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Last Wednesday, hours before a default, Congress finally agreed to raise the debt ceiling and fund the government…until January 15th, when we can repeat the drama. Of course, the bipartisan group set to negotiate a longer budget might come to broad agreement by December, but that doesn’t seem very likely.

Viewers of Spielberg’s Lincoln were were witness to the agonizingly slow process of achieving consensus for the permanent abolition of slavery in all states even at the late date of 1865. The film presents Lincoln using any and all means to cajole, bully and horse trade his way towards passage of the 13th Amendment.Lincoln was concerned that court challenges after the war might endanger the freedom of slaves freed by 1863′s Emancipation Proclamation, which he had issued as an Executive Order during the war. He wanted to have their liberty confirmed and slavery permanently abolished by writing it into the constitution. Contrast that imagery with the methods used to pass the Affordable Care Act (ACA) in 2009.

ObamaCare was rammed through by crook. Americans were promised they could keep their health insurance if they wanted to. We were told it would bend the rising costs of health care down, and that the Universal Coverage Mandate was not a tax. Before the House vote, then Speaker Nancy Pelosi said of the 2000+ page bill ”…we have to pass the bill so that you can find out what’s in it…”.  In the end, unlike the 13th Amendment or any other major entitlement program in American history, the ACA was passed along entirely partisan party lines, with no Republican votes.

So why are the Republicans still essentially crazed about the ACA? After all, the Supreme Court has confirmed the legality of ObamaCare’s Universal Mandate (as a tax), and the 2012 elections confirmed that new leadership would not repeal the law. Republicans have obstinately kept up defund Obamacare efforts because they believe government’s overhaul of the health care sector creates an expensive and unfunded new entitlement for all Americans at a point in time that any private person or entity would be looking to more prudently manage expenses. This fiscal house of cards must ultimately collapse,  and the resulting pain to Americans will make the ”great recession” seem like the good old days. As seen in the chart below, absent entitlement reform, these spending programs will crowd out all discretionary program spending by around 2030.

Actual & Projected Federal Spending & Revenue as % of GDP

 There hasn’t been a serious federal budget and tax overhaul since 1986. Discretionary spending in 2012 accounted for about 36% of the federal budget, but without reforms, these will be completely overtaken by entitlements in the near future unless tax revenues are significantly increased above historical norms. Compassionate citizens understand that all Americans should have some form of major medical health care coverage that does not bankrupt them, but ObamaCare is a terrible and costly way to achieve this end when there are many better alternatives. (see 7 Practical Solutions on Health Care)

Government spending is typically inefficient, but a look at the shutdown of the government and the rollout of Obamacare are especially illuminating. 800,000 government employees were furloughed for 16 days, inconveniencing taxpayers, and then were awarded back pay (over $6 billion including benefits) for no work done.

Healthcare.gov cost taxpayers over $500 million and was planned for years.Ill conceived and poorly executed; it simply doesn’t work. And clueless HHS Secretary Kathleen Sebelius is still on the government payroll, and has the full support of the president. In an age when the U.S is home to the world’s largest, most successful Internet companies, how is it possible that our government can’t even manage to build a functional website without blowing through hundreds of millions of dollars? What would be the news media and public judgment be if Apple, Google or any other company promised a revolutionary new product for nearly four years, and then botched the introduction so completely? Why do the people who can’t build a working website also deserve the power to reorganize one-sixth of the U.S. economy?

The executive branch of government is so named because it is supposed to “run” the government. Even if Congress cannot agree, all Americans have a President who is charged to make it all “work”. When we look at our “great” presidents, they came from alternate sides of the aisles during our history in mostly a two party system. Among the traits they shared were meeting problems with a willingness to incorporate at least some of the other side of the aisle into their solutions.

