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Archive for the ‘Media Bias’ Category

Given the repeated failures of Keynesian economic policy, both in America and around the world, you would think the theory would be discredited.

Or at least be treated with considerable skepticism by anyone with rudimentary knowledge of economic affairs.

Apparently financial journalists aren’t very familiar with real-world evidence.

Here are some excerpts from a news report in the Wall Street Journal.

The economy was supposed to get a lift this year from higher government spending enacted in 2018, but so far much of that stimulus hasn’t shown up, puzzling economists. Federal dollars contributed significantly less to gross domestic product in early 2019 than what economic forecasters had predicted after Congress reached a two-year budget deal to boost government spending. …Spending by consumers and businesses are the most important drivers of economic growth, but in recent years, government outlays have played a bigger role in supporting the economy.

The lack of “stimulus” wasn’t puzzling to all economists, just the ones who still believe in the perpetual motion machine of Keynesian economics.

Maybe the reporter, Kate Davidson, should have made a few more phone calls.

Especially, for instance, to the people who correctly analyzed the failure of Obama’s so-called stimulus.

With any luck, she would have learned not to put the cart before the horse. Spending by consumers and businesses is a consequence of a strong economy, not a “driver.”

Another problem with the article is that she also falls for the fallacy of GDP statistics.

Economists are now wondering whether government spending will catch up to boost the economy later in the year… If government spending were to catch up in the second quarter, it would add 1.6 percentage points to GDP growth that quarter. …The 2018 bipartisan budget deal provided nearly $300 billion more for federal spending in fiscal years 2018 and 2019 above spending limits set in 2011.

The government’s numbers for gross domestic product are a measure of how national income is allocated.

If more of our income is diverted to Washington, that doesn’t mean there’s more of it. It simply means that less of our income is available for private uses.

That’s why gross domestic income is a preferable number. It shows the ways – wages and salaries, small business income, corporate profits, etc – that we earn our national income.

Last but not least, I can’t resist commenting on these two additional sentences, both of which cry out for correction.

Most economists expect separate stimulus provided by the 2017 tax cuts to continue fading this year. …And they must raise the federal borrowing limit this fall to avoid defaulting on the government’s debt.

Sigh.

Ms. Davidson applied misguided Keynesian analysis to the 2017 tax cut.

The accurate way to analyze changes in tax policy is to measure changes in marginal tax rates on productive behavior. Using that correct approach, the pro-growth impact grows over time rather than dissipating.

And she also applied misguided analysis to the upcoming vote over the debt limit.

If the limit isn’t increased, the government is forced to immediately operate on a money-in/money-out basis (i.e. a balanced budget requirement). But since revenues are far greater than interest payments on the debt, there would be plenty of revenue available to fulfill obligations to bondholders. A default would only occur if the Treasury Department deliberately made that choice.

Needless to say, that ain’t gonna happen.

The bottom line is that – at best – Keynesian spending can temporarily boost a nation’s level of consumption, but economic policy should instead focus on increasing production and income.

P.S. If you want to enjoy some Keynesian-themed humor, click here.

P.P.S. If you’re a glutton for punishment, you can watch my 11-year old video on Keynesian economics.

P.P.P.S. Sadly, the article was completely correct about the huge spending increases that Trump and Congress approved when the spending caps were busted (again) in 2018.

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There’s a long and sordid history of people in Western nations acting as dupes and apologists for communism.

This is especially the case with the wretchedly impoverished totalitarian outpost 90 miles south of Florida.

Based on what he wrote for the opinion pages of the New York Times, Nicholas Kristof belongs on that list of “useful idiots.”

