Wednesday, July 18, 2012 - A New Tax System?

*NOTE: SPECIAL SURVEY EDITION. This week's edition includes an interactive survey. After you finish reading, please make sure to assess my plan and tell me what you think!

Taxes: Taxes are always a big issue in politics and public policy. However, right now there is a crescendo of agreement building in Washington that it’s time to make some fundamental change to our tax system.

The debate in Washington of late has been confined to the so-called Bush tax cuts, all of which are scheduled to expire at the end of this year. Essentially, should we extend all of them, none of them, or some of them? The erudite readers of these missives (that's you) have heard all of this before and know the arguments for and against the extension and all about taxing the "rich" and such. So, I won't repeat them here. Economists are unified in their predictions of recession if we are allowed to go over the “fiscal cliff” on December 31 and allow all of the tax cuts to expire and the sequestered spending cuts take effect. Those cries are not falling on deaf ears in Washington. I think that eventually all of the Bush tax cuts will be extended for somewhere between 6 months and one year. I don't know whether that vote will happen before or after the election, but I think the fragility of the economy necessitates this action and reasonable minds will prevail at some point.

But, no one is happy with the current tax system. And, no one is happy with the idea that there is no permanency to the tax code today and that so many elements of it expire every year. This adds a totally unnecessary uncertainty into the economy that hampers decision making and is one of the many factors restricting our growth. And frankly, lawmakers hate the fact that every year or so we are faced with the Hobson's choice of either raising taxes or allowing the deficit to rise. That is not a vote that any Republican or Democrat relishes taking. So, the 1 year or 6 month extension this year should be about giving us time to try to completely remake the tax code in 2013.

Many of you know that I am the only member of Congress with a Master’s Degree in Business Taxation (MBT). I received that degree from USC (Fight on!) in 1977. I am a CPA and once prepared tax returns for a living. At that time, I learned the Internal Revenue Code of 1954. We now have the Internal Revenue Code of 1986. I believe we may soon see the Internal Revenue Code of 2013.

But, what will that code look like? We ought to "reach for the stars" here. Let's not just tinker with the tax code and change it a little bit. Let's see if we can get 218 votes in the House, 60 votes in the Senate and the signature of whoever is president on a complete restructuring of the Code that would make it flatter and simpler.

It's actually pretty clear what to do on the corporate tax side. Eliminate a bunch of deductions and credits and get the rate down from the current 35% to hopefully 25%. Of course, the trick is getting that done. Every corporation will favor a lower rate, but most will fight to keep their deductions in favor of cutting the others. In my opinion, deductions should follow accounting principles. If they are greater than what we allow on a financial statement, then it’s some form of tax benefit. We may want to keep a few tax benefits for some industries (like manufacturing) to remain competitive in the world market, but most of them should go. And, we should allow US corporations to repatriate their overseas earnings without penalty.

The bigger issue, however, is what we do with individual taxes. Obviously, these are the taxes we all pay on our wages and investment income and such. But, the vast majority of businesses pay taxes under individual tax rates if they are formed as a "pass-through entity", like a partnership, LLC, subchapter S corporation or sole proprietorship. I have seen estimates that show roughly 1/3 of individual income taxes are actually paid on income from a business in one of those entities. So, that being said, the individual tax system is the one that will have the most impact upon economic growth simply because it affects absolutely everyone in one way or another.

Now, you have already read that I have a background in this area. Accordingly, this is not my first rodeo. For the last 6 years, Paul Ryan (R-WI), Jeb Hensarling (R-TX) and I have been the authors of a bill called the Optional Simplified Tax. It created a new, optional tax code with 2 tax rates and absolutely no deductions. It was optional (you could elect to continue to pay on the "old" system and rates) because we were unsure when we wrote it 6 years ago that the public was ready for this radical a change. I now think that the public has shifted some and is ready for radical reform. But, I have shifted some too.

Over the last 6 years, my thoughts on what a new, reformed tax system should be have changed. In fact, my thinking has changed in the last 6 weeks. The point in telling you this is to highlight that there is no obvious solution here, regardless of your particular political or economic philosophy. There are good arguments for and against different alternatives.

So, I'm going to present to you what, at this point in time, I would do with the individual tax system if I were king. And, I'm giving you the opportunity to vote right here on the major elements of it and tell me if you agree with me or not. I'll be interested to see what you all think. And, I'll also tell you in a future laptop how you all responded. Feel free to disagree with me. I may disagree with me after I think about it a little more.

