Taxes – Not In My Backyard!

There is a lot of discussion about the renewal of the Bush tax cuts enacted in 2003.  This past week the Senate passed a bill to renew the tax rates for all those with less than $250K taxable (not gross) income – $200K if filing single.  The measure is unlikely to pass the Republican dominated House which wants the cuts extended for all taxpayers, including the wealthiest.

For many of us, the tax rate cuts started in 1987, not 2003, after the Tax Reform Act of 1986.  Below is a 100 year chart of historical tax rates for a married couple with two children with a gross income of $66,000 in inflation adjusted dollars (thanks to the Tax Foundation)  After the standard deduction and exemption allowances, this is approximately $40,000 in taxable income.  This is middle class income, slightly below the median for married couples.

As you can see, we have enjoyed comparatively low income tax rates for the past twenty-five years.  For the past ten years, we have been conducting two wars without paying for them.  The rich are not paying.  The middle are not paying.  When our parents and grandparents ran up huge debts fighting WW2 and recovering from the 1930s Depression, they increased taxes on the middle class and the rich to pay down the debt.  This generation, the children and grandchildren of that WW2 generation, decided they had a better idea – charge it!  After all, we have expenses that previous generations didn’t have – like our cable TV bill and internet bill and cell phone bill.  The WW2 generation also had bills that previous generations didn’t have – car, electrical and phone bills for services and products that their parents and grandparents didn’t have.  Did they use that as an excuse to reduce their taxes?  No.

We continue to argue over how much government services and programs we want.  We argue over how much to spend on defense.  We argue whether we want somebody (but not us, God forbid) to pay more in taxes.  While we argue, the Federal debt continues to climb.

GDP and Elections

“Bummer, dude!” may be what President Obama’s election campaign manager thought when the quarterly GDP figures were released this past Friday.  Second quarter growth clocked an anemic 1.5% annualized growth rate – a tepid pace – but one which was slightly above the market consensus of 1.2%.   This first estimate of quarterly GDP growth is often revised up or down 1/2% as more data comes in (BEA Source).  Second and third revisions to the GDP growth rate will follow in August and September, but pose a challenge for any re-election campaign.  What is the pace of this recovery?  It has been three years, or 12 quarters, since the official end of the recession in the 2nd quarter of 2009.  In that time, real or inflation adjusted GDP has grown 6.7%.  What has the been the real GDP growth rate of past recoveries?  Below is a comparison of the total GDP growth of past recoveries and the Administrations in office at the 3 year mark after a recession (Click to enlarge in separate tab)

At the 3 year milestone after the 1960-61 recession, President Johnson had been in office for just two months after the assassination of Kennedy in November 1963.    At mid recovery after the long recession of 1973 – 75, Carter took over the reins from President Ford, who had taken office after Nixon resigned over the Watergate scandal.  Likewise, President Clinton took office from the first President Bush near the middle of an ongoing recovery from the recession of 1990 – 91.  In addition to the disgrace of resignation, President Nixon never enjoyed three years without a recession and so does not make it on this chart.  President Johnson has the distinction of never having a recession during his tenure in office.

Although the media and the public like to pin the economic tail on the President, the House and Senate have much more to do with the economy than the President.  Bills originate in the House (primarily) and Senate. Presidents do not initiate legislation.  Below is that same chart showing the mix of House and Senate during each recovery since WW2.

We can’t say that the strongest recoveries are when the House and Senate are the same party as the President.  We might be able to say that recoveries are strongest when Democrats are in the House, but Democrats ruled the house, except for four years in the late forties and early fifties, from 1933 through 1994 – a period of almost sixty years! (Metric Mash)  This doesn’t leave much for comparison.  We can’t say that a mixed Congress of Democrats and Republicans produces a weak recovery.  What makes this recovery unique is that, for the first time since at least 1900, the House switched parties during an economic recovery (Congressional Research Service, NBER and Metric Mash).  In the 2010 elections, anger over the health care act helped fuel a newly established Tea Party which worked within, not outside, the Republican Party and helped that party gain a large number of seats to take the majority in the house.  If history is any guide, the American public can change direction in the House during a recession, after a recovery, but not during a recovery.  The recovery plans set in place by either party need a chance to work themselves out.  To interrupt those plans in midstream produces a stalling effect.

