Obama's Nontax Tax

On a Sunday show, the President offers a revealing definition.

President Obama didn't make much news on his round of five Sunday talk shows yesterday, with one notable exception. The President revealed a great deal about his philosophy of government and how he defines a tax increase. It turns out the President thinks a health-care tax is not a tax if he thinks the tax is for your own good.

Appearing on ABC's "This Week," Mr. Obama was asked by host George Stephanopoulos about the "individual mandate." Under Max Baucus's Senate bill that Mr. Obama supports, everyone would be required to buy health insurance or else pay a penalty as high as $3,800 a year. Mr. Stephanopoulos posed the obvious question about this kind of coercion when "the government is forcing people to spend money, fining you if you don't [buy insurance]. . . . How is that not a tax?"

"Well, hold on a second, George," Mr. Obama replied. "Here's what's happening. You and I are both paying $900, on average—our families—in higher premiums because of uncompensated care. Now what I've said is that if you can't afford health insurance, you certainly shouldn't be punished for that. That's just piling on. If, on the other hand, we're giving tax credits, we've set up an exchange, you are now part of a big pool, we've driven down the costs, we've done everything we can and you actually can afford health insurance, but you've just decided, you know what, I want to take my chances. And then you get hit by a bus and you and I have to pay for the emergency room care, that's . . ."

"That may be," Mr. Stephanopoulos responded, "but it's still a tax increase." (In fact, uncompensated care accounts for about only 2.2% of national health spending today, but that's another subject.)

Mr. Obama: "No. That's not true, George. The—for us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is, is that we're not going to have other people carrying your burdens for you anymore . . ." In other words, like parents talking to their children, this levy—don't call it a tax—is for your own good.

Mr. Stephanopoulos tried again: "But it may be fair, it may be good public policy—"

Mr. Obama: "No, but—but, George, you—you can't just make up that language and decide that that's called a tax increase."

"I don't think I'm making it up," Mr. Stephanopoulos said. He then had the temerity to challenge the Philologist in Chief, with an assist from Merriam-Webster. He cited that dictionary's definition of "tax"—"a charge, usually of money, imposed by authority on persons or property for public purposes."

Mr. Obama: "George, the fact that you looked up Merriam's Dictionary, the definition of tax increase, indicates to me that you're stretching a little bit right now. . . ."

Mr. Stephanopoulos: "I wanted to check for myself. But your critics say it is a tax increase."

Mr. Obama: "My critics say everything is a tax increase. My critics say that I'm taking over every sector of the economy. You know that. Look, we can have a legitimate debate about whether or not we're going to have an individual mandate or not, but . . ."

Mr. Stephanopoulos: "But you reject that it's a tax increase?"

Mr. Obama: "I absolutely reject that notion."

If you can follow this reasoning, then you probably also think that a new entitlement is the best way to reduce entitlement spending. The Congressional Budget Office estimates that the Senate's individual mandate will result in new revenues of some $20 billion over 10 years because some people will choose to opt out of ObamaCare—or because they can't afford to buy in, given that other taxes and regulation will make health care more expensive. If that $20 billion doesn't count as tax revenue, then what is it?

And for that matter, what doesn't count as a nontax under Mr. Obama's definition? All taxes can be justified in the name of providing some type of service, however wasteful. Mr. Obama complains that "My critics say everything is a tax increase," as if that is his political problem. His real problem is that the individual mandate really is a tax, but the President doesn't want voters to think of it that way, because taxes are unpopular.

Cap and Tax Delay

Senate Democrats realize they don't have the votes—for now.

Health care isn't the only destructive White House priority running into trouble in the Senate. Yesterday, Barbara Boxer (Marin County) and John Kerry (Nantucket) announced that Democrats won't release their cap-and-trade bill next week as scheduled after all, but will instead postpone it for up to a month. It's far too early to say that carbon tax and cap is dead, but mark this delay down as one more sign that it remains well short of 60 votes.

Ms. Boxer and Mr. Kerry insist that all systems are still go, though it didn't sound that way when the No. 2 Democrat in the Senate, Dick Durbin of Illinois, told Bloomberg TV last month that "I have to be honest with you. As a whip, I count the votes and I count the days in the week, and I look at this rule book in the Senate and think this is not an easy lift. I think we can still do it, but it's a question of timing."

Presumably, and we hope, he was talking about the very distant future. Cap and tax will most hurt the rural and Midwest states that most rely on coal-fired power and heavy manufacturing. Middle-American Senators aren't about to rush through a huge new tax on carbon energy—e.g., their constituents—that will largely flow to the wealthier coasts, even if it is done in the name of saving the planet while the here-and-now economy is still sputtering.

The House barely passed the Waxman-Markey climate bill in June, and only after weeks of arm-twisting and outright legislative bribery and at significant political cost to Blue Dog Democrats. The same tactics won't be as effective in the upper chamber. In any case Ms. Boxer, Mr. Kerry and President Obama really have to convince Members of their own party, such as Kent Conrad (North Dakota), Jay Rockefeller (West Virginia) and Blanche Lincoln (Arkansas).

The latest delay is probably a submission to reality, which is a rare thing in the current political environment—and a major victory for the U.S. economy, at least for now.

The Cap and Tax Fiction

Democrats off-loading economics to pass climate change bill.

House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.

Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.

Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

Associated Press

Henry Waxman

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.

A Flat Tax for California?

The Governator goes back to his roots as a reformer.

'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."

-- Arnold Schwarzenegger, June 11, 2009

Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.

Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.

Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.

"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.

The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.

This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.

The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.

Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.

None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.

Springfield Tax Revolt

Taxpayer victories are rare these days, so let's cheer the good news in Illinois, where earlier this week the state House in Springfield voted 74-42 against a plan to raise the income tax rate on individuals and businesses by 50%.

When Governor Pat Quinn succeeded Rod Blagojevich in January, he immediately proposed raising the personal income tax to 4.5% from 3%, the business tax rate to 7.2% from 4.8%, and expanding the sales tax to services ranging from dry cleaners to Internet hookup. The Democrat says the income tax hike is "based on a principle as old as the Bible. Taxes should be based on the ability to pay." But voters can distinguish between rendering unto God and unto Quinn, and public dismay was so widespread that even 26 Democrats voted to kill this tax grab.

Just as surprising, not a single Republican voted for the tax increase. In recent times the ideological distinction between the GOP and Democrats has been as murky as the Chicago River. Former Governors "Big Jim" Thompson, Jim Edgar and George Ryan transformed Republicans into the tax-and-spend party.

Solidarity has given Republicans new leverage in the budget debates because majority Democrats are terrified to pass a tax hike on their own. Mr. Quinn may call for a new tax vote, but the GOP can now instead demand spending and ethics reforms in a state where political corruption is at New Jersey proportions. One reason Mr. Quinn's tax plan failed is because there was little effort to slow down spending that has increased 45% (to $4,700 from $3,250 per person after inflation) in the past decade.

