Should everyone pay some income tax?

There is growing sentiment, especially within the Republican Party, that every American with income should pay some income tax.  As Indiana senator Dan Coats said, “Everyone needs to have some skin in the game.”

That makes sense.  The personal income tax provides the lion’s share of federal revenues, and it represents each American’s support in funding the federal government.  In the never-ending quest to balance federal revenues and expenses, the income tax symbolizes the revenue side of the equation.

The problem is that, because of our highly progressive tax rates, 47% of American families pay no income taxes.  To them, the income tax is merely an abstraction.  Can you imagine any institution that depends on constituency support to declare that half of its constituents should contribute nothing?  A church?  A nonprofit?

As usual, you can depend on the NY Times to provide a liberal defense of the current status.   According to a recent editorial, the Times suggested that the Republican effort to broaden the tax based was merely another “new tool to stoke class resentment.”  That takes real chutzpah for the liberal Times to accuse the Republicans of creating class warfare.  In fact, later in the column, the Times snarkily conceded that the Bush tax cuts had a “veneer of egalitarianism” because they extended to all income levels.

President Obama and the Democrats have been pushing to let the Bush tax cuts expire only for those taxpayers who earn more than $200k/$250k.  Republicans want to make the Bush tax cuts permanent.  I think we should compromise by letting the Bush tax cuts expire for everyone until America is able to balance its budget.  That would satisfy the liberal demand that the rich pay more and the conservative demand that everyone should have some skin in the game.

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Hurricane Irene and Iraq/Afghanistan

Last night, I watched the Ed Show on MSNBC and heard Ed Schultz excoriate Republicans for suggesting that the federal expenses associated with Hurricane Irene would need to be offset by cutting expenses elsewhere in the federal budget.  Shultz called such statements heartless and said that Republicans haven’t shown similar frugality when dealing with wars in Afghanistan and Iraq.

If I didn’t know better, I would think that the Republicans scrooges were opposing the federal relief efforts, but they weren’t.  They were merely stating that America would have to find a way to pay for those efforts.  And since when are the wars in Afghanistan and Iraq Republican wars?  I believe President Obama has been commander in chief for more than two and a half years.

Ed Schultz was a sportscaster for a North Dakota TV station when I lived there back in the 80s, so I excused his intemperate comments to his being an idiot.  But a few minutes later, I read Maureen Dowd’s new column in the NY Times, and she said virtually the same thing.    For good measure, she brought in Katrina villain Michael Brown and all-around villain Dick Cheney to support her nonsensical thesis.

President Bush caught a lot of flak for his handling of Katrina, but history has shown that state and local officials were the primary culprits.  Spinning by liberal pundits like Schultz and Dowd will not change that history.  And the federal government has to prioritize its spending; it can’t just print money.  Oh, yeah, I guess it can’t, but it needs to get out of that habit.

Science and the Republican Party

NY Times columnist Paul Krugman recently wrote that the Republican Party was becoming an anti-science party.   He concluded his column with the following statement:

• Now, we don’t know who will win next year’s presidential election. But the odds are that one of these years the world’s greatest nation will find itself ruled by a party that is aggressively anti-science, indeed anti-knowledge. And, in a time of severe challenges — environmental, economic, and more — that’s a terrifying prospect.

To support his column’s thesis, Krugman pointed to Rick Perry’s cavalier dismissal of man-made global warming and Mitt Romney’s backing away from prior statements in which he accepted man-made global warming as a scientific fact.

I agree with Krugman that (a) Perry is pandering to a significant percentage of the Republican primary voters and (b) Romney is trying to avoid alienating this group en masse.  But the problem isn’t the candidates; the problem is figuring out how to deal with this group of voters.

I had some first-hand experience with these voters during my congressional race in 2010.  At a candidate forum in Devine, one voter asked Quico Canseco and me whether we gave any credence to that “crazy global warming thing.”  Quico quickly responded that the whole idea was ridiculous and a corrupt conspiracy, and the crowd roaringly approved.  I said that, although the scientific evidence was compelling, I endorsed Romney’s position that America should continue to study the problem instead of agreeing to some draconian cap-and-trade law.  My response was greeted with silence.

