O’Reilly and Taxes

Posted: July 13, 2011 in Taxes
Tags: , ,

In the below video, Bill O’Reilly argues something along the lines of the following:

  1. Because tax revenues as a percentage of GDP are at post-WWII lows, we need more revenue.
  2. To obtain more tax revenue, we need to raise taxes in ways that will not harm the economy.
  3. Raising the federal income tax will harm the economy.
  4. Implementing 1% federal sales tax will not harm the economy.
  5. We should implement a federal sales tax (at least over a federal income tax).

Two questions for Bill:

If the whole [tax debate] thing is class warfare, what does that mean for a flat sales tax?

What is your vision for the size and role of government?

Ezra Klein writes,

The cynical interpretation of McConnell’s motivations [for his proposal] is that McConnell sees that the White House is winning the politics of this issue, and he knows that Republicans will eventually be forced to agree to something. When they do, President Obama will be the great Compromiser-in-Chief. He’ll have shown himself willing to face down his party to make a deal and he’ll get credit for making it impossible for Republicans to continue to say no. After three years during which McConnell had slowly but surely destroyed Obama’s reputation as a postpartisan unifier, the White House will see its core political brand revived and invigorated. Obama will be a lock for reelection.

Klein and the “cynical interpretation”  of McConnell’s proposal are right in some ways and wrong in others.

Klein is wrong that “the White House is winning the politics of this issue.”   A Gallup poll released today shows twice as many Americans oppose a debt ceiling increase as support an increase.  Even among independents,  46% oppose an increase and only 18% support an increase.  Maybe the White House is winning the public opinion war on the desirability of the economic outcomes of debt limit decisions (after all, who really likes lower credit ratings?), but for the debt limit in the abstract, the public opposes the White House’s stance.

Additionally, the interpretation assumes that McConnell is acting under the assumption that there is no doubt about a debt limit increase.  Yet it is still very possible there will not be a debt limit increase.  What happens then?  Would this interpretation make sense?

My former political science professor, John Sides, gets it right concerning the outcome of a failure to compromise:

Assume there is no deal and then assume, as Geithner and others have warned, that there are serious consequences for the economy when the debt ceiling isn’t raised.  This will hurt Obama.  And it will hurt him more than it will hurt the Republican Party.  Presidents suffer the consequences of a bad economy.  Divided government does not change this.  Beware pundits who see silver linings for Obama in this scenario.

If McConnell’s proposal is really just a mad scramble to claim credit for a budget compromise that will inevitably happen with the intent of leveraging the resulting political capital of the compromise against Obama on behalf of the political interests of himself and his party, it makes very little sense for him to push for a debt limit increase. Under a scenario in which the debt limit does not increase, the GOP has better political leverage over Democrats for meaningful spending reductions.  Thus Republicans are heavily and perversely incentivized to not raise the debt ceiling and to weaken the economy due to their own re-election interests.

However, most people (especially predictive markets!) give Washington a good chance at reaching a compromise.  This outcome more likely considering Boehner, Obama and Co. managed to pull off an enormous tax compromise not too long ago. This supports the cynical interpretation on its basic claims, but overlooks the fact that a debt ceiling increase may not necessarily turn Obama into The Great Compromiser.  Klein puts too much faith in McConnell’s naive pursuit of political clout, too much importance on political action, and too little faith in the primary predictor of elections to predict elections: the economy.  High level party politicians, like McConnell, understand that America’s economic condition is of utmost importance for both campaigning and influencing voters’ decisions, and would not bet against a bad economy knocking off Obama.

Sides once again breaks down the possible outcomes.  First he asks, “What if there is a deal but it hurts the economy?”

Assume the Keynesians are right and the GOP and, for that matter, Obama are wrong.  If so, fiscal austerity is only going to make the economy worse.  Maybe not as bad as it would be if the debt ceiling weren’t raised, but still: worse.  If so, Obama will suffer.  End of story.  It does not matter that the deficit will (in theory) go down.  Election-year changes in the size of the national debt do not affect election outcomes.  And it does not matter that a deal could make Obama appear “bipartisan.”  Independent voters do not put political process ahead of the most tangible outcome: the economy.  See also Matt Yglesias.

