Monday, May 31, 2010

Memorial Day, Taxes, and Remembering the Future 

On Friday, as the Memorial Day weekend was about to begin, I heard a commercial on a local radio station that began with these words, “Memorial Day. Time to have fun and do projects.” It was an ad for a home improvement supplies store. Excuse me for being petulant, but Memorial Day isn’t a time to have fun and do projects. It’s a day intended for remembrance. It’s a day devoted to thinking of all that has been done and is being done for us by those who have served or are serving, in one way or another, for the defense of our nation and our liberties.

Memorial Day is not a time for fun. When I think about those who have given their lives, or one or more of their limbs, or their health, and who have sacrificed time, for recompense that is just infinitesimal fractions of what the power brokers haul in, I cannot but admire the gifts that Members of the Armed Forces have bestowed on this country during the past 234 years. We owe them, and we owe them a lot. I can’t imagine that they were simply having fun.

Memorial Day ought not be, and will not be, just one day. That will become readily apparent when this nation wakes up and understands the debt it owes to those who have served. Wars may end, but our obligation to care for our veterans does not end. It will not end. When we read or speak of the trillions of dollars that have been expended in the current war, we forget that the expenditures will persist for as long as there remain with us survivors of those dreadful experiences.

Memorial Day is not just a time to think about the past, but a time to think about the future, for the past impacts the future. When the time comes to pay the price for the irresponsible behavior of the “spend-but-don’t-tax” crowd, we will hear a variety of complaints about spending to which many might object but which is as imbedded in the budget as are interest payments on the overwhelming federal debt. We must understand that as the future rolls upon us, we are obligated to continue funding the care, rehabilitation, and well-being of those but for whom we would not have a future.

When Memorial Day’s wider meaning is understood, the lesson “you can pay now or you can pay a lot more later” comes home both in a defense sense as well as in a fiscal sense. Wherever one stands in the “tax-and-spend” versus “don’t-tax-don’t-spend” or “cut-tax-cut-spending” debate, it is nothing but short-sightedness to have thought or to continue thinking that “spend-but-don’t-tax” is a responsible way of being stewards of our nation. Let’s make certain that when today becomes the “later” in the painful process of “paying later” for the foolishness of “spend now, pay later,” that we don’t require our veterans to pay a second time. What they paid the first time is far more than what most Americans have ever imagined paying. Unlike taxes, what they’ve paid cannot be measured in dollars.

Remember these things, especially as the debate gets even more heated. Remember these things, when the temptation to forget becomes overpowering. Remember these things, when time tries to push memories into the distant past that once was today’s future.

Friday, May 28, 2010

To Amnesty or Not to Amnesty, That is the Question 

Sorry about the bad grammar, but it happens. A grammatically correct expression of the thought would create too long of a post title.

The topic is getting attention because two amnesty programs are underway that affect the geographical region in which I live. Both Pennsylvania and Philadelphia are conducting tax amnesty programs. Under Act 48, signed into law on October 9 of last year, the Pennsylvania Department of Revenue has set up the Pennsylvania Tax Amnesty Program, which runs from April 26 until June 18. The Department is waiving all penalties and half of the interest for any taxpayer who owes back taxes and who comes forward to pay up. Philadelphia has initiated the Philadelphia Tax Amnesty Program, its first in 24 years, which runs from May 3 until June 25. Like the Pennsylvania arrangement, the city is waiving all penalties and half the interest for any taxpayer who owes back taxes and steps up to pay.

Actually, there are two questions about tax amnesty. One is asked by a government agency, namely, should an amnesty program be established? The other is asked by taxpayers, namely, should I take advantage of the amnesty program? The considerations that are taken into account in making a decision are different.

From the government’s perspective, the principal economic advantage of an amnesty program is that it generates a short-term surge in revenues, and it’s obvious why amnesty programs are getting much attention at the present time. Another advantage is that amnesty programs, by enticing taxpayers to pay back taxes on their own initiative, save the government the costs it would otherwise incur in tracking down delinquent taxpayers, engaging in audits and reviews, and pursuing a collection process. The disadvantage is that the existence of an amnesty program and the possibility it will be repeated in the future encourages taxpayers who are thinking of letting their current tax obligations go unpaid to do so. The interest and penalties that are designed to discourage waiting to pay taxes until the government tracks down the taxpayer lose some, or all, of their impact if taxpayers perceive them as empty threats waiting to be tossed aside when the next amnesty program rolls around. There are all sorts of studies and articles written about the success of tax amnesties, evident from the numerous results searching for “’tax amnesty’ and success” but those reports focus on the short-term revenue surge. Other studies, such as Katherine Baer’s and Eric La Borgne’s Tax Amnesties: Theory, Trends, and Some Alternatives, suggest that in the long run amnesties work only if coupled with increased enforcement after the amnesty expires, and claim that amnesties do not bring chronic non-filers back into the system. Others question the impact on the morale of compliant taxpayers, who may see themselves as having made the economically unwise choice when compared to the delinquent taxpayer who ended up with penalty-free, lower-interest use of money for the period the tax debt was outstanding. Whatever the analyses may demonstrate, tax amnesties are all the rage among state and local governments. Even the federal government instituted a limited tax amnesty program with respect to off-shore transactions and accounts. Whether one likes them or not, tax amnesty programs are all around us.

From the taxpayer’s perspective, the principal economic advantage of an amnesty program is that it guarantees an elimination of penalties and a reduction of interest that will not be available if the government pursues the taxpayer through the usual procedural channels. The economic disadvantage is that the taxpayer who enters into the program is giving up the chance that the government would not have identified, located, or pursued the taxpayer. Does not the amnesty program send a message that the government cannot keep up with all of the delinquent taxpayers and that it is offering to cut a deal because it would raise less revenue, and pay more money doing so, in the absence of the amnesty? Does this not mean that the chances of getting “caught” are lower than the taxpayer may have originally contemplated? Consider that a government with a 100 percent delinquent tax collection success rate doesn’t need an amnesty program.

What this analysis omits is the moral component. Taxpayers ought to pay taxes that are legally owed. Yet penalties and interest don’t deter a growing number of taxpayers who, for a variety of reasons, some nefarious and some simply negligent, fail to pay or refuse to pay their tax obligations. The decision to enter or not enter an amnesty program isn’t unlike the decision to pay or not pay taxes that is faced when the taxes are due. Economic analysis might suggest that playing the audit lottery optimizes “profits.” But the cost of short-term profits often is long-term loss, a concept that seems to have been missed by many taxpayers, businesses, entrepreneurs, and commentators. That long-term loss includes not only direct economic loss, but the indirect economic loss that flows from inattention to moral obligation. If amoral economic analysis prompts every taxpayer to decide not to pay taxes, the long-run cost, not only in economic but in societal terms, is devastating.

So to the taxpayer my advice would be to “get in there and pay before it is too late.” That advice probably would cost me a lot of clients who simply don’t want to contribute anything to the cost of the society in which they live. My advice to governments, however, is more nuanced. I would tell them, “Sure, institute a tax amnesty program, keep it short in duration, but then come down hard on the delinquent taxpayers who did not pay up, perhaps dedicating 20 or 30 percent of what is collected from the amnesty to undertake a rigorous pursuit of the scofflaws.”

Wednesday, May 26, 2010

More Proof The U.S.A. Needs More and Better Tax Education 

It started with my post, Is Public Truly Getting IRS-Congress Distinction?. My suggestion that if people understood the tax system and the fallacies advanced by the anti-tax folks and by those advocating even more tax cuts for the wealthy riled up Peter Pappas, who posts at Tax Lawyer Blog. He commented on my analysis, In If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest. In If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, I elaborated on my position and analyzed the arguments Pappas raised, but that failed to persuade him, for in Taxes, Saints & Sinners, he tried to controvert what he identified as the three main points that I had advanced. I followed up with a three-part series, Canonizing the Rich with Tax Cuts: Part One, Canonizing the Rich with Tax Cuts: Part Two, and Canonizing the Rich with Tax Cuts: Part Three. Not surprisingly, Pappas has reacted to my arguments with his latest post in this debate, Anti-Taxers are Either Rich, Plan to be Rich or Think the World is Flat.

Although the debate started with my contention that the nation suffers from the effects of inadequate education with respect to taxation and tax policy, it has evolved, as one can tell from the titles to some of the posts, into an examination of the motives of those who support tax cuts for the wealthy and even those who oppose taxes, period. I’ve been accused of labeling these people as “evil,” though I did not use that word, of being arrogant, because, I suppose, I’m so confident that misinformation about tax and tax policy has harmed the country, condescending, perhaps because I see lack of education as something needing redress, sophomoric, for reasons that escape me, and insulting, surely because I dare to challenge the goals of those who oppose remediation of a decade’s worth of bad tax policy. Accused of offering no facts to support my position, I have supplied cite after cite to study after study, none of which get any acknowledgment in the posts Pappas propounds.

