Tag Archives: Government Waste

In One Image, Everything You Need to Know about Health Insurance, Community Rating, and Pre-Existing Conditions

When discussing government involvement in the health sector, I usually focus on the budgetary implications. Which makes sense since I’m a fiscal wonk and programs such as Medicare, Medicaid, and Obamacare are diverting ever-larger amounts of money from the economy’s productive sector.

I also look at the tax side of the fiscal equation and complain about how the healthcare exclusion mucks up the tax code.

Though it’s important to understand that government involvement doesn’t just cause fiscal damage. All these programs and policies contribute to the “third-party payer” problem, which exists when people make purchases with other people’s money. Such a system is a recipe for inefficiency and rising prices since consumers generally don’t care about cost and providers have no incentive to be efficient. And since government figures show that nearly 90 percent of health care expenditures are financed by someone other than the consumer, this is a major problem. One that I’ve written about many, many times.

But there’s another economic problem caused by government – price controls on insurance – that is very important. Indeed, the fights over “community rating” and “pre-existing conditions are actually fights about whether politicians or competition should determine prices.

Simply stated, politicians want insurance companies to ignore risk when selling insurance. They want artificially low premiums for old people, so they restrict differences in premiums based on age (i.e., a community rating mandate), even though older people are statistically far more likely to incur health-related expenses. They also want artificially low premiums for sick people, so the crowd in Washington requires that they pay the same or similar premiums as healthy people (i.e., a pre-existing conditions mandate), even though they are statistically far more likely to incur health-related expenses.

Set aside that the entire purpose of insurance is to guard against risk. Instead, let’s focus on what happens when these types of price controls are imposed. For all intents and purposes, insurance companies are in a position where they have to over-charge young and healthy people in order to subsidize the premiums of old and sick people. That’s sounds great if you’re old and sick, but young and healthy people respond by choosing not to purchase insurance. And as fewer and fewer young and healthy people are in the system, that forces premiums ever higher. This is what is meant by a “death spiral.”

The pro-intervention crowd has a supposed solution to this problem. Just impose a mandate that requires the young and healthy people to buy insurance. Which is part of Obamacare, so there is a method to that bit of madness. But since the penalties are not sufficiently punitive (and also because the government simply isn’t very competent), the system hasn’t worked. And to make matters worse, Obamacare exacerbated the third-party payer problem, thus leading to higher costs, which ultimately leads to higher premiums, which further discourages people from buying health insurance.

So how do we solve this problem?

One of my colleagues at the Cato Institute, Michael Cannon, is a leading expert on these issues. And he’s also a leading pessimist. Here’s some of what he wrote a week ago as part of a column on the Senate bill to modify Obamacare.

ObamaCare’s “community rating” price controls are causing premiums to rise, coverage to get worse for the sick and insurance markets to collapse across the country. The Senate bill would modify those government price controls somewhat, allowing insurers to charge 64-year-olds five times what they charge 18-year-olds (as opposed to three times, under current law). But these price controls would continue to make a mess of markets and cause insurers to flee.

But he wasn’t enamored with the House proposal, either. Here are some excerpts from his analysis earlier this year of that proposal.

The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide… The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law.

Though existing law also is terrible, largely because of Obamacare. Here are passages from Michael’s column in the Hill.

ObamaCare’s core provisions are the “community rating” price controls and other regulations that (supposedly) end discrimination against patients with preexisting conditions. How badly do these government price controls fail at that task? Community rating is the reason former president Bill Clinton called ObamaCare “the craziest thing in the world” where Americans “wind up with their premiums doubled and their coverage cut in half.” Community rating is why women age 55 to 64 have seen the highest premium increases under ObamaCare. It is the principal reason ObamaCare has caused overall premiums to double in just four years. …Why? Because community rating forces insurance companies to cover the sick below cost, which simply isn’t sustainable. The only solution ObamaCare supporters offer is to keep throwing more money at the problem — which also isn’t sustainable.

Anyone who wants to really understand this issue should read all of Michael’s work on health care issues.

But if you don’t have the time or energy for that, here’s an image that I found on Reddit‘s libertarian page. Using not-so-subtle sarcasm, it tells you everything you need to know about why price controls ultimately will kill health insurance.