Following the defeat of California's tax increase, the Illinois revolt is more evidence that voters are rejecting tax-and-spend politics. Beltway Democrats, take note.

Tax and the Cayman Islands

Grey skies in the Caribbean

The taxmen circle the white beaches

THE seas round the Cayman Islands may be blue, the sands white and the coral reefs a rainbow, but to the OECD, an economic group of rich countries, the Cayman Islands are grey. On May 14th the OECD ruled to keep the British colony on its list of unco-operative tax havens.

That has miffed the Cayman Islanders. In April the OECD gave a clean “white” grade to rivals such as Jersey, Guernsey and Barbados. These lists rank a financial centre’s willingness to share information about offshore bank accounts with tax authorities around the world. To get on the white list, a dozen or so tax-information exchange treaties are needed. Barbados has 19. Until recently the Caymans had just one, with the United States. On April 1st it signed agreements with five Nordic countries. It now reports income from savings accounts to European Union countries. It has offered to share tax information with 12 other countries.

The OECD is not the only group pressing for more openness. Barack Obama’s budget proposes to close loopholes which allow American companies to use offshore centres to avoid taxes. A Stop Tax Haven Abuse bill in the American Congress would assume that Americans who set up companies in tax havens are their owners and levy penalties on financial institutions that block tax enforcement.

The bill’s sponsors are disdainful of the tax treaties favoured by the OECD, which work only when the supplicant tax authority can name a particular taxpayer and bank. Under their measure, which in an earlier version in the last Congress was sponsored by Mr Obama, companies that are registered offshore but do most of their business in America would be taxed there. Mr Obama has pointed to Ugland House, the Cayman Islands’ office of a law firm, Maples and Calder, which last year was the legally registered address of 18,857 companies and other bodies, almost half of which had an American billing address.

Anthony Travers, a former managing partner of Maples and Calder who chairs the Cayman Islands Financial Services Association, argues that this bill would damage the American economy, by tempting hedge funds to move their managers from Connecticut to the Caymans, for example. Better, he says, would be a “proactive” treaty, with the American authorities automatically notified of their taxpayers’ offshore accounts.

Over the past half-century offshore finance, along with tourism, has lifted the Cayman Islanders from poverty to prosperity. Both have been hurt by world recession. The islands’ new government, elected on May 20th, has its work cut out.

California Reckoning

Tax and spend governance may finally hit the wall.

Californians head to the polls Tuesday to decide the fate of six ballot initiatives, all of which are ostensibly designed to combat the Golden State's budget crisis. If the polls are right, all but one of these measures will crash and burn -- and by wide margins. A reckoning for liberal tax and spend governance may finally be arriving.

AP

We have some sympathy for Governor Arnold Schwarzenegger, who was elected to fix this mess six years ago. His original mistake was to accept a token bipartisan fix when he was most popular, and once the unions crushed his reform initiatives in 2005 he had little leverage over the Democrats who run the legislature. So he's now decided to settle for the lowest common denominator reform that both parties can agree to, which isn't nearly enough considering the magnitude of the state's fiscal and economic problems.

By far the most consequential initiative is Proposition 1A, which is favored by most of the Sacramento political class. Prop 1A creates a rainy day fund of up to 12.5% of the budget and imposes a new annual spending cap. It would divert 3% of revenues during economic boom years into the rainy day fund that can only be spent during recessions. Mr. Schwarzenegger is correct that this is a sensible reform, because for 40 years the state has endured revenue booms and busts.

Alas, the cap is far weaker than the Gann Amendment that passed with 74% of the vote in 1979, as the sister initiative to Proposition 13, and helped usher in a decade of budget surpluses. The Gann Amendment -- until public unions neutered it in the early 1990s -- imposed a ceiling on spending at the level of population growth plus inflation; when revenues exceeded that limit, the money was returned to taxpayers.

By contrast, Prop 1A allows revenues and thus spending to grow each year at the average rate of growth of tax receipts over the previous decade, or at the rate of population growth plus inflation, whichever is greater. Revenues above that amount are pushed into the reserve fund to be spent at a later date. This gives incentives to legislators to raise taxes whenever possible, because the spending cap rises along with revenues. Prop 1A also allows the legislature to raid the rainy day fund to pay for "capital outlay purposes" -- roads, bridges, schools and even pork projects.

Even to get this minimal spending cap, voters must also approve a two-year $16 billion extension of this year's tax hikes. The 0.25% income-tax surcharge (to 10.55%) and the near doubling of the car tax would be extended through 2013, and the one percentage point sales tax hike (to 9%) would be extended through 2012.

Even worse is Prop 1B, which would divert $9.3 billion from the rainy day fund to the education spenders in Sacramento and thus exempt half the general fund budget from any belt tightening. This would refortify the teachers unions, which have spent $2.7 million to pass the measure and are the very group most responsible for California's fiscal mess. Teacher pay and benefits are already 35% above the national average.

Then there are the gimmick Propositions 1C, 1D and 1E, which would raid trust funds and use any surpluses to pay current general fund bills. The preposterous 1C would raise $5 billion today by securitizing future lottery revenues. That would add more than $350 million of new debt payments annually for at least the next 20 years. What's next, selling the silverware in the Governor's mansion?

Given all of this trickery, it is no wonder polls show Props 1A-E are likely to lose. The only initiative ahead in the polls, Prop 1F, would block pay raises for lawmakers if they fail to balance the budget. One recent poll found that 72% of Californians agreed that "if the measures on the special election ballot are defeated, it would send a message to the governor and the legislature that voters are tired of more government spending and higher taxes."

That's a good message to send. California politicians have operated for years as if the purpose of government is not to provide reliable public services at low cost, but to feed public employee unions. Sacramento also needs to rethink its highly progressive antigrowth tax code, where the tax rates are the highest outside of New York City. The Golden State now ranks worst or second worst on most ratings of state business climate. This drives away entrepreneurs and high-income taxpayers, which in turn leads to lower revenues.

If the voters do reject these false fixes, there will be wails of despair in Sacramento. Assembly Speaker Karen Bass, who never saw a spending or tax increase she didn't like, says "California, frankly, is going to be in a world of hurt." Mr. Schwarzenegger says he will be forced to release 30,000 criminals from jail, and to lay off teachers, troopers and firefighters. Look for the state to ask Washington for another bailout "stimulus."

But voter rejection may be precisely the jolt of reality that California needs to inspire real reform. Start with a new Gann Amendment to cap total spending, and add a flat-rate income and sales tax of 5% or 6%, which is roughly the national average and will stop driving business from the state. A flat tax would help to stabilize revenues over time, avoiding boom and bust. Drilling for oil offshore would also bring in billions of dollars of revenues.

