The world is not linear. No matter how much we would like to believe that B follows A in some simple predictable manner, it has been my experience that the best that can be observed is some sort of first order differential equation where B is dependent on A but also on itself (B), when it is not dependent on C, D and E. In fact most of my observations fall into the second order non-linear camp. This is true for tax policy (Laffer curve), population dynamics, and global warming just to mention a few.

The lack of Congressional strategic planning ability or the ability to even somewhat accurately project the consequences of policy is annoying. Without even going to Washington DC, you also can observe the problem, which appears to be endemic, in the corporate world. People want simple answers and typically want them in time for quarterly earnings reports or next year’s elections.

Some time ago I wrote about a hit-and-run involving my daughter. That missive was based on the report from a bystander that the driver of the other vehicle (my daughter’s vehicle was parked and she in bed) was “Mexican looking” and presumably illegal.

Now my daughter has been involved in three hit-and-runs and two comprehensive claims where her windows were smashed out. Not one of these were her fault, and in four out of the five claims she was not even present. As a result of these “excessive” claims, my unnamed insurance company sent me a notice that they were dropping insurance on both my daughter and her vehicle. Now as it turns out, on her way to Seattle she did encounter a revenue-needy jurisdiction in Wyoming. After a 200 mile stretch of 75 MPH highway, Lovell has strategically placed 35 MPH speed limit signs with 35 MPH AHEAD signs well short of the necessary typical stopping distance for 75 MPH. Considering that the mimimum fine was $100 for a 1-10 over the limit offense, this burg needs to be listed. So we have five claims and one instance of a seriously dangerous driver at 1-10 over the limit.

It is to no one’s surprise that small towns derive a significant portion of their revenue from speeding tickes. Some juristictions, fondly mentioned in other Angry Man entries, also seem to use tickets as an extended revenue source. So we have the situation where insurance companies are rating driver and vehicles on moving violations, and jurisdictions using those same violations as a major source of revenue, and using the insurance rating process as a justification for setting fines higher and higher. We even have the absurd situation where the legal jurisdictions offer non-permanent settlements, at a higher cost, for clearing the violation. (See Illinois and Missouri DMVs).

So the jurisdictions view the problem as one of revenue with the insurance companies providing a means for extorting higher fines. The insurance companies, looking to next quarter’s revenues, see their policy as a loss control mechanism. Dumping drivers with “bad” records is a loss stopper. Dumping good drivers with excessive claims without regard to fault is a loss stopper. States who pass no-fault laws in auto accidents have succeeded only in changing the limits from x number of at-cause claims to x number of any claims. States have made it illegal to drive without insurance, yet also apply financial responsibility taxes to violations. This is all enabled by the fact that America is now a mobile society rather than a stationary one. (The milkman used to deliver to you.) So to recap:

  • America is mobile – driving is more or less a necessity
  • States require insurance by law
  • Insurance companies attempt to stop loss by cancelling policies with excessive claims
  • Jurisdictions use moving violations as a source of revenue
  • Jurisdictions use the potential loss of your policy as a means of extorting additional revenue by offering cash alternatives to permanent violations on record

Insurance companies offer policies with uninsured/underinsured driver coverage. In my daughter’s case, even though she was not at fault, since the other driver could not be located, the company was responsible for the loss. That this is an endemic problem can be deduced by the fact that comprehensive and under/un-insured motorist coverage now comes with a deductible as high as collision, and the liability limits on this coverage are now as high as on the vehicle underwritten. Translation: There are a lot of accidents involving hit-and-runs or uninsured motorists.

So here is where the strategic planning comes in, or lack thereof. Insurance companies by promoting their loss policies are, in fact, limiting their losses in the short term. People who are dropped from coverage, and cannot afford the “high-risk” coverage, naturally drive without insurance. As their numbers increase, and they will because of the requirements imposed by a mobile society, the pool of potential long term customers shrinks. Further, jurisdictions using the same instrument the insurance company uses as a risk metric (tickets) as a revenue source, drive the number of excessive claims cancels and further limit the pool. Overall, the probability of non-insured-vs-insured collisions increases. This of course flows into the loss limit which further exacerbates the problem. The end result is either a stable phase point of no revenue, or of no market for insurance.

In fact, this is nearly homologous to the dog-flea problem, an example of two first order coupled differential equations in its simplist formulation. In that problem, if there are too many bites, the dogs die out. Too many fleas and they starve for lack of dogs and die out. Stable solutions exist trivially with no dogs and fleas or non-trivially in stationary points in phase space or phase-space limit cycles.

