Friday, July 27, 2007

The Folly of Luxury Taxes

Opinion Journal had a "fun" piece this week, originally from The American Spectator, written by David Hogberg, entitled "Emptying the Humidor" and sub-headed "Congressmen push a cigar tax, proving they've learned nothing from history." Here's some portions for you to smoke over:

Last week members of the Senate Finance Committee including chairman Max Baucus (D., Mont.), Jay Rockefeller (D., W.Va.), Chuck Grassley (R., Iowa), and Orrin Hatch (R., Utah) cut a deal to increase the funding for the State Children's Health Insurance Program to the tune of $35 billion over five years. To generate this money, the deal imposes a new luxury tax on cigars.

To understand why the luxury tax on cigars is a terrible idea, we need to revisit the history of the luxury tax of the early 1990s--a history that congressional members' severe amnesia is preventing them from remembering. Class-warfare thinking infected the luxury tax of 1990. Think of the multimillionaire whose wife was wearing a gold-and-diamond necklace and a fur coat. They were getting into their limousine to drive to their 100-foot yacht on which they would spend their weekend. How was it possibly fair that the rich spend so lavishly on such unnecessary items when Joe Six-Pack struggled just to put food on the table? Imposing a luxury tax on those items was a proper way to even things out, to make the rich pay their "fair share" to fund the government programs that helped Joe Six-Pack.

Unfortunately, Congress never bothered to consider that increasing the tax on these items, and thereby increasing the price of those items, might change the behavior of said rich people. (Indeed, many members of Congress stubbornly refuse ever to acknowledge that taxes ever affect behavior.) But said rich people had other ideas. If the price of jewelry, furs and yachts suddenly increased, then maybe purchasing a winter home in Florida seemed like a much better deal. Or maybe those rich people would take a shopping trip to other parts of the world, where the prices of jewelry, furs and yachts were now much more competitive thanks to the U.S. Congress.

And if members of Congress never considered that the luxury tax would discourage rich people from buying luxury items in the U.S., then they surely never considered that such an effect might not be so good for the Joe Six-Packs who worked in the industries producing luxury items. A Joint Economic Committee study later found that 330 jobs in the jewelry industry and 7,600 jobs in the yacht industry were lost thanks to the luxury tax. Perhaps the greatest irony was that in 1991 the federal government paid out over $7 million more in unemployment benefits to those workers than it collected in luxury tax revenues....

Fast forward to 2007. The current tax on cigars is a maximum 4.8 cents a cigar. The new proposed luxury tax on cigars is 53.13%, up to a maximum tax of $10 a cigar. Thus, if you like cigars worth $20, you'd be facing a staggering tax increase of 20,733%. By comparison, the luxury tax of 1990 was an increase of only 10%...

Of course, about as many people are going to shed tears for the person buying a $20 cigar as did for the rich person buying a yacht. But they might feel a lot of sympathy for the Joe Six-Packs who work in the cigar industry. Exact numbers about how many people work in the cigar industry today are hard to come by since the federal government stopped collecting data on cigar producers a few years ago. In 1999, the Census Bureau reported that 3,845 people worked in the cigar industry. Norm Sharp, president of the Cigar Association of America, guesstimates that the industry now employs between 7,500 and 10,000 workers, a plausible number given the growth in the industry in recent years. Whatever the number, what is clear is thousands of cigar employees face a fate similar to workers in the yacht and jewelry industries in 1990.

That is what Congress's severe case of historical amnesia yields--an astronomical tax increase leading to workers losing their jobs. But try to look at the bright side. If those cigar workers lose their jobs, the resulting decline in their incomes will mean that their kids will have no trouble qualifying for the State Children's Health Insurance Program.

I was with a glass and mirror company that was a supplier to a famous yacht manufacturer at the time of that tax on high-end goods and I saw first hand the effect of the luxury tax on workers who had no idea a "luxury tax" could hurt them.

Bottom line: All taxes have consequences and often the unintended consequences are the harshest.

Pope Benedict on Environmentalism & Evolution

John L. Allen in his weekly All Things Catholic reports on Pope Benedict regarding the environment and on evolution:

One could say that summer 2007 is when the Vatican decided to go green. First came an announcement in June that more than 1,000 photovoltaic panels will be installed atop the Paul VI Audience Hall, allowing the building to utilize solar energy for light, heating and cooling. A month later, the Vatican became the first state in Europe to go completely carbon-neutral, signing an agreement with a Hungarian firm to reforest a sufficiently large swath of Hungary's Bükk National Park to offset its annual CO2 emissions.