Cuba…in health care…does an impressive job that the United States could learn from. …an American infant is, by official statistics, almost 50 percent more likely to die than a Cuban infant. By my calculations, that means that 7,500 American kids die each year because we don’t have as good an infant mortality rate as Cuba reports. …a major strength of the Cuban system is that it assures universal access. Cuba has the Medicare for All that many Americans dream about. …It’s also notable that Cuba achieves excellent health outcomes even though the American trade and financial embargo… Cuba overflows with doctors — it has three times as many per capita as the United States… Outsiders mostly say they admire the Cuban health system. The World Health Organization has praised it, and Ban Ki-moon, the former United Nations secretary general, described it as “a model for many countries.”

Kristof admits in his piece that there are critics who don’t believe the regime’s data, but it’s clear he doesn’t take their concerns seriously.

And he definitely doesn’t share their data. So lets take a close look at the facts that didn’t appear in Kristof’s column.

My first recommendation is to watch Johan Norberg’s video on the real truth about Cuba’s infant mortality.

But there’s so much more.

Jay Nordlinger authored the most comprehensive takedown of Cuba’s decrepit system back in 2007. Here are some of the highlights.

The Left has always had a deep psychological need to believe in the myth of Cuban health care. On that island, as everywhere else, Communism has turned out to be a disaster: economic, physical, and moral. Not only have persecution, torture, and murder been routine, there is nothing material to show for it. The Leninist rationalization was, “You have to break some eggs to make an omelet.” Orwell memorably replied, “Where’s the omelet?” There is never an omelet. …there is excellent health care on Cuba — just not for ordinary Cubans. …there is not just one system, or even two: There are three. The first is for foreigners who come to Cuba specifically for medical care. This is known as “medical tourism.” The tourists pay in hard currency… The second health-care system is for Cuban elites — the Party, the military, official artists and writers, and so on. In the Soviet Union, these people were called the “nomenklatura.” And their system, like the one for medical tourists, is top-notch. Then there is the real Cuban system, the one that ordinary people must use — and it is wretched. Testimony and documentation on the subject are vast. Hospitals and clinics are crumbling. Conditions are so unsanitary, patients may be better off at home, whatever home is. If they do have to go to the hospital, they must bring their own bedsheets, soap, towels, food, light bulbs — even toilet paper. And basic medications are scarce. …The equipment that doctors have to work with is either antiquated or nonexistent. Doctors have been known to reuse latex gloves — there is no choice. …So deplorable is the state of health care in Cuba that old-fashioned diseases are back with a vengeance. These include tuberculosis, leprosy, and typhoid fever. And dengue, another fever, is a particular menace.

Wow, I guess shortages extend well beyond toilet paper.

Next we have some very sobering data from a 2004 article in Canada’s National Post.

…a small bottle of tetracycline costs US$5 and a tube of cortisone cream will set you back as much as US$25. But neither are available at the local pharmacy, which is neat and spotless, but stocks almost nothing. Even the most common pharmaceutical items, such as Aspirin and rubbing alcohol, are conspicuously absent. …Antibiotics, one of the most valuable commodities on the cash-strapped Communist island, are in extremely short supply and available only on the black market. Aspirin can be purchased only at government-run dollar stores, which carry common medications at a huge markup in U.S. dollars. This puts them out of reach of most Cubans, who are paid little and in pesos. Their average wage is 300 pesos per month, about $12. …tourist hospitals in Cuba are well-stocked with the latest equipment and imported medicines, said a Cuban pediatrician, who did not want to be identified. …”Tourists have everything they need,… But for Cubans, it’s different. Unless you work with tourists or have a relative in Miami sending you money, you will not be able to get what you need if you are sick in Cuba. As a doctor, I find it disgusting.”

And here’s some scholarly research from Katherine Hirschfeld at the University of Oklahoma (h/t: Scott Johnson).

