Where’s the economics? Romney’s tax plan is new

September 10, 2007 – 11:07 pm

James Pethokoukis at Capital Commerce asks an important question. Where is the economics in the GOP primary?

Talk about weird. It was as if Wednesday night’s Republican presidential debate hosted by Fox News was beamed in from an alternate reality— Earth 2 or something—where the economy is still booming and housing prices are still rocketing higher. Because here on Earth 1, the six-year economic expansion is stumbling thanks to a credit crunch caused by the imploding housing market.

In some ways, it is probably telling that in today’s environment in a GOP primary health care plans came out before tax plans. James points out in another post that Mitt Romney’s tax plan has something to recommend for it:

Romney may have begun to address that issue–and differentiate himself from his rivals–with his populist-yet-pro-growth Middle Class Savings Plan, the details of which he recently released.

Romney said:

I have proposed changing the rate of taxation on capital gains, dividends and interest to 0 percent for middle class Americans. … Under my plan, any taxpayer with Adjusted Gross Income of under $200,000 would pay a tax rate of absolutely 0 percent on all of the income they earn from their savings. This will allow over 95 percent of American families to save and invest tax-free without worrying about the federal government reaching into their pockets and snatching a share of their savings income each year.

I asked a Democratic friend who used to work on the Hill about it. Other than disagreeing, he made two important points. First, it would be difficult for Democrats to object to this. And, second, once it passes, it creates a principle in the tax code for a zero capital gains tax. Once that passes, it becomes hard to raise it again, on the one hand. On the other hand, Congress just negotiates over levels. Is $200k the right level? What about $300k?

Assuming a Democratic Congress, what would Romney do if a Democratic Congress, seemingly more and more likely, were to let the Bush tax cuts expire and replace them with this? Who would get credit for that?

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Thoughts on the Huckabee conference call

August 31, 2007 – 3:40 pm

Excuse the disorder of my notes. This should have somewhat more organized thoughts. In some real sense this was my first exposure to Huckabee as a candidate. I had interacted with him previously through the Young Republicans, and I knew that he was doing what he was doing to move his candidacy. But I was never forced to process him in the same way that I did today. So please excuse the structure of this.

The first thing that struck me is that no one that I had heard of was asking questions. Huckabee said that they have 150 "Bloggers for Huckabee," and they are clearly different people. Every question, except mine, started with an expression of support or love. This is not how it works for Rudy Giuliani or John McCain. The people on those calls are high-traffic national blogs focused on politics. The people on the Huckabee call were, at least, local blogs, often focused on things other than politics. At the very least this is a different model than the McCain and Giuliani are taking. It is very possible that it is closer to what Mitt Romney’s campaign is doing online, namely developing a blogger community that talks primarily to supporters. Thompson’s seems some of a hybrid. This is interesting, although I am not sure what to make of it.

Second, I asked a question about Huckabee’s economic populism. The answer is pretty striking, and you aren’t likely to hear it from any other GOP candidate in the field. He attacked CEOs and hedge fund managers. Perhaps the most interesting passage was:

As a Christian, [this is] not just an economic issue, but a moral issue. When you have real success, you share it with the people who helped you.  … That’s the difference between capitalism and greed. … A President has to show the moral leadership of the country, not just policy leadership. …

And:

The basic way that the rules have been written to favor a few. …  You have a tax policy that encourages boards a huge tax incentive to give a huge salary to the CEO."

This language could have come out of Barack Obama’s or John Edward’s mouths with little trouble. It probably couldn’t come out of Hillary Clinton’s mouth. I don’t think that she does populism like that. Unlike many of the national blogs out there, I think that there is a real openness in the GOP base for this. The Fabrizio poll that examined the base of the party found an awful lot of people who are not economic conservatives or who view a more activist government as a good thing. Mike Huckabee could make a real play to turn Romney into the candidate of the country-club set, if he tried. And I’m not sure how much of the country club set is still Republican.

