Jindal Fears Higher Taxes on People Who Don't Buy Chevy Volts... Like in Louisiana

Louisiana Governor Bobby Jindal and Santa Claus both punish the naughty and reward the nice. (Photo credit: Wikipedia)

Louisiana Governor Bobby Jindal inadvertently illustrated the point I made in my last post when he explained why he wasn't going to implement Obamacare.

“It really raises the question of what’s next, what’s allowable,” Jindal said on a Republican National Committee Conference Call. “Taxes on people who refuse to eat tofu or refuse to drive a Chevy Volt…this whole ruling I think is ridiculous. It’s a huge expansion of federal power.”

Well, bad news, governor.  People who don't own a Volt already pay higher taxes. Purchasers of hybrid and electric vehicles in 2012 got a $7,500 tax credit.  Put differently, I paid $7,500 more in taxes because I didn't buy a Volt or some other qualifying car.

I'm not a big fan of this credit, even though I would love for people to use less fossil fuels, because I don't think the government is smart enough to pick the right technologies to subsidize. A carbon tax would make much more sense. But the government taxes us more for doing stuff not on the approved list all the time.

Ironically,Louisiana also offers a state tax credit for alternative fuel cars (including Volts), which Governor Jindal signed into law in 2009 .

I guess he wasn't such a freedom lover back then.

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The real reason GOP needed Supreme Court to nullify ACA

They're not worried that families and businesses will hate it. They're terrified that, once implemented, people will like it as much as Medicare and Social Security. Both were derided as socialism and worse by critics. They're the most populate federal programs now.

(This is terse because I'm trying to write before the doors close on my plane to SFO.)

Health Insurance Mandate/Penalty is Just Another Tax

I can’t resist pointing out that I reached the same conclusion as Chief Justice Roberts and the majority more than two years ago.  The penalty you have to pay for not having health insurance is not coercion: it’s just a tax, and not different from dozens of other mandates in the tax law. Not being a lawyer, I had no idea how the court would rule, but as an economist, the question is really a no brainer.  We do this stuff all the time.  (The following is from CNNMoney. I wrote it before I was blogging regularly for Forbes.)

Critics argue that the new law’s requirement to purchase insurance or pay a fine is a radical departure and unconstitutional.

In fact, this is nothing new. Our tax returns are full of implicit mandates with huge penalties — in the form of lost credits and deductions — for noncompliance. The government wants us to donate to charity, own a home, save for retirement, adopt a child, buy a hybrid car … If we don’t, we pay more tax (a penalty).

There is a semantic difference between the health insurance mandate and these other tax nudges in that the government doesn’t require you to donate to charity or own a home. But the government doesn’t really require you to get health insurance either. You are free to ignore the “mandate” and pay the tax.

And some of the other mandates are much more onerous. If I chose to rent rather than own, I’d pay about $7,000 more in taxes — more than three times the maximum penalty for going uninsured.

…

The requirement to file a tax return is itself a pretty serious mandate, involving hefty penalties and sometimes imprisonment for those who opt out. The point is that the new health insurance mandate is different only in form, not in substance, from the plethora of existing mandates.

The new insurance mandate assesses an excise tax of up to $2,085 per family in 2016 (smaller penalties in 2014 and 2015) for those who do not have “minimum essential” health insurance coverage. Low-income families, Native Americans, undocumented immigrants and some religious groups are exempt.

As I noted in the earlier commentary, a lot of the existing mandates are dubious as a matter of policy, but the health insurance mandate is not.  There’s no plausible way in a private health insurance system to get near universal coverage without a mandate. Absent a mandate, people would just wait until they got sick to buy health insurance, but that would send premiums through the roof.  That obviously doesn’t work.

The future of the Affordable Care Act is far from certain. The next presidential election will now be as much about health care as the economy and that is as it should be. There is a constitutional remedy for government policies that people don’t want: an election.

I hope the president does a much better job than he has so far in explaining why people should support the law (and his reelection). We’ll find out if he did on November 6.

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Obama Should Beware of Democratic Strategists

I was struck by this article in the Washington Post:  ”Obama campaign’s rough patch concerns some Democrats.” The Democratic establishment apparently believes that the team that got President Obama elected in a “change” election year is not adapting to the new realities of a sputtering economy, ballooning public debt, and widespread dissatisfaction with Washington.

“The bad thing is, there is no new thinking in that circle,” said one longtime operative in Democratic presidential campaigns who spoke on the condition of anonymity to be candid.

Eight other prominent Democratic strategists interviewed shared that view, describing Obama’s team as resistant to advice and assistance from those who are not part of its core. All of them spoke on the condition of anonymity as well.

The president’s definitely got his work cut out for him, but I’m terrified at the thought of the establishment political wizards riding in to take over messaging for his campaign. If they do for Barack Obama what they did for Al Gore, John Kerry, and Hillary Clinton, that is great news for Mr. Romney.

Don’t get me wrong. I think Stan Greenberg and James Carville (two of the Democratic strategists mentioned in the Post article) are brilliant, but their track record in post-Bill Clinton presidential elections is dreadful.  Obama and team ran a brilliant campaign in 2008 beating two formidable opponents, Hillary Clinton in the primaries and John McCain in the general election.  Somehow Obama and his group of Chicago greenhorns managed to excite the public in a way that no Democrat had done since Bill Clinton. Especially given the weak economy and the general sense of malaise, rekindling that excitement would seem even more important in 2012 than in 2008.

