Does David Brooks Read the New York Times?

In his column today, David Brooks offers this apologia for the total incompetence of FEMA in response to Katrina:

This preparedness plan is government as it really is. It reminds us that canning Michael Brown or appointing some tough response czar will not change the endemic failures at the heart of this institutional collapse.

So of course we need limited but energetic government. But liberals who think this disaster is going to set off a progressive revival need to explain how a comprehensive governmental failure is going to restore America's faith in big government.

If he had bothered to read the lead story on the front page, he would have discovered the following:

Under the Bush administration, FEMA redefined its role, offering assistance but remaining subordinate to state and local governments. "Our typical role is to work with the state in support of local and state agencies," said David Passey, a FEMA spokesman.

In other words, FEMA failed not because of some inherent inability of government, but because this administration has attempted to get out of the business of government. The reason that FEMA failed (in addition to the fact that Bush had filled the upper ranks with political hacks with no experience or competence in disaster relief) is that, following the Bush party line, it intentionally abdicated its role as the principal source of disaster relief.

National governments have the ability to do things that state and local governments and the private sector cannot do. These smaller entities typically face more immediate financial pressures. By way of example, if New Orleans or Louisiana had attempted to undertake the cost of building a levee system or a massive relief organization-in-waiting, they would have been bankrupt in no time, since businesses would have fled to lower tax jurisdictions. The federal government can undertake these tasks because the American citizenry is not likely to flee to some other country.

Government can provide essential goods and services for its populace that cannot be provided in any other way. When you place the reins of government in the hands of ideologues who do not understand or appreciate the central animating principle of government, you end up with failures like the one that we have seen for the last two weeks. The response to Katrina was not an illustration of some natural limitation on the ability of government to act. Rather, it was a demonstration of the fundamental failure of the ideology of the Republican right which refuses to recognize the necessity of government.

Housekeeping

On the right, you will notice that there are now two possible ways to get postings via email. Both have their strengths and weaknesses.

Bloglet does not carry the captions and if I post more than once in a single day the email comes across as a single posting.

FeedBlitz cures these problems and, in addition, allows postings to come in via HTML. Its primary weakness is that, if you subscribe to more than one blog via FeedBlitz, you receive all of the postings on any day from all of them in a single email. However, the postings from each blog are grouped together.

If you want to follow a number of blogs, the best way is via Bloglines. At the top of the column on the right you will find an icon that will allow an easy way to subscribe via Bloglines.

Better Late Than Never?

Katrina has, if not killed estate tax repeal efforts, dealt them a serious body blow. Now that estate tax repeal is off the immediate news radar, Floyd Norris chief economic reporter for the NYT finally, FINALLY, had a column on the subject, How to Assure the Very Rich Stay That Way.

The column contains no information that is new to those who have followed the issue via the blogosphere for the last several months. Why did it take the Times chief economic reporter so long to examine the topic? Had it not been for Katrina, after all, the Senate would already have taken the key votes on the question.

To an increasing extent, there is a stratified gradient of the amount and quality of news and information Americans receive.

At the lowest level, there are those who get no information other than via television or commercial radio. It is this mass market that is most susceptible to the baloney dished out by the Faux News and the Rush Limbaughs and Bill O'Reillys

At the next level are the local newspapers. Due to market forces, these institutions have been greatly diminished over the last generation. (Don't tell that to the New Orleans Times-Picayune, however. The work of the paper and its reporters in response to Katrina have been nothing less than inspirational.) In any event, fewer people now receive their information via their local papers than was the case say 25 years ago.

On the next rung on the ladder are the national newspapers, the NYT, WaPo, the WJS, the LAT and, to a somewhat different degree, NPR.

Finally, we have the constant stream of information via the blogs.

None of the steps in the ladder completely displace the steps preceeding it. In particular, weblogs are still too hit or miss to replace the national papers and, in smaller cities, don't even touch the issues addressed by the local papers. Also, weblogs actually rely on the papers for much of their source material, digesting that material and aggregating it in interesting and novel ways.

However, there is a growing knowlege gap between those who get their information solely from the first or the second rungs of the ladder and those who obtain informaton from the third and fourth rungs. And, as the Norris column reveals, there is a growing information gap between those who come to rest on the third rung and those who move up to the fourth.

Daniel Shaviro's Tax Crystal Ball

Daniel Shaviro has a post on Katrina and Pending Tax Issues. He is rather pessimistic on the possibility that Katrina could bring some sanity back into Congressional tax policy. His conclusion: "[T]he only bipartisanship on view for several years has involved making looting and giveaways a bipartisan process."

The Estate Tax: A Constructive Discussion

I first want to thank Jim Maule for carrying the laboring oar in posting our correspondence. I think he fairly summarized both sides of the dialogue.

