Wednesday, December 03, 2008

Re: Abundant and Great Investment Opportunities

Al and All,

For a long time, I have been supportive of a revenue neutral tax increase on oil. While I believe Al Gore is way off the reservation in regard to global warming (carbon dioxide concentrations have hit record levels over the past 10 years while the globe has cooled), I have said that I could support his plan to raise taxes on fuel and to offset the tax increase with a tax exemption on the first so many thousands of dollars of payroll tax. One idea batted around has been a $15,000 exemption.

The economic idea is straight forward; raise taxes on fuel and we will use less; lower taxes on labor and we will hire more. The first two principles of good tax policy are 1) to raise taxes as efficiently as possible and 2) to avoid using taxes to socially engineer as unintended consequences are the result of poorly planned tax schemes. The unintended consequences of our current system have gotten way out of hand.

The adjustment needed is to go to the Fair Tax, which is a tax on consumption rather than a tax on income. It should be obvious to all that it makes sense to encourage income growth and to discourage excessive spending. It is painfully obvious that Americans engage in wasteful spending; we buy huge houses in the suburbs and we get to and from them in gasoline guzzling monster cars. If we were to eliminate the tax on saving, there would be less spending, more saving and a lower risk economy. The business cycle would be tamed by the end of crazy swings in tax policies. We need to stop handcuffing the invisible hand of Adam Smith.

The vested interest in the income tax system is huge, so, the fair tax is not likely to pass soon; eventually, good ideas keep coming back until they are adopted. In the mean time, we must take baby steps in the right direction. Economically, it would be better to offset a new carbon tax with reductions in income taxes, but the reduction to the payroll tax is the thing that could get passed by a democratic congress. The other thing positive thing that has democratic and republican support is a lowering of the corporate tax rate accompanied with a reduction in loopholes.

As far as stimulus packages go, not much is needed. Low interest rates and low prices are having an effect which will gather momentum in the months ahead.

As far as infrastructure is concerned, we simply need to use available technology to put the money where it needs to go. We now have the ability to count the traffic on every road in America. This means we can stop building roads and bridges to nowhere and paving rural highways to senators barns. Under the current system, revenues derived from heavily used highways, many of them interstate highways, is siphoned off and spent on boondoggles. Projects have included everything from subways to skateboard parks. Worthy projects, perhaps, but not the responsibility of the highway trust fund. Many four lane interstate highways would already be six lane highways if the income derived from these roads had been used to fund and maintain these roads. Interstate highways have been very profitable for governments but over the past 20 plus years the funds have been siphoned off to Amtrak, bus stations and child care facilities. If the count shows that 5.5% of all miles driven last year were driven in South Carolina, then South Carolina should receive 5.5% of all federal gasoline tax revenues the following year. The building of a monster bridge to Charleston would automatically result in tightness in the building of other roads in South Carolina. Most importantly, the people of South Carolina would not be taxed to build monster bridges in California.

The adoption of a carbon tax on all fuels would discourage the purchase of super charged or monster vehicles while encouraging all sorts of fuel saving techniques. We do not need empty buses being driven around town, but the number of bus routes would increase if the price of fuel was increased. Using the money to replace the payroll tax on the first $15,000 worth of income, would have a significant impact on job growth. This is the kind of tax that will more than pay for itself. Our country would see tax revenue increases as a result of job and income growth. Upon the success of this first step, it might be easy to "do it again". The second go round could totally end the payroll tax with the end of the income tax thrown in for good measure.

Al, the problem is in the timing. Right now we are suffering from the "Paradox of Saving"; the economy is being hurt in the short run by excessive savings, while setting up for a tremendous and long run of prosperity. Consumers are spending less than they normally would, which is a reduction in demand and a decline in GNP. Gradually, consumer balance sheets are improving and lower real estate prices and interest rates are making the buying power of consumers soar.

