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.

The Flat Tax May Spread to Bulgaria

The global tax reform revolution may soon include Bulgaria. The Sofia Echo reports on the pressure - thanks to tax competition - for Bulgaria to hop on the flat tax bandwagon:

It won’t be surprising if in a couple of years Bulgaria introduces a flat 10-per cent tax on incomes, Georgi Angelov, senior economist at Open Society Institute, said, as quoted by Pari daily. Radical reforms are carried out more easily in countries with radical problems, such as those in Eastern Europe. A quarter of the countries in Europe levy a flat tax. The first to introduce a flat tax rate was Estonia – 26 per cent in 1994. The tax has been cut to 22 per cent already and the fashion has spread to neighbouring countries like Lithuania, Latvia, Russia and Ukraine. The example has been followed by Slovakia, Romania, Georgia, Serbia and Macedonia, with the Czech Republic and Albania expected to apply the lowest rate of 10 per cent from 2008. According to Angelov, one of the reasons for that is that Bulgaria has so far focused on reducing the corporate tax. Now that the tax has been cut to 10 per cent, the logical step is to reduce labour taxation by implementing a single rate. Just a few years ago, a 10 per cent tax was wishful thinking, but now it is a fact.

Abundance Has Arrived

Today is the official release date for my new book, The Age of Abundance. In it I offer a new interpretation of American history since World War II – one that focuses on the sometimes exhilarating, sometimes disorienting social changes triggered by the advent and deepening of mass prosperity. The civil rights movement and the sexual revolution, environmentalism and feminism, the fitness and health care boom and the opening of the gay closet, the withering of censorship and the rise of a “creative class” of “knowledge workers,” the decline of machine politics and the mad proliferation of subcultures and lifestyles – all, in my telling, are the progeny of economic abundance. Furthermore, I argue that the upshot of all these changes is a much more libertarian America, although politics has not yet caught up to the new social reality.

I’ve also started up a weblog, www.brinklindsey.com, as a companion site for the book. The idea is to comb the Internet’s massive historical archives for materials and imagery that relate to the book’s themes. Check it out!

DHS Privacy Committee Declines to Endorse REAL ID

The Department of Homeland Security’s Data Privacy and Integrity Advisory Committee is filing comments on the REAL ID regulations. Comments close today (Tuesday). Instructions for commenting can be found here, and apparently, due to difficulties with the automatic comment system and with receiving faxes, DHS has opened an email address for receiving comments: oscomments [at] dhs [dot] gov (subject: DHS-2006-0030) . Emails must have “DHS-2006-0030” in the subject line.

The Committee took care to offer constructive ideas, but the most important takeaway is summarized by Ryan Singel at Threat Level:

The Department of Homeland Security’s outside privacy advisors explicitly refused to bless proposed federal rules to standardize states’ driver’s licenses Monday, saying the Department’s proposed rules for standardized driver’s licenses – known as Real IDs – do not adequately address concerns about privacy, price, information security, redress, “mission creep”, and national security protections.”Given that these issues have not received adequate consideration, the Committee feels it is important that the following comments do not constitute an endorsement of REAL ID or the regulations as workable or appropriate,” the committee wrote in the introduction to their comments for the rulemaking record.

I’ll be testifying on REAL ID today before the Senate Judiciary Committee.

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.

Prospective Teachers: You Too Can Afford College!

As I was sitting at home on Saturday morning, flipping through the TV channels, I came across Education Sector’s Kevin Carey on C-SPAN’s Washington Journal. Now, I’m not sure what his main topic was – as I said, I stumbled on him whilst channel surfing – but just as I tuned in he seemed to be offering a stale but unchallenged argument: College student debt is too high, and we know this because there’s no way on his salary a new teacher could comfortably afford to make his monthly debt payments.

Intuitively, my reaction to this all-too-common refrain was “hogwash.” But then, being properly skeptical about all things, including my own knee-jerk reactions, I thought I’d best test out the proposition that a new graduate saddled with an average student debt load couldn’t possibly afford to become a public school teacher.

To run my test, I sketched a rough expense estimate for a new graduate who will be starting off as a first-year teacher in Indianapolis, Indiana, a city I thought seemed like “average” America.

So what would his expenses likely be? Below is a basic list, with bases for estimates:

Monthly Loan Payment: $300. (The State PIRG’s Higher Education Project reports that for a new graduate with $20,000 in debt – roughly the average for a new graduate who has taken out a loan – that must be paid back in 10 years at a 6.8 percent interest, the monthly payment would be $230. For the sake of a “fudge factor,” I boosted the payment to $300.)

Rent: $650 (This is from CNNMoney.com. It turns out rent in Indianapolis is relatively cheap. However, rents are likely at least partially reflective of overall lower living costs, which would in turn be reflected in salaries, evening this out.)

Food: $200 (I just guesstimated this based on my own food expenditures, and then added a bit on the off-chance I eat less than the average recent graduate.)

Transportation: $120 (My notional teacher is both living and working in Indianapolis so I didn’t figure he’d have too great a commute. I estimated that he’d fill his tank up about once a week at $30 a pop.)

Auto Insurance: $90 (Young Mr. Chips drives a 2001 Corolla and has a pretty good driving record. Allstate’s quote estimator reported that this would be close to his monthly premium.)

Renters Insurance: $20 (I got this quote through State Farm. Actually, their quote for an 800 square-foot apartment, about $40,000 worth of stuff, and $100,000 in personal liability was $16.50 per month.)

Clothing/Laundry: $100 (I guesstimated this too. I don’t buy a lot of clothes, but thought it might be a reasonable amount.)

So what’s our recently minted grad’s grand monthly total for all these essentials and student loans? $1480.

Now, let’s see if a first-year teacher working for the Indianapolis Public Schools (IPS) could afford such a load on their initial salary. Looking at the salary schedule for IPS teachers, one finds that our fresh graduate heading right into teaching will earn – get ready – an annual salary of $34,638, or a monthly salary of $2,887!

At this point I shouldn’t even have to do the math to see my test’s results, but let’s make this formal: If we subtract our new teacher’s monthly expenses from his monthly salary, we find that he has $1,407 left over! That’s right, almost half of the young man’s salary remains after paying off his monthly loan charge and all of his major expenses. That is a lot of beer money! (Or, I suppose, money he could save.)

Of course, there are expenses missing from this calculation – taxes, for one – but there are also major income boosters missing. After all, most teachers only teach for about ten months, and many get temporary jobs to fill the time. That means their teaching salary is generally not their only income. And I didn’t mention such major benefits as the generous loan forgiveness programs for which many teachers qualify.

Now, maybe I’ve overlooked some big expense, or grossly underestimated something, or my example isn’t representative of the financial challenges facing the average first-year teacher. If none of those things are the case, though, then there’s only one possible conclusion that can be drawn about the “student debt is too high and teachers’ salaries are too low” argument: It is utter hogwash, and ought never, ever, to be repeated again.

I’m not holding my breath.