The “system” of checks and balances is actually working in Washington today. A serious imbalance in the direction of government has unleashed as torrent of vitriol by the Republican right because the Democratic left has pushed too far, too fast without incorporating contrary views and opposing solutions. It is precisely this “winner take all, losers shut up” attitude that is making our country more difficult to govern. Elections do matter—almost as much as leadership. We want our President to act like a leader, not just a politician who gained a tactical advantage this week. The man who won the Nobel Peace Prize should now do something BIG… like being bigger than everyone else, make peace and do the people’s business.

For starters, form a new bi-partisan commission to tackle budget and tax reform. Unlike the Simpson Bowles Commission of 2010, this commission should be constituted with a mandate to present their conclusions for a simple up or down vote, without amendments, from both houses of congress and a commitment from the President to sign such legislation. Second, another bi-partisan commission should be formed to restructure government. Sen. Tom Coburn has documented $365 billion annually in waste, duplication and silliness in federal programs, but can’t enact reforms because of lobbying activities. If a bi-partisan commission were to make cutting and restructuring proposals that were guaranteed a straight up or down vote in both houses (like the periodic Base Realignment & Closure Commissions ), it could give Congress the political cover it needs to do the right thing. These commissions would be exercises in finding common ground, and could incrementally lead to better government as well as progress on immigration reform and other issues that urgently require action.

Americans require compromise solutions to end the gridlock and allow for greater economic growth that will lift all boats, including government coffers. The country rightly counts on its chief executive to bridge the gaps, make the compromises, and smooth the way to passage. We need less drama, less cost and more effectiveness. Trying to lead with constant partisan bickering is no leadership at all. It’s no way to run a country.

America has been both a constitutional republic and a representative democracy for over 225 years. During that period, we have continually redefined what those terms meant and what people they applied to. The constitution has been amended 27 times. 15 of these changes have expanded and enumerated the rights of citizens, while 7 have codified states’ rights and electoral procedures.

Our Constitution declares that the states shall determine how we vote in congressional districts, and how we tally those district votes in presidential elections. Indeed, re-drawing the map on how a congressional district is composed within a state is mandated every 10 years. So calling for election reform is not particularly unusual. Reform is particularly needed now, because our polarized congressional representatives appear incapable of reaching necessary compromises to enact important fiscal reforms needed to remove economic threats to our country and its future.

How Did we Get Here?

Gerrymandering by state legislatures over the last 15 years has contributed mightily to our dysfunctional congress.”Packing” has been used to push minorities, racial or political, into compressed districts to diminish their influence into only one district. The “cracking” technique draws voting districts so as to disperse minority votes across several districts in attempts to deny or dilute minority representation. The following chart illustrates how many Members of Congress represent “safe” districts. If incumbents can’t realistically be voted out, challenges to them decrease, and our voting rights are diminished. 

 

 

The chart also shows the success of state Republican legislatures in maximizing their party’s results in the US House. Of the 345 congressional districts that lean strongly to either party, one would expect that the party split would mirror the underlying population. A Gallup Poll of likely voters in 2012 found that 47% of Americans self identify as Democrats and 42% self identify as Republicans. Yet the “safe” Republican districts account for 42% of the House, and Republicans are able to contest another 90 seats, an additional 20% of the house. The magic of drawing partisan districts explains how Republicans could have lost the popular vote for the House in 2012 by more than a million votes nationally, yet kept control of the House by 33 seats.

The methodology for drawing congressional voting districts is easily subverted by the party in power doing the drawing, and in 1964 the Supreme Court ruled that congressional districts must be contiguous in order to be constitutional. This sounds reasonable, until one looks at the contortions employed to produce some very strange looking districts. Take for example theIllinois4th. It was intended to pack Hispanics, and is also known as the “earmuff district”, and is shown below. Unfortunately, there are many more such examples of oddly drawn districts.

Illinois 4th Congressional District


Solutions

Delegating specific responsibilities to the states results in the development of various responses to the same problem. The states are all over the spectrum in terms of the primary systems that they employ. 20 states allow each party to determine whether primary voters must already be registered as a party member (a closed primary). In 13 states, voters are able to declare themselves a party member and vote in the primary on primary day (a semi-open primary), and in 17 states voters are able to vote without declaring as a party member (an open primary).

