Yglesias Digs In On Tax Breaks For Idle Rich

I recently took issue with a Matt Yglesias piece purporting to demonstrate the supposedly socially beneficial economics behind giving preferential treatment to investment income (or "capital gains").  Yglesias has now replied to the critics of that piece but remains thoroughly unpersuasive.  He completely ignores several major points of critique around the original piece (such as the point that the one doctor is not "doubly" taxed) and starts by simply trying to change the subject into the desirability of some kind of progressive sales tax, which I'll address later, but on his previous post, this is about all he has to say:

Last I'll say that I was a bit surprised by some of the blowback simply because this is such standard practice. Not only have capital gains been taxed at a lower rate than ordinary income throughout almost all of American history (with the gap even bigger when you consider that investment income isn't subject to Social Security tax), but the gap was particularly large during the postwar decades that progressives often cite as an example of a time when high tax rates were compatible with strong economic growth. In European countries with large welfare states, similarly, there's a lot of reliance on consumption taxes as a finance base.

This is really sloppy and fallacy laden argumentation, in order:

1. "Standard practice" - so lots of orthodox neoliberal economists think this way.  So what?  Shall I start of list of things that the neoliberal economic consensus was wrong about over the past 20 years? Maybe Yglesias is right that most economists agree with this, but it's not hard to find dissenters.  One of them is the most famous (living) economist on the planet after all.  He's not alone either.  Krugman's problem with this policy is what I highlighted from Yglesias' last piece; the wafer thin nature of the evidence of the actual benefits we're supposed to realize.  
2. "American history" - most of American history has US federal policy largely controlled by wealthy interests, sometimes actually driving, other times using their veto on policy they don't like via the Senate (which was the explicit point of the Senate).  The period between The New Deal to the end of LBJ's presidency is about the only period where liberal policies designed to benefit the majority were somewhat dominant.   Even so, America didn't get universal health care in this period like so many other rich countries, so even then the rich still had outsized political influence.  It's not shocking that they managed to keep their cherished tax break afloat.
3. "Postwar decades" - Let's concede for sake of argument that progressives all think the postwar decades were utopia.  Does that mean lower capital gains taxation is good?  Or that this period was good despite this tax preference?  Isn't that a more likely interpretation of progressive views on the subject?  

Now, as to a progressive consumption tax, this strikes me as beside the point.  Yglesias set out to show why Mitt Romney's tax rates should be lower than those of working people, and having failed to persuade his readers of that (at least judging by the comments and my own reaction) he diverts to saying that a progressive sales tax could alleviate progressive concerns about growing inequality.  Well, maybe.  But in an America funded by progressive consumption taxes, then we're also not taxing income either, so the preference for investment income over labour goes away.  When and if a progressive sales tax is on some kind of plausible agenda, I might be persuadable that it is superior to raising the capital gains tax, but that's not the world we live in today. 

Nobody on the left gets out of bed every day on raising the capital gains tax.  If Yglesias has some vision of America where the rich pay their share other ways, then probably I and others wouldn't care so much about this tax break mostly benefiting the idle rich, but inequality is growing, various forces are trying to use government revenue shortfalls as an excuse to cut the programs most important to the bottom half of society, and in the absence of a strong case for the general benefits of this tax break, it should be "on the table" too.  If an increase in the capital gains tax rate would keep some number of the poor able to get Medicaid or keep the Medicare eligibility age from increasing then damn right it should go up. 

Actually raising the capital gains tax rate is not on any likely-to-pass agenda, but at least let's not help the 1% plead their case by claiming it's better for everyone that the Mitt Romneys of the world pay lower taxes than us working shmoes.  The last thing we need is smug conservative pundits citing "even the liberal" Matt Yglesias as being in favour of this tax preference for the rich. 

Deregulation Kills Workers

The CBC has done a good job tracking the story of a gas station employee killed as he tried to stop a customer who was driving away with over $100 in gas without paying.  I'm glad I wasn't the only one who saw the original story on the weekend and immediately guessed that the cause was that his employer was docking his pay for theft losses.  Now, the employer (a Shell franchisee) in this case denies it, but the deceased man's family (who insist he was penalized) are much more likely in my opinion to be telling the truth. 

The man, likely earning at most minimum wage plus a dollar or two, in the face of seeing several days worth of wages driving off was prompted to put his own life at extreme risk facing off against someone in a vehicle. 