So it seems that Klein’s vision of a post-compromise presidency even more unlikely.  Klein and the cynicists both believe a compromise will grant substantial political capital to Obama.  Yet the reality is that in the event that the debt ceiling harms the economy, Obama can emerge from a debt limit compromise considerably weaker in the long term.  So perhaps we should reconsider McConnell’s rationale: is he proposing a compromise not to merely join the band-wagon and join in the credit claiming, but rather to help lead Obama to a political demise of the president’s own design?

Sides then asks, “What if there is a deal but raising the debt ceiling doesn’t cause substantial economic harm?”

Assume that there is some sort of deal…I will ignore for the moment what must then be negotiated in 2012.  Assume that neither a 2011 deal nor any future deals affect the economy between now and November 2012.  Then what?  Let’s subdivide.

Scenario [1]: The economy is still weak throughout 2012, as some forecasts suggest.  Obama will suffer…He may win, depending on the GOP nominee and the campaign itself, but it will not be easy.  All the GOP has to do is hammer him on jobs, jobs, jobs and no one will remember his masterful bargaining over the debt ceiling, or what the debt ceiling is in the first place.

Scenario [2]: The economy does improve—somehow, someway.  Now Obama has the edge, and the economy is what he should campaign on.  Maybe it’s not morning in America, but election-year economic growth is a powerful elixir to myopic voters.

So I have to conclude that Klein is pretty wrong and the logic behind the cynical interpretation is questionable: if the economy experiences respectable growth and unemployment drops, the cynical interpretation makes sense and Obama’s resurgent political power will vindicate Klein’s vision.  If the economy stagnates or weakens and unemployment doesn’t fall, Klein is wrong about the future and Obama looks to be in trouble.  It is only if McConnell is acting in anticipation of the final scenario, the situation in which the economy awakens and the debt limit increases, that it makes sense for McConnell to be acting in a truly political, bandwagoning manner as described in the cynical interpretation.

Ezra Klein posted the following graph from YouGov.com today:

What caught my attention was not the graph itself, but the title above it: “Democrats like compromise.  Independents like compromise.  Republicans don’t like compromise.”

Couldn’t this graph just as easily be titled something like the phrase below?

“Democrats don’t want principled politicians.  Independents don’t want principled politicians.  Republicans want principled politicians.”

Every once in awhile I read something over at ThinkProgress that really makes me think about my own beliefs.  Most of the time, however, they produce content like this:

As ThinkProgress has documented, a tightly-knit group of right-wing Political Action Committees (PACs) and corporate foundations have unleashed an assault on public education, pushing school voucher schemes nationwide that would funnell taxpayer dollars away from public schools and toward private schools instead. In doing so, many of these voucher advocates claim they simply want to expand school choice and improve the quality of education for all.

It’s refreshing to see a vouchers promoter who is honest about her real intent — to destroy public education,” responded Julia Rubin, a spokeswoman for Save Our Schools, a New Jersey organization that is opposing the voucher push in the state. “Fortunately, most New Jersey residents understand how devastating vouchers would be for our excellent public schools.” (HT: @DianeRavitch)

How dare those people who advocate legitimate school choice advocate on behalf of…school choice!

Letting public schools truly compete with private schools (not just for school vouchers) is not an outrageous proposition worthy of fear-mongering.  While the post certainly is a factual account of the voucher advocates’ intent, the post is designed in the vein of Joseph McCarthy’s accusations against Communists, not based upon civil discussion of the merits and weaknesses of voucher programs.

Arnold Kling outlines his “two-tier” health insurance system,

1. Currently, government programs for health care involve open-ended commitments to reimburse doctors for whatever services they deem appropriate. This is too expensive (although you can see why key constituencies would find it popular).

2. The government needs to get control of its health care budget. It is likely to do this by reducing its reimbursement for discretionary health care services, such as diagnostic screening, futile late-stage care, and other procedures that have been found to have high costs and low benefits.

3. Regardless of how government draws the line between necessary procedures and discretionary procedures, it will not allow people to be deprived of necessary procedures for lack of money. Nor will it prevent people who can afford discretionary services from obtaining them using their own resources.

4. Hence, we will see a two-tier system. Necessary procedures will be available to all (which is pretty much true today, through the proverbial emergency room). Beyond that, wealthier people will be able to purchase more costly discretionary medical services, just as they can purchase fancier cars or more expensive food.

