Capital Gains and Games

So goes the logic (with only mild exaggeration) of one of the most ridiculous policy proposals I've read in a while -- to make up for falling gas tax revenues with a new tax on miles driven.  Ashley Halsey III is on the case in The Washington Post yesterday. 

The appropriate tax instrument to make up for declining or inadequate gas tax revenues is ... a higher gas tax rate.  Compared to a higher gas tax rate, a tax on miles driven ignores the amount of fuel used to drive those miles.  Highway travel is taxed the same as city travel.  Gas guzzlers are taxed the same as hybrids. Neither change makes any sense from an environmental perspective. 

 Washington invariably prefers the quick fix and ignores the underlying causes of whatever problem it faces. What better example than the financial crisis? At its most fundamental level, we underpriced the risk of mortgages and other financial assets. Why? President Obama and Congress have focused on the moral hazard of "too big to fail" financial institutions driven by bonus crazy CEOs making bets backed by government insurance. There's plenty of truth in that, but the deeper cause was easy money. A month ago, I defended Ben Bernanke's refutation of charges that the Fed's 2004 to 2006 easy money policy was to blame. So if, Fed monetary policy wasn't too easy, what was wrong? The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1.

Anyone who reads the Wall Street Journal's editorial page knows that it hates the value-added tax. I don't mean hate the way it hates liberals, government regulators and the capital gains tax. No, the Journal hates the VAT more deeply and strenuously than anything else.

The reason is that the Journal sees the VAT as the essential fuel of the welfare state. Without it a European-style welfare state cannot exist. Therefore, if you hate the welfare state--as the Journal does--you must oppose the VAT with every fiber of your being. No fooling around; the VAT means Armageddon, the end of America as we know it and victory for welfare state liberalism. If we impose a VAT we will all soon be cheese-eating surrender monkeys just like the French.

The problem with the Journal's hatred of the VAT is that it also embraces consumption-based taxation. Under a pure consumption tax there would essentially be no taxes on the returns to capital--no taxes on interest, dividends or capital gains.

I can't believe I didn't focus on this before.

A week ago, Shan Carter and Amanda Cox at the New York Times published this very cool, fun, interesting, and interactive chart that shows the different components of the federal budget in a way that analysts, geeks, observers, and commenters up to now have only dreamed about.  It puts to shame the static pie chart that has been used in the budget itself for decades.

What's most impressive and useful is the way the chart displays a great deal of information both visually and with text that provides the actual numbers.  Also, check out the buttons at the top left of the chart.  In particular, click on "Hide Mandatory Spending," and be amazed at how simply and easily it tells you all you really need to know about the federal budget debate.

The only thing missing is a similar chart for revenues.  Shan and Amanda?

Bruce raises a number of interesting points in his post on whether having a regular question time of the president by Congress similar to the questions asked of the prime minister by the House of Commons in the U.K. would be a good idea.  And you have to love Bruce's idea of having the president also be able to ask questions of members of Congress.

But in spite of all of the enthusiasm for the idea that became evident immediately after the president did more than hold his own at a televised Q&A session at the GOP retreat last week, including a bipartisan group of journalists and others publicly requesting that the practice occur regularly, it's a safe bet that it's not going to happen, or at least not happen any time soon.

The reason: The GOP made a huge communications mistake when it allowed the Q&A session with the president to be televised and isn't likely to repeat it any time soon.

 I could hardly believe my ears just now, watching former Reagan OMB Director Dave Stockman pronounce the end of the tax cut era on the PBS Newshour.

Stockman started by lambasting Wall Street gunslingers, of which he was one, for wrecking the financial system.  Then he cited the AIG bailout as the worst policy mistake of our era.  Then he said the deficits will have to be addressed, that the Reagan tax cuts failed to restrain government spending, and that we'll be forced to raise taxes from now on.  That's an amazing turnaround from one of the original supply side torch bearers.

Actually, I don't really disagree with Bruce on this.  But there are a few things that distinguish the Obama fiscal 2011 budget from all of the other presidential budgets that, as Bruce pointed out in his excellent history, have been quickly forgotten over the years.

After President Obama visited their conference last week and took questions from them, Republicans have become very keen on institutionalizing the event the way it is in Britain, where the prime minister routinely takes questions from the opposition in Parliament.

It appears to me that Republicans are simply looking to save face from having believed their own propaganda about Obama's inability to speak without a teleprompter. Also, it's standard debating technique for underdogs to be elevated by being granted a debate with the leader. The debate makes both appear equal and the challenger has less to lose than the leader.

Nevertheless, I think Republicans are being short-sighted in their demands. Would they really have wanted the grossly inarticulate George W. Bush to have had to take questions regularly from Democrats in Congress? I think not.

Moreover, the dismal quality of presidential news conferences does not lead me to think that much useful information will be gleaned from question time with members of Congress. They will just ask "gotcha" questions or about obscure issues that are only of interest to them.

I need to rant on this one.

I was going to use a "This Is Just Silly" headline, but it's not silly: If it's true, it's infuriating and pathetic, and that's being kind.

Republican and self-professed fiscal conservative Senator Richard Shelby (AL) yesterday supposedly put a hold on all Obama administration nominations unless he gets billions of dollars for several earmarks for his state.

This is a senior senator from a political party that routinely rails against earmarks, government spending and deficits in effect saying...the deficit be damned, I demand that additional billions of dollars be spent for projects.

That puts the whole GOP bull on the budget and deficit out there for all to see.

A number of people are calling for Democratic Majority Leader Harry Reid (NV) to tell Shelby to go to hell by not honoring the holds, bringing up the nominations, and forcing Shelby to filibuster each one over the spending/earmark issue.