Third, he is quite serious about health care, and he talks about it differently than Rudy or Romney do. They are talking about tax credits and pools of risk, etc. These are, of course, tremendously important. However, it is hard to relate to that. Huckabee’s language, befitting a preacher, is much more grounded in the reality of a person’s experience. Look at what he said:

Giving people a $500 discount for doing a health risk assessment. … Free quit smoking classes… Free weight-loss classes. … Studies show that health costs are 60% or more, even 80%, lower after they reduce their obesity…  Turn this thing toward preventive health…

I might even agree with a lot of this. There’s plenty of evidence that preventative medicine pays back plenty over time. (that’s one of the reason that I have a certain sympathy to the Medicare Part D bill.) It is also notoriously hard to score (no way that the CBO or OMB got it right for Part D, and it is clear that, in some cases, they over-estimated the cost) and would be very difficult to get through in that context if there was real penny-pinching going on.

The way he talks about it also makes health care reform a problem of "helping the person" (especially the person acutely aware of their own problems) not "fixing the system." If I am the candidate, I want to be where he is. But can that be converted into a real plan? We shall see.

This was a very interesting call. I still don’t know what to make of Huckabee. There is a lot that I like about him, although I have a gut aversion to populism, and I think that he is wrong, wrong, wrong about how to deal with globalization. But if he continues to gain, he is by far the most credible social conservative and populist in the field.  Those are convertible to victory in Iowa and South Carolina, but probably not in New Hampshire and Florida, and he seems to know that. I wonder where he will go with this.

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Republicans, Democrats, and taxes

August 31, 2007 – 11:45 am

I am really surprised that the tax fight hasn’t been engaged really. There was some, but not too much, noise when the tax-raising budget was passed by a Democratic Congress. But this is going to come back.

In theory, the Bush administration helped the 2008 GOP nominee because imminent, steep tax increases are on the horizon. One question will be how these will be presented over the next couple of years as this debate winds down. Capital Commerce has some great thoughts on this:

The Republican presidential candidates seem to be assuming that their Democratic rivals are going to push for repeal of all the Bush tax cuts. That’s why they are always talking about a potential $2 trillion-plus tax hike when those reductions expire at the end of 2010. More likely, Democrats will call for only the tax cuts on wealthier Americans to be repealed—such as raising the top rate from 35 percent to 40 percent—and for keeping most of the middle-class tax cuts, including rate reductions and a higher child tax credit.

The flip side of this is that the Democrats are going to propose lots of new spending, in the form of health care, etc. How are they going to pay for it? Especially, if they keep the middle-class tax cuts, etc.? Again, Capital Commerce:

Of course, Democrats are going to have to explain how they will pay for keeping the Bush tax cuts after 2010. Even if a Democratic president and Congress let them all expire, none of the new tax revenue—assuming there is any and the economy doesn’t tumble into a recession—could be spent on new programs like healthcare under current congressional budget rules.

Somehow, a circle is going have to get squared in this debate.

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Huckabee’s secret sauce? The FairTax

August 12, 2007 – 7:09 pm

Here are some facts and a hypothesis:

  • FairTax had 20-30 buses. (how can a 501(c)(4) give to a state party??)
  • Mike Huckabee had no buses.
  • The FairTax had enormous presence and good location.
  • Mike Huckabee had a bad location and little on-site staff.
  • But, Huckabee was the only candidate to endorse the FairTax.

Here’s the hypothesis: Mike Huckabee’s coalition included the FairTax, and they turned out bodies for him.

Here’s some corroborating evidence. A reader in Iowa contacted me with a story. She called up the Huckabee campaign, said she wanted to vote for Huckabee but couldn’t drive to Ames. She asked how to get there. The answer?

Governor Huckabee does not have buses.

So how do I get there? I can bring my husband too.

"Well, the FairTax bus pick up is" such and such. "That’s how I’m getting there."

What great irony. The farthest left candidate on taxes "wins" the straw poll because of his taxes coalition group. You have to admire it.

UPDATE: Iowa Independent has more facts and beat me to the punch.

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Club for Growth slams Huckabee

August 2, 2007 – 4:54 pm

For the critical week of recruiting before the Ames straw poll, The Club for Growth is attacking Mike Huckabee.  They have details here.

I think that this is going to hurt a lot. People who are still undecided and just show up are going to see this. And, like all Club for Growth ads, it is outrageous enough to get some free replays of its own. The Bill Clinton comparison should do that.