Unfortunately, none of this phase state analysis makes it to the policy makers at the local government or to the risk analysts at the insurance companies. Each is acting as if the problem were purely linear and totally decoupled. At the very least, both should acknowledge that actions taken effect the other and at least jointly consider the long term consequences.

The short term consequence to the particular insurance company mentioned in this specific case was the loss of all policies held with that company (6 or so policies); the douchbags.

I presume that most of our beloved readers have day jobs—the kind where you show up, do some work, and get some money in exchange. I presume further that for most of you, if you were paying the invoice for important products for work, and sent the payment to the wrong company, consistently, you’d probably be in trouble. Well, that’s a euphemism…you’d almost certainly be out of a job.

And if your bank or employer routed your direct-deposit paycheck to the wrong account, certainly that would be a major issue. And if they did it for dozens or hundreds of customers, that would, you’d think, lead to local, state, or federal investigations, class action suits, etc.

So why does the IRS get a free pass?

Recently, the IRS has announced, pretty nonchalantly, that they’ve mailed stimulus checks to the wrong addresses—well, the envelopes are addressed correctly, but the checks inside are for someone else:

Well, at least that’s only for physical checks, at least direct-deposit is fine. Or not:

Well, mistakes happen, and I’m sure they’ll get it straightened out. Then you’ll get the right amount, finally. Unless you don’t:

But, at least, unless you’re one of the unlucky few who had their checks misrouted, their money deposited in some stranger’s account, or the wrong amount credited them, well, then you’ll get your money according to a clear schedule. Unless you are among the 20 million who won’t:

Yes, anyone who took a refund-anticipation loan from their provider, or deducted money from a refund to pay for tax preparation, or split a tax refund across more than one bank account, or did anything else the IRS decides to come up with, those unlucky folks will get their checks sometime, maybe, if they’re lucky.

Well, they call them stimulus checks, and I’m stimulated alright…to get rid of the IRS! Or at least make taxes simple, straightforward, and clear.

What about you?

Well, once again the dreaded Tax Day has come again in the United States. As millions scramble to finish their returns at the last minute, and millions more are reminded for a moment about how painful, frustrating, and stupidly complicated this year’s taxes were, perhaps you will give me a moment to indulge a fantasy:

Imagine there’s no 1040
It’s easy if you try
No capital gains tax
Eating away our pie
Imagine all the people
Keeping all their pay…

Imagine there’s no AMT
It isn’t hard to do
Nothing to evade or cheat for
And no Schedule-C too
Imagine all the people
Earning cash in peace…

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

(With no apologies to Lennon, that socialist twit.)

While many taxpayers are lucky enough to use 1040-EZ (as long as they don’t mind missing out on half the deductions allowed), anyone who has ever: bought a house, received any money for contract work, sold any stock, earned any sizable amount of interest, earned any dividends, used a car or possession for business, or done any of a hundred other fairly common things knows the joy of the full 1040. And that’s a joy that they get to enjoy for a longer time each year, as the code grows in complexity.

This year, in fact, we were treated to the wonderful spectacle of a recursive function in the capital gains worksheet: Box 22 depended upon Box 10, Box 10 depended upon Box 37, and Box 37 (naturally) depended upon Box 22. A literal Catch-22 right there in the 1040! So what did the taxpayer do: why fill out boxes in order over and over again until the numbers stopped changing. Yes, this year’s tax form required iterating over a recursive function. It’s official: advanced mathematics is now required to accurately fill out an American tax form. I guess we should just be thankful the function converges…this time.

So, enough whining. What should we do?

Scrap the damn tax code!

No band-aids, no simple patches like the mid-80s reforms, no more kicking the problem out for another decade or so. Scrap the cobbled together, rickety, ideologically-driven, overly-intrusive, economically regressive thing, and start again.

But what to replace it with? The Flat Tax? The Fair Tax? The As Yet Unknown Tax? No Federal Tax? (That last one’s for states rights fanatics like Angry Midwesterner.) Before I try to lay out a positive, let me shoot down some perennial red herrings:

We can’t have a [flat/Fair/no] tax – it’s regressive!
Now this objection can have a reasonable meaning, which is: the very poor must use the vast bulk of their money for necessities, and the very rich use almost none, so a tax code should respect that each tax dollar is a greater burden on the poor than the rich. And that reasonable objection has a simple and reasonable answer: set a personal deduction large enough to ensure that the poor pay little or no tax.

