Howard Rich's Blog

July 20, 2009

Europe Thumps U.S., Again

Filed under: Headlines — willfrable @ 5:08 pm
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From the Wall Street Journal

On present trends, most of Europe will soon have lower income tax rates than most of America. And now the European Union is stealing another competitive march on Washington, this time on a free trade deal with the world’s 13th largest economy, fast-growing South Korea.

Last week Brussels and Seoul finished the outline of a new trade agreement, and the two sides will now write up the technical language to codify it. As for the pending U.S.-Korea trade agreement, Congress has done . . . nothing.

South Korea has made negotiating trade deals a centerpiece of its foreign and economic policy. The U.S. FTA, signed in 2007 but still not ratified, is one example. Negotiations are planned or under way with a long list of countries, including India, Canada and Australia. On the EU side, the Commission is vigorously defending the pact against domestic critics, including the European auto industry. EU approval isn’t a sure thing, but Swedish Prime Minister Fredrik Reinfeldt is aiming to finish it by December.

Compare that to the U.S., where the FTA with Korea is bogged down in Big Labor politics. Bashing the deal became de rigueur in the Democratic Party primary before last year’s Presidential election. Candidates Barack Obama and Hillary Clinton both claimed the deal wouldn’t open Korea’s auto market to U.S. imports, all evidence to the contrary. Now, with Democrats running both the White House and Congress, prospects are bleak for any trade deal. Colombia has also been left hanging, even though its goods already enter the U.S. duty free under the Andean preferences program.

Don’t count on progress any time soon. President Obama’s trade representative, Ron Kirk, rose from his slumbers last week to give his first big speech but he failed to mention either South Korea or Colombia. Instead, he focused on “trade enforcement,” by which he seems to mean picking fights with U.S. trading partners. This will include, Mr. Kirk said, investigating “labor violations” inside other countries. “And if they don’t fix their labor problems, we will exercise our legal options,” he said. Just what our friends want to see when global trade is contracting: Another U.S. excuse for protectionism.

Korea’s progress with the EU shows how risky U.S. delays are. The European Commission says the EU-Korea deal will eliminate $2.2 billion in duties Korea currently imposes each year on European goods — and cut duties and eliminate nontariff barriers on imports of European cars. American companies could gain similar benefits if only Congress would approve the U.S.-Korea pact.

Across the globe, countries are moving ahead with similar bilateral trade deals, often giving their own national companies an edge over U.S. competitors. In a perfect world, all countries would be able to benefit from multilateral trade opening under the Doha Round. But for now bilateral deals are better than nothing, and America is leaving itself behind.

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July 1, 2009

The ‘Absentee’ Senator

From the Wall Street Journal

The Minnesota Supreme Court yesterday declared Democrat Al Franken the winner of last year’s disputed Senate race, and Republican incumbent Norm Coleman’s gracious concession at least spares the state any further legal combat. The unfortunate lesson is that you don’t need to win the vote on Election Day as long as your lawyers are creative enough to have enough new or disqualified ballots counted after the fact.

Mr. Franken trailed Mr. Coleman by 725 votes after the initial count on election night, and 215 after the first canvass. The Democrat’s strategy from the start was to manipulate the recount in a way that would discover votes that could add to his total. The Franken legal team swarmed the recount, aggressively demanding that votes that had been disqualified be added to his count, while others be denied for Mr. Coleman.

But the team’s real goldmine were absentee ballots, thousands of which the Franken team claimed had been mistakenly rejected. While Mr. Coleman’s lawyers demanded a uniform standard for how counties should re-evaluate these rejected ballots, the Franken team ginned up an additional 1,350 absentees from Franken-leaning counties. By the time this treasure hunt ended, Mr. Franken was 312 votes up, and Mr. Coleman was left to file legal briefs.

What Mr. Franken understood was that courts would later be loathe to overrule decisions made by the canvassing board, however arbitrary those decisions were. He was right. The three-judge panel overseeing the Coleman legal challenge, and the Supreme Court that reviewed the panel’s findings, in essence found that Mr. Coleman hadn’t demonstrated a willful or malicious attempt on behalf of officials to deny him the election. And so they refused to reopen what had become a forbidding tangle of irregularities. Mr. Coleman didn’t lose the election. He lost the fight to stop the state canvassing board from changing the vote-counting rules after the fact.