Rather than continue in the same dialogue format, I will simply outline points that I think, in their totality, strongly argue against a tax upon death of all untaxed capital gains (which, for purposes of brevity, I will refer to as the "CGUD Tax.")

The first of these is a sort of Burkean principle. That is, it is truly revolutionary to throw out a tax regime with a system of rules and decisional interpretations that has been built up over many years in favor of a wholly new design. For better or worse, I would err on the side of conservatism here (mark this date--it may be many years before you see this again). I believe that the current system, while in need of some tweaking perhaps, offers a fairly good design for taxing the transmission of wealth since the basic rules of the road are reasonably well established. The type of tweaks that I would suggest are, perhaps, indicative of my normative choices:

• One aspect of the current tax regime that contributed to the force of the political drive to abolish the estate tax in its entirety was the failure to automatically adjust the unified credit to take account of inflation. Thus, the initial credit amount, which was quite generous when it was first enacted, began to be seen as being too miserly when even those who considered themselves middle class began to cross the $600,000 threshhold. Though the lifetime credit has been raised, now to $1.5 million and soon, in increments, to $3.5 million, the earlier low credit amount has scarred the psyche of middle class taxpayers. I would like to see the credit set at some specific amount, say $2.5 million, that would automatically adjust based upon some sort of inflation index. (For reasons I won't go into here, I am not certain that the index should be the CPI.)


• I think that many of the abuses in the present system can be easily abolished, if by "easily abolished" one means that the technical means of abolition are simple. I have in mind here insurance trusts in particular. I suspect that if one means "easily abolished" in the political sense, insurance trusts would certainly not fall into this category, since the insurance industry is certain to lead an energetic charge in defense of its cash cow. However, other methods that are used to game the system, such as family limited partnerships designed to obtain lower estate tax valuations, could also either be repealed or be subjected to clear and unambiguous rules.


• Finally, the manner in which qualified plans are taxed has to be changed, since they are frequently subject to both income tax and estate tax at roughly the same time. I know that in subjecting them to tax in this way we are not really taxing them twice (after all, both the contributions and the subsequent earnings and asset value appreciation have not yet been subject to income tax), but that is not the perception of the public. I would subject to income tax an amount equal to the previously untaxed contributions and subject to the estate tax both that amount (net of income taxes) and all appreciation, allowing a step-up in basis of the assets.
  

Let me now address what I perceive to be some negative aspects of the CGUD Tax.

At the outset, let me note that I firmly believe that Jim is overly optimistic about making a CGUD Tax comparable in progressivity to the estate tax. As I noted in April, in a research paper published in 2000, The Distributional Burden of Taxing Estates and Unrealized Capital Gains at the Time of Death, James M. Poterba and Scott Weisbenner (using figures from 1998) concluded that:

[A]mong those with small estates ($1 million or less), taxing capital gains at death would collect more revenue than the current estate tax from roughly half of the decedents. For those with larger estates, replacing the estate tax with a tax on unrealized gains at death would result in a substantial reduction in total tax payments.

In order to engraft onto the CGUD Tax concept a degree of progressivity that we find in the current estate tax, Jim would really have to enact a wholly-new set of tax rules and tax rates. (E.g., The first $X million dollars in gains would be exempt and there would have to be a progressively increasing rate of tax imposed which, at some point, perhaps its upper end, would be significantly greater than current capital gains rates.) I suspect that, just as is the case with the income tax now, there would be numerous rules, exceptions, and exemptions built into the law by various interest groups.

This, together with Jim's proposed merger of the CGUD Tax with the gift tax, would leave us with a system that would be both extraordinarily complex and subject to a whole new set of rules. Because the new rules would not carry with them the years of judicial and administrative interpretation that go with the current estate tax, years of controversy and litigation would likely result. If this were the case, both Jim and I could probably extend our careers for the remainder of our natural lives (and perhaps longer if either of us wrote the definitive treatise on the CGUD tax), however, I somehow doubt whether this would endear either us or the CGUD Tax to the taxpaying public.

Furthermore, the current estate tax carries with it a strong incentive to make charitable contributions. Again, while it is evidence of a maverick streak of conservatism on my part, I think that encouraging the growth of charities is a good thing because it establishes a decentralization of power and influence. While some reforms may be necessary in this area (do we really want to continue a system where the inventor of Vicks VapoRub continues to exert political influence long after his death), it is reforms that are necessary, not a radical restructuring of the system.

Also, it just may be that the tax rate is too low at the upper end of the wealth scale. The Mars family, for instance, is reputed to be worth about $30 Billion. Can it reasonably be argued that if we reduce their family wealth to a mere $10 Billion we are inflicting upon them a grievous wound?

In concluding, let me suggest that, despite our differences, Jim and I share a good deal of common ground. Both of us, I think, believe that upon death there should be a progressive tax imposed, although we likely differ on the degree of progressivity that we would favor. Additionally, we both welcome true tax simplification, although we might differ on the paths to that goal.