Washington and California use a top two primary, which allows unaffiliated voters to vote for any candidate in a primary. The top two vote-getters from any party proceed to a final election. This system, which of course infuriates party officials, is meant to produce general election candidates who have the broadest appeal within the district. Proponents of the top two system think closed single party primaries exacerbate the radicalization that often occurs at the primary stage, when candidates must cater to their party’s “base” rather than the political center.

The top two primary is a positive electoral change that could easily be adopted across the country. The problem would still be that the congressional districts themselves are being gerrymandered in clear attempts to rob some of us our our democratic rights. Elections for the US Senate take place across every state instead of only house districts, and they are usually more competitive than House elections. If statewide elections are both more competitive and are not subject to gerrymandering, what changes in primary election procedures could capture these benefits in House elections?

The most intriguing idea is the Single Transferable Vote (STV).  Under STV, a voter has a single vote that is initially allocated to his or her most preferred candidate. As the count proceeds on election night and candidates are either elected or eliminated, that vote is transferred to other candidates according to the voter’s stated preferences. The exact method of reapportioning votes can vary, but the STV attempts to avoid “wasted” votes as compared to a simple one person, one vote system, because presumably it is better to count a voter’s second choice than to give that voter no voice. This system can be used for either one person or multiple person elections.

Maineand Nebraskause proportional voting for presidential elections, which are statewide and not subject to tampering by gerrymandering. Rather than winner take all for electors, each political party can claim some portion of the votes. But then when they vote for the House, these states revert to voting in gerrymandered districts. Some argue that the states should give redistricting authority to non-partisan groups. This never seems to resolve the issues, and is made even more problematic whenever a state loses a House district through relative population changes, because as in the game of  musical chairs, there is always a clear loser in such cases.

In the past few weeks local news in NY was dominated by the mayoral primaries, which were won resoundingly by Democrat Bill DeBlasio and by Republican Joe Lhota. If this had been an open primary, Bill Thompson, a Democrat, would be facing DeBlasio in the general election. Thompson received more than five times as many votes as Lhota. In fact, three other Democrats, Christine Quinn, John Liu and even the disgraced Anthony Weiner (a/k/a Carlos Danger) received more votes than Lhota. In November, voters will chose between the most progressive Democrat and a Republican, and a moderate, centrist candidate with perhaps the broadest appeal to all voters will not be on the ballot. The latest poll shows DeBlasio at 62% among eligible voters, more than 40% ahead of Lhota.

The preferred change would be to incorporate widespread use of the top two primary system in house elections. Ideally voters would vote in statewide elections, but this is impracticable in larger states that have many representatives such asCalifornia (55) andTexas (38). No matter how voting districts are drawn, more moderate voices should be capable of being elected if much of the country was less tied to a traditional two party primary system that is not working well forAmerica.

Many Americans were painfully aware of the dispute between Time Warner Cable and CBS which was finally resolved this week. The network attempted to sharply increase fees paid to it by TWC to transmit CBS’s programming, demanding $2/head. Time Warner knew that it would not to able to pass along this cost to subscribers and allowed the network to go black for subscribers.

TWC had many reasons to fight. It argued that the networks have traditionally been advertising based revenue models who provided their programming free to local over-the-air broadcast stations. The cable companies have for years paid small fees for bundles of the networks’ channels, but CBS wanted a substantial increase.

The biggest reason TWC was resisting the new fee demands is that many of its subscribers now consider cutting the cord on cable television monthly fees altogether. Paid television peaked at 86% of households a few years ago, but are now shedding subscribers, and as the following chart shows, nearly 20% of US households will no longer pay for television by 2017.