Do the weak economic figures doom Obama’s re-election?  Not so, according to 538.  Whoa!  What’s 538?  The answer is who’s 538. And the answer to that who? is Nate Silver, a statistician who developed a system for predicting the performance of baseball players.  His methods for analyzing baseball proved to be suprisingly accurate in predicting the 2008 and 2010 elections.  After his almost perfect predictions for the 2008 electoral races and the recipient of a few awards, the NY Times licensed Mr. Silver’s blog in 2010. 

You can find Mr. Silver’s take on what the latest GDP figures mean for the election here.  Mr. Silver also has an interesting article on the primary economic indicators he thinks have the most influence on voter’s choices.  You can bookmark his blog here.  

Health Care and the Supremes, Part 1

Sorry, no pictures or graphs this week 😉

A few weeks ago, the Supreme Court ruled on the constitutionality of the health care act.  26 states brought suit against the government, asserting that the Government had no constitutional authority to impose a penalty on people for not buying health insurance.  Regardless of the arguments for and against, many of us have a gut level aversion to the Federal Government, or a State Government, for that matter, forcing us to do something.  While living in Brooklyn in the early 70s, I knew two people who had left good jobs to take sporadic cash only jobs because they did not want to be forced to have their taxes pay for the Vietnam War, a war they – and many others – believed was immoral.  In my state, Colorado, there have been many who think that the state government has no right to force drivers to wear seat belts.  For those of you in the more crowded coastal states with better public transportation systems, driving in the western states is as much a necessity of living as eating. 

The Government argued that Congress had the power to impose an individual mandate to buy health insurance under the following authorities: 1) the power to regulate Commerce as found in Article 1, Section 8, Clause 3 of the Constitution; 2) the Necessary and Proper Clause (clause 18 of the same section); and 3) the taxing power in the Constitution.

Writing for a 5-4 majority, Chief Justice Roberts rejected the first argument, writing “Congress has never attempted to rely on that power [the constitutional power to regulate Commerce] to compel individuals not engaged in commerce to purchase an unwanted product.” (pg. 18 majority opinion) He asserts that the Constitutional grant of power to the Congress to regulate Commerce does not imply that the Congress can create Commerce.  On page 20, he writes “The individual mandate … does not regulate existing commercial activity.”  On pg. 24, Roberts writes “The Framers [of the Constitution] gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this understanding.”  In short, “regulate” does not mean “create” nor does it mean “compel.”

During oral arguments, Justices Roberts and Kennedy had repeatedly asked the government advocate for a limiting principle to Congress’ authority to regulate Commerce.  On page 21, Roberts makes an important distinction in the Wickard v Filburn case regarding a 1942 law that had the effect of regulating a farmer, Roscoe Filburn, growing wheat for his own consumption.  The Wickard decision, Roberts summarized,  upheld Congress’ authority to regulate the production of something, not the consumption of a product.  The individual mandate regulates the consumption of a product.  “Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.” (pg. 23) 

On page 25, Roberts rejects the Government’s oft repeated argument that individuals are inherently “active in the market for health care,” writing that any inactivity can be said to be participating in some arbitrary market; without any limiting distinction, the phrase has no constitutional significance. He writes “Our precedents recognize Congress’s power to regulate ‘class[es] of activities’…not classes of individuals, apart from any activity in which they are engaged.”  He finds that the individual mandate breaks precedent: “The individual mandate’s regulation of the uninsured as a class is, in fact, particularly divorced from any link to existing commercial activity.”  Who can regulate individuals?  The states alone have that power: “Any police power to regulate individuals as such, as opposed to their activities, remains vested in the States.”

Roberts rejected the government’s second argument that Congress has the authority to impose the individual mandate under the Necessary and Proper Clause as a regulatory mechanism associated with the existing economic activity of healthcare.  The Government argued that the mandate is an “integral part of a comprehensive scheme of economic regulation.”  Roberts reasserts previous precedents that the intention of this clause of the Constitution is to unequivocally grant Congress power which is incidental or instrumental in enacting the powers enumerated in the previous clauses of that section of the Constitution.  It does not give Congress new powers or enable Congress the ability to expand its power.

The Government’s third argument, a fallback position, was that the mandate was not “ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.”  Roberts cites previous precedents that “if a statute has two possible meanings, one of which violates the Constitution, courts should adopt the means that does not do so.”  On page 31, Roberts writes that “The most straightforward reading of the mandate is that it commands individuals to purchase insurance.”  However, he acknowledges the merits of the Government’s contention that the mandate “can be regarded as establishing a condition – not owning health insurance – that triggers a tax” and that the mandate “makes going without insurance just another thing the Government taxes, like buying gasoline or earning income.” (pg. 32) Roberts acknowledges that this interpretation of the mandate is not the most natural one, but cites previous precedent that “The question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.”

