Thursday, November 8, 2007

Fact Check: Ron Paul

In the November 8, 2007 Washington Post article "Ron Paul Faces $1.1 Trillion Budget Shortfall," Michael Dobbs checks the facts on some of Ron Paul's campaign claims and finds distortions.
"You don't have to get rid of all of the government. If you got rid of the income tax, you would still have enough revenues which were about equivalent to what we had in the year 2000."
--Ron Paul, Jay Leno TV show, October 31, 2007.

"I realize that Ron Paul doesn't lie enough to make for entertaining reading on this site, but at least put his name on the Candidates' list."
--Aaron Hanson, Ron Paul supporter from Minneapolis, message to the Fact Checker, November 7, 2007

Ok Paulites, we hear you. Your man has not been getting enough MSM attention. A candidate needs at least three Pinocchios from the Fact Checker to be taken seriously in the 2008 campaign. Now that Paul has raised more money on-line in a single day than any other candidate in the current election cycle, he deserves a good, hard look from the fact-checking fraternity. So what have we got?

The Facts

It took us about five minutes to find a questionable statement from the good doctor. We began with last week's Leno interview, which can be found on You Tube here. Expounding on his proposal for abolishing the income tax, Paul claims this would still leave the U.S. Treasury with roughly the revenues it had in 2000, in the final year of the Clinton administration. A post on the Paul campaign website explains that individual income taxes account for "approximately one third of federal revenue."

Unfortunately for the tax slashers, the one-time Libertarian candidate for president is wrong on both counts. According to the Congressional Budget Office, individual income taxes represent between 45 and 49 percent of federal tax revenues, depending on the year. For financial year 2007, total receipts from individual income tax were in the region of $1.1 trillion dollars. If you eliminated all that revenue, the federal budget would shrink to the size it was around 1995.

Take a look at the following chart, compiled from figures supplied by the U.S. Treasury and the Congressional Budget Office. You can find the latest budget figures for 2007 here, and the historical tables here. Imagine the revenue crunch that would result if the orange line federal income tax expenditures were eliminated, in accordance with the Paul plan.

Could America exist without an income tax? Here is Ron Paul's answer:

"The idea seems radical, yet in truth America did just fine without a federal income tax for the first 126 years of her history. Prior to 1913, the government operated with revenues raised through tariffs, excise taxes, and property taxes, without ever touching a worker's paycheck...Does anyone seriously believe we could not find ways to cut spending back to 2000 levels? Perhaps the idea of an America without an income tax is not so radical after all."

The $1.1 trillion in receipts from individual income tax represents the entire discretionary spending of the federal government, according to Roberton Williams, a budget analyst at the Urban Institute. That does not include social security and Medicare spending, which is mandatory, but it does include the entire defense budget, federal education spending, agriculture subsidies, and so on.

"It's a non-starter politically," said Williams. "I don't think it has a snowball's chance in our climate, much less a warmer climate."

In attempt to figure out where the $1.1 trillion in annual savings is going to come from in a Paul administration, I talked yesterday afternoon to the candidate's policy director, Joseph Becker. He pointed out that Paul has promised to bring troops home from Iraq and Afghanistan, eliminate the foreign AID bill, eliminate agriculture subsidies, and get rid of the U.S. Education Department. A President Paul would, however, leave a residual miitary in place, to defend the homeland.

The Pinocchio Test

Do Ron Paul's figures add up, or is this a prime example of voodoo economics? Let us know what you think.

The candidate appears to be off by at least four-five years on the shrinkage that would be caused to the federal budget if income taxes were eliminated. Paul has not explained how he is going to plug the $1.1 trillion annual shortfall. Becker has promised to supply us with a pie chart, detailing precisely what parts of the federal government will be eliminated under a Paul administration, together with the savings gained. We will post the pie chart when it arrives.

As a courtesy to a newcomer to this column, we are giving the Paul campaign a short grace period to show us their calculations. This gives us an opportunity to unveil our snappy new VERDICT PENDING icon.

