Pat Allen: The View from Right Field

The New French President Wants to Raise Taxes on the Rich - But the Rich Don’t Want to Pay

I have commented several times that, in effect, it is a lot easier to raise tax rates on the rich than it is to get them to pay more taxes. It is worth it to the rich to pay big money to their accountants and tax lawyers to avoid, or at least minimize, the effect of higher tax rates.

And so, I read with interest an article in SpiegelOnline on Friday about the effect of new French President Francois Hollande’s campaign promise to raise the tax rate on incomes above one million euros to 75%:

“During the election campaign, French President François Hollande threatened to slap an income tax rate of 75 percent on high earners. Since then, wealthy French have been looking for ways to get themselves and their money out of the country. And nowhere looks more attractive than millionaire-friendly London. …

Real estate agents have been aware of a new wave of interest for months, but it's been especially noticeable since Feb. 28. The night before, the then Socialist candidate for French president, François Hollande … announced that, if elected, he would raise the top rate of tax on incomes over €1 million to 75 percent. … [I]n London, the news produced a reaction that was noticeable on the computers of the London-based property company Knight Frank.

‘Since February, when Hollande announced his wealth tax, there has been a large rise in web searches from French customers,’ Liam Bailey, head of residential research at Knight Frank, recently told the Daily Telegraph.

To meet the demand, the property company Douglas & Gordon has just opened an office in South Kensington, where four native French speakers will be available to help out their house-hunting compatriots. Hollande's tax speech immediately led to a 40 percent increase in inquires from worried French citizens, says David Blanc from the London asset management firm Vestra Wealth. …

London Mayor Boris Johnson, who speaks perfect French, recently encouraged workers in France's financial sector to move to the City. ‘Bienvenue à Londres,’ he said in February. ’This is the global capital of finance. It's on your doorstep.’ …

In South Kensington, the epicenter of elegant French exiles, the bon vivant can get all life's necessities. There are French creperies, fromageries and rotisseries, as well as French bookstores and bakeries. There are French-speaking dentists, plumbers and tax accountants, not to mention French schools. There is even a French cinema and a radio station. The French's tricolor flag is as visible here as the Union Jack, and the district secretly sees itself as the 21st arrondissement of Paris.”

Just like in the United States: It’s a lot easier to raise tax rates than it is to get people to pay more taxes.

Paul Ryan’s Budget Plan – Such As It Is*

Last week Paul Ryan (R-WI), Chairman of the House Budget Committee, presented his proposed budget plan for fiscal year 2013, which starts October 1, 2012, and people in both parties are happy.  Republicans (or at least some of them) are happy because it gives them something to stand on, a program to get the budget under control and get/keep taxes down.

Lots of Democrats are happy too, perhaps even happier than some Republicans.  Of course, the Democrats aren’t happy because they think Representative Ryan’s plan is good one and they can to support it.  Rather, the Democrats like it because they think they will be able to use it against the Republicans in the fall (politics über alles, after all).**

I haven’t read enough about Representative Ryan’s plan to know all of the details.  I have a couple of concerns, and there are several things I really like.  First, the concerns.  I wish Representative Ryan, and other House Republicans, were not trying to set the cap for discretionary spending for fiscal year 2013 below the number that was agreed to last August.  The deal last August set a cap of $1.047 trillion for discretionary spending for fiscal year 2013.  Representative Ryan’s budget drops that number by $19 billion to $1.028 trillion.  Democrats call this a breach of faith, while the Republicans say the $1.047 trillion figure was a just maximum, not an agreed-upon number.  I’m not sure who is right, but I wonder if a fight over $19 billion, especially this way, is something we want to be doing in the middle of the presidential election this fall.

Also, I wish Representative Ryan could have been a little more specific on how he is going to get the necessary tax revenues to start cutting the deficit, especially with his proposed reductions in tax rates.  (The deficit is so big that cutting spending isn’t going to do the job by itself.  We need to increase tax collections, too.)  Representative Ryan said that that isn’t the job of the Budget Committee, and he is right.  Still it would be nice to see more specifics.  But then maybe identifying the necessary changes (i.e., the deductions we would have to get rid of, etc.) would just give Democrats political issues (remember, politics über alles) without accomplishing much of anything.

