Government Spending and Tax Avoidance

There has always been a conflict between government’s desire for tax revenue and the peoples’ reluctance to give up their hard-earned – or otherwise obtained – dollars. Many seem to believe that this is a new phenomenon, with powerful corporations and the wealthy gaming the system. Not true!

Below is illustrated an example of this conflict going back to the 17th century in England. Notice anything odd about this house in modern-day Southampton?

Clearly some windows have been plastered over. The reason arises from a creative tax by King William III. He needed money and he wanted a progressive tax that was easy to assess, so he came up with a window tax. He reasoned that wealthier people would have bigger houses with more windows, and obviously assessing the tax merely required a walk around. This tax prevailed for over 150 years even though owners and landlords found this simple tax avoidance scheme.

The message is that, no matter how creative the tax basis is, people will find a way around it. This is clearly true for direct taxes, and I suspect it also applies to indirect taxes like the VAT. Moreover, the rich will be more successful in this tax avoidance because they have the resources, experience, and technical support needed.

Democratic candidates for President have very ambitious plans for government action to improve our lives: free college tuition, student loan forgiveness, Medicare for all, infrastructure modernization, subsidized daycare, climate change mitigation, and so forth. These will be very expensive and will no doubt require new or enhanced taxes. To paraphrase Sen. Everett Dirksen’s apocryphal remark, “A trillion here and a trillion there, and pretty soon we are talking real money.” So candidates who are not simply pandering for votes should take King William’s experience to heart. It won’t be easy to pry the needed funds from reluctant taxpayers.

These candidates are generally murky about how they will pay for their proposals beyond simply running Treasury printing presses overtime. I hope they are strongly pressed about this uncomfortable reality during the primary season.

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Climate Change – An Uncomfortable Truth

Here’s my take on this subject. There can be no doubt that the world-wide climate is changing – rapidly and for the worse from a human perspective. The impacts are already being felt, but not in a way that motivates the average American to be concerned. Until and if it does so, there will be insufficient voter support for doing anything meaningful in response.

I won’t argue these assertions. They are plain to anyone interested in the facts. I honestly believe that many climate change skeptics either don’t wish to deal with the problem or are scientific dullards who grasp at any straws to avoid reality. I grant that there is disagreement about the influence of human activity on this coming climate catastrophe, but that isn’t relevant to my point. It is coming, and that is all that we need to know.

Now, none of the above is at all remarkable. It is probably the consensus of any competent observers. But there is more. I believe that eventually the impacts will be sufficient to move even a lethargic electorate. They will feel them where it counts, in their pocketbooks. This might happen soon or decades hence. The timing is difficult to predict. Climate requires skill, data and perseverance to understand. But when this does happen, we will come to a very uncomfortable realization. One way or the other, we are facing a substantial reduction in our standard of living. Indeed, this could be similar to regressing a hundred years in time!

I say “one way or the other” because we could do nothing and just let it happen, or we could move aggressively and make the best of it. In both cases, however, the reduction will inevitably occur, although managing it affirmatively should lessen the pain.

Those who currently advocate immediate action really haven’t grasped the consequences. They rightly see the danger but they haven’t thought through what a response might entail. Their plans, like the Green New Deal, are pie in the sky. It isn’t just the astronomical cost, though that should daunt anyone. It is the consequential change in how we live, work, travel, and amuse ourselves. Read any good history describing life in the early 20th century for a flavor of our future.

However, this could be misleading because the intervening years have brought knowledge and progress in many ways that would persist in spite of the changes I predict. For example, we won’t suddenly forget our accumulated medical knowledge, nor will the internet mysteriously disappear. The pace of automation might actually increase. Nevertheless, I suspect that it will be fair to say that our lives will slow markedly and some industries will be curtailed or disappear entirely. Our food supplies and distribution chain will be hurt. That will be far worse in less developed countries, and we are hardly immune from turmoil abroad, as recent history makes abundantly evident.

Tracking these impacts so far in advance is very difficult, though their broad scope is certainly amenable to scientific analysis. That is beyond anything I could do, but I do hope that academia turns its attention to this soon so that plans can be formulated for the time when the political will emerges.