This kind of reform will only come from Golden State voters who aren't yet on the public dole or the public payrolls. Howard Jarvis led such a charge 30 years ago. It needs to happen again for California to break out of its tax and spend death spiral.

Another California Tax Revolt?

State voters may say no next week to various spending initiatives.

STEVEN GREENHUT

Santa Ana, Calif.

'I think it's going to be a tough summer, and I'm not sure of the solutions yet." So said California Republican Assembly leader Mike Villines last week as he announced that he was stepping down from his leadership post.

California Republicans have been adrift in recent years, and this quote is one indication why. The state is facing a massive deficit, talk of bankruptcy is in the air, and polls indicate that on Tuesday voters will reject the legislature's Band-Aid budget fixes. GOP leaders aren't able to challenge the Democrats who run the state legislature by offering viable solutions.

The drift, however, may be coming to an end. Mr. Villines is the second GOP legislative leader to fall this year. State Senate Republicans ousted their leader, Dave Cogdill, in February after he negotiated a budget deal that raised taxes. Something is brewing in California, and it looks a lot like the mix of politics that led to the recall of Democratic Gov. Gray Davis in 2003.

The driving issue is a budget deficit that won't go away. Several months ago, lawmakers were forced to tackle a $42 billion deficit that stems from a 35% general fund spending increase since Republican Arnold Schwarzenegger replaced Mr. Davis. The deficit is $4 billion larger than the one that helped end Mr. Davis's political career. After wrangling over what to do, the governor and legislature struck a deal that raises income and sales taxes as well as car-registration fees. In all, the tax increases will cost Californians some $13 billion over the next three years.

The lawmakers punted the decision to enact much of the budget deal to voters in six ballot initiatives -- most of which are behind in the polls by nine percentage points or more. According to a recent Field Poll, 72% of voters agreed that rejecting the measures "would send a message to the governor and the state legislature that voters are tired of more government spending and higher taxes."

Voters are upset at the budget games lawmakers have played: One trick employed this year to balance the books was to send taxpayers IOUs instead of tax refunds they were owed. In an editorial, the San Diego Union Tribune captured the consensus on the budget deal by calling it "a sham, an utter sham."

With the GOP's grass-roots ablaze in anger over taxes, Republican leaders are being forced to either come out against the initiatives or be driven from positions of power. Mr. Villines is lucky he only lost his leadership post. There are four recall efforts underway aimed at wayward Republicans. Assemblyman Anthony Adams is being targeted because he voted for the budget despite taking a no-tax pledge. Assemblymen Jim Silva and Jeff Miller are facing a recall effort because they refused to go along with an earlier coup attempt against Mr. Villines. And recall petitioners are taking aim at state Sen. Bob Huff because he voted to put one of the initiatives on the ballot.

Even Democratic activists are keeping the tax hikes on the ballot at arm's length. At the state's Democratic Party convention last month, delegates voted against endorsing several of the initiatives, notwithstanding pressure from party leaders to get in line behind the budget deal. Commentators of all political stripes are mocking the measures as buck-passing frauds.

The core initiative is Proposition 1A, which would extend by two years the tax increase passed in the budget deal. State officials know that voters would never approve direct tax increases, so they dressed them up as a budget-control measure that increases the size of the state's rainy day fund and imposes spending caps.

But those caps are a "fantasy," as Jon Coupal points out. He's the president of the Howard Jarvis Taxpayers Association, a watchdog group founded three decades ago as part of the state's last major tax revolt. The caps, he points out, allow spending to go up with state tax revenues, and they also allow the rainy-day fund to be raided on the say-so of the governor.

The remaining measures include a $9 billion earmark to the public schools that the Los Angeles Times calls a payoff to the California Teachers Association. Other initiatives propose to divert funds from previously passed state initiatives dealing with children's health services and mental health into the general fund. Another would expand the state's lottery enterprise. The only initiative that's ahead in the polls would deny pay raises to legislators and state constitutional officers in years when the state is running a deficit. That initiative is meant to gin up support for the others by convincing voters that the initiative package really means business.

But voters are smarter and have longer memories than politicians give them credit for. They seem ready to approve the last one and say "no thanks" to the others in part because there is a general feeling that taxpayers have been taken one too many times.

After all, voters gave Mr. Schwarzenegger approval to borrow $15 billion back in 2004. He promised then that the new debt and accompanying reforms would permanently solve Sacramento's fiscal problems. He said he was taking the state's "credit cards, cutting them up and throwing them away." He's now campaigning for the initiatives using scare tactics. This week, he threatened large state layoffs, budget cuts, and a sell-off of state-owned properties if the initiatives come up short.

Fiscally irresponsible legislators will likely blame "irresponsible" voters for the mess that's left after the budget initiatives get rebuked. But California has a history of tax revolts that remake the state's political landscape. Thirty-one years ago, the state's voters ignored a scare campaign and voted for Proposition 13, which placed strict limits on property taxes and helped ignite a nationwide tax revolt.

That antitax movement played a role in electing Ronald Reagan, a former governor of California, president in 1980. Some politicians may not know what to do in a fiscal crisis, but California voters often do.

Mr. Greenhut is a columnist for The Orange County Register in Santa Ana, Calif.

Obama's Tax Plans

A bad tax idea

Illinois-based McDonald's, Caterpillar and Boeing make billions of dollars selling their burgers, earthmovers and airplanes around the world. Like other multinational companies located here, they pay U.S. corporate income taxes of up to 35 percent on those revenues only when they ship the money back to the U.S. or pay it out as dividends. Otherwise, the taxes are deferred.

President Barack Obama believes that encourages overseas investment rather than U.S. investment and robs money from the U.S. Treasury. He has proposed to restrict the corporate tax deferment.

Obama this week blasted the loophole-ridden U.S. tax code as one "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y."

The example was strong on alliteration, but weak on logic. India's corporate tax rate is just under 34 percent, according to the international accounting firm KPMG International's most recent survey of tax rates. In other words, it's right there with the U.S. rate. Low labor costs and access to a highly educated population have more to do with the surge in Bangalore jobs than any tax advantage does.

Obama estimated that his tax deferment changes, along with cracking down on individual and corporate tax havens, would raise $210 billion over the next decade.

But why would Obama want to make American companies less competitive in the world?

Most countries don't tax their companies' foreign profits -- and most have lower corporate tax rates than the U.S. does. The U.S. deferment exists as partial compensation for the different tax treatment by the U.S.

A French company doing business in Dublin pays Ireland's 12.5 percent corporate tax rate and faces no additional French taxes. The French company can use the profits to build new plants and create jobs in France or elsewhere.