But there are good things in Representative Ryan’s budget.  First, even though there aren’t a lot of specifics, I like Representative Ryan’s idea of lowering rates and broadening the base for taxes.  That is the way we have to go.  It’s also what was suggested by President Obama’s own debt commission after the election in 2010.  As I said on Sunday, raising taxes rates on the rich, which is President Obama’s idea, isn’t going to work (because it won’t raise enough money), and it’s not a plan for the future.  Representative Ryan’s plan may be missing some detail, but he has the right idea, and his plan heads us in the right direction.

I also like Representative Ryan’s suggestions for Medicare.  The current system is not sustainable.  It can’t continue as it has.  There isn’t enough money.  President Obama’s plan is, apparently, to keep costs down by government rules and government experts.  While I won’t use the name, the Obama plan will have government experts and government committees telling us what treatments are okay and what drugs can be used (or at least paid for) based on their relative effectiveness (and their costs).  If your condition doesn’t respond to the “best” treatment (in the eyes of government experts), that will be unfortunate (for you), but at least costs will be controlled – in theory.

Most importantly, I like the fact that Representative Ryan is trying to restore the automatic cuts that are supposed to be made in defense spending cuts because the “supercommittee” failed to come up with a solution last fall.  I realize that Democrats will say that this, too, is breaking faith with the compromise reached last summer.  Maybe it is.  I don’t care.  As I have said before, we can afford the defense budget we need to protect ourselves and our interests.  Defense comes first.  The Constitution talks about “provid[ing] for the common defense,” not providing for solar subsidies or providing for federal aid to elementary education.  If the compromise made last summer doesn’t provide enough money for defense, then it needs to be changed.

Representative Ryan’s plan is not perfect.  But in the most important way, it is better than President Obama’s.  If you can’t all the way, at least go in the right direction.  Representative Ryan’s plan does that.  President Obama’s does not. 

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* I am using the same title I did on Sunday for my post on President Obama’s economic and budget plan.  Trying to be even-handed.

** The Democratic view of the politics of the budgeting process can be seen in this quote from an article in The New York Times a couple of weeks ago:

“Democrats say that if the House and Senate stick to that number [i.e., $1.047 trillion in discretionary spending – see the third paragraph of this post], Congress could devote much of its energy to working on a long-term deficit reduction plan that would be ready for a vote shortly after the November election.”

In other words, the Democrats aren’t interested in making any hard decisions or taking any positions that might be unpopular before the election.  If Paul Ryan wants to do that, they’ll take advantage of the situation to score political points.  But they’re not going to do it themselves.  It reminds you of what President Obama said to Russian President Medvedev yesterday: “After my election I have more flexibility.”

President Obama’s Economic and Budget Plan – Such As It Is

To the extent that President Obama has an economic plan, it is to spend more money and raise tax rates on the rich, which has basically been his preferred plan since he took office. (To the extent that I once wondered whether Barack Obama was “Very Liberal or Just a Moderate Democrat for Change,” I now know. He’s very liberal. And to the extent he hasn’t been very liberal, it has been because Congress wouldn’t go along or he was worried about getting re-elected.)

In any case, back to the President’s economic plan, especially the part about raising tax rates on the rich. There are two reasons to raise tax rates on the rich. One is to raise more tax revenue. The other is that it feels fairer to make the rich pay a higher tax rate even if the government doesn’t wind up collecting more money in taxes. I realize the latter seems a little bizarre, but in 2008 Barack Obama did say that “fairness” was a reason for raising the tax rate on capital gains even if the increase did not collect more tax revenue. (See the 18th paragraph of this post.)

But even the first reason, raising tax rates to raise tax revenue, won’t work in the range President Obama is talking about. In England the Conservative-Liberal Democrat coalition is lowering the top rate on the income tax from 50% to 45%. Why? This excerpt from an article in this week’s Economist, entitled: “The 50% tax rate: Falling flat: Why the higher rate of income tax yielded so little,” explains:

“‘No Chancellor can justify a tax rate that damages our economy and raises next to nothing,’ said George Osborne as he announced the passing of the 50% higher rate of personal tax. His assertion that the tax reaped little revenue was founded on analysis by tax-office wonks, published alongside the budget. The study is based on a single year’s tax returns, but is nonetheless compelling.

