Tag Archives: taxes

Why Warren Buffett pays 0% social security tax

Social Security is billed along with Medicare (health care for the poor) as an anti-flat tax called FICA where middle class workers pay 7.65 -15.3%, and rich people pay essentially 0%. The reason that Warren Buffet and other rich people pay 0%, on a percentage basis, far less than their secretaries, is that there is a FICA cap of $127,200 currently, and he earns far more than $127,200. Buffett’s secretaries pays 7.65%, or which 6% approximately is social-security payment, and the rest Medicare. Buffett’s company then matches the 7.65% — a situation that applies to virtually every employee in the US.

A self employed person though, a gardener say, pays both the employee and employer portion or 15.3%. The same $127,200 cap applies, but since few gardeners make more than this amount, they are likely to pay 15.3% on all earnings, with no deductions. FICA really socks the poor and middle class, and barely touches a rich man like Buffett. This is the tax-inequality that most needs addressing, in my opinion, and one I have not heard discussed.

A short history of FICA

A visual history of FICA rates (right), and of the salary cap (left). Medicare contributions were added in 1966.

As I write this, there is a debate about tax reform that mostly involves income tax, but not at all FICA. Income tax could be improved, in my opinion, and should be. We could remove some exemptions that are being abused, and we should lower the general rates, especially for foreign-earnings, but the current income tax isn’t that bad, in my opinion. Buffett likes to brag about the high rate he pays, but it’s not a bad rate compared to the rest of the world. And Buffett benefits from a lot of things we don’t. His income is taxed at a lower rate than a worker’s would be since most of it is unearned. And, like most rich folks, he has exemptions and deductions that do not apply to most. He can deduct cars, private airplanes, and interest; most folks don’t deduct these things since they don’t spend enough to exceed the “standard deduction”. I’m happy to say these issues are being addressed in the current tax re-write.

The current, House version of the GOP tax proposal includes a raise in the standard deduction and a cap on interest and other deductions. There is a general decrease in the tax rate for earnings, and a decrease for earnings made abroad and repatriated. I’d like to see tariffs, too but they do not appear in the versions I’ve seen. And I’ve very much like to see a decrease in the FICA rate coupled with a removal of the salary cap. Pick a rate, 4% say, where we collect the same amount, but spread the burden uniformly. Why should 7.65%-15.3% or the workmanship wages got to the window, the orphan, and healthcare of the poor, while 0% of Buffett’s go for this?

Some other tax ideas: I’d like to see shorter criminal sentences, especially for drugs, and I’d like to see healthcare addressed to reduce the administrative burden.

Robert E. Buxbaum, November 17, 2017. In the news today, the senate version puts back the tax exemption on private jets. The opposite of progress, they say, is congress.

Taxes and accounting jokes

A friend called the other day asking about a financial matter. It seems his wife bought some pictures for  pictures a few days ago for $2000, and after having them apprised, she finds they’re worth $2,000,000.

I started talking about un-realized profits, and mentioned that I never imagined that his wife had such an eye for art. He said, they’re not art pictures, exactly; they’re of you discussing business with the Russians. (It’s a joke — I thought you-all might depreciate it).taxation with representation

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When I started my business, I found that you could deduct medical costs. I called the IRS and asked if I could deduct birth control. They told me: “only if it doesn’t work.”

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I’m glad I learned about parallelograms in school, instead something mundane, like taxes. It’s really come in handy this parallelogram season.

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I got a robo-call asking me to press “1” to hear about a government program for those who wanted to avoid paying back taxes. I did, and a voice said “Leavenworth.”   It wasn’t much of a program, more of a sentence.

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Robert E. Buxbaum, April 5, 2017.  For jokes on other topics, click the jokes tag, here.

The argument for free trade is half sound

In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. Why pay more?  How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and it is clear that some people will benefit more from cheap products, others less, and some folks will even suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely a non-zero tariff rate that does not slow trade too much, but still provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. While we put no tax on most imported products, while much of the world taxes our products rather heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to produce what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d retrain the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But for several reasons industrial voters didn’t trust her. Redistribution of wealth rarely works because, for example, the manufacturer can keep his profits off-shore, as many do.

While a very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we extract 0.4 suits in tax revenue, but nothing on export. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell his suits for less than the American, but not quite as much less. If the manufacturer moves to Mexico he makes more money than by trade alone, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

Repeating the above for different tax rates, we find that, in the above fictional economy a 50% tariff in the maximum to allow any trade (or the minimum rate to stop trade completely): the first two suits might enter; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food. There would be no profit for the importer, and he/she would stop importing. At 50% tariff, we would get no new goods, and we’d collect no new revenue – a bad situation. Lincoln’s “protective tariffs” of 1861 may have contributed to Southern succession and the start of the civil war. While there is a benefit to trade, it seems to me that some modest tariff (10%, 20%) is better for us — a conclusion that Trump seems to have intuited, and that many other countries seem to have come to, too (see map-chart above). As for the academic economists, I note that they also predicted that stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. For experts on money, I find that most economists are not rich.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter. As