Of course, America has always had its irrational people, but historically the cost associated with politicians pandering to them outweighed the benefit.  If you said something stupid to win their few votes, you would lose more votes from the moderate middle.  Inexplicably, the irrational people in the Republican Party primaries have reached a critical mass that can win a primary election.  For proof of that, see the primary victories of Sharron Angle and Christine O’Donnell.

Krugman’s column focused on the issue of global warming, but it also referred to evolution, which is even a bigger issue in Texas.  Krugman quoted Perry as “dismissing evolution as ‘just a theory,’ one that has ‘got some gaps in it’ — an observation that will come as news to the vast majority of biologists.”

According to the Texas Tribune, Perry went on to say, “In Texas, we teach both creationism and evolution in our public schools.  Because I figure you’re smart enough to figure out which one is right.”  This created an uproar because teaching creationism in public schools was held unconstitutional by the U.S. Supreme Court in 1987.

The Texas Tribune article went on to quote former Utah Gov. Jon Huntsman for “seeming to mock Perry for the creationism comment, as well as for his recent statements on climate change:  ‘To be clear. I believe in evolution and trust scientists on global warming. Call me crazy.’”

Call me crazy, too, because I had no idea that a lot of people felt compelled to deny the science of evolution.  Global warming can be dismissed as a money-making conspiracy, but I don’t know of any conspiracy allegations surrounding the science of evolution.  Even the Roman Catholic Church, according to Wikipedia, has accepted evolution:

• “The Church has deferred to scientists on matters such as the age of the earth and the authenticity of the fossil record. Papal pronouncements, along with commentaries by cardinals, have accepted the findings of scientists on the gradual appearance of life.”

My only hope is that there are enough moderate Republican voters to prevent control of the party from going over to the dark side.  That means Romney or Huntsman.

Sunday Book Review #44 – Big Red, by Red McCombs

Shortly after moving to San Antonio in 1987, my growing family needed the convenience of a recent invention – a minivan.  Although Chrysler invented the minivan (1984), I was a committed Ford man, so I took a short drive down the road to McCombs Ford, and ended up buying a Ford Aerostar – a beautiful vehicle that served us well.

I still remember dealing with the slick McCombs sales manager who buttered me up by saying I was such a good negotiator that I should leave USAA and take a job with McCombs as a salesman.  I blew off his compliment because, as an insurance adjuster, I had learned that guys like him will say anything to close the deal and that he will like me only as long as I had something that he wanted – i.e., my money.

In my subsequent dealings with McCombs Ford, either with Sales or Service, I was similarly unimpressed.  They reminded me of the old saying, “A fool and his money are soon parted.”  If you weren’t careful with your money at McCombs Ford, they would end up with it.  I thought of that sales manager as I read Big Red, Memoirs of a Texas Entrepreneur and Philanthropist, by Red McCombs.  McCombs Ford was an extension of Red McCombs – it’s all about the money.

Back in the late 80s, when I bought my first McCombs vehicle, Red’s name meant nothing to me.  Since then, the 84-year-old McCombs has acquired some fame, first by buying and selling the San Antonio (NBA basketball) Spurs and later by buying and selling the Minnesota (NFL football) Vikings.  In the past few years I have learned that he had an ownership interest in communications company Clear Channel, and then he started appearing on the Forbes list of the 400 richest men in America, with between $1 and $2 billion.

Big Red tells the story of a poor kid from a small town in west Texas who rose to become one of the 400 richest men in America.  There is so much to the story that I didn’t know, and I found it to be fascinating.  The key to Red’s rise, as he freely acknowledges, is that he is a “wheeler-dealer,” although he benignly defines the term as someone who transforms under-performing assets into high-performing assets.  Actually, according to Wiktionary, it means, “A shrewd, and often unscrupulous, person who advances his own interests by scheming; a hustler; political or commercial shady operator.”  That is actually a more complete description of Red.