It shows that the combined incomes of the taxpayers liable to pay the 50% rate (ie, those with earnings above £150,000, or $238,000) fell by a quarter, from £116 billion to £87 billion, in 2010-11, the first year in which the tax applied. This sharp drop means either that the well-paid did a lot less work in Britain or that they shielded their income from the higher tax rate. A closer look suggests the latter. The tax wonks find that up to £18 billion of income was brought forward to the previous tax year to avoid the top rate. …

The Treasury’s estimate of a £100m revenue loss from cutting the top rate of tax to 45% is based in part on the analysis of 2009-10 tax receipts. The results suggest that the tax take from incomes over £150,000 is little different whether you set the tax rate at 45% or 50%. Setting the rate much higher than 45% is pointless; beyond 50% it is self-defeating.”

President Obama can raise tax rates as much as he wants (if he gets enough Democrats in Congress to vote for it), but he won’t get the tax revenue he expects because the people will rearrange things so as little as possible of their income is subject to the new, higher tax rate. I don’t know if he doesn’t understand this or can’t understand it (because it is so contrary to the liberal Democratic/progressive belief system), but if you raise tax rates, people will do their best to figure out how to avoid the higher taxes. It’s not just the rich (anybody can buy on Amazon to avoid sales taxes or buy their cigarettes in a neighboring state with lower tobacco taxes), but the rich have more at stake – and more money to pay accountants and tax lawyers to help them figure out how to do it.

So what is President Obama going to do if he is re-elected and the tax revenues from his increased tax rates on the rich don’t raise enough money for all the spending he wants to do? He can spend less, continue to borrow trillions, or raise taxes on the middle class. My guess is that he’ll start with number two. But he will only be able to do that as long as the world is willing to lend to us, at which point we will be forced to do both one and three. Because number two can’t go on forever. We just don’t know when it will end.

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* Before you say that either one of those rates is a lot higher than the top rate in the United States, consider that President Obama wants to raise the top income tax rate to 39.6%, as well as add other, extra taxes on the rich. Plus add in state income taxes, which are 10% or more in some states, and you’re right up there.

Obama’s Corporate Tax Plan Is So Good, We Ought To Do It for Individuals, Too

The Obama administration has proposed lowering the corporate tax rate from 35% to 28% while, at the same time, getting rid of “dozens” of special tax breaks and deductions.

Three comments on the plan. First, I think it’s great. Lowering rates and broadening the tax base is a great idea. It even has the potential, if done right, to increase tax revenues while lowering marginal rates.

Second, I hope the Obama administration does not reduce the benefits from getting rid of a lot of special interest tax breaks and deductions by replacing the old ones with new ones aimed at President Obama’s special favorites. Articles here and here list some new tax breaks that President Obama wants to grant. That is not a good sign. Just moving the tax breaks around like a giant shell game doesn’t help. We need to actually get rid of them – and keep them gone.

Third, the Administration’s plan to lower corporate income tax rates and eliminate special tax breaks is such a good idea, they ought to do it for personal income taxes, too.

A final comment on tax reform: I have mentioned before, in posts on President Obama’s desire to raise tax rates on the “rich” (i.e., couples making more than $250,000 a year and individuals making more than $200,000 a year), that the rich, and especially the really rich, won’t wind up paying all of those extra taxes the Obama administration thinks it will collect. The rich will rearrange their finances and how they get their income to minimize their taxes under the new rates. And the richer they are, the better they’ll do because they can afford the best tax lawyers and accountants.

Now, at the same time the Administration wants to increase personal income tax rates, it is proposing to cut corporate income tax rates. Which makes it clear one of the ways the rich, and especially the really rich, will avoid those higher personal income tax rates: Instead of taking income personally, they will rearrange things so that more of their income is in corporations, which pay a lower rate. Back when the top personal income tax rates were 50% and more, people arranged their affairs so they got less of their income personally and more of their income in corporations. When personal tax rates came down, this was no longer necessary. It became easier just to take income personally. If President Obama gets his way, the reverse will happen.