P.S. None of this suggests we should feel sorry for health insurance companies. They got in bed with the previous administration and endorsed Obamacare, presumably because they figured a mandate (especially with all the subsidies) would create captive customers. Now that it’s clear that the mandate isn’t working very well and that increased Medicaid dependency accounts for almost all of the additional “insurance coverage,” they’re left with an increasingly dysfunctional system. As far as I’m concerned, they deserve to lose money. And I definitely don’t want them to get bailout money.

P.P.S. Republicans aren’t doing a very good job of unwinding the Obamacare price controls, but they deserve a bit of credit for being bolder about trying to undo the fiscal damage.

Addendum: A comment from Seb reminds me that I was so fixated on criticizing price controls that I never bothered to explain how to deal with people who have pre-existing conditions and therefore cannot get health insurance. I’m guessing the answer is “high-risk pools” where the focus of policy is directly subsidizing the relatively small slice of the population that has a problem (as opposed to price controls and other interventions that distort the market for everyone). But the main goal, from my perspective, is to have states handle the issue rather than Washington. A federalist approach, after all, is more likely to give us the innovation, diversity, and competition that produces the best approaches. States may discover, after all, that insurance doesn’t make sense and choose to directly subsidize the provision of health care for affected people. In the long run, part of the solution is to get rid of the health care exclusion in the internal revenue code as part of fundamental tax reform. If that happened, it’s less likely that health insurance would be tied to employment (and losing a job is one of the main ways people wind up without insurance).

Reposted from International Liberty

No one can give you what is already yours

This is the first of “How Big a Life Do You Want” articles.

No One Can Give You What is Already Yours.

Rights. A lot is said about rights. Not all everything called rights have anything to do with what essential rights are. If one were to get down to the root of the matter – rights are first and foremost unalienable, inherent, part and parcel of your very being. If at any moment the idea is accepted that rights are anything but unalienable, part of your very existence, then what you think you have is no longer a right but a decree, edict, endowment or some specific benefit bestowed by some higher authority, usually some form of government or ruler.

In the first case, your rights are the basis of law; in the latter, laws define your rights. Further, if rights are inherent, unalienable then no person, entity or governing body can be said to have jurisdiction over your rights. This is because the rights of every individual emanate from each and every individual’s very existence; this bundle of rights exist a priori, proceeding any law or government.

This is precisely what was meant by that portion of the Declaration of Independence which reads:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed, by their Creator, with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.”

Frédéric Bastiat in “The Law” says it this way:

We hold from God the gift which includes all others. This gift is life—physical, intellectual, and moral life.

But life cannot maintain itself alone. The Creator of life has entrusted us with the responsibility of preserving, developing, and perfecting it. In order that we may accomplish this, He has provided us with a collection of marvelous faculties. And He has put us in the midst of a variety of natural resources. By the application of our faculties to these natural resources we convert them into products, and use them. This process is necessary in order that life may run its appointed course.

Life, faculties, production–in other words, individuality, liberty, property—this is man. And in spite of the cunning of artful political leaders, these three gifts from God precede all human legislation, and are superior to it.

Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.¹

This cannot be understated: whether you believe in a God or not, if your rights begin and end with a governing entity, then you do not possess unalterable, unalienable, inherent rights. What you would have were little more than someone giving you at their discretion what they deem you should have. Their presumption is that they have the right and therefore the authority to decree as they see fit. How do they have such authority? Did you give it to them? By what right do they claim such power? Birth? Privilege? A superior intellect? Some high moral character that sets them apart and above the rest of humanity? Or is it mere political power?

Surely the ridiculousness of this notion can be see for what it is. If what you cling to as “rights” under this scenario can be dismissed at the whim and leisure of a ruling individual or group, then rights do not exist; only authority and political power. If rights are believed to be endowed by authority, and not inherent, unalienable, political structure doesn’t matter – it can be a true dictatorship, an oligarchy or a democracy (which is little more than soft tyranny of the majority).

Are you comfortable with the idea that what you believe you have as a right is nothing more than what another deems it to be? Or does it make more sense that rights are truly part and parcel of your being and the being of every individual? If these essential rights are inherently yours, then they are not and cannot be given to you.

No one can give you what is already yours: Life, Liberty, Property. Everything else grows out of this basic concept. Rights either are inherent and unalienable or law is based upon who rules at the time. The choice should be obvious.
Life, Liberty, Property – these are the essential rights each of us possess. You cannot have one without the other two. The existence of these carries with it your right to hold and enjoy these and to defend them, to keep them from being take from you.