Pappas agrees that I did suggest three possible reasons why he – or anyone else for that matter -- advances the cause of tax cuts for the wealthy. Here is what I had said:
I offered three possible reasons for the vigorousness with which Pappas opposes letting the tax cuts for the wealthy expire. First, perhaps he is among the wealthy. Second, perhaps he is certain to be or desires to be wealthy. Third, he thinks tax cuts for the wealthy have so benefitted the entire populace that more should be enacted.
Paraphrasing these three reasons, Pappas concludes:
Now, if I ascribed to either one of the first two reasons, that would make me selfish and self-interested. If, however, I ascribed to the third reason, I would be a blithering idiot because it’s obvious that we are doing worse today, in the midst of a recession, than we were ten years ago when we were not in a recession. That’s not much of a choice, now is it?
No, it is not much of a choice, and it proves my point. If the third reason is a non-starter, or as Pappas puts it, “no option at all,” because the nation’s economic experience has demonstrated the foolishness of cutting taxes on the wealthy at the turn of the century and the double foolishness of not undoing that mistake when government spending exploded with the onset of war, then what’s left to commend the cause of those who want to preserve the economic status quo as it relates to taxation of the wealthy?

Pappas provides this nugget of wisdom:
Maule is correct. Most of us are indeed worse off today than we were ten years ago. But that hardly means that we’re worse off because George W. Bush lowered the top tax rates. Correlation is not causation. There are thousands of subtle and not so subtle differences between the 1990’s and the 2000’s, any one or a combination of which might be responsible for our current predicament. Cherry-picking a single difference and assigning it all of the blame is both simplistic and silly. So simplistic and silly, in fact, that anyone can do it. Like thus:

The reason we are worse off now than we were in 2000 is that during the 90’s, when we had higher tax rates on the rich, corporations moved their operations overseas in record numbers. The flight of the job creators eventually caused the massive rates of unemployment we began seeing in 2007.
In his attempt to disprove the established connection between the government’s don’t-tax-but-spend policy of the 2000s and the nation’s current economic mess, Pappas conjures up an implausible example in the hopes that its disconnects can somehow create a broad brush that would sweep away any explanation that dares to lay blame on those don’t-tax-but-spend policy decisions and decision makers. The silliness of Pappas’ “straw man” argument is that tax rates were reduced during the Clinton administration – though not deeply enough to satisfy the wealthy and their advocates – making it fantastical to claim that tax increases in the early 1990s caused a mess in 2007 through 2010 despite intervening tax cuts pushed through by people on both sides of the partisan aisle, one side because it wants to destroy taxation and the other because it perceived political survival as requiring caving in to the other side on this point. While we’re playing this sort of game, try this analysis: the success at pushing through ill-advised tax cuts, and in preserving them in the face of overwhelming war-time expenditures, so emboldened this group that they parlayed their addiction to money, a/k/a greed, and the need for ever-increasing “money highs,” into riskier and riskier stunts like mortgage securitization schemes that also afflicted the same rapidly-vanishing middle class that was already reeling under the impact of the tax cuts for the wealthy. Pappas wants “certainty” but although quantum physics teaches us that in the long run there is no such thing in the material world, I suggest he take a look at this prescient analysis from October 2007, and note particularly the observation that most Americans were not doing what they needed to do to LEARN about the impending economic mess, which exploded in their faces not long after, in no small part due to lack of education.

Pappas claims that “none of the possible motives Mr. Maule attributes to me are flattering.” Aside from the fact I attribute them not only to Pappas but to his mentors, disciples, and tax policy comrades, Pappas does nothing to flatter himself by parading out the discredited claim that letting the rich get richer while the rest of the country stagnates is good for everyone. His disingenuous “who, us?” defense of the tax-cut crowd, wrapped in the cry that someone or something else, but surely not tax cuts for the wealthy, is the cause of current economic misery, is likewise not flattering at all. Perhaps it’s time for Pappas and the rest of the tax-cut defenders to admit that there isn’t anything that can be said about their position that flatters them or their policies.

Pappas complains that I, and others who share my views, “are constitutionally incapable of seeing any nobility or decency whatsoever in a person who believes something different than what they believe.” Where have I tagged Pappas as lacking nobility or lacking decency? This debate started with my claim that Americans need more tax education, not that they need lessons in nobility or decency. If Pappas wants to interpret my call for more tax education as “arrogant” or as an “ad hominem” attack, so be it. Perhaps that interpretation proves my point even more. Folks who believe the earth is flat, in the face of evidence from Magellan’s circumnavigation through satellite photographs, can object all they want to calls for geography education, and ought not and will not be treated as ignoble or indecent, but they ought not be permitted to be in charge of any government policy that involves, depends on, or deals with the shape of the globe. In other words, tax-cut advocates, you had your chance, it didn’t work, so please step aside and give others an opportunity even though it will be a tougher task because of the mess you left for us.

Monday, May 24, 2010

Philadelphia Soda Tax Proposal Shelved, But Will It Return? 

Some tax issues don’t get widespread attention because they’re too technical or deal with obscure transactions, but the proposed Philadelphia soda tax has been the talk of the town. On Thursday, as reported in this Philadelphia Inquirer article, City Council passed a budget that omitted the mayor’s proposed tax on soda and other beverages containing sugar. According to the article, similar proposals failed to pass in Baltimore, Washington, and New York State, though I’ve been told by readers that similar taxes do exist here and there throughout the country. It’s a controversial tax, and one on which I shared my thoughts most recently in Yes for The Proposed User Fee, No for the Proposed Tax. My op-ed piece on the issue, Why Phila. Soda Tax Already Has Gone Flat, was published in the Philadelphia Inquirer on March 24 of this year. It amuses me when supporters of the tax claim that the opposition comes from the “big soda lobby” because I do not own a soda company, I do not own stock in a soda company, I do not sell soda, and I do not drink soda. My opposition to the tax rests on a variety of principles, but there’s one that stands out.

Aside from the legal issues, aside from the difficulties of implementing the tax, aside from the cost to retailers of collecting the tax, aside from the cost to the city of enforcing the tax, aside from the ease with which the tax can be avoided, one huge question looms over the debate. Why single out beverages? Every justification that is given for taxing sugary beverages applies equally, if not more thoroughly, to other items. Donuts, for example, not only contain sugar, but contain fats. Hard candy is nothing more than condensed sugar. Cookies contain sugar, carbohydrates, transfats, lard, and all other sorts of things that do as much damage to a person’s health if ingested in unreasonable quantities. The supporters of the soda tax, though correct in pointing out that soda contributes to obesity, act and speak as though nothing else contributes to a person’s being overweight. There are far more than enough obese people who do not drink sugary drinks. A user fee, reflecting the cost to society of overindulgence in unhealthy foods, would be much more appealing if it applied to everything that was harmful to a person’s well-being. Spread over all unhealthy foods, a user fee could raise the same amount of revenue as would the mayor’s proposed soda tax without through a very low per-item assessment, unlike the significant increase in the prices of certain beverages that the soda tax would generate. Even a user fee on oversized portions might make sense, although that would punish people who save half of the gargantuan meal for the next day.

City Council’s decision to leave the soda tax out of the budget has not deterred supporters of the soda tax. The mayor explains that he is not “done fighting” and observers suggest that it will be re-proposed by the end of next month. In the meantime, even though Council passed a balanced budget, according to this Philadelphia Inquirer story, the mayor claims he will need to cut several fire companies, chop a day from library opening hours, and eliminate two classes at the police academy. Why? To increase the reserve fund. Reserve funds are important, and there’s much to be said about building them up during times of plenty, to insure against times of need, but is this a good time to be collecting more in revenue than is being spent? Yet, in another explanation, the mayor claims that the cuts are needed because of cash flow problems, that is, the timing of the inflow and outflow of tax receipts and expenditures. As it is, the budget passed by Council will allow for reserves, so Council and the Mayor are at odds over the size of the reserve. Are the mayor’s threats simply bargaining chips, considering how his planned cuts affect three city services that affect everyone, namely, police, fire, and libraries? No one in city government seems to mention how much can be saved by ditching those patronage jobs at the BRT, or elsewhere. Why?

Friday, May 21, 2010

R.I.P., BRT 

On Tuesday, the voters of Philadelphia decided to relegate the Bureau of Revision of Taxes to the trash heap. According to this Philadelphia Inquirer article, more than 70 percent of those who voted opted to send the BRT into the pages of history. The vote was not surprising. The Mayor, most members of City Council, political watchdog groups, commentators, and just about everyone except those who benefitted from the BRT’s inefficiencies and the patronage jobs it provided were in favor of saying good-bye to an antiquated tax administration structure.

During the past several years, a continuous parade of revelations about BRT operations showed up in Philadelphia papers, often on the front page. I commented on some of these issues in a long series of MauledAgain posts, starting in An Unconstitutional Tax Assessment System, and continuing in Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, and Taxes and Priorities.