But a U.S. firm doing business in Dublin pays Ireland's corporate tax rate, and then pays U.S. corporate taxes if it brings the money home for investment or a payout to stockholders. (Essentially, it pays 35 percent to the U.S., minus the taxes it paid to Ireland.) Rather than encouraging multinationals to bring that money home with the lure of lower taxes, Obama wants to hike their U.S. tax exposure.

To be competitive in the international marketplace, many countries in the last decade have cut their corporate tax rates -- on average from 31.4 percent to 25.9 percent, according to the KPMG survey.

Obama insisted that he wants "to see our companies remain the most competitive in the world." There's a way to do that: Simplify the tax code, get rid of sweetheart loopholes and lower the overall corporate tax rate so there isn't such a disparity between the U.S. and other nations.

Addressing Overseas Tax Dodge Questions

Addressing Overseas Tax Dodge Questions

By Robert Samuelson

The U.S. tax code is "full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share."

-- President Obama, May 4

Like it or not, ours is a world of multinational companies. Almost all of America's brand-name firms (Coca-Cola, IBM, Microsoft, Caterpillar) are multinationals, and the process works both ways. In 2006, the U.S. operations of foreign firms employed 5.3 million workers. Fiat's looming takeover of Chrysler reminds us again that much business is transnational.

For most people, the multinational company is a troubling concept. Loyalty matters. We like to think that "our companies" serve the broad national interest rather than just scouring the world for the cheapest labor, the laxest regulations and the lowest taxes. And the tax issue is especially vexing: How should multinationals be taxed on the profits they make outside their home countries?

Listen to President Obama, and the status quo seems a cesspool. Pervasive "loopholes" engineered by "well-connected lobbyists" allow U.S. multinationals to skirt American taxes and outsource jobs to low-tax countries. So the president proposes plugging loopholes. Some jobs will return to the United States, he said, and U.S. tax coffers will grow by $210 billion over the next decade.

Sounds great -- and that's how the story played. "Obama Targets Overseas Tax Dodge," headlined The Post. But the reality is murkier; the president's accusatory rhetoric perpetuates many myths.

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly -- less so than their foreign counterparts.

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States), and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

Myth: Plugging overseas corporate tax loopholes will dramatically improve the budget outlook as multinationals pay their "fair" share.

Reality: Dream on. The estimated $210 billion revenue gain over 10 years -- money already included in Obama's budget -- represents only six-tenths of 1 percent of the decade's tax revenue of $32 trillion, as projected by the Congressional Budget Office. Worse, the CBO reckons that Obama's endless deficits over the decade will total a gut-wrenching $9.3 trillion.

Whether Obama's proposals would create any jobs in the United States is an open question. In highly technical ways, Obama would increase the taxes on the foreign profits of U.S. multinationals by limiting the use of today's deferral and foreign tax credit. Taxing overseas investment more heavily, the theory goes, would favor investment in the United States.

But many experts believe his proposals would actually destroy U.S. jobs. Being more heavily taxed, American multinational firms would have more trouble competing with European and Asian rivals. Some U.S. foreign operations might be sold to tax-advantaged foreign firms. Either way, supporting operations in the United States would suffer. "You lose some of those good management and professional jobs in places like Chicago and New York," says Gary Hufbauer of the Peterson Institute.

Including state taxes, America's top corporate tax rate exceeds 39 percent; among wealthy nations, only Japan's is higher (slightly). However, the effective U.S. tax rate is reduced by preferences -- mostly domestic, not foreign -- that also make the system complex and expensive. As Hufbauer suggests, Obama would have been better advised to cut the top rate and pay for it by simultaneously ending many preferences. That would lower compliance costs and involve fewer distortions. But this sort of proposal would have been harder to sell. Obama sacrificed substance for grandstanding.

A 200% Tax Even Socialists Will Hate

Robert H. Frank, A 200% Tax Even Socialists Will Hate

by Alan Reynolds

In the latest issue of Forbes, Cornell University economist Robert H. Frank is pushing “A Tax Even Libertarians Can Love.” I hope he wasn’t counting on this libertarian’s support.

What he advocates is “replacing the income tax with a progressive tax on spending. …A family’s income minus its savings is its consumption, and that amount minus a large standard deduction — say, $30,000 a year for a family of four — would be its taxable consumption. …Rates would start low, perhaps 20%, then rise gradually with total consumption. …With savings tax-exempt, top marginal tax rates on consumption would have to be significantly higher than current top rates on income.”

His concept of “significantly higher” includes tax rates of 100-200% on marginal income that isn’t saved. This is about minimizing affluence, not maximizing revenues. There is ample evidence from Emmanuel Saez and others that the amount of reported income drops sharply as marginal tax rates rise above 25-30% (and even less on capital gains).

In his 2007 book, Falling Behind: How Rising Inequality Harms the Middle Class, Frank suggests marginal tax rates of 50% above $220,000 and rising to 200%. Since seniors (like me) commonly finance retirement from past savings, Frank’s tax scheme amounts to rapid confiscation of past savings.

For young people, Frank’s tax can’t possibly encourage savings because it discourages earning any income in the first place. Consumption is, after all, the motive for both earning and saving. The prospect of facing future consumption taxes of 50-200% would surely discourage saving much, because the rewards from invested savings (namely, future consumption) would be subjected to such prohibitive tax brackets. Under this steeply progressive tax on unsaved income, any income exempt from taxes today would be subject to brutal taxes whenever folks wanted to buy anything of value, like a car or house, or to retire on their accumulated savings.

In another April 25 piece in The New York Times, Mr. Frank shifts from promoting confiscatory taxes on consumption to defending small tweaks to the current tax regime. “The current [tax] system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient.” That comment was aimed at the tea parties. Yet tax party protesters clearly understood, as Frank does not, that the president’s first wave of proposed tax increases come nowhere near paying for his grandiose spending plans. My estimate of last October, that Obama’s plans would add $4.3 trillion to the deficits over ten years is now looking much too generous, if not wildly optimistic.

In the New York Times piece, Frank argues that income differences are mainly a matter of luck. As he often does, Frank pretends to possess evidence about this topic that other economists have missed. He says, “economists have only begun to realize [that] pay differences often vastly overstate differences in performance.”

In his book, whenever Frank alludes to what “the evidence suggests,” his sources are usually suspect, obsolete or invisible. He claims “regulations, like cartoons are data.” He cites an unpublished master’s thesis, unidentified surveys and “casual impressions.”

Frank claims “happiness can be measured reliably” by brain waves. Explaining this better in the Economic Journal in 1997, he noted that people who say they are happy show “greater electrical activity in the left prefrontal region of the brain” which “is rich in receptors for the neurotransmitter dopamine, higher concentrations of which been shown independently to be correlated with positive affect.” If we accept the amount of dopamine in the brain as the gauge of happiness, however, then the happiest people are those who routinely abuse crack and meth.