An excellent example of Red’s wheeling and dealing was his purchase of a small chain of Mister M convenience stores.  The local owner of Mister M was selling the chain to 7-Eleven, a national chain based in Dallas.  When Red heard about the imminent sale, he interjected an offer and prevailed upon the local owner to give a local boy a break.  He told them, “I don’t know what it is like to sell to a big national chain like that, but you also have an opportunity to sell it to a  San Antonio boy.  I just hope you give me a chance.”  Red closed the deal for Mister M, and the next day 7-Eleven offered him $50,000 to transfer the sale to them.  Red refused, but said he would sell it to them for $1 million, and they refused.  So much for the local boy wanting to keep the chain locally-owned.

There is a lot of truth to Red’s assertion that he likes to buy low and sell high, and a natural salesman, like Red, can do that for a lifetime.  In Red’s eyes, however, he was more than a salesman.  That is why his definition of a wheeler-dealer includes transforming low-performing assets into high-performing assets.  A perfect example of this is his ownership of the Minnesota Vikings.

Red bought the Vikings in 1998 for $250 million.  Although the team regularly sold out its games, it was not doing well financially because of an inadequate stadium.  Despite seven years of trying, Red was not able to secure a new stadium and in frustration he sold the team in 2005 for $600 million.  Red defending  this immense profit by asserting, “The fact is I had increased the value of a poorly performing asset and turned it into a major profit center.  The revenue streams that I had built were far more than what I had purchased, so that if you looked at the purchase based on anticipated revenue, then Zygi Wilf  actually paid less for the Vikings than I had paid.”

That unsupported assertion seems quite a stretch, especially when you consider that in his seven years with the Vikings (a) Red was unable to obtain a new stadium that would improve the local revenue stream (30% of their income) and (b) the NFL-TV deal that provided 70% of their income had been finalized before Red purchased the Vikes.  Maybe Red has been drinking the Republican Party’s Kool-Aid because his assertion sounds like the Republicans talking about balancing the federal budget without cutting entitlements.

The Wiktionary definition of “wheeler dealer” refers to a “political shady operator,” and it’s difficult to imagine that a wheeler dealer like Red would not work the political angle in his dealings.  There is, however, almost no discussion in Big Red of any lobbying.  The two notable exceptions are (1) Red’s inability to persuade three different Minnesota governors to help with a new stadium, and (2) his partner’s (Lowry Mays) lobbying in Washington D.C. for legislation that resulted in the exponential expansion of Clear Channel.  According to NEWSMEAT, Red has given $600,000 in political contributions, with 64% going to Republicans, 8% going to Democrats, and 29% going to special interests.  I would be surprised if Red’s motivation for these contributions was altruistic.

Speaking of altruism, the book’s sub-title suggests that philanthropy has played a major role in Red’s life, and although the book’s major focus is on entrepreneurship, his philanthropy is well-reported, too.  Red learned philanthropy from his mother Gladys, who in the 1930s religiously took $2.50 from her husband’s weekly $25 paycheck for their church donation and commented that she wished they could save some of their spending money so that she could give something to the church.  Red responded that they were already giving $2.50, and his mother told him that the $2.50 already belonged to God; any amount above that would be a gift.

Another example of his family’s religiosity – his mother Gladys was raised in the Church of Christ, but started attending a Baptist church with her husband.  Gladys’ mother was a die-hard proponent of the Church of Christ – “Gladys, are you still going to that Baptist church?”  Upon being told that Gladys was attending it, and loving it, her mother calmly added, “You’re going to hell, Gladys.  I’m sorry but you’re going to hell.”  That’s taking your religion seriously.

Big Red describes some of his major philanthropic gifts, including $40 million to MD Anderson Hospital in Houston and $50 million to the University of Texas business school.  I suppose it is customary seven- and eight-figure contributions to result in buildings being renamed McCombs, but Red’s name is attached to so many buildings his giving seems less pure than Gladys’.  To his credit, Red notes that his $50 and $100 charitable contributions early in his business career were more painful to him than his current seven- and eight-figure gifts.

