normal levels, a boon to the retired.
Still, many people feel “disappointed … insecure and shortchanged,” he writes.  Perhaps their new jobs pay less.  Perhaps long-term opportunities are less clear.  Perhaps they have simply given up looking.  An estimated seven million prime-age men no longer want to work.

Less clear is Obama’s Affordable Care Act.  For people who could not afford health insurance coverage, it was a major breakthrough.  But it was flawed, thanks to a poorly conceived marriage of government and private sector insurance.  Immune from being repaired, it may now be killed.

In world affairs, the bad news seems to swamp the good news.  Much of the blame goes back to the ill-conceived Iraq war, launched in 2003.  Just as in Afghanistan, the U.S. had no clear objective.  Even worse, it tried to sponsor nation building without having a good understanding of the nations in question.

Afghanistan has become the longest war in American history.  Iraq has led most people to oppose the use of U.S. forces on the ground in the Middle East or perhaps anywhere.  The muddled American goals in both places have not yet been met.

In Syria, where American policy came to be seen as weak and indecisive, Russia seized the opportunity to assert the leading role in the world that it had lost with the collapse of the Soviet Union.  Will Trump do better than Obama or will he be enthralled with Putin?

On the plus side to most people, Obama ended more than a half-century of failed policy toward Cuba.  The real significance of that move was strengthened U.S. relations with many other countries in Latin America, which opposed America’s Cuba policy.

China’s poor domestic air quality led it to cooperate with Obama on climate issues.  But it managed to enhance its power in Asia.  Not only did it build new, well-armed islands in international waters, but also it induced the Philippine leader, whose country was an American ally, to cozy up to it.

The Trans-Pacific Partnership trade deal, designed to enforce America’s leadership in the face of China’s moves, seems doomed because it is badly drafted and detracts from the powers of U.S. courts.

For many Americans, accustomed to feeling proud of their country’s dominant role in the world, these developments are unfamiliar and even humiliating.  When Trump says he wants to “make America great again,” his message is meant to respond to this post-Iraq uneasiness.

The country will now try a new approach to governing.  Whether this is the best or worst of times will depend heavily on how much leaders place country above party.

Friday, December 16, 2016

Democrats should stem post election panic, find new leaders

The Democrats are in trouble. Next year, they won’t control either the presidency or the Congress. Only six states will have both a Democratic governor and legislature. In eighteen more, they will hold at least one house of the legislature.
In Maine, the Democrats control the House with a GOP governor and Senate.
The message is not difficult. What the Democrats have been doing doesn’t work. The party needs to renew its appeal to voters. They have taken for granted historic constituencies: workers, minorities, and youth.
Democratic voters are usually willing to support equal rights for all. But each group in the coalition has its core issues, which may only get lip service while a few current issues are pushed.
An Ohio Democratic leader said, “people in the heartland thought the Democratic Party cared more about where someone else went to the restroom than whether they had a good-paying job.”
Because the recession, technology and trade have deprived so many workers of their job security, the rote recital of traditional Democratic promises has lost its appeal. The party’s proposals have not insulated people from unemployment and worry.
Voters could easily find the Democrats too closely aligned with the Wall Street interests that they associated with the greed and excesses that brought on the recession.
Bernie Sanders responded to this concern, but the party’s establishment believed its candidate, a woman with ties to minority groups and committed to traditional policies would beat the dangerous and irresponsible Donald Trump. That was a mistake.
The Democrats will survive just as both parties have recovered after calamitous defeats. But it will not govern if it does not break with its recent past.
That starts with the party itself. Unlike this year, the organization must remain neutral among its leaders. Now it must identify and support new faces to head its federal and state election tickets. Preparing for the 2018 mid-term elections, when the party should pick up seats in Congress, begins now.
The Democratic National Committee chair should be a full-time job. Tacking it onto being a member of Congress implies the Democratic Party is a part-time organization. It needs an articulate and hard worker to serve as its spokesperson while the party is in the wilderness.
The House Democrats have again selected Nancy Pelosi as their leader, more out of sentiment than common sense. She did not provide the spark for major House gains this year and is obviously ill at ease behind a microphone. She represents a wealthy California district, perhaps putting her out of touch with average people.
In the Senate, Democrats picked New York’s Chuck Schumer. Wall Street is his constituency, and he takes care of it.
Pelosi and Schumer hail from the two coasts. Meanwhile, the GOP carried Michigan, Wisconsin and Pennsylvania, once thought to be solidly Democratic states. Party leadership candidates from mid-America were turned aside in both houses.
In contrast, the GOP leaders, now in charge of both houses, come from Kentucky and Wisconsin.
These days, Democrats despair over their losses, but cling to business as usual. Given their wipeout, the elections should have forced the party into a complete renewal.
It is easy to gain the impression that Democratic office holders want to keep their seats more than take the risks and offer the bold initiatives necessary to regain at least some political leadership.
Being a leader means being willing to take risks. In seeking to recover and renew their agenda, Democrats should focus more on making their renewed case rather than clinging to their seats.
Loretta Lynch, the departing Attorney-General, summed it up: “We have to work for what we want and we have to be committed and we have to keep our voices raised to make sure that people who are in power know that these are important issues.”
Oddly, it’s Donald Trump who ran a risky campaign. He took highly controversial and unconventional positions, not seeming to care about their electoral effect. His obvious willingness to say what many thought was outrageous might have convinced many voters that he really would bring change.
Their defeat has led Democrats and other progressives to wring their hands or even panic about the coming GOP regime. Instead of dithering and complaining about Trump, they should get to work and start rebuilding the alternative for the coming elections.
Where are the new leaders – the innovative, bold and risk-taking Democratic candidates needed for the 2018 election?
In Maine, aspirants for the Democratic nomination for governor should start speaking out now.