It is also interesting that this tries to be a grassroots lobbying style 501(c)(4) intervention. Can you do that? After all Huckabee can’t vote for the House bill, H.R.1077, discussed. This looks like straight political advertising.

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Carbon tax versus cap-and-trade

August 2, 2007 – 10:37 am

Normally, I don’t go so policy-oriented on people, but I think that there is an important point to be made here. Today Energy and Commerce  Committee Chairman John Dingell wrote:

A carbon tax or fee has been endorsed by President Bush’s former chief economic adviser, Greg Mankiw; Nobel Prize-winning conservative economist Gary Becker; the chief executive of the largest U.S. auto-dealer chain, Mike Jackson; and several environmental organizations. From Alan Greenspan to Greenpeace, many recognize its utility. …

I don’t expect to overcome ideological Republican opposition to all forms of taxation, but if CEOs, economists, environmentalists and citizens speak out, we could effect real change. I don’t pretend to speak for my party on this; I’m trying to speak to common sense and experience.

While I don’t want to agree with John Dingell on anything but Greg Mankiw makes an important point:

Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is,

Cap-and-trade = Carbon tax + Corporate welfare.

If the public understood this theorem, the carbon tax alternative, with revenues rebated to households through lower payroll or income taxes, would attract a lot more interest.

In many ways, cap-and-trade is a policy-equivalent of sending tariffs to struggling businesses, something Democrats love. In addition, there is something deeply arbitrary about cap-and-trade. Right now, 5 EU member states are suing the EU because the caps are arbitrary:

Poland, Hungary, the Czech Republic, Slovakia and Estonia have all started legal action against pollution quotas imposed by the European Commission. The arguments they use are similar to those made by China and other emerging markets: that the strict limits will hurt their economic growth.

It seems to me that if you believe that environmental regulation is necessary, the least market distorting is a carbon tax. Now many (but perhaps not most) conservatives and Republicans will disagree with the if clause in that statement. But, surely legislation is coming on this in the next Congress, especially with a Democrat president. Surely we need a position that makes sense before then? And an idea like replacing a corporate tax with a carbon tax could get some Republican support?

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Senate trying to fix loopholes, aka stopping people from making an honest buck

June 19, 2007 – 10:16 am

Now, I normally don’t get excited about tax policy. Mostly because it is obscure. But this got me annoyed, so here goes.

Senators Baucus and Grassley have introduced a bill to shut down a "loophole" in the tax code as it relates to private equity. The basic idea is that private equity partnerships are taxed as capital gains, not income. The long-term capital gains tax is around 15%, while the US has the highest corporate tax is the industrial world after, I believe, Japan. So they want to tax private equity partnerships as corporations under the higher tax rate.

Now there are reasonable arguments for this. One is that private equity has a significant advantage versus corporations because they get to keep around 25% more of their profits. So the current tax code could be said to create "unfair" competition. That is, if the current tax code had any sense of fairness in it at all, which it doesn’t. But that’s not what is going on here. This is a story of the government trying to stop someone from getting rich by outthinking Congress, something most Americans would argue isn’t that hard.

Let me start with a story about the tax code from a friend who was a Senate Democratic tax staffer:

A constituent had asked for a small tariff on a kind of purse several years before. The purpose of this tariff was to screw the less politically-connected competition. The goal was to create more demand for their bag by raising the prices for their competition. But, several years after the tariff was introduced, fashions changed, and this company wanted to move into this market, which had the tariff that they had asked for. So they went back to ask for a repeal of the tariff.

That’s how our tax code works. Some honest businessman got screwed because some other politically connected businessman made a bad decision. And that’s what is going on here. Private Equity looked at the tax code and figured out how to structure their companies so that they made money. There’s nothing wrong with people making decisions based on taxes or prices. I am driving to Canada for a family reunion this weekend. I will have to make decisions about when to purchase gas. I might buy it in NY, PA, MD, or VA. And most of the difference in cost is due to regulation (taxes plus varying environmental standards)

Now, if our Senators made the change take effect for partnerships created in the future, sure. I might be ok with that, because there really is a competition issue here. (don’t tell the credit unions!) But that’s not how this became a political issue. It became an issue because the unthinkable is about to happen. Somebody is about to make a boatload of money by out-thinking the tax code:

Meanwhile, Democrats, and some Republicans, are taking aim at the booming private-equity buyout industry, especially the much-ballyhooed public offering of Steve Schwarzman’s Blackstone Group. It seems these buyout guys are just too rich.