To some, these may seem curiously cutting edge moves from a pope whose recent decisions to revive the pre-Vatican II Mass and to reaffirm claims that Catholicism is the lone true church have cemented his reputation as the ultimate "retro" figure. He sometimes brings to mind the famous quip that rolling back the clock is a perfectly reasonable thing to do if it's keeping bad time.

So what gives?

..."Everyone can see today that humanity could destroy the foundation of its own existence, its earth, and therefore we can't simply do whatever we want with this earth that has been entrusted to us, what seems to us in a given moment useful or promising, but we have to respect the inner laws of creation, of this earth, we have to learn these laws and obey them if we want to survive," Benedict said. "This obedience to the voice of the earth is more important for our future happiness than the voices of the moment, the desires of the moment. … Existence itself, our earth, speaks to us, and we have to learn to listen."

From there, Benedict said, we may also learn anew to listen to the voice of human nature as well, discovering in other people and in human communities moral laws that stand above our own ego. In that regard, the pope said, we can draw upon the great moral experience of humanity. Doing so teaches that human liberty never exists in isolation from others; it works only if it's rooted in a sense of common values....

And given some rather confusing statements from a number of sources on where the Vatican and Catholicism in general stands on evolution, here is what the Pope said:

"Presently I see in Germany, and also in the United States, a fairly bitter debate between so-called creationism and evolutionism, presented as if they were mutually exclusive alternatives: whoever believes in a Creator cannot believe in evolution, and likewise whoever believes in evolution has to exclude God," Benedict said. "This opposition is an absurdity, because on the one hand, there are many scientific proofs in favor of an evolution that seems to be a reality that we have to see, and that enriches our understanding of life and of existence as such. But the doctrine of evolution does not respond to all questions, above all to the great philosophical questions: Where does everything come from? How did everything start on the path that finally arrived at humanity?"

...To put this into a sound-bite, Benedict believes in both evolution and creation, each understood on its own terms. Speaking later in the session on a different topic, Benedict XVI said that this passion for synthesis is the spirit of Catholicism, always seeking both/and solutions.

And one more unrelated tidbit from the pontiff that I liked while he was discussing change in the Church and in society:

"Yet," Benedict said, "while falling trees make noise, growing ones are silent."

If you have some time the entire article is interesting both in fact and tone.

Thursday, July 26, 2007

Globalization, Free Trade and Income Inequality

So many misconceptions abound as to globalization, free trade and inequality of incomes, even among so many "educated" and well informed people. The facts are very different from the perceptions and we see that so often today in our populist politicians clamoring to spread the notion that free trade/globalization is bad and that, I suppose, government welfare and high taxes are good.

I tend to think of Edwards who seems to be running his campaign on this notion and of course supported by any politician seeking union contributions. Other politicians, such as Obama, tend toward the same use of politically popular and incorrect statements on economics but since Edwards is from North Carolina I find him especially interesting to watch. [An aside, I am glad he is playing on the national stage and not a Senator wanna-be in NC right now.] The reality is that union workers are more middle class than poor and see free trade as a threat to their jobs - which in some sense is true especially for the UAW stuck with the misguided leadership of Detroit compared to the innovation of the Far East (Toyota, Honda, Kia) and the poor leadership of the textile and furniture industries of the United States.

I will expand on these thoughts later and present from facts at hand and especially refer to serious economic analysis for you to wade through but for now how about some summary from a recent IBD editorial, "The Backlash Against Globalization":

A Financial Times-Harris poll of more than a thousand people found that those in the U.S., Britain and France were three times more likely to think globalization hurts their country than helps it.

And "in response to fears of globalization and rising inequality," wrote Financial Times reporter Chris Giles, "the public in all the rich countries surveyed . . . want their governments to increase taxation on those with the highest incomes."

...Those who see the world "worse off" because of globalization must explain why, as global trade has surged over the last 30 years or so, the rate of poverty around the world has plunged.

As Surjit Bhalla, an economist affiliated with the Institute for International Economics, recently wrote: "World poverty fell from 44% of the global population in 1980 to 13% in 2000, its fastest decline in history. Global income inequality has dropped over this period and is at its lowest level since 1910."

But what about workers in rich countries like the U.S. who worry about inequality? Will higher taxes correct their so-called inequities? Not at all. U.S. economic inequality has virtually nothing to do with globalization or free trade, per se. It has everything to do with education and skills.

A recent study for the National Bureau of Economic Research found that those with a bachelor's degree can expect to earn $51,000 or so a year. Those with just a high school diploma earn $28,000.So the "income gap" is really an education and skills gap. And it's quantifiable: $23,000 a year, or nearly $1 million over a career spanning 40 years. Taking more money from people who did the right thing — went to school or pursued more high-level training — isn't the way to run an economy. That is, unless you want to run it into the ground.