Friday, December 9, 2016

“Presidential facts” replace plain facts

“Everyone is entitled to their own opinions, but they are not entitled to their own facts.”

This bit of wisdom has been attributed to Daniel Moynihan, a college professor turned U.S. senator. But it may now be all wrong.

Defending statements made by President-elect Trump, a campaign loyalist said the  American people “understood that sometimes — when you have a conversation with people, whether it’s around the dinner table or at a bar — you’re going to say things, and sometimes you don’t have all the facts to back it up.” 

Does that mean Americans should not take everything Trump says as fact, but rather as casual chat? If so, people could find themselves getting upset over nothing.

When asked about Trump spreading misinformation, Kellyanne Conway, his final campaign manager, replied, “He’s the president-elect, so that’s presidential behavior.”  If Trump says, believes and acts on false information, it becomes fact or at least “presidential” fact. 

By this interpretation, a president gains power over truth and error simply by virtue of winning an election.  Perhaps that reflects the current lack of confidence among many people about what constitutes fact or even if facts exist. 

Former Alaska Gov. Sarah Palen persistently attacks the “lame-stream media,” her attempt to blame  principal print and electronic news sources, the mainstream media, for liberal bias in their reporting.  But the mainstream media surely includes Fox News and the Wall Street Journal, neither of which could be called liberal.

Fox has reported as fact matters that suit its right-wing slant, but which are not supported by proof.  But, to be fair, the New York Times and the Washington Post let their coverage be shaded by their editorial bias.  Their facts may be supported, but their tone tilts.

The media is supposed to report objectively and to provide facts needed by readers and viewers to understand and evaluate what their leaders are asserting.  Often, efforts at objectivity have amounted  to simply providing comments from both sides of an issue and giving them equal weight. 

Whether assertions are correct are dealt with “after the fact.”  So-called fact-checkers on some newspapers provide evidence, pro or con, about political statements, but after the statements have been reported.  That's useful, but inadequate.

Palen and others have succeeded in causing some people to dispute any fact that is offered by the media.  Having lost faith in the news, they may believe there is probably enough evidence either way on most issues.

Take the claim  by Trump and the suggestion by Maine Gov. LePage that this year's elections were subject to massive fraud.  Without being able to show any cases of fraud, let alone massive numbers, such assertions do not stand up.  But many of their supporters may accept them as fact.

Trump might simply regard such a claim as mere campaign talk, not meant to be taken seriously.  We readily accept loose talk by candidates, but presidents have to be more careful, because so much rides on their statements as the leader of the most powerful nation on earth.