…the Cuban government continues to respond to international criticism of its human rights record by citing…praise for its achievements in health and medicine…the unequivocally positive descriptions of the Cuban health care system in the social science literature are somewhat misleading. In the late 1990s, I conducted over nine months of qualitative ethnographic and archival research in Cuba. During that time I shadowed physicians in family health clinics, conducted formal and informal interviews with a number of health professionals, lived in local communities, and sought to participate in everyday life as much as possible. Throughout the course of this research, I found a number of discrepancies between the way the Cuban health care system has been described in the scholarly literature, and the way it appears to be described and experienced by Cubans themselves. …After just a few months of research, …it became increasingly obvious that many Cubans did not appear to have a very positive view of the health care system themselves. A number of people complained to me informally that their doctors were unhelpful, that the best clinics and hospitals only served political elites and that scarce medical supplies were often stolen from hospitals and sold on the black market. Further criticisms were leveled at the politicization of medical care… Public criticism of the government is a crime in Cuba, and penalties are severe. Formally eliciting critical narratives about health care would be viewed as a criminal act both for me as a researcher, and for people who spoke openly with me. …One of the most readily apparent problems with the health care system in Cuba is the severe shortage of medicines, equipment, and other supplies. …Many Cubans (including a number of health professionals) also had serious complaints about the intrusion of politics into medical treatment and health care decision-making.

Three academics at Texas Tech University also found very troubling data when they investigated the nation’s health system (h/t: David Henderson).

With 11.1% of GDP dedicated to health care and 0.8% of the population working as physicians, a substantial amount of resources is directed towards reducing infant mortality and increasing longevity. An economy with centralized economic planning by government like that of Cuba can force more resources into an industry than its population might desire in order to achieve improved outcomes in that industry at the expense of other goods and services the population might more highly desire. …Physicians are given health outcome targets to meet or face penalties. This provides incentives to manipulate data. Take Cuba’s much praised infant mortality rate for example. In most countries, the ratio of the numbers of neonatal deaths and late fetal deaths stay within a certain range of each other as they have many common causes and determinants. …Cuba, with a ratio of 6, was a clear outlier. This skewed ratio is evidence that physicians likely reclassified early neonatal deaths as late fetal deaths, thus deflating the infant mortality statistics and propping up life expectancy. Cuban doctors were re-categorizing neonatal deaths as late fetal deaths in order for doctors to meet government targets for infant mortality. …Physicians often perform abortions without clear consent of the mother, raising serious issues of medical ethics, when ultrasound reveals fetal abnormalities because ‘otherwise it might raise the infant mortality rate’. …The role of Cuban economic and political oppression in coercing ‘good’ health outcomes merits further study.

The bottom line is that Cuba is a hellhole and statistics from a repressive regime can’t be trusted.

Though the real message of today’s column is that we should be revolted by people who are willing to be dupes for totalitarianism.

And I can understand why people willing to debase themselves in that way are so sensitive to criticism.

P.S. The New York Times has a pathetic history of covering up for the crimes of communism, most notably Walter Duranty, who was given a Pulitzer Prize in 1932 even though he despicably lied in his reports to promote Stalin’s horrid regime. He even covered up Stalin’s holocaust of the Ukrainian people. Even though Duranty’s evil actions are now public knowledge, the Pulitzer Prize Board has not revoked the award. The New York Times, to its credit, at least has acknowledged that Duranty lied to promote Stalin’s brutal dictatorship. One wonders if the newspaper eventually will apologize for Kristof.

P.P.S. I’m also not impressed that a former Secretary General of the U.N. endorsed Cuba’s health care system. After all, it was an official from the U.N. who praised the lack of obesity among the starving people of North Korea.

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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

But all these instances of intentional and unintentional bias are trivial compared to our next example.

The New York Times has gone above and beyond conventional media bias with a video entitled, “How Capitalism Ruined China’s Health Care System.”

Here’s the part that caused my jaw to drop.

After the sad opening story about the guy with the sick mother, there’s a section from 1:33-2:27 that makes two observations that basically show the premise of the video is totally wrong.

  • First, it points out (from 1:33-1:42) that there is a universal, government-run health system that ostensibly covers the guy’s mother, so her unfortunate status is yet another example that coverage in a government-run healthcare system is not the same as treatment.
  • Second, it points out (from 2:05-2:27) that life expectancy soared once the communist party relaxed its grip on the economy and allowed some liberalization, which would seem to be powerful evidence that capitalism leads to better health outcomes.