Finally, although I don't want to commit Jim with respect to the politics of the current estate tax debate, I think that both of these concepts set us apart from the true radicals who want to abolish the estate tax.

Back to you, Jim.

Postponement

The President's Advisory Panel on Federal Tax Reform has postponed its meetings on September 8th And 15th:

"There is mutual agreement among the Chair, Vice-Chair, Panel members, Treasury Department and the White House to postpone our two upcoming meetings," said Jeffrey Kupfer, the Executive Director of the President's Advisory Panel on Federal Tax Reform. "In addition, we are having ongoing discussions to determine when the Panel's final report will be delivered to the Treasury Secretary."

The panel is reportedly attempting to determine whether the lines in Subterranean Homesick Blues:

You don't need a weather man
To know which way the wind blows

have any applicability to their deliberations and, if so, what that is.

London Calling

Even though the estate tax repeal is (at least temporarily) shelved, I can get at least one more blog posting out of it.

TaxProf has collected a wealth of material from different perspectives concerning the intersection between Paris Hilton and tax policy. The best of the lot is the television ad by United for a Fair Economy that can be viewed here. Perhaps not as much fun as the original Paris Hilton Carl's Jr. ad, but worth a look.

Yes, Americans Actually Have Some Sense of Decency

Via Mauled Again, we learn that the scheduled vote on the estate tax repeal debate has been postponed indefinitely. My sense of this is that while Frist and Friends will try to spin this as a slight tactical delay and there will probably be some residual skirmishing, the effort to repeal the estate tax is dead.

Even David Brooks, dapper NYT apologist for the Bush Administration ("The Bursting Point"), acknowledges that Katrina and its aftermath, coming after a host of other "institutional failures" have "cumulatively changed the nation's psyche." Brooks contends that "it is beginning to feel a bit like the 1970's, another decade in which people lost faith in their institutions and lost a sense of confidence about the future." That's wrong.

It's really more like a less intense version of the 1960's (if that's not an oxymoron). There's a sense that the greed and self-indulgence which really took off in the '70's and stoked by Bush and Co. to a fever pitch, have gone too far and have to be replaced with a greater focus on the common good.

For instance, the problems with the environment are real. As two scientists recently put it:

The real question we are faced with is not whether humans are changing climate. The science on this is clear, and decades of research have culminated in a scientific consensus on this point. The real question now is what we need to do about it.

It is true that governmental intervention alone will not solve these environmental problems. But it is not acceptable for the govenment to abdicate its role under the guise of "we don't know enough yet."

Similarly, it is obvious to anyone who wants to look that there are widening disparities in wealth in this country. Trickle down economic and tax policies have not narrowed these disparities, they have expanded the distance between classes. The high water mark of this lunacy (I use that phrase with only a hint of a smirk in light of Katrina) was reached this week in Grover Norquist's appeal to help the victims of Katrina by repealing the estate tax. Americans will only tolerate fools such as this for so long.

The symbolic end of the McCarthy era came when Joseph Welch, counsel for the Army, stood up against McCarthy and said "Have you no sense of decency, sir? At long last, have you left no sense of decency?". But Welch really didn't expose McCarthy. McCarthy exposed McCarthy. And this week, Frist, Norquist, and, last but certainly not least, Bush, exposed themselves as enemies of the commonweal. As a result, they have been forced to abandon the most grotesque of their excesses. This, I suspect, is the start of a more general retreat.

Lying Knave Watch

TaxProf reports that, an "American Shareholders Association study released Friday claims that Death Tax Repeal Will Have No Impact on Budget Deficit:

'ASA has uncovered new information from the Congressional Budget Office (CBO) which demonstrates that Death Tax repeal will be revenue neutral over the next ten years without taking into consideration any effect of higher levels of economic growth stemming from the tax cut.'"

Well, not really.

The ASA argument, breathlessly reported in two pages here, is as follows:

1. The CBO report on the cost of the repeal of the estate tax underestimates the growth in the economy over the next ten years ("CBO assumes over the next 10 years, real GDP growth will average 2.98 percent. The CBO forecast encompasses a 3.7 percent estimate for 2006 and then averages 2.9 percent from 2007-2015. This 2.98 percent forecast is an underestimation of historical averages and a 1 percent increase of GDP over tenyears is more than plausible.")


2. Because the total tax intake (using the ASA's assumptions, of course) will approximately equal the tax loss due to the repeal of the estate tax, the estimate of the cost of the tax loss from the repeal of the estate is too high ("Matching up the CBO Death Tax repeal score with the underestimation of GDP growth reveals a small revenue loss of $9 billion over 10 years.")

The people who drafted this nonsense are either (a) disingenuous, (b) hopelessly stupid, (c) mendacious liars, or (d) all of the above.