President Obama Says Jesus Wants the Rich to Pay More Taxes

In his campaign speech at the National Prayer Breakfast last week, President Obama explained how his Christian faith supported his calls for higher taxes on the rich:

“And I think to myself, if I'm willing to give something up as somebody who's been extraordinarily blessed, and give up some of the tax breaks that I enjoy, I actually think that's going to make economic sense.

But for me as a Christian, it also coincides with Jesus’ teaching that ‘for unto whom much is given, much shall be required.’”

I think that President Obama should be a little careful about using Jesus quite so prominently in his call for the rich to pay more taxes.  I say this because President Obama wants the government to force the rich to pay more by raising their taxes.  But I don’t recall Jesus ever calling on Caesar to raise taxes.  Instead, Jesus called on people to give more.  And giving more money to the government voluntarily is not something I have heard the President – or Mr. Buffett – ask their fellow billionaires and millionaires to do.

Taxing the Rich – By Eliminating Tax Credits for Electric Cars

President Obama wants to raise taxes on “the rich,” who he calls “millionaires and billionaires” but who, under most of his proposals, are those who make more than $250,000 a year ($200,000, if they aren’t married).  And I want to get rid of wasteful government tax credits and subsidies, especially those that mainly benefit the middle classes and above.

Here is an idea that meets both criteria.  It taxes the rich (by raising the amount of taxes they pay) and it eliminates a tax credit that really only benefits the upper middle class and above:  Eliminate the subsidies and tax rebates for electric cars.  Think about it.  Who are those subsidies going to?  Are poor people or even working or lower middle class people buying electric cars?  Do regular working people have enough money to buy a “hobby” car that makes a nice political and environmental statement but costs more than cars with internal combustion engines?  To ask the question is to answer it.  These cars are being bought, to the extent that they are being bought at all, by the upper middle class.

The liberal-left buys electric cars to show-off their environmental consciousness.*  And I have no problem with them doing that.  I just don’t see why we have to subsidize this choice of theirs – especially when our deficit is so large and we have so many other needs.

As President Obama said in a different context, I am not telling upper middle class people that they can’t have an electric car.  I’m just saying that, in our present fiscal situation, they just need to pay a little more to for it.**

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* When Toyota came out with its hybrid, Toyota made the Prius look different than its other cars.  When Honda came out with its hybrids, Honda just put a hybrid engine (and battery packs) in its existing cars and put a little nameplate on the back that said it was a hybrid.  Toyota’s Priuses sold; Honda hybrids didn’t – because you couldn’t tell they were hybrids.  After all, what is the purpose of driving a “statement” car if nobody can tell you are doing it?

** Supporters of the electric car subsidies and tax credits (other than those who are just trying to get government money for themselves) will argue that the purpose of the subsidies is to help the environment by encouraging people to buy electric cars (and to help develop the electric car industry).  Well, President Obama talks about how rich people are willing to help America by paying more taxes.  Why doesn’t he also ask his friends (i.e., upper middle class liberals, the target market for electric cars) to help American by buying electric cars without a tax credit?

More Money for Businesses – Brought to You By Your Friendly Neighborhood Politician

The headline on the front page of Friday’s Chicago Tribune said the headquarters of Sara Lee’s North American meat business would be moving from Downers Grove to Chicago.  Mayor Emanuel gave the company tax incentives worth an estimated $5 million to $6.5 million to get them to move.

This is dumb. Yesterday’s Chicago Tribune had an editorial about what is happening between states:

“Santa Claus came early this year – to Ohio.  And now he’s on this way to Illinois.

On Monday, Ohio Gov. John Kasich announced $60 million in state tax breaks to retain and attract more than two dozen companies.  On top of that, he’s reportedly bidding as much as $400 million to lure the headquarters of Sears Holdings away from northwest suburban Hoffman Estates.

On Tuesday, Speaker Michael Madigan said he will call the Illinois House back into session this week to consider tax breaks for Sears, as well as CME Group and CBOE Holdings.  Two days later, House Republican Leader Tom Cross said he has agreed to a package that helps the targeted companies and extends some other tax breaks.

This competition between states selects and rewards a few lucky players and penalizes everyone else, businesses and individuals.”*

Back to Chicago and Downers Grove:

“First Gov. Pat Quinn stepped up battles with Indiana, Wisconsin and other states by offering lucrative tax breaks to lure companies to Illinois or prevent them from fleeing.