These are astounding mistakes.

But it gets worse. Sarah Lilly, who lives in China, debunked the rest of the video in a column for FEE.

The New York Times…attempts to blame capitalism for the many problems in China’s health care system. …As a resident of China and a recipient of outstanding private health care here, I was confused as to why the Times would show us the horrors of a capitalist system without actually visiting a private health care facility. …All of the horrors depicted in the high-quality video—the long lines, the scalping, and the hospital fights—occurred at government-run health care facilities. …At the very least, failing to feature a single private medical facility while blaming capitalism for the dysfunction of China’s public health system is intellectually dishonest.

She points out that the big-picture analysis in the video is wrong.

In the video, the Times praises Chairman Mao’s introduction of “free” health care and claims that when capitalism was introduced into the country, the state retreated and care was no longer free. Neither statement is true. First, health care was never free; it was paid for by tax revenues. Second, the state never retreated; rather, its regulatory apparatus became vaster and even more invasive. Out of sheer necessity, China allowed for the creation of private hospitals to ease the burden of the country’s heavily bureaucratic and deteriorating health care system.

And she also explains that the details of the video are wrong.

The Times video depicts the ungodly long line most Chinese face to see a physician. …It’s an appalling scene. …There’s just one problem. The Shanghai Cancer Center is a public hospital, not a private one. The long lines, scalpers, bribes, and physical fights with hospital staff—all of these exclusively happen in the public, communist, government-run hospitals. …In an egregious bit of sleight-of-hand, the Grey Lady asserts that capitalism is ruining Chinese health care while presenting us with a hospital where capitalism is not practiced.

To be fair, we get the same type of mistake when journalists look at the flaws in the American health system. They blame capitalism when the problems of ever-higher prices and uneven coverage are the consequences of government intervention.

P.S. My columns about sloppy bias at the New York Times don’t include Paul Krugman’s writings. Debunking those mistakes requires several different collections.

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I don’t focus much on media bias because journalists generally aren’t dishonest. Instead, they choose which stories to highlight or downplay based on what advances their political agenda. Though every so often I’ll highlight an example of where bias leads to an egregious (maybe even deliberately dishonest) mistake.

Now we have an addition to that collection from a WonkBlog column in the Washington Post. The piece starts with an accurate observation that the tax plan on Capitol Hill isn’t a long-run tax cut.

Senate rules require the Tax Cuts and Jobs Act not to add to the federal deficit after 10 years. …The bill aims to cut corporate taxes in perpetuity…but they actually need to raise money to offset the permanent corporate tax reduction.

Yes, as I wrote two weeks ago, the long-run tax cuts have to be offset by long-run revenue increases. So that part of the column is fine.

We then get this rather dubious assertion.

Republicans are paying for a permanent cut for corporations with an under-the-radar tax increase on individuals.

In part, it’s a dodgy claim because there are provisions in the bill that collect more revenue from companies, such as the partial loss of interest deductibility and various base erosion rules. So if he wanted to be accurate, the author should have begun that sentence with “Republicans are partially paying for…”

But that’s only part of the problem. As you can see from this next excerpt, he cites a former Democrat staffer and doubles down on the allegation that individual taxpayers will be coughing up more money to Uncle Sam because of the legislation.

This chart, playing off what the Senate’s former top tax aide and New York University professor Lily Batchelder pointed out on Twitter on Friday evening, makes vividly clear where Republicans ultimately raise that money. …we know it’s individual taxpayers who ultimately bear the cost of the tax bill.

And here’s the chart that ostensibly shows that you and me are going to pay more money so evil corporations can enjoy a tax cut.

Notice, however, the part I circled in green. It shows that Republicans are repealing Obamacare’s individual mandate as part of their tax reform plan, and it also shows that repeal has budgetary effects.