Sadly, most fans of “progressive” taxes don’t give a damn about the poor—they’re besotted by the sin of envy and want to soak the rich and damn the cost! For these folks, the answer above is worthless because it only benefits the poor, it doesn’t punish those evil, evil rich. You’ll pardon me if I see no reason to respect the wishes of a bunch of folks eager to punish the deadly sin they hate (greed) by enshrining the one they love (envy) in law.

Any tax code we come up with will just get hijacked again—and be just as complicated soon!
This is actually very reasonable, and a useful cautionary warning. But as an objection to doing something it’s pretty wrongheaded. Just because every system can be abused doesn’t mean that some aren’t better than others. Given that the current code kills a sizable forest every time they need to print a hard copy of it, I find it very hard to believe that much simpler systems will somehow be easier to corrupt.

Now is not the time for radical reform—we have massive deficits and are in a recession!
No, now is exactly the time for change, especially if those things are true. Taxes are, almost always, regressive economically: the more taxes the less growth and the greater the chance of recession. Lower taxes, and you spur growth. Ah, but simplify taxes, and you reduce the burden of complying ($200-$500 billion dollars annually), which lowers the effective tax burden (taxes plus fees to file taxes). So a simpler system would spur growth even without lowering taxes. Anyone who’s run their own business, done contract work on the side realizes this. The current system burdens the self-employed with significant costs.

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So, away with these objections, and on to the glorious future!

Well, actually, I don’t have a nicely laid out, detailed plan for tax reform any more than anyone else does. But, to avoid the label of coward, I’m willing to stick out my neck and recommend a general outline of one. First the general principles: the poor should not pay tax (they’re poor), those who work should not be punished (they’re industrious), those who invest should not be punished (they generate capital), those who start businesses should not be punished (they are the engine of growth).

So, the plan:

  1. A flat income tax of 25% Easy to calculate, easy to file.
  2. A standard personal deductible of $20,000 per adult and $5K per child. Make less than that? No tax for you. Creates these effective tax rates:
    Effective Rate by Income
      $20K $35K $50K $100K $250K $1 million
    Single 0% 11% 15% 20% 23% 24.5%
    Single Parent (2 children) 0% 3.5% 10% 17.5% 22% 24.25%
    Family (2 children) 0% 0% 0% 12.5% 20% 23.75%

    Progressive!

  3. No capital gains tax. (That’s right: 0%! Don’t whine too much though, lefties, look on down the page.
  4. No tax on interest or dividends. (That’s right: 0% But wait, progressives, you’ll get your day!)
  5. No corporate taxes. (That’s right: 0% here too! Think about it: corporations don’t pay taxes, they just pass those taxes on to shareholders, customers, or employees. If they simply avoid taxes through clever bookkeeping. Breathe steadily, lefties, good news follows!)
  6. Earned Income Tax Credit: reward the working poor who are stuck, for the moment, with low-paying jobs. Exact mechanic to be worked out, but we should be generous while always making it more profitable to take a better job!
  7. Nothing else. No other deductions. No tax loopholes. No tax shelters. No tax-free trusts. No mortgage deductions. You get a personal deduction, you pay 25% on what’s above it. That’s it.

Now, before I’m hauled outside, doused in environmentally friendly fair-trade organic vegetable oil, and set alight, let me point out why this is a win for the soak the rich crowd:

Who pays taxes in America? Despite campaign rhetoric, it ain’t the poor. In fact, it’s the rich. The top 10% of income earners (those making $103K and up) control around 46% of the wealth but pay over 70% of the taxes! This means, of course, that most of those nice deductions, exclusions, etc. benefit the wealthy. A 25% rate might seem like a tax break, since the current top rates range from 28% ($77K-$160K) to 35% (above $350K), but those rates on on taxable income—after deductions have had their day. A 25% rate on all income above $20K should compare pretty favorably to 28% on income left over after well above $20K in deductions have been applied.

So why would the rich approve? Because a flat tax allows them to calculate their burden easily, estimate the economic costs of various options easily, avoid expensive tax preparation and record-keeping, and eliminate the expensive audits or penalties which arise from the inevitable mistakes in the current ridiculously complicated tax environment.

And, best of all, eliminating compliance costs and flattening rates will spur an economic boom. Wealth, individual income, and tax revenues will rise, and the tax base will grow as new workers enter the pool.