One might expect that the focus would now turn to implementation of the terms of the resolution that the voters approved. Within months, the mayor, exercising authority provided by the city charter, is expected to set up the Office of Property Assessment and the Board of Property Assessment Appeals that will take over the functions that had been assigned to the BRT. By separating the task of assessing property from the task of listening to and deciding appeals with respect to those assessments, the changes provide a better system of checks and balances than existed within the BRT.

But things may not move along on the expected timetable. According to this KYW Radio report, at least one member of the BRT has suggested he will challenge the vote. He questions the authority of the City Council to put the referendum on the ballot. The State Supreme Court, as reported in this article, and as I noted in Taxes and Priorities, previously dismissed a procedural challenge to the vote, but left the door open for a challenge based on the merits of the argument that City Council lacked the requisite authority.

Even if the BRT is successful, all it accomplishes is a postponement of its date of death. If the referendum is overturned, the issue will be raised in the state legislature, which is unlikely to ignore the overwhelming voter support for terminating the BRT and which will be under pressure from the mayor, City Council, and other civic and political leaders in Philadelphia to put an end to the BRT. The BRT can prolong the process, but it cannot turn back the tide of change. Its delaying tactics, however, would cause Philadelphia taxpayers to endure one or two or three more years of inefficient property tax administration, while the city waits for the new system to be implemented.

This is one of those situations in which prudence should trump legal niceties. It’s a point not easily learned by some folks, including some lawyers. When I taught the course in wills and trusts, I used an example dealing with advancements to ask students what they would advise a client in a position to end up with more of her mother’s estate by staying out of the probate process. Some students, but far from all, understood that the client would end up with more money by declining to participate in probate, but would end up with an unhappy group of other heirs. What’s to be gained, in the long run, by suing to prevent the death of the BRT when it’s going to terminate one way or the other? It’s not too difficult to guess why the members of the BRT don’t want the BRT to die. It’s very easy to understand why the voters of Philadelphia have provided a resounding death sentence to the BRT.

In the long run, I’ll miss the BRT only because its death will mean that the stream of BRT stories on which I comment will come to an end. Somehow, I have a feeling that this post is not the last BRT post. We’ll see. But, fear not, I’m also confident that there will be more posts concerning the Philadelphia property tax and the new system that inevitably will be put in place.

Wednesday, May 19, 2010

Canonizing the Rich with Tax Cuts: Part Three 

Today, in conclusion, I will deal with what Peter Pappas describes as my third point, namely, the assertion that Pappas opposes higher taxes because he is either already rich or plans to be rich some time soon. Actually, what I wrote was the following: “Either Pappas is already among the wealthy, or he is so sure or desirous of joining their ranks that he subscribes to their outlook. Surely he cannot think that the nation is economically better off now than it was before the wealthy engineered their tax cuts a decade ago. Or perhaps he does so think?” In other words, I offered three possible reasons for the vigorousness with which Pappas opposes letting the tax cuts for the wealthy expire. First, perhaps he is among the wealthy. Second, perhaps he is certain to be or desires to be wealthy. Third, he thinks tax cuts for the wealthy have so benefitted the entire populace that more should be enacted. My rhetorical style somehow encouraged Pappas to add “some time soon” to what I purportedly claimed, even though those words don’t appear. Quick to criticize my debating style, Pappas more than once has added or changed what I have said so that he can set up something that is easier for him to attack than are the positions I actually have put forth.

Thus, Pappas claims that even though he “listed six perfectly reasonable, non-selfish justifications for opposing high taxes and the continued expansion of government,” I insisted “on assigning to [him] a selfish motive.” Pappas claims that I am “making the assumption that [he is] either rich or plan[s] to be rich some time in the near future.” The style in which I wrote my conjecture, specifically “Or perhaps he does so think?” suggested that Pappas was in fact relying on six justifications offered up as “perfectly reasonable” but dismantled for the reasons I and many others have repeatedly shared. There is no way of telling if Pappas is rich or not, if he wants to be rich or not, or if he expects to be rich or not, but it is clear that he subscribes to the notion that taxes for the wealthy ought not be raised, and that taxes, even though lower than they have been in the past, are high. Why he does so in the face an overwhelmingly dismal tax-cut track record astounds me. I can admire his tenacity but mourn his misplaced tax policy perspective.

Perhaps the deep attachment Pappas has for the cause of the wealthy will loosen after he takes a look at several recent revelations. In Tax Cuts and ‘Starving the Beast’, Bruce Bartlett explains how the “reduce taxes so that government can be reduced” tactic backfired and contributed to the economic mess in which the nation finds itself. It turns out that when the opportunity to increase taxes on the wealthy arose, federal expenditures as a percentage of GDP fell. But that effort was short-circuited when the “cut taxes for the wealthy and spend trillions in Iraq” fiscal insanity was foisted on the nation under the dubious promise of economic prosperity for all. In the meantime, a Quinnipiac University study revealed that a proposal to increase taxes on households with more than $250,000 of income is supported by 60 percent of Americans. The clincher, though, is Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans, a position paper signed by small business owners and even several wealthy individuals, who understand the serious damage done by those tax cuts for the wealthy, in which they seek a plan of “Undoing the Damage” caused by “The Great Tax Shift” that came from “Asking Less from Those with More.” I suppose that by supporting continued tax cuts for the wealthy, Pappas supports continuing these trends set forth in Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans: (1) The share of total federal taxes paid by the top 0.1 percent fell from 60 percent to 33.6 percent over a 44-year period, costing the Treasury $281.2 billion in 2007 alone; (2) The share of total federal taxes paid by the top 400 income-earners fell from 51.2 percent to 16.6 percent over a 52-year period, costing the Treasury $47.7 billion in 2007 alone; (3) The 2001 tax cuts cost the Treasury $700 billion between 2001 and 2008, and if retained as Pappas desires, will add another $826 billion to the federal deficit; and (4) In the meantime, the middle 20 percent of taxpayers pay 16.1 percent of their income in total federal taxes, whereas 50 years ago, it was 15.9 percent. Pappas wants studies, surveys, and facts. There are more then enough in this document alone.

If, despite seeing these facts, Pappas wants to continue advocating tax cuts for the wealthy, making the nation more and more a debtor nation, he ought not be surprised when things take a turn in the direction they have in Greece. Unlike Greece, there are no nations to which the United States can turn for a bailout. Given these facts, how can anyone continue to ask for more of the same? It makes no sense to stay the course when a tornado is heading straight at us. Tenacity is not a virtue when a tornado is headed directly at someone. Good judgment impels the sensible thing, and that is to reverse course, quickly.

Monday, May 17, 2010

Canonizing the Rich with Tax Cuts: Part Two 

Today I will deal with what Peter Pappas describes as my second point, namely the assertion that statistics showing that the rich pay a greatly disproportionate share of taxes are flawed. In If You Oppose Tax Increases You’re Stupid, Exploited, or Dishonest, Pappas relied on statistics showing the percentage of taxes classified according to adjusted gross income. Those statistics, for example, show that 22 percent of income is earned by those in the top one percent of adjusted gross income, but that those individuals pay 40 percent of income taxes. In If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, I pointed out that adjusted gross income is a misleading measure, because it omits various sorts of income far more likely to be found among the wealthy than the rest of the nation’s taxpayers. If, instead of using adjusted gross income, the statistics reflected all increases in wealth – net of the cost of generating the income – the statistics would change. What sorts of transactions are missing? The adjusted gross income measure omits tax-exempt income, depreciation on properties not going down in value, earnings on money stashed overseas, gifts and inheritances, deferred compensation, and a long list of exclusions and deductions either far more likely to be found among the transactions of the wealth or, when also showing up in the activities of the not-wealthy, far more likely to be of a much higher dollar amount among the wealthy.

Why would the use of a less flawed statistical base matter? Consider an example. Assume that the nation has 1,000 taxpayers. Ten of those taxpayers (the top 1 percent) each have adjusted gross income of $10,000,000 and pay income taxes of $3,000,000. Each of the other 980 have adjusted gross income of $50,000 and pay income taxes of $3,000. The total adjusted gross income of the 1,000 taxpayers is $149,000,000. Of that amount, the top 1 percent account for 67.1 percent. The total taxes paid by the 1,000 taxpayers is $32,940,000. Of that amount, the top 1 percent account for 91.1 percent. What happens if the same analysis is done using a measure of income that more closely approximates increase in wealth. Among the wealthy, there are far more dollars excluded and deducted that consist of tax breaks than there are among the not-wealthy. Assume (and I’ll come back to that) the ten taxpayers each have a more accurately measured income of $15,000,000, and still pay income taxes of $3,000,000. Assume the other 980 each have a more accurately measured income of $65,000 and still pay income taxes of $3,000. The total more accurately measured income of the 1,000 taxpayers is $213,700,000. Of that amount, the top 1 percent account for 70.2 percent. The total taxes paid by the 1,000 taxpayers remains $32,940,000. Of that amount, the top 1 percent account for 91.1 percent. The point is that the closer the income measurement is to an accurate measure, the less of a “discrepancy” between the wealthy’s share of income and the wealthy’s share of taxes.