So how is this a tax increase (the pink portion of the bar chart), as the Washington Post wants us to believe?

Needless to say, the honest answer is that it isn’t a tax hike. Getting rid of the mandate means people won’t get “fined” by the IRS if they choose not to buy health insurance. If anything, that should count as a tax cut.

But that’s not what’s represented by the pink part of the bar chart. Instead, it shows that when you get rid of the mandate and consumers choose not to get Obamacare policies, that automatically means that insurance companies will get fewer subsidies from Uncle Sam (getting access to that cash was one of the reasons the big insurance companies lobbied for Obamacare).

In other words, the chart actually is showing that corporate rate reduction is partially financed by a reduction in spending, which is a win-win from my perspective.

By the way, you don’t have to believe me. On page 9 of the Joint Committee on Taxation’s revenue estimate (which presumably will be posted on the JCT website at some point), you find this footnote about the “outlay effect” of repealing the mandate.

At the risk of stating the obvious, an “outlay effect” is when a change in law causes a shift in government spending. That’s what’s happening, not a tax increase on individuals.

By the way, the author sort of admits this is true in a passage buried near the bottom of the column.

…a number of analysts argue that it’s wrong to consider the loss of insurance related to the end of the ACA mandate a tax increase, because it reflects individuals’ choice not to get insurance.

That’s a pathetic attempt at justifying a dishonest article.

Here’s the bottom line.

  1. Individuals will be paying less money to the IRS because of this provision, not more.
  2. The fiscal impact of the provision is less spending, not more tax revenue.

Sadly, most readers will have no idea that they were deliberately misled.

P.S. The “alternative inflation measure” in the bill (the red portion of the bar chart) arguably is a tax increase. Or, for those who persuasively argue that it’s a more accurate measure, it’s a provision that will result in individual taxpayers sending more money to Uncle Sam compared to current law since the new measure (chained CPI) will result in smaller inflation adjustments to tax brackets and the standard deduction.

P.P.S. If repealing just one small piece of Obamacare will save about $300 billion over the next decade, imagine how much money we could save if the entire law was repealed.

P.P.P.S. Since I’ve previously explained how politicians use alchemy to turn spending increases into tax cuts, I guess it’s not surprising that some folks are using the same magic to turn spending cuts into tax increases.

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While it’s quite clear that the establishment media leans to the left, I don’t get too agitated about bias. Though every so often I can’t resist the temptation to comment when I come across egregious examples on issues such as poverty, guns, Greece, jobs, taxes, and education.

The bias extends to politics, of course, though the only time I felt compelled to comment was when ABC News rushed to imply that the Tea Party somehow was connected to a mass shooting in Colorado.

Well, I now feel compelled to comment again. But this example goes beyond bias and should be characterized as blatant and disgusting dishonesty. The hacks at Time took a quote from Charles Koch and then used selective editing to completely misrepresent what he actually said.

In a just world, the person who engaged in this bit of mendacity would lose his or her job and never again work in journalism. But I would hold my breath waiting for that to happen.

But let’s set aside the issue of media bias and dishonesty.

I want to highlight what Mr. Koch said about GDP. He expressed skepticism of that measure because it doesn’t distinguish between good expenditures and bad expenditures.

That’s one of the reasons why I prefer gross domestic income instead of gross domestic product. In simple terms, GDI measures how our national income is generated and GDP measures how it is allocated.

As the Bureau of Economic Analysis explains, the two numbers are basically different sides of the same coin.

In national economic accounting, GDP and GDI are conceptually equal. GDP measures overall economic activity by final expenditures, and GDI measures it by the incomes generated from producing GDP. In practice, GDP and GDI differ because they are constructed using different sources of information. …when one looks at annual data – where the timing differences are less important, the correlation between GDP and GDI is 0.97.

That correlation shouldn’t be a surprise. Indeed, over a longer period of time, the two numbers should be identical.

Both go up when the economy is doing well, and both go down when there is a recession.

But I want to make a more subtle point.