Cross of gold democrats

While it is dangerous to paint a large organization like the Democratic party with a single, broad brush, there are always patterns that appear, in this case in every presidential platform for a century. Beginning in the late 1800s when the Democratic party gave up on slavery, a stated goal of every Democratic platform has been to help the poor and downtrodden. Republicans claim to help too, but claim to target the worthy. For Democrats, by contrast, the common aim is to provide help without reference to individual worth or work — to help just because the individual needs it. All versions of this classic Democratic goal are achieved through forms of wealth redistribution: taking from the rich to give to the poor, Robin Hood style, at least temporarily. There is some inherent tension here: if the recipient can get free money without working, why would he work — a tension that some find insulting, but others accept as part of the comic nature of society. Many Americans accept that helping poor people is such a worthy goal that they knowingly accept the tension and cheating.

Mayor Quimba of Springfield (from the Simpsons). A classical Democrat, his motto: Corrupts in Extremus

Mayor Quimby of Springfield (from the Simpsons) is a classical Democrat, he has no morals beyond, ‘whatever the public wants’. Quimby is corrupt and an awful manager, but quite likable.

Extracting money from the rich always proves difficult: the rich generally object. The most direct way to extract money is taxation, but Democratic politicians, like Mayor Quimby, right try to shy from this to avoid being branded “tax and spend Democrats.” This year, Bernie Sanders has taken this line, proposing to raise the tax rate on the wealthy to 90% of income so he can do good for the poor and curb the power of rich Republicans. He has no problem with rich Democrats like Ms. Clinton, or perhaps he does, but doesn’t say so. In Britain, under Attlee, the tax rate was raised to 95%, a rate memorialized in The Beatles song “Taxman” (there one for you nineteen for me; 19/20 = 95%). Americans oscillate between accepting high tax rates and acknowledging that the worker and creative must be able to keep most of his/her earnings or he/she will stop working.

Every few years recipient Americans revolt against the way redistribution makes rich Democrats richer, and how high taxes seem to go with crony corruption. The motto of The Simpson’s Mayor Quimby is “corruptus in extremus”, a nod to the observation of how corruption in redistribution favors friends and family of those redistributing the wealth. Redistribution also tends to create poverty. This happened in England, for example. As Quimby says: “I propose that I use what’s left of the town treasury to move to a more prosperous town and run for mayor. And, er, once elected I’ll send for you.”

An alternative many Democrats favor is to print money or borrow it. This appears to be Ms Clinton’s approach, and was proposed famously in the “cross of gold” speech of William Jennings Brian in 1896.  In this speech, one of the finest in American history, Bryan (an unknown until then) proposed to monetize silver and other assets, allowing him to print money. He would spend the money on the poor by debasing the currency, that is by inflation. Bryan claimed that the rich were anyway sitting on unused money: a useless, dangerous pile that he’d inflate away. He also claimed that the poor are the ones who owe money, a burden that he would wipe out with inflation. Bryan’s final line is immortal: “you shall not press down on the people this crown of thorns, you shall not crucify the nation on a cross of gold.” The speech managed to combine God and greed and was an enormous success. Following the speech there was stunned silence, and then whoops and hollers. Bryan was carried around the convention for an hour before being chosen the Democratic candidate for president in 1896, 1900, and 1908. His speech has appeared, to a greater or lesser extent, in the platform of every Democratic candidate since with a greater or lesser reference to God depending on the conservatism of the speaker.

Donald Trump currently the front runner for GOP president reads to his grand-daughter Chloe from that Christmas classic, 'winners aren't lots.' photo by Donald Trump, jr (Chloe's Dad) aboard their car (?) plane (?).

Donald Trump currently the front-runner for GOP president reads to his grand-daughter, Chloe from ‘winners aren’t losers.’ photo by Donald Trump, jr., Chloe’s Dad. Trump seems to revel in the lovable, rich jerk persona as no Liberal or Democrat could.

Republicans have traditionally supported property rights and harder money: gold in the old days, a balanced budget today. They claim that low inflation is good for the rich and poor alike, and especially for the small businessman. Entrepreneurs are pictured as more virtuous than the idle, wastrel Democrats. Free money, the Republicans note, discourages work. Of course, distinguishing worthy from wastrel is easier said than done. Republicans are accused of being uncharitable, and of helping the idle rich once they get into office. Presidential candidate, Donald Trump claimed that until now he’d give big donations to candidates of the left and right so they would repay the favor with interest at a later date. No one knows if it will change when he gets in office, but so far he’s avoided the major rich donors. He’s doing well running as a lovable, rich, jerk who’d do things different.