This right of defense (to hold and enjoy one’s basic rights freely) is the foundation of all law. So, the purpose of Law is to protect the inherent and unalienable rights of every individual. Laws or legislation that violate anyone’s essential rights would then be contrary to the purpose of Law Theft and fraud are the taking of your property by force or coercion. Murder is the taking of another’s life. Slavery is the taking of one’s freedom and property. It is lawful to prevent theft, fraud, murder and slavery precisely because they take or attempt to destroy the essential rights of an individual or another group of individuals by another individual or group of individuals.

A characteristic of rights is that one’s possession and exercise of that right does not take from another. Your thinking, your speaking, your breathing, your own efforts do not directly cause the loss of the things in anyone else. Your Property, which begins initially with your own body, is not another person’s, nor does your mere existence, put an end to another individual’s having a body. Your right to maintain and improve your own existence does not preclude another person’s right to do so.

This may seem ridiculous to cover, but over the years so many assumptions have glossed over the basic concepts and observations of our own humanity and our relationships, they have to be mentioned. These are what make a truly free society possible,. Precisely because these are presumptive they are often overlooked and forgotten.

So what happens when the co-equal and inalienable rights of two individuals cross paths? Shall one merely use force to take what they want or need from the other? Or shall a mutually agreeable exchange be made to the basic satisfaction of both parties? Which of these choices would be the more civil and respectful? Which action represents freedom and tolerance?

I ask then, just how big a life do you want?

“The Law” by Frédéric Bastiat can be found in several places (it’s a mere 75 pages):

https://mises.org/library/law

http://bastiat.org/en/the_law.html

http://www.constitution.org/cmt/bastiat/the_law.html

http://www.econlib.org/library/Bastiat/basEss2.html

Does “Freedom” Mean an Entitlement to Other People’s Money?

Does “Freedom” Mean an Entitlement to Other People’s Money?

Maybe the warm weather is affecting my judgement, but I’m finding myself in the odd position of admiring some folks on the left for their honesty.

A few days ago, for instance, I (sort of) applauded Matthew Yglesias for openly admitting that punitive tax rates would put us on the downward-sloping portion of the Laffer Curve.

He still favors such a policy, which is very bizarre, but at least his approach is much more honest than other statists who want us to believe that very high tax rates generate more revenue.

Today, I’m going to indirectly give kudos to another leftist.

Writing for the Washington Post, Katrina vanden Heuvel openly argues that the meaning of freedom should be changed. Here’s some of her argument, and we’ll start with her reasonably fair description of how freedom currently is interpreted.

For conservatives, freedom is centered in markets, free from government interference. …Government is the threat; the best thing it can do is to get out of the way. …freedom entails privatization, deregulation, limiting government’s reach and capacity.

Needless to say, I agree with this definition. After all, isn’t freedom just another way of saying “the absence of coercive constraint on the individual?

Heck, this is why I’m a libertarian. Sure, I like the fact that liberty produces more prosperity, but my main goal it to eliminate needless government coercion.

But I’m digressing. Let’s get back to her column. She complains that folks on the left have acquiesced to this traditional conception of freedom.

Democrats chose to tack to these conservative winds. Bill Clinton’s New Democrats echoed the themes rather than challenge them. “The era of big government is over,” he told Americans, while celebrating “ending welfare as we know it,” deregulation of Wall Street… Obama chose consciously not to challenge the conservative limits on what freedom means.

Then she gets to her main argument. She wants Hillary Clinton to lead an effort to redefine the meaning of freedom.

This is Hillary Clinton’s historic opportunity. …She would do a great service for the country — and for her own political prospects — by offering a far more expansive American view of what freedom requires, and what threatens it. …expanding freedom from want by lifting the floor under workers, insuring every child a healthy start, providing free public education from pre-k to college, rebuilding the United States and putting people to work… Will she favor fair taxes on the rich and corporations to rebuild the United States and put people to work? Will she make the case for vital public investments — in new energy, in infrastructure, in education and training — that have been starved for too long? Will she call for breaking up banks…? Will she favor expanding social security…? …to offer Americans a bolder conception of freedom…and set up the debate that America must decide.

Needless to say, I strongly disagree with such policies. How can “freedom” be based on having entitlements to other people’s money?!?