So, here's my description of the JC Tax Code of 2013, Version 2.0:

• Eliminate all deductions except: charitable contributions, home mortgage interest and non-elective medical expenses. This will mean that we cannot get to a 25% income tax rate. It will have to be higher than that. I used to think that we should eliminate all deductions and take the lower rate and the added simplicity. But, I now have persuaded myself that it is important that individuals fund as many societal needs as possible through charitable activities rather than leaving them to inefficient and biased government allocation. Eliminating the charitable deduction would make that much more difficult. Medical expenses (other than cosmetic surgery and such) are a burden none of us want to spend money on. But if we have to, I think we should do it with pre-tax dollars - particularly when we return the control of medical care to the individual and take it away from the government by repealing Obamacare and replacing it with a system where we each have the freedom to make our own medical decisions. Finally, the home mortgage deduction has long been a staple of "The American Dream" of homeownership, and an integral part of our economy. If we eliminate it, homeownership will drop further, causing jobs and the economy to suffer mightily.
  
  
• Go to 2 tax rates: one for incomes below $100,000 (maybe 20% under this scenario) and a second for incomes above that (something like 28%). I know that the single "flat tax" rate has a guttural appeal to many of you. But, there is no way to implement a truly flat tax (and keep the total revenue collected about the same) without raising taxes on the middle class and cutting them for higher incomes. I do not share Obama's desire to punish the "rich". But, neither do I think that raising middle class taxes in order to achieve a top rate below 25% is a good trade-off.
  
  
• Allow corporations to deduct dividends from their income, but make dividend income taxable as ordinary income with no preferences to individuals. This is complicated stuff. Dividends are currently taxed at a maximum of 15%, but the dividend payment is not deductible to the corporation that pays it out.  I propose that we tax dividends like any other type of income at whatever the full rate winds up being, but allow corporations to deduct the dividend the same way they deduct interest payments on bonds. This will put debt and equity on an equal footing in corporate boardrooms as a method of raising cash. Which will mean more equity issuance and less debt. This is a good thing. And, we also eliminate the complexity of another "class" of income at the individual level.
  
  
• Eliminate any preferences for capital gains, except for non-depreciable assets held over 5 years. We have always defined capital gains as any gain from the sale of a "capital" asset. I propose that we change that. I propose that all gains on sales of anything held for less than 5 years are taxed at the same rate as any other income. I don't know why "trading" or other short-term income should get a lower rate than a salary or interest income. But, we do need a lower rate (maybe 10%) for sales of non-depreciable assets that have been held for 5 years or longer. There is a simple elegance to having all income, regardless of its character, taxed at the same rate - that would mean no preference for capital gains or anything else. I am romanced by such a prospect. But, the economic reality is that a high tax rate on the sale of long-term assets will discourage people from selling them and moving that asset to someone who will make better use of it, thereby creating jobs. So, I think a 10% rate on gains from the sale of non-depreciable assets held more than 5 years makes sense.
  
  
• Implement a minimum tax so that anyone with any income at all pays 2% of their gross income or a minimum of $100. You have probably read that over 50% of Americans now pay no income tax at all. A few of these are relatively wealthy people with all their money in tax-free municipal bonds. But, most are lower income people or people with a lot of deductions. In fact, 50% of Americans pay nothing at all for national defense, national parks, or the court system, in spite of the fact that they undoubtedly benefit from all of these services and more. Everyone who earns a paycheck or a dividend payment should participate in the funding of the basic elements of American government. The top 20% of incomes will still fund 67.9% of everything. But, everyone with income will participate in some way. Society succeeds when all pay and all benefit. Society fails when a few pay and most receive.

CLICK TO TAKE THE JOHN CAMPBELL 2012 TAX CODE, VERSION 2.0 SURVEY

This is serious and complicated stuff. The humor in the survey is injected to make it readable and to try to take some of the mouth-destroying dryness out of tax accounting. But, your answers will be taken seriously and this debate is very important.

I will let you know what you all have to say. Maybe you'll change my mind.......

Until then, drive fast and live free....

Monday, July 9, 2012 - Obamacare: The Good, the Bad, and the Ugly

Stephanopoulos: But you reject that it's a tax increase?

Obama: I absolutely reject that notion.......

Stephanopoulos:......That may be true, but it’s still a tax increase.

Obama: No, that's not true, George.

-Excerpts from an exchange between President Obama and George Stephanopouls in 2009. For the entire clip of the exchange, click HERE.

