The Sovereign Mind

For those who don’t know, the government will give you $4,500 to trade in your old clunker and buy a brand new car. Sounds like a good deal, but as far as public policy is concerned, the program is simply unsupportable.

There are two reasons that proponents give to support the program:

1) The program supposedly helps the environment by getting gas guzzlers off the road and replacing them with newer, more efficient cars. It is debatable whether the program has any positive impact on the environment at all. And even if it does, the minimal impact begs the question: what else could we have spent that money on that would have helped the environment much more? It’s a little like going out to an expensive restaurant, and then justifying the expense by saying, “Well, we had to eat, right?”

2) The program is supposed to help stimulate the economy by getting people to buy new cars. Even those who see through the environmental argument often agree that it has succeeded in that purpose. And I don’t disagree, but let’s look at the issue more closely.

First, let’s start with the basics: Every dollar that the government spends is a dollar out of the pockets of a tax-payer. That should be obvious, but it seems that we sometimes forget this basic fact, maybe because we don’t see our tax bill increase at the passage of these sorts of programs. But it is true, whether the money comes from tax-dollars directly, or is borrowed (and therefore will be paid by future generations of tax-payers), or is printed (which we pay for because of the inherent devaluation of existing currency). There is no escaping the fact that there is no such thing as free money.

With this is mind, can this program be considered as anything more than taking money away from people who don’t want to buy a new car, and giving it to someone who does? The government is essentially telling you, “If you aren’t going to buy a new car, we’ll take your money and give it to someone who will.” By doing this, the government subverts the dichotomy that, during a recession, it is in each individual’s best interest to save money, but it is in the economy’s interest that we spend. I don’t blame the government for attempting to find ways to stimulate the economy during a recession, but giving people the choice of spending money or losing it is beyond over-reach.

So we must ask ourself this question: is it more important to (slightly and artificially) stimulate a sector of the economy for a very short period of time, or is it more important to respect our freedom to save or spend our money as we please? Maybe some in congress may disagree, but it seems to me that the answer to that question is obvious.

Robert Gibbs, Obama’s press secretary, says this about the withdrawl of Tom Daschle as the nominee for secretary of health and human services after it was revealed that he failed to pay hundreds of thousands in taxes:

Obama’s response, to his credit: “I screwed up”.

My inconvenient question: If Daschle’s nomination was a screw up, why wasn’t also the nomination of Timothy Geithner, who also had to pay back taxes, as treasury secretary? He was recently confirmed. If Obama thinks the Daschle pick was a screw up, does he think that of the Geithner pick as well? I can only assume so, considering if any nominee deserved scrutiny for tax issues, it should be the guy who will head up the IRS. So what is he going to do about it?

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I don’t believe in voting for self-interest. For one thing, it’s selfish. But for another, what’s in my self-interest is not always as simple to figure out as some try to make it. Some people can’t understanding why anyone in the middle class wouldn’t vote for Obama. Don’t they know they will get a tax break (assuming he does as he has promised, and ignoring the fact that he would not unilaterally write the laws)?

No, we don’t all exist in a vacuum. The poor do benefit, to some extent, from cutting taxes on the rich. After all, it does increase the chance of finding work. On the other hand, the rich do benefit from cutting taxes on the poor and middle class, since it gives the rich more customers. Clearly, our economic system is intertwined, so determining what is in my best interest (even if I were to vote that way) is not so easy to figure out and certainly involves more than a simple calculator.

But, as an experiment, I decided to suspend whatever intellectualism I have and determine how I would vote if I truly were to yield to my most primal instincts (give me more money!). I don’t wish to disclose the details of my financial situation to the world, but if is sufficient to say that I am doing pretty well. I am one (of the apparently few) that is actually better off than I was four years ago. But I am still solidly middle-class, and certainly not anywhere close to Obama’s definition of rich (which he says is $250,000).

So, with that in mind, I expected Obama to win my auctioned vote, given that he has championed the cause of the middle class, and has painted McCain as only caring about the rich. I had heard of a tax calculator on Obama’s website, so I checked it out. Sure enough, I would get 9 times more of a tax cut with Obama than McCain. Hmm… maybe there is something to this “vote for my own self-interest” after all.

But then of course, I couldn’t resist yielding to at least a little bit of intelligence in my decisions process. So I decided to see if there were any more independent calculators. I found this one which is promoting Obama, but at least claims to be based on independent numbers. I filled out the form and found out that apparently I will be getting even more with Obama than even Obama’s website claimed! Cha-ching! But…

…I would get even more with McCain.

Apparently I would get 14 times more under McCain than what Obama’s website told me I would. Let me repeat that: Obama misrepresented McCain’s tax cut by 14 times! Of course I shouldn’t be surprised by that, but it is appalling.