Raising taxes during a recession would be counter productive, as is clearly evidenced by the tax increases Roosevelt put through during the early years of the great depression. It was republican government policy that got the recession going and democratic policy that converted a tough recession into a great depression. The following is the way to accomplish what needs to be done:

The congress should pass an exemption to the first $15,000 of payroll, giving every working American and every business an immediate tax cut. The law should include a delayed offsetting carbon and gasoline tax. The carbon tax and the gasoline tax should be phased in 20% per year at the end of the next 5 years. The carbon tax should be on the order of $50 per tonne and the gasoline tax should be about 50 cents per gallon. Consumers having benefited by about $1,100 in higher income would hardly notice the 10 cents per gallon increase at the end of the year.

A separate law should be passed to lower the tax rates on corporations. This law should immediately close loopholes so that all corporations have to pay taxes. The new corporate rate should be determined by calculating the revenues to offset the planned increase in carbon taxes to be paid by corporations. A lot of dirty industrial burning would be eliminated and a lot of jobs would be created.

One beauty of this plan is that the precise amount needed to be raised from the fuel tax would be known. The tax cut to consumers would amount to about the sum of 7.5% (or whatever the precise payroll tax) times $15,000 for each person employed in America. The last increase in the fuel tax could be required to bring the fuel tax increase into line with the payroll tax savings. The calculations for corporations would be a bit more complicated but it should be easy to come close to approximate neutrality. This revenue neutral concept is the assurance that would attract the few moderate-conservative votes needed.

Under the above plan, the private sector would spend far more than $150 Billion on alternative energy research. Mass transit usage would grow. Miles driven would be reduced. Subsidies for corn fuel could be ended. Windmills, solar, nuclear and other low carbon producers would be more competitive. Battery research would be expanded.

As noted, I think Al Gore is full of hot air, but taxing consumption, rather than income is the key. In the short run, the cost of electricity would be higher than otherwise but, in the long run, more efficient means of production would win out. The earth is not likely to ever run out of oil, however, we have millions of years supply of thorium that is cost competitive with coal fired electricity. Indeed, thorium plants generate the high heat that can be used to extract tar sands and oil shale and to convert coal into clean liquid fuel.

It is time to tell the auto companies to tighten their belts, sell Volvo and Saturn to independents to survive or to enter Chapter 11 bankruptcy. A few years ago, a clearing price was reached. Once auto workers started making around $90 per hour in total compensation, the hand writing was on the wall. America needs millions of new jobs, not just a few hundred thousand $90 per hour jobs.

Obama is steering hard toward the middle. He has removed his windfall profits tax plan from his web site. While he has consistently advocated tax cuts for the middle class, he has backed off on the massive tax increases he earlier proposed. A tax cut on the first $15,000 of payroll income would be a progressive tax cut consistent with his campaign pledges. The high income worker and the low income worker would get the same dollar benefit but the low income worker would see a dramatically higher tax cut percentage. When the fuel tax kicked-in, the low income bus rider would have his cake and eat it too.

On Wed, Dec 3, 2008 at 10:56 AM, Al wrote:

Is it time to put a floor under liquid fuel energy prices? The additional taxes would pay for much needed infrastructure improvements and stabilize our use of oil, allowing us to develope a long term total energy policy. Even as the big three ask the government for money (loans to be paid back), the price continues to fall at the pump, assuring that bigger vehicles will again become popular. Detroit will be back in business and the trend of bigger imported vehicles will continue. For those of us who have seen three major energy chrisis, the results are always the same, a return to larger, abet somewhat more efficient vehicles followed by another oil spike. As soon as the good times return, which will be long before the current high priests of gloom and doom predict, most of our old consumption habits will return. The free market will quickly stop investing large sums in alternative energy sources, as it will no longer offer large profit potentials. Just this week we officially found out that we have been in a recession for a year. Jack is right, the good times are at hand. The next oil price spike is only as far away as the limits of our energy conservation policy.

Maybe not all tax increases are bad?