Hillary’s Got Some Promises and a Rat’s Nest

03 Monday Aug 2015

Posted by Nuetzel in Big Government, Central Planning

Tags

Andrew Napolitano, Capital Gains Tax, central planning, Clinton renewable energy plan, Friedrich Hayek, Half a billion solar panels, Hillary Clinton, Hillarycare, Ira Stoll, Jeffrey Tucker, Larry Kudlow, Obamacare employer mandate

Hillary Clinton is an advocate for governmentalizing the social order, and asks America to trust that central control, under her command, will accomplish great things such as upward mobility for the middle class, a rising standard of living, green energy for all, a “fix” for Obamacare, and much else. Jeffrey Tucker writes of Hillary’s delusions in “Hillary Clinton’s Ideological Vortex of Power and Planning” and her assurances that she’ll take measures with predictable impacts on the global climate, measures that will direct all details of energy production and use.

Tucker throws cold water on Hillary’s promises by viewing them in the context of F.A. Hayek warnings about the ruinous effects of central planning and control:

“That brilliant economist spent 50 years explaining, in book after book, that the greatest danger humanity faced, now and always, was a presumption on the part of intellectuals, politicians, and bureaucrats that they know better than the emergent and evolving wisdom of social forces.

This presumption might seem like science but it is really pretense. Civilization arises from, is protected by, and advances through the dispersed knowledge of billions of individual decision makers and the institutions that arise from them.

Hayek called the issue he was investigating the knowledge problem. Society needs to know how to use scarce resources, how to navigate a world of uncertainty, how to form rules that turn struggle into peace. It is a problem solved through freedom alone. No ruler, no scientist, no intellectual can substitute for the evolving process of decentralized decision making and trial and error.“

I discussed the fatuous presumptions of the left in an earlier SCC post entitled: “Conscious Design, the Collective Mind and Social Decline“. In that post, I used the wonderful Hayek quote:

“We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we were doing.“

More specifically, on energy policy, Clinton says she will set an agenda for the country to produce enough renewable energy within 10 years to power every American home, and to install half a billion solar panels across the country by the end of her first term. As Ira Stoll says at Reason.com, this is “central planning at its worst“.

“Clinton assumes that man-made climate change is a risk serious enough to try to mitigate, and that America should try to mitigate it by reducing its carbon emissions. These are big ‘ifs,’ but ones I will grant for argument’s sake. Even granting those assumptions, there is a humongous logical leap to the conclusion that the appropriate policy response is setting a national target for the number of solar panels installed.

For one thing, it’s a classic error of measuring inputs rather than outputs. If the goal is the reduction of dangerous emissions, why not set a goal for that, and support any energy method—solar, wind, algae, hydroelectric, nuclear, hydrofracturing—that gets America closer to that goal? Why privilege solar over all the other technologies, including some that may not even be invented yet?“

Certainly, proposals like this create tremendous opportunities for rewarding cronies. Stoll also notes that solar technology will improve over time, but rushing to install millions of panels, undoubtedly encouraged by heavy subsidies, would saddle users in the long-term with less efficient versions. With future improvements in efficiency and cost, the technology will gradually draw users in without the need for subsidies. That’s what rational economic decision-making looks like!

A specific economic proposal from the Clinton camp would increase the capital gains tax rate on asset sales held from 364 days up to six years. The rate would double if the asset was held up to two years. The increases become gradually smaller for two-to-six year holding periods. Hillary’s is somehow unaware that the government has already made it incredibly difficult for businesses to raise capital to invest in new buildings, equipment, and technology. Capital gains taxes are punitive: they represent double taxation of income to investors and they further distort rates of return by taxing assets on inflationary increases in value, which diminish their real value. Larry Kudlow wrote a good opinion piece on this proposal, called “Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme“. He focuses on Hillary’s attack on the alleged “short-termism” in the economy, but this is a little odd, because her plan essentially discourages saving.

On health care, Clinton has pledged to “improve” Obamacare, but not repeal it. Too bad. It is similar to the plan she put forward as a Senator, including the individual mandate. The only piece of good news here is that she has discussed eliminating the employer mandate, which has been deferred by the Obama Administration twice already. However, some effects of the employer mandate have been felt, as it has tended to discourage employers from taking on full-time employees.

On foreign policy, Clinton is probably more hawkish than President Obama. Her stint as Obama’s Secretary of State was not marked by any noteworthy accomplishment.

Then there is the question of Clinton’s integrity. She’s been tainted by scandals before (e.g., Whitewater). She told a Brian Williams-like lie about being fired upon in Bosnia. The role of the Clinton Foundation, and whether it served as a mechanism for influence-buying, has also been in question, not to mention its seeming role as a personal slush fund for the Clintons. Her ties to Wall Street probably exceed Obama’s. And she maintained a private email server while Secretary of State, which was imprudent at best, and depending on the the classification of what went through that server, criminal at worst. Finally, her involvement in the Benghazi tragedy has been in question from the beginning. On some events related to Benghazi, including Hillary’s potential involvement in suspicious arms trading activity, Andrew Napolitano insists that “Hillary Keeps Lying“.