Obamacare: I am old enough to remember Harry Truman. No, not President Harry Truman. I am not quite that old! I mean the stubborn individualist who lived in Washington State at the base of Mount St. Helens when that volcano erupted in 1980. That Harry Truman refused repeated attempts by government authorities to evacuate him from the base of the mountain he loved. He was never seen again after the eruption and is presumed to have been buried in a deep lava flow. So, what does Harry Truman have to do with Obamacare? Keep reading. I will get to that.

When I sit down with my MacBook Pro to write, I take care to try and avoid trite and overused phrases or metaphors that, in my view, have ceased to have any literary punch. But, I'm going to use one now because it just fits too perfectly. In analyzing the Supreme Court's decision on Obamacare, I truly see “The Good, The Bad and The Ugly”.

First, the Good. The court nearly unanimously rejected the idea that it is constitutional for the federal government to force someone to buy something. Writing for the majority, Justice Roberts noted that the government cannot require someone to enter into commerce so they can then have that commerce regulated. The dissenting opinions, which believed in striking the entire law down, also reaffirmed this notion. This is actually a very good precedent and one which sets back the agenda of self-described "progressives" who want the government to compel us to do (and not do) all sorts of things. The court has ruled that the federal government cannot do that.

And, for the first time ever, a Supreme Court ruled that the federal government went too far in using the carrot and stick of federal money to force a state to do something. The federal government has been doing this for decades. States had to raise the drinking age to 21, for example, or lose federal highway funds. They had to enact seatbelt laws and have a speed limit no higher than 55 mph or lose federal funds. And, there are dozens more similar examples. None have ever been struck down by the court....until now. This court ruled that the threat to withhold Medicaid dollars from states if they did not move more people onto Medicaid rolls (and off of Obamacare) was ruled as overly punishing and prescriptive. The good news here is that, for the very first time, the court has said that there are limits on the extent to which states can be made to enact laws they don't want to enact for fear of being punished with federal money.

And, the final bit of good news was eluded to in our opening quote today. The Obamacare tax, which the President insisted was not a tax, is formally deemed to be a tax. Never again will a congress and a president be able to mislead the American people as President Obama and the Pelosi Congress did in 2009 by calling a tax a “penalty” or a “fee”.

Now, for the Bad News. As you all know, the biggest, baddest news is that Obamacare was not struck down by the court. And, calling the Obamacare tax a tax now is too late for those who supported it to have had to defend that position during the debate on the bill. So, they got away with it. More bad news is that the concept of the tax that the Supreme Court approved is disturbing in its own right. When we have taxed in this country, we have always taxed an action. If you earn income, you pay an income tax. If you buy stuff, you pay a sales tax. We have never before taxed the people for inaction. If you don't buy health insurance, we will tax you. Think about how pernicious this concept of taxing inaction could become. For liberals reading this, imagine that if you don't own a gun, you will be taxed. Many of you more liberal readers are saying, “Oh, that could never happen.” Are you sure? When freedom is lost, it can be lost to the forces of good or the forces of evil - however you perceive those forces to be. If you don't buy 2 servings of fruits and vegetables a day, you will be taxed. Under the Supreme Court ruling, the government could not force you to eat those veggies, but they can tax you if you don't buy them.

So, what's the Ugly? That is how this whole thing will progress from here. Already, the administration has admitted that various aspects of the bill are unworkable, including the so-called CLASS act, which would have created a new long-term care insurance program. That punched one hole in Obamacare. The unconstitutionality of withholding states' Medicaid money if they do not comply will punch another enormous hole in the bill. To give the illusion that socialized medicine works somehow, Obamacare required states to push a whole bunch of new people into Medicaid that would otherwise be on the roles of Obamacare. This was designed to shift higher costs to the states, which, in turn, would not be reflected in Obamacare when figuring the "cost" of the bill. (i.e. it was a way to hide costs) In order to make states take on this additional cost, the bill would remove all Medicaid funding from states that did not comply with this order. Now, because of the Supreme Court ruling, states don't have to comply and they will still get all their Medicaid funding. However, now, if states don't comply, millions and millions of new people will go on the Obamacare rolls without anyone to pay for them.

And, why would states comply? Remember, 26 states sued the federal government over this very issue. They won. You would have to expect that those 26 states will not choose to voluntarily assume billions of dollars in additional, unreimbursed costs just to help the President fund Obamacare. That alone will make the financials on Obamacare go from bad to worse. Leading Democrats in my home state of California are already praising the ruling and saying that California, of course, will voluntarily comply with this wonderful law. In addition to the added direct costs that this position implies, it also will make California even more of a magnet for people from other states who want free stuff. In other words, more people on government assistance moving in and more people of accomplishment moving out of California. This will all hasten the coming insolvency of my home state.