Red ends his book by saying that he plans to work until the day he dies because he loves what he does.  He reminds me a lot of Warren Buffett, the so-called greatest American investor.  A principle difference between them, other than about $40 billion, is that Buffett uses a great analytical mind in making investing decisions whereas Red uses his gut a lot more.  And although Red will occasionally apply Buffett’s “buy and hold” strategy (such as with Clear Channel), he is more often looking to “buy low and sell high.”  Another difference between the two men is that Buffett thinks it would be wasteful for his kids to attempt to manage Berkshire Hathaway, but Red is in the process of letting his daughter manage McCombs Enterprises.

If you have an idea, Red’s door remains open, but he doesn’t believe in late bloomers.  Real entrepreneurs like him start young, and if you haven’t made your mark by age 40, it’s unlikely you will.  He also isn’t much interested in start-ups.  He prefers under-performing assets that can be polished and sold.

For anyone interested in being an entrepreneur, I can’t think of a better role model than Red and I can’t think of a better primer than Big Red.

Reforming Medicare

An excellent op-ed column in the NY Times today by Ezekiel Emanuel and Jeffrey Liebman contrasted good and bad budget cuts to Medicare.  It provided three examples of good cuts:

1. Stop paying for Avastin, an ineffective anti-cancer drug that costs $88,000 per year per patient and causes serious side effects.
2. Stop paying for colonoscopies on patients older than 75 years because the procedure is ineffective and risky on patients older than 75 years.
3. Stop paying for placement of stents in patients with stable heart disease because drug therapy is just as effective and costs substantially less.

The column also provided three examples of “ill-conceived” cuts:

1. Across-the-board cuts in payments to providers.  This will diminish availability of care.
2. Raising the eligibility age from 65 to 67.  This will (a) shift financial responsibility to private insurers, or (b) result in
   an increase in the number of uninsureds.
3. Increasing co-pays and deductibles.  This will (a) shift financial responsibility to beneficiaries, or (b) result in deteriorating
   health as beneficiaries decline to see their doctor or use prescription drugs.

I agree that the so-called ill-conceived cuts don’t address the underlying problems associated with escalating healthcare costs in America and that ObamaCare contains the “seeds of a solution” to some of those problems.

But I don’t agree that the cuts are ill-conceived.  Medicare and Medicaid are bankrupting America, and the federal government needs to stem the bleeding by cutting its costs.  (RyanCare with vouchers for Medicare and block grants for Medicaid are examples of similar cutting.)  Then on a parallel track, it can explore methods and policies such as those in ObamaCare that enable healthcare to become more available and affordable.

The case against extended unemployment benefits

As you may recall, late in 2010 the Democrats and Republicans made a devilish un-tax-and-spend compromise – Democrats won a continuance of unemployment benefits for up to 99 weeks and Republicans won a continuance of the Bush tax cuts.  In hindsight, this compromise seems like the work of the devil and a classic example of “kicking the can down the road.”

Hindsight, of course, is easier because at the time of the compromise America wasn’t as concerned about its deficit and debt problems, but it’s hard to imagine any action that could exacerbate those problems more than this compromise that greatly increased spending and reduced taxes.  At the time of the compromise, America was in the process of shifting from a stimulatory mindset to one that is trying to tighten its belt.  Today, there may be some talk about a jobs program, but the efficacy of a stimulus has been so discredited that not even Democrats argue for it.

In rethinking the un-tax and spend compromise, the Bush tax cuts need to be considered in the context of a bigger budget and tax-reform deal, but the merits of extended unemployment benefits are becoming clearer as a stand-alone proposition.

Some public-policy experts have suggested that generous unemployment benefits encourage beneficiaries to take it easy and not actively seek work.  The counter argument is that generous benefits are needed to prevent economic distress to individuals and families who, through no fault of their own, find themselves in dire straits.