Tuesday, September 11, 2007

Crank Politics

Jonathan Chait is the author of the 2007 book, THE BIG CON: The true story of how Washington got hoodwinked and hijacked by crackpot economics. In the September 11, 2007 article "Crank Politics," Paul Krugman responded:
There’s only one word to describe Jon Chait’s book: shrill. I mean, how can Chait say that “American politics has been hijacked by a tiny coterie of right-wing economic extremists”? The cocktail-party circuit knows better. As Peter Beinart, the then editor of The New Republic, wrote in his review of my 2003 book The Great Unraveling, “guest lists that cross ideological lines can help liberals understand the conservatives they write about. And many Washington conservatives genuinely don't see the Bush administration as radical: they see it as having ratified a big-spending, culturally liberal status quo.”

OK, end snark. Obviously I agree with just about everything that’s in Jon’s book. I cover some of the same ground in my own forthcoming book, The Conscience of a Liberal, though in much less detail. I’d like to take this conversation in a slightly different direction by talking about the second part of the book, on the political environment that lets crackpot economics flourish; Jon’s description is correct, but, I think, somewhat incomplete.

First, supply-side quackery is only one of the gambits used to sell tax cuts.

There are other, older versions – notably the claim that government is wasting your money on vast armies of useless bureaucrats. Way back in 1964, in his famous speech on behalf of Barry Goldwater, Reagan talked about how crazy it was that the federal government employed 2.5 million civilian workers; nobody pointed out that two-thirds of those civilians worked either for the Pentagon or for the post office.

Second, Jon talks at some length about the media, and in particular about the Republican ability to get journalists to harp endlessly on supposed character flaws of Democrats, while their own candidates get a free pass. He emphasizes the right-wing echo chamber, but there’s more to it than that. It’s also – as I can report from my own experience – a result of asymmetrical intimidation. Quite simply, if you point out character flaws in a conservative, there will be an all-out effort, involving major media as well as blogs and talk radio, to discredit and ruin you, personally. This just doesn’t happen on the other side.

So journalists feel that it’s safe to ridicule Democrats, even if the supposed character-defining episode never happened; they choke up and shy away when it comes to Republicans. That’s why even the most grotesque stuff, like Giuliani’s claim that he’s a rescue worker too, or Romney’s remark that his sons are serving the country by helping him become president, doesn’t get picked up.

Third, I’m surprised that Jon doesn’t talk at all about the key political role of race in the political shift in this country. Reagan didn’t start as a supply-sider: he started as the enemy of welfare queens in their welfare Cadillacs. And what I’ve learned from Larry Bartels, Tom Schaller, and other political scientists is that race is really central to the whole thing. Here’s a preview quote from my own book:

“The overwhelming importance of the Southern switch suggests an almost embarrassingly simple story about the political success of movement conservatism. It goes like this: thanks to their organization, the interlocking institutions that constitute the reality of the vast right-wing conspiracy, movement conservatives were able to take over the Republican Party, and move its domestic policies sharply to the right. In most of the country, this rightward shift alienated voters, who gradually moved toward the Democrats. But Republicans were nonetheless able to win presidential elections, and eventually gain control of Congress, because they were able to exploit the race issue to win political dominance of the South. End of story.”

Wednesday, August 29, 2007

Be Fair to the Fair Tax - A Rebuttal from Its Supporters

Be Fair to FairTax -- Throw the Red Herrings Back in the Water
August 29, 2007; Page A13 of The Wall Street Journal

It is apparently getting so difficult to defend the current income tax system that its guardians must use smear tactics to slow down its best replacement. Bruce Bartlett ("FairTax, Flawed Tax," editorial page, Aug. 25) is the latest status quo defender to use fiction to slander the FairTax plan.

The FairTax was developed many years ago, totally independently of any other proposal, group or movement. It is a product of more than $20 million of advanced economic research, as well as detailed conversations with citizens as to their preferences defining the best possible national tax system. Many groups and individuals have agitated to replace the deeply flawed income tax system, including, apparently, the Church of Scientology. As a founder of Americans For Fair Taxation, I can state categorically, however, that Scientology played no role in the founding, research or crafting of the legislation giving expression to the FairTax.

Mr. Bartlett is equally wrong about many other aspects of the FairTax. We are disappointed but hardly surprised by such distortions about it coming from the very economist who once opined that the income tax system just needed a little "tweaking."

Leo Linbeck
Chairman and CEO
Americans for Fair Taxation

My guess is that few readers made it with an open mind past Mr. Bartlett attributing the FairTax's origins to the Church of Scientology. That organization may have a similar proposal or a proposal with a similar name, but I know for certain that the mainstream FairTax proposal found at has no connection to it.

