The Latest Bad Tax Ideas From Washington

Bad ideas flow from Washington, D.C. like water flows over Niagara Falls.  But there are two that make up the latest bad tax ideas from Washington.

Niagara Falls The Latest Bad Ideas From Washington

(click for animation)

Naturally, these are being floated as part of the tax reform effort. Politico has summarized the proposals being kicked around. You can read more there. And Dan McLaughlin, attorney and columnist for the National Review Online, has written briefly about one of these proposals. (In fact, it was Dan’s column that alerted me to the potential problem.)

But here are two of the many ideas floated in the Politico article.

One idea quietly being discussed would be taxing the money that workers place into their 401(k) savings plans up front: an idea that would raise billions of dollars in the short-term and is pulled from the Camp plan. This policy idea is widely disliked by budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save.

Among the decisions that the White House, Treasury and congressional leaders have settled on is that any tax proposal will require U.S. companies to bring back earnings from overseas at a one-time low tax rate, a favorite proposal of the business community known as repatriation.

I’ll discuss these proposals in order.

Taxing Retirement Contributions

It happens you can already make retirement contributions out of taxed income. The Roth IRA allows you to make contributions out of after-tax income. You get no tax deduction in the year you contribute. But you are allowed to withdraw when you retire and pay zero taxes. To summarize, contributions to Roth are from after-tax income, while withdrawals are tax-free. Contributions to conventional IRAs are from before-tax income, but withdrawals are taxed as ordinary income. (Rollover IRAs are accounts created when a balance is transferred from, say, a 401(k) account. Employers sometimes require this, especially for employees who no longer work at the firm.) Also, some households hold more than one type of IRA.

But this proposal is different. It would essentially mandate that contributions to 401(k) plans be made out of after-tax income. (Presumably, the 403(b) plans used by academics would also be included.) This is a terrible idea for a number of reasons. First, as Dan McLaughlin noted,

While the overall goal of cutting business and investment taxes by lowering the corporate tax rate is a good one, much of the pro-growth benefit of reducing business taxes will be kneecapped if the budget bean-counters get away with slapping additional taxes on money invested in 401(k)s, many of which flow into investments in the same corporations getting the tax cut. Taxing individual retirement savings is also bad from the standpoint of conservative economic philosophy, because it discourages self-reliance. It would unsettle plans made in reliance on the existing code by lots of people – not a reason to freeze the code in amber, but certainly a caution for anyone monkeying with the rules. And as an electoral matter, it’s likely to be politically radioactive with precisely the sorts of wavering suburban voters who were staunch Republicans during the Obama years but are uncomfortable with Trump.

Second, economists have complained for decades that Americans don’t save enough. And it’s true. In the second quarter of 2017 household saving was 5.4% of gross national income (GNI).[1] The last thing we need is to remove an incentive to save. But that’s exactly what this proposal would do.

Political Risk

Finally, there’s political risk. Roth IRAs essentially create tax revenue for the government today. But future tax revenue will be lower when retirees withdraw funds tax-free. Future Congresses are likely to be unhappy with this. What today’s Congress has done any future Congress can undo. It’s entirely possible that a future Congress could revoke the tax exemption for withdrawals.[2] This explains something that has puzzled many economists and investment advisers. If you believe the government’s promise, no one with an ounce of understanding of economics would ever choose a conventional IRA over a Roth IRA. Yet Roth IRAs have not been very popular. To see this, we can compare the demand for Roth and conventional IRA accounts.

The Employee Benefit Research Institute publishes data on IRA holdings (among many, many other topics). Their latest data is from 2013.[3] And there are two measures: the percentage of households holding each type of IRA and the percentage of assets held in each.

Looking first at the percentage of households, conventional IRAs were 34.5% of the market, Roth IRAs were 20.5%, and rollover IRAs were 21.0%. The remaining 24% of households held two or all three.

Market share by households The Latest Bad Ideas From Washington

Market share by households (click for larger image)

The market share by percentage of asset valuess shows conventional IRAs were 26.6%, Roth IRAs were 5.7% and rollover IRAs were 19.8%. Again, the remaining 47.9% of total assets were allocated to two or all three.

Market share by assets The Latest Bad Ideas From Washington

Market share by assets (click or larger image)

Roth vehicles continue to be unpopular. As Vice-President Pence said recently, “People in Ft. Wayne understand this.”