Just because total tax revenues are underestimated due to a low assumption as to economic growth does not mean that the revenue loss due to the repeal of the estate tax is understated. All that it means is that the revenue loss due to the repeal of the estate tax will, if ASA's assumptions hold, be made up by other sorts of taxes. Since the estate tax falls on the very wealthy and, in fact, primarily on the very, very, very wealthy, and other taxes are either only mildly progressive or actually regressive, the ASA's argument is really as follows:

The CBO is wrong in its estimates, because the revenue loss due to the repeal of a tax on people of great wealth will be made up by an increase in taxes on everyone else.

Which, of course, brings us to the question of who is the ASA? On its face, it would seem to be sort of a grassroots organization of individuals who own publicly traded stocks. It's not. The ASA is s apparently a front for Grover Norquist. See here.

Norquist's principal front organization is "Americans for Tax Reform Foundation" which is primarily supported by the Scaifes (through the Sarah Scaife Foundation and the Carthage Foundation), the Olin's (through the John Olin Foundation), the Waltons (through the Walton Family Foundation), and the Randolph Foundation (funded by a trust established by the guy who invented Vicks Vaporub). See here. ASA is simply another front organization that is part of the ATR family.

In other words, the ASA "study" is yet another hack job from the usual knaves.

Does Everyone in Bush Administration Have Their Pants On Fire?

From Mark Schleifstein of the New Orleans Times-Picayune:

Dr. Max Mayfield, director of the National Hurricane Center, said Sunday that officials with the Federal Emergency Management Agency and the Department of Homeland Security, including FEMA Director Mike Brown and Homeland Security Secretary Michael Chertoff, listened in on electronic briefings given by his staff in advance of Hurricane Katrina slamming Louisiana and Mississippi and were advised of the storm’s potential deadly effects.

Mayfield said the strength of the storm and the potential disaster it could bring were made clear during both the briefings and in formal advisories, which warned of a storm surge capable of overtopping levees in New Orleans and winds strong enough to blow out windows of high-rise buildings. He said the briefings included information on expected wind speed, storm surge, rainfall and the potential for tornados to accompany the storm as it came ashore.

"We were briefing them way before landfall," Mayfield said. "It's not like this was a surprise. We had in the advisories that the levee could be topped.

"I keep looking back to see if there was anything else we could have done, and I just don't know what it would be," he said.

So much for the question of whether Chertkof and Brown had no idea that the levees could be breached.

And, via Mark Kleiman, we learn that the WaPo story that quoted a "senior Administration official" the Governor of Louisiana had failed to declare a state of emergency was false.

Can't we just give every member of the Bush Administration some sort of medal so that they will just go home?

Overwhelming Generosity

At its pressroom, Morgan Stanley proudly reports that it "will allocate more than $1 million in support for the victims of the disaster." Of that amount, $500,000 is in the form of a match to employee contributions.

This from the same firm that paid Stephen Crawford $32 million after he resigned after 3 1/2 months as co-president. Not that Mr. Crawford was ungrateful. He did note that it was "a great privilege" working for the firm.

Just to put this in perspective, if Mr. Crawford made a contribution of just 1.5625% of his termination award, it would totally absorb the amount set aside by the company for employee matches.

Of course, I suppose Morgan Stanley would refuse to match the contribution since Mr. Crawford is no longer an employee.

A Civilized Commentator

I often disagree with Jim Maule. He is somewhat conservative and, as close readers of this blog may have observed, I'm . . .not. His most recent posting, Taxes and Sustaining a Civilized Society, is, however, a must read regardless of one's location on the political spectrum.

In a sense, it ought not be necessary for any educated adult to read Maule's essay, since the lesson he teaches is one that we should all have learned by now--taxes are necessary to pay for that community which we call civilization.

At times, I think that Maule is being too charitable. For instance, he says:

During the past several decades, the anti-tax movement gathered steam and rolled through the political landscape. The impetus for this movement is understandable. Aside from corruption and other commonly held unacceptable activities, the most significant object was the use of tax proceeds to fund government programs that did more to enrich bureaucrats than the intended beneficiaries, and to nourish government programs that were inconsistent with the goals of those who flocked to the anti-tax movement. Cries for tax reduction reflected a frustration with a political process that was not responsive.

Unfortunately, the cries for tax reduction drowned out the rest of the argument. Full and open debate on how tax proceeds ought to be spent took a back seat to the rush to find ways of "cutting taxes." Trickle-down or not, even with the occasional tax increase (including one that doomed the re-election of one president), taxes were cut. Tax revenues increased at times as the economy grew, with tax cut supporters claiming that tax cuts were the cause of the economic upswings. Does that mean cutting taxes to almost zero would generate almost infinite tax revenues? No. The economy bounces up and down for many reasons, tax being just one, and not necessarily the most important one.