And here is Jeffrey Tucker waxing sarcastic about Hillary in another context: “Just trust her. Truly, just trust her …”

Do Not Rot Productive Capital

21 Saturday Feb 2015

Posted by Nuetzel in Taxes

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Capital Gains Tax, corporate income tax, Dividend tax Rate, Double Taxation, Inflation tax, Kim Henry, stepped-up basis, The Freeman, Triple Taxation

Dividend and capital gains income are taxed at lower rates than regular wage and salary income. That such income is taxed lightly strikes progressives as offensive, but the intent and effects of these lower rates is not to redistribute income to rentiers. Rather, relatively low dividend and capital gains tax rates are in place because they limit double-taxation, minimize taxation of inflationary “gains”, and reward successful risk-taking.

Dividends, and ultimately capital gains, derive from corporate earnings. Corporate income in the U.S. is taxed at the highest rate in the OECD, with a top federal rate of 38% (though the rate drops to 35% above a certain level of earnings). Dividends may or may not be paid to shareholders from corporate income, but if so, they are subsequently taxed again as personal income. If dividends were taxed as regular income to individuals, the combined federal taxes (corporate and individual) on that marginal income in upper brackets would be in excess of 75%. With state corporate and personal income taxes added on, the after-tax dividend received by an individual shareholder from each dollar of pre-tax corporate income could then be less than 10 cents in some states.

The top federal tax rate on dividends is 20%, versus 39.6% for regular income. One reason that dividend income is taxed at lower rates than wage and salary income is recognition of the confiscatory nature of double taxation, as illustrated above. Realized capital gains are taxed at the same rate as dividends for the same reason. A capital gain is the increase in the value of an asset over time. Such gains are taxed only when an asset is sold, when the gain is realized. The low tax rate on gains from the sale of corporate stock also limits double taxation (and even triple taxation).

Stock prices tend to rise along with the expected stream of future after-tax corporate earnings and dividends. A prospective buyer of shares knows they will incur taxes on future dividends, which limits the price they are willing to pay for the shares. So, higher future earnings will be taxed to the corporation when they occur, higher future dividends will be taxed to the buyer of shares when dividends are eventually paid, and the resulting gain in the share price received by the seller today is taxed as a capital gain to the seller. Triple (and anticipatory) taxation! A relatively low tax rate on capital gains at least helps to limit the damage from the awful incentives created by multiple taxation of the same income.

Another important reason for taxing capital gains more lightly than wages and salaries is that the tax, in the presence of inflation, diminishes the real value of an asset. As an example, compare the following situations in which the price level increases by 20% over five years: Worker Joe earns $10 an hour to start with and $12 an hour at the end of year 5; Saver Dev earns $1 dividends per share of the Prophet Corp (which he plans to hold indefinitely) to start with and $1.20 at the end of year 5; Retiree Cap buys one share of Gaines Corp worth $100 at the start and sells it for $120 at the end of year 5. On a pre-tax basis, these three individuals all keep pace with inflation. The real value of their pre-tax earnings, or the share value in Cap’s case, is unchanged after five years. Cap keeps pace by virtue of a $20 capital gain, so the real value of his share is unchanged.

If all three types of income are taxed at the same rate, Joe and Dev both keep pace with inflation on an after-tax basis as well. But what about Cap? After taxes, the proceeds of his stock sale are $115. Cap’s after-tax gain is only 15%, less than the inflation that occurred, so the real value of his investment was diminished by the combination of inflation and the capital gains tax. The same would be true for farmland, artwork, or any other kind of asset. It is one matter to tax flows of income that change with inflation. It is another to tax changes in property value that would otherwise keep pace with inflation. This is truly a form of wealth confiscation, and it provides a further rationale for taxing capital gains more lightly than wage and salary income, or not at all.

There are further complexities that influence the results. For one thing, all three individuals would suffer real losses if inflation pushed them into higher tax brackets. This is why bracket thresholds are indexed for inflation. Another wrinkle is the “stepped-up basis at death”, by which heirs incur taxable gains only on increases in value that occur after the death of their benefactor. This aspect of the tax code was recently discussed on Sacred Cow Chips here.

The third rationale for taxing capital gains more lightly than wage and salary income is an attempt to improve the risk-return tradeoff: larger rewards, ex ante and ex post, are typically available only with acceptance of higher risk of loss or complete failure. This is true for private actors and from a societal point of view. It is hoped that lighter taxes on contingent rewards will encourage savings and their deployment into promising ventures that may entail high risk.