Inflation is a dangerous mistress, the middle class generally doesn’t like the way it wipes out debts and savings, while supporting a class of rich wastrels, drunks and the chronically unemployed. Many of the poor and middle class save, while the rich tend to build up debts. The rich have better credit ratings than the poor, and thus borrow more. They are also better positioned to increase their borrowing if they think inflation is coming. The money they borrow is invested in hard assets: land, homes, and businesses. When inflation slows, they can sell these assets. And if they pick wrong, the government bails them out!. William Jennings Bryan lost all three of his runs at the presidency, twice to McKinley and once to William H. Taft, who stood for doing nothing.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

I think the American people want a balance in all things. They want a balance between helping everyone, and helping only the deserving; between high taxes to help folks, and allowing folks to keep their wealth. They don’t quite know where to draw the line, and will even help the wastrels, even those who refuse to work, because they don’t want them starving in the street. They also seem to accept rich folks getting richer, especially when a big project is needed — a ship or a bridge, for example. We elect an alternating mix of Democrats and Republicans; conservatives, and liberals to avoid false paradoxes, achieve some liberty, and establish one of the richest states known.

As for me, you might as well know, I’m a liberal Republican. I favor low income taxes, but some welfare; taxing imports (tariffs), and low inflation –“bread currency,” I like Peter Cooper, and the Greenback Party, 1876. Cooper claimed that the dollar should always have the same value “for the same reason that the foot should always have 12 inches and the pound 16 ounces.” I also think enforcing morality is a job for preachers, not politicians. For 160 years students of Peter Cooper’s union were getting a free college education and I’m one of those engineering students, see my biography of Peter Cooper.

Robert E. Buxbaum, December 30, 2015. See my view of Scrooge’s economic education in the Christmas Carol.

Flat tax countries: Russia, Mongolia, Hungary

For no obvious reason, many Republicans and some (few) Democrats are fans of the flat tax. That is a fixed percentage tax on every dollar earned with no deductions, or very few. They see the flat tax as better, or more fair, than the progressive, graduated tax found in the US and most industrial countries. While most Republicans don’t like high taxes, as in Sweden, France, or in the UK, the flat-taxers want a single tax rate: a constant percentage for all. A common version is what Ben Carson described earlier this month, “if you earn ten million dollars your tax will be one million; if you earn ten dollars, your tax will be one dollar.” Herman Caine (R) proposed something similar eight years ago, and (surprisingly) so did Jerry Brown (D).

Ben Carson proposes a 10% flat tax. I'm guessing his source is the Bible.

Ben Carson proposes a 10% flat tax.

As it happens, of the 230 nations on the planet, several already have a flat income tax, and none of them are industrial juggernauts. I will list the larger of these countries in order their tax rate: Mongolia and Kazakhstan, 10% flat tax and hardly any services; Russia and Bolivia, 13% flat tax: moribund, raw-material-based, police-states; Romania and Hungary 16%; Lithuania and Georgia 20%; Zambia 22%; Switzerland, 35% when you include the Cantonal and municipal flat rates, and (topping the list) Greenland at 45%. Not one of these is a productive, industrial powerhouse, like the US, and there is no indication that this will change any time soon.

I suspect that the flat tax enters the minds of conservatives from the Bible, from the 10% of grain that was given to the Levites (Numb. 18:24), and the second 10% eaten of pilgrimage festivals or given to the poor (Deut. 14:22-24). If that’s the source, let me suggest a better modern version is to give out cans of food, or to support ones church. But as a model for government finance, I’d suggest it’s best to leave more in the pockets of the poor, and tax more from the rich. Even in Biblical times, the government (king) levied a substantial tax above the 10%s described above.

A measure of tax rate is the percentage of the total GDP that goes to taxes. As things go, our tax rate isn't particularly high.

A measure of tax rate is the percentage of the total GDP that goes to taxes. As things go, our tax rate isn’t particularly high.

A flat tax does not necessarily imply a low tax, either. Greenland’s flat 45% rate is among the highest in the world, and Israel had a 50% flat tax until fairly recently. It’s also worth noting that personal income isn’t the only thing one can tax. Several countries combine moderate personal income rates with high corporate rates (Venezuela, Zambia, Argentina), or add on a high sales tax, or a transaction tax. Herman Caine’s 9-9-9 tax plan included a 9% transaction tax and a 9% federal sales tax that would have gone on top of whatever the state tax would have been. The revenue collected by the 9-9-9 plan would have been no less than we had, but would be, he claimed, simpler. Cain’s flat tax wasn’t even really flat either, as there was an exclusion, an income level below which you were taxed 0%. That is, he was really proposing a two tier system, with a 0% rate at the first tier. Rand Paul seems to favor something similar today.

The two advantages of a flat tax are simplicity, and that it reins in the tendency to tax the rich too much, a tendency found with many liberal alternatives. The maximum tax rate was 95% in England under Attlee. Their 95% tax-rate appears in the Beetles’s song, Mr Taxman: “…There’s one for you, nineteen for me; ‘Cause I’m the Taxman.” High rates like this caused the destruction of many UK businesses, and caused The Beetles’s to leave and reincorporate in the Cayman Islands. Bernie Sanders recently proposed a top rate that was nearly as high, 90%, and praised Denmark (60% maximum rate) for its high social services. Sorry to say, Denmark seems to have concluded that their 60% maximum was excessive, and earlier this year reduced their maximum to 47.794%. This is below the maximum US rate if you include New York state and city income taxes. History suggests that if you tax the rich at rates like this, they leave or do other socially unacceptable things, like go black-market. On the other hand, if you tax too little, there is no money for education or basic social services, e.g. for the desperately poor. At one point, I proposed the following version of graduated to negative scheme that manages to provide a floor, a non-excessive top rate, and manages to encourage work at every income level (I’m rather proud of it). And there are other key issues necessary for success, like respect for law, and not having excessive minimum wages or other excess regulations.