But, back to Obamacare. The tax, now affirmed as a tax by the Supreme Court, is $750 a year. It is assumed that millions of Americans will pay this tax and go on free Obamacare because it is still a lot cheaper than buying health insurance. This bill was never going to work even if it operated as planned. But, now the wheels are literally coming off. It will collapse of its own weight because many of the fragile and unstable underpinnings have formally been removed now.

But, as it collapses, it will take jobs and the economy down with it. This will make us long for deficits of only $1 trillion, as our new deficits will balloon with all the free health care doled out with little revenue to offset it. (AND, you can confiscate all income of $250,000 and it won't come close to paying for Medicare, not to mention Obamacare. So, don't pretend that is a solution) That's why the House will vote this week to completely repeal Obamacare. That repeal will pass the House with, I would think, all Republicans and a few dozen Democrats voting in favor. But, the Senate will not pass it and the President will not sign it. To change that, you have to send us a new senate and a new president in November.

In closing, I return to Harry Truman. Why did I begin this missive with the crusty fellow from Mount St. Helens? I would not want to have lived Harry Truman's life nor would I have made the decision he did in advance of that volcanic eruption. But, one of the hallmarks of America is that an individual here has the freedom to live the life he or she wants, not the life someone else insists he or she have. Harry Truman didn't ask for anything. He didn't want anything...except to be left alone. To live his life on the side of that mountain, and to make his own decisions in the face of impending threats. But, now it appears if Harry Truman does not buy health insurance, IRS agents will go find him wherever he is and tax him, even if he has no income. And, perhaps in the future, if Harry doesn't own a gun or buy 2 servings of vegetables, they will hunt him down and tax him more. Just like that lava flow, Harry can't escape the conscription of the federal government even alone with his 14 cats in the wilderness.

The Harry Trumans out there lost some freedom on June 28. We all lost some freedom on June 28. We did not lose it at the point of a sword, as has often been our fear. We lost it at the point of a pen. We cannot allow the pen of compulsory action, socialism and statism to prevail, or the "progressives" will rob us of freedom more slowly, but every bit as inexorably as the sword.

Wednesday, June 27, 2012 - Lessons from Europe

Lessons from Europe: Unless you have been hiding in Attorney General Eric Holder's "Fast and Furious" documents file, you know that trouble is brewing in Europe. Big trouble. Real big trouble. None of us know where it will go from here. But, I can see no good outcome. The experiment of monetary union without fiscal or political union has failed. Most of the solutions they are now discussing will simply delay the inevitable. Using debt that you have no plan to repay in order to pay other debts that you can't repay doesn't work with mortgages and will not work with governments. And, it is hard to even describe the political challenges they have over there. Look at the gridlock we have here with one country, one culture and 2 political parties. Now, imagine having 17 countries, dozens of cultures and a hundred political parties. I think you get the point.

Whenever the European crisis hits and however it is manifested, the US will be affected. It could affect us in a small way or a big way. That is impossible to predict at this point. It is also not possible to predict when it will hit, as doing so involves the collective actions of investors and politicians and companies across the globe. I can assure you that in Washington we are doing at least one thing on a bipartisan basis: We are trying to get ready to meet whatever challenges Europe may throw at us.

But, there is a way that we can actually benefit from the problems in Europe. And, that is to learn from their mistakes. I have oft repeated that in my business career (prior to losing my mind and going into politics) I learned more from hearing about others mistakes than I did about their successes. The successes seemed to involve sets of circumstances that I just could not replicate in my business. But, when I saw how the once mighty fell, I realized that those mistakes were easy to repeat and they would lead me to a similar miserable outcome. "Now I know what NOT to do," I would tell myself. I am a better person for having learned such lessons.

Well, here are 4 lessons we can learn from Europe. This is a list of what NOT to do. Unfortunately, each of them is still on somebody's "to do" list in Washington:

