Tuesday, September 21, 2021

Who Bears The Burden Of Taxes on Business?

On August 13, 1996, during the Republican National Convention, a panel was held in honor of candidate Steve Forbes.  I was invited to serve on the panel discussing Forbes’s tax plan, which was a slight modification of the original Hall-Rabushka flat tax.

Art Laffer, of Laffer Curve fame, was also on the panel.  He told a story about the impact of taxes on business.  I don’t know if it originated with Laffer or if he got it somewhere else.

 

Given the plethora of taxes that Biden and the Democrats want to impose on business, this is a good time to tell the story.

 

We all know about Robin Hood.  Few of us know that Robin had a twin brother, Robert who lived in a medium sized medieval town surrounded by prosperous farmers.

 

Robert was politically ambitious.  He wanted to be mayor.  He concocted a scheme that he thought might succeed.

 

Every year, about the same time, an itinerant merchant would come to town to buy goods for cash (silver coins) to sell to people in other towns.  Robert waited around the last bend on the road to town.  When the merchant came into view. Robert set upon him and seized his saddlebags of silver coins.

 

Robert returned home and called a meeting of the townsfolk and farmers.  He said he would give each of them a packet of silver coins equal to a year’s income if they elected him mayor.  And so, he was.

 

A year rolled around and Robert needed money to buy votes to be reelected.  Again, he hid behind the last bend in the road and robbed the unwary merchant.  He doled out the silver and was unanimously reelected.

 

Another year came to pass.  Robert waited for the merchant and seized the saddlebags.  To his dismay, they were empty.  Robert asked the merchant how he planned to buy goods without money.  He replied, “on credit.  I will write an IOU to each person and promise to repay them after I have sold the goods.”

 

Robert returned home and told the townsfolk he had no money.  They were extremely angry, grabbed him, tied him up, tarred and feathered him, mounted him backward on a donkey, and exiled him from town.

 

The problem?  After two years of free money, the craftsmen in town stopped working and the farmers stopped planting.  That winter many died from starvation and all the craftsmen lost their businesses.  No one had any money to buy what they needed to survive.  The merchant had changed his behavior and the craftsmen and farmers paid the price.

 

It took many years for the town and neighboring farmers to recover and all was well again.

 

But memories are short, especially after the older generation passed away.  Fifty years later, another ambitious politician arose with similar ideas.  You already know the end of the story.  “When will they ever learn?”

 

It seems never.  So here we are again, with politicians promising free money by only taxing rich merchants.

Wednesday, September 15, 2021

Stanford Votes 93.5% NO To Recall Governor Gavin Newsom

Altogether, 3,369 faculty, staff, and students and their partners who live in Stanford Campus Housing are registered to vote in the precincts that make up the University’s exclusive 94305 zip code.  Santa Clara County reports the results for Stanford in precincts 2542 and 2543.  I combine them into one comprehensive result for 94305.

Statewide, 48% of registered voters turned out to cast their ballots.  Of those, 64% voted NO.

 

Turnout at Stanford was slightly higher at 52% of registered voters.  Of those, 1,864 (93.5%) voted NO and 140 (6.5%) voted YES.  This result is similar to Stanford percentages for Hillary Clinton in 2016 and Joe Biden in 2020.  The final numbers may change slightly as ballots postmarked  September 14 or earlier can be counted for seven days through September 21,  and are added to the totals.

 

I want to commend Stanford President Marc Tessier-Levigne for stating that Stanford values diversity of political opinion along with all other forms of diversity.  But those in charge of hiring faculty, staff, and admitting graduate students have not achieved much diversity of political opinion in their schools, departments, and staff.

 

Quelle surprise!  It is important to talk about diversity of political opinion.  It is hard to accomplish it  in hiring.  The University’s principal agenda is recruiting women and people of color, who are nearly uniform in their Democrat/liberal political outlook.

Tuesday, September 7, 2021

Both Left And Right Agree That Democracy Nation Building Is Failing

On September 1, 2021, Michael McFaul tweeted “That the US benefits more from democracy in the world does not mean that American leaders today have the ideas or means to promote democracy abroad.  After fourteen years of democratic recession worldwide we should be humble in our proclamations & ambitions.”  McFaul served as adviser to President Obama, US Ambassador to Russia, is Director of the Freeman Spogli Institute at Stanford (which houses the Center for Democracy, Development, and the Rule of Law), Professor of Political Science at Stanford, and Hoover Institution Senior Fellow.