My numbers are rough, and doubtless need fine-tuning. We’ll need a bunch of work to get things right, and we’ll have to work across the political divide to get a tax code that rewards hard work and investment without unfairly hurting hard-working blue-collar folks. But we can do it! We can revolt against this bloated tax code shoved upon us by a political class of lawyers and lobbyists and return to something simple and sensible. Fourteen states have done it, seventeen nations have done it, and we can do it too!

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

Sometimes it takes somebody to step back from the tactical morass of the pending primaries and presidential elections and take a look at the significant issues. I am referring to actual decision trees that must be traversed to establish policies that affect the United States, as opposed to emotional and class-divisive issues that are used for political short-term electoral positions.

Now political pundits will say that there is nothing other than the tactical political position — after all, the goal is to get elected and you can’t resolve real issues if you aren’t in a position of power or authority. But candidates mired in the short term tactical issues — addressing irrelevancies for a point here or there against their opponents — can become intellectually bankrupt of vision. Then, even if elected, they cannot address the real issues, or perhaps have compromised their political capital to the extent they are totally ineffective.

By and large, I want to address issues that can be managed in some concrete fashion, not issues that parties believe should be managed. Party issues that are litmus test issues, such as abortion, cannot have a resolution in the current political system. 40% of people oppose abortion, 40% are “pro-choice”, and the rest either don’t care or have mixed positions. Given this distribution, any executive is not going to be able to generate a policy that has an immediate impact on the United States. One might be able to create an environment where one position or another might be enabled in a future act, but such environments are very fragile. The issue of stem cells is a case in point — for all the posturing, the issue became irrelevant when Japanese scientists persuaded ordinary skin cells to transform back into undifferentiated stem cells (and with the added benefit that they were donor specific.)

So enumerated below are some issues and my tags:

AbortionAbortion — (easy since I’ve already addressed it in brief) Doesn’t matter. Can’t be resolved in the current system. Trying to make this a plank is a waste of time. Yes, there are moral and ethical issues on both sides and the current treatment is inconsistent and there are deep feelings on both sides. Doesn’t matter. Irrelevant.

ImmigrationImmigration — The United States needs to get its act together here. We have two contradictory processes at work that need to be reconciled. Our food supply is dependent on manual labor imported from outside. To increase the pay scale to the point compatible with a job an American Union Worker would take will increase the cost of food. Economically we are chained to cheap imported labor. The presence of people in the country who exist outside the legal system creates massive economic costs, yet it still somewhat to our benefit to educate and care for a certain number of these people — the cost of not doing so may be greater still.

Further, much of America’s growth is due to legal immigration, its innovation due to contributions from immigrants. From the technological and innovative point of view, why would be want to train and educate students from other countries, and rather than employ them here with a H1B, send them back to India, or China, or Pakistan where they can use what we have taught them to develop competing businesses.

The current set of immigration policies are horrible with no consistent underlying vision or plan. We need to restore the United States to that land of opportunity that calls people from all walks of life to participate in achieving their dreams, and makes them want to be legal participating citizens in the American democratic process.

The Plank: Recognize that America is built on immigration and adjust policies to reflect this fact. Increase or eliminate H1B visa limitations. Devise a guest worker program as a means to satisfy our current economic dependency while at the same time requiring such workers to exist within our legal framework (i.e., valid driver licenses, auto insurance, immunizations, etc.). Finally, enforce the subsequent laws.

BusinessBusiness Investment — The current governmental bureaucracies (both State and Federal) have created an environment where investment is going elsewhere: London, China, Russia. Our policies and laws like Sarbanes-Oxley have made the hurdle of listing in the United States financially onerous. The FDA has made developing new drugs near-impossible with the result that corporations are being fined millions of dollars for reporting their research protocols to doctors (off-label touting is a crime); deciding drugs need not be approved because existing drugs are already available (competition anyone?); and generally making the process so complex and lengthy that the evil pharmaceutical companies have to charge an arm and a leg to break even of the research and development. The Justice department obtains some of its own budget from the fines levied in actions. (oops)

These, and many more government bureaucracies have to be checked, reduced or eliminated. The government can and should regulate commerce so that the playing field is level, but by and large, issues such as who can compete should be left to the market to decide.

The sub-prime/securitization/derivatives financial liquidity crisis is providing another opening for government to over-regulate. The market is already sorting out (in the British SAS sense of the phrase) the people who were stupid. Banks are moving assets back to their balance sheets. Hedge funds are unwinding and assets are being marked to real market value. Government interference here is what created the mess. Let’s not multiply the problems.

The plank: The Government’s role should be to provide transparency. Hold hearings, investigate processes and systems but without moralizing and demonizing the industries. And then do nothing while the system, now aware of the problems, corrects itself.