My views here are well-known. I do not view the rabid tax cutters with nearly Maule's degree of equanimity. Thus, I frequently refer to them as fools and knaves. I firmly believe that the radicals of the tax cutting movement possess the same true-believer psyche as our homegrown Communists of an earlier era. Greg Mankiw was right to brand them "charlatans and cranks." (If you're still not convinced that these people are of a piece with, say, the Jim Jones Kool-Aid drinkers, take a look at Grover Norquist's latest (via the Daily Kos) where he argues that abolishing the estate tax will assist the victims of Katrina. Of course, even Norquist didn't have the balls to articulate it as "A rising tide raises all ships.")

However, I agree with the core of Maule's argument:

The nation allegedly is at war. We are allegedly at war with terrorism, or terrorists, or terrorist-sponsoring states, or insurgents, or well, bad people, I suppose. Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money. Would opposition to specific military campaigns been stronger, or developed sooner, had taxes been increased to fund the campaign, as good fiscal management demands? Maybe. My guess is that those who supported a campaign, or at least most of them, would have acquiesced, reluctantly or otherwise, to a tax increase. . . . . I've been told, and I've read, that when the nation went to war in 1941, and even as it was preparing to do so in 1939 and 1940, taxes were increased. I don't know if there was much griping, or how extensive it was, but people knew that war means war. It requires sacrifice. My parents have described what life was like under a rationing program for a long list of items. The nation allegedly is at war. A few individuals and their families, constituting a very tiny percentage of the population, have made and are making sacrifices. The rest of us, it seems, are living lives that somehow don't seem consistent with what life is like during war. Perhaps I am wrong, but for me, war is like pregnancy. Either a woman is pregnant or she isn't. Women cannot be partially pregnant or have limited pregnancies. Concepts of limited war or partial war get used not only to create the sorts of conditions that preclude victory, as happened in Vietnam and Korea and as is beginning to happen in Iraq, but also to deflect the effects of war-waging decisions so that war seems, somehow, more palatable. War, at times, unfortunately, is necessary. War, though, should never be palatable.

Now the nation faces another, more serious catastrophe. Hurricane Katrina has all but destroyed a city. It has closed the nation's largest port. It has shut down a significant portion of gasoline refinery capacity. It has closed and damaged much of the Gulf of Mexico oil and natural gas production, the latter getting very little attention, but wait until October's chills set in for that to flare up as a mainstream media and politician soundbite. A quarter of the nation's coffee supply is rotting in New Orleans warehouses. Steel, zinc, rubber, and bananas must find their way in through some other port, if that is possible. Most of the grain harvest, and other domestic agricultural product, has no way out. If 9/11 disrupted the economy, Hurricane Katrina has the potential to devastate it.

And thus I turn back to taxes. Money is being spent, and more money will be spent, by governments on rescue, relief, and recovery. Government surely will spend money on rebuilding, as will the private sector. Where does government get that money? Does it borrow, thus increasing the deficit and thus fueling the "foreign ownership of dollars" problem? Does it raise taxes, thus taking money out of the private sector? Doesn't the private sector have a better chance of spending the money more efficiently than does the government? Perhaps taxes need to be raised. Certainly, they should not be lowered.

Maule goes on to argue (I think) for a fairly high degree of progressivity in any new tax enactments:

It is time to consider raising taxes on those whose taxes are not as high as they ought to be. Those folks happen to be the ones enjoying low tax rates on dividends and capital gains. I've yet to see the evidence that lowering taxes on dividends and capital gains, but not on wages is better for the economy. Many of the displaced people in the Gulf Coast region have been paying taxes at higher rates than those imposed on dividends and capital gains.

He then goes on to discuss an end to dividend tax rate preference and the current effort to repeal the estate tax. (However, he is willing to consider a full estate tax repeal in exchange for taxing capital gains at death subject to what he terms a "sensible" exemption. Here, we part company.)

Finally, he directs an appeal to the tax reform commission that will soon be issuing a report on ways to restructure the federal tax system. Maule is pessimistic that the nation can "reset its course." In an sense, I am both more pessimistic and more optimistic than he is.

On the side of pessimism, I have no faith in the tax reform commission. I think that too many of the people who will populate its warrens will be ticket-punchers, seeking to get one more star on their report cards.

However, I am optimistic that there are sufficient numbers of political leaders (today, the Mayor of Houston comes readily to mind) who recognize that, ultimately, Benjamin Franklin was correct: We must hang together, or assuredly we shall all hang separately.

Katrina Made Me Do It

From the LAT, we read this:

The disaster in the Gulf Coast changes the political dynamic on other big issues before Congress. For example, images of stranded hurricane victims in squalid shelters give Democrats ammunition against GOP plans to hold a vote next week on repealing the estate tax, a measure critics say benefits only the wealthiest taxpayers.

That vote had been scheduled before Congress began its monthlong August recess. In a letter Thursday, Reid urged GOP leaders to postpone the issue.

