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Archive for August 9th, 2010

Caroline Baum of Bloomberg has an excellent column explaining why soak-the-rich taxes don’t work. Simply stated, wealthy people are not like you and me. They have tremendous control over the timing, composition, and level of their income. When the rich are hit with higher tax rates, they adjust their behavior and protect themselves by reducing the amount of taxable income they earn and/or report to the IRS. That usually causes collateral damage for the economy, but the class-warfare crowd is either oblivious or uncaring about real-world effects.

Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government? “Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.” …The rich have the luxury to respond to incentives, to opt for more work and less leisure when the return on work is greater. They are motivated to take risks, maybe start a business, invent something, and get even richer while giving others the opportunity, through hiring, to do the same. The opposite is true for low-income workers. When the government raises taxes, someone struggling to put food on the table for his family may have to go out and get a second job to maintain his level of take-home pay. For this socio-economic group, higher taxes translate to more work. To ignore evidence that the rich behave differently is silly. The government can’t get more blood from a stone, yet it keeps trying. Instead of demagoguing tax cuts for the rich, Democrats should try embracing them for a change. …Academics are busy churning out articles claiming tax cuts for the rich deliver less bang for the buck because the rich save more of the money than the poor. That’s true. It also misses the point. The goal isn’t spending, or distributing other people’s money to create “aggregate demand.” That’s a wealth transfer, not a net stimulus. (Fiscal policy gets its punch from monetary policy, from the increase in the money supply to pay for the spending.) The goal should be to incentivize individuals to work hard, save and invest in the future. It’s about growing the pie. Sound familiar? We’re right back to square one. I, for one, would like to see the debate shift from class warfare over tax rates and targeted tax relief to tax reform. Either scrap the tax code and introduce a simple flat tax with no deductions, or scrap the IRS and move to a consumption tax. If you want to get money out of politics, there’s only one way to do it. Take the tax code out of Congress’s hands.

Baum’s column touches on most of the key issues, but she doesn’t address the political economy of class-warfare taxation. In this video on soak-the-rich tax policy, I provide five reasons why high tax rates are misguided – including the oft-overlooked point that politicians impose punitive taxes on the rich as a prelude to hitting the rest of us with higher taxes.

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I’m not a lawyer, so I don’t pretend any expertise on the legal issues, but this brewing controversy about prison policy in South Carolina strikes me as a case of political correctness run amok. The state separates prisoners with AIDS and sends them to a separate facility that has specialized medical treatment. This policy also protects uninfected prisoners from exposure due to rape. I suppose one could argue that this is a form of quarantine, but all prisoners – by definition – are being quarantined, so that hardly seems to be a compelling argument. A former staffer with the Department of Justice’s Civil Rights division has a column in the Washington Examiner, which is excerpted below.

Two unpleasant topics of conversation most of us avoid are the epidemic of HIV/AIDS among prison inmates and a variety of sometimes violent events resulting in transmission of the disease. Some states long ago implemented policies to protect the uninfected part of the prison population while providing exceptional medical treatment and counseling to the infected population. In South Carolina, it has worked so well since 1998 that there has only been a single transmission of HIV/AIDS to a noninfected prisoner. All that may change, however, thanks to a threat from Eric Holder’s Justice Department. South Carolina received a letter from the now-infamous Civil Rights Division that the policy of keeping infected inmates at a designated facility, instead of scattered across the state in the general prison population, may unfairly stigmatize infected prisoners. To the Obama political appointees in the Civil Rights Division, this constitutes discrimination under the Americans With Disabilities Act. …Justice raises three primary objections to this effective and humane approach. First, it prevents infected prisoners “from participating in activities and jobs of their choosing.” Leave it to bureaucrats in Washington to concoct the grievance that prisoners have choices when it comes to activities in the first place. Second, DOJ claims the South Carolina program is unconstitutional, something the courts have repeatedly rejected. Once again we see the rule of law falling by the wayside when it comes to decisions of this Civil Rights Division. This is the same Civil Rights Division that was sanctioned more than $4 million during the Clinton administration for bringing cases as frivolous as the one against South Carolina prisons. Third, with all the pragmatism of a sociology lecture at Harvard, DOJ argues that the separation of the HIV/AIDS prisoners “stigmatizes” the prisoners. Ozmint responds, “Prison is a voluntary activity; breaking the law, earning a criminal record, and wearing ‘state issue,’ all stigmatize. Since one purpose of prison is punishment, this stigmatization is somewhat intentional.” How refreshing.

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You know that bureaucrats are getting wildly overcompensated if even the New York Times is publishing articles about the problem. The article notes that there is a nationwide problem, and then cites developments in Colorado, where lawmakers actually took a tiny step in the right direction by limiting cost-of-living adjustments for existing retirees. Not surprisingly, the bureaucrats are suing to overturn this reform.

There’s a class war coming to the world of government pensions. The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide. The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks. …Consider what’s going on in Colorado – and what is likely to unfold in other states and municipalities around the country. Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year. …this was apparently the first time that state legislators had forced current retirees to share the pain. Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.” But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity. …”All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.” Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

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