Has the GOP become the Tax-The-Poor Party?

In the late 1850s, a Northern performer began playing what he thought was a humorous and biting tune about the South. In less than a decade, to his shock and horror, Dixie became the unofficial anthem (and label) of the South itself. I’m wondering if Rush Limbaugh feels the same way about his 1991 April Fool’s Day rant in favor of taxing the poor…because the Republican Party appears to have made Tax-The-Poor its one consistent economic policy – to its and the nation’s peril.

Contrary to what it might seem, this realization did not hit me with John Cosgrove’s victory last night (although perhaps the inspiration to post did). Cosgrove defeated Stearns (my preferred candidate) for many reasons, some of which Brian Kirwin describes in detail here. That said, the nature of that race – namely that Stearns himself needed to run to ensure an anti-tax-hike candidate was even an available choice – is yet another symptom of the larger disease that is damaging the party: to wit, a desire to avoid reducing the size and scope of government by making poor Americans and Virginians cover its cost.

Moreover, this should not be seen as an indictment of one wing of the party, or a salvo in intra-Republican arguments. The entire party – economic and social conservatives, moderates and “RINOs”, and anyone else I may have missed – are culpable in this, including yours truly.

Admittedly, those who have supported the various GOP-backed tax increases in Virginia seem to be the worst offenders – emphasis on “seem”, because even those of us who are not in that group have shown a refusal to acknowledge the problem, let alone address it.

Think back to last year, when all of the arguments regarding the expiring tax cuts focused on the income tax rates. Obama wanted higher ones; the Republicans didn’t. Everyone quickly assumed their usual positions (such as they were) on taxes.

Yet when Obama asked to extend the payroll tax reduction and Republicans demanded he drop it, hardly anyone in the GOP uttered a word in protest: not the economic conservatives, not the social conservatives, not the moderates, not the “RINOs”, not the squishes.

Why were we all so comfortable letting a tax cut for the poor expire?

Closing in on Virginia, just about every tax increase proposed by Republicans or enacted with Republican support involved taxing the poor, and not lightly (even the 2004 income tax hike in Virginia, whose highest rate begins at $17,000 a year, hit poor Virginians, and the higher sales tax that year certainly did). How have tax-hiking Republicans tried to fund their transportation “fixes” in the past? Higher gas taxes or higher sales taxes. How did they “fix” it this year? Higher and broader sales taxes. Who feels the effect of these regressive taxes the most? The poor.

As for those of us on the opposing side of these tax increases, how have we made our arguments? To be fair, I can’t speak for all, but I can speak for myself, and I have focused largely on the dynamic portions of the economy, and how they are slammed. I have focused on how the regional tax increases were tax-the-rich in disguised. I ripped the lack of budget discipline. I talked about misguided road priorities and dysfunctional systems.

And my posts railing about the effect of the tax hikes on the poor? Don’t bother looking, even I know they’re not there.

We are rapidly approaching a new and dangerous consensus on the size and growth of government: i.e., big is back. The only arguments we seem to be having is whether the rich should foot the bill (as the Democrats contend) or the poor should (as Republicans increasingly contend). However, turning the Republicans into the tax-the-poor party has horrific consequences.

Firstly, as I’ve hinted above, it politically institutionalizes big government. The distance between America and Europe can really be described in one policy: the Value Added Tax. Without it, the half-social-democracy-half-corporatist-democracy we have built is unsustainable within a decade. With it, the thing can wheeze forward for a generation or more – long enough for our children and grandchildren to assume that this era was the economic equivalent of the Wild West.

Moreover, it marginalizes poor Americans politically. Was there any discussion of the poor in the 2012 presidential campaign? Has there been any in the current races this year? Are we really that convinced, as Republicans, that we have nothing to offer the poor but higher tax bills? The poor have to deal with big government as much as we do – in many cases, more so. They know as well as anyone how inefficient, demoralizing, and draining of human capital it really is.

Finally, it puts us at immediate electoral disadvantage. If the Democrats talk about higher taxes for the richest 5%, while Republicans talk about taxes for the poorest 25%, we’re 20 points behind from the get-go. Not smart.

The Republican Party has much to digest from the last year, and we need to ask, as a party, what we wish to be. There can be several answers, good and bad. I humbly submit a tax-the-poor platform is just about the worst of the lot.

Cross-posted to Bearing Drift

Sanford wins special election to Congress

I am surprised at how the blogosphere seems to have missed the pertinent lesson of Mark Sanford’s return to Congress last night.

Yes, it’s a highly Republican district (SC-1). Yes, Sanford has had some personal issues. Yes, he ran about 8 points behind Tim Scott (although, this being a special election, weird things can happen).