"Given the tragic and devastating events along the Gulf Coast, members of the Senate would have great difficulty explaining why we were debating the estate tax during our first days back," Reid said in his missive to Senate Majority Leader Bill Frist (R-Tenn.).

A nonpartisan budget analyst said it would be politically inopportune to cut taxes on the wealthy while the government was grappling with a humanitarian disaster that will add billions to the federal deficit.

"People would wonder what the heck the Senate is up to with all that is going on in Iraq and New Orleans," said Robert Bixby, executive director of the Concord Coalition, a watchdog group.

Bob Stevenson, Frist's spokesman, said there was no plan to pull the tax bill from the schedule but that Frist was prepared to do so if necessary to make progress on relief.

(Emphasis supplied.)

WTF? Frist gets it bass ackwards. The estate tax repeal bill is not blocking the bill to provide Katrina relief. What really is occurring is this: The Katrina disaster points up what happens when we starve or attempt to strangle domestic programs (e.g., Army Corps of Engineers efforts to bolster flood control in New Orleans, the funding of FEMA, constructive efforts to address global warming). The estate tax repeal is dead because suddenly Americans have suddenly awoken to the reality that government and taxes are necessary and that there's no free lunch.

I will offer more comments on this topic later this evening.

Unnatural Disaster

Editor and Publisher asks: "Did New Orleans Catastrophe Have to Happen? 'Times-Picayune' Had Repeatedly Raised Federal Spending Issues."

The story, well worth reading in its entirety, states that:

New Orleans had long known it was highly vulnerable to flooding and a direct hit from a hurricane. In fact, the federal government has been working with state and local officials in the region since the late 1960s on major hurricane and flood relief efforts. When flooding from a massive rainstorm in May 1995 killed six people, Congress authorized the Southeast Louisiana Urban Flood Control Project, or SELA.

Over the next 10 years, the Army Corps of Engineers, tasked with carrying out SELA, spent $430 million on shoring up levees and building pumping stations, with $50 million in local aid. But at least $250 million in crucial projects remained, even as hurricane activity in the Atlantic Basin increased dramatically and the levees surrounding New Orleans continued to subside.

Yet after 2003, the flow of federal dollars toward SELA dropped to a trickle. The Corps never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security -- coming at the same time as federal tax cuts -- was the reason for the strain. At least nine articles in the Times-Picayune from 2004 and 2005 specifically cite the cost of Iraq as a reason for the lack of hurricane- and flood-control dollars.

Newhouse News Service, in an article posted late Tuesday night at The Times-Picayune Web site, reported: "No one can say they didn't see it coming. ... Now in the wake of one of the worst storms ever, serious questions are being asked about the lack of preparation."

In early 2004, as the cost of the conflict in Iraq soared, President Bush proposed spending less than 20 percent of what the Corps said was needed for Lake Pontchartrain, according to a Feb. 16, 2004, article, in New Orleans CityBusiness.

Emphasis added.

Not to put too fine a point on it, there is a direct correlation between Bush/Cheney policies and the devastation resulting from Katrina.

Thanks to the Wonkette for the tip.

Katrina and Estate Tax Repeal

This country's response to Katrina will rely primarily on two sources of funding: govenmental programs and programs run by charitable organizations. It is estimated that full estate tax repeal would reduce federal revenues by $1 Trillion over a 10 year period. It would also dramatically reduce contributions to charities. Perhaps this explains the report today in Kleinrock that:

With lawmakers on August 31 nearly ready to return to work and the debate over repealing the estate tax heating up, conspicuously missing from that conversation is President Bush.

Weak Joints

Yesterday, I criticized Kleinrock for confusing the Joint Economic Committee with the Joint Committee on Taxation. I called the JEC "a satrap of the knavish right."

In the back of my mind, I began to have doubts. Had I gone overboard in rhetorical excess? Much to my relief, after I did further research, I discovered that my initial instincts were correct.

Going to the website of the JCT and drilling down a bit, I came to the Committee's explanation of "How [It] Fulfills Its Statutory Mandate." The explanation was lengthy. It described how:

The Joint Committee staff does not operate either as a majority staff or as a minority staff. It does not have the duty of representing one particular point of view on an issue. Consequently, it is able to examine critically tax policy in all its aspects.

The explanation noted that, "the Congressional tax committees need a source of independent, nonpartisan technical tax advice even when the party controlling the Congress (House and/or Senate) is the same as that controlling the Executive Branch."

Compare that charter with the way the JEC operates. The description of how the Committee operates is set forth in three scant paragraphs. Among the "research reports" it offers are such even handed offerings as "A Brief Explanation of the Economic Burden Imposed by Federal Taxes" which purports to explain how "[e]conomic theory gives policymakers solid support for resisting tax increases and preferring spending reductions as a method of reducing the federal deficit." The Democratic side of the Committee's website has similar broadsides from the other side of the partisan divide. Of course, the Democrats cannot cast their position papers as being the work of the Committee staff (apparently a group of Heritage Foundation wannabes), so, facially at least, they seem to have a lower degree of legitimacy.

