To Regulate or To Tax: Happy Tax Day

The question is whether to regulate or to tax. The answer from the Obama Administration is apparently both. Yesterday, as expected, the Senate failed to pass the so-called Buffett Rule. It became increasingly obvious as the debate unfolded and tough questions were asked and analysis revealed, this was nothing more than a populist election year gimmick that, in typical Obama fashion, fails to address the larger picture and problems facing this country. Instead, we have a Treasury secretary making the rounds of the Sunday morning talk shows trotting out the same old, tired excuses for the failure of this Administration when it comes to economics. This is somewhat to be expected. Most of the alleged brain power in his Administration is woefully short on real world experience. It is one thing to theorize on and analyze numbers and history from the friendly confines of a university office and quite another reality to actually be a player in the economy. This fact alone- the utter failure of Obama’s economic policies- should be the nail in the coffin of these “czar” appointees.

The Buffett rule simply obfuscates and cloaks the real problem with the Federal government and that problem is three-fold. First, it pecks at the very outer margins of true and fundamental tax reform. The evolution of this idea is akin to the Bush reasons for invading Iraq. What started as a search for WMDs soon transformed into regime change. What started as a deficit reduction scheme soon evolved into a “fairness” issue. Governor Christie (R-NJ) had probably the best answer to the Buffett rule: if he is so concerned, just write a check to the Treasury and shut up. Of course, the Buffett/secretary example was taken out of context to start with as Buffett was making the point not to illustrate apparent “unfairness,” but as a call to reform the entire tax code. Because there are certain exemptions, deductions, exclusions and credits available does not necessarily mean that anyone, if they are concerned about fairness, has to take them all. They’d be a fool not to, but that is another story.

In reality, the Buffett rule is a back-door way of raising the long-term capital gains tax rate. These are the very investors who provide the capital for new businesses which create the new jobs needed. If some start-up company becomes successful enough to go public or be acquired, this Buffett tax takes a huge bite from the profits of the investors. Hence, it serves only to stifle investment and the risk-taking necessary to fund new businesses. This is why people of wealth- the 1%, if you will- pay a lower rate than Warren Buffett’s secretary: because their income is taxed as capital gains.

In order to create jobs, we should encourage investment. By raising the capital gains tax- either overtly or covertly through the Buffett rule- we do the exact opposite. It is a simple fundamental economic principle that John Kennedy, Ronald Reagan, Bill Clinton, and George W. Bush apparently understood, but one that Obama ignores. As Senator Portman (R-OH) note in a POLITICO article, raising the capital gains rate does not mean more revenue is gained. It is an “elective tax” which is paid only when you sell an asset. He notes that after every recent capital gains tax cut, actual revenues from the tax increased. In 1987 when rates increased, revenues decreased 55%. Also, capital gains are double taxed. The “gain” of purchasing stock is paid at a 35% rate at the corporate level and 15% when you sell that stock. These simple facts are the very reasons why Canada, Japan, and Great Britain are lowering corporate tax rates and capital gains taxes in order to attract new businesses and jobs.

Besides Obama’s failure to address true tax reform and insist on this populist “soak the rich” tack, he has doubled-down on an effective hidden tax on businesses, investors and consumers. By this, I refer to regulation. In January, Obama claimed that his Administration has enacted less regulations than Bush after three years. Technically, he is correct- Bush had 10,674 to Obama’s 10,215. The sheer number, regardless of the occupant of the White House, is mind-boggling in and of itself. However, when we look at the magnitude of these regulations, the differences become evident. Obama is hardly the great deregulator he is making himself to be. The Heritage Foundation estimates that after three years, regulations promulgated under Obama (by unelected officials, I might add) amount to $46 billion compared to $8.1 billion under Bush after three years. Additionally, there are some 2,576 regulatory changes in the pipeline under Obama. Of those, 133 are projected to have annual compliance costs of at least $100 million annually (thats $13.3 billion annually folks). And what do we get? We get modified air bags and window design on cars (increased car cost: $53 to $200), new reporting requirements for ABS instruments which stifle credit flows, new emission standards on solid waste incinerators, a higher minimum wage for foreign workers under H2-B visa program, higher fuel efficiency standards for heavy-duty pick ups (increased truck price: $6,000), cigarette labeling guidelines, and more energy efficient flourescent lamp ballasts, to name but a few. Some of these are being contested in the courts and one would hope the judiciary has more commonsense than the egghead bureaucrats thinking up these regulations.

There is a solution to this regulatory overkill. The GAO has reported that Congress and the various Executive Department agencies have failed to act on greater than 60% of their recommendations…from 1994! Since 1996, Congress has the authority to overrule new regulations, but has used that authority only once. This Congress passed HR-10 which would reign in the power of agencies but a similar measure in the Senate (S.229) languishes in committee. Simply put, any regulation where the estimated cost exceeds $50 million should be approved by Congress. Secondly, every regulation should have a sunset date after which is can then be analyzed again and voted upon. Third, duplicative and outdated programs need to be eliminated. The US Geological Service was created to map the nation’s natural resources. I think they’ve done a great job as the over 300,000 maps produced attest. That is one example of a government agency that has outlived its usefulness and there are countless others.

The third fatal error of the Obama Administration is that he and his minions have very few suggestions for entitlement reform. The nation currently has over $65 TRILLION in unfunded future promises and mandates. People like Paul Krugman can shoo away that fact under the rug all they want, but that fact remains. While THINKERS like Paul Ryan have put forward ideas that fundamentally reform programs like Social Security, Medicare and Medicaid without affecting the promises made to the current elderly and poor who rely on these programs, Obama’s solution is to pay doctors less in Medicare reimbursements and blind acceptance of Obamacare. For Social Security, his likely solution is some kind of means testing and tax increase. But since he has not proposed anything, this is only conjecture.

Democrats like to portray Republicans as wanting to resort to the 19th century where women were in the home saddled with unwanted pregnancies, blacks were denied employment or educational opportunity and the elderly lived in poverty without health care. That denies the reality. It also underscores Obama’s ignorance of economic reality. Because he is stuck in the liberal mindset of tax and spend- the mindset of the New Deal and the Great Society- it is the Republican Party that is trying to move the economy and the government and entitlements into the 21st century while the Democrats seem stuck in the 1960s. These Republican ideas are not “the same failed policies of the past that got us in this mess.” They are the ideas based on commonsense and economic reality that advanced this country a greater amount in a short period of time. Along the way, we became the greatest nation on earth. Today, we run the risk of becoming an international joke with another four years of Obama.