The key, of course, is the assumption. No one really knows how much income is earned by the wealthy on monies stashed in secret overseas bank accounts or in offshore trusts. What’s certain is that there is quite a bit, and people earning lower amounts of income aren’t the ones with the “excess cash” available for deposit in Switzerland or the Cook Islands. Better guesses can be made with respect to some of the other items, but for one reason or another, the IRS does not generate all of the information that is required to generate precise numbers. The limited attempt to determine “expanded income” by the IRS does not provide the hidden information. The point is that the adjusted gross income numbers on which Pappas relies are, to this extent, arbitrary and tainted with the residue of the many tax breaks available, legally and illegally, to the wealthy. It has been demonstrated, for example, that two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, as explained in this report and analysis.

Yet Pappas accused me of “[i]gnoring or dismissing facts [I] don’t like” and that doing so “is not evidence.” It is widely agreed among tax professionals that adjusted gross income is a flawed measure of actual income. According to this explanation of adjusted gross income, “In terms of the income tax system, AGI is the broadest measure of income but, compared with taxable income (the income measure to which tax rates are actually applied), it does not reflect personal differences that affect individuals’ ability to pay taxes.” An example of this flaw shows up in the fact that in 2006 there were 8,252 individuals with adjusted gross income of $200,000 or more who paid no federal income tax, and another in the news that nearly 1,000 individuals with income exceeding $1,000,000 paid no income tax in 2007. Pappas claims that I fail to offer “a shred of evidence” and fail to point “to a single contrary study” showing that his statistics “are wrong.” They’re not “wrong.” As I pointed out in If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, they’re misleading and flawed. The evidence for this conclusion is overwhelming, I’ve pointed to enough of it to make the point, and anyone who has been through a good basic federal income tax or economics course understands this point. Even the IRS tries, though with limited success, to mitigate the flawed nature of adjusted gross income as a measuring stick by working with what it calls expanded income. It’s no wonder that Pappas and the wealthy have far more affection for statistics based on adjusted gross income than they do for statistics based on actual income.

Next, in an effort to prevail with quantity rather than quality, Pappas cites six things he generously calls “studies.” One is the IRS information based on adjusted gross income, another simply copies that information, a third is the U.S. Treasury version, a fourth is a very brief note that cites the Treasury item, the fifth is a CNN news report that refers to the fourth item, and the sixth is a CBO report that is the only one that relies on something other than adjusted gross income, but it makes no attempt to deal with the hidden income from overseas hidden bank accounts and offshore trusts or the deductions and exclusions which are not backed out in its attempt to generate “comprehensive household income.”

Pappas concludes by asserting that there is no room to “question whether or not the rich actually” “pay a disproportionate share of taxes.” Recall that this particular point of contention arose from the attempt by Pappas, in If You Oppose Tax Increases You’re Stupid, Exploited, or Dishonest, to demonstrate that the claim, “The rich don’t pay their fair share of taxes” is a “doozy,” one of “many distortions that regularly ooze from the mouths of big government activists demanding higher taxes on the rich.” When I rebutted that attempt, I did not try to prove that the wealthy do not pay disproportionately higher taxes. Instead, I stressed that “Pappas does nothing to define ‘fair share,’ even though there is much support for the proposition that regressive taxes are not fair.” Pappas still hasn’t offered his definition of “fair share.” Perhaps Pappas thinks it is “fair” that, as reported in Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans, the top 400 income-earners paid 51.2 percent of their income in taxes in 1955 but only 16.6 percent in 2007, whereas the median income-earner saw the percentage of income paid in taxes grow from 7.4 percent in 1955 to 13.6 percent in 2007. I suspect his emphasis on the word “disproportionate” provides a clue that he’s in favor of the wealthy and the low-income folks all paying at the same rate, or perhaps for the aforementioned trend to continue until the top 400 are paying 0.1 percent of their income in taxes while the median income-earner pays 70 percent of income in taxes. The wisdom of cutting taxes for the wealthy is about as devoid of fairness as is the thinking behind the notion that the Sun revolves around the Earth.

In the next post, I turn to the question of why Pappas so zealously opposes the expiration of those unwise tax cuts for the wealthy.

Friday, May 14, 2010

Canonizing the Rich with Tax Cuts: Part One 

It started with my post, Is Public Truly Getting IRS-Congress Distinction?, in which I asked, “Isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” That jab at the attempts to persuade Americans that tax cuts for the wealthy are the gateway to paradise riled up Peter Pappas, who, in If You Oppose Tax Increases You’re Stupid, Exploited, or Dishonest, criticized my treatment of Sarah Palin’s “47 percent of households pay no federal income tax” comment, suggested – correctly – that I think “all small-government, anti-tax conservatives are motivated by self-interest,” claimed that the my attitude and those of others who share my fiscal policy views “is both arrogant and condescending . . . sophomoric and insulting,” and set forth five of “many distortions that regularly ooze from the mouths of big government activists demanding higher taxes on the rich,” which he then attempted to disprove by dragging out worn-out, disproven arguments. I replied, in If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, which I am not going to summarize at this point. As might be expected, Pappas has rejoined with Taxes, Saints & Sinners, in which he tries to demolish what he has identified as the three main points in If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?

Today I will deal with what he describes as my first point, namely, the assertion that anti-tax conservatives are selfish people. In follow-up posts, I will address his analysis of what he claims is my second point, namely, that statistics showing that the rich pay a greatly disproportionate share of taxes are flawed, and his analysis of what he claims is my third point, that Pappas opposes higher taxes because he is either already rich or plans to be rich some time soon.

Recall that Pappas asked if I think “all small-government, anti-tax conservatives are motivated by self interest?” I replied, “Yes, I do. Many are motivated by financial self-interest, as more than a few have admitted to me to my face or in emails. One person said, ‘I am selfish.’ At least he’s honest. Others are motivated by the self-interest of being let alone by government, and that’s clear from their complaint that government is too big and intrusive. They want to do what they want however they want to do it, with no restrictions on their ‘freedom’ and ‘liberties.’” I pointed out that “[s]ome of their advocates, of course, claim that they take this anti-tax position because lower taxes mean more jobs, but the experience of the last decade taught us that lowering taxes, in the long run, caused jobs to vaporize, helped the rich get richer, and left everyone else with incomes and assets that declined in real terms.”

Pappas suggests that my conclusion that “many” anti-tax advocates are “motivated by financial self-interest” should be rejected because I base my conclusion on “conversations with some of them.” What I said was, “Many are motivated by financial self-interest, as more than a few have admitted to me to my face or in emails.” My reference to communications with people was an example of one source of information shedding light on the thought process of anti-tax advocates. That reference does not imply that I made no use of the torrent of other anti-tax advocacy readily available in the media nor that my conclusion was based only on conversations. The anti-tax individuals who rest their opposition on the argument that government ought not be big, ought not be fed money, and ought not have the means to intrude on individual liberties and freedoms are advancing a position that has been around so long that it has become part of the political landscape. One does not need a survey to learn what these folks are thinking. What sort of survey would be required to figure out that those who oppose taxes in order to choke off government restriction of “freedom” and “liberties” are manifesting their self-interest in those asserted freedoms and liberties? As for the “lower taxes are good for everybody” argument, isn’t it time that to admit that every attempt to help everybody with lower taxes has only helped those whose taxes were lowered?

Pappas explains that he questions the “anti-tax equals selfish” thesis because it “effectually conceded” his point that “pro-tax, big government liberals sincerely and passionately believe they are morally and intellectually superior to those who oppose tax increases.” It has nothing to do with superiority. It has everything to do with what works and what doesn’t work. If repeated tax cuts for the wealthy worked, the nation’s economy would be robust. It isn’t. Pappas is particularly dismayed, because, he claims, “Maule’s opinion of conservatives and conservatism is a tragic one for any American to have, but it’s particularly disturbing in this case because it’s held by a member of the Academy who has, supposedly, committed himself to the idea of intellectual open-mindedness.” Open-mindedness, though, does not mean accepting as truth the absurd claims that have been made for several decades that the path to national economic success are more and more tax cuts for the wealthy. Open-mindedness means willingness to look at the facts, even when they compel conclusions that tear apart the premise underlying the argument that tax cuts for the wealthy, even in the face of huge increases in military expenditures, and the resulting huge budget deficits, are good for the nation. And it is to that issue that Pappas invests most of his attempt to deal with the “anti-tax equals selfish” thesis. He labels as misinformation the conclusion that tax cuts for the wealthy have ruined the economy, making the rich richer and the poor poorer. He quotes Thomas Sowell, who falls back on the notion that because today’s poor supposedly are better off than yesteryear’s poor, we ought not call today’s poor “poor.” Sowell claims “there is very little real poverty in the United States today, except among people who come from poverty-stricken countries and bring their poverty with them.” Good grief. Apparently none or few of the people who have lost their homes and health insurance on account of the huge jump in unemployment aren’t living in poverty, barely getting by, postponing medical check-ups, visiting food kitchens, buying clothes at thrift shops, and even living on the street. The notion that “there is very little real poverty in the United States today” flies in the face of information in reports such as The Changing Face of Poverty in America, statistics showing the scope of hunger in America, and the rapidly growing suburbanization of poverty.