The media must step up to doing a better job of prompt reporting of facts, especially in their historical context.  Blogs, not subject to editorial review, won't suffice. And the media needs to be even more mindful of the need to screen out as much bias in reporting as possible.

Trump can get his facts right and act on them.  Recently, the media, eager too show him up, at first missed his having done that, because he had upset established policy.

He had taken a congratulatory phone call from the president of Taiwan, which is claimed  by China but remains independent.  He pointed out that the U.S. does a lot of business with Taiwan, so it made sense for him to accept the call. 

The media went out of its way to stress that American leaders do not talk with Taiwanese leaders because it would anger China.  But didn't Trump promise change?  Might this be an example of it?  The media gradually began to catch on.

The Chinese have taken over a big swath of the high seas by building artificial islands.  They seem unconcerned by apparently tepid U.S. opposition.  The fact of that counterbalancing issue might have been given prominence equal to coverage of the State Department's elitist displeasure with Trump's phone manners.

Facts are real.  No president should be allowed to manufacture them.  It's up to people to demand evidence and more attention to the context of the news and the media to provide it promptly.

Get rid of Electoral College? Impossible, but…

Abolish the Electoral College?

It’s under attack, mainly because Hillary Clinton won the popular vote nationally but, thanks to the electoral vote, lost to President-elect Donald Trump.

To many people, it seems unfair to deny the popular will.  This is the fifth presidential election out of 58 in which more people voted for the loser than the winner.  The last time was as recently as 2000, one reason the issue has gained more attention.

The Founders thought that by having the president chosen by popularly voted “electors” whose only job was electing the president, the election would be a popular vote but with the added independence and wisdom of the electors.  It was a kind of “popular vote plus” approach.

Because the country was formed out of thirteen separate states that had always made decisions unanimously, the new Constitution was designed to respect the states as well as the people.  The balancing deal came in the two houses of Congress.

The more populated states, like Virginia, wanted Congress elected based on population alone.  The small states, like New Jersey, wanted the traditional equal state representation.

The Connecticut compromise was the House of Representatives elected by population and equal state votes in the Senate.  This deal was the key to inducing states, large and small, to accept the new Constitution.

Rhode Island provided a clear sign of the concern of the small states and the need to let them have an equal voice.

The smallest colony, it was the first to declare independence from the British king, but the last to accept the Constitution.  It was reluctant to merely exchange central control by Great Britain for similar dominance by the new federal government.

When the new Congress first met, Rhode Island remained an independent country.  President Washington avoided it on his first tour of New England.  Finally, Congress clamped a trade embargo on it, and Rhode Island, with its two senators, caved in.

As for the House, the Founders debated how to count the South’s slaves.  Originally, the Constitution provided that both House votes and federal taxes would be based on population.  Surprisingly, some northerners wanted to fully count slaves, banned from voting, because that would boost tax revenues from the South. 

In the end, a compromise counted slaves as three-fifths of a person, an absurdity that lasted until after the Civil War.  By that time, the freed slaves were fully counted, but they did not get full voting rights for another century.  That helps explain congressional dominance by the South during those years.

Based on the congressional compromise, it was logical that the electors would be chosen by state and each state’s votes would reflect the congressional deal.  The result was that each state has a number of electoral votes that’s the sum of their two senators and the number of their House members.

The main purpose of the census every ten years is to set the number of representatives each state is assigned for the next decade.  The total number of representatives, now 435, is set by Congress as it wishes.

The original deal still works as intended.  Even now, 20 smaller states have greater weight in the selection of the president, thanks to the two votes for each state, than they would with purely popular voting.  Maine, for example, has almost twice the influence it would have based on population alone.

With that kind of benefit for so many states, it seems highly unlikely that enough states – 38 out of 50 – would amend the Constitution and allow a popular vote for president.

Complaints about the Electoral College range from its having been supposedly based on slavery to being too complicated to understand.  Whatever its drawbacks, the deal’s benefits to small states remains.  As for understanding the system, the media and schools need to do better in fulfilling their obvious responsibility.