Heck, it’s almost like slavery since it presupposes that a “right” to live off the labor of others. But that’s not technically true since presumably there wouldn’t be any requirement to work. So what would really happen in such a society is that people would conclude it’s better to ride in the wagon of government dependency, as illustrated by these cartoons.

Which means, sooner or later, a Greek-style collapse because a shrinking population of producers can’t keep pace with an ever-expanding population of moochers and looters.

Nonetheless, I give Ms. vanden Heuvel credit for acknowledging that her preferred policies are contrary to the traditional definition of freedom.

To be sure, I’d admire her even more if she simply admitted that she favors government coercion over freedom. That would be true honesty, but I can understand that folks on the left would prefer to change the meaning of words rather than admit what their agenda really implies.

P.S. Some of you may recognize that the issues discussed above are basically a rehash of the debate between advocates of “negative liberty” and supporters of “positive liberty.” The former is focused on protecting people from the predations of government while the latter is about somehow guaranteeing goodies from the government.

P.P.S. As mentioned in Ms. vanden Heuvel’s column, today’s effort to redefine freedom is similar to the so-called economic bill of rights peddled in the 1940s by FDR.

Reposted from International Liberty.

Hillary opines on voter fraud, voter ID.

Interesting that with all of the turmoil surrounding Mrs. Clinton that she is now all concerned about voters ability to vote (NYT: Clinton on Voting Rights). Then again, when was distraction not the favorite tool of politicians (“Look over here! Nothing to see over there.”)?

I was listening this morning to a radio discussing voter fraud. Found it ironic one person called made a statement about how little voter fraud actually happens and bolted without any discussion.

I’ve had several conversations with several over the last couple of years. In my research here’s what I found –

1) the actual number of incidents versus the voting population is as it is oft cited by Liberals: minimal or negligible.

You’ll find similar sources in Mother Jones, Salon, and The Huffington Post

This, however, is where they stop. However, it is a half truth.

2) It is not the number of incidences; it’s not even the even fewer number of convictions. As with the fulcrum and lever (a very large weight can be moved with minimal effort), it’s not the number of incidents, but the impact of those incidents.

Case in point:

During the 2008 Democratic Primary four individuals within Indiana’s Democratic political/election machine were convicted of voter fraud. They forged enough signatures that had it been caught at the time, then candidate Obama might not have been lawfully placed upon the Indiana ballot. Let that sink in. In one place, four individuals (not a large number in contrast to the entire voting population), effectively influenced the outcome of an entire election through fraud. One incident.

http://www.foxnews.com/politics/2013/06/17/indiana-dem-official-sentenced-to-prison-for-08-ballot-fraud-in-obama-clinton/

This is only one instance. There are many others. Again, number of instances versus number of voters – insignificant. But like the ratio of the rudder on a aircraft carrier, a small thing (relative to the size of the object it influences) can and does modify the outcome (in the case of a ship, its direction) considerably. It doesn’t matter which candidate such may effect – voter fraud literal steals from the masses their legitimate vote, the most significant influence we as citizens have upon the direction of our government. The case above shows just how damaging such fraud can have, regardless of what political party is involved or which candidate it helps or harms.

What is glaring about the voter fraud that occurs is (1) not all are convicted (some are dismissed for appropriate reasons; some plea bargain) and (2) it appears from what I have found thus far that the vast majority of these are committed by Democrats (I’ve yet to find a Republican that has been indicted for voter fraud).  Interesting, wouldn’t you say?

Don’t know about you, but I’d like to know my vote counts. Otherwise, we are no longer a truly free society.

Even the IRS Admits that the Tax Code Is Very Biased against Successful Taxpayers

Even the IRS Admits that the Tax Code Is Very Biased against Successful Taxpayers

When I debate class warfare issues, here’s something that happens with depressing regularity.

I’ll cite research from a group like the Tax Foundation on how an overwhelming share of the income tax is borne by upper-income taxpayers.

The statist I’m arguing with will then scoff and say the Tax Foundation is biased, thus implying that I’m sharing bogus data.

I’ll then respond that the group has a very good reputation and that their analysis is directly based on IRS data, but I may as well be talking to a brick wall. It seems leftists immediately close their minds if information doesn’t come directly from a group that they like.

So I was rather happy to see that the Internal Revenue Service, in the Spring 2015 Statistics of Income Bulletin, published a bunch of data on how much of the income tax is paid by different types of taxpayers.