It’s bad enough that Obama tries to appeal to my selfish side by putting up a tax calculator. But to make matters worse, he blatantly lies about the tax cut I would see under McCain, in order to make his tax cut appear more appealing. In my opinion, this is more than just a typical politician who misrepresents the facts. He directly lied to me in order to persuade me to vote for him.

Beware, self-interested voters.

(By the way, I already know McCain frequent misrepresents Obama’s tax policy. I had given Obama the advantage in terms of honesty on tax policy. No longer.)

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The rhetoric has heated up recently in the debate over tax policy. Should we tax the rich in order to reduce taxes on the poor (or even write them a check, in some cases)? Or should we cut taxes on the rich? I think it’s a very interesting debate, but I’m disturbed by some extreme comments I’ve heard from supporters of both candidates, and echoed by the candidates themselves.

“The rich can afford to pay more taxes”

True. One simple but reasonable definition of rich might be “someone who can afford more than they need.” In other words, someone is rich if he has excess wealth. Therefore, rich people, by definition, can afford a lot of things, including paying more taxes. However, by that logic we should always increase taxes on the rich, as long as there are rich people to tax. As long as there is a rich person, that person can afford more taxes, so we should tax him more. People who perpetuate this logic don’t intend it, but the logical conclusion of the argument is that there would be no rich people left, because they would have all been taxed to the point where they could not afford more taxes (which, be definition, means they are no longer rich).

“The rich should pay their fair share”

I agree. No one is arguing that anyone should pay more or less than their fair share. But to those who espouse this argument, I ask: How much is their fair share? Obama wants to change the tax highest tax bracket to 39% instead of 36%, as well as increase the capital gains tax. So I ask, Is that their fair share? Can you honestly tell me that if that were the current tax rate, you wouldn’t be arguing for higher taxes on the rich right now? How am I supposed to believe that after Obama implements his tax policy, there won’t be calls for more “fairness” in the tax system? After all, there will still be CEOs that make many times more than their mail-room workers. Are tax increases on the rich always fair, and tax decreases on the rich always unfair?

“Obama’s tax cut is socialism and/or income redistribution”

If any proposed tax policy that favors the poor is considered socialism, then any tax policy that favors the rich should be considered feudalism. Clearly, those are two extremes. Yes, perhaps it could be considered a step toward socialism, in the same way that a step down a mountain can be considered a step toward falling off a cliff. Clearly, if we label any tax policy proposal that cuts taxes to the non-rich at the expense of the rich as “socialism”, we have gone too far.

But many would point to the fact that Obama’s tax cut is really a tax credit which can go to people who don’t even pay taxes, or who pay very little. That is true, but that is really not that exceptional. Many people receive more from the government than they contribute to it, not only in the form of tax credits, but also public services. We would never adopt a system where a person is limited to getting no more benefit from the government than the amount of taxes they pay. That would defeat the purpose of government providing services (for the common good). Imagine if your house caught on fire and the fire department told you they could only fight the fire for a half hour, because you only paid enough taxes for that amount.

What really matters

So let’s get down to what really matters. To me, that means what tax policy is most likely to help our economy recover.

Conservatives argue (in addition to the rhetoric described above) that cutting taxes on the wealthy helps create jobs as rich people have more money to expand businesses and invest in other businesses. Liberals argue (in addition to the rhetoric above), that cutting taxes on the poor and middle class allows them more money to buy goods and services, which also helps grow business. So who’s right? They both are.

The key to both arguments is that money flows. The flaw of so called “class warfare” is that it does not recognize that wealth does not exist in a vacuum. Money is only worth something because it can be transferred, and most money is immediately transferred when it is acquired. When you get paid, you will use that money to spend (transferring to businesses), or save and invest (which again makes that money available to businesses and other individuals). How much money do you have just sitting around in a checking account or your wallet? That is the only real money you hold. The rest of your wealth you’ve either spent or loaned to others.

So wealth flows both from rich to poor and from poor to rich. So both trickle-down and bubble-up are valid economic philosophies. But which one is best for us now? Well, the answer to that question is above my pay grade. You didn’t really think I was going to solve that question in this post, did you? If I could do that… well… I’d be rich.

But one thing I do know: We can debate who to cut taxes on, but raising taxes on anyone during a recession is a bad idea. Obama, to his credit, has said that he will delay raising taxes on the rich until the economy recovers. But it doesn’t seem like a much better idea to raise taxes just as we are recovering. And, since he will not delay his massive tax credit to the poor and middle-class, that will run up the deficit greatly, which somewhat negates his argument that his tax plan is more fiscally responsible.

McCain proposes to cut taxes across the board, with a more modest tax cut to the middle-class than Obama is proposing. This seems more reasonable during a recession. However, my problem with McCain is that he has promised to balance the budget in four years, which seems like wishful thinking. Cutting taxes combined with a slowing economy mean much less revenue for the government, and as much as I like McCain’s commitment to lower government spending, I just don’t think it’s possible to cut that much so fast.

So there’s our choice, rhetoric free. I hope we choose well.