We're Not Drilling Deep Enough In The Tax Debate

“Lies, damned lies, and statistics” (attributed to Mark Twain)

There were a lot of responses on the tax piece, “Taxes: Obama or Romney”.  Thank you for the emails.

Some comments supported Obama.  The most extreme came from Lori S., a stock broker from San Francisco who is clearly a dyed-in-the-wool Pelosi-ite Democrat.  She heaped opprobrium on me. She criticised everything we wrote as well as the Tax Foundation view of the Romney tax plan.  She offered no concrete support for Obama’s positions. She produced no numbers, only ridicule.  Clearly, Lori does not know me well.  With behaviour like hers, she never will. 

Joe G. from Washington gave a thoughtful response. He said to look at the Tax Policy centre commentary that has a different set of assumptions. Joe, I agree with you. We both know that assumptions make all the difference in the world. The reason I chose the Tax Foundation analysis is that they took a stand, even though their positions make strong growth assumptions that may or may not be realised. Something is better than nothing, as you and I discussed in our email exchange. Thank you, Joe, for your helpful comments.

Readers may find this link to the TPC website of interest.  “Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?”

In addition to the link we offered in our first commentary, we also suggest the following one.  The Tax Foundation analysis, “Analysis of Romney’s Tax Plan With and Without a $25,000 Cap on Itemized Deductions,” can be viewed by clicking here.

Sherman B. of New Jersey roared back as a Romney supporter.  “Excellent!” harrumphed Sherman who celebrates iced tea, green tea, black tea, and hot tea. He is either at the tea party or in his wine cellar. Thank you, Sherman; I always appreciate the responses.

Roger B. of Pennsylvania says, “Hey, how about the CBO or some neutral scoring facility?” Thank you Roger, your response is thoughtful. The key is to go back and look at CBO scoring techniques. Turn the clock back five years to see how well they have done. Their margin of error is measured in the hundreds of billions on either side and in either direction. They are constrained by a set of rules passed by Congress, who wrote the rules to make themselves look good. Sadly, this is now a flawed system.

Media responses were appreciated as well. Some asked why there is such a difference between the analyses. Has Romney been completely clear? What are the substantive issues that are unresolved? These are great questions, which demand complex answers although both candidates do not give them.  We will offer some thoughts in the closing comments.

No one talks much about expectation changes or behavioural changes. The tax debate ignores the difference between static versus dynamic analysis. It is not a simple statistical matter.

However, the fundamental issue is simple. If you want more of something, lower the taxes on it. If you want less of something, raise the taxes on it. I learned that from a fine economics professor and good friend, Bill Poole.  Apply that concept first; it makes compromise easier to obtain if you do.  If only our politicians would listen!  That principle includes personal income and aggregate GDP.

Here is where we stand today. We talk about a fiscal cliff in a conversation laden with political acrimony but without solutions. We talk about tax changes, yet the most important tax change, a 2% cut in the payroll tax that would deliver a thousand dollars in spending power to every household in America and relieve working people of the most regressive taxation, is not on the table. Neither Obama nor Romney has proposed extending the payroll tax cut. They are both busy defending the respective special interests that are on their sides of the political aisle.

Why not put the payroll tax cut on the table? Why not debate regressive taxes and whether to make them permanent? The reason is simple. The so-called political forces of the United States (Democrats and Republicans), aspirants for the White House, and incumbent congressmen all have the same issue. They do not want to give the revenue back to the people who work and pay taxes in the US. They have their own program agendas that they want to push forward. The common issue of tax relief is talked about and not acted upon.

Taxes are a big deal in the campaign. Are we drilling deep enough in the debate? No. Do we have to resort to looking at analyses that come from private organisations whether it is the Tax Foundation, the Tax Policy centre, or somewhere else? Yes. That is the best we have.

Let me add one final comment on the tax-comparison pieces. The analysis of taxation was done by the Tax Foundation, not us. We provided readers with the link, as we have also done with the Tax Policy centre.  Those folks are responsible for their numbers. 

Cumberland assembled the analysis of municipal taxation (taxation of tax-free bonds or tax treatment of tax-free bonds) – whether they are going to change and what the rates will be. We work in that turf.

Our conclusions are clear. The benefits of tax-free bonds are huge. The political constituency that supports them consists of school boards, sewage authorities, airport authorities, counties, townships, and states. That is a massive constituency. Every finance officer in those agencies knows that the cost of finance goes up if you eliminate the tax exemption of interest or the favourable tax treatment of interest on tax-free bonds. Simply put, there is almost four trillion dollars of outstanding state and local government debt in the US. It is turning over, rolling over, refunding, or otherwise changing every day.

If you add 100 to 150 basis points to the cost of the financing, that added cost falls on state and local government issuers. Unlike the federal government, those organisations must balance their budgets.  Thus they will find the revenue to pay the higher debt service from one source or another. They will raise user fees, raise local taxes, hike property taxes, and/or increase sales taxes. One way or another, they will pass on the cost added by increased debt service. Think about it. Do we really want to burden state and local governments in the US at the time when they are retrenching, deleveraging, and altering the entire concept of provision of their services? That, too, is a question that should be part of the political debate this year.

My colleague Michael McNiven makes an interesting point of comparison between Obama and Romney.  Mike uses the state and local government balancing requirement to illustrate his view.  Michael wrote:

“Romney has not been completely clear.  A lot of what he proposes is conceptual and vague.  He says he will balance the budget by 2020, but is not clear on how he will do so.  What we do know about him, however, is that he has balanced every budget within his responsibility for the balance of his career.  This includes business as well as public budgets.  He does bring credibility and a transparent track record to this budget balancing issue.  Yet, how and when he would balance this federal budget is an open question.  He has indicated his strong desire to do so, which is consistent with his personal record.

Obama has been clear on the deficit: he has run sequential trillion-dollar deficits.  With Obama’s future plans, we will have deficits for a very long time.  All of the improvements take place in out years and are speculative as to results.  Using history as a clue, there is no historical record of Obama ever balancing a budget.

Thank you, Michael, for articulating an even-handed view.  I’m sure some of or readers will dispute this but you have encapsulated the actual results accurately.

We thank all readers for their comments both positive and negative as we try to advance this taxation discussion.

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