Presidential Succession

To any who actually read this blog, first an apology for letting it languish. I have been doing most of my tax and government posting at www.freeliberal.com.

As we head toward January 20, I am thinking yet again about the tragedy scenario - what would happen if someone tried to take out the entire government by killing the President, Vice President, Speaker, President Pro Tem and Cabinet, which is the order of succession according to law (not the Constitution). By practice, one of the members in succession is always held in reserve, however if a nuke hit DC, even that one person would die, so our plans seem to have more to do with status than with actually rebuilding the government.

I offer an alternative, which will not make the Cabinet or the senior member of the ruling party in the Senate very happy - but is more workable and defensible.

In a real tragedy, if split second decisons are made, whoever is the senior military officer will likely make them, as any attack worth its salt will take down the lines of communication, assuming any cabinet members survive. We actually have more to fear from terror than nuclear war anyway, so split second decisions will not be necessary.

My proposal is, after the Vice President and the Speaker, the next step would be for the House of Representatives to elect a new President under the procedures outlined in the Constitution for election of President when no one has a majority of electoral votes - which would be a vote of te House with each state having one vote and the requirement that a majority of state is necessary to elect the President (26). Of course, it may be that the House cannot meet due to the lack of a quorum (and the issue would be raised if the Presidency were at stake). In this case, the Senate would meet to elect a Vice President, who would serve as acting President until the House could establish a quorum and fulfil its constitutional responsibilities. The beauty of this scenario, which does not rely on the ascension of the Senate's most senile member, is that if the Senate is also unable to meet it soon will be because its members can be replaced by appointment by their governors. As long as air travel is possible, a newly appointed Senate could meet in a day to select a new Acting President, who would carry much more authority than any surviving Cabinet member due to his or her selection.

Keynes in 2008

WaPo last Sunday ran an Outlook column by a Keynes biographer regarding the current crisis.

Keynesianism broke down because it could not explain why, even with lingering deficits, the economy would go into recession. However, if one factors in the effects of paying interest on the national debt and lags the economic effects by one fiscal year, the effect is discernable. When Republicans are in power, their fiscal policies require running a deficit in excess of net interest in order to get growth. Democrats, because of their fiscal policies can balance the budget and get growth of about 3% on average per year.

The reason the GOP needs to run deficits is that their tax policies reward savers. The only way to move this money back into the productive sector is to borrow it from them, lest it be use for speculation. The Democrats tax the excess savings of the wealthy, so they can afford to reduce the debt without decreasing consumption in the economy.

Here is the equation. Note that you must run it by regime (JFK, Johnson-Nixon-Ford, Reagan-Bush I, Clinton, Bush II):

Growth % in FY+1 = (Deficit/Surplus + Net Interest in FY)/GDPTry running the numbers before you say it doesn't work.

Reactions to the President's Advisory Panel on Tax Reform

Recently, while surfing the net in search of a real job having to do with tax reform from a Value Added Tax (VAT) perspective, I found both comments attacking the use of a VAT, as well as a copy of the VAT analysis from the final report of the President's Advisory Panel on Tax Reform. (Frequent readers know that I contributed analysis to this effort, which is provided on my Geocities page.

Overall, I am encouraged by the Panel’s treatment of this topic. Their overall approach is similar to mine – combining a VAT and a simplified income tax. Due to the scope of their assignment, they were not allowed to consider the replacement of Payroll Tax revenue with the VAT, even though this would be the most natural use of such a tax. Payroll taxes function essentially as a hidden VAT as they add to the cost of labor at a fairly uniform rate, with the exception that the contribution to disability, retirement and survivors insurance is capped. Additionally, in order to keep rates on both taxes low, the Panel “split the difference” by assuming a 15% VAT and a 15% high income tax rate (with a lower 5% rate for lower incomes). Work and family size credits were also assigned to the simplified income tax. This results in a system with three tax systems – consumption, payroll and income. In the end, this proposal was not adopted because fiscal conservatives on the panel believed that the VAT would make it to easy to raise revenue.

This echoes the comments of the Hoover Institute, Citizens for Tax Reform and the Heritage Foundation. These denizens of the right favor a flat tax or the Fair Tax, largely because they wish to have every citizen pay taxes in as obvious method as possible (including by eliminating withholding and requiring the submission of a monthly tax payment by every citizen), believing that this will lead taxpayers to demand less government services. They also fear that an income tax will still be included in any VAT scheme (Grover Norquist considers this the worst possible scenario), which exactly what the Panel’s analysis showed. I proposed such a scheme as well, as has prominent Yale Law Professor and former George H.W. Bush official Michael J. Graetz , although I would institute a higher VAT and lower residual income tax rate.