Now Chicago Mayor Rahm Emanuel may have reignited such skirmishes on a regional basis.

Asked Thursday whether he had touched off a war by offering a tax break to snag the headquarters of Sara Lee's North American meat business from Downers Grove, Emanuel said, ‘No. It's just — we won.’

Downers Grove Mayor Martin Tully fired back, suggesting Emanuel had better watch his step.

‘He should be considering my willingness to use incentives to attract companies from the city of Chicago,’ Tully said.”

In other words, Chicago gives special tax breaks to get companies in Downers Grove to move to Chicago, and then Downers Grove gives tax breaks to companies in Chicago to move to Downers Grove.  In the end, each city will have about the same number of companies.  It’s just that their names will be different, and each city will have given away millions of dollars in future tax revenue.

When it comes to these so-called tax incentives, regardless of which city, or state, “wins” in the short run, the final result is more subsidies for businesses – at the expense of regular taxpayers.

In fact, I think the “Occupy” movements may be missing the point when they “occupy” financial districts.  Instead of occupying Wall Street and LaSalle Street, they ought to occupying the State Capitol and City Hall.  That’s where the rich companies keep getting more and more money from the 99%, i.e., the rest of us taxpayers.  And they are getting it from the leaders we thought we were electing to represent us.

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* “CME, Sears and the zero-sum game,” Chicago Tribune, December 11, 2011

President Obama’s Debt Reduction Plan

I apologize for not commenting earlier on the deficit reduction plan that President Obama submitted to Congress on Monday, but I have been busy going to a couple of Cubs games against the Brewers (fortunately, I went to the two games the Cubs won and not the one they lost) and some other things.  Also, there didn’t seem to be any real rush to comment on it.  It’s not like it’s going to pass. 

A week and a half ago I said that President Obama wasn’t really serious about trying to pass his American Jobs Act because of how he was proposing to pay for it:  He suggested raising taxes that the Democrats wouldn’t vote for when Nancy Pelosi was Speaker.

The President’s plan to reduce the deficit was similarly unserious – except as a campaign document.  First, of the $3 trillion in cuts that the President is claiming, $1 trillion is money that we save by cutting our troops in Iraq and Afghanistan.  This is obviously phony since those cutbacks are going to happen anyway.  It’s sort of like saying I’m going to cut my expenses in 2012 by not having another wedding.  The Associated Press wouldn’t call it phony because Republicans were proposing the same thing.  Well, if Republicans are counting those reductions in their plan, then that part of their plan is phony, too.

Three-quarters of the rest of the deficit reduction plan is tax increases – on the rich, of course.  These aren’t going to pass in this Congress.  For that matter, given the reception they are getting from a lot of Democrats, they aren’t going to pass in the next Congress either, even if President Obama is re-elected.*

While the President’s plan isn’t going to pass, it is interesting.  I think it probably answers certain questions I asked about Barack Obama back on September 1, 2008:

“So what does this tell us about [Barack] Obama? Does it tell us he is very liberal, except when political expedience makes him take more moderate positions? Or does it tell us that he is really moderate, except when political expedience (and his constituents) requires him to take liberal positions?”

I think what his deficit reduction plan and his American Jobs Act tell us about President Obama is this:  He thinks government should spend lots more money.  He thinks government can do good things when it spends money.  Things like green energy (for example, Solyndra), high speed rail, and more.  And he thinks he can pay for all those things by raising taxes on people who aren’t paying their fair share of taxes, people who really have more money than they need.  President Obama still thinks, as he said back in 2008, “when you spread the wealth around, it’s good for everybody.”

House Majority Leader Eric Cantor (R, Va.) said this about one of the Democrats who participated in the debt talks with Vice President Biden in May and June: “[H]onestly, one of them said to me, ‘Some people just make too much money.’”**  While it wasn’t President Obama who said it, you get the feeling that he believes it, that this belief is a central part of his political philosophy, and that this is how he’s going to pay for all that increased government spending he is in favor of.

Which means the next 13-1/2 months is going to be a very long campaign.

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* And if they did pass, I can assure you they would not generate nearly as much money as is projected.  Rich people will figure out how to pay less tax than Congress thinks it is imposing.  Count on it.