Bernie Sanders: tax the rich at 90% of income.

Bernie Sanders: tax the rich at 90%; I doubt this is a good idea.

Whatever the tax structure is, there is probably an optimal average rate and an optimal size for the government sector. I suspect ours is near optimal, but have no real reason to think so (probably just nativism). I’ve found that comparing the US tax rates to other countries’ is very difficult, too. Most countries have a substantial Value Added Tax (VAT), that is a tax applied to all purchases including labor, but we do not. Some countries have import taxes (Tariffs, I’m in favor of them), while we have hardly any. And many countries tax corporate profits (and sales) at rates above 60% (France taxes them at 66.6%). To make any sort-of comparison, I’ve divided the total tax income of several countries by the country’s GDP (I got my data here). This percent is shown in the chart above. The US looks pretty average, though a little on the low side for an industrial nation: just where I like to see it.

Robert E. Buxbaum, November 29, 2015. I imagine myself to be a centrist, since all of my opinions make sense to me. When I change my mind on something, I stay at the center, but the center moves. If this subject interests you,  seems to have dedicated his life to following the flat tax.

Is cannibal tourism good for Michigan?

Governor Snyder has no appetite for it, but ex-governor Jennifer Granholm did, and some of her Democratic colleagues still do. Not cannibal tourism, as such, but movie subsidies paid for by a tax on business property independent of profits. Some seven years ago, in 2008, then-governor Granholm and a majority of our legislature instituted a $132 million/year subsidy program that provided up to 42% of movie production costs. The hope was that films would bring Hollywood-type wealth and glamor, and that they would spark tourism. As it happened, the jobs went to Hollywood transients to such an extent that the total number of MI film employees was reduced. It is now 100 lower than at the start, and virtually all of the money spent went to out-of state employees (quite often the high-priced star) who left as soon as the filming was done. The report concluded that the program returned 11¢ for every tax dollar spent. One of Governor Snyder’s first acts was to diminish the subsidies, and the legislature has just put an end to them: revenge of the nerd.

Offspring, filmed in Michigan. It does not seem to have promoted Michigan tourism.

Offspring: no jobs created, and perhaps no tourism … but think of the cool factor.

The amount spent in the early years, $132 million/year, was about 1/3 of the state’s deficit, a major misuse of funds. Reason magazine claimed it was “stone-crazy” to support movies when the state had, at the time, 14% unemployment, the highest rate in the nation. They argued that the money could be better spent on roads, or schools, or left in folks’ pockets (I agree).

The effect on tourism isn’t quite what was hoped. Movie makers tend to see Michigan as a setting for dystopian films, for example, “Offspring,” a film about cannibal tourism. This film got one of the largest state subsidies. A plot summary is:  “Survivors of a feral flesh-eating clan are chowing their way through the locals.” If this encouraged tourism, it’s not necessarily the tourists you wanted. You can tell it’s Michigan by the Michigan symbol on the police cars. Michigan funds also brought two Batman movies to Detroit, along with Michael Moor’s “Capitalism, a love story“, a  movie billed as showing how capitalism makes life in America a nightmare. The current head of the film board has noted that “realistic cannibalism; the gruesome and graphically violent depiction …. is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.” I can agree.

Batman and Superman in Detroit.

“Batman vs Superman.” They battle in Downtown Detroit, as do “Red Dawn” and “Transformers.”

Opposition to dropping the program came mostly from the Democratic side of the aisle. Rep. Jeremy Moss, D-Southfield, said the film incentives were creating good jobs. Rep. Kristy Pagan, D-Canton, pointed to “… the cool factor. Who doesn’t want to see Ben Affleck or Amy Adams walk down our streets?” (I don’t). In the end, three Democrats and virtually every Republican voted to end the program. Among the Republicans for keeping the program were Kathy Crawford R-Novi, and Mike McCready, R-Birmingham.

You should not feel too bad for the makers of gore films. Subsides are still available in Massachusetts, Oregon, Washington, California, Minnesota, Nevada, and several other states. Massachusetts welcomed Part 2 of The Offspring, a Massachusetts headline proclaimed the victory: “Come to Massachusetts, We Love Cannibals!” Massachusetts folks have been full of themselves for years. As for the money we saved, our Michigan legislature has finally begun balancing the budget and decreasing the destructive personal property tax that helped fund these schemes.

Robert E. Buxbaum, November 5, 2015. I should also commend the legislature for making “talk like a pirate day” a state holiday, and for passing, on November 3, a necessary roads bill. It was signed by most Republicans and two Democrats. Bipartisan-ish. With good management, Michigan might be coming back – lets hope it continues.

Michigan’s road bill — why not?

Stagnating before the Michigan Senate is a road improvement bill that passed the Michigan house 10 days ago. Though it’s not great, I hope they sign the bill. The bill would raise raise $600 million to $1.2 billion/year, an increase of $60 to $120 per person per year ratcheting up over the next six years. The first stage of the bill would take effect in October 2016, and would raise $400 million by increasing our car/ truck registration fees by about 40%. People with normal sedans would pay about $60 more per car per year. Those with more expensive, heavier vehicles would pay more. Though our registration fee is already among the highest in the nation, raising it further has the potential (It seems to me) to be the most fair and reasonable source of additional revenue. People with fancy cars, I imagine, are wealthy and those with heavy cars (I imagine) do the most road damage. This is the part of the bill that has proven the most contentious.

The next stage would begin in early 2018. It would raise $200 million by increasing Michigan diesel and gasoline taxes. The larger part would be on diesel fuel, an increase of 7.3 cents/gal presumably to soak out-of-state truckers who come through Michigan. These individuals deserve extra taxation, I imagine, because they don’t pay registration fees and probably damage our roads even more than those with fancy cars. Besides, they don’t vote in Michigan. The gas tax increase is smaller, 3.3 cents/ gal on regular gas, but Democrats are correct to point out that it is regressive. It takes a greater fraction from the poorer than from the rich. The hope is that, by the time the tax increase takes effect, we’ll have some inflation and also some more fuel-efficient cars so the bite won’t be as bad. Sorry to say, we already pay the 10th highest gas tax in the country.

The final phase of the road funding bill would not take full effect until 2021. The idea is to transfer $600 million from the general fund to pay for the roads with money left over to reduce home-owner taxes. Underlying the ability to do this is an assumption that Michigan industry and home prices will recover enough between now and then that we’ll be able to stop using the gasoline taxes to fund our schools, ideally with money left over from the regular income and sales tax. While I’d like to see this happen, and while this is possible given that the last few years have seen the state’s GDP recover at a 15.5+% growth rate (third highest in the nation) there is also a basis to say the assumptions are over- optimistic. On the other hand, the Democratic plan, based on 1.6% growth next year is likely over-pessimistic. As The Yogi says, “Predictions are always difficult, especially about the future.”

Whatever your views of the future, our roads are crumbling now, and new money is needed to fix them now before they get worse. If taxes must be raised, I’m inclined to do it with use -taxes, that is by charging those who use the services most. This is a philosophical preference of mine. Not all Republicans agree with this, and only one House Democrat has signed on so far. It was the view of the old-time, labor Democrats I grew up with, but not of today’s Democrats who prefer to tax “the rich” for any and all goods and services. Their point: that there are struggling, poor people who drive heavy, expensive cars. They’ve something of a point on the heavy cars, but I have less sympathy for the rest. I wrote a comic story about a poor guy trying to dispose of an expensive car, a Viper. My guess is that struggling rappers and poser politicians would not find it funny.

Dollars per capita spent on roads, 2013. From MDoT's road funding proposal.

Dollars per capita spent on roads, 2013. From MDoT’s road funding proposal.

Part of the way that MDoT (the Michigan Department of Transportation) justified its target of $600 million to $1.2 billion was by comparison with surrounding states — not my favorite way of analysis. The MDoT graphic shows that Michiganians spend about $57 less per capita on roads than folks in Illinois, Wisconsin, or Ohio, and about $100 less than folks in Indiana or Pennsylvania. Multiply $57 by our state’s population, 10 million, and they conclude we should spend some $570 million more per year. Multiply by $100, and you get $1.0 billion.

While the need for at least $600 million/year sounds about right, I note that the per-capita spending justification seems dubious. If you calculate instead on the basis of dollars per lane-mile, as below, you find that Michiganians are already paying more per mile than Minnesota, Wisconsin, or Indiana. You’ll also note that Ohio and Illinois pays about 1 1/2 times as much their roads aren’t much better. A major part of the variation, I suspect, is corruption, and the rest, I guess is incompetence. Illinois, perhaps the most corrupt state in the mid-west, has seen 4 of its past 5 governors go to jail, along with innumerable Chicago Aldermen and lesser officials. Citizens of Illinois pay for this corruption in over-size construction projects, and over-size construction fees. After the $600 million increase, we’ll pay $8,950 per lane mile suggesting we are still not quite as costly per lan-mile as Illinois or Ohio. If it turns out we need the full $1.2 billion extra, it will suggest we are even more incompetent or corrupt than Illinois.

Road funding state by state comparison.

Road funding state by state comparison, from the same MDoT report, 2013.

An ideal way I’d like to reduce the costs of Michigan’s roads would be to reduce corruption, a trend that’s already helped to revitalize Detroit since the Justice department jailed the mayor and his father plus some associates for “pay for play”. I’m sure it also helped to remove the chief of police (millions in his ceiling) and Bobby Ferguson of the useless, expensive Jail project and Guardian building scandal.

Conviceted IL

It’s somewhat hard to judge the level of general incompetence in a state, and even harder to find a fix. Minnesota had a bridge collapse in 2007, and we had the Zilwaukee in 1982 (and 2008), the 9 mile bridge collapse of 2009, and the Southfield overpass collapse of 2014. It’s been proposed that we should be able to fix both our corruption and our incompetence problems by holding the contractors responsible for any failures. If only it were that easy. Holding contractors responsible might get some contractors to allow the concrete cure for longer periods under water before opening a road, but I’m not sure the public would stand for it. A more-likely outcome is that crooked contractors would charge more for the same bad work, and then go bankrupt as soon as the road fails. If their company were appropriately structured, they could re-appear the next day: the same people and equipment, operating under a new corporate name.

The biggest single incompetence issue that I can see appears to be poor under-road drainage. In Oakland county, where I am, the drain department looks responsible for the major flood of last summer. We’ve had rains this big in previous years without this massive flooding. I suspect a lack of dry-wells, but don’t know. From what I see, the drainage is bad beneath many Oakland roads, too. It seems like the concrete slabs are not deteriorating as much as they are coming apart. That’s a sign of bad drainage. I also see sink-holes, new lakes, and places where the sidewalks sink. Again, that’s a sign of bad drainage; a sign there is a swamp near or beneath the road. If the ground below a major road is a swamp, there is no practical way a contractor can build a long-lasting road over it. Until the drains get better, or the corruption subsides, we’re going to have to replace the roads often at a cost of another $600 million/year. We might as well acknowledge our problems and sign the bill.

Robert Buxbaum, November 2-3, 2015. If you feel like getting involved, contact your state senator and tell him/her to vote yes (or no). Our senator is Vince Gregory. And if anyone would like to put me on a drainage board, I’d be happy to serve for free.

Detroit emerges from bankruptcy. Not quite.

missing homes Detroit

While Detroit’s central core comes back, surrounding, homes burn at 220+/month, leave Detroit streets looking like the teeth of an aging hillbilly.

Detroit went bankrupt last year, the largest US city to do so since New York in 1970. As with New York’s bankruptcy, Detroit’s was used to cancel old debts and rewrite ill-thought contracts. Detroit also got to jail some crooked politicians including mayor Kilpatrick, described as “a walking crime wave.” But the city and county have no easy path out of bankruptcy as both city and county are likely insolvent. That is, they spend more than they take in despite massive out-state funding, and high taxes, 10% above the state level. To make matters worse, they are losing population at the rate of 1% or so per year. It’s hard to fund a city built for 2 million on the tax revenue of 1/3 as many, especially when they are mostly unemployed. Unless a lot changes soon, another bankruptcy is almost inevitable — likely this time at the county level.

We got in this state, largely as a result of a 50 year war between the black, solidly Democrat, somewhat anarchist, political establishment of Detroit, and the white, stayed, mostly Republican out state. The white population fled following the riots of the 60s and the richer black population soon followed. The remainder stayed, trapped in slowly decaying neighborhoods as the city went broke. White flight allowed the black community to develop its own, Motown culture, but except for the music industry, it has not benefitted from this culture.

Detroit's murder rate, 45/100,000, is the highest in the US. It's coming down but not that fast.

Detroit’s murder rate is the highest in the US. It’s come down 10% in the last 2 years, but has far to go.

Detroiters have poor health, poor savings rates, high murder rates, and a fire rate of about .22% per month, 2.6% per year. The city lacks basic city services like reliable fire fighting and street plowing. Police at one point erected signs that said, “enter at your own risk.” There is a lack of small businesses and the services they would provide too: laundromats, grocery stores, and taxis (though no lack of bars and marijuana maintenance clinics). Employment in the auto-industry is down. And it’s not being replaced by home-grown small business – perhaps hampered by the low savings rate. A surprisingly large fraction of the Detroit homes are in foreclosure, see map, and with it a high abandonment rate and a high fire rate. As pheasant and dear return, non-core Detroit is beginning to look like farm country.

Detroit foreclosures near me. Blue is occupied homes, red is unoccupied, yellow unknown, and green is destroyed homes or vacant, foreclosed land.

Detroit foreclosures near me. Homes in dark blue are occupied foreclosed, red is unoccupied, and green plots are destroyed homes or vacant, foreclosed land.

It’s not clear what political leaders should do. The city council would like to return to their pre-bankruptcy ways where they could borrow as much as they felt they needed and spend on whatever they saw fit — often on fast friends, fast cars, gambling, and vacation homes outside of the city. But the out-state population has been reluctant to give them the credit card. Is this racist or is it prudent — probably both, but this can not continue. The city and county pension funds were ransacked for ill-advised investments and consulting fees to cronies and their power-lawyers. Either the money is replaced from out-state or there will be some unhappy retirees in the not-too-distant future. My guess is that the state will have to pick up the tab for this mismanagement, but that they won’t want to hand over management control afterwards.

Rand Paul, a potential GOP presidential candidate, has proposed rebuilding business and property values by a method that the city will almost certainly reject. His solution: cut services to low-population density areas and cut taxes on business and earned income. While this would likely bring in new people and new businesses, the people would likely be white, and the businesses white-owned/ white-serving. Black-Detroiters have too little savings, organization and income to directly benefit from this plan. Detroit’s Democrat politicians will claim, not without merit, that this is welfare for rich whites: a way for them to become yet-richer while doing nothing for the poor blacks of the burning neighborhoods. They are likely to demand control as the elected officials of the town: regulating business and raising the minimum wage to create “equality.” I suspect this is a bad idea.

Detroit hunger games

Detroit suffers from two populations and a divide.

To some extent we’re already seeing the return of white-owned, white-serving businesses. Classic buildings in the core of the city have been purchased by white developers – notably Dan Gilbert of Quicken Loans leading to gentrification and an influx of single, white hipsters. The newcomers are viewed as half-saviors, half-carpetbaggers. They dwell in a whiter city core with hipster bars and expensive restaurants. Does a poor city with massive debt, crime, and unemployment benefit from a core filled with high-priced, gourmet coffee and fern bars?

The author, Robert Buxbaum, enjoys a day at an artificial beach in central Detroit.

The author, Robert Buxbaum, enjoys a beer at an artificial beach-cafe in central Detroit with some, few black folks, none poor. Is this good for Detroit?

The new hipsters put a squeeze on city services too — one that’s hard to deal with fairly. Detroit can not afford to plow all the streets after a snow. Should the new high-tax white folks get plowed streets, or should they suffer equally with everyone else? Detroit education is abysmal, but the high tax-bracket folks want better. Should they get it, or suffer equally? They want extra street lights and police protection. Should they get it, or suffer equally? Is this the way up?  A solution I’d proposed some while ago was to divide the core city from the now-rural outskirts so that each could be managed more sanely. It’s not a grand a solution like Rand’s plan, but less likely to be rejected. One way or another, we seem destined to have a Detroit with a rich core and abandoned neighborhoods. I suspect it might as well be managed that way.

Robert E. Buxbaum, February 10, 2015. I don’t have solutions, but write about the city’s problems, and the partial solutions I’ve heard as a way to clarify my thinking — and perhaps yours too.

Statistics of death and taxes — death on tax day

Strange as it seems, Americans tend to die in road accidents on tax-day. This deadly day is April 15 most years, but on some years April 15th falls out on a weekend and the fatal tax day shifts to April 16 or 17. Whatever weekday it is, about 8% more people die on the road on tax day than on the same weekday a week earlier or a week later; data courtesy of the US highway safety bureau and two statisticians, Redelmeier and Yarnell, 2014.

Forest plot of individuals in fatal road crashes over 30 years. X-axis shows relative increase in risk on tax days compared to control days expressed as odds ratio. Y-axis denotes subgroup (results for full cohort in final row). Column data are counts of individuals in crashes. Analytic results expressed with 95% confidence intervals setting control days as referent. Results show increased risk on tax day for full cohort, similar increase for 25 of 27 subgroups, and all confidence intervals overlapping main analysis. Recall that odds ratios are reliable estimates of relative risk when event rates are low from an individual driver’s perspective.

Forest plot of individuals in fatal road crashes for the 30 years to 2008  on US highways (Redelmeier and Yarnell, 2014). X-axis shows relative increase in risk on tax days compared to control days expressed as odds ratio. Y-axis denotes subgroup (results for full cohort in final row). Column data are counts of individuals in crashes (there are twice as many control days as tax days). Analytic results are 95% confidence intervals based on control days as referent. Dividing the experimental subjects into groups is a key trick of experimental design.

To confirm that the relation isn’t a fluke, the result of well-timed ice storms or football games, the traffic death data was down into subgroups by time, age, region etc– see figure. Each groups showed more deaths than on the average of the day a week before and after.

The cause appears unrelated to paying the tax bill, as such. The increase is near equal for men and women; with alcohol and without, and for those over 18 and under (presumably those under 18 don’t pay taxes). The death increase isn’t concentrated at midnight either, as might be expected if the cause were people rushing to the post office. The consistency through all groups suggests this is not a quirk of non-normal data, nor a fluke but a direct result of  tax-day itself.Redelmeier and Yarnell suggest that stress — the stress of thinking of taxes — is the cause.

Though stress seems a plausible explanation, I’d like to see if other stress-related deaths are more common on tax day — heart attack or stroke. I have not done this, I’m sorry to say, and neither have they. General US death data is not tabulated day by day. I’ve done a quick study of Canadian tax-day deaths though (unpublished) and I’ve found that, for Canadians, Canadian tax day is even more deadly than US tax day is for Americans. Perhaps heart attack and stroke data is available day by day in Canada (?).