This is now the second time Republicans have been beaten in this kind of legal street fight. In 2004, Dino Rossi was ahead in the election-night count for Washington Governor against Democrat Christine Gregoire. Ms. Gregoire’s team demanded the right to rifle through a list of provisional votes that hadn’t been counted, setting off a hunt for “new” Gregoire votes. By the third recount, she’d discovered enough to win. This was the model for the Franken team.

Mr. Franken now goes to the Senate having effectively stolen an election. If the GOP hopes to avoid repeats, it should learn from Minnesota that modern elections don’t end when voters cast their ballots. They only end after the lawyers count them.

June 15, 2009

The IRS Phones Home

From the Wall Street Journal

With federal spending in 2009 at 28% of the economy and deficits heading north, Democrats are eyeing tax increases on everything from soft drinks to electricity to health benefits to charitable contributions. But the palm for creativity goes to the Internal Revenue Service, which is contemplating a new tax on the use of business cellphones.

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a “fringe benefit” and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it’s only fair that they pay for the privilege. What’s next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? As one wag put it on the Journal’s Web site, “It’s like charging for the use of the company washroom.”

The IRS isn’t proposing a new rule per se, merely planning to strictly enforce a 1989 law requiring workers using company phones for personal use to include the value of those calls as income. But in effect it’s the same thing, given the inherent difficulties of distinguishing the work from the personal when employees are expected to remain tethered to the office 24-7. The IRS suggests that businesses automatically assign 25% of annual phone expenses as a taxable liability — unless employees could provide proof that they used other forms of communication during work hours. We think most taxpayers will agree that preparing for April 15 is stressful enough already.

The political class may come to regret stepping into this minefield, however, and not only because this is precisely the sort of common non-sense that incites tax revolts. It’s one thing if the next Tom Daschle forgets to pay taxes on his company chauffeur. But it’ll be quite another if the next nominee goes down for taking too many personal calls without giving the government its due.

May 29, 2009

Taxing Health Care

From the Wall Street Journal Online

Politicians wouldn’t be politicians if they didn’t trim their sails to the prevailing winds. Even so, the emerging 180-degree turn by Democrats on taxes and health insurance is one for the record books.

Democrats have spent years arguing that proposals to equalize the tax treatment of health insurance are an outrage against the American people. Workers pay no income or payroll taxes on the value of job-based plans, but the same hand isn’t extended to individuals who must buy coverage on their own. Last year liberals mauled John McCain for daring to touch the employer-based exclusion to finance more coverage for the individually uninsured. He was proposing “a multitrillion-dollar tax hike — the largest middle-class tax hike in history,” said Barack Obama, whose TV ads were brutal.

But now Democrats need the money to finance $1.2 trillion or more for their new health insurance entitlement. Last week Senate Finance Chairman Max Baucus released his revenue “policy options” and high on the list is . . . taxing health benefits. Or listen to White House budget director Peter Orszag, who recently told CNN’s John King that the exclusion “was not in the President’s campaign plan, it wasn’t in our budget. Clearly, some Members of Congress are putting it on the table and we are going to have to let this play out.”

Mr. King tried again. “Let this play out. But would the President sign a bill that includes a pretty significant tax increase? That would be a tax increase.” Mr. Orszag: “We’re not going to be — I think it’s premature to be commenting on individual items . . . There are lots of ideas that are being put on the table.” Translation: You betcha he’d sign it.

The tax exclusion is such a big revenue prize because Mr. Baucus is scrubbing every other tax nook and cranny and only coming up with rounding errors. A sampler:

– Impose an excise tax on hard alcohol, beer and some kinds of wine. That would be in addition to a sin tax on beverages sweetened with sugar or high-fructose corn syrup, such as soda. Mr. Baucus doesn’t offer revenue estimates, though the Congressional Budget Office says a $16 per proof gallon alcohol tax might raise $60 billion over 10 years, and another $50.4 billion at three cents per 12 ounces of sugary drink.

