Thursday, January 17, 2008

Dialog Becomes Argument

Here is a hypothetical discussion at an automobile dealer.

Customer: I would like to buy a car that will seat my family of four, and will get really good gas mileage, say around 40 miles per gallon.

Salesman: What you really need is our Reckless Sports Coupe. The engine has 350 horsepower, and it has a convertible top.

Customer: But it only has 2 seats. I need a car that seats 4.

Salesman: That 350 horsepower engine in the Reckless will take you from zero to 60 mph in less than 6 seconds. And the Reckless comes in 7 sporty colors including racing green and fire engine red.

Customer: I really need a car that gets better gas mileage, because I have a long commute and a short budget. And I need at least 4 seats.

Salesman: The convertible top on the Reckless will make you the envy of the neighborhood. And it will let you enjoy the fresh air and sunshine on your Sunday afternoon drives.

Customer: I agree. The Reckless has a big engine and goes very fast. It's convertible top makes it lovely to look at and fun to ride in. But I need a car with 4 seats and fuel efficiency. I shall visit another dealer.

This is not a dialog, it is a one-sided argument. The salesman does not hear, or he defiantly ignores the customer's needs. He continually changes the subject. The salesman so believes in his product that he is determined to sell it, even though it does not meet the buyer's requirements. He goes on and on, extolling the virtues of the car that, in this buyer's eyes, has two major drawbacks. That the frustrated buyer goes somewhere else to make his purchase is to be expected.

Politicians do this all the time. When his pet program is criticized by a citizen whose needs are not met by it, the politician makes no effort to show how those needs can be satisfied. Nor does he attempt to modify his program. Sometimes the simple truth is that the politician does not want to meet the needs of this citizen. He changes the subject because he has no reasonable alternative to offer. He talks about all the other features of his program, or he appeals to emotions--anything to avoid discussing the expressed concern of the citizen.

If the customer decides to fall in love with the racy colors and the convertible top, he votes for the politician and ends up with a program that does not really benefit him. If he absolutely has to have 4 seats, he votes for another candidate.

That's why political discussions are so frustrating. The 'salesmen' relentlessly dodge the issues.

Tuesday, January 01, 2008

The "Fair Tax" is NOT Fair

I will be the first to admit that I have not read a detailed proposal for the so-called "Fair Tax." I understand that the concept is to replace the Federal Income Tax with a Federal Consumption (or sales) Tax.

Its proponents may call it a Consumption Tax, if they wish, but I can think of two reasons that it should not be called a "Fair Tax."
  • First, a personal one -- a significant portion of my income comprises my contributions to company pension, on which I have already paid Federal Income taxes. That income is reported, but not taxed a second time. If a consumption tax were implemented, I would be paying consumption tax on money that was already subjected to the income tax.
  • Second, it appears to me that a consumption tax unfairly benefits high wage earners over lower wage earners.

To illustrate the second point look at two simple examples: one a laborer who earns $50,000 per year; the second an executive who earns $5,000,000 per year.

  • The laborer now pays 15% of his earnings ($7,500) in income taxes. If he is frugal, he saves about 10% of the after tax money and spends the rest, $38,500 to live on. Under the so-called "Fair Tax," the laborer will still put $4,250 into savings. He will spend the remaining on goods taxed at a 23% rate ($37,195 in goods and services, $8,555 in federal tax). That means his tax bill has gone up from $7,500 to $8,555)
  • The executive now pays about 24% of his earnings ($1,200,000) in Federal income tax, invests about $2,800,000 in savings, and spends the last 1,000,000 to live on. Under the so-called "Fair Tax," the executive will still live on 1,000,000 worth of goods and services, on which he will pay $230,000 in Federal Consumption tax, and he will invest the remaining $3,770,000 in savings, which will earn him even more money next year. His taxes decrease by $970,000. [Now, you rich guys can explain to me that you just can't get by on a measely $1,000,000 per year. But even if you significantly change the spending to investment ratio, the taxes still go down. Moreover, the laborer does not have the latitude to make that kind of adjustment.]

