Why Do They Say This Guy is So Smart, Again?

This bit from yesterday's State of the Union Address still has me shaking my head.

In the next few weeks, I will sign an executive order clearing away the red tape that slows down too many construction projects.  But you need to fund these projects.  Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.  (Applause.)

Huh?  Even without the expense of the Iraq War, we are still running a deficit somewhere in the vicinity of $1.5 trillion a year.  How exactly do we pay down anything based on the fact that we could have been spending more?  Sorry, they never covered this accounting trick in B-School.

The Wall Street Journal Imitates Me

Hmm, sounds familiar.

This is because wealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.

This double taxation is one reason the U.S. has long had a differential tax rate for capital gains. Another reason is because while taxpayers must pay taxes on their gains, they aren't allowed to deduct capital losses (beyond $3,000 a year) except against gains in the current year. Capital gains also aren't indexed for inflation, so a lower rate is intended to offset the effect of inflated gains.

A Simple Proposal

With the all the brouhaha over Mitt Romney's tax return, and the President's State of the Union address, much has been lost about why some rich investors pay such a low rate.  The media and politicians always seem to miss that it is the simple fact that capital gains are treated differently than regular income.  Should it be, well that depends on your perspective, but there are several legitimate reasons why it is.  Such as:

1.  They have already been taxed, both when the original capital was taxed as income, and at the corporate level, which on the books at least, is one of the highest in the world.

2.  They are not indexed for inflation. If, for example, you have an investment which makes a 30% return over a period of time when the inflation was 40%, you not only lost 10% in real terms, but you get the pleasure of paying a tax to the government for the honor.  Not exactly fair.

3.  They are not riskless.  If you receive a paycheck, the worst thing that can happen is you are laid off, and your pay goes to zero.  If you invest $1 million and receive an income stream off of it, you not only lose your income, but you can lose your $1 million.  If you make a million you have to pay taxes on that income, but if you lose that same million, the government does not cut you a check for that same amount in taxes.

So while I can understand why some people argue that for fairness, the very rich at least, should have to pay a higher capital gains right, fine, first just address the 3 issues I have raised above.  Raise the capital gains rate to the same as income, but first cut the corporate rate to 15-20%, in line with the rest of the developed world.  Then allow capital gains to be indexed for inflation, and finally allow capital gains losses to be offset against regular income.

Anyone think the president will actually propose any of these?  Nah... didn't think so.

But Lawyers Are?

I will leave it up to the inimitable Steven Landsburg (just picked up his latest book) to address the bad economics in this Paul Krugman post, but I was most interested in the anti-business bias.

A brief thought on something I’ll try to expand on later. Leaving aside all the questions about what Mitt Romney did or didn’t do at Bain — and about his self-aggrandizing double standard — there’s an even broader question: why does anyone believe that success in business qualified someone to make economic policy?
For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

Well first of all, nobody claims that businessmen are experts on macroeonomics and monetary policy, but in general they at least have an idea in how to lead large organizations and how the economy works.  Right now we have a government run by lawyers.  Over half of the Senate are lawyers, every Democratic presidential and vice presidential candidate since 1984 has gone to law school (Al Gore, the Nobel Prize winning intellectual of the left and creator of the Internet dropped out, shortly after flunking out of law school).

So having someone with some experience in the real world, outside of government or the court room, is not a bad thing.  There aren't really any good jobs to prepare for being president anyway, aside from being a governor, which is why most presidents are former governors.  A first term senator getting elected to the presidency is actually quite rare, for a reason.  Romney being both a governor and successful businessman certainly demonstrates more experience than our current part-time law professor/community organizer in chief.  Now you can definitely make some arguments against voting for him based on policy, but that is another topic.

Democrats Against Democracy

Aside from this whole thing where Obama simply ignores the constitution by pretending that Congress is in recess, the fact that liberals support the CFPB because it is protected from democracy is disturbing.  Can our system be corrupt and self-serving at times?  Sure, but it is the best we got.  Creating government entities which are immune from control by elected from officials and which rely solely on the virtues and judgement of bureaucrats, is, dare I say, fascist.

The bigger question is why Republicans oppose an agency that would stop financial companies from cheating and taking advantage of ordinary Americans, which happened to millions during the mortgage mania. They complain that the current setup leaves the bureau "unaccountable" to the American people, in part, because its funding comes automatically out of the Federal Reserve's budget rather than through the congressional appropriations process.
Unfortunately, the interests of the American people and individual members of Congress are not always one and the same. The funding mechanism was created precisely to remove the power of the purse from the industry's handmaidens in Congress. During 2007 and 2008, the height of Wall Street excess, conservatives cut the funding for the Securities and Exchange Commission, whose job it was to patrol the markets. They apparently want the ability to deny the Consumer Financial Protection Bureau the means to stand between the unscrupulous financial salesmen and their unsophisticated prey.

I Blame Paul Krugman

Well since the Nobel Laureate already set a precedent for accusing people you disagree with politically of motivating crimes, then I will start trying to connect his anti-banking rhetoric and support of the Occupy Wall Street crowd to this attempted fire bombing of a bank in Seattle.

 Seattle police arson/bomb-squad investigators and the FBI are trying to determine who left an incendiary device at a Southeast Seattle bank early Friday.

The device, which one witness described as two bottles wrapped in tape in a box with wires, failed to ignite. Seattle police are calling the incident an attempted arson.

Police spokesman Mark Jamieson said that someone who apparently saw the device inside the secure ATM area at the Chase Bank, at 7100 Martin Luther King Jr. Way S., flagged down a patrol officer at 6:37 a.m.