In the second chapter of Falling Behind, his first graph lists a Census Bureau URL as the source for household income data from 1949 to 1979. Click on that link and you will find the data only go back to 1967. In reality, all of Frank’s income and wealth graphs actually came from Chris Hartman at inequality.org. Hartman is not an economist or statistician, but a “researcher, writer, editor, and graphic designer with experience in politics, higher education, and publishing.” Hartman’s non-facts used in Robert Frank’s first graph actually came from a 1994 book from the Economic Policy Institute, reflecting the “authors’ analysis. . . of unpublished census data.” Frank’s comparison of CEO pay with “average wages” came from Hartman’s flawed calculations for United for a Fair Economy, which were critiqued on page 131 of my textbook Income and Wealth. And Frank’s demonstrably false claim that “asset ownership has become even more heavily concentrated during recent years” is likewise from inequality.org.

In short, Professor Frank often bases his remarkably strong opinions on fragile facts.

This Tax Is for You

A levy on Joe Six Pack.

Today is the dreaded April 15, but at least in Oregon it's even going to cost you more to drown in your tax sorrows. In their sober unwisdom, the state's pols plan to raise taxes by 1,900% on . . . beer. The tax would catapult to $52.21 from $2.60 a barrel. The money is intended to reduce Oregon's $3 billion budget deficit and, ostensibly, to pay for drug treatment.

If it passes, Oregon will overnight become the most taxing state for suds, one-third higher than the next highest beer tax state, Alaska. The state may do this even though Oregon is the second largest microbrewery producer in the U.S. The beer industry and its 96 breweries contribute 5,000 jobs and $2.25 billion to state GDP. Kurt Widmer of Widmer Brewing Co. says the tax would "devastate our company and small breweries throughout the state." Adds Joe Henchman, director of state projects at the Tax Foundation, "This microbrewery industry has gravitated to Oregon in part due to low beer taxes."

For Oregon to enact punitive taxes on its homegrown beer industry makes as much sense as Idaho slapping an excise tax on potatoes or for New York to tax stock trading. Even without the tax increase, taxes are the single most expensive ingredient in a glass of beer, according to the Oregon Brewers Guild.

But Democrats who run the legislature are desperate for the revenues to help pay for Oregon's 27.9% increase in the general fund budget last year. If they have their way, every time a worker steps up to the bar and orders a cold one, his tab will rise by an extra $1.25 to $1.50 a pint. Half of these taxes will be paid by Oregonians with an income below $45,000 a year. Voters might want to remember this the next time Democrats in Salem profess to be the party of Joe Six Pack.

Tax Tea Party Time?

Bruce Bartlett

Higher taxes may not be as bad as they seem.

Next week is April 15, the day when most Americans have to file their federal income tax returns. To protest the allegedly high level of taxation in the United States, various right-wing groups are organizing tea parties around the country in the spirit of the Boston Tea Party of 1773.

The irony of these protests is that federal revenues as a share of the gross domestic product will be lower this year than any year since 1950. According to the Congressional Budget Office, the federal government will take only 15.5% of GDP in taxes this year, compared to 17.7% last year, 18.8% in 2007 and 20.9% in 2000.

The truth is that the U.S. is a relatively low-tax country no matter how you slice the data. The following tables illustrate this fact by comparing the U.S. to other members of the Organization for Economic Cooperation and Development, a Paris-based research organization.

As Table 1 shows, total taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes.

Table 1: Total Taxes as a Share of GDP, 2006

Denmark	49.1	U.K.	37.1	Ireland	31.9
Sweden	49.1	Hungary	37.1	Greece	31.3
Belgium	44.5	Czech Rep.	36.9	Australia	30.6
France	44.2	N.Z.	36.7	Slovak Rep.	29.8
Norway	43.9	Spain	36.6	Switzerland	29.6
Finland	43.5	Luxembourg	35.9	U.S.	28.0
Italy	42.1	Portugal	35.7	Japan	27.9
Austria	41.7	Germany	35.6	Korea	26.8
Iceland	41.5	Poland	33.5	Turkey	24.5
Netherlands	39.3	Canada	33.3	Mexico	20.6

Source: OECD

There's a stronger case for the U.S. being a high tax country when looking at the top statutory tax rate on labor income. The OECD calculated the U.S. rate at 41.4% in 2007. As Table 2 shows, this put America right in the middle of the distribution despite a reduction in the top rate from 46.7% in 2000. The reason is that 19 OECD countries have reduced their top rate since 2000; only 3 have increased it.

Of course, the top rate applies only to those with very high incomes. According to the OECD, one would need to make almost 9 times the average worker's wage to pay the top rate in the U.S. In most OECD countries one hits the top rate at an income barely above that of the average worker, which puts workers in other countries in much higher tax brackets than those in the U.S.

Table 2: Top Statutory Income Tax Rate, 2007/2000

Denmark	59.7/59.7	Canada	46.4/46.4	U.K.	40.0/40.0
Sweden	56.5/55.4	Italy	44.9/46.4	N.Z.	39.0/39.0
Belgium	53.5/63.9	Spain	43.0/48.0	Luxembourg	38.9/47.1
Netherlands	52.0/60.0	Switzerland	42.1/43.2	Korea	38.5/44.0
Finland	50.5/55.2	Portugal	42.0/35.0	Hungary	36.0/40.0
Austria	50.0/45.0	U.S.	41.4/46.7	Iceland	35.7/45.4
Japan	50.0/50.0	Ireland	41.0/44.0	Turkey	35.6/35.6
France	47.8/53.3	Greece	40.0/45.0	Czech Rep.	32.0/32.0
Germany	47.5/53.8	Norway	40.0/47.5	Mexico	28.0/40.0
Australia	46.5/48.5	Poland	40.0/40.0	Slovak Rep.	19.0/35.0

Source: OECD

Table 3 presents effective tax rates for an average one-earner couple with two children. It shows American workers paying 11.8% of their income in taxes in 2007. Only five countries had lower tax rates. The average for all OECD countries was 21%--almost twice the rate paid by American workers.

One may wonder how working people manage to pay so much in taxes in other countries. The answer is that they get a lot back from the government in other ways. For example, most other countries have a broad system of family allowances that come in the form of cash payments to virtually all families regardless of income.

Table 3: Personal Income Tax Rate on an Average Worker, 2007

Hungary	38.7	U.K.	25.4	Luxembourg	15.3
Denmark	35.8	Poland	24.7	Portugal	14.8
Austria	31.8	Germany	23.9	Iceland	14.4
Netherlands	31.7	Australia	23.4	Spain	12.4
Belgium	30.6	France	21.9	U.S.	11.8
Turkey	30.3	N.Z.	21.5	Czech Rep.	10.8
Finland	30.1	Italy	20.4	Slovak Rep.	9.7
Sweden	27.6	Canada	16.9	Korea	9.5
Norway	27.1	Switzerland	16.5	Ireland	5.9
Greece	26.5	Japan	16.3	Mexico	5.2

Source: OECD

When these cash payments are deducted from taxes, the effect is to substantially reduce the effective tax rate in almost every OECD country. As Table 4 shows, in many cases the impact of cash allowances is dramatic. The effective tax rate falls to just 2.8% from 21.5% in New Zealand, and in Ireland workers get back more than 200% of their tax payments.