In general, any law passed by Congress establishing a regulatory or oversight mission (and its associated bureaucracy) needs a sunset provision and a requirement for periodic review to determine whether its still needed. Establish a goal to cut by 10% annually both the budget and employee count of every major department. (The Jack Walsh method.)

TaxA Rational Tax Policy — The current situation is not sustainable. The class-based tax warfare must stop. Now we have the situation where the top 1% of the country’s earners pay 39% of the Federal income tax; and that 60% of the people pay less than 1%, if any. And what do we hear from Congress: “Taxes need to be more progressive.” and “We can’t have executives making $30 million dollars.” and (of course) “We have to ensure that the rich pay their fair share.” So what occurs when 0.1% of the earning population pays 99% of the income tax? What happens if they get pissed off and leave? (oops!)

Also, it is unconscionable that a PhD in accounting and mathematics, let alone a typical citizen can’t read their tax return instructions. The entire system (and the IRS) needs to be abolished and replaced with a simplified taxation system that requires no more than one page to fill out. And keep Congress out of it. Their attempts to “fix” things got us into this mess. Remember the AMT, supposedly legislated to insure that 140 people who paid no tax forty years ago, never ever got a free pass again? And now 30 million Americans have to figure their taxes twice and pay because they are now “rich”!

The Plank: Set up a commission to oversee the collection of taxes — ten members max — like the Fed. Make any revision to the code require a supermajority of 80% Congress. Make it flat or at most two tiered with no exclusions. Most people would pay a higher rate just to not fill out the forms ( or pay their tax accountants to do it for them — they would save money.) Dump the AMT, eliminate capital gains tax or any reinvestment double taxation. Simplify — forbid social reform and manipulation via taxation.

WarThe War in Iraq — Doesn’t matter. We are there, we can’t leave until its stable. Why beat a dead horse. We kill more teenagers on the highways than in the armed forces. Fix foreign policy and this will go away. Irrelevant

Foreign PolicyForeign Policy — Which one? The White House, The State Department, The Trade Office, the CIA?

The Plank: Downsize the bureaucracies and reduce the competing agendas. Let’s get some consistency in the message America sends to the rest of the world. Like Patrick Swayce in Roadhouse: Be nice, be nice, be nice until it’s time to stop being nice. Let’s treat Russia and China and other countries with respect and some understanding that they have legitimate concerns. America, for better or worse, is a superpower and is likely to remain so.

Castle RomeoNuclear Proliferation — Doesn’t matter. The first world knows this through detente. The third world has to learn. And it’s not as if we can really do anything about it — any physics grad with some practical engineering experience can do it.

Few alive today have an understanding of the effects of these weapons. If a state uses one against another state, that state is toast. Self-correcting problem. Irrelevant.

JudicialThe Judiciary — At first I was going to assign this a ‘doesn’t matter’ but I rapidly came to the conclusion that it does in the long term. Two things:

Any president should have the right to select and should have the expectation that his selection be confirmed unless there are really significant problems with the choice. By problems, I mean competency, legal and qualification problems, not fundamental philosophical differences. When the people select a president through an election, they are (hopefully) voting for a vision and a philosophy and they expect that that vision will have its day in the sun. Selecting like-minded people is an executive’s prerogative. This includes judges and attorneys-general. This is part of the implementation of the vision (and philosophy). Using the confirmation process as a weapon deprives the People of the United States of their choice of a vision. Conflicting visions each deserve a chance so confirmation should be competency-driven instead of philosophically-driven.

Since certain judicial positions are life positions, judicial appointments establish long-term trends and enable conditions for follow-on legislation by establishing the interpretative environment for that legislation. When the judicial system is strictly constructionalist, this does not matter, but whenever judges use their authority to bypass legislative strictures, and have become ‘activists’, different concerns arise. For those who believe that certain positions are warranted and have an intrinsic value independent of that determined by the will of the people (as expressed by a majority of the legislative body), judical activism is a key component in achieving these positions. Consequently, judicial appointments become critical in preserving this channel of change, and this is reflected in the acrimonious confirmation process of today.

I note in passing that a conservative position of strict construction with regard the the US Constitution is not inherently an adverse position. At most it is a neutral position with respect to ‘active change’. At most, supporters of changes currently enabled via judicial activism have only to assure that their laws pass Constitutional muster. Of course, the entire reason for judicial activism is not for reviewing laws, but for circumventing the legislative process in the first place. If they could get their laws passed, there would be no need for judicial activism. This activism is also not the exclusive province of the left. In the early 20th century, laissez-faire courts blocked Federal regulation of interstate commerce on the basis of the ‘santity of private commerce’, an appeal beyond any reasonable Constitutional interpretation.