I’ll be very curious to see how they respond when I point out that their favorite government agency admits that the bottom 50 percent of earners only pay 2.8 percent of all income tax. And I’ll be every more curious to see how they react when I point out that more than half of all income taxes are paid by the top 3 percent of taxpayers.

There’s a famous saying, generally attributed to Daniel Patrick Moynihan, that “Everyone is entitled to his own opinion, but not his own facts.”

With this in mind, I’m hoping that this data from the IRS will finally put to rest the silly leftist talking point that the “rich” don’t pay their “fair share.”

This doesn’t mean, by the way, that the debate about policy will be settled.

Getting statists to accept certain facts is just the first step.

But once that happens, we can at least hope that their minds will be opened to subsequent steps, such as understanding the economic impact of punitive tax rates, recognizing that high tax rates won’t necessarily collect more revenue, or realizing that ordinary workers suffer when harsh tax policies reduce economic vitality.

Though I’m not holding my breath and expecting miracles. After all, some leftists openly state that they don’t care if the economic damage of high tax rates is so significant that government doesn’t collect any tax revenue.

You can see an example of one of these spite-motivated people at the 4:20 mark of the video I narrated on class-warfare taxation.

P.S. Shifting to another tax topic, some of you may have heard about the massive data breach at the IRS. Here’s some of what CNN is reporting.

The Internal Revenue Service believes that a major cyber breach that allowed criminals to steal the tax returns of more than 100,000 people originated in Russia, Rep. Peter Roskam confirmed to CNN on Thursday. …The IRS announced Tuesday that organized crime syndicates used personal data obtained elsewhere to access tax information, which they then used to file $50 million in fraudulent tax refunds.

I suppose I could use this opportunity to take a few potshots at the IRS, but there’s a far more important issue to raise.

I’m guessing the IRS probably has the best computer security of any tax bureaucracy in the world. Yet even all the IRS’s expertise couldn’t stop hackers from obtaining sensitive information.

Now let’s contemplate something truly frightening. The Obama Administration wants the United States to be part of an OECD pact that obligates participating nations to promiscuously share information with dozens of other governments, including untrustworthy, hostile, and/or corrupt regimes such as Russia and China, not to mention make information available to jurisdictions that presumably will have very little technical capacity to guard data from hackers and identity thieves. Here’s the list of participating nations on the OECD website, and it includes Azerbaijan, Cameroon, Greece, Indonesia, Mexico, Nigeria, Romania, Saudi Arabia, and Ukraine.

Yet none of this reckless endangerment would be an issue if we had a simple territorial tax system like the flat tax. Under such a simple and fair system, only income inside America’s borders would be taxed (unlike the wretched system of worldwide taxation we have now), so there would be no need to have risky information-swapping deals with dodgy foreign governments.

P.P.S. Senator Rand Paul is one of the few lawmakers fighting to protect Americans from having their information shared with foreign governments.

P.P.P.S. Shifting back to the original topic of class-warfare taxation, here’s a lesson on the Laffer Curve I offered to President Obama.

Reposted from International Liberty.

In the Left’s Orwellian World, Taxpayers Who Get to Keep their Income Are Getting “Handouts”

In the Left’s Orwellian World, Taxpayers Who Get to Keep their Income Are Getting “Handouts”

I’ve sometimes asserted, only half-jokingly, that statists believe all of our income belongs to the government and that we should be grateful if we’re allowed to keep any slice of what we earn.

This is, at least in part, the mentality behind the “tax expenditure” concept, which creates a false equivalence between spending programs and provisions of the tax code that allow people to keep greater amounts of their own income.

Here’s how I characterized this moral blindness when criticizing a Washington Post columnist back in 2013.

Hiatt presumably thinks that the government’s decision not to impose double taxation is somehow akin to a giveaway. But that only makes sense if you assume that government has a preemptive claim to all private income. …Hiatt wants us the think that there’s no moral, ethical, or economic difference between giving person A $5,000 of other people’s money and person B being allowed to keep $5,000 of his or her own money.

Today, I have a particularly absurd real-world illustration of this statist mindset.

Two writers for the Wonkblog section of the Washington Post recently wrote an article entitled, “The rich get government handouts just like the poor. Here are 10 of them.”

Did their list of 10 “handouts” include the Export-Import Bank, which lines the pockets of big corporations? Nope.