Another way that workers in other countries benefit is in having almost all of their basic health care expenses covered by the government. According to the OECD, 19 of its 30 member countries cover 100% of health care costs, and another eight cover more than 89% of costs. Of the three remaining countries, Turkey covers two-thirds of health expenses, and Mexico pays for half.

In the U.S., however, the government covered only 27.4% of health costs in 2006. And almost all of that went either to the elderly in the form of Medicare or the poor in the form of Medicaid. The American average worker either had to pay for his own insurance in the form of deductions from his pay or go without.

In 2008, employer-provided health insurance reduced the cash wages of American workers by 7.9%, according to the Bureau of Labor Statistics. If businesses didn't have to pay for health insurance, they could afford to pay their workers 7.9% more and be no worse off. If workers paid 7.9% more of their income in taxes to pay for national health insurance, they would also be no worse off.

To a large extent, this is exactly what happens in other countries. Workers see the higher taxes they pay the same way Americans view the deduction from their pay for health insurance--not as money down a rat hole, but as the payment for a tangible benefit.

This isn't necessarily an argument for national health insurance. There are lots of reasons why it may be preferable to maintain the largely private health system we have in America. No one thinks it would be a good idea to pay higher taxes in return for having the federal government provide us with food. Variety and quality would undoubtedly suffer a great deal. The same would be true if the federal government took over the provision of health care.

The point is that one can't look just at the taxes people pay here or elsewhere without looking at what they get in return. It doesn't automatically follow that the places with the lowest taxes are the best places to live and work. This is obvious when we think about where to buy a house. We always look at the quality of local schools as a major factor and are willing to pay higher property taxes in return for good schools. The same is true at the national level as well. Higher taxes may pay for services that people value and thus are not as burdensome as they might appear at first glance.

Table 4: Income Tax Rate Less Cash Transfers, 2007

Turkey	30.3	U.K.	20.6	Australia	10.0
Denmark	29.3	Austria	19.8	Korea	9.5
Netherlands	26.9	Sweden	19.8	Switzerland	9.3
Greece	26.5	France	17.5	Iceland	6.7
Poland	24.7	Japan	13.9	Mexico	5.2
Hungary	24.4	Italy	12.5	Slovak Rep.	4.4
Germany	23.9	Spain	12.4	N.Z.	2.8
Finland	22.9	U.S.	11.8	Luxembourg	2.8
Belgium	22.4	Canada	10.6	Czech Rep.	-6.3
Norway	21.5	Portugal	10.3	Ireland	-12.0

Chicago Tax Revolt

Obama's $163,000 Tax Bomb

Families well below the president's 'no-tax' threshold will get a six-figure bill.

MICHAEL J. BOSKIN

The House and Senate are preparing to pass President Barack Obama's radical budget blueprint, with only minor modifications, by using (abusing would be more accurate) the budget "reconciliation" process. This process circumvents the Senate's normal rules requiring 60 votes to prevent a filibuster. Reconciliation was created by Congress in the mid-1970s to enforce deficit reduction, the opposite of what the president and his party are aiming for.

AP

The immense increase in nondefense spending and taxes, and the tripling of the national debt in Mr. Obama's budget, have been the subject of considerable scrutiny since it was announced. Mr. Obama and his economic officials respond, not without justification, that he inherited an enormous economic and financial crisis and a large deficit. All presidents present the best possible case for their budgets, but a mind-numbing array of numbers offers innumerable opportunities to conjure up misleading comparisons.

Mr. Obama's characterizations of his budget unfortunately fall into this pattern. He claims to reduce the deficit by half, to shave $2 trillion off the debt (the cumulative deficit over his 10-year budget horizon), and not to raise taxes on anyone making less than $250,000 a year. While in a Clintonian sense correct (depends on what the definition of "is" is), it is far more accurate to describe Mr. Obama's budget as almost tripling the deficit. It adds $6.5 trillion to the national debt, and leaves future U.S. taxpayers (many of whom will make far less than $250,000) with the tab. And all this before dealing with the looming Medicare and Social Security cost explosion.

Some have laid the total estimated deficits and debt projections (as more realistically tallied by the Congressional Budget Office) on Mr. Obama's doorstep. But on this score the president is correct. He cannot rightly be blamed for what he inherited. A more accurate comparison calculates what he has already added and proposes to add by his policies, compared to a "do-nothing" baseline (see nearby chart).

The CBO baseline cumulative deficit for the Obama 2010-2019 budget is $9.3 trillion. How much additional deficit and debt does Mr. Obama add relative to a do-nothing budget with none of his programs? Mr. Obama's "debt difference" is $4.829 trillion -- i.e., his tax and spending proposals add $4.829 trillion to the CBO do-nothing baseline deficit. The Obama budget also adds $177 billion to the fiscal year 2009 budget. To this must be added the $195 billion of 2009 legislated add-ons (e.g., the stimulus bill) since Mr. Obama's election that were already incorporated in the CBO baseline and the corresponding $1.267 trillion in add-ons for 2010-2019. This brings Mr. Obama's total additional debt to $6.5 trillion, not his claimed $2 trillion reduction. That was mostly a phantom cut from an imagined 10-year continuation of peak Iraq war spending.

The claim to reduce the deficit by half compares this year's immense (mostly inherited) deficit to the projected fiscal year 2013 deficit, the last of his current term. While it is technically correct that the deficit would be less than half this year's engorged level, a do-nothing budget would reduce it by 84%. Compared to do-nothing, Mr. Obama's deficit is more than two and a half times larger in fiscal year 2013. Just his addition to the budget deficit, $459 billion, is bigger than any deficit in the nation's history. And the 2013 deficit is supposed to be after several years of economic recovery, funds are being returned from the financial bailouts, and we are out of Iraq.

Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.

What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In 10 years, interest would bring the total to well over a quarter million dollars, if paid all at once. If paid annually over the succeeding 10 years, the tax hike every year would average almost $34,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.

We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1% or 5% of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000. (With interest, the tax hike would rise to more than $162,000 in 10 years, and over $20,000 a year if paid annually the following 10 years). In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage.

While Mr. Obama's higher tax rates are economically harmful, some of his tax policies deserve wide support, e.g., permanently indexing the alternative minimum tax. Ditto some of the spending increases, including the extension of unemployment benefits, given the severe recession.