The Plank: Confirm presidential appointments on the basis of competency and not philosophy. Develop policy to prevent and avoid judicial activism. Let the process work by confirming presidential selections, and let Democracy work by reducing judicial activism.

[Many thanks to AOC for his erudite analysis and review.]

President Bush’s new (and DOA at the House) $3.1 trillion dollar budget projects that, by September 30, 2008 — the end of the current Federal fiscal year — the shortfall over revenues will be $410 billion. The House majority party is salivating over the choice chops of political fodder this provides in an election year, while at the same time patting themselves on the back for delivering a $150 billion stimulus package to the economy, which does nothing to stimulate the economy. Because this stimulus spending is short term, the package outlay translates dollar for dollar directly to the deficit. (To be fair, the President has signed off on this package also in the spirit of true bipartisanship — lookout taxpayer!)

I consider myself somewhat prudent in that while I have a mortgage, the P&I seldom exceeds $1000 a month (it’s an ARM and thus varies with LIBOR); I don’t have any outstanding credit card debt — I am a transactor rather than a revolver; and I have some investments and savings.

The Federal Reserve has reduced interest rates in the last few months by almost 2 points. This is to bolster the economy (as perceived through the lens of the equities and bond markets). The markets have rallied, and then sunk as the impact is absorbed and evaluated. Democrats in Congress are talking about not being able to ‘afford extending the Bush tax cuts‘ and not being able to ‘afford the revocation of the AMT‘. They are also talking about expanding many programs.

What does this all mean to me?

My ARM resets every February based on the preceding six months LIBOR so the reduction of the Fed rate is likely to have little impact on my P&I. Additionally, since the LIBOR has lately decoupled from the Fed rate there is no guarantee that any Fed action will lower LIBOR. Credit card issuers adjust their loan rates monthly, usually based on 10-12% over the Fed rate, so that they can maintain a good net interest margin. However, since I am prudent and have no revolving card debt, I obtain no benefit from this. Since the rate goes down, so does the interest accrued to my meager savings and money market accounts. Current savings rates are less than the CPI so in terms of dollar denominated spending power, the value of my savings actually decreases.

One effect of the cuts manifests in the dollar’s value compared with other currencies. The dollar has achieved new lows. As a result, dollar denominated commodities such as oil and grain, have increased in terms of price. The value of a barrel of oil is the same or slightly rising (due to demand) but the value of the dollar is falling meaning that you need more of them to buy that barrel. Consequently, gasoline is hovering near $3.00 per gallon and can only rise as demand picks up again. Consequence to me: I have to pay more to get to work and back to buy fuel. I have to spend more of my pay to keep my house heated in the winter and to pay for electricity.

Policy decisions in Congress, particularly with the ethanol alternative fuel initiative, have also had their effect. These efforts are a derivative effect to mitigate the higher oil prices. Subsidies to ethanol producers — again an expense supported by taxes — have driven corn prices higher. Basic grain products have increased in price, cattle feed and thus meat has increased in price, and since corn syrup is used in about everything, most other processed foods have increased in price. Consequences to me: inflation.

One of the reasons that is used to support the package is that the liquidity of the financial markets is being reduced. The reason for that is simple — bankers don’t have a good feel anymore for what an asset is worth, and consequently are reluctant to lend money against that asset. Multiple levels of risk diversification haven’t quite worked out as planned. While I am a fan of and support securitization, the packaging of asset and mortgage backed securities with credit enhancements and credit default swaps constituted building a house of cards. Young financial engineers with little experience in the downside of things spun up an edifice of risk that is still in the process of toppling. But the Fed has already provided an answer to the liquidity problem through its discount window where banks are assured of obtaining the capital they need. The stimulus package doesn’t affect this. By viewing the economy entirely through the lens of the financial market, rate cuts only reinforces risky behavior. The Fed action is predicated on the premise (unsubstantiated) that whatever affects the markets eventually affects the general economy.