– End or limit the tax-exempt status of charitable hospitals, which only costs currently a mere $6 billion a year.

– Make college students in work-study programs subject to the payroll tax. Also targeted are medical residents, perhaps on the principle that they’ll one day be “rich” doctors. CBO has no score on these.

– Reducing Medicare reimbursement rates for supposedly “over valued physician services,” such as diagnostic imaging. CBO says that requiring doctors to get prior clearance could save $1 billion in 10 years.

– For individuals with high-deductible insurance plans, contributions to health savings accounts would no longer be tax deductible. That would penalize patients who choose plans that encourage them to be informed consumers. CBO says that banning HSA payments entirely would yield all of $10 billion.

By contrast, the employer-based exclusion offers a huge money pot — an estimated $226 billion in 2008. Yet as liberal MIT economist Jonathan Gruber recently told Mr. Baucus’s committee, “no health expert today would ever set up a health system with such an enormous tax subsidy to a particular form of insurance” (his emphasis). It creates a coverage gap between workers who receive it from their employers and those who pay — or can’t afford to pay — with after-tax money.

The tax exclusion is also one reason health costs continue to rise. It encourages workers to take an extra dollar of compensation in fringe benefits instead of cash while also routing low-deductible health spending through third parties. Some 84 cents of every medical dollar is spent by someone other than the patient. The insured have no incentives to make cost-conscious decisions about care.

So reforming the exclusion would inject a dose of discipline into American medicine. But for most Democrats the goal isn’t to create a more rational health-insurance market. They simply want the revenue for another government program. Mr. Baucus won’t target gold-plated employer insurance plans in general, because union-negotiated benefits are usually gold-plated. Rather, he may cap or phase out the exclusion by income, starting with workers earning more than $200,000. Insurance options that don’t conform to government diktats (health savings accounts) would also lose any tax advantage. This would do nothing for market efficiency, but it would be one more stealth tax increase.

Democrats owe an apology to Mr. McCain, and it’ll be fascinating to see if they will now suffer a political backlash of their own making. Having told the country that this tax reform is really a tax increase, Democrats are opening themselves to the same attacks they leveled against Republicans.

They could avoid that fate if they used the tax exclusion money to finance, say, a tax credit for the uninsured. That would be a genuinely bipartisan reform. But liberals won’t accept that because they want to take one giant step toward government-run health care. And the only way they can pay for it is by taxing everything in sight, including your current health insurance.

May 18, 2009

We Need National Term Limits

In a Letter to the Editor, U.S Term Limts President Phil Blumel talks about national term limits in the Wall Street Journal.


In his May 11 letter (“Haven’t You Noticed Term Limits Are in the Constitution”), Thomas J. Miranda claims that “the Constitution already provides for term limits,” but that people “are too stupid” to do their constitutional duty and vote their representatives out of office.

He is right that over 90% of U.S. House incumbents are routinely re-elected to their seats, but “stupidity” is not the explanation.

In 2008, 55 incumbent seats went unchallenged. In many more seats, the incumbent was challenged by a drastically underfunded candidate who didn’t receive meaningful support from their own party. And many of these were simply gadflies.

This situation did not occur because people are stupid, but for the very rational reason that against such odds it does not pay for successful, goal-oriented people to run for office against incumbents. It is rational for parties to avoid using limited resources on unwinnable seats. Meanwhile, special interests quite rationally fill the coffers of and maintain their relationships with entrenched incumbents.

For these reasons among others, voters get lousy choices and incumbents are practically unbeatable. Term limits would change this dynamic by providing open, competitive races at regular intervals in every congressional seat. It’s a smart idea.

Philip Blumel

Atlantis, Fla.

Potential candidates know that the chance of defeating an incumbent is so small that it’s not worth the effort.

With term limits the number of candidates for an open seat would be much larger. They wouldn’t be running in a race skewed by the advantages of incumbency.

And then, I hope, with new, term-limited members in Congress the rest of the Constitution would have a better chance to operate as it should.

George Rosser

Charlotte, N.C.