Repatriating Funds Held Overseas

Where to begin? The first objection is that corporations would be required to repatriate funds held in other countries. This sounds more like Socialism than capitalism. The government will actually order businesses to return those funds?

But even worse, this is a one-time offer at a lower tax rate. Corporations have already paid taxes on those earnings in other countries. The correct U.S. tax rate would match what other countries charge: 0.00%.

Finally, it’s temporary. As economists once knew, temporary tax changes do not change long-run behavior. Even if these funds are repatriated, the deadline for this deal will pass and corporations will once again begin to accumulate funds in other countries. Sadly, this is typical of the short-sighted “thinking” in Washington, D.C. Whoever dreamed up this idea should be booted out of the meetings discussing tax reform.

Conclusion

Over the past 30 years I’ve positively dreaded the idea that the tax system would be overhauled again. When Congress opens up the tax code for any serious rewriting, you can bet the farm that the code will not get any simpler. As I’ve written many times before, Congress and the President use tax complication to hide the many favors they dispense to favored interest groups. Sadly, it appears that we may be in for another 5,000 pages added to U.S. tax law.

[1] Source: U.S. Bureau of Economic Analysis. Accessed September 4, 2017.

[2] I once used this example in an MBA finance class. One of the students exclaimed, “They [Congress] would never do that!” He became more cynical as the course progressed.

[3] Craig Copeland, Ph.D., Employee Benefit Research Institute. “Individual Account Retirement Plans: An Analysis of the 2013 Survey of Consumer Finances” November, 2014, Number 406.. https://www.ebri.org/pdf/briefspdf/EBRI_IB_406_Nov14.IAs1.pdf accessed September 4, 2017.




Operation Choke Point Is No More

Red Tape

Red Tape (click for larger image)

A win for the good guys!  Operation Choke Point is no more.  This underreported story was pointed out by James Taranto who helped me with my first Wall Street Journal op-ed (Stimulate the Economy and Spend Nothing, jan. 16, 2017 )  I’ve written about this abysmal assault on our Constitutional rights before. Click here and here and here and here.

Reporting in the Washington Examiner, Joseph Lawlor wrote

The Trump administration has ended Operation Choke Point, the anti-fraud initiative started under the Obama administration that many Republicans argued was used to target gun retailers and other businesses that Democrats found objectionable.

Assistant Attorney General Stephen Boyd told GOP representatives in a Wednesday letter that the long-running program had ended, bringing a conclusion to a chapter in the Obama years that long provoked and angered conservatives who saw Choke Point as an extra-legal crackdown on politically disfavored groups.

“All of the department’s bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again,” Boyd wrote in the letter.

The letter was addressed to Jeb Hensarling and Bob Goodlatte, the chairmen of the Financial Services and Judiciary Committees, respectively. Their staffs confirmed they received the letter.

Here’s the full letter from Assistant Attorney General Boyd.

Letter from Steven Boyd

 




Complexity Hides Corruption in the US Tax Code

Yes, I know, I should have written this in April. But I was busy with paying projects and filed an extension. We almost always get a federal refund, so I wasn’t worried about the payment. And, as always, I used TurboTax, the same software I’ve used for at least 20 years. And, yes, I pay for my copy every year, too.

But there were two new gotchas. Sigh. Taxes get more annoying every year. And complexity hides corruption in the US tax code. But, if you don’t itemize deductions you can stop reading now. These are Schedule A issues.

Mortgage Origination Date

So I’m chugging along entering mortgage interest. It happens that my lovely wife and I each owned a house before we were married. So that’s two mortgages on which we’re paying interest. And all of a sudden up pops these questions:

TurboTax new mortgage interst questions Complexity Hides Corruption in the US Tax Code

TurboTax new mortgage interst questions (click for larger image)

Outstanding balance? Origination date? And why am I being asked for property taxes here when I know for a fact that there is a separate line item on Schedule A for property taxes?

OK, I can find this information on the companies’ websites. But it was yet another pain heaped on top of the mountain of trivia and frustration from the U.S. tax code. For what it’s worth, here’s the line item from the mortgage interest worksheet:

Mortgage interest worksheet Complexity Hides Corruption in the US Tax Code

Mortgage interest worksheet

Adding Insult to Injury

The greatest pleasure from the whole tax-filing process is finishing the job. But another minor source of joy has been deducting tax preparation expenses. What I pay for TurboTax, Quicken, and a few other items never amounts to much. But there’s a little ray of bitter sunshine knowing that at least the IRS pays for part of these expenses. By the way, this also applies to unreimbursed employee expenses.