So the Consumption Tax is NOT a fair tax! It benefits the wealthy at the expense of the poor. Most tax laws are written this way because they are written by wealthy people. Then they present the tax in such a way that it appears to be "fair."

Most people will agree that any tax on a person who earns less than "the poverty level" is not really fair. Many will agree that at some point one's earnings are such that he can live comfortably, build his savings, and still have a LOT of money "left over." Just ask Bill Gates or Warren Buffet.

A flat tax on income, or a somewhat progressive variant thereof, is probably the only way to approach fairness in taxation. The variation I suggest is a tax on ALL personal income (regardless of source, no deductions, no adjustments, no credits) -- approximately the first $33,000 of income to be tax-free; from $33,001 to $200,000 of income to be taxed at 12%, and from $200,000 up be taxed at 25%. The break points should be adjusted annualy for inflation. The actual rates can be calculated to make sure that the structural change is "revenue neutral."

A few notes: (1) I said personal income. Taxes on corporations are never paid by the corporations; they are passed on to the consumers in the form of higher prices. (2) The highest rate of 25% may seem low to some ultra-liberals, but remember it applies to ALL income (i.e. no more 15% rate for capital gains). (3) ALL income may be hard to determine, because some people receive many types of income and do not report portions of it that are not salary, wages, or interest. (4) The consumption tax is even more cruel to the poorest of wage earners who now pay no income tax. Suddenly, they will see their buying power decrease by 23%.

I know this is all overly-simplified. The discussion is meant to be conceptual, as opposed to specific. But one of the keys to solving the tax problem is to simplify it. One important concept is that taxation should be used to fund the operations of government, not to control people's behavior. A typical governmental abuse of "consumption" taxes is to increase the consumption tax on "undesirable" products and services. A tax that is simply based on total personal income avoids that kind of abuse.

Global Warming: Fact or Fiction?

An editorial in the Orange County Register today states that the "consensus" on global warming is a fiction.

It points out that many scientists from prestigious institutions disagree strongly with the findings of the U.N.'s Intergovernmental Panel on Climate Change that increases in man-made greenhouse gases are causing global warming.

The skeptical scientists are experts in many fields: climatology, oceanography, geology, biology, environmental sciences, physics, and others. They are affiliated with institutions that inclured Harvard, NASA, the National Oceanic and Atmospheric Administration, the National Center for Atmospheric Research, MIT, the International Arctic Research Center, and the Royal Netherlands Meteorological Institute, among others. Their views are accumulated in a report from the U. S. Senate.

The consensus-refuting comments can be read at http://www.epw.senate.gov (click on U.S. Senate Report: Over 400 Prominent Scientists Disputed Man-made Global Warming Claims in 2007). Some examples:
  • Dr. Howard Hayden, University of Connecticut: "Climate history proves that Gore has the relationship between carbon dioxide concentration and global warming backward. A higher concentration of carbon dioxide in the atmosphere does not cause the Earth to be warmer. Instead, a warmer Earth cause the higher carbon dioxide levels."
  • Swedish geologist Dr. Bibjorn Karlen, professor emeritus at Stockholm University: "...As far as I can see the IPCC 'Global Temperature' is wrong. Temperature is fluctuating, but it is still most places cooler than in the 1930's and 1940's...it will take about 800 years before the water level has increased by one meter."

The OC Register is correct--there is no consensus! Some scientists disagree over the extent, if any of the warming trend. Others see correlation between increases in CO2 concentration and Earth temperature increases, but disagree on which is the cause and which is the effect.

So which group of scientists should we believe? I maintain that it does not matter all that much, because there are less complex issues on which it is easier to reach consensus. We can probably agree that the continuing and increasing use of fossil fuels will result in both the eventual depletion of the resources and an unacceptable pollution of our atmosphere. Their continued use threatens the viability of our civilization. Irrespective of the hullabaloo about global warming, it makes sense to reduce both our total energy consumption and our dependence upon fossil fuels.

Whatever actions we take, however, must be based on thorough mathematics and sound scientific principles. We must accurately assess both the energy cost of producing a product and the pollution created upon use or disposal of the product when we consider replacing that product with another. Those characteristics are easier to predict and to quantify for some specific products than is the more complicated processes of global climate change.