Topic: Government and Politics

Politicians May Slow Growth - and Help America’s Competitors - with Big Tax Hike on Capital Markets

The Wall Street Journal appropriately savages a putative Senate proposal to dramatically increase the tax on private equity firms. Senators Baucus and Grassley apparently think it is wrong that fund managers get a slice of the capital gains pie if investments rise in value, and they want to tax those gains as if they were income instead of increases in net worth. In a well-designed system that eliminates double taxation of saving and investment, the capital gains tax rate would be zero, so this proposal clearly would be a big step in the wrong direction. But politicians specialize in bad policy. First, they drove a substantial share of IPO business to Hong Kong and London with Sarbanes-Oxley. Now they want to drive private equity firms out of America as well:

This week Senators Max Baucus and Charles Grassley, the chairman and ranking minority member of the Finance Committee, will hold “informal meetings” to ponder a 133% tax hike on private equity firms. There’s no good rationale for this beyond the fact that Congress wants money and private equity funds have lots of it. Private equity firms will raise and deploy a record one-half trillion dollars of investment capital this year – funds that provide start-up and expansion-phase money for firms large and small. …Senator Grassley says he suspects “subterfuge” that allows fund managers to underpay their taxes. The managing partners of equity funds generally receive compensation in two ways. They charge the fund investors a 1% or 2% management fee for finding high-return business opportunities and for orchestrating the portfolio. Those fees are taxed at the personal income tax up to 35%. But fund managers also typically lay claim to a 20% slice of the fund’s future profits. That return is called “carried interest” and is taxed at the long-term capital gain rate of 15%. Congress is considering reclassifying that income as labor compensation and taxing it at the 35% income tax rate. … Far from being a clever tax dodge, carried interest plays a central role in the performance of private equity funds: It establishes an incentive structure which aligns the financial interests of the managers and investors. …The biggest losers from a private equity tax hike may be pension funds, which have become large investors in these funds; their high performance has made millions of Americans wealthier in their retirement.

WAMU Wags Its Finger, Part I

I listen to National Public Radio in the morning.  The frequent left-wing bias can be grating, but that’s nothing compared to the inaccuracies and condescension of those annoying NPR membership drives.

My local NPR station is WAMU, which broadcasts from American University in Washington, DC.  WAMU is holding one of their membership drives this week. In the past, I’ve heard NPR and WAMU personalities lecture listeners that we are “free riders” unless we cut them a check.  The only problem with that argument is that WAMU receives about 7 percent of its revenue from the federal government, which means that every WAMU listener already contributes to the station – albeit involuntarily.  Calling any of WAMU’s listeners “free riders,” therefore, is the sort of inaccuracy of which a journalist should be ashamed.

This came to mind at about 8am today when I heard a WAMU reporter reprove, “It is important for you to become a participatory member.” As if I weren’t already.

I value WAMU.  It’s just so darned informative.  But I’ve decided that I’m not writing them any checks until they forswear all involuntary contributions or Congress weans them off of the same

Until then, I’ll try to blog every inaccurate or condescending ploy that I hear WAMU use to belittle my existing contributions.  I encourage my NPR-listening colleagues to do the same.  If we blog enough of them, maybe we can wrap them up and send them to WAMU as a very special contribution. 

Though I wouldn’t count on getting the tote bag.

Property Tax Revolt: The First Time Was Only a Warning

It looks like a property tax revolt is brewing across the country, perhaps the biggest one since the era of Proposition 13, in the late 1970s. The Christian Science Monitor reports today that “legislative proposals, citizen initiatives, and lawsuits are on the agenda in at least 20 states.”

It’s no surprise why. Rising home values have meant rising assessments in many parts of the country. Rising home values are great if you’re selling; but if you’re not planning to sell your house, the increase can just mean higher taxes. And now, as Dennis Cauchon pointed out in USA Today, house prices are falling in some places but assessments haven’t yet been adjusted.

More importantly, cities and counties gleefully increased spending as the tax revenue rolled in during a decade or so of rising prices. But now that the revenue increases are slowing, local governments don’t want to cut back. Instead, they want to raise rates to keep the good times rolling—for governments if not for taxpayers.

The Wall Street Journal reports that more and more taxpayers are protesting their assessments. That’s one form of rebellion. Another is tax protests and calls for political action, and the Journal reports that those are happening, too, from Florida to Minnesota.

Back in 1978, the college newspaper cartoonist Berke Breathed (later famous for “Bloom County” and “Opus”) drew a brilliant cartoon about Proposition 13. For the benefit of our younger readers, I’ll explain: Proposition 13, which slashed property taxes in California, was spearheaded by Howard Jarvis. And it passed in June 1978, about the time the movie The Omen II came out, with its tagline “The first time was only a warning.” And Breathed was right: Prop 13 was a warning to the political class that taxpayers were fed up. After Proposition 13, the Democratic Congress cut the capital gains tax rate. Massachusetts passed Proposition 2-1/2 in 1980. More than a dozen other states put constitutional limits on taxes in the next few years. Ronald Reagan ran for president on a tax-cutting platform; he defeated incumbent Jimmy Carter, swept in a Republican Senate, and cut the top marginal income tax rate from 70 percent to 50 and then to 28 percent.