One need only to work through the numbers, as is done, for example, in this analysis of income information, to learn that from 2004 to 2005, those imprudent tax cuts had the effect of increasing the income of those in the top one percent by 14 percent, while DECREASING the income of those in the bottom 90 percent by 0.6 percent. Between 1980 and 2005, the top 300,000 Americans went from receiving about 200 times as much income per person as did those in the bottom 150 million to receiving 440 times as much income. This is what tax cuts do for the nation. Even from an international perspective, the growing inequality in this nation tops that in almost every other nation, as explained in Gap Between Rich And Poor Growing. Things haven’t changed during the intervening five years. Take a close look at Recession Widens Gap Between Rich and Poor Even Further, and at Not Everyone is Hurting – The Rich Get Richer as the Income Inequality Gap Explodes. So much for Thomas Sowell’s proclamation that poverty has pretty much disappeared.

Now, of course, Pappas contends that tax cuts have nothing to do with this. I intend to turn to that argument in the next post.

Wednesday, May 12, 2010

More on Private Toll Roads 

After reading my Friday post, Are Private Tolls More Efficient Than Public Tolls?, Phineas Baxandall, Senior Analyst for Tax and Budget Policy of the U.S. PIRG, Federation of State PIRGs, sent me a copy of a report, “The Facts About Toll Road Privatization and How to Protect the Public.” It is definitely worth reading, as it provides a much more thorough analysis of the issues than can be enveloped in a blog post. The report can be found on-line at this link. For an analysis of the issues as they apply to other public assets, see Privatization and the Public Interest: The Need for Transparency and Accountability in Chicago’s Public Asset Lease Deals.

Another reader offered an explanation for why the private sector considers itself more efficient at building and operating toll roads than is a state or local government. According to this reader, who is familiar with these sorts of transactions, the principal advantage is that the private sector claims to be more disciplined than is the government when the “design build” phase of infrastructure construction is commenced. Governments are less efficient because of “political pressure and a lack of sophistication and ‘ownership’” in the project. The “private equity risk” faced by a private sector concessionaire encourages a “heightened level of discipline.” This reader agrees, though, that using a private concessionaire after the construction phase doesn’t provide an advantage, and wonders if “lack of discipline during the design-build phase” could be handled by having “governments . . . pay management fees to project managers who oversee the life cycle of the project and impose that discipline on the project,” though he explains that the “problem this approach is politics: politicians and interest groups will get involved and pressure the project manager to make decisions that don't contain costs over the long term.” This reader also points out that it is cheaper for governments to finance infrastructure through tax-exempt bonds, which “represent lower-cost financing to governments than private financing.”

My reaction to these insights were summed up in my response, slightly edited:
So it comes down to whether the savings to taxpayers by shifting the design build phase to the private sector are enough to allow for the profit that is required for the private sector to be willing to do this plus the extra cost of borrowing that the private sector encounters, and whether, if so, it makes sense to put the project in the hands of the private sector which is impervious to ballot box pressure. With the outcomes in Orange County, San Diego, and South Carolina (the last of these coming to my attention in a follow-up article (Two roadblocks to new tolls on PA highways) by Joe DiStefano, who wrote the article (Private Toll Roads Are on Their Way Back) that triggered my Are Private Tolls More Efficient Than Public Tolls?post), I am very dubious about the claims made by the private sector. However the theory turns out, the practical application is bringing low grades to the private sector experiment.
And I wrote this response before reading the the report that Phineas Baxandall sent me.

So does the choice come down to choosing between toll highways built by governments that are inefficient in the design-build phase or toll highways built by private sector firms whose track record is far from ideal? Or is the answer some sort of arrangement by which the design-build phase is bid out to private sector management for a fixed fee, with some sort of safeguards installed to cut out the pressure for decisions that benefit politicians and interest groups at the expense of cost overruns for the project? The theoretically ideal answer is for voters to make government more efficient by holding them accountable through the ballot box, an avenue of recourse not available with respect to private sector construction and operation of toll roads, but unfortunately, in practice, voters tend to re-elect the very people about whom they gripe so much.

Monday, May 10, 2010

User Fees As Alternative to Cutting Spending 

A little more than a week ago, in Taxes and Priorities, I noted that “[t]The tension between demands for reduced taxes or reduced tax increases and demands for government services is escalating.” One of the recent developments that I included in my list of examples was the news that in order to devote more of its dwindling resources to crime fighting, the Philadelphia Police Department would no longer send police officers to handle minor vehicle accidents. If the motorists agree to exchange information, no one is injured, and the cars can be driven, the police will not show up. Motorists will need to go to the nearest police station or call in the accident by phone. According to the Police Department, there are roughly 68,000 minor accidents in Philadelphia each year.

Not surprisingly, the negative reaction has commenced. In a perceptive editorial, Free Pass for City's Aggressive Drivers? Ignoring Fender-benders Will Encourage Worse, Brian Hickey points out the risks that the new policy poses for motorists driving in Philadelphia. He explained that he was in a minor-fender bender recently, and that the other motorist did not remain at the scene. He argues that with common courtesy so lacking on Philadelphia streets, it’s asking too much to expect motorists to handle these 68,000 accidents without additional difficulties. He also argues that the new policy “could convince bad motorists that there’s no price to pay for driving amok.” Hickey thinks the new policy will create more arguments for lawyers defending motorists who flee the scene of serious accidents. What happens, he asks, if one of the motorists in a minor fender-bender is drunk, uninsured, or fleeing the scene of another crime? He’s puzzled why a Police Department objecting to the district attorney’s new policy of diverting focus away from prosecution of minor marijuana possession offenses has decided to “give aggressive drivers cover to escalate their behavior to hit-and-runs.” He shares the concerns of one attorney who worries about “injuries that don't become evident until later, increased civil litigation, false accident reports, reluctant witnesses, claims that insurers won't process without valid police reports, untrained civilians handling traffic control, and uncredentialed drivers and cars going unpunished.” The same attorney wonders if the new policy will open the door to reduced or eliminated response to vandalism and theft.

Reduction in essential services is, as I pointed out in Taxes and Priorities, an almost unavoidable consequence of cutting taxes. “You can cut taxes if you cut spending” is a rallying cry of those who want to reduce the size of government. But there is an alternative. Why not reduce the need for the services? Quick arithmetic suggests that there are almost 200 minor accidents every day in Philadelphia. How many truly are accidents, and how many are caused by irresponsibility? How many of the accidents result from texting while driving, reading newspapers while driving, paying more attention to a child or dog than to driving, putting on makeup while driving, trying to drink coffee while driving? Will the “cut spending so you can cut taxes” crowd devote time and energy to cutting down on accidents so that there is less demand for city services to deal with them? How many of the accidents that are so easily prevented are caused by members of the “cut spending so you can cut taxes” crowd who are among the first to dial 911? I don’t know. But it’s clear that a significant number of these accidents are preventable, and it’s unlikely that the advocates of spending and tax cuts are not among those creating a demand for police services at the scenes of minor accidents.

Here’s a better way to manage the problem. Send a police officer. Let the police officer, subject to department and judicial review, determine if any of the involved motorists was violating the law or violating common sense. Subject those motorists to user fees, equal to the cost of providing the police service. It doesn’t matter that this user fee would not be paid in advance as are most others. Think of it as a variant of the principle expressed in the sign, “You Break It, You Bought It.”

Friday, May 07, 2010

Are Private Tolls More Efficient Than Public Tolls? 

On Tuesday, in PhillyDeals: Private toll roads are on their way back, Joseph N. DiStefano, after explaining the history of toll roads, predicts that private toll roads will be returning “to a neighborhood near you.” He may be right, and I have no evidence to prove that private toll roads will not be returning. The question is whether it makes sense to permit this to happen.