May 13, 2009

Tax Increases Could Kill the Recovery

From the Wall Street Journal

The barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.

Historians and economists who’ve studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.

The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.

The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama’s proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.

But those are false tax cuts in which no one’s tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government’s new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.

Mr. Obama’s biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.

CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.

But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.

The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.

The next-largest tax increase — with a projected rise in revenue of more than $300 billion between 2011 and 2019 — comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn’t take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes — by changing the way they are compensated, increasing deductible expenditures, or simply earning less — it overstates the resulting increase in revenue.

Since the projected revenue from this source is already designated to be used for Mr. Obama’s health plan, some other tax increases will be needed. Moreover, Mr. Obama’s budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be “additional resources and new benefits to be determined with Congress.” Those additional resources would no doubt be even higher taxes.

The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.

It’s not too late for Mr. Obama to put these tax increases on hold. If he doesn’t, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.

April 24, 2009

Global Warming Overreach

Congressman Henry Waxman played to the crowds this week with high-profile hearings designed to boost his climate legislation. To listen to the Energy and Commerce committee chair, a House global warming bill is all but in the recyclable bag.

To listen to Congressman Jim Matheson is something else. During opening statements, the Utah Democrat detailed 14 big problems he had with the bill, and told me later that if he hadn’t been limited to five minutes, “I might have had more.” Mr. Matheson is one of about 10 moderate committee Democrats who are less than thrilled with the Waxman climate extravaganza, and who may yet stymie one of Barack Obama’s signature issues. If so, the president can thank Democratic liberals, who are engaging in one of their first big cases of overreach.

Not that you couldn’t see this coming even last year, when Speaker Nancy Pelosi engineered her coup against former Energy chairman John Dingell. House greens had been boiling over the Michigan veteran’s cautious approach to climate-legislation. Mr. Dingell’s mistake was understanding that when it comes to energy legislation, the divides aren’t among parties, but among regions. Design a bill that socks it to all those manufacturing, oil-producing, coal-producing, coal-using states, and say goodbye to the very Democrats necessary to pass that bill.

Such sense didn’t deter Mrs. Pelosi, who first tried an end-run around Mr. Dingell in 2007 by putting Massachusetts Rep. Edward Markey in charge of a new global-warming committee. When that didn’t get her a bill, she helped her fellow Californian, Mr. Waxman, unseat Mr. Dingell. Environmentalists threw a party, and the Waxman-Markey duo got busy on legislation to please their coastal crowds.

Cap and trade was already going to be a brawl, but the two upped the ante by including tougher targets and restrictions. If that weren’t enough, they rolled in every other item on the green wish list: a renewable electricity standard; a low-carbon fuel standard; a broader renewable fuels policy; new efficiency standards. Any one of these is a monumental fight on its own. Put together they risk an intra-party committee mutiny.

There’s Mr. Matheson, chair of the Blue Dog energy task force, who has made a political career championing energy diversity and his state’s fossil fuels, and who understands Utah is mostly reliant on coal for its electricity needs. He says he sees several ways this bill could result in a huge “income transfer” from his state to those less fossil-fuel dependent. Indiana Democrat Baron Hill has a similar problem; not only does his district rely on coal, it is home to coal miners. Rick Boucher, who represents the coal-fields of South Virginia, knows the feeling.

Or consider Texas’s Gene Green and Charles Gonzalez, or Louisiana’s Charlie Melancon, oil-patch Dems all, whose home-district refineries would be taxed from every which way by the bill. Mr. Dingell remains protective of his district’s struggling auto workers, which would be further incapacitated by the bill. Pennsylvania’s Mike Doyle won’t easily throw his home-state steel industry over a cliff.

Add in the fact that a number of these Democrats hail from districts that could just as easily be in Republicans’ hands. They aren’t eager to explain to their blue-collar constituents the costs of indulging Mrs. Pelosi’s San Francisco environmentalists. Remember 1993, when President Bill Clinton proposed an energy tax on BTUs? The House swallowed hard and passed the legislation, only to have Senate Democrats kill it; a year later, Newt Gingrich was in charge. With Senate Democrats already backing away from the Obama cap-and-trade plans, at least a few House Dems are reluctant to walk the plank.