I know this because the two principal founders of the FairTax movement, Leo Linbeck and Bob McNair of Houston, are friends of mine who served on my board at the Dallas Fed. I was there as they began to develop their proposal in the mid-1990s. I watched them pitch their fledgling idea to their friends and business associates, and I watched them urge prominent economists to do independent research on their proposal. I even accompanied them to San Francisco to pitch it to Milton and Rose Friedman. (I still remember Rose's homemade cookies.)

We should give the FairTax a fair chance. In fact, I posted a blog with that title a few weeks ago. See A fair chance means a thorough evaluation and discussion of its merits without the distraction of a red herring.

Bob McTeer
Distinguished Fellow
National Center for Policy Analysis
Former President of the Dallas Fed
Frisco, Texas

The FairTax would replace the federal corporate and individual income tax, payroll taxes and the estate and gift tax with a 23% national retail sales tax on all goods and services. Each household would be provided with a monthly prebate equal to the sales tax rate times the federal poverty level plus a small extra amount in the case of a married couple to prevent a marriage penalty.

The FairTax bill (H.R. 25) was developed by economists, business people and tax lawyers who understood that the current tax system is dysfunctional. Specifying the criteria by which successful reform should be evaluated, they engineered the tax around the notion that reform should minimize the adverse growth effects of the tax system, be neutral between debt and equity, consumption and savings, and among industries, should reduce compliance burdens that waste more than a quarter trillion dollars today, respect civil liberties instead of requiring Americans to reveal virtually every aspect of their lives to government, eliminate favoritism shown imports and remove the penalty on exports, enhance the competitiveness of the U.S. as an investment destination and a location for headquartering businesses, eliminate the bias against upward mobility, and increase transparency and comprehension of the tax system.

Mr. Bartlett questions economic claims that under the FairTax proposal the gross domestic product will rise 10.5%. In fact, Arduin, Laffer & Moore Econometrics estimates GDP gains up to 24.4% greater than under the current system by the 10th year. Michael Boskin, former chairman of the Council of Economic Advisers, estimates long-term gain to GDP from a consumption-based tax reform would be about 10%. Laurence Kotlikoff estimated a 7% to 14% increase in GDP. Many others find high single digit to low double digit gains. Lowering marginal rates and eliminating double and triple taxation of savings will increase the well-being of the American people by a trillion dollars per year and perhaps much more.

The FairTax would untax existing homes that represent three-quarters of all homes bought and sold. And by allowing mortgage interest payments to be paid with both pre-income and pre-payroll tax dollars, the tax is the equivalent of allowing mortgage interest to be deductible against payroll taxes today. Interest rates will drop by 25% for the same reason municipal bond rates are lower than taxable bond rates. Interest would not be taxable to the recipient. And of course there is the benefit of having the only developed economy in the world with a zero rate of tax on income.

Dan R. Mastromarco
David R. Burton
Alexandria, Va.

(Messrs. Mastromarco and Burton are principals in the Argus Group, a law and government relations firm.)

Sunday, August 26, 2007

The Fair Tax is a Flawed Tax

In the August 26, 2007 Wall Street journal editorial "Fair Tax, Flawed Tax," conservative Bruce Bartlett asks "Does adding 30% to the price of every house sold sound like a good idea to you?"
Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other (This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are, so that its supporters can claim that it is revenue-neutral. But for the government to afford to purchase the same goods and services, it would have to raise spending by the amount of the tax it pays to itself. The FairTax rate, however, is not high enough to finance the higher spending it imposes. Therefore the proposal only works if federal purchases are cut by 30%, close to $300 billion--the increased cost imposed by the FairTax.

Similarly, state and local governments would have to pay the FairTax on most of their purchases. This means that it is partly financed by higher state and local taxes. It's also worth remembering that state sales taxes now average 6%, which means that the total tax rate will be 36% on retail sales.

State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly.

Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% to the federal government on top of the purchase price of your next house.

Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income.

Aside from the incredible complexity and intrusiveness of tracking every American's monthly income--and creating a de facto national welfare program--the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.

Rejecting all the tricks of FairTax supporters and calculating the tax rate honestly--by including the higher spending that it mandates and by being realistic about what could actually be taxed--professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.