Finally, it seems as if Congress doesn’t learn anything. If anything was clearly demonstrated by the Bush tax cuts, it was Laffer’s theorem that there is an optimum taxation rate to provide maximum revenue. Since the stimulus package will increase the deficit, the inevitable result will be a call for an increase in taxes. The result of that will be a slowdown of the economy, a decrease in tax revenue, which will result is still higher deficits. Plus, the effect will flow down to the States and their revenue streams. All of the ‘good’ and ‘beneficial’ programs will be strained and States and Cities will attempt to make up the shortfall. Consequence to me: My take-home pay decreases as my fed taxes increase. My property tax component which is now slightly less than my P&I amount will exceed it and I will absorb more of the burden of government.

The reason that the market has blipped higher and then reset is that investors collectively know these things. This non-stimulus stimulus package offers no long term market or economic benefit. This package and the rate cut itself is a profligate renunciation of fiscal prudence. The current set of policies rewards the behavior the current Congress rails about: the lack of savings of US citizens; an excessive burden of credit card debt; highly leveraged mortgages; overreliance on oil.

Here is my table of consequences:

Result/Effect Prudent Man Profligate Consumer
Gasoline Prices Screwed Screwed
Leveraged Mortgage Not Applicable Bailout
Savings Reduced Value Say What?
Food Prices Higher Higher
Credit Card Payments No Effect Lower
Risky Financial Behavior No Effect Rewarded
Income Taxes Increased Likely Exempt
Property Taxes Increased Dude! I rent.

So!

Never one to bitch without offering a solution, here is what we need to do:

  • Actually limit federal and state spending. Cut agency staff and eliminate costly programs which do not perform. Insure each agency has a performance metric upon which future funding is based.
  • Stop adding new entitlement classes to existing entitlements of Medicare and Social Security. Take a close look at the implementation to insure that the program is not driving UP the cost of health care.
  • Eliminate tax deductions on corporate contributions for employee health care.
  • Increase the Fed Rate by 3 full points. The market will take a dive. So the next day …
  • Announce the elimination of the AMT (and follow through) and make a permanent tax rate of 10% ($20,000 < Income < $250,000) and 22% (Income > $250,000).
  • Completely eliminate capital gains tax.
  • Eliminate corporate income tax. (This is just another tax on the consumer , since it’s passed through).

Basically, fix the tax problem and all other problems will fall into line. There is a reason why formerly Communist countries have gone to flat taxes and low rates.

This article is the first in a series I am going to be writing which focus on a common topic. The fact the Virginia sucks. Having spent a good part of my childhood in Virginia, and having completed my undergraduate education in the state… I’m sorry the commonwealth… which styles itself “the mother of presidents”, I have an intimate knowledge of the depths to which that state is willing to plumb. In describing many of these to one of my office mates, he came up with the best explanation for all of Virginia’s problems I have ever heard: “Virginia sucks”.

I’ll leave the general explanation for another article and cover here just one particular way in which Virginia sucks: Its tax law.

Unlike more civilized states, Virginia feels that taxation is not a process of citizens funding the government, but rather the natural exercise of an entitlement the state has with respect to your money. Evidently if any mistake is made during the process of taxation, no matter who is at fault, Virginia shakes down the tax payer for more money. Here are some of the more egregious portions of the law in question:


  • YOU owe more money if the government mailed your bill to the wrong address — What one assumes this portion of the tax law (enacted in the 1981-82 Report of the Attorney General 393, March 25, 1982) is attempting to account for is when a false address is given by the taxpayer. However this portion of the code also applies if the Treasurer has the correct address, and failed to properly mail the bill. I ran into this particular clause myself once. In my case the treasurer’s office actually had the correct address, but had transcribed the address wrong when it was forwarded to the billing department. So I ended up owing penalty fees because of mistakes Virginia made, even though the treasurer’s office admitted the mistake was theirs. To top matters off, it was a special tax assessed to new residents of the county, whose due date was not publicized outside of the mailed bills. Good to know the taxpayer exists as the cash cow of the state.
  • YOU owe more money if the government lies to you, or misrepresents the tax law — According to portions of the tax code enacted in the 1981-82 Report of the Attorney General 350, May 13, 1982, if a taxpayer receives erroneous information from a government official, whether in writing, from personal conversation, or over the phone, the taxpayer is still responsible for the correct tax amount.
  • YOU owe more money if the government billed you for the wrong amount — This is perhaps the worst of the bunch (enacted in the 1986-87 Report of the Attorney General 321, July 31, 1986). It doesn’t matter to the state of Virginia that you payed the bill they mailed you, if they billed you for an incorrect amount, you owe penalties. Given the fact that your owed taxes changes from year to year due to assessment changes, tax relief, and new taxes, it is nearly impossible for an individual to figure out their property taxes, car taxes, and other fees. So why are the taxpayers responsible for the mistakes of the government during billing?