Rumors were in fact flying earlier this week that Mr. Markey might have to postpone next week’s subcommittee markup. For now, he and Mr. Waxman are busy trying to buy or arm-twist votes. They have some potent tools, in particular the enticement of giving some carbon-emission permits away for free, or allocating them to specific industries. Yet having set expectations so high, the duo risk losing liberal members if they give away too much.

The Obama team is aware it has trouble, which explains last week’s well-timed Environmental Protection Agency “finding” that carbon is a danger. The administration is now using this as a stick to beat Congress to act, arguing that if it doesn’t the EPA will. (Reality: Any EPA actions will be tied up in court for years.) It also helps explain EPA’s Monday analysis claiming the legislation won’t cost all that much. (Reality: The agency could only make this claim by assuming an endless recession.)

The real risk to the president is that his bill goes down at the hands of his own party — with nary a Republican to blame. Whether Mrs. Pelosi and Mr. Waxman considered this as they crafted their gem is unclear. But the overreach has made it a possibility now.

April 11, 2009

In today’s Wall Street Journal

Today in the Wall Street Journal I am pleased to say my letter to the editor was published.

Our Government Should Serve the People, Not Donors

commend you for “The State Lawsuit Racket” (April 8th) describing the remarkably bald face pay-to-play scheme Pennsylvania Gov. Ed Rendell conjured up with major campaign contributor F. Kenneth Bailey, of the Bailey, Perrin & Bailey law firm.

The gambit is as simple as it is shameless: Mr. Bailey contributed $90,000 to Mr. Rendell’s re-election campaign. In turn, Mr. Rendell skirted Pennsylvania law to reward his benefactor’s law firm with a potentially lucrative no-bid contingency fee legal contract. Asked about the apparent impropriety of such a transparent political payoff, Mr. Rendell’s spokesman replied that Bailey, Perrin was selected because of “their experience in these kinds of legal matters.”

The practice of such nefarious pay-to-play ploys as Mr. Rendell’s is all too common not only in Pennsylvania, but nationwide. And it is the most corrupting of practices. Not only does it cost the taxpayer billions in no-bid backroom deals, it betrays the trust of voters who expect politics to be played on a level field.

Citizens in Colorado last year moved to end this blatant abuse when they passed Amendment 54. And while those feeding off the pay-to-play system are challenging it, most legal scholars agree the people have it well within their rights to set the terms of sole-source contracts with vendors.

Nobody getting the benefit of an non-competitive, no-bid contract from government should be allowed to funnel money to the people awarding, or overseeing, that contract. It is basic fairness.

Pennsylvania, and Congress, should follow the example set by Colorado and ban this obscene practice once and for all.

April 8, 2009

An “Outrageous” Double Standard

By Howie Rich, Chairman of Americans for Limited Government.

Outrage seems to be the “coin of the realm” in Washington D..C. these days – as long as it’s focused on the (former) private sector and not the government agencies and politicians overtaking it.

Politicians who, it should be noted, are every bit as culpable in creating our current economic mess.

The rules don’t apply to these “leaders,” though, even though they’ve been availing themselves of taxpayer-funded bonuses a lot longer than the Wall Street firms have.

An “Outrageous” Double Standard

March 25, 2009

Watching The Trillions Pile Up

By: Howard Rich Chairman of Americans for Limited Government

With another $2 trillion in federal interventionism announced within the last week alone, the price tag for America’s economic “recovery” continues to soar to stratospheric, scarcely-comprehensible heights.

First we had hundreds of billions for troubled – now “toxic” – assets.

Then we had President Barack Obama’s $787 billion bureaucratic bailout – an unprecedented expansion of programmatic, status quo spending that will create the “Mother of All Annualizations” for dozens of cash-strapped state governments that even now still refuse to live within their means.

Next there was “quantitative easing,” which is another way of saying our federal government started printing money so that it could purchase more of its own debt.

All told, the feds have pledged $13 trillion to deal with the current recession – or trillions more than our existing national debt.

Think about that for a moment – $13 trillion.

Watching The Trillions Pile Up

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