This is just a good case in point to remind ourselves at least anecdotally how regulation (with adequate enforcement) saves lives.  Ontario actually has a law that prohibits employers from holding their employees financially accountable for any assets the employee doesn't have sole control over, but it's obvious that there is widespread under the radar disobedience of this law by the station owners.  Now, this is what happens even with the law prohibiting it.  Imagine what would happen if this law were repealed?  The numerous anecdotal reports of gas station employees facing such penalties (and to which I can add my brother, who worked for a real cheapskate station owner many years ago) show that the incentives are in favour of owners outsourcing this risk to their staff, and the power disparity between owner and employee is such that they will almost certainly get away with it. 
 
The usual conservative/libertarian answer to this is "if you don't like it, find another job" - but even for individuals able to do that, the industry practice wouldn't change and many more clerks will get hurt or killed over gasoline thefts.  No, if you actually want to prevent these tragedies, regulation is the answer.  We're often told that business owners deserve every penny they can squeeze out of their businesses because they take all the risks in opening them, I'm not convinced of this, but I do know they should not be allowed to delegate downside risk to staff with no comparable upside opportunity. 

There will still be cases where regulations are ineffective or do more harm than good for whatever reason, but such cases do not negate the basic rationale for regulations:  Employers almost always have more power than employees and if left to their own devices, many will exploit that power imbalance in unfair and socially harmful ways.

A Liberal MPP has proposed a bill to make pre-payment at Ontario gas stations mandatory and the Ontario Federation of Labour has moved quickly to set up a hotline where people can report gas station owners who violate this law. 

Yglesias' Weak and Incomplete Defence of Romney's Tax Rates

Slate's Matt Yglesias attempts to defend the fact that Mitt Romney generally pays a lower rate of taxation on his millions in income than many working people pay.  It's exactly as unconvincing as you might expect.  To summarize his case:

• Widely accepted economic theory states that lower (or zero) taxation on investment income incents aadditional investment by people who would otherwise not bother investing it (see his example of two doctors deciding what to do with the money they make being doctors)
• It's really a great theory but there's no clear proof of it in the data

No, really, he has no proof of this theory, quote:

That's the theory, at any rate. It's a pretty solid theory, it's in most of the textbooks I've seen, and it shapes public policy in basically every country I'm familiar with. Even researchers like Thomas Piketty and Emmanuel Saez (see "A Theory of Optimal Capital Taxation") who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income. Empirically, it's a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy.

I can't help but snark here and express my utter surprise that the empirical evidence for the benefits of trickle down economics is thin.  I could stop right here as I think that alone disqualifies the piece from having achieved its aim, but there's a couple other things to say: 

•  Yglesias contends the doctor who invests his money is being "double taxed" on the money when he has to pay normal income tax rates on the gains he makes.  His commenters take suitable exception to this, even if investment income is taxed like regular, when you sell your $1M in stock, you only pay taxes on the gains not the amount you originally invested.
• It's bizarre to use an example of two upper-middle class professionals to justify the tax rates that Mitt Romney pays.  Romney is in the stratosphere of wealth, he can consume as much luxury goods as he can possible use or want and not have to make hard choices about whether to invest money.  Maybe it could marginally affect how much he invests or spends but Yglesias' example has the prodigal doctor who spends all his money on luxury vacations and such and invests none of it. 

Lack of evidence aside, the glaring logical flaw is that Yglesias is making a utilitarian argument in defence of an inherently unfair (I think he agrees it's at least prima facie unfair) tax preference for unearned income because it supposedly has some great pragmatic benefits, but fails to contend with the downsides of the policy.  This is a tax break that mostly goes to the rich, it has costs, like the direct increase of social inequality, and starving government of revenue or forcing it to get those revenues elsewhere.  A growing body of evidence shows that social inequality has real costs, in health, cohesion, happiness, crime, productivity, education and just about everything in society is affected. 

Even if Yglesias could prove some increase in investment because of lower tax rates, and further prove that additional investment leads to broad societal gains (something he doesn't attempt) - in a utilitarian argument you still have to show the gains are worth the costs.   I strongly doubt letting the rich keep all unearned income tax free (or significantly discounted) could survive that test. 