To those who study health policy, and even to those who only understand the basics of the American health care system (ignoring the tin foil hat types), this is indeed a “blinding glimpse of the obvious.”

What Kling fails to acknowledge is that we already have a two-tier health care system and that while the PPACA changes some things, the beast remains. In general, Medicaid is for the poor, Medicare is for the formerly working elderly, and private insurance is for the middle and upper classes with prestigious jobs or high incomes.

As much as Obama likely idealizes a complete health care overhaul, Medicaid and the various state-only plans for specific poor populations will continue to generally provide less coverage than Gold and Platinum Medicare plans.  In turn, these will offer substantially less coverage than many private insurance plans. Medicaid participants will continue to be less affluent than private health insurance consumers.  Those with high-paying jobs and post-secondary education degrees will be far more likely to receive or purchase private insurance with coverage above and beyond the coverage of Medicare and Medicaid.

My disagreement with Kling comes from his point #1.  Despite his allusion to the grandeur and limitless supply of public health insurance subsidization, reality’s contrast is stark.  Medicaid frankly isn’t that great for most people.  Medicare Part A isn’t that great either.  This is because each is in fact not a black hole of money and endless coverage.  We ration via limits on services, deductibles, and blatant limits on coverage (for example, catastrophic coverage is different than long-term care).

What we ultimately will see with the PPACA is more of the same: a two-tier system in which the poor largely depend upon Medicaid and state health insurance plans while the middle and upper classes receive better treatment with better Medicare plan options with peripheral private health insurance coverage or employer-provided health insurance plans. The PPACA is a plan to make John Rawls proud: the poor will continue to receive less health coverage than the rich, yet even the poorest will receive better coverage than before. That is, until we perhaps realize that we cannot afford our promises and must decide how we will truly ration health care.

Saw this article from the Washington Post:

 Evidence is mounting that calorie labels — promoted by some nutritionists and the restaurant industry to help stem the obesity crisis — do not steer most people to lower-calorie foods. Eating habits rarely change, according to several studies. Perversely, some diners see the labels yet consume more calories than usual.

Questions about the effectiveness of calorie disclosure come as the federal government is finalizing regulations to nationalize labeling in chain restaurants next year as part of a measure tucked into President Obama’s health-care law. Some chain restaurants are…offering more low-calorie meals. Yet several high-cal eateries…report no change in dining habits because of the labels.

“Have we seen a big [drop] in sales? No, not at all,” said Todd Stallings, owner of several Five Guys restaurants in Montgomery, which based its rules on the upcoming federal policy. “When people come to Five Guys, they know we are not cooking their french fries in water.”

and later…

Research in a fast-food restaurant in King County, Wash., where calorie labeling is also law, found similar results. The stated finding was grim: “Mandatory menu labeling did not promote healthier food-purchasing behavior.”

Another recent study shows what really worked was imposing a higher price — by way of a tax — on big-calorie items.

Experts say that for most diners, the issue is not about having information but about lacking self-control. Behavioral economists have for years zeroed in on a logical hiccup: We are unable to balance short-term gains with long-term costs…With eating out, the gains are immediate (yummy giant burrito!) and the costs are delayed (heart disease!).

“The long-term consequences are totally intangible,” Loewenstein said. “Eating has that in common with cigarettes: One cigarette is not going to kill you, and one big meal is not going to kill you. But the difference is, you need to eat to survive. So there’s an easy rule for the cigarette problem: Stop. There is no easy rule for eating. We must eat.”

I think the article hints at the possible explanations for the failure of calorie labeling, but doesn’t explicate them well enough.  Here are the possibilities that I see:

