McCain's Impotence on Tax Policy

Somewhat Republican (meaning RINO) nominee for the Office of President of the United States Senator John McCain (R - Arizona) has a tax plan that needs help from a little blue pill. Read a summary of the Candidates' intentions on page 5 of this document.

Rather than try to reform the tax code to achieve specific policy objectives, the Senior Senator from Arizona has put forward a lukewarm tax proposal that reflects his years in the Senate. His policy is to doodle around the edge with incremental changes or, in his most questionable policy moves, no changes at all.

The centerpiece of Senator McCain's proposal is keeping the status quo. He would sign legislation to make permanent the 2001/2003 tax cuts approved by the Republican majority in Congress and signed by President Bush. One wonders why they were made temporary anyway... but that is fodder for another article. He would also make permanent changes to the death tax and changes to the AMT (Alternative Minimum Tax) exemption. Other than that, his proposals mostly involve corporate taxation including a reduction of the corporate rate from 35% down to 25%.

As a policy this lacks coherence, particularly in as much as Principle and Policy believed the 2001/2003 tax cuts lacked coherence. The great issue in the wake of the internet bubble burst and the despicable events of 9-11-01 was capital formation. That is, there was great concern that the capital markets would be underfunded in the wave of defaults and bankruptcies in the tech sector. Reducing taxes on capital therefore made sense. But what about the $1000 per child tax credit that is "refundable" (refundable being Beltway speak for welfare payments to those with no tax liability)? Was baby formation a large problem after 9-11? What possible rationale is there for continuing such a policy?

Principle and Policy strongly supports reduction to corporate tax rates because 1) the U.S. rates are now among the highest in the world and 2) corporations don't pay taxes, people do. But other than that, there doesn't seem to be a solid reason for McCain's proposals other than he doesn't want tax increases. Senator Obama on the other hand seems to have such a guiding philosophy. He would continue to build in special breaks for the blessed groups at the expense of the others. He would turn the tax code into the welfare state that existed under President Carter.

The best tax proposals are those that see the tax code as a coherent whole and reform the code to achieve specific objects. Certain flat tax proposals probably meet this criteria. Senator McCain would implement an optional flat tax system with no deductions. Principle and Policy wonders why not continue to protect IRA/401k/HSA contributions to encourage these important savings vehicles? The U.S. has the lowest savings rate of all developed economies and capital formation continues to be in the long term interest of the country. Principle and Policy also questions why we should implement an optional flat tax when the AMT is a flat tax and already exists?

In the short-run McCain's resistance to raise taxes is likely preferable to Obama's tinkering. But Principle and Policy longs for a visionary tax reform plan that would dramatically alter incentives to encourage capital formation, investment, and wider stock ownership by the population.

Not Non-Partisan Tax Policy Studies

This past Friday news services were reporting with glee a "preliminary" study comparing the tax plans of Presidential candidates Senator Barrack Obama (D - Illinios) and Senator McCain (R - Illinois). One reason this report was so widely reported (or should I say celebrated) is the sponsoring think tank.

The report was issued by the Tax Policy Center. According to the tank's website

The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government.

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The report was widely acclaimed as being from a "non-partisan" think tank. See the report on CNN for as an example.

But voters really want to know one thing: How would the presidential candidates' views trickle down to their tax bills? A report released Wednesday by a nonpartisan policy group in Washington, D.C., takes a big first step toward answering that question.

It is true that these two think tanks label themselves as "non-partisan". But the only just description of these two think tanks is "left-leaning". The Brookings Institute has been a vociferous critic of the war in Iraq. The urban institute demonstates its bias with statements such as:

An even larger fallacy in the President's claim is that it rests on the assumption that the tax cuts are a costless gift from a beneficent government. In fact, deficit-financed tax cuts eventually have to be paid for.

Apparently the Tax Policy Center is taking after its joint venture parents. This report on the candidates tax policies tries to be even-handed but cannot contain its wholesale adoption of left-leaning dogma. For example, the report states:

It should be noted that both the Republican Study Committee and the presidential campaign of Senator Fred Thompson have proposed optional alternative taxes. We estimated that those plans would result in dramatically reduced revenues—by as much as $6–7 trillion over the next decade compared with current law (Burman, Leiserson, and Rohaly 2008). Those proposals would have disproportionately benefited those with very high incomes, making the tax system less progressive.

and

Given the large pending increases in public spending on senior citizens due to the forthcoming retirement of the baby boomers, it seems inappropriate to target special income tax breaks to this group.

Thus, the authors of the report fail to recognize that tax cuts stimulate growth and adopt wholesale that progressive tax codes (and class warfare) are preferred over other tax codes.