I don’t know whether that will be enough to get the president four more years, but I really worry about his chances if he returns to the the 2000 and 2004 game plan (and the team of strategists who produced it).

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A Progressive Consumption Tax?

Economists have long been attracted to consumption taxes because, unlike an income tax, they do not penalize saving. The Achilles Heel, however, has been that consumption taxes tend to be regressive—hitting lower-income people proportionately harder than higher-income folks. The reason is simple: low-income people spend all their income (or more) while those with higher incomes save a substantial portion.   Thus, the sales tax or the VAT tend to be most burdensome on those struggling to get by.  Sometimes the regressivity is lessened by exempting necessities like food, clothing, and medicine or taxing them at a lighter rate, but that makes the tax more complex, opens new avenues for tax evasion, and reduces the efficiency advantages of the tax.

In 1981, economists Robert Hall and Alvin Rabushka proposed a less regressive kind of VAT called the Flat Tax.  Businesses pay a flat tax rate on revenues less expenses (cash flow) and workers pay the same flat rate on earnings above a basic exemption level.  The tax base is exactly the same as for a very broad-based VAT except for that exemption. The other key difference is that businesses cannot deduct wages, shifting the statutory obligation for that portion of the VAT onto workers, which is what makes the exemption work.  (Hall and Rabushka’s book, updated in 2007, is available for free on the Hoover Institution website.  I explained why a flat tax is economically equivalent to a VAT on this blog.)

But even with a very generous exemption, a flat tax is much less progressive than the income tax. The late Princeton economist, David Bradford, extended the flat tax idea by incorporating progressive tax rates on wages. Bradford was a brilliant economist, but not a marketing genius, and he called his proposal the X tax, guaranteeing that it would frighten away the majority of Americans who are still recovering from the trauma of high school algebra (“solve for X”).

Nonetheless, academic economists have long understood that the X tax could, in theory, solve the principal defect of the flat tax/sales tax/VAT. But the idea has never caught the public’s imagination like the Flat Tax or the “FairTax” (a national retail sales tax that sounds great, but is neither fair nor feasible).

Tax experts Bob Carroll and Alan Viard are trying to rectify that with their new book, Progressive Consumption Taxation: The X Tax Revisited, just published by the American Enterprise Institute. (Video from an AEI book launch event is here.)  The book is a careful, comprehensive, clear explanation of the X Tax and all of the issues that would be involved in implementing it.  It’s not exactly light reading, but the authors made a heroic and largely successful effort to avoid jargon and technical analysis that would put off intelligent lay readers.

Also, perhaps surprisingly for a book from the conservative American Enterprise Institute, the book takes “fairness” very seriously (and doesn’t rely on the convenient wishful thinking of assuming that trickle down would deal with all distributional issues). The book cites President Bush’s tax reform panel, which concluded that a very comprehensive X Tax could mimic the distribution of tax burdens under the current (circa 2005) income tax with rates ranging from 15 to 35 percent so long as there are refundable tax credits to replace the EITC and child tax credit. The authors also acknowledge that rates would have to be higher if tax breaks for homeownership, health insurance, and charitable contributions are preserved.  Thus, it is easy to make the case that a fair X Tax is feasible, at least in theory.

There are numerous implementation issues, only some of which I had thought of before reading this book. One issue is transition from an income tax to an X Tax, which is very complicated.  The economic literature blithely concludes that switching cold turkey from an income tax to a consumption tax is efficient because it creates an implicit lump-sum tax on existing capital. (For example, unused depreciation deductions go out the window.) Carroll and Viard reasonably conclude that this is infeasible and undesirable in the real world, and suggest ways to deal with existing assets without undue hardship. (They don’t talk about what to do about tax-exempt bonds, which would presumably become much less valuable once all kinds of capital income are tax-exempt.) The book discusses other gnarly issues such as the handling of international transactions and financial services, as well as laying out a wide range of other details.  And it considers alternative ways of lightening tax burdens on capital (including my favorite, which is a VAT dedicated to paying for healthcare). Not surprisingly, they conclude that the X Tax is the best option.

I’m not entirely won over to this position.  The X Tax would be susceptible to the same kinds of vandalism that has eroded the income tax base, and that would require much, much higher tax rates (since savings are exempt). The concerns about equity that produced the Buffett Rule would apply in spades—Warren Buffett and Mitt Romney would get huge tax cuts since capital gains and dividends would be tax-free.  Carroll and Viard can explain until they turn blue in the face that the millionaires are paying a tax on their spending, but if they can get that lesson on economic incidence across to the average American, they are the best economics teachers in history. And I am worried about the potential accumulation of enormous largely tax-exempt fortunes in family dynasties.  (I’d be more supportive of the proposal if it included large inheritances in the tax base.)

But I really appreciate Carroll and Viard’s just-the-facts style of presentation. They don’t overstate their case or make stuff up.  They acknowledge, for example, that exempting saving from the tax base doesn’t magically simplify the tax system (since taxpayers would have a huge incentive to make taxable earnings look like tax-exempt savings). They say what almost all economists know, but few consumption tax advocates admit, which is that switching to a consumption tax—even with a border-tax adjustment—would not represent a subsidy to exports, and they recommend against the border adjustment on simplicity grounds. (Alan has an excellent short essay explaining this point on the AEI website.)

Bottom line: this book makes David Bradford’s intriguing X Tax proposal accessible and not so scary.  People interested in tax reform will find it invaluable, and it would make a nice supplemental text for courses on tax policy or undergraduate or masters level courses in public finance.

However, the X Tax still needs a better name.

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