From earmarks to entitlements to local assessments, it’s time for taxpayers to give the political class another warning.

Back Door Takeover

In September 2005, U.S. Secretary of Education Margaret Spellings announced the creation of a commission charged with formulating a “comprehensive national strategy” for higher education. The commission was chaired by long-time Bush pal Charles Miller – who’d helped create the Texas predecessor to the No Child Left Behind Act (NCLB) when Bush was governor – and it seemed very likely the commission would recommend federally enforced standardized testing for all colleges and universities. Thankfully, federally mandated testing was not among the recommendations in its final report, an outcome almost certainly attributable to adamant opposition to such lunacy both from within and without academia.

Ah, but in Texas they don’t give up easily!

Unwilling to face what would no doubt be major opposition to publicly trying to force inane, NCLB-esque standardized testing on the Ivy League, Seven Sisters, etc., the Department of Education has chosen a different tactic: it’s tried to sneak it in through the ivory tower’s back door.  Rather than putting testing requirements into legislation that would have to get through Congress, the administration has been quietly trying to rewrite regulations governing accreditation in order to make accreditors force schools to administer standardized tests.

Thankfully, there’s been a lot of resistance among accreditors to this assault on academia, and Education Department negotiators have had to tone down their once explicit demands for testing. As Inside Higher Ed reports:

As the department’s various proposals have evolved over the weeks and months, they have become slightly less intrusive at each turn. Most recently, the department issued draft regulatory language — based, its officials repeated again and again, on a proposal that some of the “non-federal” negotiators had suggested — that would no longer require accrediting agencies to dictate to colleges the levels of performance they must achieve in student learning.

That’s good news, but as IHE continues, it hardly gets schools out of the woods:

But because the government would still require accrediting agencies to judge whether the standards that colleges set for themselves and their success in meeting those goals are sufficient — and because the accreditors would be doing so knowing that the Education Department can (through its process for recognizing accrediting agencies) punish any accreditor who doesn’t set the bar high enough to satisfy department officials — some members of the negotiating panel argued Tuesday that even the less-aggressive changes amount to federal control of accreditation, and ultimately of higher education.

In light of all this, I have a confession to make. When Spellings first announced the creation of her commission, and as the national strategizers conducted their work, I was almost certain we’d see the Bush administration try to assert explicit federal control over higher education, just as it had done in K-12. Well I was wrong. The administration hasn’t tried to do anything explicit in higher education. No, it’s tried to hide what it’s been up to ever since the commission’s final report came out.

Barney Frank, the Occasional Libertarian

Rep. Barney Frank, chairman of the House Committee on Financial Services, gave a resoundingly libertarian interview to NPR’s “All Things Considered” Friday evening. Frank has introduced a bill to repeal last year’s ban on online gambling. As he did in this 2003 Cato Policy Forum, he made his argument in libertarian terms. From the Nexis transcript:

ROBERT SIEGEL: First of all, what is your motive here? Is it libertarian? Is it to achieve more revenues for the government by taxing activity? What is it?

Rep. FRANK: It’s libertarian. I am appalled at the notion that the government tells adults that they cannot do certain things with their own money on their own time in ways that do not harm anybody else because other people disapproved of them. …

But my motive is overwhelmingly that I just don’t want to see the government telling people what to do….

SIEGEL: How much money would taxing Internet gambling bring in to the federal government?

Rep. FRANK: Well, in the bill I am - not a lot - I really want to make it very clear, that’s not my major focal point here. Potentially this could be a useful source of revenue just like any other business. But I do want to stress, my main motivation here is that I do think I should mind my own business and I want to deal with the environment, and I want to deal with economic problems, and I want to deal with poverty and all these other things. But I spend a lot of energy trying to protect people from other people. I have none left for protecting people from themselves.

In between those segments, Frank said that we allow lots of things over the Internet–like wine sales–that are appropriate for adults but not for children. And he said that conservatives want to ban things they think are immoral, and liberals want to ban things they think are “just tacky.”

It’s good to hear an elected official use the word libertarian, and use it correctly, and apply it to issues. Would that more of his colleagues would do so. I’m reminded that seven years ago I did a libertarian rating of Congress. Frank did better than most Democrats, and indeed better than most Republicans (including 7 of the 11 members of the Republican Liberty Caucus Advisory Board). But he voted to restrict steel imports, restrict gun sales and gun shows, and implement the restrictive “Know Your Customer” bank regulations, and he opposed a tax cut. So his commitment to not telling what people to do with their own lives and their own money seems limited.