Neither a large deficit in a recession nor a small increase from the current modest level in the debt to GDP ratio is worrisome. And at a 50% debt-to-GDP ratio, with nominal GDP growing 4% (the CBO out-year forecast), deficits of 2% of GDP would not be increasing the debt burden relative to income.

But what is not just worrisome but dangerous are the growing trillion dollar deficits in the latter years of the Obama budget. These deficits are so large for a prosperous nation in peacetime -- three times safe levels -- that they would cause the debt burden to soar toward banana republic levels. That's a recipe for a permanent drag on growth and serious pressure on the Federal Reserve to inflate, not the new era of rising prosperity that Mr. Obama and his advisers foresee.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Obama's Poor Tax

Why raising the tobacco levy will hurt the states.

BRAD SCHILLER

"I can make a firm pledge . . . no family making less than $250,000 a year will see any form of tax increase." Remember that? It was Barack Obama, campaigning to become president last Sept. 12 in Dover, N.H.

Indeed, he promised repeatedly that 95% of American families would get a tax cut. So it's especially fitting that he chose April Fools Day to implement his first tax increase -- which will fall mostly on individuals and families who do not make anywhere near $250,000 per year.

Early in February, the president signed a law to triple the federal excise tax on cigarettes -- which will jump from 39 cents per pack to $1.01 today. His administration projects this tax hike will bring in at least $38 billion over the next five years.

If you don't smoke, maybe you don't care. Maybe you even think a higher "sin tax" is a good thing. But health issues aren't the only concern here. There are also questions of fairness, federalism, macroeconomic impact, and crime.

The fairness issue is particularly troubling. According to the Centers for Disease Control and Prevention, only one in five Americans smokes, so the excise targets a minority -- and over half of all smokers are low income, and one of four are officially classified as poor.

Mr. Obama prefers to tout his tax cuts for low-income households. But his "stimulative" Make Work Pay tax cut gets dribbled out at $8-$10 a week. A pack-a-day smoker will pay half of that back in higher cigarette taxes. Smokers getting welfare, unemployment or disability checks instead of paychecks won't get as much in tax cuts, but they will still pay the whole cigarette tax increase. Anyone concerned about widening income inequality should have second thoughts about this distribution of the tax burden.

We should also note how this tax increase affects state finances. State governments rely on their own cigarette excise taxes for hefty revenue streams. In 2008, according to the National Tax Foundation, state governments took in $15.4 billion in cigarette taxes. Hard-hit Michigan, Pennsylvania, and California each took in over $1 billion; New York and Texas took in $1.5 billion each.

Higher taxes discourage cigarette sales. Nobel economist Gary Becker pegs the long-run price elasticity of demand for cigarettes at 0.8 -- i.e., a 10% increase in price causes an 8% decline in unit sales. The Obama tax hike translates into a 13.3% increase in the average pack price. That implies a 10.6% decline in unit sales -- which the National Tax Foundation has calculated adds up to a $1 billion overall revenue loss for hard-pressed states.

Because Southern states have low tax rates (most less than 40 cents per pack), the federal tax hike raises their cigarette prices by a larger percentage and thus cuts deeper into their unit sales. New York, by contrast, has the highest state taxes ($2.75 a pack) and prices, so it gets hit less in percentage terms. The Tax Foundation estimates a 12.6% revenue loss for South Carolina this coming fiscal year, and a 6.7% loss for New York.

None of this is good for the economy. Consumers and state governments are already having a tough time making ends meet. Burdening them with a new $38 billion tax and a $1 billion cut in revenues isn't going to help create jobs. Estimates by the National Association of Tobacco Outlets of the job losses in cigarette manufacturing and distribution alone exceed 100,000.

Smugglers and counterfeiters won't lose their jobs, though. Both the General Accounting Office (GAO) and the Alcohol, Tobacco, and Firearms (ATF) agency have concluded that the multibillion-dollar cigarette-smuggling business grows with every excise tax increase. The ATF and GAO also believe that cigarette-smuggling is a form of cash laundering and profits for both organized crime and terrorist organizations.

Clearly, we were fools to believe that if we weren't wealthy, Mr. Obama wasn't going to raise our taxes. We'll be even bigger fools if we acquiesce to further tax increases of this kind.

Mr. Schiller, professor of economics at University of Nevada, Reno, is the author of "The Economy Today" (McGraw-Hill, 2008).

Night of the Living Death Tax

Obama's budget quietly resurrects it in 2010.

Lawrence Summers, President Obama's chief economic adviser, declared recently that "Let's be very clear: There are no, no tax increases this year. There are no, no tax increases next year." Oh yes, yes, there are. The President's budget calls for the largest increase in the death tax in U.S. history in 2010.

The announcement of this tax increase is buried in footnote 1 on page 127 of the President's budget. That note reads: "The estate tax is maintained at its 2009 parameters." This means the death tax won't fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all.

This controversy dates back to George W. Bush's first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return.

And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn't seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is "fair" because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation.

The importance of intergenerational wealth transfers was first measured in a National Bureau of Economic Research study in 1980. That study looked at wealth and savings over the first three-quarters of the 20th century and found that "intergenerational transfers account for the vast majority of aggregate U.S. capital formation." The co-author of that study was . . . Lawrence Summers.

Many economists had previously believed in "the life-cycle theory" of savings, which postulates that workers are motivated to save with a goal of spending it down to zero in retirement. Mr. Summers and coauthor Laurence Kotlikoff showed that patterns of savings don't validate that model; they found that between 41% and 66% of capital stock was transferred either by bequests at death or through trusts and lifetime gifts. A major motivation for saving and building businesses is to pass assets on so children and grandchildren have a better life.

What all this means is that the higher the estate tax, the lower the incentive to reinvest in family businesses. Former Congressional Budget Office director Douglas Holtz-Eakin recently used the Summers study as a springboard to compare the economic cost of a 45% estate tax versus a zero rate. He finds that the long-term impact of eliminating the death tax would be to increase small business capital investment by $1.6 trillion. This additional investment would create 1.5 million new jobs.

In other words, by raising the estate tax in the name of fairness, Mr. Obama won't merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that's why the news of this unwise tax inc

Republican Tax Travesty

Bruce Bartlett

Congress votes for a 90% tax on federally funded executive bonuses.

On March 19, the House of Representatives voted to impose a 90% tax on the incomes of certain executives of financial institutions receiving federal funds. What was remarkable about this vote is that 85 Republicans voted for this travesty. The consequences will be felt for years to come.

The history of tax policy is that it tends to go in one direction until there is a key event that establishes a new direction. Thus the vote by a Democratic Congress in favor of a lower capital gains tax in 1978 set the stage for the Reagan tax cut of 1981 and a decade of lower tax rates. When Republican George H.W. Bush switched gears and supported higher taxes in 1990 it presaged Bill Clinton's 1993 tax increase and many years of rising taxes.