Finally, as several commenters point out, there's no reason that investment income cannot also be taxed progressively even if the rates are lower than labour income.  Maybe the doctor should pay 15% on his modest capital gains, but why can't Romney pay 25% or 28% on the millions he makes instead of 15%?  Even making the case for lower taxes on investment income in principle is not to defend America's crazy ultra low 15% rate on all capital gains. 

Canadian Senate Reform On Hiatus

Or possibly even dead:

Under the guise of a projected Supreme Court reference on Senate reform, Prime Minister Stephen Harper may be about to bury his party’s grand plan until at least the next federal election and, possibly, for all time.

For American readers, Canada's system allows the Government to ask the Supreme Court "Do you think this would be constitutional?" in advance of actually passing a bill or taking some action.  For Canadian readers, the US system doesn't allow this for reasons that as a non-lawyer I don't claim to understand.

Anyway, this is a huge relief.  I wrote about Harper's plans last year and explained what's wrong with appointing "elected" Senators:

Currently, only Alberta has held its own unrecognized Senate elections, and Harper actually did appoint one of Alberta's "elected" Senators.  A couple other provinces out west are considering holding elections too.  This is exactly what Harper is hoping for.  If even 3 or 4 provinces start electing Senators, that could be enough to fundamentally change the nature of the Senate as an institution.  Once you have a mass of "elected" Senators in the body, operating under term limits, they're going to start trying to legislate, amend bills and defeat bills.  They won't feel constrained by the chamber's lack of democratic legitimacy, because they'll claim they were elected.

What will the Senators who never won elections do?  Some will join in the crusades of the elected peers, and others will try and stand aside, but the result will be a mess.  What happens when the partially elected Senate defeats a House bill?  The public reaction will almost certainly be in favour of electing the rest of them.   However it plays out, the result will be to break the strong traditional prohibition on the Senate playing an activist role.  Once this gets going, there won't be any way to stop it. 

 My take was that this was a way to create a self-fulfilling prophecy of Senate reform by fostering a democratic legitimacy crisis in the Red Chamber.  I went on in that piece to note that while one of the typical Western beefs with Ottawa is being underrepresented in the House of Commons (which is mostly false) in the Senate the four Western provinces actually are dramatically under weight by their population.  So it surprised me that Harper's lot were willing to empower the chamber that empowers Quebec and the Atlantic so much to their expense.  As it turns out, they're not actually willing to do that, back to Hebert:

They (rightly) worry that giving the Senate the enhanced legitimacy of an elected house without making it more reflective of the demographics of the country only stands to enshrine Western Canada’s democratic deficit in Parliament.

“To the extent that the Senate becomes a more influential body — and that’s uncertain — but to the extent that it does, it would shift power into Atlantic Canada and away from the West,” [Canada West Foundation leader Roger] Gibbins explained in an interview earlier this year

So I was wrong by underestimating the simple regional zero sum cynicism of conservativism.  Well, I can live with that.  I can also live with this bad Senate reform thing not happening.  I'm glad Harper and co are chickening out, because I think their plan would have worked.  Making political offices elected is one of those magic button solutions that voters leap at as a panacea to resolve whatever problems exist with corruption, indolence or incompetence in some government function.  A few months of political wrangling where some half-elected Senate started mucking with House business would very quickly bring numbers up in favour of some variation of a triple-e senate plan.  This really struck me as very similar to how the US 17th Amendment (requiring direct election of Senators) was passed.  Actually, Hebert suggests another pretty basic reason Harper is backing away from empowering the Senate, he can't really control Conservative Senators:

The prime minister might well need backing from the Court to convince some of his own appointees to live up to their initial commitment to give up their Senate seats before they reach the current mandatory retirement age of 75.

This didn't occur to me last year, but it makes perfect sense.  Harper might be able to kick Senators out of the Conservative party and probably out of the Conservative Senate caucus, but if they have very lengthy terms and get to run for re-election as well established incumbents in province-wide elections, they'd make dangerous opponents to him.  House members fear their party leaders because almost no House members have enough notoriety to win re-election on their own name as an independent candidate.  Being kicked out of the party is to face almost certain defeat at the next election.   A Senator who wins a big population province is potentially getting several million votes.  S/he might be able to swing a Lieberman and stymie the party leadership.  Comparatively, the Prime Minister will only have one riding's worth of voters, a few tens of thousands of votes directly for him/her.  I can well imagine some Alberta Senator rejecting Harper's demands and claiming a stronger mandate to represent the wishes of Alberta Conservatives than Harper. 