On September 5, 2021, Peter Berkowitz wrote in a Real Clear Politics column that “promoting democracy and freedom are beyond America’s capabilities…”  Berkowitz served as Director of Policy Planning at the U.S. State Department under Trump and is a Hoover Senior Fellow.

 

Democracy specialist Larry Diamond has chronicled the growing democracy recession to which McFaul refers.  Diamond spent time in Iraq after Hussein was overthrown, headed the CDDRL for nearly a decade, and is a Senior Fellow at both Freeman Spogli and the Hoover Institution.

 

McFaul recommends that NGOs be given priority in helping autocracies with health care, education and other social services.  Berkowitz suggests that U.S. foreign policy should not threaten autocracies with regime change, but rather encourage them to allow more economic freedom and civil liberties.

 

Diamond blames the democracy recession since 2015 primarily on President Trump.  He recommends some changes, such as weighted voting, but places top priority on stopping Trump from regaining the White House.  He argues that the U.S. must focus on restoring its own democracy before it can advocate it abroad.

 

Condoleezza Rice’s 2017 book, Democracy:  Stories From The Long Road To Freedom, examined six cases of democracy nation building.  Between the time she started her research and  the date of publication, three of the six were disintegrating.  Rice served as National Security Advisor to President George W. Bush, Secretary of State in the Bush Administration, and is currently Director of the Hoover Institution.

 

McFaul recommended that President Biden establish a Cabinet-level Department of Democracy.  President Biden recently announced that the White House will host two International conferences this December and next to study democracies and then implement a carefully-developed program to promote democracy nation building.

 

The effort to build democratic nations took off with decolonization in the 1960s.  It has since grown into an industry of academic and think tank centers, NGOs, and international organizations supported by Western governments.  Thousands of people have participated and millions of dollars have been spent in this effort, with diminishing results.

 

Nearly fifty years ago, Harvard Professor Kenneth Shepsle and I coauthored Politics In Plural Societies:  A Theory of Democratic Instability (1972), reissued with a Postscript in 2008.  The book is available for free download here.  If the above-mentioned individuals have not read the book, perhaps they might read it as they refashion their ideas on the hazards and pitfalls of democracy promotion.

Wednesday, August 25, 2021

Getting Ready For the Democrat Party’s Tax Increases

Assuming the Democrat Party’s $3.5 trillion spending plan passes Congress later this year, it will include several tax increases.

While we wait for the details, I would like to remind readers of a true story, which illustrates the difference between persons or firms that appear to be paying taxes and those who really bear the burden, the incidence, of taxes.

 

In November 1991, Congress enacted and President George H.W. Bush signed a 10% luxury surcharge tax on new boats over $100,000, cars over $30,000, aircraft over $250,000, and furs and jewelry over $10,000. The tax was called a “luxury” tax because it was to “tax the rich.”  The government estimated it would raise $9 billion over the following five years to reduce the budget deficit

 

Take new boats.  Assuming boat builders could not reduce the price of new boats overnight, a boat that previously cost $100,000 would now cost $110,000.  A rich buyer of a $110,000 boat would appear to pay the $10,000 luxury surcharge.

 

Buyers who were willing to pay $100,000 for a new boat might not be willing to pay $110,000.  How many might that be?

 

To the shock of boat builders and their employees, the number was huge.  Buyers literally went on strike, refusing to pay the luxury tax.  Sales of luxury yachts fell precipitously.  Firms fell into the red and many employees were laid off.

 

Who bore the burden, the incidence, of the 10% luxury surcharge tax on boats?  Almost all was borne by boat builders and their employees.  Very little was borne by consumers who topped buying them.

 

The tax caused a loss of jobs in New England, hitting Senate Majority Leader George Mitchell’s home state of Maine very hard.  In August 1993, the tax was repealed at the urging of the yacht industry.