The reason I like GDI over GDP is because one the former is more likely to lead people to support good policy while the latter is more likely to lead people in the direction of bad policy.

Here’s some of what I wrote on the topic back in 2013.

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub. Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable? The same principle is true – or should be true – for a country. That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income. …We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

And, on a related note, you can back to 2009 for a column I wrote explaining that consumer spending is a reflection of a strong economy, not the cause of a  strong economy.

And this video ties everything together by debunking the Keynesian argument that politicians should focus on goosing consumer spending.

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As I peruse the news, I periodically see headlines that are misleading in some fashion.

And if the headline is sufficiently off-key or bizarre, I feel compelled to grouse.

Now I have a new example, though I’m not sure whether to call it dishonest or clueless.

The EU Observer has a brief report that poverty has reached record levels in Germany.

Despite a booming economy, 12.9 million people in Germany were living below the poverty line in 2015, the Equal Welfare Association reported on Thursday. Based on figures from the Federal Statistical Office the alliance found a record high poverty rate of 15.7 percent in 2015.

By the way, I can’t resist pointing out that there is no “booming economy” in Germany. Growth in 2016 was only 1.9 percent.

Yes, that’s decent by European standards of stagnation and decline, but it’s far from impressive in any other context.

But I’m digressing. Let’s get back to the main point of today’s column.

As you can see from the story’s headline, the implication is that lots of people are left behind and mired in deprivation even though the economy is moving forward.

But there’s a problem with both the story and the headline.

If you read carefully, it turns out that both the story (and the study that triggered the story) have nothing to do with poverty.

No link at all. None. Zero. Nada. Zilch.

I’m not joking. There’s no estimate of the number of people below some measure of a German poverty line. There’s no calculation of any sort about living standards. Instead, this story (and the underlying report) are about the distribution of income.

…people [are] defined as poor when living on an income less than 60 percent of that of the median German household.

One might be tempted at this point to dismiss this as a bit of journalistic sloppiness. Indeed, one might even conclude that this is a story about nothing.

After all, noting that some people are below 60 percent of the median income level is about as newsworthy as a report saying that half of people are above average and half are below average.

But there actually is a story here. Though it’s not about poverty. Instead, it’s about an ongoing statist campaign to redefine poverty to mean unequal distribution of income.

I’m not joking. For instance, the bureaucrats at the Paris-based Organization for Economic Cooperation and Development actually put out a study claiming that there was more poverty in the United States than in nations such as Greece, Portugal, and Turkey.

How could they make such a preposterous claim? Easy, the OECD bureaucrats didn’t measure poverty. Instead, they concocted a measure of the degree to which various countries are close to the left-wing dream of equal incomes.

And the Obama Administration also tried to manipulate poverty statistics in the United States in hopes of pushing this statist agenda of coerced equality.

Robert Rector of the Heritage Foundation wrote about what Obama tried to do.

…the Obama administration…measure, which has little or nothing to do with actual poverty, will serve as the propaganda tool in Obama’s endless quest to “spread the wealth.” …The current poverty measure counts absolute purchasing power — how much steak and potatoes you can buy. The new measure will count comparative purchasing power — how much steak and potatoes you can buy relative to other people. …In other words, Obama will employ a statistical trick to ensure that “the poor will always be with you,” no matter how much better off they get in absolute terms. …The weird new poverty measure will produce very odd results. For example, if the real income of every single American were to magically triple over night, the new poverty measure would show there had been no drop in “poverty,” because the poverty income threshold would also triple. …Another paradox of the new poverty measure is that countries such as Bangladesh and Albania will have lower poverty rates than the United States, even though the actual living conditions in those countries are extremely bad.

Even moderates such as Robert Samuelson recognized that Obama’s agenda was absurd. Here is some of what he wrote.