Up to now, Blackstone’s authoring statement had envisioned some kind of two-tiered tax plan, where ordinary corporate compensation would be taxed at the 35% corporate rate while high-risk investment-fund profits would be taxed at the 15% capgains rate. And now, Senators Baucus of Montana and Grassley of Iowa want Blackstone to pay the much higher corporate tax on all its income.

Better stop those guys from making that money. That just ain’t right.

If the Dems want to make an issue of people using the tax code in innovative ways, they need to start with a redesign of the tax code from scratch that introduces some notion of fairness. Get rid of all the various loopholes and tax earmarks. Get rid of all the tax breaks for their buddies and all the other corporate welfare. But don’t go grabbing the money of the guys who just ended up being smarter than Congress.

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Romney against tax simplification

May 15, 2007 – 2:01 pm

So says Dan Hoover:

Romney told reporters and editors of The Des Moines Register last month that he wants to lower marginal tax rates for Americans, not overhaul the code.

"I’m probably not going to be recommending throwing out the code and starting over," he said.

That’s exactly where the Fair Tax crowd and Romney’s chief cheeleader in South Carolina part company with him. Both want to dump the tax code and the IRS along with it.

No wonder Mitt Romney isn’t going to get the Club for Growth endorsement…

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Pat Toomey: “Disappointed” except for Brownback

April 2, 2007 – 1:06 pm

The Club for Growth’s Pat Toomey was interviewed on Fox and Friends and had some explosive things to say about Presidential candidates:

Quotes:

Nobody walked away with it either.

But there’s an opening….

What disappointed me a little bit is that no one came out with a really bold platform … Sam Brownback was the most specific and concrete.

Good for Sam…

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Oppo dumps before Club for Growth meeting

March 29, 2007 – 1:33 pm

Well, people are certainly throwing trash out. Why? You better make your opponents stink before the Club for Growth meeting…

The problem for the Club for Growthers is that they are going to have to choose between Rudy Giuliani and Mitt Romney. Both of these have gotten smeared with economic oppo.

http://farm1.static.flickr.com/177/437976778_e6c5eeaff5_o.jpgRomney first. For Romney there is an article in the Hill about Romney’s economic record. The issue is:

Anti-tax advocates are scrutinizing Mitt Romney’s (R) record as governor of Massachusetts and focusing on the fact that he increased fees in the state by $500 million and proposed nearly $400 million in business tax increases.

The article also points out something that the Brownback team even put on their blog:

The Cato Institute, a libertarian think tank, published a fiscal-policy report card for 2006 that gave Romney a C grade, ranking him behind 11 other governors, including Democratic White House hopeful Bill Richardson, governor of New Mexico.

And, of course, third, is the picture at my right… Romney said that tax cuts were lower priority than … campaign finance reform, among other things.

Then there is Rudy. This is an important issue for Rudy, as Tony Fabrizio points out to the Journal, the Wire has another version for non-WSJ subscribers:

The competition for the mantle of top tax cutter could be crucial if antiabortion and other activists seek another champion, as many are threatening to do. "Giuliani has to be pro tax cuts….It is the only thing that would even keep him in the race," said Tony Fabrizio, a Republican strategist. The candidate has a record of endorsing gun control, gay rights and abortion rights. "If he went south on taxes, that would be the absolute ending," Mr. Fabrizio said.

I don’t completely agree with Fabrizio, precisely because Rudy is trying to transcend issues. But, Rudy is clearly pushing that, including in a radio ad in Georgia. And people are taking out the trash on Rudy. Ramesh Ponnuru at NRO is writing about it (here, here, and here). Even the NY Sun, Politico,  NY Times, and the DNC are playing the game. (did I just repeat myself? NY Times and DNC … get it?) The basic allegation is that Rudy was against the Flat Tax before he was for it. And he had a poor spending record for a while.

Maybe it was right for John McCain to skip this after all….

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