In this respect a triple-e Senate would be worse than the US system because at least in the US, the sitting President always has the largest direct democratic mandate (larger than any Senators at least).  In Canada, it's theoretically possible for a Senator from Ontario or Quebec to have more votes than the ruling party got combined.  In 2011, the Tories got 5.8 million votes total.  Ontario has 9 million registered voters (5.5M actually showed up) and Quebec has 6M.  It's not terribly likely, it would take some universally beloved figure to get that kind of support, but that the theoretical possibility even exists is reason enough to worry about cutting loose our 105 Senators to preen about the national stage without accountability to their parties.

Just eliminate the Senate.  If it must exist, hobble it severely like the UK House of Lords.  Make it responsible for issuing pointless proclamations, ratifying what goes on stamps and coins, and correcting spelling mistakes in legislation.  Anything more makes Canada into a very bad copy of the US, with the worst features of both the Parliamentary and Presidential-Congressional systems.  Neither orderly division of powers nor Responsible Government.

Let Them Eat 47%

The irony of this is that liberals have spent years tearing their hair out trying to figure out why so many people actually in the bottom half of the income spread vote for conservatives who promise to cut the programs they depend on for survival.  In 2008, McCain got 43% of the votes of people making $30-50K, 37% of those making $15-30K and even 25% of those making less than $15K.  Sure, he lost each voting bloc, but you can still win elections by taking substantial chunks of your opponent's most fertile voting ground. 

Romney didn't even try to make some kind of nuanced argument, that it was tougher for him to reach the 47%.  He outright dismissed them as flat out voting for Obama.  It's not even a case of the so called "classic gaffe" in DC where one tells the truth, the Tea Party is heavy with poor and lower-middle class people who are in denial about the fact that they're dependent on government for assistance.  I suppose the only hope for Romney in this fall out is along these lines as Salon's Alex Pareene tweeted:

good luck convincing any white american that they're in "the 47%" romney's talking about

Romney was talking about that other 47%.  The ones that think that being unemployed and living in a van puts you in the 53% of US federal income tax payers.

Organizations Can Succeed Without Great Leadership

Former Firedoglake and Open Left writer Ian Welsh has a very thoughtful piece on the Obama/Bush administrations' failing strategy of assassinating Taliban and Al Qaeda leaders, arguing that these are organizations with lots of members who believe in the mission of the group, and thus don't really require some brilliant or charismatic leader to keep them going:

Leadership isn’t as big a deal as people make it out to be, IF you have a vibrant organization people believe in.  New people step up, and they’re competent enough.  Genius leadership is very rare, and a good organization doesn’t need it, though it’s welcome when it exists.  As long as the organization knows what it’s supposed to do (kick Americans out of Afghanistan) and everyone’s motivated to do that, leadership doesn’t need to be especially great, but it will be generally competent, because the people in the organization will make it so.

Even better is his commentary on how this applies to the corrupt institutions of the United States:

American leaders are obsessed with leadership because they lead organizations where no one believes in the organization’s goals.  Or rather, they lead organizations where everyone knows the leadership doesn’t believe in its ostensible goals.  Schools are lead by people who hate teachers and want to privatize schools to make profit.  The US is lead by men who don’t believe in the Constitution or the Bill of Rights.  Police are lead by men who think their job is to protect the few and beat down the many, not to protect and serve.  Corporations  make fancy mission statements and talk about valuing employees and customers, but they just want to make a buck and will fuck anyone, employee or customer, below the c-suite.  They don’t have a “mission” (making money is not a mission, it’s a hunger if it’s all you want to do), they are parasites and they know it.

I think he's on to something, that this is a form of projection, the common fallacy where one assumes others think or are motivated by the same things as yourself.  American institutions, particular in government are stymied by both the necessity of careerist caution (see: Shirley Sherrod) and the true lack of honest information about what the organization is supposed to be doing.  Even to the extent there are people with initiative who are willing to act in the absence of instruction from above, they don't know what behaviours would be rewarded and the consequences of perceived failure (even just having a right wing clod decide to make you a target) are severe.