I take no pleasure in these predictions and I sincerely hope that they are overwrought. But what if I am right? Think about it, and review your own attitude towards climate change.

“Two madmen walk into a bar …”

One can never tell when Donald Trump is joking or not, or even if it is unintentional humor. As one example, after his recent State of the Union address, he said that Democrats who didn’t clap for him were “treasonous”. As has happened many times before, his spokesman responded to the resultant furor by saying that the President was of course just joking. Do we really know? I certainly couldn’t tell from his facial expression on TV at the time.

Well, on Saturday evening, the President attended the annual Gridiron Dinner, which is an old tradition where journalists and the President trade tongue-in-cheek jabs before a constellation of Washington’s elite. One would certainly expect humor and a good time to be had by all.

But this President has often chosen off-beat stages and unusual methods for making substantial policy statements, so I am sure the press attending the dinner had their pencils sharpened and ready. And right on cue, in the midst of his joke-filled monologue, the President suggested that he was open to a meeting with North Korean dictator Kim Jong-un. Said without talk of preconditions, this is a big policy change. Or was it a joke? Hmm …

The President – and many others to be sure – have called Kim a madman. So the natural question was whether Trump was worried about meeting with a madman, and he responded, “As far as the risk of dealing with a madman is concerned, that’s his problem, not mine.” Is this clever repartee or some revealing and unintentional self-deprecation? Honestly, I don’t know. He has me as confused as the next person.

The Border Wall Mystery

With respect to the proposed wall on our southern border, I think I have it right that Democrats oppose it — vehemently — and Republicans, by and large, favor it. I understand the Republican position. They seem convinced that it will help solve our illegal immigration problem. But barring building a Berlin-type barrier with electrified fences, mines and machine guns, I frankly doubt this. A complete wall built according to current proposals will likely have some effect, but people will find a way across our border if the economic incentive is sufficient.

However I am a bit puzzled by the Democratic opposition. I searched the internet and none of their spokesmen make a clear and unambiguous statement about this. I would have thought that wasting all that money that could be put to better use would be an obvious reason, but they never seem willing to put it quite that baldly. Still, I assume that this is basically their position — and mine, too.

But here’s the problem. Both of the top Democratic leaders, Sen. Chuck Schumer and Representative Nancy Pelosi, have stated in clear terms that, if funding the wall is included in a bill to raise the debt ceiling, Democrats will vote to block it. This situation will likely arise in December. They are fully aware that Democratic votes plus those of the extreme right in the Republican caucus will prevail. In other words, they are willing to sabotage the nation’s credit, drop a bomb on our economy, and risk significantly increased interest rates rather than wasting some money on the wall. On its face that doesn’t make economic sense. In fact, it defies logic unless there is something more at stake than wasting a few billions. So, what exactly is the real issue? And is it really worth that much?

Knowing Democrats, my theory is that this isn’t a money issue at all, or at least not in its essence. There is something about building a barrier on our border that strikes at the very core of progressive ideology. To many Democrats, it’s a bit like tearing down the Statue of Liberty, perhaps combined with making English our national language. The wall has become a symbol of exclusionary philosophy that is anathema to old-style Democrats. So perhaps they would indeed risk an economic catastrophe rather than conceding this point.

Of course, this is just a theory. But if it is true, then Democrats are about as nutty as Republicans, which is a standard that is rather hard to meet.

A Radical Obamacare Solution

Regardless of how the faltering Republican effort fares, no one is going to be satisfied with what is done with Obamacare. The current law has obvious flaws. It may not collapse as Republicans predict and probably hope, but it is far from the solution originally planned by its supporters. Moreover it is in a financially precarious situation. So, what to do?

The two sides in this debate are irreconcilable. One reason is pure politics. Each side has deeply held and fundamentally different ideas of the proper relationship between government and the governed. Another reason arises from differing projections for how each of their prescriptions will work in practice. Yet neither side is being given a fair opportunity to test its ideas in the real world. We just get half measures and flawed compromises.

The first reason can’t be addressed via any specific issue, and most definitely not by the emotionally charged case of health care. But the second one could be evaluated by a scientific experiment!