Most egregious is the author's total failure to comment on the Obama effective average tax rates for those earning $20K or less. They do manage to comment that:

But his plan would drastically alter the distribution of tax burdens and make the tax system significantly more progressive. Households in the bottom quintile of the cash income distribution (the 20 percent of the population with the lowest incomes) would receive an average tax cut of 5.5 percent of income ($567) and those in the middle fifth of the income distribution would receive an average cut equal to 2.4 percent of income ($1,042). In contrast, taxes would rise by an average of 2.0 percent of income ($4,092) for households in the top quintile. And the increases would be even more dramatic within the top quintile. Taxpayers in the top 1 percent would see their taxes rise by an average of 8.7 percent of income or about $116,000. The top 0.1 percent—the richest 1 in 1,000—would face an average tax increase of more than $700,000, or 11.5 percent of income.

and

Taxpayers at the very top of the income distribution would be hit hard by the increase in the top two tax rates from 33 and 35 percent to 36 and 39.6 percent as well as the increase in the top tax rate on capital gains and qualified dividends to 25 percent.

But, the report fails to discuss that for individuals in the lowest quintile (those making less that $18,981) the average tax rate would by -.7%. It might seem trivial but for 2005 tax data (the latest available on the irs.gov website) this would represent a $50 billion net transfer of money from the rest of the U.S. to this low earning income group. The negative sign indicates that those in this group would receive welfare payments amounting to $7 billion the first year. You may have thought the welfare era was over here in the U.S., but not if Obama has his way.

Agree or disagree with the incorporation of welfare into the U.S. tax code, agree or disagree with Obama's various schemes to transfer funds to the lowest income quintile, it must be obvious that this is a topic that should be discussed in a truly non-partisan tax policy analysis.

This report has bias, it is left-leaning, and the intelligent observer should examine the candidates tax policy positions and this report, then reach their own conclusions. My analysis of Obama's tax plan can be read here.

Supreme's Battle Congress

The recent Supreme Court decision in Boumediene et al. V. George W. Bush represents another turn in an ongoing pissing contest between the Congress and the Supreme Court, or at least the liberal wing of the Supreme Court.

What the majority refer to as a conversation between the branches, is in reality a contest with respect to the separation of the branches. In this decision, the majority are dead set on declaring unconstitutional an act of Congress declaring that the judiciary may not entertain habeas corpus petitions from detainees at Guantanamo Bay Cuba. The prime motivation is transparent: that Congress shall not tell the Judicial Branch what it can and cannot do.

This is the fourth major decision with respect to detainees. In all four cases, the prime motivation of the majority appears to be to reject Congressional intrusion into the prerogatives of the judicial branch. Previous cases were Hamdi v. Rumsfeld, Hamdan v. Rumsfeld, and Rasul v. Bush.

The problem with this "conversation" is that the result is poor law and poor policy.

This outcome is not restricted to the actions of the Court either. Congress' actions are just as weak.

These are unique circumstances brought on by the unique times in which we live and the unique status of the Guantanamo Naval Station in Cuba. It is precisely in these circumstances that we need our various branches of Government to develop policy based on principle. But that principle ought not to be "stay out of our business" separation of powers arguments. Instead the principles that should be honored, and developed if needed, are those that most important. What policy furthers the cause of liberty and freedom? What policy furthers the ability of the Executive to transform warfare into lasting peace?

Principle and Policy doubts that entertaining habeas pleas from the detained in the U.S. court system is the optimal policy. The dissent of the Chief Justice is persuasive on this point. If results in the detained being released to take up arms against our forces or our citizens, then it clearly is suboptimal. The Principal now visible is this:

Peace isn't just the absence of conflict it is the presence of Justice, but arguments over the separation of powers bring neither Peace nor Justice.

Obama the Tardy Leader

This morning word broke that Senator Barrack Obama (D - Illinois), the Democratic nominee for President, finally met with Senator Hillary Clinton (D - New York) to try to achieve party unity.

Too bad this happened 5 days too late.

Interestingly, national radio correspondent Jamie Dupree recognized today in his appearance on the Neal Boortz show that Sen. Clinton has been driving Sen. Obama since the Texas primaries. Further testimony to the lack of leadership skills in the junior Senator from Illinois.

Obama's First Leadership Failure

Congratulations may be in order to Senator Barrack Obama (D - Illinois) for apparently securing the Democratic Party's nomination for the Office of President of the United States. Condolences are probably in order for the wider Democratic Party.

Amidst the hubhub of the final primaries, Senator Hillary Clinton's speech set off alarms across the punditry landscape. These know-it-alls claim that Hillary should have conceded; should have urged people to unite behind Obama.

But what of the junior senator from Illinois? This was his first leadership test... how to unite a divided party behind him on the most important, and final, day of the primary season. He failed miserably.

Rather than spend the past few days huddled with Hillary's people to work out a scenario that all could support going forward, Senator Obama apparently awaited regally for the court to curtsy to his glory. As a result, his campaign missed a significant opportunity.

This indecisive leadership, marked by a lack of foresight, does not bode well for the candidates chances in November. Ask former Senator Fred Thompson (R - Tennessee), whose apparent difficulty in pulling the trigger to get in the GOP race made him look indecisive and ruined any momentum he might have had. Actions often speak louder than words. The electorate does not elect weak leaders.

UPDATE: As of about 11:20pm EDT, CNN and other news networks started reporting that Senator Obama had begun to reach out to the Clinton campaign. Too little, too late... we'll see.