Did it include agriculture subsidies, which provide unearned goodies for big agribusiness firms? Nope.

Did it the TARP bailout, which shielded Wall Street fatcats from capitalism? Nope.

And how about subsidized terrorism insurance, ethanol goodies, and green energy subsidies? Nope, nope, and nope.

Or the handouts in Obamacare for major pharmaceutical companies and big insurance companies? Nope and nope.

Instead, every single “handout” that the rich “get” from government is nothing more than a provision of the tax code that lets people keep more of their own money.

I’m not joking. Here’s the list, followed by my two cents.

1. The mortgage interest deduction for big houses and second homes.

As I’ve previously explained, I don’t think the tax code should be tilted in favor of residential real estate. But a handout is when the government takes money from Person A and gives it to Person B.

2. The yacht tax deduction.

There actually isn’t a yacht tax deduction, but if you can live in something, it can be eligible for a mortgage interest deduction. I don’t think that’s wise tax policy, but it’s not an example of government taking from Person A and giving to Person B.

3. Rental property.

The authors appear to be upset that people running a business get to subtract costs from gross income when calculating net income. But that’s exactly how businesses are supposed to be taxed. And even if one thought, for some odd reason, that gross income was the right tax base, this still isn’t an example of government taking from Person A to give to Person B.

4. Fancy business meals.

As just noted, businesses should be taxed on profits rather than gross receipts. Well, profits are the difference between total income and total costs, including the cost of business-related meals. And even if one thinks that folks in business are lying and mischaracterizing personal meals, they’re not spending other people’s money. No funds are being taken from Person A and being given to Person B.

5. The capital gains tax rate.

In a good tax system, there’s no double taxation of income that is saved and invested, so the capital gains tax should be abolished. As such, the “preferential” rate in the current system is more accurately characterized as a mitigation of a penalty. But even if one believes that saving and investment should be double taxed, a lower capital gains tax rate doesn’t take money from Person A to give to Person B.

6. The estate tax.

The death tax is triple taxation, so it also should be abolished. Regardless, letting a family hold onto its own money is not the same as taking from Person A to give to Person B.

7. Gambling loss deductions.

The government taxes gamblers on their net winnings (if any), which is the proper approach. And even if the government gave a deduction for net losses (which isn’t the case), this wouldn’t be an example of taking from Person A and giving to Person B.

8. The Social Security earnings limit.

The Social Security system is supposed to be social insurance, and one of the implications of this approach is that there’s a limit on the benefits one can receive and the payments one has to make. As such, it’s silly to assert that the “wage base cap” is somehow improper. But even if one believed in turning Social Security into a pure redistribution scheme, the existing earnings limit simply means a cap on what the government takes. There’s no coerced handout from Person A to Person B.

9. Retirement plans.

The bad news is that we have pervasive double taxation in the internal revenue code. The good news is that some forms of retirement savings, such as IRAs and 401(k)s, are protected from double taxation. That protection does not require any money being taken from Person A and given to Person B.

10. Tax prep.

I’m not a fan of companies like H&R Block that benefit from an unfair and convoluted tax code. Under a simple and fair system like the flat tax, they would go out of business. But a deduction for tax preparation costs simply allows a taxpayer to keep more of his or her income. There’s no handout from Person A to Person B.

In case you didn’t notice, there’s a strong moral component to my argument. The leftists think you’re getting a handout if you get to keep more of your own money.

I think that’s absurd.

And it’s also economically illiterate when applied to provisions of the tax code that make sense, such as companies getting to subtract expenses when calculating taxable income.

Or individuals not being subjected to double taxation.

P.S. Here’s some pro-Second Amendment humor, which cleverly uses the left’s “undocumented” terminology for illegal aliens and applies it in a much better fashion.

And if you like pro-gun humor, you can find lots of good links by clicking here.

P.P.S. Since I mentioned immigration, here’s a fascinating graphic that shows immigration trends over the past two centuries.

There’s no policy lesson of philosophical point. I just think this graphic is very informative and well designed.

But if you want my two cents, I like immigration but want to make sure we attract people who want to work and assimilate rather than scroungers (and worse) who want welfare and handouts.

Reposted from International Liberty.

Grading the Rubio-Lee Tax Reform Plan

Grading the Rubio-Lee Tax Reform Plan

In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system.