Given that Virginia Code Section 58.1-9 and 58.1-3916 prohibits the waiving of any fees, interest, or penalties, it quickly becomes obvious how stupid, evil, and greedy Virginia tax law is. The law itself is designed to screw over the taxpayer whenever mistakes are made, even though the taxpayer had no control over these mistakes. This sort of attitude and law stems from a deep disrespect of the taxpayer, and an attitude that the government is simply entitled to these taxes, regardless of its own incompetence.

Any decent state would include provisions absolving its tax payers of liability in the case of mistakes made by the government. Unfortunately, Virginia is not a decent state. I would ask how any state could act in such an evil and greedy fashion, but the answer is obvious. Because Virginia sucks.

-Angry Midwesterner


I have made mention before of the disparities between the Congressional Budget Office’s (CBO) Joint Committee on Taxation (JCT) and the Office of Management and Budget (OMB). The JCT is a body which scores tax policy for the impact of changes to the taxation system. Needless to say they are a very busy group. Unfortunately they are attached to the CBO, the unfortunate part being that first initial—Congressional. It has become more and more clear that the financial obfuscation of “fair” and “balanced” tax policy, the “cost” of programs, and the necessity to “offset” costs with increases in tax, is really a cover for providing to the Congress-critters with a financial toybox—one which allows them to dispense their largess in return for re-election, secular power and the enhancement of their self-importance.

How can one be sure of this? The JCT has always utilized static models of taxation. These models implicitly assume that taxpayer behavior is held constant when evaluating changes to the tax system. Thus Laffer and other economists who point out, correctly, that taxation policy drives consumer and corporate behavior, are completely ignored. This static model is the same one that predicted larger than actual deficits on the basis of the Bush tax cuts. The static model was completely wrong in predicting the impact of these cuts on the economy, both nationally and to the States . Any reasonable person should be able to connect their microbehavior in the face of tax policy with the macro results of that same policy. How many of us sock a few extra bucks into the ole IRA account in January? This is clearly policy driven behavior.

The problem, of course, is that the dependent variable is related to the rate of change of that dependent variable—i.e. the equation is not linear, it folds upon itself. In all probablity, there are many equations like this all coupled together relating tax impact with rax rates. Now, as some know (aeronautical engineers for instance), this is not unlike the basic equations governing flight. Writing a flight model for the simulation of an aircraft basically involves solving twenty or so non-linear second and third order differential equations. So people know how to do these things. And even when the coefficients are not evident, Kalman filters allow these to be derived. And the result is that aircraft simulators are so refined that when the simulation differs from the aircraft performance, they check the aircraft to see what went wrong.

Over at the White House, the OMB economists apparently get this. In all fairness, I expect that the JCT people get this also, but they have to work for those aforementioned Congress-critters. Either they can’t explain it to the Senators and Representatives because it is beyond 8th grade math, or they can’t explain it because they would have a first-hand view of the effect of unemployment financial impact.

Bush has proposed to restructure the $250 billion of annual federal tax subsidies on employer-sponsored health insurance by treating it as taxable income and then capping a deduction at $15,000 per family. This would provide incentive funding for uninsured and low income workers. The Democrats have declared it to be a non-starter and Congress refused to even consider the program. The JCT has scored the plan and estimated that it would save over $333 billion over the next ten years (The first JCT estimate was $526 billion.) The revenue windfall would be enough to fund millions of $5,000 healthcare vouchers to the low income and underemployed.

So why do the Democrats who support universal health care attack such a plan? Maybe because it’s a Bush plan? The OMB economists suggest that the program will save 3% or $60 billion per year on heath care expenses (Close to the JCT original estimate). The plan would equalize the tax treatment of heath care funding at the basic level and create more accountability by asking consumers to actually pay attention to what their plans cost. Estimates are that an additional 10 million people would obtain new heath insurance under the plan. This would be a positive first step in rationalizing the current health care system.

But under the current Congress, JCT has suggested that modifying the taxation policy in this manner would have no impact on health care consumption. Congress refuses to investigate the plan. So based on such denial of the obvious, what agenda exists to support this behavior. Perhaps it is that the plan would allow the American people and not the government to control their health care spending. Perhaps it’s those fat campaign contributions from HMOs and drug conglomerates. Whatever the underlying reason, clearly when their own JCT predicts a cost savings using their static model, the basis for “fair” and “balanced” tax impact is not the issue. Or…

Power corrupts, and absolute power is actually pretty neat..

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