Center for Limited Government Newsletter – Sept. 8, 2011

1. Unclear Thinking => Bad Tax Policy

By Edward N. Robinson 

Warren Buffett, one of the most successful investors in the world, and Harvey Golub, the former chairman of American Express, recently had an exchange concerning taxes. It reminded me that we should all start with some humility in expressing our political ideas, because they are frequently based more on wishful thinking or inaccurate conventional wisdom than on facts or good analysis. This bad thought process then frequently leads to bad policies and fiscal consequences.

Buffett has an enviable record of buying good companies and having them do well under his ownership. He is personally generous, having given large sums to charities and foundations. He is a nice individual, and a man of his word. Yet his recent statements regarding federal income taxes did not track logically.

He started with a statement of fact, which was that he paid something like 17 percent of his income in federal income taxes, which was a significantly lower percentage of income than that paid by people in his office who made a lot less money. He then concluded that this is: (a) unfair; and (b) should be rectified by raising rates on the rich.

On the surface, this sounds right: Why should the rich pay a lower percentage in taxes than the middle class; and why shouldn’t the tax rates for the rich be raised?

Golub, however, pointed out several flaws in the reasoning. First is that the really rich pay not only federal and state income taxes, and Medicare and Social Security taxes, the way most of us do, but also have to pay federal and sometimes state estate taxes on those same earnings, albeit further down the road, when they die and their assets (minus the estate taxes) pass to their families. He calculated that he would pay an aggregate of 80-90 percent of his income in the form of those various taxes!

Then he analyzes who is actually paying the most federal income tax, and why the effective income tax rates are sometimes lower for the wealthy. This (from the Aug. 22 Wall Street Journal) is worth quoting:

Today, top earners – the 250,000 people who earn $1 million or more – pay 20 percent of all income taxes, and the 3 percent who earn more than $200,000 pay almost half. Almost half of all filers pay no income taxes at all. Clearly they earn less and should pay less. But they should pay something and have a stake in our government spending their money too.

“In addition, the extraordinarily complex tax code is replete with favors to various interest groups and industries, favors granted by politicians seeking to retain power. Mortgage interest deductions support the private housing industry at the expense of renters. Generous fringe benefits are not taxed at all, in order to support union and government workers at the expense of people who buy their own insurance with after-tax dollars. Gifts to charities are deductible but gifts to grandchildren are not. …

Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers?

Why do we require that public projects pay above-market labor costs? Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? Why do we subsidize small airports in communities close to larger ones? Why do we pay government workers above-market rates and outlandish benefits? Do we really need an energy department or an education department at all?

Here is my message: Before you ‘ask’ for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you will need less of my money.

The bottom line is that a flat or relatively flat tax rate system (such as we have in Utah), combined with very few or no deductions, is the fairest way to collect the revenues necessary to support government, since everyone pays something, the successful pay many more dollars than the less well-to-do, and government gets out of the business of telling people how to spend and invest their money. And we citizens should constantly be insisting to our elected representatives that they enact only those programs that government truly needs to provide, and which actually work in practice in an effective and efficient manner. Maybe Mr. Buffett should apply the same standards of necessity, efficacy and efficiency to the federal government as he does to the businesses he owns.

The author, Edward N. Robinson, is director of Sutherland’s Center for Limited Government. He has been a financial adviser to corporations, a senior executive, and a management consultant. Prior to retiring in 2006, he operated Robinson Partners, consulting CEOs on corporate strategy and mergers and acquisitions. Before that, he was an executive vice president of Texas Commerce Bank (later Chase Bank of Texas and now JPMorgan Chase), where he ran the investment banking business, and then created and ran The Private Bank; was an executive director at Azurix, an international water utility business, responsible for corporate strategy and M&A; and was a managing director at First Boston (now Credit Suisse), running the firm’s Los Angeles office and the regional M&A practice. Mr. Robinson has a B.A. from the University of Michigan and a J.D. from New York University School of Law.


2. City regulations cut into homeowners’ options

By Pamela Whitmore

My husband and I had windows replaced in our basement the other day – all but two windows. Why leave them out? Because, according to the window-replacement company, if you replace basement windows – no matter the age of the home – Sandy city code requires egress windows in every bedroom. That means the window openings have to be cut out to a much larger size, among other things.

Cutting out egress windows through all that concrete will be so expensive that we are deferring it to another year. Does this improve fire safety? In fact, the new windows can be lifted out completely, and they are a lot easier for our children to escape through than the two remaining old windows with those sadistic, finger-killing latches. …


3. Next taxpayer-subsidized hotel: Salt Lake City?

By Alexis Young

The hotel industry has been attracting many cities in Utah lately. West Valley City has already decided to loan $30 million to a private developer to build a hotel; Holladay wants Salt Lake County to loan it $450,000 to prepare a site for a hotel; and now Salt Lake County is considering subsidizing a mammoth convention center hotel in downtown Salt Lake City. Is getting into the hotel business a proper role of government? We interviewed Derrick Smith, a concerned citizen; Scott Beck, CEO of Visit Salt Lake; and Richard Snelgrove, Salt Lake County Council member, to find out what they think. Watch this video report. …

To see the video report on the Sutherland Daily blog, click here


4. Why has no one replicated America?

By Dave Buer

Here is a question: If the U.S. Constitution, Bill of Rights, system of government and free market economy are the best solutions humankind has ever conjured to govern itself, why has no other country closely replicated our systems and, correspondingly, our success?

By the way, the United States of America is indeed the most successful country in the world if success is measured by a combination of freedom, security, infrastructure, lack of hunger, limited government, (relatively) low taxes, education, standard of living, innovation and justice. …

To read more of this story on the Sutherland Daily blog, click here.