A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).

I've emphasized problems with the FairTax rate because public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%. But there are also massive technical and administrative problems with collecting all federal taxes at the checkout counter and relying entirely on state governments to collect the federal government's revenue.

Among the problems: What possible incentive would the states have to be vigorous in their federal tax collections? What is to stop them from slacking off and giving their citizens a tax cut at federal expense? What about states with no sales taxes? What's to stop people from bypassing retail outlets and buying their goods from producers or at wholesale, tax-free?

Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.

Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

Mr. Bartlett was deputy assistant secretary of the Treasury for economic policy from 1988 to 1993.

Wednesday, March 28, 2007

Ken Wilber - Integral Politics

According to the YouTube video "Ken Wilber - Integral Politics":
At the recent 5-day Integral Institute seminar on Integral Business Leadership,
Ken Wilber was asked, by a senior Zen teacher, "What do you think of the Republican convention?"

Ken responded by giving an overview of what a truly integral politics might look like, and used that to compare and contrast with the Democratic and Republican conventions, both of which are less-than-integral. We think that this twenty-minute summary is brilliant, insightful, deadly serious, and wickedly funny, all at once. But by all accounts it is an extraordinary account of why all politics today are considerably less-than-integral, along with certain features that almost certainly would have to be included in the future in any truly integral politics.

In this synopsis, Ken focuses on three items that all political theories have attempted to address but none have managed to fully integrate. These are the tension between (1) the individual and the collective; (2) the source of the cause of human suffering: is the individual primarily to blame or is the society primarily to blame?; and (3) the different levels of development that the different political parties tend to represent: any truly integral politics would include and represent all of them, and yet how on earth do you do that?

Due to time considerations, Ken did not discuss two other equally important ingredients in any integral politics. One. In representational democracies, people have a right to be at whatever stage of development they are at, and generally speaking, within free speech, a right to express the values of whatever stage they are at. Traditional-fundamentalist (blue) has a right to be traditional, modernist (orange) has a right to be modernist, postmodernist (green) has a right to be postmodernist, and so on. This is generally modified in practice, to the extent that the center of gravity of a culture will tend to impose its values on others, especially if they are first-tier (or less-than-integral) values. Nonetheless, in democratic societies, there's a general background understanding that people have a right to be, and a right to express, whatever stage they are or whatever belief system they possess.

Two. They do not, however, have a right to act on those beliefs. This is generally handled in representative democracies by a separation of public and private, and by a similar if more specific principle of the separation of church and state. This means that, for example, in the privacy of my blue-meme mind, I am free to believe that Jesus Christ is my personal savior and that nobody achieves salvation without a belief in Jesus. In public behavior, however, I am not allowed to burn at the stake somebody who disagrees with me. In terms of integral psychology, this means in the interior of an individual (i.e., the upper left), the person can believe whatever they like; but in their public behavior (i.e., the upper right), they must behave according to laws drawn from a worldcentric or higher level of development (lower left), or else they are charged with civil or criminal behavior and removed from society if necessary (lower right).

This separation of church and state, or more generally what Max Weber called the differentiation of the values spheres, is one of the great and enduring contributions of the Western enlightenment, a contribution almost entirely misunderstood by extreme postmodernists, who in fact are operating under its protection while bitterly condemning it.

(The most common version of this is the aggressive attempt to reduce "I" and "It" to "We,' or the attempt to reduce art and science to a social construction, which can therefore be deconstructed. As it turns out, this reductionism presumes precisely what it denies, but then, deconstructive postmodernism has been little without its performative contradictions.)

A truly integral politics exists nowhere on the planet at this time, principally because not enough individuals have emerged at the integral levels of consciousness, and hence no governments anywhere have integral representatives as members (except rarely and by accident). Its principal challenge is to create some form of governance that allows each stage to be itself within the constraints of not harming others (i.e., to let red be red, and blue be blue, and orange be orange, and green be green, etc—precisely because, as we saw, this is a right in virtually all free societies), and yet to govern from the highest, widest, deepest, and most encompassing levels of development emerged to date (starting at yellow). Most representative democracies do this anyway, except their center of gravity is not yet fully integral, and they do it implicitly, not explicitly.

Click here to read more about Ken Wilber and Integral Theory. or see "Ken Wilber - Integral Vision."