September 5, 2008

Why it's always hard for me to vote

I think tax policy is one of the most important issues that politicians address. Unfortunately, I'm more or less alone. Tax is boring. It's not sensational enough to be interesting to the entertain-me-or-at-least-shock-me mindset of the majority of the voting public unless you can point to the rich getting much, much richer or the poor getting much, much poorer. However, boring as it is, the positions we, as a society, take on the types of economic activity that we reward really do shape not just the economy but also the types of activity that will occur within that economy.

First of all, the current U.S. tax system is very convoluted and stupid in many places.

One example is the marriage penalty (and the most recent fixes that reward low-income married couples). The country should not provide economic penalties or rewards to people who decide to enter into a legal union, and certainly not both at the same time depending on the tax bracket they are in. Right now, financially, lower-income couples are incented to be married to save taxes and higher income couples are incented not to be married to save taxes. This will revert to penalizing everyone who is married in 2011 unless it is changed. Of course, this is a long-standing problem and not too many people are fired up about it -- very few people decide not to get married for tax reasons, so neither of the candidates address it in depth (e.g. Obama tweaks with it, but neither has come out and admitted that it is stupid and married folks should pay the exact same as they would pay if they were single).

The AMT is stupid, too. It was passed in 1969 to target high earners with too many deductions, but wasn't pegged to inflation. The politicians have to pretend that they are going to apply it to all who would be hit to make the budget look better, but then, every year around December 31, they get together and admit that, oh shit, what was a high-earner in 1969 is actually middle class now. We probably shouldn't tax them all under the AMT 'cause then they may not vote for us, how 'bout just some of 'em? A few more than last year, but not all of 'em. So, you never know how badly you will be hit with the AMT 'til the last second. Ridiculous! How 'bout picking a number and sticking with it? How 'bout pegging it to inflation to adjust annually? It's not rocket science.

Regardless of the current mess of the U.S. tax system, I think it is important to consider how it may change with the new president, and whether, we as a country want to be encouraging and discouraging the types of behaviors that their tax plans will incentivize.

I've read enough about Obama's tax policy to know that I do not agree with several of his plans and think they will be bad for the economy. First, and foremost, I think increasing capital gains tax to 25 percent (from its current max level of 15) is likely to freeze up capital and decrease liquidity in the markets. And given the lack of debt that is currently being made available as the banks and lenders sort through the subprime mortgage mess, we really need liquidity.

It is harder for companies to get the debt they need to do deals these days, which means it is more likely that good companies in a strategically disadvantaged positions will lay people off or shut down rather than getting acquired. It is harder for individuals to get the debt they need to buy homes right now, which means the housing slump will continue because people who would be good buyers and pay their bills are unable to buy homes that are sitting on the market (often in the hands of folks who couldn't afford their mortgages in the first place and now find their home-values plummeting). Anecdotally, I have even heard that it is even harder for individuals to get consumer credit these days. All of these changes mean less money flowing through the economy, which, of course, contributes to a recession. I think a low tax rate that rewards capital investment by taxing it at a lower rate than other forms of income makes sense -- it encourages the exact type of behavior that we, as an economy, need to be encouraging. Now, and, in general.

McCain plans to leave capital gains rates at the current levels. But his plan isn't exactly my favorite either. He wants to cap the estate tax with a $5 Million exemption and a max rate of 15. Obama wants to cap it with a $3.5 Million exemption and a max rate of 45. Here, I think Obama's policy makes more sense, although 45 may be a bit too high. Regardless, from a policy perspective, wealth transfer by inheritance is not the type of economic transactions we should treat favorably (and thus, encourage). Inheritance requires no innovation, labor, creation of efficiency, or any of the things that are good for our economy. In what world does it make sense to say that people who invest wisely, save, and then sell their investments to either make other investments or spend it in the economy should pay the same tax rate on the wealth they generated by making wise and disciplined investments as those who happen to win the sperm lottery?

In my opinion, the biggest difference between the two plans lies with McCain's proposal to decrease the corporate tax rate to 25%. I know, I know, it looks like I'm taking the side of big corporations here. But, what I'm really doing is looking at the international world and acknowledging that we are out of sync. Microsoft now runs the majority of its revenue through its Ireland headquarters, as opposed to running it through Redmond. Why? The same reason many major companies have relocated fiscal operations there -- its very favorable corporate tax rate of 12.5%. Ireland moved from one of the worst economies in Europe (18% unemployment, close-to-third-world-country infrastructure) to one of the best, and most experts largely credit these changes to their change in corporate tax rate.

In fact, when you include the double taxation regime of state corporate tax on top of federal corporate tax, in many states, the combined US corporate tax rate is higher than Japan, the country with the supposed *highest* corporate tax rate.

What types of companies leave high-corporate-tax ratet countries in search of better corporate tax rates? Profitable ones. The types of companies that have many employees. The types of companies creating innovative products that sell well.

In short, I agree with McCain's policy on this issue and think that targeting a level of 25% is reasonable, pragmatic, and necessary to be somewhat competitive in the world economy. I think a federal level of 25% addresses the reality of the issue, but still leaves the U.S. in the high end of the tax rates paid across the world. In fact, France, currently #5 in the world at 34.4% is discussing lowering its rate to 20%, which, if it went through and McCain's suggestion went through would leave the US comfortably in 4th-20th place worldwide, depending on the state.

Finally, as for the only tax issue that most people care about -- personal income tax and its effects on those in various brackets -- the Candidates' plans follow the party lines. Obama is a democrat. He's for more government-sponsored social services, decreasing taxes on those in lower income tax brackets and increasing taxes on those in higher income tax brackets. Predictably, his plans target the top 1% of earners very heavily and the top 0.1% of earners the most. McCain is a republican. He's for decreasing taxes overall, decreasing government sponsored social services, and, of course, his plan results in tax decreases that are higher for the highest income tax brackets and lower, proportionately, on the lower income tax brackets.

Neither of the candidates' plans in this area will really affect my life. The Tax Policy Center at the Brookings Institute estimates that we'd pay approximately 2% more of our earnings in federal taxes than we currently do under Obama's plan and approximately 3% less under McCain's plan. Those variations are too minor to matter when compared to the uncertainty in the economy (and thus our earnings in general) and the uncertainty in our current tax regime (all of the Bush tax cuts are scheduled to expire in 2011 -- no one even knows what we'd pay after that, the AMT is retroactively patched every year, but if they decided not to do that we'd be hit with way more than a 2% increase, etc.).

So, the personal income tax issues, while complicated, often stupid, and not well thought out, are not a hot-button issue for me. Neither of the candidates are addressing the personal income tax system as a whole. Neither of them are addressing the issue of the budget deficit.

And, on the issues I really care about, each of them has taken at least one position I support and at least one position I oppose. On balance, I think McCain's plan makes more sense for the economy, but I'm not in love with it. I fear Obama's combination of capital gains increases with a refusal to lower the corporate income tax rate could have very negative effects on the economy.

Of course, U.S. presidents do all sorts of important things in addition to approving tax plans, not the least of which is appointing Supreme Court Justices, so I'll have to balance those issues against the economic issues as well. Seeing as how I'm a mixture of a libertarian, a social progressive, a believer in meritocracy and a fiscal conservative, you can imagine how difficult it always is for me to vote...

1 comment:

Striker said...

your difficulties are too obvious. Must be hell to have all these tidbits rushing around to frustrate your mind. Sorry, but life can be well organized and simple. Check your premises.