George W. Bush's 2001 tax cut proved that there was bipartisan support for tax cuts that continued for several years. And I believe that when half of the Republican caucus in the House supports not just a tax increase, but a confiscatory tax increase, this shows that the wind has shifted again in favor of higher taxes.

Usually when Republicans vote for a tax increase it is because they have been pressured by a Republican president to do so and as part of a budget deal that cuts spending at the same time. But neither condition applied to the March 19 vote. It was a pure tax increase with no accompanying cuts in spending or other taxes. It wasn't required by any compelling economic necessity and wasn't even an administration initiative.

The only reason for the tax increase was outrage, stoked by faux populist right-wing talk radio hosts, over bonuses paid to executives of AIG, the insurance company at the heart of the financial crisis. That the Democrats, who traditionally support soak-the-rich policies, reacted with righteous anger against some fat cats is no surprise. That 85 Republicans joined them is remarkable and possibly unprecedented.

Particularly dismaying is the fact that supporters of the tax increase included senior members of the Republican leadership. These include Eric Cantor of Virginia, House minority whip, the No. 2 position in the House Republican leadership; Cathy McMorris Rodgers of Washington, vice chair of the House Republican Conference, the organization that represents all Republican House members; Roy Blunt of Missouri, who preceded Cantor as House Republican whip from 2003 to 2008; Adam Putnam of Florida, who served as chairman of the House Republican Conference in the last Congress; and Jerry Lewis of California, ranking Republican on the House Appropriations Committee and chairman of the House Republican Conference in the 101st and 102nd Congresses.

In addition, there were a number of Republicans who supported the increase who have in the past been among the most conservative in Congress. These include Dana Rohrabacher of California, who served as a speechwriter for Ronald Reagan in the 1980s; Peter Hoekstra of Michigan, who played a key role in developing the Republican Contract With America in 1994; and Paul Ryan of Wisconsin, ranking Republican on the House Budget Committee.

The following table presents of complete list of the ignoble Republicans who supported confiscatory taxation on March 19th.

House Republicans Voting for 90% Tax Rate

Aderholt	Cassidy	Guthrie	Miller (Mich.)	Ryan (Wis.)
Alexander	Castle	Heller	Moran (Kan.)	Schmidt
Barton (Texas)	Crenshaw	Herger	Petri	Schock
Biggert	Davis (Ky.)	Hoekstra	Platts	Shimkus
Bilbray	Dent	Johnson (Ill.)	Putnam	Smith (N.J.)
Bilirakis	Diaz-Balart, L.	Jones	Rehberg	Smith (Texas)
Blunt	Diaz-Balart, M.	Kirk	Reichert	Stearns
Bono Mack	Duncan	Lance	Rodgers	Tiberi
Boozman	Ehlers	Latham	Roe (Tenn.)	Turner
Brown (S.C.)	Emerson	Lee (N.Y.)	Rogers (Ala.)	Upton
Brown-Waite	Fleming	Lewis (Calif.)	Rogers (Ky.)	Walden
Buchanan	Forbes	LoBiondo	Rogers (Mich.)	Wamp
Calvert	Fortenberry	Manzullo	Rohrabacher	Whitfield
Camp	Frelinghuysen	McCaul	Rooney	Wittman
Cantor	Gallegly	McClintock	Ros-Lehtinen	Wolf
Cao	Gerlach	McHugh	Roskam	Young (Alaska)
Capito	Goodlatte	Mica	Royce	Young (Fla.)

Source: Clerk of the House, Roll Call 143 (March 19, 2009).

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It should be noted that this legislation came up under special rules that required a two-thirds vote for passage, so Republicans could have defeated it easily if the bulk of them had opposed it.

Tellingly, none of these Republicans rose on the House floor to justify their vote before casting it. The only one I could find who even tried to defend it afterward was Rep. Tom McClintock of California, who gave this lame and unconvincing excuse for abandoning his principles: "It will slow the corporate bailouts that are bankrupting this country."

I was always taught that two wrongs don't make a right. But McClintock apparently doesn't see it that way. He thinks that because a business receives federal funds that this is justification enough for treating its employees in a grossly high-handed and punitive manner, taxing them as if it's entirely their fault that Congress voted to give aid to their company for some purpose of which McClintock disapproves.

By this rationale, how could McClintock justify voting against 90% tax rates on the executives of defense contractor Lockheed Martin or any other business that receives funds from the federal government? I don't really see the difference with AIG. In each case, Congress decided that these private companies are doing work that is necessary for the national welfare. To penalize the employees of one while letting those of another off the hook is nothing but hypocrisy.

And the hypocrisy goes beyond Congress. For many years, a group called Americans for Tax Reform has imposed a rigid and uncompromising tax pledge on members of Congress. Those signing it vow never to support higher tax rates under any circumstances.

All but eight Republicans voting to raise taxes are listed as signers of the ATR pledge. Credit goes to Joseph Cao of Louisiana, Mike Castle of Delaware, Vernon Ehlers of Michigan, John McHugh of New York, Todd Platts of Pennsylvania, Harold Rogers of Kentucky and Robert Wittman and Frank Wolf, both of Virginia, for at least having the courage of their convictions by refusing to sign the pledge; the rest obviously consider it to be nothing but a scrap of paper to be abandoned whenever the lords of talk radio demand it.

To be fair, ATR appeared to give them permission to vote for higher taxes. According to ABC News, when asked whether a vote on the 90% tax rate was a violation of the pledge, ATR President Grover Norquist hemmed and hawed and said it might be OK if other taxes were cut. But of course they weren't. Many Republicans were left with the impression that they could vote for the tax increase without violating the pledge.

Although ATR posted a denunciation of the vote on its Web site, it remains to be seen whether it or other rabid anti-tax groups like the Club for Growth or the National Taxpayers Union will make any effort to hold tax-hiking Republicans accountable. I'm not holding my breath; partisanship almost always trumps principle these days.

Ironically, Barack Obama may save the Republicans from their own craven cowardice. He and his advisers have signaled that the administration has serious problems with the confiscatory tax bill--including doubts about its constitutionality. Liberal legal scholar Lawrence Tribe thinks the 90% tax might violate the Constitution's prohibition against bills of attainder--laws that single out specific people for punishment. It's appalling that 85 Republican congressmen never gave any thought to this consideration in their rush to pander to ignorant fools.

The worsening of the government's budget deficit virtually ensures that higher taxes will be required in the not too distant future. When that day comes, Republicans will undoubtedly claim that anti-tax purity prevents them from supporting such action. However, in the case of 85 House members this won't be the case. We already know what they are; it's just a question of negotiating the price.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor and How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes.