Natalist Nationalist Policies

I have staked out a position as a limited-government nationalist, but haven't delineated how that differs from standard conservatism or from more right-wing proposals from the alt-right.  Here are two natalist policies consonant with the desire to keep America great into future generations.

A key issue for nationalists is the high levels of immigration, illegal and otherwise.  Much of the apologia for allowing the immigration centers around low U.S. birth rates the need for more workers.  But importing people who lack the intellectual or cultural wherewithal to successfully integrate into our European (and more specifically Anglo-Saxon) society is a death sentence for the Bill of Rights in the long term. (To be clear, I am calling for an end to all immigration immediately with an emphasis on building a wall at the southern border.)   What should be done to ensure the future of our people and a future work force?  Increase the birth rate of the native born.  I know that natalist policies have been a mixed bag; but I ultimately believe that incentives matter and can work in this area.  For example, the high rates of illegal immigration have kept down wages for nannies, and at least one study linked this to higher birth rates of native-born Americans when compared to Europeans. 

Tax policy can provide huge incentives for couples to have children.  But we want couples who are already successful to have children because they have already demonstrated genetic fitness, and because they have the financial resources to provide for children.  I propose a massive increase in the child tax credit that is a percentage of adjusted gross income. The total value of the credit should be in the range of 5% of AGI per child capped at $1 million in income.  That means a couple earning $200,000 per year would get a $20,000 credit for two children.  That might be too generous, I would need expert help to get the incentive just right.  Basing the credit on a percentage of AGI would also encourage couples who already have children to earn more money, which can only help the economy and their kids.

Another key issue is that college bound women waste their peak fertile years in college.  However, for the benefit of our society, it is best to educate women to eventually join the work force.  In order to increase the birth rate, we need some way to encourage college-aspiring women to have babies starting at 18 but still retain the opportunity for college. This might be remedied by a policy that provides scholarship money to woman who delay the start of college to have children.  This policy is intended to have "unintended" consequences.  First, I know that many such women who have a child will not want to return to work or college soon.  My gut instinct, based on some reading, is that removing more women from the work force and returning them to traditional roles will result in a more traditional and conservative society.  Fat young women who have no business being in college, as evidenced by their selection of critical dance theory as a major, are a ready source of "troops" for leftist causes.  Further, pregnancy alters the brains of women; I would bet that it does so in ways that make women more amenable to supporting traditional societal norms.  

I intend to write more about both natalist and nationalist polices.  If you are reading this column by way of twitter, I wrote this for John Rivers, whom I follow.  He makes great points, but I keep thinking that more detail is needed to implement national policy that will achieve the results we mutually desire.  Just hating the left isn't going to change the trajectory of the nation.  Since we are descendants of the people who invented Western civilization and modern industrial society; there's no reason to believe we can't start to figure out how to reverse the current trends in America that put us on a trajectory towards third world dictatorship.

The Challenge of Tax Reform

Paul Ryan's budget proposals are being excoriated by the left. His push for reform is of course laudable, but we should acknowledge that there are some difficulties with the approach he has taken. First the good stuff.

Mr. Ryan wants to avoid a tax increase and reform the tax code because he realizes that the budget will never balance over the long term without economic growth faster than today's 2% a year.
. . .
He has also issued a second budget estimate based on evidence from the 1960s, 1980s and 2000s that tax reform and spending restraint will increase GDP by about 0.5 to one percentage point a year. This means the Ryan budget reduces the debt to GDP ratio to 50% in 10 years from 74.2% this year (and heading higher) and thus steers the U.S. away from the Greek fiscal rocks.
. . .
But what really matters on spending over the long term is entitlement reform, and on that score Mr. Ryan goes further than any Republican Congress or President since 1995. He understands that without converting Medicare into a market-based program with more choices for seniors, and without devolving Medicaid to the states and repealing ObamaCare, tax increases will soon become the political default option.

I agree that reforming entitlements, including social security, not just medicare and medicaid are necessary elements of reform. The Rebublican party needs more Congressman like Ryan.

Ryan proposes a simplified two tier tax system with rates of 10% and 25% and a corporate rate of 25%. He proposes to pay for this with unspecified cuts to tax loopholes. The following chart from the CBO illustrates the relative size of the loopholes, aka tax expenditures, on the budget in GDP percent.

The problem is that every one of these deduction/credits are very popular. What do Republicans propose to remove to make up for the lowered rates? According to Ruth Marcus at the Washington Post, there are about $12 trillion over ten years in such "tax expenditures" and Ryan needs $4.6 trillion over the same period to keep revenue static. However, I'm not sure revenue needs to be static, since Ryan's goal is to reduce the federal government's size to under 20% as it has historically been. Even so, which deduction is the tea party supporter willing to forego?

• Taxing health care benefits makes sense to me, but can you imagine the uproar after Obamacare is repealed or struck down and now we want make health insurance even more expensive?
  
• Do we really want to discourage saving for retirement by taking 401(k) and IRA savings?
• Mortgage interest is very powerful in propping up the prices of homes.
• What about long term capital gains? Don't we want to encourage investing?
• How about state taxes? Doesn't seem fair to pay taxes on money that was taken away by taxes.
• Charitable giving? How are we going to show that we need less government if charities don't step up.
  

These are tough calls. My belief is that we are going to have to go for a package deal that persuades people that they are better off without the deductions in return for lower rates and growth.

The Big Truth - Investors Create Jobs

A friend on facebook recommended an article and video featuring Nick Hanauer, a highly successful investor, THE BIG LIE: “Rich People Create Jobs”. Hanauer assert that it is not the rich who create jobs, but the "ecosystem," which requires thriving middle class willing to spend money so that investors can get rich. He also says that Amazon.com destroyed more jobs than it created. He is an idiot. Here's why.

The real issue isn't jobs, per se, but new jobs. A few minutes worth of thought or reading a standard economics text would reveal that new jobs can only come from investment. Even a primitive economy that consumed all that it produced would have no wealth available to invest. Imagine a simple agrarian economy with farmers and a blacksmith. The blacksmith makes plows for the farmers, which he sells for food. If he wants to make more plows he has to expand his business by using some of the food to pay those same farmers to build a bigger shed. Perhaps he has an idea for a better plow. He has to spend some of his labor on trying out designs that might not work out. He can only do so if he has enough surplus food that he can temporarily forgo making plows. That means he is investing in new technology. Eventually, if the plow helps the farmers be more productive he can charge a higher price, hire a helper, and the farmers can reap more crops. The local economy grows, but only if consumption is temporarily reduced to fund investment.

In a monetary economy, the investment climate matters. The marginal tax rate change will have an effect on marginal behavior. Nick doesn't understand, he thinks only in terms of a single average investor for which there is a single high rate that will cause him to stop investing. This is a common fallacy in economic argument.

Further, he underestimates the effect of foreign investment and its sensitivity to tax rates. The United States has benefited from foreign investment throughout its entire history. Our freedom and rule of law made this land the place to invest. Raising taxes on profits reduces the foreign investment that is so helpful to us now.

Finally, there is no basis for some of Hanauer's assertion. He said that the share of national income goes to the rich is increasing. This was certainly true up until 2007. However, what would you do about it? I would have a tax system that causes the richest to pay slightly more than their share of income in taxes and everyone else to pay slightly less. It might look like this:


Wait, that is a picture of our current tax system, courtesy of the non-partisan CBO.

Hanauer also rails against middle class suffering due to the spiraling costs of health care and education, coincidentally the two areas of heaviest government involvement. Health care is heavily regulated and subsidized and higher education is heavily subsidized, resulting in a bubble.

As to whether Amazon.com destroyed or created jobs, I can't say for sure, but I am certain that Hanauer isn't taking into account the jobs created by Amazon because:

• They provide a new platform for "storefronts" on Amazon.
• They create greater demand for product manufacturers that sell through Amazon.
• They leave greater disposable income that can be used to buy other stuff in the hands of consumers.

Should the Rich Pay More Taxes?

Of course, they should. And in a growing economy they would be. But raising the marginal tax rates on the "rich" actually produces little extra revenue, especially, given the flawed, loophole riddled tax code that we have in the United States. The question of how to increase revenue without discouraging economic growth has fortunately been answered by our experience with the 1986 tax reform. Economist Martin Feldstein explains.

The Tax Reform Act of 1986, enacted 25 years ago last Friday, showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue.

How does this work?

This dramatic increase in taxable income reflected three favorable effects of the lower marginal tax rates. The greater net reward for extra effort and extra risk-taking led to increases in earnings, in entrepreneurial activity, in the expansion of small businesses, etc. Lower marginal tax rates also caused individuals to shift some of their compensation from untaxed fringe benefits and other perquisites to taxable earnings. Taxpayers also reduced spending on tax-deductible forms of consumption.