Once upon a time, some roads were privately owned, and DiStefano gives as an example the Lancaster Turnpike, which is now the state-owned Lancaster Pike that traverses the western Philadelphia suburbs. Yet even while private individuals were building and then charging for use of this turnpike, travelers also had the option of heading west on Conestoga Road, portions of which still exist, without paying tolls. Those in a hurry and with money used the Lancaster Turnpike, and those unwilling or unable to pay used the less convenient Conestoga Road. During World War One, the Commonwealth of Pennsylvania purchased the Lancaster Turnpike, took over its maintenance, and abolished the tolls. Today, there are two main differences between Lancaster Pike and Conestoga Road in those areas where both exist. Lancaster Pike has four lanes of travel in most places, whereas Conestoga Road has two lanes. And Lancaster Pike wins the “has more traffic lights” contest by a wide margin. Both roads are toll-free, and both get very congested during peak travel times, and are quite busy throughout most other times.

DiStefano reports that Pennsylvania’s governor, seeing his proposal to use tolls on I-80 to fund road and bridge repairs elsewhere in the state and his proposal to use the proceeds of a Turnpike lease for the same purpose having been rejected, is going to be pressured by a campaign for a return to private toll roads. This campaign, DiStefano tells us, is “a well-funded movement, with support in both parties” and is orchestrated “by building contractors, investors and their professional representatives.” These folks have placed the catchy tag of “Public-Private Partnerships” on their idea.

When the state builds a toll road, it borrows money, pays for the construction, charges tolls, and uses the toll proceeds to maintain the road and to pay off the loans. According to DiStefano, the Public-Private Partnership allows private companies to acquire money by borrowing – “from banks, investors, even federal loan programs” – pay for the construction, charge tolls, and use the toll proceeds to maintain the road and pay off the loans. As best as I can tell, there are two differences between public state toll road construction and private toll road construction. First, the private toll road needs to charge a higher toll in order to make a profit. Second, the private toll road is beyond the control of voters, because voters do not have the opportunity to speak at a ballot box with respect to the private companies the way they do with the state.

DiStefano quotes Frank M. Rapoport, who represents big contractors. He says, “Nobody’s against this,” although I’m guessing that by “this” he means turning over to the private sector the construction of additional highways, or even the construction of additional tolled lanes to existing highways. Rapoport cites, as support for his proposition, a Frank Luntz poll that “found commuters would pay more to drive, if it would cut traffic delays.” That survey proves an unsurprising outcome. Those with the means to do so would pay for access to roads with lower traffic density. But it doesn’t tell me that those roads need to be built with money borrowed by the state that is repaid through state-charged tolls or with money borrowed by private industry that is repaid through private tolls that are higher because the private investors seek a profit that is not an object for a state-operated highway system.

Though Rapoport claims, “Nobody’s against this,” I am, at least until someone demonstrates how the numbers play out. Someone needs to explain to me, and to everyone else for that matter, how a privately constructed and operated toll road is less expensive than one built by the state. In other words, if it is possible for a private company to build a road from point A to point B, or to add express lanes to Highway W, then why can’t the state do the same thing at a lower cost because of the absence of a profit motive? Perhaps the answer is that those who stand to gain by reason of privatizing highways lead the charge to protest “expansion of government” in response to state-built toll roads, but are waiting to jump at the chance to do the same thing themselves in order to squeeze out that profit. Those who cannot afford the higher private tolls would be left to fend for themselves. Perhaps that is the plan. Those who can afford to pay ride on the nice roads, and those who cannot afford to pay are stuck with the public roads that cannot be improved because of objections to “expansion of government.”

The explanations that I provided for my opposition to selling or leasing publicly owned toll roads, shared in Selling Off Government Revenue Streams: Good Idea or Bad?, in Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, five months later in Selling Government Revenue Streams: A Bad Idea That Won't Go Away, and a year later in Turnpike Lease: Bad Policy and Now a Bad Deal , The Pennsylvania Legislature Gets It Right and Killing the Revenue Idea That Won't Die, are not fully applicable when the road in question is a new road. At least with a new road, a public asset isn’t being sold off to the private sector. But it isn’t clear to me that the analysis of the numbers flips when shifting the question from selling or leasing an existing road to building a new one. Why do something as risky as privatizing highways when there are other options, such as the mileage-based user fees I discussed in Tax Meets Technology on the Road.

Indeed it is risky to transfer highway expansion to the private sector. It’s not a new idea, and one need only look at what happened in California when it permitted private industry to build and charge tolls for express lanes on Route 91 to learn how the ultimate bearer of risk is the taxpayer. More recently, the private enterprise building another California private toll road filed for bankruptcy. In the first instance, the financial mess was absorbed by taxpayers when the regional highway agency had to take over the Route 91 express lane operation. In the second instance, it remains unclear whether Caltrans will need to step in. A major factor in the Route 91 failure was the provisions in the agreement that prohibited the state from building additional lanes on the public portion of the highway. A major factor in the second failure was a huge increase in the tolls.

In How Do Toll Road Lessees Make a Profit?, I pointed out how the profit factor enters into the picture when private industry operates toll roads:
Lee Matchett shared what he calls "another twist" to the proposed arrangement. And indeed a twist it is. He noted that as one tries to determine why the lessee would fork over big bucks for the rights to take over what currently is the equivalent of a break-even enterprise, the answer must be found by "think[ing] through the deal from the other side." He asks:
What does the lessee have to gain, and what are the lessee's potential pitfalls?. One obvious potential liability for the operator would occur if there was a decrease in revenue caused by, say, a decrease in the vehicles deciding to use the toll road. What could cause this? Well, perhaps if alternative roads were improved, or if some other form of transportation were made available (mass transit, rail, etc.), maybe drivers would opt not to pay the increased tolls.
He then directed me to Patrick Bedard's column in the February issue of Car and Driver magazine.It's an important read for drivers, taxpayers, citizens, and voters. Not only are lessees extracting promises from state and local governments to refrain from making improvements to highways offering alternative routes to the leased toll road, they are also compelling the governments to make those alternate routes less attractive by reducing speed limits for no sensible reason (other than to steer vehicles onto the lessee's road) and by adding traffic signals and other restrictions that otherwise have no reason to exist.

Lee's point is important. I've consistently warned that the only way for private enterprise, in the business of making profits, to extract profits from a toll road that presently breaks even is to increase profits, cut services and maintenance, or both. So now the nasty twist to the deal is revealed. Revenue can be increased without raising tolls by coercing drivers to use the toll road. To the free market advocates, I direct this question: Is that how a free market works? If so, it's not a free market. Toll road lessees want to use public resources, namely, the legislature and highway department) to crush any opposition (the alternative roads). It's been happening in the corporate world, to no good end, and now invades the public sector through these "privatization" boondoggles.
What I said in Raising Revenue Through Tolls Isn't Simple concerning the imposition of tolls on existing toll-free roads applies to the idea of private construction and ownership of new roads or new highway lanes. I predicted what DiStefano indicates is about to happen:
Unfortunately, the issue [of tolling existing highways] isn't going to be resolved on the basis of economic analysis, the weighing of public costs and utility, the worth of user fees, or the disadvantages of selling government out to wealthy private interests. Instead, as has happened with so many federal and state legislative decisions during the past several decades, it will come down to politics. More specifically, it will come down to campaign contributions and the granting of favors. And we know, when that is how the game is played, the people with money and assets end up with more, everyone else ends up paying more, and the promised benefits do not materialize as promised. Someday Pennsylvanians and those using Pennsylvania highways are going to rub their eyes, blink, and ask, "How did this happen?" The response will be, "While you were sleeping."
Perhaps the eagerness with which advocates of private toll highways in Pennsylvania have adopted a modern phenomenon originating in California can be matched by their eagerness in reading carefully this warning from the story about the bankrupt private toll road project near San Diego: The outcome “may wind up testing the wisdom of public-private partnerships.” With a growing string of failures presented by their predecessors, the private toll road advocates in Pennsylvania have a lot of explaining to do, and the governor and the legislature have a lot of studying to undertake. The last thing Pennsylvania needs is another failed private sector promise.

Wednesday, May 05, 2010

If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What? 

My post, Is Public Truly Getting IRS-Congress Distinction?, has riled up Peter Pappas over at Tax Lawyer Blog. In If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest, he makes a number of points in an attempt to rebut the propositions and conclusions that I set forth.

He doesn’t like the suggestion implicit in my inquiry, “Isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” He interprets this question as proclaiming my claim that “those who don’t agree with [me] and support tax increases on the rich are being duped by evil rich people.” I don’t see the word “evil” in my question. Yet in a footnote, Pappas concedes, “Maule and Leonhardt are smart enough to refrain from calling those who merely follow conservatives like Sarah Palin evil.” I didn’t use the word evil at any point in my post.