…the new definition has strange consequences. Suppose that all Americans doubled their incomes tomorrow, and suppose that their spending on food, clothing, housing and utilities also doubled. That would seem to signify less poverty — but not by the new poverty measure. It wouldn’t decline, because the poverty threshold would go up as spending went up. Many Americans would find this weird: People get richer but “poverty” stays stuck.

To put this all in context, the left isn’t merely motivated by a desire to exaggerate and misstate poverty. That simply the means to an end.

What they want is more redistribution and higher tax rates. The OECD openly admitted that was the goal in another report. Much as all the fixation about inequality in America is simply a tool to advocate bigger government.

P.S. Germany is an example of a rational welfare state. While the public sector is far too large, the country has enjoyed occasional periods of genuine spending restraint and German politicians wisely avoided a Keynesian spending binge during the last recession.

P.P.S. Though Germany also has its share of crazy government activity, including a big green-energy boondoggle. And lots of goofy actions, such as ticketing a one-armed man for have a bicycle with only one handlebar brake, taxing homeowners today for a street that was built beginning in the 1930s, making streetwalkers pay a tax by using parking meters, and spending 30 times as much to enforce a tax as is collected.

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Because of his support for big government, I don’t like Donald Trump. Indeed, I have such disdain for him (as well as Hillary Clinton) that I’ve arranged to be out of the country when the election takes place.

The establishment media, by contrast, is excited about the election and many journalists are doing everything possible to aid the election of Hillary Clinton. In some cases, their bias leads to them to make silly pronouncements on public policy in hopes of undermining Trump. Which irks me since I’m then in the unwanted position of accidentally being on the same side as “The Donald.”

For instance, some of Trump’s private tax data was leaked to the New York Times, which breathlessly reported that he had a huge loss in 1995, and that he presumably used that “net operating loss” (NOL) to offset income in future years.

As I pointed out in this interview, Trump did nothing wrong based on the information we now have. Nothing morally wrong. Nothing legally wrong. Nothing economically wrong.

All that people really need to know is that NOLs exist in the tax code because businesses sometimes lose money (the worst thing that happens to individuals, by contrast, is that we get laid off and have zero income). With NOLs, companies basically get a version of “income averaging” so that they’re taxed on their long-run net income (i.e., total profits minus total losses).

In other words, this is not a controversy. Or it shouldn’t be.

But if you don’t believe me, let’s peruse the pages of The Flat Tax, which was written by Alvin Rabushka and Robert Hall at Stanford University’s Hoover Institution and is considered the Bible for tax reformers.

Here’s what it says about business losses in Chapter 5.

Remember that self-employed persons fill out the business tax form just as a large corporation does. Business losses can be carried forward without limit to offset future profits (assuming your bank or rich relatives will keep lending you money). There is no such thing as a tax loss under the individual wage tax. You can’t reduce your compensation tax by generating business losses. Well-paid individuals who farm as a hobby or engage in other dubious sidelines to shelter their wages from the IRS had better enjoy their costly hobbies; the IRS will not give them any break under the flat tax.

And here’s the business postcard for the flat tax. As you can see, it’s a very simple system based on the common-sense notion that profits equal total receipts minus total expenses.

And it allows “carry-forward” of losses, which is just another term for a company being able to use NOLs in one year to offset profits in a subsequent year.

But it’s not just advocates of the flat tax how hold this view.

A news report for the Wall Street Journal notes that NOLs are very normal in the business world for the simple reason that companies sometimes lose money.

The tax treatment of losses, bound to become a subject of national debate, is a typically uncontroversial feature of the income-tax system. The government doesn’t pay net refunds when business owners lose money, but it lets taxpayers use those losses to smooth their tax payments as they make money. That reflects the fact that “the natural business cycle of a taxpayer may exceed 12 months,” according to a congressional report.

Megan McArdle of Bloomberg also comments on this make-believe controversy.

At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. …this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. …Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. The Times could have just as truthfully written that the provision was “particularly prized by America’s small businesses, farmers and authors,” many of whom depend on the NOL to ensure that they do not end up paying extraordinary marginal tax rates — possibly exceeding 100 percent — on income that may not fit itself neatly into the regular rotation of the earth around the sun.