Robert Buxbaum, December 12, 2014. I write about all sorts of stuff. Here’s my suggested, low stress income tax structure, and a way to reduce/ eliminate income taxes: tariffs– they worked till the Civil war. Here’s my thought on why old people have more fatal car accidents per mile driven.

High minimum wages hurt the poor; try a negative tax

It is generally thought (correctly I suspect) that welfare is a poor way to help the poor as it robs them of the dignity of work. Something like welfare is needed to keep the poor from starving, and the something that’s generally chosen in a living wage — a minimum wage set high enough that even a minimally skilled worker should be able to support a family of 4. This may be better than welfare, but I’d like to propose something better still — and a way to pay for it — a negative tax.

I suspect that a high minimum wage hurts the poor and middle class in a few ways. For one, by flattening the wage structure, it hurts the ego of higher skilled workers and reduces their incentive to improve. A senior worker should make more than an unskilled beginner, but a high minimum wage dampens this. What’s more, a high minimum wage cuts the lower rungs off of the employment ladder, making it harder for young folks, and unskilled folks to be productively employed. There may be some worthwhile minimum, but not everyone lives independently (or should) and not every job deserves to support a family of four, if only because not every unskilled worker is supporting a family of four. Many minimum wage earners are living at home or are heads of double-income couples, and only a few have the skills to justify the wage on a value added basis. A high minimum wage is thus needlessly costly for many workers. People accept the cost because it’s borne by the company (and companies are seen as evil). But passing the burden has limits, and a high minimum wage creates high unemployment in low skill areas, as employees are reluctant to pay a lot for low skill work. In Detroit before bankruptcy, the living wage was set so high that companies could not compete. Many went bankrupt and the others hired so selectively that the unskilled were basically unemployable. Even the city couldn’t pay the wage and its bills.

Even with the highest minimum wage, there is always a need for welfare, as some workers will be unemployable — because of disability, because of lack of skill, or from an ingrained desire to not work. The punishments a community can mete out are limited, and sooner or later some communities stop working and stop learning as they see no advantage.

The difficulties of taking care of the genuinely needy and disabled while the lazy and unskilled has gotten even some communist to reconsider wealth as a motivator. The Chinese have come to realize that workers work better at all levels if there is a financial reward to experience and skill at all levels. But that still leaves the question of who should pay to help those in need and how.  Currently the welfare system only helps the disabled and the “looking” unemployed, but I suspect they should do more replacing some of the burden that our minimum wage laws places on the employers of unskilled labor. But I suspect the payment formula should be such that the worker ends up richer for every additional hour of work. That is, each dollar earned by a welfare recipient should result in less than one dollar reduction in welfare payment. Welfare would thus be set up as a negative tax that would continue to all levels of salary and need so that there is no sudden jump when the worker suddenly starts having to pay taxes. The current and proposed tax / welfare structure is shown below:

Currently someone's welfare check decreases by $1 for each dollar earned. I propose a system of negative tax (less than 100%) so each dollar earned puts a good fraction in his/her pocket.

Currently (black) someone’s welfare check decreases by $1 for each dollar earned, then he enters a stage of no tax — one keeps all he earns, and then a graduated tax. I propose a system of negative tax (red) so each dollar earned adds real income.

The system I propose (red line) would treat identically someone who is  incapacitated as someone who decided not to work, or to work at a job that paid $0/hr (e.g. working for a church). In the current system treats them differently, but there seems to be so much law and case-work and phony doctor reports involved in getting around it all that it hardly seems worth it. I’d use money as the sole motivator (all theoretical, and it may not work, but hang with me for now).

In the proposed system, a person who does not work would get some minimal income based on family need (there is still some need for case workers). If they are employed the employer would not have to pay minimum wage (or there would be a low minimum wage — $3/hr) but the employer would have to report the income and deduct, for every dollar earned some fraction in tax — 40¢ say. The net result would be that the amount of government subsidy received by the worker (disabled or not) would decrease by, for 40¢ for every dollar earned. At some salary the worker would discover that he/she was paying net tax and no longer receiving anything from the state. With this system, there is always an incentive to work more hours or develop more skills. If the minimum wage were removed too, there would be no penalty to hiring a completely unskilled worker.

At this point you may ask where the extra money will come from. In the long run, I hope the benefit comes from the reduced welfare rolls, but in the short-term, let me suggest tariffs. Tariffs can raise income and promote on-shore production. Up until 1900 or so, they were the main source of revenue for the USA. As an experiment, to see if this system works, it could be applied to enterprise zones, e.g. in Detroit.

R. E. Buxbaum, June 27, 2014. I worked out the math for this while daydreaming in an economics lecture. It strikes me as bizarre, by the way, that can contract with someone for barter, e.g. to help you move for a pizza, but you can’t contract for less than the minimum wage $7.45/hr. If you hire the worker for less you can go to jail. In Canada they have something even more bizarre, equal wages for equal skills — a cook and a manager must earn the same, independent of how well the cook cooks. No wonder violent crime is higher in Canada.