As I mentioned in the comments at Ian's place, this feature of the Taliban is actually well understood in military doctrine.  The Germans brought it to prominence in WW2 with a concept they called "Auftragstaktik."  It explicitly demands, as a matter of military strategy that each leader give his subordinates the main mission and leave as much detail on how to implement to them.  In fact, it even allowed for cases of disobeying orders so long as this was done to facilitate the ultimate mission of the organization.  Subordinates could make errors and not be punished.  All of this is highly ironic for the German Army in its role as the military of a fascist dictatorship, but the doctrine long predates the Nazis and to my knowledge had nothing to do with them (Hitler was a notorious micromanager much to his own disadvantage).

I don't know if the Taliban consciously models themselves on this basis, but it is probably a more or less automatic necessity of running an insurgent organization that must operate in constant fear of overwhelming force being brought down anywhere they are detected.  There just isn't room to micromanage.

None of this is to get too far into a tactical or strategic debate over how to fight the war in Afghanistan, but rather to highlight the efficiency costs of corrupt institutions and how the basic utilitarian logic of society can crumble as it becomes increasingly focused on the whims of the overlords rather than representing small d democratic impulses.  Increasingly American institutions don't function because they can't, and this is costing lives when it comes to fighting organizations not so encumbered.

International Aid Works.

People often complain there isn't enough good news, but mostly when there is, it gets ignored.  UNICEF has released a report showing the enormous progress that has been made in reducing childhood mortality:

Data released today by UNICEF and the United Nations Inter-agency Group for Child Mortality Estimation show that the number of children under the age of 5 dying globally has dropped from nearly 12 million in 1990 to an estimated 6.9 million in 2011.

That's enormous, when you consider that the world population in 1990 was something like 5.2 billion versus the nearly 7 billion it would have been in 2011.  So even as the population has increased significantly, the absolute number of children dying has decreased markedly in absolute terms.

The obvious neoliberal explanation is that this is all due to magic market fairies, free trade, deregulation and so forth, but the report notes:

The report shows that all regions of the world have seen a marked decline in under-5 mortality since 1990. Neither a country’s regional affiliation nor economic status need be a barrier to reducing child deaths; low-, medium- and high- income countries all have made tremendous progress in lowering their under-5 mortality rates.

While the increases in income in many parts of the previously abjectly poor world, like China are no doubt helping reduce childhood mortality, the inclusion of still poor countries in these declines strongly suggests concerted aid by groups like UNICEF make a real difference. 

I once attended a debate on the subject of whether foreign aid did any good, and was struck by how similar the anti-aid position was to the usual right wing "tough-love" position on domestic welfare.  Instead of individual welfare recipients becoming dependent, you hear that Nation-States become those lounging in the aid hammock. 

Aside from the usual heartless libertarian take on aid, the glaring flaw I see in the anti-aid argument is that it assumes that cutting off aid is like adhering to some kind of Star Trek Prime Directive of non-interference in some foreign culture.  We stop our good intentioned "meddling" and the locals fix their self-inflicted problems on their own with gumption and boot straps.  But in the real world the "meddling" that governments and NGOs do to help afflicted areas is only part of the total meddling.  Pull that out, and you still have corporations plundering their resources by bribing corrupt officials, you still have warlords fighting over diamonds and rare earth metal mines, you still have druglords and international crime, and you still have plenty of ill-intentioned foreign meddling in these nations' affairs - knocking over "unfriendly" leaders, supporting rebel groups and arms peddling.  To the extent that people like Dambisa Moyo have a point that Africa (her focus, though her point obviously would generally extend to all aid everywhere) is still largely a mess after decades of aid, it's because aid isn't operating in a vacuum.  The patient may not be better despite being on an IV of antibiotics, but that's because he's also being repeatedly injected with raw sewage by psychopaths.  The aid may be all that keeps him alive.

There's plenty of aid-gone-wrong anecdotes, but yet we are making real progress.  If you pay any attention to news from poorer parts of the world, it can all seem like an endless slog of corruption, disease, drought, war, rape and ruin, but reports like this quantify the suffering in ways that allow us to know whether our efforts are futile.  They're not.  Aid works.  Even if you want to give credit to economics, the "market" is not on the verge of eradicating Polio, the World Health Organization is doing it, much like they did with Smallpox in the 70s.  Aid does things the market won't, and if market conditions are improving for a country, I expect that makes aid even more effective at resolving health problems even faster than they would be fixed organically.  These things matter and it's worth looking to the long horizon (both forwards and aft) once in awhile to see how things sit.