For the purposes of the Constitution, is the individual mandate a tax or an “assessable penalty?”  Roberts cites several previous laws in which Congress has shown that it regards a tax and a penalty as two separate entities. He quotes a previous decision, that of Drexel Furniture, which ruled that what distinguishes a penalty from a tax is whether an exaction or payment is punitive.  If so, then it is a penalty.  The tax imposed by the individual mandate is less than what it would cost someone to buy a policy, indicating that Congress had no intent to impose a punitive penalty. The individual mandate does not have a scienter requirement typically associated with a penalty; that an individual must have intent or knowledge that their action or inaction is against the law.  In addition, there is no criminal prosecution if someone does not pay the tax, another indication of Congress’ intention that the mandate is a tax.  In the law, there is no requirement to buy an insurance policy; there is only the imposition of a tax if you don’t buy a policy.  Roberts also cites an older precedent regarding the child labor law tax.  Even though the law called it a tax, the court held that, because it was very punitive, it was a penalty, regardless of what Congress called it.  Roberts is continuing to build on previous court decisions to reinforce the court’s policy that, although the court should regard the use of a particular word by Congress as intentional, Congress can not obfuscate the stated intentions of the entirety of a law by attaching a label to a piece of it.  On page 12 of the majority opinion, he writes “Congress cannot change whether an exaction is a tax or a penalty for constitutional purposes by describing it as one or the other.”

Did the Supreme Court even have the authority to hear this case at this time?  Did the 1867 Anti-Injunction Act prevent the court from hearing the case till someone actually paid the tax?  In finding that the individual mandate can be construed as a tax, Roberts distinguishes between a present tax and a future tax, justifying the Court’s authority to hear the case at this time. The Anti-Injunction Act was designed to prevent a state or any party from “restraining the assessment or collection of tax” (pg. 12 of majority opinion).  The tax will not go into effect for two years and no one will actually pay the tax for three years.  The suit that the 26 states have brought before the Supreme Court is not intended to delay the collection of this tax; therefore, Roberts rules that the Supreme Court can hear the case.

Although Justice Ginsburg was in the majority, she strongly dissented with Roberts arguments that the individual mandate was unconstitutional under the Commerce clause.  Hopefully, I’ll get some time to go into Ginsburg’s arguments as well as the dissenting opinions of Justices Scalia, Kennedy, Thomas and Alito.

June Labor Report and Plaques

On a recent vacation road trip, I enjoyed a number of tourist sites.  At Carlsbad Caverns in New Mexico, I learned that 2000 men with the CCC (Civilian Conservation Corp) built most of the visitor walkways and accomodations in the caverns between 1938 and 1942. Not only did the Caverns project provide enjoyment and a learning experience for me seventy years later, it provided work for a country still suffering through a long depression.  In Corpus Christi, I learned that, in the early 1970s, the sand dunes had been reclaimed by a joint effort of Texas and the Federal Government.  Stopping at a scenic site in west Texas, I read that visitor accommodations had been built as part of the Federal Highway project in the 1950s. At Big Bend National Park, I learned that Texas had turned these deep canyonlands into a state park in 1935, providing work for many in the process. 

What tourist sites will our children and grandchildren visit?  Will they read any signs that herald the hard work of those who lived through this Great Recession?  Why not?  Politicians argued about the budget and the national debt in the 1930s, in the 1950s, in the 1970s, just as they do today.  Then they got to work and made something happen.  Democrats and Republicans have sat on opposite sides of the fence and pointed fingers at each other in those past decades – then grudgingly came to a compromise and got something done, putting thousands to work on enduring projects.  Fifty to a hundred years from now, will there be any projects built by this generation that will have visitor plaques that our great grandchildren can read while on vacation?

With that, I’ll turn to the June employment report.  The headline number was a disappointment to many.  Although the number of jobs increased by about 75,000, it was less than the 120,000 hoped for.  The good news is that the year over year percent increase in jobs for most of the working population continued to increase.

The core working force – as I call it – those aged 25 – 54 continued to show modest positive increases as well.