What I am proposing would not be as horrible as Grover Norquist and company make it out to be. I would divide the VAT into a transparent tax to fund government services and a hidden component to directly fund transfers to larger or poorer families, remedial education services to adults, disability and health care costs (employee and retiree) and education funding contributions to parents, public schools or private schools. The hidden VAT costs could be directed to non-governmental providers or to governmental providers, at the choice of the firm’s employees and shareholders. The hidden portion of the tax would be administered by the states and federal – and possibly matching local – funding of these spending priorities would be supplanted by the new tax structure. The remaining federal income tax would be enacted at a lower rate and would be set aside to pay for net interest on the debt, foreign aid and debt forgiveness, overseas military operations – including the wars in Iraq and Afghanistan, transfer costs in privatizing retirement insurance and repayment of the Social Security Trust Fund, repayment of the debt held by the public and the transition to hard currency from the Federal Reserve System. When international commitments can be fully funded by customs duties and tariffs and all real and contingent obligations are exhausted, the income tax would sunset until needed to fund armed conflict.

The Job of President

In Sunday's Washington Post, Joel Achenbach talks about Presidential Job descriptions. There is a great deal of agreement in the political science community that the job of President, as written, is undoable. Most presidents have aides make many decisions that could better be made by an elected official. This is not necessarily salutory for representative government.

The way around this is to homogenize regional boundaries across agencies and create regional vice presidencies and regional congressional caucuses to handle most of these affairs (from base closings to regional economic policy). Regional VPs could be elected by the electoral college, with each nominee appointing a slate and the winner of the most votes in that region elected to office. In other words, in New England/New York, you would likely have a Democratic RVP. In Dixie, you would have a Republican, etc. The stability would be good for government.

The regional VPs could meet in a council headed by the VPUS, who could also oversee domestic agencies with a national mission - such as a Department of Science containing NASA, Air Traffic Control, Highway Safety, Fuel economy, Environmental Superfund, Medical Research and Drug regulation, National Parks and Patents; the Department of Treasury and Commerce, which would focus on the gathering of economic statistics, the Census, Engraving and Printing, Comptroller of the Currency, the public debt, social security privatization and collection of an income surtax on the wealthy; and the Department of Justice and Civil Rights, which would monitor the civil rights performance of regions, executive clemency, representation of the United States, workplace safety and wage and hour regulation (which some regions will likely do poorly).

This arrangement would free the President to focus on what is really important: defense, foreign affairs and homeland security. The existence of regional vice presidencies would also narrow the field of presidential "eligibles" to people who have held this office and high level flag officers. Governors and Senators would be outclassed.

For more on this proposal, see the relevant chapter of my book at http://www.geocities.com/christianlibertarianparty/regionalgovernment.html.

Tax Discussion on Blog Talk Radio

We are discussing tax reform and the Fair Tax on Blog Talk Radio on Tuesday, April 15 at 9:30 EDT.

Fixing the Fair Tax

Let me state at the outset that I am a Huckabee supporter. Readers of my Christian Libertarian Party blog will know why. It is not because of the Fair Tax. I have no fear, however, that the Governor, if elected President, will be able to enact the Fair Tax as written and I am pretty sure he knows that. The Presidency is a bully pulpit, but so is the Chairmanship of the House Ways and Means Committee – and Charlie Rangel is not going anywhere. The purpose of this essay is to lay out how the Fair Tax proposals can be altered to counter some of their flaws. My hopes are that the Governor’s people will see this essay and use it accordingly and that those who might support him save for the problems of the Fair Tax can see that with modifications such a tax can be salutary for the Republic.

What is the main attraction of the Fair Tax to most people? It doesn’t take a rocket to answer this one, especially during tax season. Except for those truly twisted souls that enjoy filling out and sharing with the Government forms regarding their personal financial status, the Income Tax is seen as an onerous burden to be done away with at the first available opportunity. Indeed, abolishing the IRS is touted as its main attraction (although the agency will be replaced by something else, so the likely effect will be to change the nameplate on the building, nothing more).

The Fair Tax has its problems, although these can be resolved in negotiations with Congress, which will likely be Democratic after the election. Let me address a few of these and their likely solutions.