How about this idea? We let Congressional Democrats design their “optimum Obamacare”, i.e. with any changes they believe would make it work better, including just making it a true single-payer, uniform system like they have in the U.K. Congress then passes this bill intact, with Republicans holding their noses as they vote. However – and this is the key provision – this plan would be completely optional on a state-by-state basis. States could accept Improved Obamacare or they could reject it entirely. They couldn’t equivocate; it would be all or nothing. I think the default should be rejection, to account for miscreants who simply can’t make up their own minds, but that is open for debate. I am also assuming that Trump doesn’t interfere with this experiment.

No doubt many red states would reject this plan, probably including a majority of the states. Meanwhile big states like California, New York and Massachusetts, plus several others, would gladly accept it, and they may actually comprise a majority of the population.

That would set up the experiment. This shouldn’t be too difficult for insurance companies to handle from an actuarial perspective. There would be very large population groups under each of the two circumstances, and there would be only the two to consider.

After a few years the results should be clear. Democrats believe that those states accepting Improved Obamacare would flourish, with abundant, affordable and high-quality health care. Health care providers would accept their new reality and easily adjust to it. Meanwhile, Republican states would rejoice that the federal meddlers were finally leaving health care decisions to the people, with a free-market proliferation of products that meet individual needs and pocketbooks. I suppose it is conceivable that both circumstances would be successful, since people truly do have different perceptions of what is good, but I strongly doubt it.

One side is going to look longingly over the fence at a neighboring state. Voters will importune or force their legislators to reverse their initial choice. Meanwhile, people will vote with their feet and move to where the grass is greener. The same is true for individual providers. Doctors and insurance companies will gravitate to the environment that suits them best. Over time, one side or the other will give up and the country will finally have what it actually wants from border to border, and not just something which some Congressional ideologues think they want. There might be some irreconcilable holdouts. For example, I could conceive of the entire country rejecting Improved Obamacare while California stubbornly goes its own way. But what is wrong with that?

Of course such an experiment would be a bit cruel. That is the nature of scientific experiments on human subjects. Those in the political minority in a state would suffer the choice of the majority. But isn’t that how our system mostly works anyway? In any case, if I am right, the experiment will naturally terminate in at most a few years as one approach proves its case in practice and the other fails. And if unexpectedly both are actually successful in their own ways, meeting the differing desires of their states, that would be a success too.

Reforming Government Work

One long-standing Republican idea may finally be put to the test in the coming Trump administration. They propose to change the model of government business to align with how business in general is conducted. And the federal civilian workforce is not going to like it one bit.

The primary motivation for this is efficiency. The view of many Republicans is that government workers, or “the bureaucracy” as they snidely say, are a coddled elite who are profligate with our tax dollars. This cartoon from the Bill Clinton era captures that viewpoint amusingly.

federal-employees

This is a gross canard, but it is true that they live in a somewhat insulated world, with job protections and benefits the rest of us don’t enjoy. At one time this seemed justified by the fact that they were paid less than equivalent workers in the private sector. By and large this is no longer true, so why not strip off some of this insulation? Wouldn’t it be helpful for government workers to better appreciate the impacts of their actions if they were equally affected?

Note that I said “some of this insulation”. Creation of a modern civil service was a big improvement over the politically corrupt system it replaced. It should be a matter of pride not scorn. So changes should be made cautiously so as to preserve its benefits. Those envisioned seem largely to satisfy that constraint.

The key ideas are pay for performance rather than longevity, green light to fire poor performers, ban on union business on government time, and switching to 401k’s instead of defined benefit pensions. Every one of these is anathema to federal unions and, presumably, to their members. But really, what is wrong with them from the broader perspective of a productive and frugal government?

Their one other idea along these lines is to impose a hiring freeze in order to shrink government generally by attrition. Even though they would exempt military, public safety and health workers, and actually increase the Border Patrol, this still seems a bit mindless to me.

What now for Democrats?

As I have often remarked, I hold no allegiance to either of our two venerable political parties. Indeed, at the risk of insulting my readers, I confess that I consider true-believers of either ideology to be happily deluded at best and sadly demented at worst. Both parties have ideas worth considering and certitudes that are simply nonsense on their face. With this background in mind, here are a few of my thoughts about the situation that the Democrats now face after their recent electoral defeat.