But no more. Tax preparation expenses are now means tested. In order to deduct anything your expenses must be more than two percent of your adjusted gross income. This is, essentially, a gift to the wealthy. They can shield a lot of their income from taxes, making their AGI relatively low. And they probably pay quite a bit to have their taxes done. It’s us poor slobs who exist on the fringes of the upper middle class who watch our deduction drop to zero.

Means-tested items new this year Complexity Hides Corruption in the US Tax Code

Means-tested items new this year

Conclusion

For decades I taught my students that the U.S. tax system will never be simplified. If it was, taxpayers could easily see which individuals and businesses were getting special treatment. But complexity hides corruption. The U.S. tax code is a monument to that saying.




Stimulate the Economy and Spend Nothing

Published in the January 17, 2017 Wall Street Journal.

Stimulate the Economy and Spend Nothing - WSJ

 




Operation Choke Point

[This was first published in early 2014.  I’m reposting it now so it will be easy for Wall Street Journal readers to find.]

I recently wrote about Operation Choke Point.  That’s the name of the new set of banking regulations designed to choke off bank access to illegal activities.  Except that many of the activities are perfectly legal.  Here’s a partial list of entities targeted:

Choke Point Targeted Industries

Choke Point Targeted Industries

So much for the second amendment: firearms and ammunition sales.  So much for your social life: dating services (no, I won’t include escort services).  And pharmaceutical sales?  Are they talking about the drugs I regularly get from Kaiser via USPS?  Needless to say, racist materials, telemarketing, and even pornography are broadly protected by the first amendment.

Kelsey Harkness

Kelsey Harkness

Kelsey Harkness at The Daily Signal has been all over this story.  Today she reported what may be a bit of good news:

Daily Signal Article

Daily Signal Article

The correspondence I received from the FDIC and DOJ is a great first step in ensuring that those responsible for Operation Choke Point are held accountable and that Congress and the American people receive details and answers they deserve.

The investigation will be conducted by the Justice Department (bad) and the Federal Deposit Insurance Corporation (probably good). Eric Holder’s Justice Department has been a cesspool of cronyism, discrimination, racism, and Chicago-style shakedowns. We owe thanks to  Rep. Blaine Luetkemeyer (R-MO), quoted in Ms. Harkess’s article →

But there’s more.  Consider this (from the Daily Signal article, quotation attributed to FDIC):

Responsible for regulating and auditing more than 4,500 banks, the FDIC also agreed to investigate what it calls a “serious allegation” by the congressmen that an FDIC senior official provided false testimony to Congress on the operation.

“Going forward, we will work through the committees and report the results of our work when and as it is appropriate to do so,” wrote Fred W. Gibson Jr., Principal Deputy Inspector General for the FDIC.

We can only hope.

 

 




My 2017 Economic Forecast

Opening slide

That leaves Trump with economic advisers who are 100% batshit crazy protectionists. Kudlow would have been a voice of sanity.

[Update January 22 with news about the chair of the Council of Economic Advisers]

Apparently Larry Kudlow is out. From the linked article →

The good news is that Kevin Hassett is on the short list.  He’s currently

…director of research for domestic policy for the American Enterprise Institute, is a tax expert with a Ph.D. from the University of Pennsylvania. His presence in the administration would address the concern of some economists, including former Republican and Democratic chairmen of the panel, that Trump lacked academic economists on his team. Hassett has published several articles [four listed on his cv] in the peer-reviewed American Economic Review.

This guy is the real deal, albeit with a strong focus on taxes and tax policy.  I was unable to find anything about his views on international trade, but he’s a respectable economist — the first, so far, in the current administration.  You can find out more about him via his page on the AEI website.

[Updated January 20 to add the video of my talk.]

On January 9 I had the privilege of speaking with the Hayward Rotary Club on the economic outlook for 2017.  I have a video of my presentation, but it will take me some time to get it online.  For now you can click here for a pdf version of my Powerpoint slides.  As always, feel free to leave comments, opinions, or just chime in with your forecast.