The Fair Tax, as proposed, taxes government purchases. This will result in the need for drastic cuts in government services. What will happen instead is an increase in the Fair Tax rate to enable agencies to buy the same amount of hardware or the gutting of the non-entitlement, non-defense budget in order to pay for much needed weapon systems for the War in Iraq – or else a continued scarcity of much needed equipment.

Perhaps there needs to be an exemption for weapons – however any exemption will require a higher tax rate, so this is no help for the Fair Tax purists. The more likely scenario is the dropping of this part of the strategy, which will increase the Fair Tax Rate to 50% of the base cost of goods and services (up from the current 30% estimate – the touted 23% rate is the share of the tax as the total purchase price).

At this rate, there will be a large industry in tax avoidance. Soon, everyone will be buying wholesale – of course buying wholesale won’t be the answer for long, since wholesale buyers must then file Fair Tax returns on their retail sales. If they have none they will be caught by whatever agency succeeds the IRS. Clearly we have a problem here.

The way the Fair Tax impacts housing raises eyebrows. Not only will the deduction for mortgages go away, but rent and some new houses will be taxable, while investment and used houses will not be. As a result, the price of new housing will go down unless it is clearly earmarked for rental while the cost of used and investment homes will go up as these properties will be more attractive to home buyers and past renters. Some renters who cannot afford to buy a house will pay the tax, although their incomes will be higher due to the lack of an income tax and the payment of a Prebate. Rental rates will go down as well, as these currently include the income tax on rent. Making this cost explicit will lower the base rent but leave the monthly cost the same. These effects are not entirely unwelcome, except to the home lending and building industries, which prefer to build new homes and upper income apartments and who benefit from the subsidy paid to borrowers. The hew and cry over these provisions may kill the Fair Tax or lead to the carving of an exemption in the law. Such an exemption would make the Fair Tax rate on the remaining economy so high that it could not be passed. Another possible solution is to treat the purchase of a home on credit as a wholesale transaction and apply the tax to the Principal as the loan balance is paid off.

Another problem with the Fair Tax is that it forecloses the possibility of Personal Accounts for Social Security. These can only come about if there is a payroll tax to be diverted. If the payroll tax is abolished Social Security is an entirely governmental affair. Income information must still be provided to the Social Security Administration by employers, minmizing the paperwork reduction of the Fair Tax.

Excluding the retirement savings and redistribution portion of payroll taxes from conversion to the Fair Tax allows the creation and expansion of Personal Accounts until they eventually replace government provided Social Security for most workers. Frequent readers of my blog already know the details I propose. For others, a simple search will reveal them. Taking this step will decrease the Fair Tax required by 11% (preserving a payroll tax rate of 10% of income, of which 4% will be transferred to Personal Accounts, or 8% of the 23% of the Fair Tax, leaving a 15% rate before government purchases are added back).

A main criticism of the Fair Tax is that it transfers the cost of payment to the middle class from the wealthy. The Prebate will keep the poor from paying tax, thus replacing the Earned Income Tax Credit; however those above the poverty line will be paying much more of their income in taxes while the wealthy will be paying much, much less in hope that they will invest it to grow the economy. This is the classic supply side argument, which ignores the very real fact that no productive investment in plant and equipment is ever made unless there is an underlying demand for the product produced. Shifting taxes to consumption will dampen the need for productive investment. When this occurs, speculative investment increases. Vehicles such as Real Estate Investment Trusts are created. We all know what happened with that. Eventually, the wealthy will be called upon to invest in public debt, since overseas investors must eventually stop buying it. When this happens, the economic logic for not taxing the same money being borrowed from the wealthy goes away, since these monies are taken out of the private economy and put into the public economy either way – the difference being that borrowed money must be paid back with interest – thus creating a privileged aristocracy of bond holders. My impression was that abolishing aristocracy was one of the reasons this nation was founded.

A way around this problem is to retain an Income Surtax on high income individuals (not high income families). This tax would fund overseas military adventures; net interest on the debt and debt retirement; the transition to Social Security, Civil Service and Military Retirement Private Accounts and the forgiveness of bad international debt held by the World Bank/IMF. After these items are fully funded, the surtax would be suspended. The higher this tax rate is, the faster the surtax is suspended. Excluding these items from the Fair Tax will drastically lower the Fair Tax rate to a somewhat more palatable level. Retaining the Surtax as an individual, rather than a business assessment also allows those who would pay the tax to keep this information private from their employers or investments. All personal income, including liquidated inheritances, would be subject to tax, although assets held would not be. All individual income under $100,000 would be included. Family income would not be taxed (so two earners making $90,000 each would have no liability to pay the Surtax).