Unemployment benefits traditionally last 26 weeks because, beyond this length of time, there becomes a concern that the individual isn’t trying hard enough to find a job.  The benefit period is sometimes extended in periods of high unemployment because policy makers believe that long-term unemployment during these times is due to the economy, not laziness.  That may be true, but an article in the NY Times several weeks ago suggested another reason why the benefit period should not be extended past the traditional 26-week period.

According to the article, employers in droves are deciding that individuals who have been unemployed for a long time are not desirable workers.  This is becoming such a problem that NJ recently outlawed job ads that attempt to disqualify unemployed individuals.  And, although hiring discrimination against unemployed individuals is not currently prohibited by law, the EEOC is studying whether such discrimination may be illegal because it adversely affects old people and minorities, who are protected by law.

Looking past the hiring discrimination issue, I suggest that this hiring trend reflects a truth – (a) being unemployment beyond six months will likely cause job skills to deteriorate, and (b) individuals who are willing to collect unemployment benefits for more than six month may have a problematic work ethic.  If unemployment benefits stopped after six months, individuals would be more motivated to accept employment (or underemployment) in an industry that was hiring instead of waiting around for an industry that isn’t hiring.  Furthermore, the individuals would be keeping their work ethic in shape.  That would be good for everyone, including the taxpayers.

Entitlement has become an ugly word

The following diatribe is floating around Facebook:

• Entitlement my butt!! Older Americans paid into Social Security with every paycheck. Their benefits aren’t some kind of charity or handout! Congressional benefits – free health care, outrageous retirement packages, 67 paid holidays, three weeks paid vacation, unlimited paid sick days – now THAT’S welfare.  And Congress has the nerve to call Social Security and Medicare entitlements? Re-post if you are sick of their crap and ashamed of our “leaders”!

Many Americans appear to have conflated entitlement with welfare even though there is a stark difference.  An entitlement is simply something that a person has a right to.  A government entitlement is a program that provides benefits to those beneficiaries who satisfy the eligibility requirements provided for in the law that authorizes the program.  The beneficiaries are legally “entitled” to the benefits.  By contrast, government welfare means a program that provides benefits to individuals who are in dire straits and need help.  Eligibility for welfare benefits is “need-based.”

Based on these definitions, Medicaid, TANF (temporary assistance to needy families), SNAP (food stamps), and Section 8 housing are America’s dominant welfare/entitlement programs.  Social Security, Medicare, and Unemployment Benefits are entitlement programs, but not government welfare because they are not need-based.

Welfare has always had a negative connotation because most Americans want to be self-sufficient and don’t want to depend on government charity or handouts, so entitlement beneficiaries don’t want to be lumped in with welfare beneficiaries.  The problem is that, because of the constant refrain that entitlement programs are bankrupting America, many people have begun to attach a negative connotation to all entitlement programs, too.

The author of the Facebook diatribe is trying to distinguish Social Security from other entitlements on the basis that individuals have earned the benefit by virtue of contributions, and that point has some merit, although Social Security benefits have always exceeded the amount that was actuarially justified.

Furthermore, Social Security is a red herring because most experts agree that Medicare and Medicaid, not Social Security, are the programs that need to be reformed before they bankrupt America.  Medicare is like Social Security in that beneficiaries have contributed to the system, but their contributions aren’t even close to actuarial justification.  And there are no contributions from beneficiaries entitled to benefits under Medicaid.   Interestingly, one of the suggested fixes to Medicare is to convert it to a welfare program – i.e., make it need-based.

Entitlement reform is needed.  Everyone agrees that Social Security is in a category by itself because contributions approximate benefits, but that is not true about Medicare.  Any serious attempt to balance the budget, like the Paul Ryan proposal, will need to make major changes to Medicare and Medicaid.

Parenting – why stop?

A few weeks ago, I was having lunch with three of my sons, and one of them asked whether I had ever considered starting a new family after my divorce five years ago.  Because I’m 57-years old, I think they were surprised when I told them that I had considered it, but eventually decided against it.

Last week, I was talking to my oldest son Bobby, who has 4-month old twins, and he joked that I was lucky with my earlier decision because there was no way that a man with my energy could adequately assist in raising a child.  (I think my ex-wife might suggest that at age 30 I lacked the energy – or motivation – to adequately assist her in raising our kids.)