When you read analyses which claim that the incidence of the Democrat Party’s tax increases will fall largely on the rich, keep this example of the 1991 10% luxury surtax on boats in mind.  What appears to be a tax on the rich may, in fact, turn out to be a tax on middle- and lower-middle income households.

Thursday, July 15, 2021

A Tale Of Two Investment Strategies

In the wake of the financial crisis of 2008-09, I accepted Stanford’s Faculty Retirement Incentive Program.  I officially retired on March 15, 2010.  My retirement account is 95% in an S&P index fund.  After taking 11 Minimum Distribution Requirement payments, the balance in my account still increased 240%, or 3.4 times.

In comparison, Stanford’s endowment, after accounting for its slightly 1% higher payouts, increased only 80%. This overstates Stanford’s return because annual gifts contributed additional amounts to the endowment over the past decade. Adjusting for those gifts puts the gain around 65-70%.  So, I’ve done 4 times better than Stanford.

In 2010, Stanford compared its performance against the S&P, which Stanford outperformed.  in 2020, Stanford compared its performance against other universities.

Was I smarter or just lucky?  First, I believe in the American economy. Second, things change.  Stanford’s asset allocation model puts 6% in domestic equities.  Stanford missed the boom in FAANG and similar tech stocks.  Why?  There were no new multibillionaire start up hot shots among the Stanford Management Company’s selection of investment partners or on the supervisory Stanford Trustees Finance Committee.

As if that weren’t bad enough, Stanford advises its retirees to increasingly shift from equities to fixed income bonds as they age. Those who did lost millions.

Will Stanford change its investment strategy in this decade?  Who can tell?  Old people do not have new ideas.  New ideas require new people.

Tuesday, June 15, 2021

The Coming California Dust Bowl

The whole state of California is in drought with predictions of megadrought on the horizon.  Just how bad the situation is can be seen in a display comparing the current level of water storage in the main reservoirs with historical averages.  

Type into your browser water.ca.gov.  Click on, in succession, Current Conditions in the toolbar, then Reservoir Conditions, and finally, Daily Reservoir Storage Summary, and then gasp at what you see.

The last major dam, the New Melones Dam, was completed in 1979, although it had been authorized by Congress in 1944.  In 2014 voters approved a $7.1 billion water bond issue, but none of the funds could be used for new dam construction.  Six consecutive governors have done nothing to increase water storage

Between 1980 and 2020, the population increased 66.3%, from 23.67 million to 39.37% million.

Conserving water makes sense, but only if there is water to conserve. The environmental lobby has been successful at blocking new dams. But even the most rabid environmentalists will find life difficult when the Central Valley has turned into a vast dustbowl and the cities and towns are strictly rationed. Wells will dry up and new wells will be banned to prevent further decline in the underground water level.

Lots of measures can be taken to better allocate existing water supplies.  It makes no sense to use so much of the state’s water to grow rice and alfalfa.  But historical water rights stand in the way of sensible solutions.

The Oklahoma Dust Bowl of the 1930s, 90 years later, will occur in California.  How ironic that the  great grandchildren of the Oklahoma migrants will be returning to Oklahoma to escape the California Dust Bowl.

Monday, April 5, 2021

Will Biden’s Plan To Increase The Corporate Tax Rate From 21% To 28% Improve Tax Fairness?

In 1985, the Wall Street Journal asked me to interview a panel of tax experts to determine who really pays corporate taxes.  Is it investors in lower returns? Is it workers in lower wages and fewer jobs?  Is it consumers in higher prices?

I published the results of my survey in the Wall Street Journal issue of April 15, 1985.  You can read it on my website at alvinrabushka.com

Click on Articles and Essays on the toolbar.  It is the third article under the subhead Wall Street Journal.

What’s new in the past 36 years?  Not much. The answers are the same, depending on who you ask.  What’s different is that economists today use more complex mathematics and statistics to make their answer.  Left-leaning economists try to show that an increase in corporate taxes will fall on owners of capital, thereby making the tax system fairer. Right-leaning do the same for labor, thereby worsening fairness. Others aren’t sure, especially in the current climate of massive monetary expansion.

Economists who say they know are putting politics first. It boils down to whose side you’re on.

Do read my 1985 article, please.