To further lower the Fair Tax Rate, tax business income rather than retail transactions. Taxes would still be generated by sales, but it would not matter if the sale were retail or wholesale. Enforcement is also easier, since purchases by businesses would be exempt if reported to the IRS, with taxation on the Value Added. This tax could be explicit or included in the price of the item – or some combination of the two. The explicit VAT would be some minimum percentage required to fund direct government services and would satisfy the desire by libertarians to show the true cost of services provided by the government in the tax structure, thus providing an incentive to cut government.

The included portion could be used to fund the Prebate for employees, as well as other tax expenditures demanded by organized interests. A higher Prebate could be paid under this scheme on the order of a living wage of about $520 per dependent per month (or $120 per week). The Prebate would be paid to everyone working or participating in an educational program to overcome welfare dependency. As such it would be a pro-life measure. The reason that abortion rates go down in Democratic administrations is that they provide more generous benefits to such families. For the Republicans to truly call themselves Pro-Life, they must do the same. So that firms don’t fund their entire payroll using the Prebate, a higher taxable minimum wage of $12.00 per hour would also be instituted.

Deductions or credits could also be instituted in the Business Income Tax portion for health care or insurance costs and mortgage interest, as failing to do so will likely doom the package. Note that at the local level there would be a charitable contribution credit designated by the employees and paid to accredited social welfare and education agencies, such as Catholic Charities, Lutheran Social Services and parochial schools. This credit, which could be partially matched by a Federal credit, allows for the privatization of welfare, public education and even corrections (although corrections and mental health costs might be more effectively funded by a Land Value Tax or property taxes). If retiree health care is paid for explicitly or through a fund sponsored by the former employee’s house of worship, Medicare and Medicaid can be dispensed with, removing the government from the health sector as well.

To me, it makes much more sense to use the Fair Tax to actually shrink government rather than using it to anger taxpayers enough to demand that services be cut.

Privatization and the Fair Tax

The candidacies of Mike Huckabee and Ron Paul have raised the profile of the proposed Fair Tax, which would make up 23% of the purchase price on all new goods across the board, including those purchased by the government. Seen another way, it is a 30% tax on the base goods or services. As such, it would require a 30% cut in any taxed spending – or would require a higher rate to make up for the higher appropriation levels required to make the same purchases. If appropriations were not increased, then government contracting would decrease by 30%, forcing agencies to do more work in house. In other words, if the Fair Tax passes you can kiss all future and current privatization of government services goodbye.

You could call the Fair Tax the bureaucrat reemployment act.

UPDATE: I was wrong on this, as Federal Employee salaries are taxed in taxes paid to the state government. The federal government is, in effect, taxed twice since its employees are taxed by paying the Fair Tax, although their individual salaries would be higher, although there would be 23% less of them.

Uncrunching Credit and Housing

Former Labor Secretary Robert B. Reich writes in Salon about prospects for getting beyond what he sees as a credit crunch and a collapse of the housing market. What he says makes absolute sense, given his citation of how much real estate is overvalued when compared with such fundamentals as earnings and rents. His solution is foreign bail out, which is happenning and will ease the credit crisis. He does ignore one set of obvious obvious solutions, however - increasing incomes, as well as one which is counter-intuitive but true - increasing taxes on savings.

Income tax rate cuts actually would do some of that, although a far more robust way to increase income for those who need it would be to not only give a temporary rebate, but also a permanently larger tax credit for children and other dependents. Doubling this credit from $1000 to $2000 and making it both refundable (to help lower income individuals) and available at withholding (so that it comes with payroll) would have this effect. Coupling this with a $10.00 per hour minimum wage (so that people aren't being paid only their tax credits) will increase income by the required amount.

Of course, it would save everyone much bookkeeping to simply transfer the tax liability for most wage withholding to the employer, replacing the personal income tax for all but the wealthiest with a VAT (which could be hidden as a business income tax, explicit like a VAT, or some combination of the two). Of course, this might lead to a recession in the financial and accounting sectors. Pity that.

The other piece, which will pay for some of the expansion in tax credits, is higher income taxes on the wealthy. Instead of waiting for the Bush tax cuts to expire, end them now. This will force money out of the savings sector into the government sector, where it will be used to decrease the deficit, thus freeing up money in the credit markets for consumer use. In a short period of time, the repayment of the debt will continue, leaving more money available for private borrowing.

Keynes is alive and well and living in the economy.