 




Check Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Update: just as I was about to publish this article, Kelsey Harkness’s recent article flashed in front of me. Kelsey is a writer and producer at The Daily Signal. And, once again, the two of us have been thinking along the same lines. (See Operation Choke Point for another example.) Her article includes a nifty video featuring interviews with customers who use overdraft protection and payday loans.  Both are substitutes for more conventional types of credit, including credit card lending, personal loans, car loans, and mortgages.  The last two, of course, are collateralized.  Miss a few car payments and the lender can take back the car. (See the classic Repo Man (1984, Harry Dean Stanton at his best) for examples.)

Payday Loan Cost Table Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Payday Loan Cost Table (click for larger image)

Now on to my original article.

Have you ever bounced a check? (“What’s a check?” Patience, grasshopper.) Technically your check was returned because the balance in your account did not have sufficient funds to cover the amount of the check. Such events are called NSF in the industry.

Today, of course, people use debit cards and many checks are processed via automated clearing house (ACH) systems. Nevertheless, when you use a debit card for a transaction that exceeds the balance in your account, in many cases it will be covered by overdraft protection. And, guess what? You pay for the privilege of not having the transaction declined. (Indeed, you are more likely to have a credit card transaction declined if the balance is near your credit limit.)

On December 20 the Pew Charitable Trusts released a study of overdraft protection. It would be hard to imagine more bias. The research focuses exclusively on overdraft protection fees and their impact on the poor. There was no mention of the benefits to consumers.

And there are many benefits. For one thing, both the bank and the merchant will charge you a fee for NSF. The lowest fee I’ve seen at a business is $25. But there’s also a larger cost. If enough transactions are declined your credit rating will suffer. If a very large number are declined, your bank may terminate your account. These costs are probably greater than the actual monetary costs, especially for the poor who usually don’t have very good credit.

As for the bank fees, let me use Wells Fargo Bank NA as an example. (I bank at Wells Fargo and am quite familiar with their website. I chose them because it was my lowest-cost research option.)

Wells Fargo charges $35 for overdraft protection at the most basic level. (Interestingly the fee is only $12.50 for “Teen checking” accounts.) However, this is literally a personal loan with no collateral.  There are no funds in any of your accounts to cover the transaction. The bank also charges $35 for an NSF transaction. But if you have a savings account and/or a line of credit with sufficient funds to cover the transaction, the overdraft fee is $12.50. And you can also set up overdraft protection using a credit card issued by the bank. For my accounts, the fee for overdrafts less than $50 is $12.50. For overdrafts greater than $50 the fee is $25.
(I got the credit card fees from a phone call to Wells Fargo customer service.)

The reason overdrafts not covered by savings, line of credit, and/or credit cards are so expensive is that they are essentially unsecured loans. Wells Fargo does note that if you cover the overdraft with a deposit by the end of the business day there will be no fee.

Legal geeks will want to read the official FDIC study on the mechanics of overdraft protection.

What About the Benefits?

… usually serves as a short-term source of small-dollar credit in order to meet a pressing need for funds and to prevent important payments such as utilities, rent, or other bills from being denied for insufficient funds. Moreover, those who use overdraft protection do so because it is better than available alternatives.

Do the benefits of overdraft protection outweigh the costs? A study by the Federalist Society in 2012 (Todd J. Zywicki and Nick Tuszynski, “The Economics and Regulation of Bank Overdraft Protection,” March, 2012) notes that overdraft protection, →

Other research shows that those who use overdraft protection (and payday loans) are quite aware of the cost. But the cost of, say, having the electric power to your home cut off is apparently regarded as much higher than the overdraft fees by actual consumers.

Economists still are pretty sure that, in most cases, consumers make the best decisions they can given their economic and social circumstances. The Pew study is yet another piece of research that implicitly assumes consumers are stupid and need government protection.

Check Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

This is a check. People once used these to buy goods and services.

Oh, yes.  Above is a picture of a check.  Don’t bother — neither the routing number nor the account number are valid.




Vancouver House

Vancouver BC Imposed a Fifteen Percent Tax on Foreign Home Buyers. Guess What Happened Next?

In the best rent-seeking tradition, I support this law. Demand will shift from Vancouver to the west coast – including the greater Silicon Valley area where my wife and I own two houses.