Even so, globalization is a boon to all Americans. From 1980 to 2006, our total trade in goods and services soared 543%, from a mere $575 billion, or 20.6% of GDP, to $3.69 trillion, or 28%of GDP.

Has that huge swing decimated our economy? Hardly. We've created 46 million new jobs over that time. And personal disposable income after inflation has surged 64% to $27,770 from $16,938.

In a study released just last month, economists Matthew Slaughter, Grant Aldonas and Robert Lawrence found that American families gain as much as $15,000 a year due to globalization — that is, freer trade. The benefits are not illusory. They're real.

By the way, countries that raise taxes to punish the rich end up punishing only themselves. At least that's the growing economic consensus. The largest recent study, by economists at the 26-nation Organization of Economic Cooperation and Development, found "tax rates negatively correlated with economic growth." A large number of earlier studies bolster their findings.

In other words, higher taxes mean lower growth. And vice versa. Higher taxes aren't a solution to inequality. Nor is protectionism.

Globalization isn't without its problems, of course, but overall it has made all of us a lot better off. We should be talking about how to improve it — not how to kill it off by erecting trade barriers and raising taxes.

I will follow up on this constantly to try to erase the myths about free trade, freedom from regulation, and the power of free markets to find the right solutions to problems, and may I dare say, usually the most moral solutions to problems rather than a government or societal solution.

Two reflections on free trade theory or the theory of comparative advantage:

First, I strongly believe that the government does have a role and duty to step in and help financially and re-train those individuals and families who suffered from the consequences of rapid changes in their workplaces and industry environments due to the lack of foresight or the greediness of managers and owners who were unwilling to adjust in time to the realities of new market places.

Second, I believe that the theory of comparative advantage as postulated by David Ricardo, a contemporary of Adam Smith in the late 1700s-early 1800s, which explains why free trade is always the best solution is irrefutable. In lay terms, when two parties specializing in what they do best and then trade then they are both better off even if one side is better at all tasks. I will devote a full post to this one day as it is absolutely true without question. Look it up if you have doubts in the meantime.

And question all you hear and read about economics and business with a keen ear.

Wind Farms in WNC

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The saga on the wind farm situation continues. To catch up just read below here. Here's part of the latest story:

An Ashe County man trying to build a commercial wind farm in Creston said yesterday that he doesn’t have the money to continue to do studies requested by the N.C. Utilities Commission.

Richard Calhoun of Northwest Wind Developers is asking for conditional permission to move forward with the project, but he said that his application could be dismissed before an Aug. 8 hearing.

The public staff of the utilities commission is recommending that the project be denied because Calhoun hasn’t submitted the requested information and because it believes that wind turbines violate the state’s Ridge Law, which prohibits tall buildings or structures on protected ridges.

“I thought early on that an individual could make a difference, but to do all the studies before you can get the certificate granted, you have to have such deep pockets,” Calhoun said. “You’d have to be a Duke Power or a Progress Energy.… it’s unfortunate.”

...Calhoun said yesterday that a wind study, site assessment, engineering studies, endangered-species studies and other work would require much more than $100,000.

“For a private individual to fund that and still be denied the ability to do a project, it’s throwing good money away,” he said. “I’m not willing to take that risk.”

Calhoun, a farmer, physician and former Ashe County commissioner, applied a year ago to build 25 to 28 wind turbines on land he owns in Creston. The project is being closely watched because it would be the state’s first commercial wind farm.

The issue has sparked passionate debate in the mountains. Supporters have said the wind turbines provide clean energy that could help solve the nation’s energy problems. Opponents say that the turbines, which can be 300 or more feet tall, would ruin the scenery and harm tourism and housing markets.

Although wind power in Western North Carolina figures prominently in the state’s goals to develop alternate sources of energy, it’s still unclear whether the Ridge Law would allow wind turbines in the mountains. Calhoun said he thinks that it does.

His family has lived in the mountains since the 1840s, and grows Christmas trees and hay, and he raises cattle. Property values have risen dramatically because Ashe County’s beauty has made it a desirable destination for tourists and second-home owners.

Some mountain families struggle now to pay taxes on land that has been in the families for generations. Calhoun said that his proposal is the right thing to do to create clean energy and to give farmers a way to make money and preserve family land.

He said he knew from the beginning that his application faced long odds. Even if the utilities commission would grant permission, he expected a challenge from the N.C. Attorney General’s Office about the Ridge Law.“I understood it from the start that this was a David vs. Goliath issue, but somebody has to make some noise somewhere to make people start thinking,” Calhoun said.

His biggest disappointment has been with people who have said they want clean energy but don’t want it in their backyards. “One of these days the lights will go dark, and we will wonder what happened,” he said.

I will keep up this story as it has broader implications than one wind farm.