The problem is that it is still not enough.  In the larger work force, aged 25+, we would like to see sustained 1.5% to 2% year on year growth to pull the economy up and out of the quicksand.  Despite all the rhetoric from the politicians who claim they know how to create jobs, those of us who actually create jobs know that the chief reason for the lack of stronger hiring is the politicians themselves.  The June survey of the National Federation of Independent Business (NFIB) a small business organization, reported that about 25% of business owners “who say it is a bad time to expand blame the current political mess.”  Another quarter of respondents blame weak sales, a fifth blame taxes and another fifth blame “unreasonable regulation and red tape.”  The number of firms planning to hire in the next six months offset approximately the same number of firms planning on reducing jobs.  In short, a lackluster preview of the second half of the year.

Over the past two years, business loans are continuing to grow, indicating increasing investment.

Businesses are preparing – cautiously – for increased consumer spending.  But consumer loan growth has stalled after a severe decline at the onset of the recession several years ago.  The spike in the first quarter of 2010 was an accounting change (explanation)

A bright spot – or dark spot – is the increase in overall consumer credit, approaching the levels of 2007.  Are consumers more confident?  Recent surveys don’t show that.  Are consumers more desperate and charging more to make up for  a lack of income growth?  Probably.

Disregard the rants and promises of blowhard politicians.  Consumer demand initiates most of the job creation in this country.  Businesses respond to that consumer demand by hiring more employees.  Without the demand, business owners create few jobs.  The only jobs created are sales and advertising jobs as business owners try to increase demand or take sales away from competitors.

In the coming months before this election, I encourage all of you to ask two questions of your representatives, senators, president and presidential contender:
1.  If consumers are still cautious, what policy can you implement that will encourage consumers to spend more? 
2.  If businesses are still cautious in their outlook, what policy can you implement that will encourage them to invest more in new jobs and equipment?

If the politician is a Republican, he or she will say that reducing regulations and taxes for businesses will help them create more jobs.  Ask them how that will help create jobs if the business has only tepid sales growth.  Should businesses hire more people just to sit around and fiddle their thumbs?

If the politician is a Democrat, they will talk about “investment” but what they mean is government spending to take the place of the lack of consumer spending.  How are they going to encourage consumers to spend more?  Silence.

Neither party has an answer to the problem of deleveraging, which is what consumers have been doing for the past several years.  They borrowed against their homes and their homes went down in value.  They charged more on their credit cards to make up for the lack of growth in their real incomes.  They had to pay down or default on that credit before charging more.  Deleveraging is a process that must be endured.

Unlike the individual states, the federal government has the constitutional capability of borrowing money.  While the federal government can not solve the problem of consumer deleveraging, it can soften the impact by borrowing to initiate the same kind of projects that the federal government, together with the states, did in previous decades: build and improve stuff that we can put a plaque on!  I do not like increasing government debt but I do like visitor plaques and informational signs at scenic and tourist sites.  Fifty years from now, will the Boomers be known as the Stumble Bum Generation or the Plaque Generation?

Income Tax and the Constitution

The Constitution of the United States was designed to protect the individual states who feared the power of a large central government.  In keeping with that design, the Constitution enumerates the various powers of the Federal Government. This past week a majority of the Supreme Court decided that the health care law known as Obamacare was constitutional, basing its decision on the taxing power granted by the Constitution and the 16th Amendment.

A fundamental presumption of writing the Constitution is the self-preservation of the new nation as such.  Various powers of defense, the ability to make war and treaties with foreign countries are some of the enumerated powers granted to the Federal Government to ensure the country’s continued existence.  What is not enumerated but assumed is the right, the duty of the Federal Government to protect the country as a whole.  At a time of armed conflict within a fractured nation, President Lincoln understood this point more clearly than most – that the utmost responsibility of a President is not spelled out in the Constitution that he had sworn to uphold.

There are two common faults that have caused the downfall of all nations, particularly nation empires: 1) the internal struggle for power by factions; and 2) the inexorable concentration of wealth and property.  The second leads to the first.

In the Federalist Paper No. 9, Alexander Hamilton wrote “It is impossible to read the history of the petty Republics of Greece and Italy, without feeling sensations of horror and disgust at the distractions with which they were continually agitated, and at the rapid succession of revolutions, by which they were kept in a state of perpetual vibration, between the extremes of tyranny and anarchy.”  Periods of calm within those empires were short-lived, “soon to be overwhelmed by the tempestuous waves of sedition and party-rage.”  As we look at and listen to the debates regarding health care, what do we see?  Party-rage.  Day after day, proponents on both sides of the issue make claims that are either blatantly untrue or a tortured stretching of fact.  There are so many dubious claims that reporters at  can only examine the more widely spread claims.