This post was prompted by a article in The Freeman entitled “A Loophole For the Wealthy? Demystifying Capital Gains“, by Dr. Kim Henry. I was somewhat surprised to learn that Dr. Henry is a dentist. His theme is of interest from a public finance perspective, and he provides a good discussion of the advantages of maintaining a low tax rate on capital gains. My only complaint is with the first of these two points:

“[The capital gains tax rate] is lower for two important reasons:
1. Although the gain is realized in one year, it actually took place over more than one year. The wine did not increase in value just in the year it was sold. It took 30 years to achieve its higher price.
2. Capital gains are not indexed to inflation. …”

To be fair, Dr. Henry’s point relative to the time required to achieve a gain probably has more to do with the riskiness of an asset or venture’s returns, rather than the passage of time per se. If an asset’s value increases by 4% per year, the three points raised above (multiple taxation, taxing of inflationary gains, and rewarding successful risk-taking) would be just as valid after year 1 as they are after year 5.

Taxing income from capital is fraught with dangers to healthy investment incentives, which are primary drivers of employment and income growth. Double taxation of corporate income is not helpful. Capital gains taxes suffer from the same defect and others. But capital income is a ripe target for those who wish to score political points by inflaming envy. It’s a dark art.

The Dire Wolf’s Collectivist Dues

24 Saturday Jan 2015

Posted by Nuetzel in Taxes

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529 Plans, Capital Gains Tax, Collectivism, Dire Wolf, Glenn Reynolds, Inequality, Market Inequality, Megan McArdle, Obama Tax Plan, Redistribution, Robert Higgs, Sheldon Richman, State of the Union, Statist Inequality

Inequality does not imply poverty for anyone, and inequality is a reasonable outcome of voluntary economic interactions between individuals who vary in their ability to create value. But inequality arising from artificial advantages conferred by the force of government and cronyism is indefensible. Sheldon Richman draws this useful distinction between the market’s distribution of rewards, which is a consequence of an unequal distribution of value-creating energy, ingenuity and talent, as opposed to the unequal rewards of a system of centralized control in which subsidies flow to cronies, monopolists are protected, barriers to activity are erected and political elites enjoy the fruits of value-destroying privilege. Here’s a sample from Richman’s post:

“Unlike market inequality, political-economic inequality is unjust and should be eliminated. … How? By abolishing all direct and indirect subsidies; artificial scarcities, such as those created by so-called intellectual property; regulations, which inevitably burden smaller and yet-to-be-launched firms more than lawyered-up big businesses; eminent domain; and permit requirements, zoning, and occupational licensing, which all exclude competition. …

Instead of symbolically tweaking the tax code to appear to be addressing inequality—the politicians’ charade—political-economic inequality should be ended by repealing all privileges right now.”

And yet we get fatuous rants from Obama about the ravages of market inequality and more tweaking of the tax code. Tweaking is too kind a word. The State of the Union address last week was a collectivist’s wet dream, replete with visions of central planning and a long list of non-neutral incentives and favors for the president’s base. He did his best to stoke the flames of class division and envy. One must ask: how long can the surviving market economy and a shrinking share of actual taxpayers support the growing dependent class and the nonproductive state apparatus?

In “Uncle Sam Is Coming After Your Savings?“, Megan McArdle warns of the dire wolf waiting at the door of every hopeful saver and middle class taxpayer. She cites Obama’s proposed tax on college savings plans (529s) as one piece of evidence, and asks “How would you feel if they did this to Roth IRAs”?

“… the very fact that we are discussing taxation of educational savings — redistributing educational subsidies downward — indicates that the administration has started scraping the bottom of the barrel when seeking out money to fund new programs. Why target a tax benefit that goes to a lot of your supporters (and donors), that tickles one of the sweetest spots in American politics (subsidizing higher education), and that will hit a lot of people who make less than the $250,000 a year that has become the administration’s de facto definition of ‘rich’?”

Then there’s the proposed elimination of the stepped-up tax basis at death, covered a few days ago at this blog, and the increase in the tax rate on capital gains and already double-taxed dividends from 24% to 28%. Of this, and the more general issue of investment incentives and efficient revenue generation, McArdle says:

“… we don’t try to tax the bejesus out of capital income, much as many would like to; old capital flees, and new capital doesn’t get formed, as savers decide it’s not worth it.”

No we don’t, for now, but that lack of capital formation is a dire implication of heavier taxes for the economy. It is an achilles heal of the redistributionist policy agenda, as a lack of new capital undermines productivity, income growth and opportunity across the board. Middle-class economics? Please, no. Glenn Reynolds has some additional thoughts on McArdle’s column:

“The truth is, in our redistributionist system politicians make their careers mostly by taking money from one group of citizens that won’t vote for them and giving it to another that will. If they run short of money from traditional sources, they’ll look for new revenue wherever they can find it. And if that’s the homes and savings of the middle class, then that’s what they’ll target.