What seems to have slipped past…well, everyone…is that Sanford also had a political record, one of the strongest in the country on spending and taxation. With his election, he is now the first member of Congress to to sign the Reject the Debt pledge from the Coalition to Reduce Spending, a great leap forward for accountability on the spending side of the budget.

Last night was a great day for limited government, and a sign that economic matters are once again firmly at the forefront of the political discussion today.

Take note, folks.

Cross-posted to Virginia Virtucon

Chris Stearns for State Senate

The May 7 “firehouse primary” for the 14th State Senate District is a tough one for me. I have friends who are backing Delegate John Cosgrove, friends I like and trust.

However, Cosgrove voted – every chance he got – for the massive tax hike known as Plan ’13 From Outer Space. Stearns, by contrast, opposed it steadfastly.

That makes Stearns the superior choice, and gives him the place in the hallowed right-hand column.

Why the Internet Sales Tax is a mistake

One of the fundamental rules of Washington legislation is that its effect will be the exact opposite of its title. Nowhere is that more true than with the “Marketplace Fairness Act” – the hilarious-if-it-weren’t-so-tragic name given the Internet Sales Tax.

The logic behind this, if one can call it that, is that online sellers are getting an unfair advantage because they can avoid paying sales taxes on their sales to consumers. This is due to the fact that said online retailers are under no responsibility to charge the sales tax in which the buyer lives.

There’s only one problem with that: brick-and-mortar stores don’t have that responsibility either. As the editors of National Review noted (emphasis added):

Historically, sales taxes have been imposed and collected at the point of sale by tax authorities with jurisdiction in that particular location. This arrangement has the important effect of making local tax authorities directly accountable for their decisions: If a township should impose an unreasonable sales-tax hike, then the local businesses to which that matters most have an opportunity to respond, either through the political process or by the expedient of packing up and moving to a new location with more reasonable taxes. Tax competition is a salubrious thing for cities, for states, and for the country at large.

But the tax collectors do not much care for it: Taxing authorities in such high-tax locales as Philadelphia and Maryland’s D.C. suburbs resent the fact that consumers make the drive to Delaware for high-priced purchases. In most places, consumers are supposed to pay an equivalent “use tax” on out-of-state purchases, but those laws are difficult or impossible to enforce in many cases.

In other words, Delaware retailers are under no responsibility to charge the sales tax in which the buyer lives. It is up to the buyer to make up the difference. As one can imagine (and the NR editors note), enforcing this on the ground is as difficult as enforcing it online.

Yet does the “Marketplace Fairness Act” address this? Of course not, because it’s not about the marketplace or fairness; it’s about sticking it to online retailers and letting states gobble up more revenue without any political consequences. Thus, a perceived disadvantage to brick-and-mortar stores would be replaced by an actual disadvantage to online retailers.

So, with the “fairness” argument having crashed and burned, let’s look at the actual effects of this tax turkey:

• Taxes will go up: Of course, that’s a supposed feature rather than a bug, but too many people are trying to get away with the claim that this is merely enforcing an existing tax. That may work for the lawyers, but economists know better: a tax unenforced is effectively a tax that doesn’t exist. As such, the economic consequences will be just as one would expect from a tax hike: sales will fall and tax avoidance will rise.
• Online retailers will face higher costs: Don’t tell me that the federal government will clear everything up with free software for retailers to calculate the myriad tax rates for myriad jurisdictions. What happens when the software errors occur? Or localities change their tax rates and “updates” need to go out? Will the federal government subsidize this software forever? Moreover, why is it that the solution to a burdensome regulation should be increasing retailers’ dependence upon Washington, DC? Haven’t we seen the damage done by corporatism often enough without having to see its damage online?
• Political accountability and transparency will suffer: Everyone in Washington who votes for this will swear up and down that they didn’t vote for a tax hike. Every legislator and local official who reaps the revenue windfall will swear up and down that this was Washington’s doing and they’re just along for the ride. Accountability and transparency in government? That’s so 20th century…

In short, the bill damages both the marketplace and fairness. No wonder Congress is calling it the “Marketplace Fairness Act.”

The Hollande endorsement, one year later

A year ago last Monday, I made my first ever left-wing endorsement for national leadership when I backed Francois Hollande for President of France. I did so for a particular reason – to stop, or at least slow down, the Fiscal Union agreement. Sadly, Hollande basically agreed to cosmetic changes in the FU, and even went forward with his own Fauxsterity debacle for his country. Despite that, I must say the ascension of M Hollande to the presidential office has been far more beneficial than even I expected – albeit for reasons that had nothing to do with his own policy ambitions.

For starters, his attempt to wring the prosperous for enough revenues to keep his government afloat has managed to jolt the business community in France out of its corporatist slumber (Reuters). Economic arguments that are more the norm in Britain and the US were usually swept under the Gaullist rug – until now. France will be infinitely better off now that economic policy will truly be debated, for the first time in decades.

Moreover, while Hollande didn’t push much on the FU, he has shattered the “Merkozy” relationship between Paris and Berlin. The unexpected result has been a slow-motion German reassessment of its place in Europe. At the top, Angela Merkel is finding David Cameron – of all people – more of a kindred spirit on European matters than her French neighbor. More importantly, euro-skepticism in Germany is finding its voice at last, with a new anti-euro party already reaching the support level needed to enter parliament…despite being in existence for less than a month (Reuters).

In short, while Hollande did not stop or slow the FU as I specifically wished, he did break one of the key bonds that gave the disastrous EU the strength it had. The end of that bond has already had repercussions for national sovereignty (none of them bad, that I can see). All in all, I think the endorsement was still a good call.

Data issues and errors spread from global warming alarmism to economics…and from left to right

Whenever I mention the statistical chicanery, data manipulation, and errors behind “global warming,” my friends on the left go into high dudgeon. They can’t fathom that such things could occur among the “experts.” Well, this week, a new example of data issues (along with an error) popped up – in my discipline (economics), and from a paper largely used on the American and European right.

James Kirkup (Telegraph) explains the importance of the paper, known in academic-speak as Reinhardt and Rogoff, for the Conservative/Liberal Democratic Coalition in the United Kingdom:

“Rogoff and Reinhart” are Kenneth and Carmen, two economist (sic) whose influence over the Coalition’s economic policy is hard to over-state.

In essence, the economists argue that government above a certain level – 90 per cent of GDP – is catastrophically bad because it exerts a “significant negative effect on economic growth”.

Their argument, backed up with empirical data from lots of countries, played a major part in persuading Mr Osborne and his colleagues that the No 1 priority for the Coalition’s economic policy should be the reduction of the deficit and, ultimately, a check on UK government debt levels.

Mr. Osborne is George Osborne, the Britain’s Conservative Chancellor of the Exchequer, but Paul Ryan has also relied on the R&R paper as evidence to bring the American budget into balance, and it has also been part of the inspiration behind the Mediterranean being driven to Fauxsterity.

So when three economists at the University of Massachusetts (Thomas Herndon, Michael Ash, and Robert Pollin) tried to replicate R&R’s work – and couldn’t – they were naturally concerned. They were, however, able to access Reinhardt and Rogoff’s data…and what they found stunned them.

To wit….

• Regarding data itself, Herndon et al found ”data exclusions with three other countries: Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950).” Now while one could argue that post World War II data should be excluded due to unusual circumstances, it does not explain why United States data was not excluded. As a result of the exclusion, Australia and Canada went from five years where the Debt/GDP ratio was above 90% to zero.  Meanwhile, New Zealand’s data went from five years (with an average of +2.8%) to one (with GDP growth at -7.9%). Speaking of the Kiwi data…
• “RR adopts a non-standard weighting methodology for measuring average real GDP growth within their four public debt/GDP categories. After assigning each country-year to one of four public debt/GDP groups, RR calculates the average real GDP growth for each country within the group, that is, a single average value for the country for all the years it appeared in the category.” Translation: Britain’s 19 years of data at high debt levels were given equal weight with New Zealand’s one year. I don’t think I need further explain the problem with this, especially given New Zealand’s prior data issues. It should be noted that Britain averaged 2.4% growth during the aforementioned 19 years. Belgium had 25 years of relevant data, but in addition to the weighting issue, the Belgian data was felled by…
•  ”A coding error in the RR working spreadsheet (which) entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis.” As it happens, the first problem already dropped Australia and Canada, while Austria and Denmark had no relevant data anyway, but Belgium’s 25 years were excluded by the error.

So, when all of the above issues are backed out of the data and model, Herndon et al still find a reduction in economic growth when debt/GDP ratio hits 90%, but it’s a much smaller value than R&R found, and it turns out to be statistically insignificant. In fact, a regression analysis of the data found the inflection point (where things go from good to not-so-good) to be at 30% of GDP, not 90% (and that’s if one chooses to ignore the hideous R-squared statistic of 0.04 – on a scale of zero to one – which means the data explains hardly any of the changes in economic growth).

As it happens, my concern regarding government is more about its scope, size, and cost (in that order) than about how much it borrows. That said, many on the right have used R&R in part as justification for reducing deficits and debt. Based on the above, they may want to look to something else.

More to the point, this shows that climate policy isn’t the only political issue that has – to quote Coldplay – “castles stand…upon pillars of salt and pillars of sand.”

The Fauxsterity Chronicles: Greece

At first read, the Examiner headline gives the impression that Greece is finally getting the message about what needs to be done – “Greek Workers to be Fired.” Here are the details:

The civil service redundancies, with a target of 15,000 by the end of next year will target “disciplinary cases and cases of demonstrated incapacity, absenteeism, and poor performance, or that result from closure or mergers of government entities”.

The sackings will overturn a Greek constitutional guarantee of jobs for life for civil servants, aimed at protecting public sector workers from unfair dismissal due to their political affiliations.

The special protections and widespread political cronyism or corruption led to the Greek civil service becoming bloated, with 700,000 officials in a country of less than 11 million people.

“It’s still a taboo to dismiss people from the public sector. There have been no forced dismissals of employees whose positions are eliminated or who for some reason do not perform,” said Mr Thomsen.

Note that “Mr. Thomsen” refers to Paul Thomsen, who speaks for the International Monetary Fund on the Greek file – and who, at first, looks like he finally drove the important message home.

Well…not so fast (Boston Globe, emphasis added):

(Greek PM Antonis) Samaras said 15,000 civil servants would be removed by the end of 2014, with 4,000 of them by the end of this year. New young employees will be hired in their place.

. . .

Minister for Administrative Reform Antonis Manitakis said Greece’s creditors had long been pressing for 15,000 public sector workers to be sacked without being replaced, but the agreement to hire new workers in their stead followed the higher-than-anticipated number of retirements — more than 180,000 of which are expected between 2010-2015.

On one level, this is just maddening; on another level, it is revealing. The IMF, European Central Bank, and European Union – by agreeing to this – have made it abundantly clear that this was never about genuine economic reform. Governments in Europe can be just as big, bloated, and burdensome on the private sector as they wish. They just have to make sure the accounting isn’t out of whack.

This is classic big-government-on-the-cheap – or, as I now prefer, Fauxsterity – and the “troika” just endorsed it.

In other words, Europe will never fix itself, because Brussels doesn’t want that. So it will be more tax increases and chicanery like this, until it all comes crashing down…

…after German voters are duped into thinking all is well on Election Day, of course.

The Prez’s budget: higher taxes and higher spending

You read that right: the president’s ten-year budget plan calls for higher spending over the next ten years.

Patrick Brennan (Corner) provides the details on the tax side, and finds that the total tax increase actually comes to just over $1 trillion.

That means less than of the “$1.8 trillion in additional deficit reduction” is actually spending “cuts” (about $800B). Why did I put “cuts” in quotes? Because the president’s budget also cancels the sequester, meaning that $1.2T in cuts are “replaced.”

Thus, actual deficit reduction is roughly $600B, and with the $1T in tax hikes, spending actually rises by $400 billion over the next decade under the president’s budget.

Maddening.

Portugal Constitutional Court rejects Fauxsterity Plan A, pushes Fauxsterity Plan B

The Portugese government, like just about every other deficit-crippled government in the Mediterranean, has responded to Brussels’ demands for belt-tightening with what I like to call big-government-on-the-cheap (or Fauxsterity), i.e., cut government salaries and bonuses, along with tax hikes.

Portugal’s highest court – the Constitutional Court – just shot that down today (New York Times), but that isn’t good news either:

The measures rejected by the court represented about 1.4 billion euros, or $1.8 billion — more than a fifth — of the 5 billion euro austerity package of spending cuts and tax increases. Among its rulings, the court drew a line on cuts aimed specifically at civil servants, who it said were being singled out for punishment and therefore discriminated against.

The decision has now called into question how the government can meet its budgetary goals in the near term and raised the broader issue of just how much austerity will be tolerated, not only by disgruntled citizens but also by justices who often act as the guardians of the Continent’s cherished social welfare system.

“The ruling could be interpreted as saying that all public spending cuts that affect civil servants are unconstitutional,” Fitch, the credit rating agency, wrote on Monday. “If that interpretation is correct, the ruling represents a setback to future fiscal adjustment efforts in Portugal.”

It added, “This is a greater concern than its immediate impact.”

…Luis Cabral, a Portuguese economist and professor at New York University, said the court still went beyond a legal ruling and delivered what amounted to “a significant political statement,” which means that “effectively, government expenditure cannot be reduced.” In terms of Portugal’s budgetary commitments, Mr. Cabral added, “when you put it all together, it’s clear that things do not add up.”

In other words, the court is demanding Lisbon raise more taxes, period, the very thing that has failed… just about every other deficit-crippled government in the Mediterranean.

This will not end well.

House passes amended Plan ’13 From Outer Space (UPDATED: Senate does too)

The House of Delegates approved McDonnell’s changes to HB 2313 (a.k.a. Plan ’13 From Outer Space), by a 64-35 vote. The roll is not up yet, but taxes will go up, including automatically for regions in the future that hit certain population and traffic levels.

I am deeply disappointed. This bill (and I assume the State Senate will grease the skids for this debacle UPDATE: which the State Senate has also passed with the Governor’s changes) will damage the state’s economy, political transparency, and accountability…while doing nothing about its over-centralized and dysfunctional transportation system.

It’s a sad day for Virginia.