In Federalist Paper No. 10, James Madison, the chief constructor of the Constitution, wrote: “Among the numerous advantages promised by a well constructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction.”  Further, he writes “Complaints are every where heard … that the public good is disregarded in the conflicts of rival parties.”  He explained what he meant by the word faction: “By a faction, I understand a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.” 

What is to be done?  Madison wrote “There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controling [sic] its effects.  There are again two methods of removing the causes of faction:  the one by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.”  The first of these methods is undesireable; the second is impractical. Madison concluded “The latent causes of faction are thus sown in the nature of man.”  He does not condemn people for this tendency to form factions; a well constructed government must deal with this part of man’s nature.

Madison saw “A zeal for different opinions concerning religion, concerning Government, …an attachment to different leaders ambitiously contending for pre-eminence and power [who] have in turn divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other, than to co-operate for their common good.  So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions, and excite their most violent conflicts.  But the most common and durable source of factions, has been the various and unequal distribution of property.  Those who hold and those who are without property, have ever formed distinct interests in society. [Many different interests] grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views.  The regulation of these various and interfering interests forms the principal task of modern Legislation, and involves the spirit of party and faction in the necessary and ordinary operations of Government.” [emphasis added]  These astute observations by Madison are true today just as they were two hundred years ago.

In its own self-preservation, a government must ameliorate the “unequal distribution of property” which Madison considers to be the chief cause of factions.  How is a government to do that and preserve the respect for property rights that Madison and the framers deemed essential to a free people?  Madison wrote “From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results: and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.”  As with factions, this contradiction is an essential process of being a free people.  To use the same sentence construction as Madison: there are two methods for removing the causes of the concentration of wealth and property:  the one, by abolishing individual property rights which are essential to a nation of free people; the other, by giving every citizen the same amount of property.  The first is undesireable; the second invalidates the first principle and impractical, as Communist societies discovered.

A well constructed government uses its taxing authority to fund its operation and control the inevitable concentration of wealth and property. Many conservatives of today argue on principle that government’s role is not to transfer wealth from one person to the next.  They ignore the history of the decline of many nations whose wealth concentration reached a critical mass that ignited revolution.  They forget that the first principle of a nation is its own preservation; that a nation MUST transfer enough wealth to slow its concentration among a small portion of its citizens.  By its very nature, a property or income tax takes, by threat of force, the property of a person.  The principle of respect for individual private property rights can not be sustained in the ideal if a nation is to survive.

The income tax, or 16th, amendment was “sold” to the state legislatures as a way to tax corporations and very wealthy individuals.  For corporations, the income tax was to be an excise tax or a fee for the exemption from liability that a corporate structure afforded its stockholders.  Today many conservatives advocate a flat tax or a less progressive tax rate structure, citing the uneven distribution of the tax burden on the rich.  When the legislatures voted on this amendment, they did so on the premise that almost all people would not be subject to the income tax.   Corporations and those with extremely large incomes were to shoulder the entire burden of the income tax.  Those state house members who voted for ratification would be shocked that the top 1% of income earners paid only 38% of the personal income tax collected in 2008 (National Taxpayers Union).  They would be indignant that corporations paid only 22.1% of the combined total of personal and corporate income taxes collected in 2008 (IRS Statistics  Table 1).  When the 16th Amendment was sold to the American people in 1910 through 1913, these two groups combined were to shoulder most, if not the entire, burden of the income tax.  In 2008, they paid a little less than 52%.

In the coming months billions of dollars will be spent to sway or negate our vote.  The people and corporations who spend these vast amounts of money will try to convince us that we should vote a certain way on principle, out of loyalty to a particular ideal, party or policy.  Those who spend this money are not evil – they are simply promoting their own interests, hoping that they will convince each of us that we share an interest with theirs.  Given a choice of two competing parties, some voters will be undecided, feeling lukewarm or conflicted about the interests of either faction.  We may wish for some alternative to these dominant factions, or a menu where we could pick and choose the narrow interests that most closely align with ours.  It is the nature of mankind that we can not either live or vote in the ideal; that we must make compromises and choose the faction which most closely aligns with our interests.

From the beginnings of this nation, parties have arisen, trying to wrest control of the government, hoping to grab control of its power for their own self-interest.  For its own self-preservation, a well constructed government MUST constantly strive to distribute competing interests and power; since money and property form the core of power, a government must spread just enough money from the richest of its citizens and corporations to the rest of its citizens.   How well a government can do so determines whether the nation survives.