The ideological slant of the JEC is apparently intentional. According to an article in the NRO by Bruce Bartlett, in the early 80's the Committee became a supporter of supply side economics. (Remember, the supporters of supply side economics have been described by Bush II economist Greg Mankiw as "charlatans and cranks." By comparison, calling them "knaves" is almost complimentary.) While Bartlett contends that the Committee currently lacks focus with "House and Senate Republicans tend[ing] to go their own way," he doesn't even attempt to make any pretense that the Committee is, as is the JCT, independent. Perhaps that's why the JCT has come under attack by such partisans as the WSJ editorial page for allegedly using incorrect predictive models (read: "predictive models that don't merely rubber stamp the economic nonsense ladled out by the Republican right").

In any event, just remember this shorthand distinction: JCT reports are reports of a single, joint, and impartial staff. JEC reports are the tendentious products of a group of determined ideologues.

The Partnership Profit Allocations of Sin

The RothCPA blog calculates that the average per partner cost of the KPMG settlement with the government is $265,000. It assumes that there are 1600 partners who will share the loss. I think that these calculations are overly optimistic.

First, the amount to be paid is not tax deductible (the agreement with the government has an explicit provision to this effect). That means that, assuming an average 45% marginal rate (including federal and local income taxes and SECA, etc.), the total cash profits that KPMG must generate to have $456 Million in cash to pay the government is about $1 Billion. Assuming further that there are 1600 partners to share the burden, the firm must generate $625,000 in profits even before the partners see any cash to take home.

Second, however, the agreement with the government calls for KPMG to abandon certain lines of business altogether. Thus, it is logical to assume that there will be fewer than 1600 partners to share the burden. The number of partners will likely decrease even further in subsequent years (the amount is to be paid over 3 years) by defections and net attrition in the partnership ranks. (I suspect that loss in partnership ranks due to retirements will likely not be made up by younger people willing to become partners due to the sharp reversal in the value of a KPMG partnership position.) Assume that the average number of partners who will share the burden is 1400. In that case, the per partner profits needed to pay the settlement is over $714,000.

Add to this incredible burden the cost of dealing with the hugh number of claims, the loss of client base due to KPMG's tarnished image, the loss of profits due to the business lines that must be shed as part of the settlement agreement, the increased overhead due to the monitoring requirement imposed by the settlement agreement, and finally the reduction in the firm's productivity due to the pall that settles over it due to the battering that it will take, you can see the beginning of a death spiral.

Correction

Before anyone else points it out, there's an error in my calculations. I assumed a 45% marginal rate, but actually used a 55% marginal rate in the calculations. This is why I'm a tax lawyer, not a tax accountant.

In any event, applying the 45% marginal rate, the total cash profits necessary to generate the $456 Million settlement is about $829 Million. That amount, divided by 1600, results in a per partner burden of $518,125. Divided by 1400, the per partner burden is a little over $592,000.

I still think that KPMG is in death spiral territory, however.

Some Tax Service

Kleinrock today breathlessly reports that "[a]ccording to research conducted by the Joint Economic Committee (JCT) [sic], the estate tax generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits that it might arguably produce." The KR report then goes on to list the alleged benefits uncovered by the research. Wrong.

First, the Joint Economic Committee is not the JCT. The JCT is the Joint Committee on Taxation. The difference is more than mere nomenclature. JCT reports are created by a nonpartisan technical staff of the Congressional Joint Committee on Taxation. The efforts of the JCT have been attacked by the knavish since the JCT's research points to a steep increase in the growth of the federal debt if the estate tax is repealed.

The Joint Economic Committee, on the other hand, is a satrap of the knavish right, lead by Representative Jim Saxton of New Jersey. Don't believe me? Take a look at a summary of the JEC's workproduct here.

More significantly, however, is that KR's report of alleged benefits from estate tax repeal appear to be drawn from a JEC report from 1998. There is a 2003 JEC update, but the talking points repeated by KR, even though set forth in that update, are merely quotes drawn from the 1998 report. There is no attempt to actually update the research. By way of example, the contention that the estate tax causes environmental degradation is based on a study "conducted prior to EGTRRA of 2001." The update acknowledges that the allegation that the "existence of the estate tax has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent" is drawn from the 1998 report and does not take into account the dramatic increase in the unified credit amount enacted in the EGTRRA of 2001.

In sum, KR's report is simply negligent.