For the moment, Americans are safe. With both houses of Congress controlled by the GOP, Obama’s proposals are DOA. But over the long term, the appetite for government spending is effectively endless, while the sources of revenue are limited. Keep that in mind as you think about where to invest your money … and your votes.”

Statistics on inequality are brandished by progressives as if to prove the existence of a great market malfunction, but as Richman points out at the link given above, an extreme form of inequality is an inevitable outcome of privilege conferred by the state. On the other hand, market inequality is no tragedy for humankind. It is an artifact of the most peaceful, productive system of social coordination ever devised. Market inequality is not related in any way to the absolute welfare of the median earning family or the least fortunate, as Robert Higgs explains in this interesting essay:

“Probably no subject in the social sciences has created so much unnecessary heat. Yet, at the same time, economists actually know a great deal about it and can dispel the public’s confusion about it if they try.” [Emphasis added]

Step-Up, Pay-Up & Shut-Up

23 Friday Jan 2015

Posted by Nuetzel in Taxes

≈ 4 Comments

Tags

Capital Gains Tax, dependency, economic growth, Estate Tax, Income Tax, IRS, President Obama, Stepped-Up Tax Basis, Tax Policy, Tax Simplification

Predicting support among relatively affluent leftists for President Obama’s proposed elimination of the step-up in tax basis at death is probably a simple matter of knowing whether they have a surviving parent or whether they have a bequest motive of their own. Perhaps I’m too cynical: it probably depends on age as well (as that may influence awareness of the tax provision). Still, I’ll bet my predictions would be highly accurate for “affluent leftists of a certain age”.

A technical digression: the cost basis of an asset is the price originally paid. The tax basis is the same until the owner’s death. When the asset is ultimately sold, the gain over and above the tax basis is taxed at the capital gains tax rate, now 20% (plus a 3.8% Medicare surtax for incomes greater than $200,000). However, under current law, when an asset is held until death, an heir’s tax basis is “stepped-up” from cost to the asset’s value at that time. No income tax is owed at the time of the inheritance even if the asset is sold immediately. The estate tax still applies to the asset’s value (depending on the size of the estate and whether there is a surviving spouse), but there is no capital gains tax liability until an heir sells the asset at a price greater than the stepped-up tax basis.

Our rhetorically-inclined president calls this feature of the income tax code a “loophole,” despite the fact that it is a legal feature of our ridiculously-complicated income tax and that inherited assets are still subject to the estate tax.

Obama’s proposal would eliminate the stepped-up basis at death. The increase in value would be subject to the capital gains tax at the time of inheritance (even if the asset is not sold) and subject to the estate tax (40%) if the size of the estate exceeds a threshold (about $5.4 million per individual). In addition, the President wants to increase the capital gains tax rate to 24.2% (plus 3.8% yields the oft-quoted 28%). These points are generally unaffected by whether the asset is held in trust for the full benefit of the heir. There are some exemptions in Obama’s proposal to eliminate stepped-up tax basis for small, family-owned businesses and for gains on primary residences. Also, gains would be taxed only after the first $100,000 per individual and only at the time of the second death for a couple.

The double taxation of capital gains in large estates might not evoke much sympathy, but it would ultimately have negative consequences for the economy. It would bleed capital out of productive, employment-generating private investments to feed a resource-hungry Leviathan, notwithstanding Obama’s high-minded pretensions. Perhaps worse is the impact on smaller estates held by conscientious middle-class savers who have understood the magic of compound growth. The aggrieved children of many such savers would find themselves in the grips of a significant income tax liability, which might require a fire-sale of assets in order to make payments to the IRS.

Complex features like the stepped-up basis are not hallmarks of a well-designed tax system. They tend to be promulgated as a way of offsetting other features of the tax code that would otherwise be punitive. If anything, this web of features is an impediment to efficient revenue generation. A simple tax code would minimize compliance costs and eliminate the many provisions that distort economic decisions. But complexity lends itself to political manipulation, which is the subtext for President Obama’s failure to propose any sort off meaningful tax simplification. Instead, he proposes even more complexity to be administered by that most trusted of institutions: the IRS. Fortunately, the president’s tax package stands no chance of becoming law, but it is illustrative of his statist agenda and his economic ignorance.

This post at Reason critiques this and other aspects of the President’s tax plan. This note in Forbes gives more detail about the proposal but is just a bit too optimistic about its potential to benefit the middle class. For a variety of reasons, the middle class is unlikely to benefit in the long-run. Slower economic growth will take its toll, and the sad truth is that Obama is seeking to increase middle-class dependence on the state.