This year, as Financial Services chairman, he’s demonstrating his interventionist tendencies as well as his sometime libertarian instincts. He wants to push all workers into government health care, to regulate corporate decisions about executive compensation, to put more obstacles in the way of free trade across national borders, to keep Wal-Mart from creating an internal bank clearinghouse to hold down its costs. Not to mention expanding anti-discrimination rules to include gay, lesbian, bisexual and transgender people.

Frank told another journalist:

“In a number of areas, I am a libertarian,” Frank said. “I think that John Stuart Mill’s ‘On Liberty’ is a great statement, and I was just rereading it.

“I believe that people should be allowed to read and gamble and ride motorcycles and do a lot of things that other people might not want to let them do.”

Would that the Republicans who once took Congress on the promise of “the end of government that is too big, too intrusive, and too easy with the public’s money” also reread (or read) “On Liberty” and take its message to heart. And would that Barney Frank come to realize that adults should also be free to spend the money they earn as they choose and to decide what contracts, with foreign businesses or local job applicants, they will enter into.

How to Reform E-Voting

On Friday, I made the case for scrapping computerized voting. Today I’m going to look at the leading legislative proposal to accomplish that goal, Rush Holt’s Voter Confidence and Increased Accessibility Act. As I wrote in a recent article, the proposal would do several things:

It bans the use of computerized voting machines that lack a voter-verified paper trail. It mandates that the paper records be the authoritative source in any recounts, and requires prominent notices reminding voters to double-check the paper record before leaving the polling place. It mandates automatic audits of at least three percent of all votes cast to detect discrepancies between the paper and electronic records. It bans voting machines that contain wireless networking hardware and prohibits connecting voting machines to the Internet. Finally, it requires that the source code for e-voting machines be made publicly available.

All of these seem to me to be big steps in the right direction. Requiring source code disclosure gives security experts like Ed Felten and Avi Rubin the opportunity to study e-voting systems and alert the authorities if major security problems are discovered. Banning Internet connections and wireless networking hardware closes off two major avenues hackers could use to compromise the machines. Perhaps most importantly, by requiring that machines produce paper records, that those records be the official record, and that the records be randomly audited, the legislation would provide a relatively high degree of certainty that even if a voting machine were hacked, we would be able to detect it and recover by using the paper records.

All in all, this seems like a good idea to me. But the legislation is not without its critics. I’ll consider two major criticisms below the fold.

One set of objections comes from state election officials. Some officials argue that some of the legislation’s requirements would be an unreasonable burden on them. I’m a strong proponent of federalism, so those concerns are worth taking seriously. But the Holt proposal appears to do a reasonably good job of respecting states’ autonomy in designing their own election procedures. For example, if a state already has an auditing procedure that differs from the procedure mandated in the Holt bill, it is permitted to continue using its own procedures so long as the National Institute for Science and Technology certifies that the state’s procedures will be no less effective. Other tweaks may be appropriate to avoid stepping on the toes of state election officials, but on the whole, the Holt legislation seems to me to strike a good balance between local autonomy and the need to ensure that federal elections are secure and transparent.

The most vocal critics of the legislation come from activists who feel the legislation does not go far enough. They believe that nothing less than an outright ban on computerized voting is acceptable. And they have some good arguments. They point out that the add-on printers now on the market are slow and unreliable, that technical glitches can lead to long lines that drive away voters, and that many voters don’t bother looking at the paper record of their vote anyway, reducing their usefulness.

These are all good reasons to prefer old-fashioned paper ballots over e-voting machines with a printer bolted on. Fortunately, the Holt bill does not require any state to use computerized voting machines. That decision is left up to the states, and activists are free to lobby state legislatures to use only paper ballots.

The activists may be right that an outright ban on computerized voting would be a simpler and more elegant solution to the problem. It would certainly make the legislation a lot shorter, since most of the bill is designed to address the defects of computerized voting machines. However, there does not appear to be much appetite for an outright e-voting ban this Congress, and I don’t think we can afford to run another election on the current crop of buggy and insecure voting machines. The Holt bill may not be perfect, but it seems like a big step in the direction of more secure and transparent elections.

This Is a Republic (2)

At an appearance in Iowa this month, the Washington Post reports, Sen. John McCain went out of his way to declare his support for President Bush:

“There’s only one commander in chief of the United States, and that’s George W. Bush,” he told the crowd.

No, senator. This is a constitutional republic, and we don’t have a commander in chief. According to Article II of the Constitution, “The President shall be Commander in Chief of the Army and Navy of the United States.”

That’s an important distinction, and it’s disturbing that any candidate for the presidency would miss it. If McCain wants to be commander in chief of the whole country, of you and me, and to direct us the way the president directs the officers and soldiers of the armed forces, he needs to propose an amendment to the Constitution–an amendment that would effectively make the rest of the Constitution irrelevant, since it was designed as a Constitution for a limited government of a free people.

Next McCain will want us to bow and curtsy.