1. High tax rates that penalize productive behavior.

2. Pervasive double taxation that discourages saving and investment.

3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

The two GOP senators have a column in today’s Wall Street Journal, and you can read a more detailed description of their plan by clicking here.

But here are the relevant details.

What’s wrong with Rubio-Lee

In the interest of fairness, I’ll start with the most disappointing feature of the plan. The top tax rate will be 35 percent, only a few percentage points lower than the 39.6 percent top rate that Obama imposed as a result of the fiscal cliff.

Even more troubling, that 35 percent top tax rate will be imposed on any taxable income above $75,000 for single taxpayers and $150,000 for married taxpayers.

Since the 35 percent and 39.6 percent tax rates currently apply only when income climbs above $400,000, that means a significant number of taxpayers will face higher marginal tax rates.

That’s a very disappointing feature in any tax plan, but it’s especially unfortunate in a proposal put forth my lawmakers who wrote in their WSJ column that they want to “lower rates for families and individuals.”

What’s right with Rubio-Lee

This will be a much longer section because there are several very attractive features of the Rubio-Lee plan.

Some households, for instance, will enjoy lower marginal tax rates under the new bracket structure, particularly if those households have lots of children (there’s a very big child tax credit).

But the really attractive features of the Rubio-Lee plan are those that deal with business taxation, double taxation, and international competitiveness.

Here’s a list of the most pro-growth elements of the plan.

A 25 percent tax rate on all business income – This means that the corporate tax rate is being reduced from 35 percent (the highest in the world), but also that there will be a 25 percent maximum rate on all small businesses that file using Schedule C as part of a 1040 tax return.

Sweeping reductions in double taxation – The Rubio-Lee plans eliminates the capital gains tax, the double tax on dividends, and the second layer of tax on interest.

Full expensing of business investment – The proposal gets rid of punitive “depreciation” rules that force businesses to overstate their income in ways that discourage new business investment.

Territorial taxation – Businesses no longer will have to pay a second layer of tax on income that is earned – and already subject to tax – in other nations.

No death tax – Income should not be subject to yet another layer of tax simply because someone dies. The Rubio-Lee plan eliminates this morally offensive form of double taxation.

In addition, it’s worth noting that the Rubio-Lee plan eliminate the state and local tax deduction, which is a perverse part of the tax code that enables higher taxes in states like New York and California.

Many years ago, while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways & Means Committee.

Here’s another version of that matrix, this time including the Rubio-Lee plan.

As you can see, the Rubio-Lee plan gets top scores for “saving and investment” and “international competitiveness.”

And since these components have big implications for growth, the proposal would – if enacted – generate big benefits. The economy would grow faster, more jobs would be created, workers would enjoy higher wages, and American companies would be far more competitive.

By the way, if there was (and there probably should be) a “tax burden” grade in my matrix, the Rubio-Lee plan almost surely would get an “A+” score because the overall proposal is a substantial tax cut based on static scoring.

And even with dynamic scoring, this plan will reduce the amount of money going to Washington in the near future.

Of course, faster future growth will lead to more taxable income, so there will be revenue feedback. So the size of the tax cut will shrink over time, but even a curmudgeon like me doesn’t get that upset if politicians get more revenue because more Americans are working and earning higher wages.

That simply means another opportunity to push for more tax relief!

What’s missing in Rubio-Lee

There are a few features of the tax code that aren’t addressed in the plan.

The health care exclusion is left untouched, largely because the two lawmakers understand that phasing out that preference is best handled as part of a combined tax reform/health reform proposal.

Some itemized deductions are left untouched, or simply tweaked.

And I’m not aware of any changes that would strengthen the legal rights of taxpayers when dealing with the IRS.

Let’s close with a reminder of what very good tax policy looks like.

To their credit, Rubio and Lee would move the tax code in the direction of a flat tax, though sometimes in a haphazard fashion.

P.S. There is a big debate on the degree to which the tax code should provide large child credits. As I wrote in the Wall Street Journal last year, I much prefer lower tax rates since faster growth is the most effective long-run way to bolster the economic status of families.

But even the flat tax has a generous family-based allowance, so it’s largely a political judgement on how much tax relief should be dedicated to kids and how much should be used to lower tax rates.

That being said, I think the so-called reform conservatives undermine their case when they argue child-oriented tax relief is good because it might subsidize the creation of future taxpayers to prop up entitlement programs. We need to reform those programs, not give them more money.

Reposted from International Liberty.