1. Socialism Does Not Work: It has now been tried in multiple countries for multiple decades and it has never worked. Describing socialism’s faults, Lady Maggie Thatcher once famously quipped that eventually, "you run out of other people's money.” Sir Winston Churchill more famously said, "the inherent virtue of socialism is its equal distribution of misery". And, economist Milton Friedman made it clear that it is senseless to tax the middle class in order to give them their own money back in inefficient government services that they could afford to buy themselves. Socialism in Europe and in this country always starts the same way - promise people free health care and free retirement and free housing and whatever free stuff wins political favor. You claim that the "rich" will pay for this. But, the problem is that the rich do not have enough money. They have enough to pay for those free services for the very poor, but not for everyone. So, the socialists borrow the money. That way, they are still giving the populace free health care. But, at some point you can't borrow the money anymore because the people you are borrowing it from realize that they can never be paid back. This is the tipping point at which socialism fails. Past this point, you have to tax the people to whom you promised the "free" stuff in order to pay for their "free" stuff (those people are the middle class). The people suddenly realize that, “Hey, it’s not free if you tax me to pay for my 'free' health care.” In fact, the middle class understands they are far better off taking their own money and buying their own health care than having the government give them bad service at a high price. Europe is currently at the stage where they have run out of other people's money to pay for their socialism. "Austerity" is the politicians there telling the people that the stuff we promised you for free is really not free. The people understandably don't want to give up their free stuff or have to pay for it. But, they will have to do one or the other. And, an entire generation will suffer for having tried the failed model of socialism only to watch it fail again. We must not make the same mistake. “Obamacare” will hopefully be overturned or repealed. Medicare taxes currently only cover 1/3rd of Medicare costs and we currently borrow the difference (which means it’s "free" right???) And, the metrics only get worse with each passing year.
   
   
2. Don't Wait Too Long to Fix it: Many of the debt problems of European countries were apparent years ago. But, they kept putting off the solutions for reasons explained in item number 1 above. As a result, they got to a point at which the depth of the problem had eliminated the efficacy of most possible solutions. We have a debt problem. The problems in Europe have actually bought us some time as we remain "the cleanest shirt in a dirty laundry bag". But, not much time. Our deficit has ballooned under Barack Obama. The government has spent into a trillion dollar deficit in every year of Barack Obama's presidency, and will continue to do so under his own budget proposal. This cannot happen or we will descend into decades of economic darkness and reduced living standards. We need to get on it now. 
   
   
3. Don't Try to Fix it All at Once: Democrats in Washington decry the “austerity” programs in Europe for being responsible for plunging European markets into recession. They are half right. They are missing the message of the previous two points as to why Europe had to turn to “austerity”. But that major issue aside, it is correct that Europe, because it waited too long, is now trying to fix its problems overnight. That is not working either. Big spending cuts and big tax increases thrown at a fragile economy will trigger recession. It has already done so in Europe and it will do so here. We should not fix our deficit in one year, even if we could find the political will to do so. We should move to a balanced budget over 5-8 years with a combination of cuts, reforms and growth. The economy would not adapt well to the shock of pulling $1.3 trillion out of it in one year right now. And, if we take our time, the markets will react very favorably to the fact that we have and are implementing a plan to balance the budget over that period. Because markets are anticipatory, they will act as though we have already done it. And, compared to the rest of the world, we will have done an amazing thing.
   
   
4. Don't Fool Yourself: Some of you right now are about to hit your "reply" button to tell me how socialism and such in Germany has worked and ask why can't we be more like them? But, you are missing something. The Euro has been enormously helpful to Germany because it allowed the citizens of Greece and Spain and other less productive countries to buy German goods using an overvalued currency. If Greece (or any other country for that matter) leaves the Euro, their new valueless currency will greatly reduce the wealth of their population and they will buy a lot fewer German goods. Germany has been in a bubble supported by the Euro, which undervalued German goods and overvalued the ability of others to buy them. Assuming this bubble bursts, German output, and therefore their social programs, will also come under strain. They will be the last country in continental Europe to feel the pain, but they will feel it. We should never fool ourselves into false security when the basis of our security is unstable.

Europe is in trouble. The United States will follow them into trouble if we follow their path. Barack Obama wants to take us down that path. He could not be more wrong.

Wednesday, June 20, 2012 - Recapping "FIX IT"

Recapping "Fix It": As most of you regular readers know, I have just finished my “Fix It” Series; a nine-part, comprehensive proposal for how to cultivate two new decades of American hegemony, prosperity and growth. I really appreciate all of the responses and the overwhelming support I have received from you for my ideas.

Some of you have recently subscribed to my “Laptop” and may have missed several of the earlier “Fix It” episodes. Others have asked if there is a way to view all of the episodes at once.  So, in order to make all of you happy, I’ve placed the entire series on my website (www.campbell.house.gov) on one main page with links to every episode. This page can be accessed directly by visiting www.campbell.house.gov/fixit.

Or, you can just click the picture below:

The "FIX IT" Series: Solutions for Renewed Prosperity in America

By the way, you can access every “Laptop” I’ve written in Congress on my website under the Laptop Report section.