However unlikely it may be, the presidential election could be brought much closer to the popular vote, without amending the Constitution.  If Congress increased the number of members of the House of Representatives, it would dilute, though not completely eliminate, the effect of the two electoral votes guaranteed to each state.

The Founders originally proposed an amendment to ensure the House would be large enough to keep representatives close to their constituents.  But the cost would be high.  Some of it could be covered by cutting the pensions and benefits of senators and representatives.    

The big question: would bringing the presidential election closer to the popular vote be worth such a change?

Friday, November 25, 2016

More deficits, debt make higher taxes a sure thing

Get ready for a tax increase.  It will be a big one.

We just don’t know when it will happen.

The problem is the federal debt.  The government owes lenders outside of the government itself, the so-called “debt owed to the public,” about $14 trillion.  If President-elect Donald Trump follows through on his proposals and gets congressional approval, that debt is expected to climb by $6 trillion.

With their own party’s president in office, congressional Republicans are expected to back off their insistence on cutting government spending.  The deficit hawks could become rare birds.

Trump claims that his proposals won’t push up the debt.  He says that, if his program is adopted, economic growth could reach three or four percent a year, producing new tax revenues to cover the added costs.

Many economists, including some in his own party, believe such growth is out of reach.  Even if the President-elect were correct, more deficit spending, pushing up the debt, would arrive ahead of the supposed boom in revenues.

But Trump’s proposals are only part of the growth in the federal debt.  The costs of Medicare and Medicaid could cause the debt to reach $45 trillion in about 20 years.  The bill for paying debt service annually would be $1.5 trillion, a huge financial burden.

The reason for the growth in federal debt boils down to a simple proposition.  The president and Congress like to adopt government programs to serve and pander to the electorate.  But they don’t like to raise the taxes necessary to pay for them, so they simply borrow the money. 

It is not difficult for the government to borrow, because it has such a good record of paying its debts.  In fact, one constitutional amendment puts debt payments beyond debate and guarantees they will be paid.

Recently, a proposal has appeared to help deal with the debt problem.  Instead of borrowing through bonds limited to 30 years, the government could replace all existing debt with bonds lasting 70 or even 100 years.  The government’s new debt would be financed at today’s low rates, which are expected to increase soon.

That’s like a person with several credit card debts at high rates rolling them all into a single loan at a lower rate.  The annual cost of debt payments goes down, though the payments are strung out over a longer period.

While that might help, it won’t help much if, like free-spending cardholders, the government simply keeps piling on more debt, because it could now afford it.  To make extending debt repayment work would depend on a kind of discipline presidents and the Congress have not shown.

By the way, this is not a state problem.  Almost all states, including Maine are required by their constitutions to have a balanced budget each year.  Of course, they may incur debt, but the annual carrying costs have to fit within the annual budget for which there must be sufficient revenues.

As a result, states usually borrow to pay for long-term projects like highways and airports.  The sound economic theory is that it makes sense to have future generations pay for facilities they will be using.  But they shouldn’t be burdened with the cost of this year’s programs.

The federal government has not adopted a so-called “two-part budget” in which current spending, including debt service, is paid out of current revenues and capital or long-term spending is financed by borrowed money.  Instead, much current expense is covered by borrowing.

Critics of federal budget deficits that increase the national debt often call for a “balanced-budget amendment.”  They expect that would duplicate the state practice.  If so, they would need to adopt the two-part budget discipline.

Why isn’t such an amendment adopted?  To balance today’s costs, including debt service, would require an immediate tax increase.  And the politicians want more programs, especially military spending, but no tax increases.

There are only two alternatives: cut spending or increasing revenues.  History shows that neither Trump nor any other president is going to propose slashing programs that have powerful constituencies.  Of course, government could operate more efficiently, but savings would not be enough. 

Meanwhile, spending will grow and people will depend increasingly on Social Security and Medicare.  As much as conservatives oppose more government, they are unlikely to eliminate such social programs.  At best, they could be made to work better.

Because the debt will keep growing, the U.S. must inevitably face a big tax increase to halt more deficits and huge interest costs.  Higher taxes cannot be avoided indefinitely.