Somehow I missed this story when it hit the newswires in July. Vancouver, British Columbia, is a delightful town with breathtaking scenery, a pedestrian-friendly downtown, and attractions for all manner of tourists. Add in the Mediterranean climate and the magnetism is almost irresistible. Apparently the lure was enough for flight capital from China to push up housing prices, especially in the higher-priced segment. According to Reuters,

The new law comes weeks after the province released preliminary data showing that foreigners invested some C$1 billion ($756.7 million) in British Columbia housing from June 10 to July 14, with about 86 percent of that in Vancouver.

The cost of a typical home in the Vancouver area jumped 32 percent over one year to hit C$917,800 [$694,500] in June. Foreign buyers have taken the brunt of the blame for the runaway market, though factors like low interest rates also play a role.

The results have been all too predictable. Bloomberg reports that the demand for $1 million plus priced houses in Seattle has spiked. The tax went into effect August 3. Here’s what happened:

Demand Shifts South and East

Demand Shifts South and East (click for larger image)

Here are the details (from Bloomberg):

The Seattle metropolitan area has already seen a 50 percent jump in house prices in the past five years, thanks in part to a booming technology industry and growth in companies such as Amazon.com Inc. and Microsoft Corp. Still, the median home value is $409,900, less than in San Francisco and Los Angeles, according to Zillow Group Inc. In Vancouver, the benchmark home price is C$919,300 ($680,000), or C$1.06 million ($782,000) with the tax.

Interestingly, some of the demand is shifting to Toronto. Please, folks, look to the south. It’s pretty nice along the California coast from Bolinas to San Diego.




A Plea to My Fellow Economists

[Update November 15: read this first.  It will save you time.]

Last summer any number of foreign policy experts wrote open letters opposing Mr. Trump’s candidacy. Some declared outright that they would not work in the Trump administration even if they were asked. While this note is addressed to my colleagues in the economics profession, I hope our foreign policy counterparts will listen to my plea.

There are many competent, qualified professional economists in the U.S. Some may be invited to serve in the Trump administration. Their inclination will be to say, “No.”

Please don’t do this. Mr. Trump’s current team of economic advisers is about the worst I have ever seen. I’ve written about his chief adviser, Peter Navarro, who is no more qualified to be an economic adviser than I am to play in the National Basketball Association.

There are, however, a number of good economists who labor in obscurity. I am especially partial to those who do the number-crunching, specifically statistical analysis. I oppose economists who rely on models that are entirely endogenous and based on assumptions. (Jonathan Gruber’s “micro-simulation model” cited when he supported the ACA is one such animal.)

So, in no particular order, here’s my list:

  1. Casey B. Mulligan, U. of Chicago has done some of the best, most original number-crunching on the impact of the ACA and other Obama programs. His predictions have been more accurate than almost anyone else.
  2. Karen H. Johnson retired as Director of the Division of International Finance at the Federal Reserve Board in 2007. But you’ll need to find her first.  Since her retirement she has apparently decided to maintain her privacy.  Dr. Johnson would bring valuable experience and intelligence to any attempt to reform the Fed.  She is very smart and articulate.  Disclaimer: she was my dissertation adviser at Stanford.
  3. David Neumark, U.C. Irvine has done the best empirical work on the minimum wage and poverty available today.
  4. Bob Hall, Stanford and the Hoover Institute. Along with Chad Jones (Stanford) Bob has the kind of eclectic research portfolio that should serve him well in Washington.
  5. Don Fullerton, University of Illinois and National Bureau of Economic Research (although a spot in the EPA might be a better fit given his expertise in environmental economics).
  6. Charles I Jones, Stanford Graduate School of Business. (See Bob Hall above.)

Casey B. Mulligan

Casey B. Mulligan

Bob Hall

Bob Hall

Chad Jones

Chad Jones

David Neumark

David Neumark

Astute readers will notice the absence of any faculty from Harvard, MIT, and other famous programs east of Lake Michigan.  Frankly, these are the folks who got us into this mess.  I hasten to add that some of Prof. Mulligan’s colleagues at Chicago have made their own special contributions to the current U.S. economic malaise.

 




Tony Lima Interviewed by Dukascopy TV

Dukascopy Studio

Dukascopy Studio

Dukascopy is a Swiss financial services firm.  A few weeks ago I was interviewed by Celeste Skinner.  The video runs about eight minutes.  And I apologize for my seemingly-closed eyes.  Next time I will position my teleprompter better.