Pappas gets very exercised with my treatment of Sarah Palin’s complaint that “47 percent of households pay no federal income tax.” He particularly is unhappy with my conclusion that Palin’s determination that little of her income will be taxed at special low capital gains rates has triggered the oxymoronic status of her comments. He claims that my conclusion is “pure speculation,” that I have “no way of knowing what, if anything, Ms. Palin has discovered about her tax rates and what effect such a discovery has had on her political positions.” He claims I am “making a pejorative assumption about her motives simply because he doesn’t like what she says.” Actually, Peter, I can’t not like what she says when it is so challenging to figure out what she’s saying, at least until one looks at it carefully. In fact, a close reading of David Cay Johnston’s Tax Notes commentary, What Polls Tell Us About the Public's View of Taxes demonstrates the logic of parsing Palin’s statement. Johnston suggests that his readers try to reconcile Palin’s “sound bite line” with her support of tax cuts. Johnston analyzes why “almost half of households end up paying no income tax last year.” The first of two factors is the economy, which pushed millions of taxpayers into the ranks of the non-taxpaying unemployed. The second of two factors is the Obama $400 income tax credit. Johnston then identifies the people who fall into the category of “not paying income taxes.” He explains, “More than half were elderly – and two-thirds of those old folks got by on less than $20,000. . . . Among households that paid neither income nor payroll taxes, just one in seven was working age and made more than $20,000.” Johnston is confident that “most of those were parents with children making under $50,000 who already paid little tax because of the child tax credit.” Johnston then concludes, “This means that Sarah Palin was complaining about income tax cuts for those who work. Who would have thought Palin was against tax cuts, yet her own words show that either she opposes tax cuts for people with jobs or she has no idea what she is talking about.” Johnston voted for the latter. What Pappas overlooked was my reaction to Johnston’s conclusion: “Perhaps. Or perhaps she very well knows what she is up to, and didn’t realize that some of us are sufficiently blessed with brains and educated with knowledge and understanding of tax law to see through her sound bite rhetoric. Unfortunately, as Johnston notes, the applause she garnered from those in attendance ‘indicates how they failed to connect rather obvious contradictory dots.’” Palin has yet to share a comprehensive picture of her tax policy position, and she continues to make herself unavailable for questioning, as Johnston documents. If Sarah Palin is as upset as Pappas seems to be about how I – and others, not just Johnston – have analyzed her sound bite fest, she surely has more far-reaching platforms than those available to me to illuminate us. So until Palin decides to step up and share some sort of coherent tax policy analysis, it is reasonable to conclude that her quip about “47 percent of households pay no federal income tax” suggests some sort of distress that she’s among the 53 percent who do pay income tax, some of whom see themselves as bearing a greater burden than they should because of the 47 percent. So, to Pappas’ question, why am I “unwilling to give Ms. Palin and those who agree with her the benefit of the doubt?,” I reply, “Because she hasn’t taken the opportunity to erase the doubt, and thus must be trying to gain some sort of advantage by leaving it in place.”

Pappas then complains that I do not “take them at their word when they say they believe that the expansion of government and the confiscation of wealth from successful people is bad for America?” The answer is that “they” (and how the argument shifted from Palin to Palin and her followers is unclear) haven’t proven the basis on which they have reached their “beliefs.” In the face of studies and facts disproving their position, and despite an experiment that put their beliefs to the test and failed, they – or more specifically, leaders of the movement – continue to rile up their followers and recruits with scare tactics that suggest the government is rampaging through cities and towns with the efficiency of Attila the Hun. There’s nothing confiscatory about tax rates in the 30 percent range. Yet polls show that Americans who share the “beliefs” Pappas is defending think that they face tax rates in the 80 percent range. Misinformation has gone viral in America, and it doesn’t earn, at least from me, “benefits of the doubt.”

Pappas asks if I think “all small-government, anti-tax conservatives are motivated by self interest?” Yes, I do. Many are motivated by financial self-interest, as more than a few have admitted to me to my face or in emails. One person said, “I am selfish.” At least he’s honest. Others are motivated by the self-interest of being let alone by government, and that’s clear from their complaint that government is too big and intrusive. They want to do what they want however they want to do it, with no restrictions on their “freedom” and “liberties.” Some of their advocates, of course, claim that they take this anti-tax position because lower taxes mean more jobs, but the experience of the last decade taught us that lowering taxes, in the long run, caused jobs to vaporize, helped the rich get richer, and left everyone else with incomes and assets that declined in real terms.

Pappas claims that my attitude, and those of others who share my views, is “both arrogant and condescending . . . sophomoric and insulting . . .” He then proceeds to give as examples quotes from others, bolstering positions that I may or may not share. My point is that after listening to more than a few followers of the pied pipers of tax reduction, it is clear that they believe in facts that don’t exist, and are in a panic mode because they’ve been told so many boogie-man fables by the denizens of right-wing talk radio. How is it that they conclude people are being crushed by 80-percent tax rates when in fact the reality is different? I didn’t call these people stupid. I called them uneducated. Pappas knows the difference. I did call them exploited. Those who feel threatened by the tides that are sweeping clean the mess of the past decade will do anything to gather votes. Pappas claims I called these people dishonest. I didn’t. I do tag the leaders of this “me first” movement dishonest. Those who spread misinformation or twist facts to fool people or scare people are dishonest.

When Pappas presents his litany of the “many distortions that regularly ooze from the mouths of big government activists demanding higher taxes on the rich, “ he drags out the same worn-out, disproven chestnuts.

To rebut the claim that “the rich don’t pay their fair share of taxes,” he points to the statistics showing that those with higher adjusted gross incomes pay disproportionately higher shares of taxes. For example, 22 percent of income is earned by those who are in the top one percent of income, yet pay 40 percent of income taxes. What these statistics do not show is the amount of income excluded from adjusted gross income by the wealthy, with tax breaks and loopholes not attainable by those without the means to invest in tax shelters and other devices. And, of course, Pappas does nothing to define “fair share,” even though there is much support for the proposition that regressive taxes are not fair.

To rebut the claim, articulated by David Leonhardt, that “rich people . . . who oppose higher tax rates only do so for personal gain while the motives of pro-tax advocates like [me] are pure, Pappas simply alleges that Leonhardt, myself, and others are demonizing our opponents. But where did I claim that my motives are “pure”? In fact, my motives also rest in self-interest. I’m less concerned with maximizing my bank account because I’m more concerned about living in a nation that has untainted food and drugs, pothole-free roads, non-collapsing bridges, safe streets, healthy neighbors and strangers, clean water, an educated citizenry, honest merchants, efficient air traffic control systems, and all the other benefits of living in a civilized society not blemished with the shenanigans of lowly-taxed wealthy pouring money overseas while taking advantage of everyone else by lowering real income and selling tarnished goods. Unlike one correspondent who admits a desire to be left alone, I understand the essential nature of community bound together by something more than a shared sense of greed.

To rebut the claim, articulated by some unidentified person or persons, that “only those who favor tax increases on the rich and an expansion of government are capable of supporting policies that are counter to their private, narrow interests. Everyone else is either a dupe, a moron or a greedy exploiter of the masses,” Pappas merely admits that even though supporting higher taxes is contrary to my own economic interest – and on this, he’s right – I therefore think the anti-tax crowd is incapable of subordinating their “own narrow, private interests to the larger interests of the country as a whole.” I do think the leaders of this movement – a movement rooted in the greed policies of Enron, Bernie Madoff, Goldman Sachs, and others like them – are clearly subscribers to the “me first” philosophy of the me generation. And there are more than a few followers who have communicated directly to me that they are more interested in themselves than in anyone else. But I also think, based on my conversations with people, that once they come to understand the reality of the situation, and think about the consequences of cutting taxes on the wealthy while increasing federal expenditures, they understand that they are being fed a bunch of nonsense. So, yes, until they get straightened out on the facts, they are being duped because those who are trying to dupe them are succeeding.

To rebut the claim that “the poor are audited more often by the rich,” Pappas asserts the opposite and claims that the anti-tax crowd “doesn’t want you to know that because it doesn’t comport with their picture of a society run by greedy, rich men who serially exploit the masses.” The comments to Pappas’ earlier post, IRS Rarely Audits the Poor more than capably explain the reality.

To rebut the claim that the “rich take more from society than they give to it/the poor give more to society than they take from it,” Pappas argues that “[s]oak-the-richers believe that the only way to get the non-rich to support increased taxes on the rich is to convince the latter that the former are a bunch of greedy freeloaders living off the backs of the working class. They euphemistically and dishonestly call this ‘education.’ I, on the other hand, dare to speak it’s true name: Propaganda. The truth is, rich, successful people not only pay most of the taxes in America, they also give the most money to charitable organizations and create the most jobs.” Here’s some education, folks. Take a tour of Enron. Show me the jobs that it created, oh, wait, the jobs it destroyed. Then take a tour of the people who came out on the short end of the financial derivatives gambling game, and guaranteed, the people who made money with that duping scheme aren’t living on the streets.

Pappas asserts that “[a]fter reading Mr. Maule’s post, it is simply impossible to arrive at any conclusion other than that he believes that only an ignorant or maliciously motivated person could possibly be opposed to higher taxes on rich people.” What sort of person can defend tax reductions that fueled a recession? What sort of person is unwilling to remediate the error and put the tax rates back to where they were before they were foolishly reduced? Anyone who studies the experience of the last decade understands why so many Americans are suffering. But the few who hang on desperately to the failures of yesterday, if not ignorant or maliciously motivated, are what? Pappas would say, “They are correct.” I would say, “Doing the same thing over and over again with the same failing result each time is insanity.”