I’ve given more thought toward parenting since reading a book on evolutionary psychology that suggests parenting is the most fulfilling thing a person can do.  Well, if it is such a great thing, then why don’t we keep doing it?

The answer for women is obvious – i.e., they are physically able to have kids only until about age 40.  Men do not have that excuse, but they have a plethora of others – such as (1) their mate is too old to have kids, (2) they can’t afford it, or (3) they are too tired to raise more kids.

But what if none of those reasons apply?  What is a mate is willing, they can afford it, and they have the energy?  Most men in that situation decide against having a child because, I think, the parenting gene is not unlimited.  Rather it can be fulfilled by having an initial batch of children and then raising them and helping raise their children.

That’s my story and I’m sticking to it.

Increase the capital-gains rate and balance the budget

As the federal government struggles with its deficit and debt, an item that has escaped much public attention is the preferred treatment of capital gains.  As Warren Buffett recently pointed out, this preferred treatment enables him to pay taxes at a lower rate than his secretary:

• “Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

James Stewart, a business/finance columnist for the NY Times, recently elaborated on Buffett’s argument about carried interest:

• For most hedge fund and private equity partnership managers, carried interest is compensation in the form of a percentage (usually 20 percent) of any gains they generate for investors. If a hedge fund manager generated $1 billion for investors by betting against mortgage-backed securities before the real estate market collapsed, the hedge fund manager is entitled to keep $200 million as compensation. The tax code treats that as a capital gain, taxed at a lower 15 percent rate. (The top rate on ordinary income is 35 percent.) The argument that this should be ordinary income rests on the notion that hedge fund managers earn these fees from their labor, just like other workers get a salary for theirs and are taxed at ordinary income rates.

Although managers of private equity and hedge funds provide a (un)popular target for tax reform, the far richer target is the complete elimination of a separate, reduced rate for capital gains.  If the capital gains rate were the same as an individual’s income tax rate, Warren Buffett wouldn’t pay taxes at a rate lower than his secretary.  Furthermore, the elimination of the reduced rate is not an extreme idea.  In fact, it was included in the estimable report of the bi-partisan Simpson-Bowles commission.

The aspect of this reform that fascinates me is the prospect of implementation would surely motivate millions of people with locked-in capital gains to claim those gains at 15% before the new 35% rate kicks in.  I have searched high and low to find an estimate of how much capital gains are waiting to be taxed, but I have been unable to find an estimate.  Although the capital-gains tax plays a relatively small part in supporting the federal government (see below), I suspect that the surge of activity to avoid a higher rate would go a long way toward balancing the federal budget that year.

Table 1 Sources of Federal Revenue (billions of 2003 dollars)

——————————————————————————–

Capital gains tax 45

Corporate income tax 132

Individual income tax 794

Social Security taxes 713

Total revenues 1,782

 

The nutritional value of rum

Last week, when sitting around with a friend and having a couple of drinks (rum & carbonated water), we started discussing the nutritional value of the drink that we were drinking.  My friend said that he knew there were about 100 calories and no carbs or fat in rum, and I added that all calories had to have carbs, fat, or protein, so then rum must have protein.  He doubted that, too, and I was just about to bet the family farm when I remembered that I had already sold that to a brother.  Instead of betting the family farm, I made a gentlemen’s bet before we goggled an answer.

Lucky for me I didn’t bet the farm.  According to the internet:

• Calories provide energy for our bodies to function.  We get calories from carbs, protein, fat, and alcohol.  For each gram, you get a set number of calories.

1 gram	Calories
Carbohydrates	4
Protein	4
Fat	9
Alcohol	7

• Unlike macronutrients such as carbs, proteins, and fats, alcohol supplies what nutritionists often refer to as empty calories.  To make matters worse, it is the first fuel used when combined with carbs, fats, and proteins, postponing the fat-burning process and contributing to greater fat storage.

So, don’t expect anything nutritious to come from rum & water.  And be conservative about what you know you know.