Category Archives: Economy

North Carolina Tax Reform

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The North Carolina Senate GOP recently revealed a plan for far-reaching tax reform.  This major reform will make several changes by lowering marginal income tax rates on both individuals and corporations, as well as begin to shift the burden of taxation to consumption rather than income.  These changes would be financed by a reduction in spending (long overdue) and an increase of taxes on services that are currently exempted.

This is the type of reform that is needed in a state with persistently higher unemployment than seen nationally, and a tax system that penalizes earning.

Moving a greater share of the tax burden to consumption is more efficient and more “fair” by any measure.  Critics argue that consumption taxes hurt those with lower income, yet this belief is based only on the current antiquated tax code.  Income taxes penalize all earners, and these taxes create a disincentive to earn (and for small business owners there is a disincentive in show a profit).  A system that forces any earner to hide and shelter their income is backwards.  In fact, consumption taxes are much more efficient.  They more you consume, the more tax you pay.  Thus, those who earn more income (and who also spend more of that income) will pay more in taxes.

Economists have argued for decades that consumption tax systems are more efficient because they push the individual tax burden into the future.  Younger tax payers will have more incentive to earn today, and then they will consume more in the future (especially after retirement).

Governor McCrory and the NC legislature should move forward on this reform and establish North Carolina as a national leader in tax policy change.

Mr. Krugman I Don’t Understand Your Economics

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Paul Krugman wrote recently in the New York Times another piece of wayward economic analysis.  His focus is a critique of Marco Rubio’s response to President Obama’s State of the Union address on Tuesday night.  Krugman claims that “that zombie economic ideas have eaten his brain” speaking of Senator Rubio.

 

Let’s look at these zombie ideas that Krugman claims the republicans, and classical liberals more broadly, are holding onto regarding the financial crisis, despite the facts:

 

Krugman “No, the government didn’t force banks to lend to Those People”

Krugman “[N]o, Fannie Mae and Freddie Mac didn’t cause the housing bubble”

Krugman “[N]o, government-sponsored lenders weren’t responsible for the surge in risky mortgages”

 

I guess Krugman still believes that markets, left to the process of self-adjustment, led to a housing bubble and collapse and intervening years of high risk lending.  No, the government didn’t force banks to lend, but the government (via the Fed) did force the price of money down to historic lows spurring mal-investment and unsustainable borrowing.  Did Fannie and Freddie cause the housing bubble?  Why no Mr. Krugman, but they did incentivize high risk lending by buying mortgages from banks and other institutions.  When government is the insurer…risky lending results.

 

When was the last time an unregulated industry collapsed?

NC Tax Proposal – On the Right Track

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There is controversy from the McCrory administration over the recent tax reform proposal by Senate Republicans, yet the proposed changes are a step in the right direction.  Taxation on consumption rather than income is more efficient, and it creates the right incentives to earn and to locate a business in the state, but McCrory’s top budget officer has concerns.

 

Reforms are sometimes difficult, but eliminating the income tax would go a long way toward stimulating the North Carolina economy.

Once again: Politics over Economics

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Harvard Economist Greg Mankiw points out that President Obama has again chosen politics over economics in his deal with the house Republicans to avoid the fiscal cliff.  Obama appointed the bipartisan Bowles-Simpson commission to examine the necessary fiscal reforms to move the U.S. economy forward.  The primary recommendations presented by the commission were almost entirely rejected by the President.

 

Instead of reforming entitlement programs and avoiding tax increases, the legislation passed by the house ignores both the current $16 trillion debt and the increasing annual deficits due to massive entitlement programs.  Marginal tax rates are set to increase on those earning more than $400,000 which will have an impact on many small businesses who create a large portion of the jobs in this country.

 

So, once again there is little evidence that the President is seeking to advance lasting reform.  Political pandering is more important than securing America’s economic future.

The Problem of Healthcare Costs

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Many argue that the Affordable Care Act (often referred to as Obamacare), is better for patients.  Those who do not have healthcare will be forced to purchase health insurance.  This mandate provision in the law that requires the uninsured to purchase health coverage gives those under certain income levels a subsidy to buy their insurance, and all others will pay for their insurance out-of-pocket.

The Congressional Budget Office (CBO) recently reported that the number of Americans who will face tax penalty unless they purchase insurance is 50 percent higher than originally estimated when the bill was passed.  One of the unintended consequences of this new law is that many who must purchase health insurance (or face a penalty) are increasingly those in the middle class that President Obama promised to protect.

One question that arises is what criteria determine the best system for patients?  In any country, there will not be enough healthcare to provide all citizens unlimited care.  Healthcare is a scarce resource and must be allocated as such.  Yet, one of the most prominent problems with healthcare allocation is that costs have climbed at a much faster rate than inflation and the rapidly changing technological improvements in healthcare don’t lower costs as in most industries.  Thus, the myriad challenges with government spending and huge deficits for entitlement programs such as Medicaid and Medicare.  Costs continue to rise, and the Affordable Care Act does little to deal with this cost problem and patients suffer because they cannot afford care.

New York University economist William Baumol, recently published the book Cost Disease where he addresses this issue.  The subtitle of the book “Why Computers Get Cheaper and Health Care Doesn’t” gets right to the heart of the issue.  In it, Baumol explains this disease where in the service sector (and particularly in government) productivity tends to stagnate while costs rise over time.  In healthcare for example, it takes the same amount of time for a nurse to perform a basic task, such as bandaging a wound, today as it did 20 years ago.  So, healthcare workers’ wages rise overtime yet productivity tends to remain flat (or flatter).  Presumably then we should experience lower costs in healthcare on the capital intensive/technological side of the industry.

Why does technological advancement in healthcare fail to reduce costs?  The answer here is not that a MRI scan and a personal computer are fundamentally different in terms of their technological development, but the pricing system for these products and services is profoundly different.  It is estimated by the CBO that half of all healthcare costs are driven by advances in technology, and while patients are the primary beneficiaries of this technology third parties pay for them.  Insurance companies and government programs approve a specific payment for a particular medical procedure and this procedure becomes available at the mandated price.  The supplier now has no incentive to lower its price because there is no competitive pressure to do so, and there is little prospect of increasing sales and market position by reducing prices.

Consequently, in healthcare both the cost disease problem explained by Baumol and the third party payment system create an industry where prices rise unchecked and there is no market-based means of cost reduction.  The Affordable Care Act fails to address the most basic problem with the U.S. healthcare system, which is uncontrollable costs

The Messy Tax Code

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As we enter the final days before IRS filing is due, many are considering the mind-numbing complexity of the U.S. tax code.  It is estimated that taxpayers and firms spend over 6 billion hours per year attempting to correctly file tax returns.  Not only does this figure represent the equivalent of millions of workers, but it also pulls billions of dollars out of more productive uses.  According to the IRS Taxpayer Advocates, who reported to Congress in 2010, the complexity of the U.S. tax code is driven, in part, by continual changes to the system as the federal government attempts to squeeze more and more out of taxpayers.  In the past decade there have been approximately 4,400 tax code changes resulting in 3.8 million words to document the American taxation system.  Since 1913, the tax code has ballooned from 400 to 72,536 pages in July 2011.  Worse yet, the blog Political Calculations expects that number to jump to 74,944 in 2012.

The irony of such an intricate tax system is that complexity is connected to compliance.  This is true both of honest taxpayers and evaders.  A recent report stated that IRS help centers provided wrong answers to taxpayer questions almost 30 % of the time.  Even the 90,000 plus IRS workers are unable to keep up with this ever-changing system.

The obvious question is why the complexity?  Why does the federal government try to increase revenue through such a complex set of rules?  The answer goes back to the fundamental role of government.  If the government wants more of something it subsidizes it, and if it wants less of something it taxes it.  A subsidy to the corn industry helps farmers grow more corn and more ethanol is produced.  A tax on imported sugar keeps sugar growers in America happy by keeping out global competition.  So, Congress uses the tax code to regulate the market in order incentivize specific behavior.  In other words, the complexity of the tax code is due to the unbridled desire for Congress to regulate.  The complexity is not a necessity to ensure Congress replenishes its coffers each year.

Congress loves to provide incentives to the tax code.  Any problem it wants to solve, use the tax code.  Any behavior it wants to change, use the tax code.  Any industry it wants to prop up or diminish, use the tax code.  President Obama’s stimulus package, which passed early in his presidency, added 300 pages to the tax code.  Manipulation of the tax code has simply become de facto government regulation.  This is not a new practice for Congress or the President.  Ever since the 16th Amendment, the federal government has increasingly used income taxes (on individuals and businesses) to regulate, but the ridiculous nature of this ever-increasing complexity is out of control.

Pursued by industry in order to impact individual incentives, federal tax deductions exist for children with an overbite who enroll in clarinet lessons and whaling captains can deduct ship repairs even though whaling in the U.S. is illegal.  The government also provides many additional deductions of impact healthy behavior from quitting smoking to doctor-ordered exercise.  While these may be a benefit to your health, is it prudent to add to the increasing complex system with additional changes, loopholes, and deductions?

Sadly, simplifying the tax code has become a partisan issue pitting those in favor of smaller government versus those who look to government to solve economic and social problems.  This is a mischaracterization of the issue.  Tax complexity is a massive waste of resources.  No matter if you are conservative or liberal, the billions of dollars invested in tax compliance are wholly unnecessary.  There may be differences on how to use the billions of dollars that would be saved with a simple system, such as a flat tax or a consumption tax, but all taxpayers should agree that 90,000 plus IRS workers and $430 billion spent each year on compliance is a colossal waste.  Now let’s convince Congress to change the system.

Obamanomics or Reaganomics?

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My newest op-ed was just published by WND.com.  In it, I discuss the ways in which government needs to “back out of the system” in order to stimulate real growth-much as Reagan did during his years of Presidency.  The op-ed is based on my latest Jesse Helms Fellows white paper  “Research on Reaganomics: Past Contributions and the Future of Economic Growth Policy.”

You can read the Obamanomics or Reaganomics op-ed at World Net Daily’s site or you can read it in its entirety below.

OBAMANOMICS OR REAGANOMICS?

Exclusive: Peter Frank advocates reversal
of ‘government is the solution’ mentality

Published: 12/16/2011 at 1:49 PM

http://www.wnd.com/2011/12/378229/print/

Economic growth is of primary concern for policymakers and the Obama administration as the president continues to tout policy designed at stimulating job creation. The mantra continues that in order to get the economy growing again, and move people into the labor force, government needs to spend more. A jobs bill, a stimulus package, a bridges bill, etc. – all that is needed is more government spending. Congress has all but forgotten, or so it seems, about the growing national debt with a $1.3 trillion budget gap this year alone. So the spending proposals continue. To what end? And has this solution proved effective in the last series of major economic challenges of the late 1970s and ’80s?

The Obama administration recently approved a half-billion-dollar federal loan guarantee to an electric-car company that has decided to manufacture its first line of automobiles in Finland. Is this the path to growth and continued prosperity for Americans? The problem here is not a question of intentions. Surely all legislators and the president desire to put Americans back to work. The problem resides in the basic limitations of government. There is no agency, politician, or bureaucrat that has enough information to efficiently direct resources in order to ensure a particular outcome. Decision-making by market participants informed by the specific knowledge of their complex circumstances is the only way forward. Washington lawmakers are unable to predict U.S. tax dollars fleeing to Finland and employing Finish autoworkers.

Instead of pushing spending bills and stimulus packages, instead of inciting protesters to blame American firms for all the evils in the world, the president should shift his focus to policy of which government can actually predict the beneficial outcome. Tax reform is the solution. Ronald Reagan demonstrated in the 1980s that when government gets off the backs of the people economic change will follow. Reagan pursued radical tax reform for two primary reasons: to lessen the burden of government while promoting the founding ideals of economic and political freedom, and to promote incentives that generate economic growth.

Optimal tax policy is not that which maximizes revenue to the federal government. Government has a limited function to perform, primarily a protective one, yet it is clear that for too many in Washington that the reach of government should have no bounds. Thus, when policymakers view government as the first solution to all economic problems, spending decisions are made irrespective of revenue – which leads to the massive deficits.

In addition to promoting liberty, the unprecedented tax reform ushered in by Reagan set a course for economic growth that was unparalleled in U.S. history. Cutting marginal tax rates for all wage earners and for the highest earners by 42 percent in six years, Reagan changed the incentive to work and earn and thus unleashed frenetic economic activity. This type of leadership and this scale of reform is what America needs today.

The solutions offered by the Obama administration to the economic stagnation that persists in the U.S. economy all reside in a failed ideology. Unlike during the 1980s, the belief in Washington today is that government is the solution and the real problem is tax policy that fails to generate enough revenue for the government to spend. Pulling dollars out of the market economy for government to spend on stimulating the market economy is backwards, yet this is exactly what the president is pushing for.

The time has come for politicians in Washington to pursue radical tax reform in the model of Reagan 30 years ago. Incremental changes in marginal tax rates will not provide the stimulus needed to jump start a sluggish economy, and raising rates on any level of income will only increase (albeit temporarily) the ability for government to spend more using the failed approach of “more spending” as the only solution. A complete change of the tax code will usher in a new decade of prosperity as occurred in the 1980s, but this will only happen if new leadership in Washington governs with the conviction that less government will lead to more “public” prosperity.