The path ahead for the Congress to raise the revenue needed to run the government and grow the economy is straightforward. The Economist editorializes

Make sure the rich pay their share, but in a way that makes economic sense: you can boost the tax take from the wealthy by eliminating loopholes while simultaneously lowering marginal rates.

The growth that results from fewer economic distortions in the tax code can also spur job creation in the economy.

Serious talk about reforming our dysfunctional tax code is a winner for the Republican nominee for President. This is why I am encouraged to see Rick Perry come out for a flat tax, although I am less impressed to find that he would give taxpayers the option of filing under the old system. Since the wealthiest have the most impact on the economy, this undermines the outcome of increased growth from a flat tax. Herman Cain's 9-9-9 plan also pushes the conversation, but a new national sales tax, on top of income taxes is irresponsible because there is no limitations on future Congress' ability to hike both rates.

I think the best plan would involve lower marginal rates for all forms of income, but an end to all deductions and loopholes, including the mortgage interest rate deduction. I would be willing to consider a charitable deduction, but that might be all. The same is true for the corporate tax code. All of the special tax breaks need to come out and profit should be calculated using generally accepted accounting principles. Top marginal rates around 20% and a corporate tax rate of 20% would be achievable. I am in favor of keeping corporate taxes rates and personal income tax rates the same to prevent shifting between retained profits and income, available to owners of corporations. Better to cause all business decisions to be unbiased by tax code considerations. The only way I would favor a national sales tax would be if the 16th amendment were repealed.

Mr. Feldstein concludes.

Combining that base broadening with a 10% cut in all tax rates would be revenue neutral in a traditional static analysis. But the experience after the 1986 tax reform implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue. With personal income-tax revenue in 2011 of about $1 trillion, that 4% increase in net revenue would be $40 billion at the current level of taxable income, or more than $500 billion over the next 10 years.

The Joint Select Committee should insist on counting that revenue as the starting point for a serious deficit reduction plan.

The Wimpy Way to Deficit Reduction

"I'll gladly pay you Tuesday for a Hamburger today," Wimpy of Popeye fame is often quoted as saying. The implication of course, was that Wimpy was never going to come up with the cash on Tuesday. With the Gang of Twelve meeting the last two days, but apparently having no comment on their actual discussions, Rodger Hedgecock helpfully summarized things today. The Democrats will offer three dollars of future spending cuts for a dollar of tax increases today. The Republicans will be split between this "bipartisanship" approach and those who want to stand firm on any tax rises. It reminded me of Wimpy's proposition. Rodger reminded us that this is the standard Democratic trick, used against George H.W. Bush when he reneged on his "no new taxes" pledge. The spending cuts never come.

But why can't the Republicans reverse this game. We'll give you a dollar in tax rises tomorrow for three dollars of spending cuts today. Now Grover Norquist might start screaming that we shouldn't vote for any tax increases, ever. But he needs to understand my methods. First, as a matter of good politics, if we don't at least promise modest tax rises to pay for the coming spending cuts, then we will lose the political battle. The Economist makes this argument persuasively in this week's leader. Second, this presents an opportunity to reform the tax code. We should back load a phase out of all deductions and all of the other special goodies in the tax code. We should offset some of the increased revenue with lower marginal tax rates, which would be permanent. Third, if spending cuts and entitlement reforms produce the economic recovery that I expect, we can later vote for even lower marginal rates, in effect cancelling the tax hikes. Finally, we can argue that tax hikes now would harm the economy, so they have to be back loaded.

I have always believed that no tax hikes are needed to balance the budget. But sometimes the packaging is very important in selling the plan. Phasing out the deductions after giving people warning is a fair way to reform the tax code and reduce cronyism. Further, if we calculated decreases in the marginal rates that were exactly offset by the phase out of deductions in a static analysis, it would actually result in revenue growth for two reasons. First, the inefficiencies that are caused by hiding income would be wrung out of the system, resulting in greater growth than static analysis would predict. Second, because people would not have ingenious means of hiding income, but marginal rates were actually lower, reported income would rise.

The deficit commission can easily achieve the $1.2 trillion in cuts over ten years if such an approach were taken. The hard part would be to get the Democrats to go along, but I think the public would like it.