Hide and Seekers

Via beSpacific, I discovered the database of the Fugitive & Electronic-Only Documents Committee of the American Association of Law Libraries, Government Documents Special Interest Section. The purpose of the Committee is to:

1. Identify and report to GPO fugitive and electronic-only U.S. federal documents on law and policy. A "fugitive document" is defined as a U.S. federal publication that, according to U.S. Code Title 44, should be distributed to libraries through the Federal Depository Library Program, but that hasn’t been cataloged or distributed by GPO. An "electronic-only" document is defined as an electronic U.S. federal publication that GPO has cataloged and assigned a Persistent URL, but that GPO will not distribute to depository libraries in tangible format.


2. List fugitive, electronic-only, and tangibly-distributed U.S. federal documents on law and policy on the GD-SIS Website.


3. Facilitate hard copy publication of some of these documents.

Some of the publications look too incredibly pedantic and dull to ever be the focus of an intentional attempt at suppression for political purposes (e.g., "Frequently Asked Questions About Copyright : A template for the Promotion and Awareness Among CENDI Agency Staff"). These documents are probably lost for the same reason that I can't find my glasses once or twice a week--I simply forgot where I put them.

Other documents, however, may have potential political bombshells hidden in them (e.g., "Privacy Office Report to Congress, April 2003-June 2004," Department of Homeland Security. Privacy Office) and its possible that they have been lost in order to keep the information contained therein from the public.

Although I can't say for certain, even a innocuous-sounding title such as the report "Process Assessment Report for a Dialogue on Impacts of Anthropogenic Noise on Marine Mammals" by the Marine Mammal Commission could fall within this category. (The Navy has been trying to push certain types of new sonar systems that allegedly pose the possibility of serious harm to marine mammals. James Taylor, Pierce Brosnan, and Jean-Michel Cousteau are on the story.)

In any event, its heartening to know that someone is keeping track.

Knaves Waiting for a Vote

Even the normally complacent Kleinrock (subscription required) has been shocked by what it calls the GOP's "Biased Survey on Estate Tax Repeal." The Kleinrock report notes:

While [the GOP] questionnaire recipients will probably be against the government profiting from a person's demise, they also might not know that few estates actually pay the tax. That shortfall in knowledge will likely make them side with abolishing what is dubbed the "Death Tax" on the questionnaire.

This support will come despite the fact that roughly 99 percent of estates pay no estate tax at all. Among the few estates that do owe taxes, the effective tax rate -- that is, the percentage of the estate that is paid in taxes after the exemption and deductions to, say, charities -- averaged about 19 percent in 2003, according to the IRS. That percentage is far below the top estate tax rate of 50 percent.

Questionnaire recipients also will not know that for many large estates that do owe estate taxes a substantial proportion of their assets have never been taxed. According to the Joint Committee on Taxation, the majority of assets in estates valued over $10 million consist of untaxed capital gains -- that is, property, stocks, and bonds that have appreciated in value since they were first purchased by the decedent but have never been subject to tax.

However, the report then quotes at length baloney dished out by knavish courtier William Beach of the Heritage Foundation as to the alleged negative impact of the estate tax. It is interesting to note that Beach, one of the A Team hacks who regularly lobbies against the estate tax, has apparently abandoned the argument that the estate tax forces families to sell their closely-held businesses and farms. This argument was so plainly specious that even he must have realized that it was a clear loser.

Economic arguments, on the other hand, are more difficult to refute. More often than not they are developed in academic-like papers that are difficult to contest in 25 words or less. One of Beach's arguments is as follows:

[The estate tax] directly undermines job creation and wage growth; and these . . . effects make death tax repeal everyone’s concern. [In other words, even we cannot make the case with a straight face that most or even many Americans will be directly affected by the estate tax. So we have to create the bogey-man of collateral economic damage.] Heritage Foundation economists estimate that the federal estate tax alone is responsible for the loss of between 170,000 and 250,000 potential jobs each year. This additional employment never appears in the U.S. economy because the investments that would have resulted in higher employment are not made.

Where's the study that Beach relies on? So far as I can determine, there was only one Heritage study, published in 2002 by Alfredo Goyburu entitled "The Economic and Fiscal Effects of Repealing Federal Estate, Gift, and Generation Skipping Taxes." The study does not support the 170,000/250,000 figure used by Beach. Instead, the predicted job-creation numbers run from a low of 25,000 to a high of 121,000.

Even these numbers are suspect since the Goyburu's analysis "incorporated a capital gains exclusion of $1 million on transferred estates and a $3 million exclusion on spousal transfers." In other words, the analysis uses an assumption of a tax break that is not in the bill being considered by the Senate. Thus, we are offered a comparison between a Heritage apple and a Congressional lemon. For any analysis to have value (and it's not clear that this one does), it must at least attempt to analyse the same proposal that is being voted on.

Kleinrock picked up on the easy stuff--that the survey question was the political equivalent of "Do You Favor Continued Beating of Your Wife." However, it failed to dig a couple of levels down and examine the substantive contentions being bandied about by Beach.