** Joseph Rago, “The Weekend Interview with Eric Cantor: Obama and the Narcissism of Big Differences,” The Wall Street Journal, August 6, 2011.

President Obama Isn’t Really Serious About the American Jobs Act

President Obama has now explained how he proposes paying the cost of his American Jobs Act, which he proposed last Thursday.  And apparently, in spite of President Obama’s claims that he wants Congress to pass this bill immediately, he really isn’t serious about them passing it.  He might be serious about using it as a campaign issue next year, but passage now?  Nope.  Not serious.

Why do I say this?  Because of how the President wants to pay for it.  86% of the money is supposed to come from Congress limiting itemized deductions for “millionaires and billionaires” (i.e., couples earning over $250,000 and individuals earning over $200,000).  What you have to remember is that President Obama couldn’t get the prior Congress, the one that was controlled by Democrats, to pass this idea.  Why would he think this Congress would pass it?  It might be a good campaign issue, but expect Congress to pass it.  No way.

One other thing that was a little tacky on the President’s part.  The 12-member special committee that was created by Congress in August to try to cut the deficit by $1.2 to $1.5 billion is supposed to start meeting soon.  Well, the President is claiming $450 billion of possible revenue increases that they could have used to meet their goal.  In other words, he just made their job harder.

Warren Buffett Wants His Taxes (and Probably Yours) To Go Up

Last week Warren Buffett took to the Op-Ed page of The New York Times to ask Congress to stop coddling him and his friends.  He wants his taxes to go up.  And, more importantly, he wants taxes on lots of other people to go up, too.  In his article, Mr. Buffett talked about the “mega-rich,” so I am not sure if he is talking about the “millionaires and billionaires” whose taxes President Obama wants to raise (i.e., couples jointly earning over $250,000 a year) or a more limited group.  But it really doesn’t matter, because if you want to raise any significant money (given the deficits we’ve got), taxes are going to have to go up on more than even President Obama’s “millionaires and billionaires,” let alone Mr. Buffett’s mega-rich friends.

Obviously, lots of people have been commenting on Mr. Buffett’s article, both pro and con.  I don’t want to repeat those comments, so let limit myself to three comments that I don’t think I have seen.  (If you have seen them, I apologize.)

First, if Mr. Buffett thinks his mega-rich friends aren’t paying enough taxes on their income, because their income comes from things like capital gains, instead of ordinary income, then why don’t we tax their wealth instead of their income?  Maybe Mr. Buffett would be willing to endorse a wealth tax that required people with wealth of more than a billion dollars, to pay 2% of their wealth to the government each year.  (We could deduct the wealth taxes people pay from any estate tax they owe when they die.)  Mr. Buffett is supposedly worth $47 billion, so a 2% tax would be $940 million in taxes.  Even 1% would be $470 million.  That would end the coddling.

Second, if Mr. Buffett wants to be obligated to pay more income taxes (instead of just voluntarily paying extra, which some critics have suggested he do), it’s simple.  He should pay himself a bigger salary.  In 2010, Mr. Buffett earned a $100,000 salary as President of Berkshire Hathaway Inc.  (His compensation also included $344,490 of personal and home security services that were paid for by Berkshire Hathaway.)  If he raised his salary to $5,000,000, which he is clearly worth, his taxes would go up a lot, as would his effective tax rate, because he’d get to pay up to 35% and more federal income tax on that money, as well as Nebraska income tax. 

Which brings me to my third comment.  Mr. Buffett says he wants to be obligated to pay more taxes.  Okay, we can agree to change the tax laws so people in Mr. Buffett’s position pay more taxes.  But I need Mr. Buffett to agree to something, too.  I need him to agree that, once the tax laws are changed to make him pay more taxes, he won’t then turn around and change what he does to minimize his taxes under the new laws.  He needs to promise that he won’t let his tax advisers, and I am sure he has them, go out and find new loopholes and new provisions to keep his taxes down in spite of the changes in the tax law.  The problem is, Mr. Buffett’s tax advisers are a lot smarter than the people in Washington, both in Congress and the bureaucracy, who write the tax laws.   Therefore, unless Mr. Buffett promises to tell his tax people to not look, they’ll just figure out a way to keep Mr. Buffett’s taxes down even if the tax laws are changed to try to raise his taxes.