Pappas then shares his reasons for opposing high taxes. He claims “government [is] inefficient,” that he doesn’t “trust the bureaucracy to use [his] money wisely,” that “[g]iving too much power to government is anti-constitutional and poses a threat to freedom,” that “[g]overnment . . . wastes a substantial portion of the tax revenue,” that [g]overnment expansions tend to be permanent,” that the “free market, as imperfect as it is, will circulate wealth in a more efficient and ultimately more just way than the federal government will circulate it,” and that the “clamoring for higher taxes on successful people is a cop out to avoid doing the hard work of cost cutting and a power grab by those who want to remove choice from individuals and give it to an intellectual elite that thinks it knows better than they do what is good for them.” Let’s see, the private sector is efficient, the corporate world can be trusted to use wisely the money it gets from its customers, the private sector did quite well with the reduction of government regulation that has characterized the last few decades, the free market worked so well during the last decade that the economy is booming, and the cutting of taxes on the wealthy has given us a nation of people whose incomes have risen in real dollar terms. Not.

Pappas thinks that those who think he takes his position on account of being ignorant or exploited are shoving the debtate into “the abyss of pejorative and character assassination.” Because I don’t think Pappas approaches this as does the tea party or as does Sarah Palin, I don’t consider him to be within the “uneducated and exploited” crowd. Either Pappas is already among the wealthy, or he is so sure or desirous of joining their ranks that he subscribes to their outlook. Surely he cannot think that the nation is economically better off now than it was before the wealthy engineered their tax cuts a decade ago. Or perhaps he does so think?

Monday, May 03, 2010

Cut Taxes, Cut Spending, Cut Safety? 

The Christie administration in New Jersey has rolled out another of its steps to reduce taxes by reducing state spending. This one, it appears, will also cut safety.

New Jersey faces some serious money problems, which the governor thinks can be solved by cutting state spending so that taxes can be cut in turn. This short-term solution is bound to come at a steep long-term price, as I previously explained in Cut Taxes + Cut Spending = Reduced Education?. In that commentary, I focused on the effect of cutting expenditures for the education of tomorrow’s leaders and voters.

Now the New Jersey Motor Vehicle Commission has decided to eliminate automobile safety inspections. Emissions inspections required by federal law will remain, and surely only for that reason. The principal argument for the repeal pretty much boils down to the notion that the cost isn’t worth it. According to a spokesman for the New Jersey Motor Vehicle Commission, as reported on Philadelphia’s KYW, doing away with these inspections would save the state $12 million. He noted that “state officials don’t think that eliminating the mechanical inspections will pose an appreciable additional danger for drivers.” He explained, however, that studies by other states, by universities, and by the National Highway Traffic Safety Administration into the effect of repealing the inspection requirement have been “inconclusive.” According to the spokesman, 6 percent of the 1.9 million vehicles that New Jersey inspects each year fail the test. New Jersey would continue to require that motorists maintain a safe vehicle. Those that do not do so would be issued a ticket “if a mechanical default was a factor in an accident.”

Twenty-nine states do not require safety inspections, including some that once did but repealed the requirement. When North Carolina studied the matter, it reported that the legislature’s Program Evaluation Division “found no proof inspections improve road safety” and that there had been “no increase in accidents” after two other states ended vehicle inspections. In North Carolina, 5 percent of the 1.9 million vehicles undergoing a safety inspection failed. The top five reasons for failure were defective tires, defective stoplights, defective windshield wipers, defective license plate lights, and defective steering mechanisms. North Carolina’s study also determined that mechanical failure contributed to accidents only 1 percent of the time. North Carolina also determined that inspections sometimes were done too quickly, and in some instances vehicles with problems nonetheless were passed.

A study by the World Health Organization, World Report on Road Traffic Injury Prevention states:
Though periodic vehicle inspections have not been found useful in reducing injury crashes, inspections and checks for overloading and safety-related maintenance for larger commercial vehicles and buses could be important for vehicles more than 12 years old (152). While there is in general no evidence that periodic motor vehicle inspections reduce crash rates, the exception is in the field of commercial vehicles, where defective brakes on large trucks have been shown to be a risk factor (153).
citing “O’Neill B et al. The World Bank’s global road safety and partnership. Traffic Injury Prevention, 2002, 3:190–194.” and “Jones IS, Stein HS. Defective equipment and tractor-trailer crash involvement. Accident Analy¬sis and Prevention, 1989, 21:469–481.” Yet the same report, though, points to seat belts, child restraints, and air bags as examples of improvements that are very efficient in saving lives and reducing injuries without explaining how one can determine if such items are continuing to work properly in the absence of periodic safety inspections.

If one accepts as true that roughly 114,000 vehicles with defective equipment are traveling the roads of New Jersey and roughly 95,000 vehicles with defective equipment are out and about on North Carolina’s highways, is it plausible to conclude that NONE of these vehicles will fail at a time and in a place that leaves the driver powerless to prevent an accident? Only some sort of miracle would prevent every single failure of steering, brakes, or lights, for example, from causing the vehicle to crash. At least in North Carolina there is an admission that mechanical failure is a factor in some accidents. New Jersey tries to brush the matter aside with the notion that there would be no “appreciable additional danger for drivers.” One only need read or listen to the many reports of accidents caused by large trucks on account of mechanical failure to understand that even if some trucks with problems manage to avoid causing crashes, at least until the next time they are inspected, there are enough that do collide with objects or other vehicles to demonstrate the high risk of dismissing vehicle safety inspections for any sort of highway vehicle as unnecessary, unless one thinks that by some magic cars with defective components don't ever crash.

What of the states that do not require safety inspections? Their residents, visitors to those states, and people living in states into which residents of the inspection-free states bring their vehicles are all at higher risk of death or injury. Perhaps not “appreciably” higher, but higher. The fact that accidents did not increase in the two states that repealed vehicle inspections proves nothing because it is quite possible that had inspections not been repealed, there would have been a slight DECREASE in accidents.

Because vehicle owners have a responsibility to maintain safe vehicles, there’s no reason not to require them to have those vehicles inspected. The cost of inspection is a cost of ownership and ought to be financed by the vehicle owners. If the problem in New Jersey is that the inspection fees are too low, thus requiring the state to shell out dollars to subsidize inspections, the solution is to increase the fees so that they cover the cost of having the vehicles inspected and having the state oversee the inspection system. This is a classic example of a user fee. There is no reason it ought not be set at the appropriate price. If inspections are done by licensed private enterprises, then the private companies are free to set a price in an environment of healthy economic competition, to which would be added the small portion remitted by the private company to the state to finance the oversight. There are states in which it works in that manner, and the state does not lose any money on the deal.

In North Carolina, the report emphasized the money that could be saved by vehicle owners if they were no longer required to have their vehicles inspected. But how much money is saved in the long term if an uninspected vehicle fails? Who wants to be the owner of such a vehicle? Surely insurance companies will raise rates to generate funds to pay for the inevitable increase in accidents that will occur as more and more vehicles deteriorate but remain on the road in an unrepaired state. In the long run, the money saved by vehicle owners will not be as much as expected.

I suspect there is more involved in this decision than simply money. I suspect that some of the pressure to eliminate state inspections comes from people who don’t want to be told what to do, who want the freedom and privilege of driving but don’t want the responsibilities that go with it. Will there be people who get their cars inspected even absent a law requiring them to do so? Of course. Will there be people who stop getting their cars inspected once the repeal goes into effect? Absolutely. Do you want to be driving on the road when the vehicle coming toward you has defective steering that would have been caught and repaired had the vehicle been inspected under the existing system?

Little solace can be found in the assurance that if an accident is caused by the mechanical failure of a vehicle a ticket will be issued to the vehicle owner. That threat will not deter the people most likely to let their vehicles go uninspected. The threat of a ticket being issued to the person whose vehicle killed someone’s child, spouse, parent, or friend is a wholly ineffective waste of time that comes way too late. Does it matter that there will be only an unappreciable increase in accidents on account of inspection repeal? Unquestionably, if the additional person killed on the highways after the repeal goes into effect is someone’s friend or family member.

Considering that state vehicle inspections can be funded through user fees and that the state budget can be reduced by increasing inspection fees to do away with the state subsidy, why go for a short-term fix that will bring long-term costs, including death and injury? Is it simply a matter of being able to proclaim that the governor “got the government off your back”? That’s too bad, especially when you are trying to get someone’s uninspected, unsafe vehicle off your child’s back. Think about that when pondering the Christie administration’s outlook that the cost of state vehicle inspections isn’t worth it. Hopefully no one’s friend or relative will need to pay the price.

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