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First, here are few statistics to ponder. It is no surprise that Democrats are despondent.

  • Republicans will shortly control the Presidency and both Houses of Congress.
  • They will likely also dominate the Supreme Court after the Scalia vacancy is filled.
  • Of the 99 state legislatures, 69 are totally controlled by Republicans.
  • In 24 states, Republicans control both the State House and the legislatures.
  • Only 6 states have Democratic Governors and legislatures.
  • There are 34 Republican Governors, providing a full bench for future Presidential candidates.
  • Fully one-third of the House Democratic caucus comes from just 3 states: MA, CA & NY.
  • Of the almost 700 counties that Obama won twice, Trump won 209 of them.
  • Of the counties that never voted for Obama, Hillary won only 6.

Basically, contrary to popular opinion, we are not a divided nation except in the sense of an Athenian democracy, which of course is not our form of government. We could take all Democratic voters and stuff them into California and never again have full Democratic control of our federal government!

I won’t list the comparable situation when Obama took office in 2008, but suffice to say that the years of his leadership have been an unmitigated disaster for his party from the perspective of political power. Not that he didn’t have some policy successes, but evidently the electorate gave him and his party scant credit. The President of course doesn’t directly influence what happens in elections at the state level. But he sets the tone and his successes or failures trickle down to a significant degree.

To be fair, Republicans did everything in their power both to see that he failed and that he was seen as a failure. His successes are thus all the more remarkable in the face of their intransigence. Still, compare his tenure with that of Bill Clinton, who faced at least as clever and relentless political opposition while presiding over the most successful Democratic regime in the modern era. And all of this was in spite of the indignity of almost being impeached.

The Democratic Party will recover and once again become a vibrant political force across the land. Early reports of fracture or even demise are overwrought and are comparable to what is usually said after painful defeats of either party. For example, the Goldwater cataclysm in 1964 was supposed to be the end of the Republican Party. However, the near victory by Hillary Clinton this time is misleading. She had the weakest opponent since the Democrats threw up Walter Mondale or Michael Dukakis. I think Joe Biden would have won handily even though he would be fighting the tide of a change election.

How long this recovery takes depends on how quickly Democratic movers and shakers come to grips with what is wrong and why. It is too soon after this election to even begin this process. In addition, the poison fruits of a generation of neglect of “flyover America” will threaten any renaissance. The 2020 census is not that far off and the mass of Republican legislatures and Governors will no doubt continue their re-apportionment gerrymandering.

My two cents worth is that depending on big city juggernauts and the growth of the Hispanic population will not work. The latter group is far more diverse in outlook and interests than is popularly appreciated. Democrats have to listen to old hands like Joe Biden and reconnect with their old base among the less-educated middle class, both white and black. These are not just “po’ white trash” as the Democratic intelligentsia sometimes appear to believe. Relying on the poor and the well-to-do intellectual class is not a viable long-term solution because they are geographically concentrated in ways that don’t work on our electoral map. Bernie Sanders had it right is some ways, but he was a flawed spokesman for that viewpoint.

Another critical flaw in the recent approach by Democrats is laying a big bet on income inequality as a political wedge. The problem is that, even for many of the poor, “coveting their neighbor’s ass” has never been much of a motivator for most Americans. People want a piece of the action but not necessarily by redistributing wealth. Indeed they often admire great success unless it is clearly undeserved; they just want a fair shot at achieving it themselves. Unsurprisingly, the big proponents for income redistribution are well-off intellectuals who, I presume, expect that “it won’t effect thee or me, but instead that guy behind the tree.

To end on a bright note for those of you who voted for Hillary, there is an excellent chance that Republicans under the leadership of Donald Trump will step in the big do-do. The announcement yesterday that Steve Bannon, of Alt-Right infamy, will be Chief Strategist for the new administration is a time-bomb waiting to explode. If the nation survives this, as I am quite confident it will, we will be well-positioned for a return to sane, progressive leadership if the Democrats can find their way to offer it in 2020.