I like how she zings the NYT for its biased treatment of the issue.

She also explains why the law allows NOLs and why businesses (including, presumably, Trump’s companies) would prefer to never be in a position to utilize them.

“If someone has a $20 million gain in one year and a $10 million loss in the second year, that person should be treated the same as someone who had $5 million in each of the two years,” says Alan Viard, a tax specialist at the American Enterprise Institute, who like all the other experts, seemed somewhat surprised that this was not obvious. “There are definitely tax provisions narrowly targeted to various industries that you could take issue with,” says Ron Kovacev, a tax partner at Steptoe and Johnson. “The NOL is not one of them.” …Losing $900 million dollars may save you $315 million or so on future or past taxes. But astute readers will have noticed that it is not actually smart financial strategy to lose $900 million in order to get out of paying $315 million to the IRS. Most of us would rather have the other $585 million than a tax bill of $0. …If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy.

In other words, Trump used NOLs, but he would have greatly preferred to avoid the big $916 million loss in the first place.

Ryan Ellis, writing for Forbes, doesn’t suffer fools gladly on this issue.

…political reporters don’t know a damned thing about taxes. …That ignorance was on display in vivid colors over the weekend. We were told that this tricky NOL was some sort of “loophole” that only super-rich bad guys like Donald Trump got to use. We were told that this relieved him of having to pay taxes for 18 years, a laughably arbitrary, made up number that is the tautological output of simple arithmetic and wild assumptions. …It’s not difficult to see how political reporters got played like a fiddle here. Most of them have never actually run a business, much less learned about the tax rules surrounding them.

I especially like that Ryan also nails the NYT for bias, in this case because the reporters used made-up number to imply that he didn’t pay tax for almost two decades.

And Ryan also notes that NOLs are very common (and were even used in 2015 by Trump’s opponent).

…a net operating loss is very common in businesses. As Alan Cole of the Tax Foundation pointed out this morning, about 1 million taxpayers had an NOL in 1995. It results from business deductions exceeding business income in a particular year. …Trump’s not the only presidential candidate this year who once had a big loss on his taxes. In 2015, the Clintons realized a capital loss of nearly $700,000. That will be available in perpetuity to offset capital gains they might incur. Unlike an NOL, a capital loss can slowly be used to offset other income, albeit at a slow $3000 per year net of any other gains offset.

Now that we’ve established that there’s nothing remotely scandalous about NOLs, let’s see whether there are any lessons we can from this kerfuffle.

Let’s return to the Wall Street Journal story cited earlier in this column.

Real-estate developers can generate losses more easily than other taxpayers. …Unlike investors in other businesses, they can use those losses to offset other income. …Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP, said…“Trump appears to have a perfect storm of allowable real-estate losses that can be offset against streams of income from salaries from his companies and royalty fees from the use of his name,” Mr. Skarlatos said. “Most taxpayers who have large real-estate losses don’t have such large steady streams of other ordinary income; they just have losses that may turn into profits in the future when they sell the real estate.”

This doesn’t tell us whether Trump actually did use his NOLs to offset other income, though I’m guessing the answer is yes. And as I speculated in the above interview, I wonder whether the losses were real losses or paper losses.

And others have suggested that Trump actually lost other people’s money and he was able to use their losses to offset some of his income.

I have no idea if that’s even possible, just as I have no idea whether his losses were real.

But I do know that a flat tax would put an end to any possible gamesmanship since it is a cash-flow system (which means it is based on actual transactions that take place, not whether companies use currency).

In a world with a flat tax, Trump would be allowed to “carry forward” losses, but only if they are real. And as explained above, he wouldn’t be able to use those losses to offset income that gets reported on the individual postcard.

So as I argued in the interview, let’s rip up the corrupt and destructive internal revenue code and copy the simple and fair flat tax that is used by Hong Kong.

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