  1. Abstract data (labeling) does not mean much in comparison to first-hand experience.  If a person has historically eaten hamburgers without any issues (whether due to age, activity level, etc.) then that person is less likely to respond to the caloric information of a hamburger because they expect a certain input (hamburger) and a certain output (change in weight).  Simply put, eating junk is a hard to kick habit.
  2. Most people know fast food is not particularly healthy for you.  While some people underestimate the calories in a Big Mac, in other cases people likely overestimate the gastric devastation of such food.  Calorie labeling brings their perceptions closer to reality, allowing them to judge the dietary “costs” of the food.  Viewing calories as the currency of one’s daily dietary budget, calorie labeling can reveal the true “price”  of food that monetary cost does not necessarily reveal to the uninformed consumer.  As a result of this “price” decrease or increase via calorie labeling, demand for the food increases or decreases.  In turn, while some people likely eat less food due to calorie labeling, some newly-informed individuals may eat more food, offsetting the decrease in aggregate consumption due to those previously underestimating the “price” of junk food.
  3. People already know some foods are bad for them.  The aforementioned “price increase” does not affect them because of their inelastic demand for the food.  However, they value saving money more than eating less calories, so a “fat tax” works.
  4. Individuals value short term gains disproportionately to long term costs, per the article.

I also had the following random thoughts as I read the article:

  1. It would be interesting to subject individuals of different BMI and eating habits to an experiment.  The setup would be simple enough: allow each subject only a certain number of calories each day.  Observe how people would change their eating habits, if at all.  Then repeat the experiment, at times changing the amount of money the individual may spend (from $5 per day to unlimited funding) and changing the caloric allowances to see if the caloric allowances would limit decisions or if individuals would ration calories.
  2. I don’t buy Loewenstein’s explanation.  Sure, we cannot live without food while we can live without cigarettes.  Yet that does not means we cannot live without certain types of foods.  Loewenstein assumes that cigarettes are harmful to our health in the long term and are considered a luxury good.  That second part, the extraneous luxury good element of cigarettes, is what supposedly distinguishes cigarettes from fried chicken.  Yet in the same sense that a cigarette is a long-term health hazard that some enjoys as a luxury and ceases consumption if necessary, is not foie gras equally so?
  3. Someone needs to conduct a survey which asks customers for their estimates of the caloric content of foods prior to calorie labeling and after calorie labeling.  Are people actually reading the labels?  Additionally, are they really that uninformed in the first place?  I’m sure this has been done, but I’d love to see the results.

Yesterday the Wall Street Journal ran an article about the furloughs which will soon shut down the entire Alto, Texas police force.  Here’s the gist of things:

City Council members sent the police home when they decided they couldn’t afford them. On June 15, the police chief and his four officers secured the evidence room, changed the passwords on their computers and locked the department’s doors for six months—longer if local finances don’t improve by then.

For now, the Cherokee County sheriff’s office, based 12 miles north in Rusk, is policing Alto, a city of about 1,200. Sheriff James Campbell said the extra load would strain his 25 deputies and reservists, who oversee a 1,000-square-mile territory. The sheriff is already responsible for the nearby city of Wells, which has a population of about 800 and earlier this year shed its only police officer. Crime went up initially, he said, but has stabilized.

This will provide an interesting case study in the effectiveness of police forces and the impact on communities of either privatizing or cutting local law enforcement units.  Will crime skyrocket, remain constant, or fall somewhere in between?  Will this have a larger (if any) impact on violent or non-violent crime rates?  An examination of the incentives at stake would be interesting: is there a moral hazard within Alto because it knows Cherokee County will lend some security because Alto is “too big to fail” or worried of contagion?  How will private businesses and residential communities react?

Of predominant interest to me is the town’s budget.  If the City Council is cutting funding for the police department, what are they not cutting?

I skimmed through the city’s budget and saw a couple interesting areas.  The city spends $6,600 on cell phones and $7,800 on landlines.  I’m not sure who has cell phones, but perhaps there could be some consolidation and removal of landlines.  There was  the possibility of closing the library, which would have saved a single job for the police staff, eliminating animal control (a paltry $2,000), and that was about it.  The police department was the third biggest expenditure besides city gas bills and administrative costs.  Water and garbage service combined was barely more than the police budget.

As someone who believes in a less robust role for government and a larger role for markets, I often am skeptical of any claims that government is as small as it should be.  Certainly some privatization could occur in this town, yet it is remarkable how little the town provides in terms of services.  There is a difference between large governments and big budgets just as there is a difference between small government and a small budget.  Within this city, certainly government is small.  Whether we are ready to throw ourselves and others into complete privatization when government dangles shiny objects bought through coercive taxation in front of those unwittingly thrown into the fire is an interesting question.