 

For anyone who has been tethered to cable or other paid TV most or all of their life, cutting the cord is liberating. Alternative technology allows one to time or place shift consumption of any media. Many consumers today believe that paying for media in any place should entitle them to consume/watch or listen to that media anywhere and anytime so long as it is not done so in the context of a commercial enterprise.

How then does one go about actually cutting the cord without becoming a hippy or an “intellectual” who proudly doesn’t even own a TV? Aereo.com is an intriguingly simple solution to local, public and broadcast network programming with a DVR function at a cost of $8/month. With Netflix, a la cart purchase options from I-Tunes and the Google Play store, and free online distribution, many techies believe most content should be advertising supported and freely available. To such viewers, any amount paid for cable is too much in an age of Miracast bluetooth wireless display from an Android phone to a big screen TV.

Alternatives to cable TV can even be an improvement to the viewing experience. For example, coverage of the US Open Tennis Tournament has been confusingly split between CBS, ESPN, ESPN2 and The Tennis Channel. Parts of the coverage are overlapping, with The Tennis Channel and ESPN showing different matches at the same time. Web simulcasts on ESPN3 are available when ESPN cable channels are showing live matches. Earlier in the two week long event, internet viewers had a choice of as many as six different matches, which were also available for replay shortly after the matches finished. The weekend coverage, which migrated to CBS, could not be viewed on Time Warner Cable a few days ago, but five courts had internet webcasts available from USOpen.org. In this day of 4G wireless, the high definition signal was stunningly sharp.

Cable and other paid TV growth has slowed in the US as alternatives have appeared. The experience can be better on the internet, as is the case with the US Open, but the changes have been driven as much by economics as by technology. Paid television costs have risen by an average of 6% over the last 17 years, far outpacing inflation according to NPD. The average US cable bill was $86 in 2011. NPD projects that monthly cost to increase to $123/month in 2015, and to reach $200/month in 2020. It’s no wonder many Americans would rather pay around $25 or less/month to consume their media without cable TV. By using a combination of Aereo, Netflix, and Itunes, they are easily able to do so while consuming media when and where they choose.

Sports viewing constitutes a significant portion of TV consumption. The ESPN franchise, owned by Disney, has become the single most valuable media property in the world, with average cost to cable households of over $5/month of their cable bill, whereas the average cable channel costs consumers $0.26/month. ESPN recently announced an 11 year deal starting in 2015 with the USTA for total coverage rights to the US Open. Every match on all 17 courts will be available on the web, and it is likely that by then ESPN’s revenue model will include an internet only option, as the technology continues evolving to present more content at lower prices and in more convenient ways. The cord cutters among us can’t wait.

 

The US government has a corporate tax problem of epic proportions. On a statutory basis, America has the highest corporate tax rate on income in the developed world. Theoretically, 35% of the worldwide income of US based corporations is to be paid as federal income tax, after deducting for foreign taxes, other credits and preferences such as depreciation. State and local taxes can bring the theoretical tax rate to over 40% of income.

In a recent report commissioned by Senators Carl Levin (D-Mich.) and Tom Coburn (R.-Okla.), the GAO looked at taxes paid by profitable U.S. corporations with at least $10 million in assets. Even when foreign, state and local taxes were taken into account, the companies paid only 16.9% of their worldwide income in taxes in 2010. So how is it possible that almost 25% of all corporate profits are not being paid as taxes?

Unlike other countries that tax only corporate profits made within its borders, the US taxes worldwide corporate income but then allows companies to postpone the payment of income tax on profits that remain abroad. As a result, many large companies simply do not repatriate most of their profits or shift income to subsidiary entities abroad. The American worldwide income tax regime perversely encourages corporations not only not to bring their profits home. It also discourages them from investing those profits in the US, where the profits on future investments will be subject to continuing high tax rates. If those companies build new factories in foreign low tax countries, future profits will not be subject to taxes.

The solution to the lack of corporate profit collections is to revise the  US tax code to have a lower rate on regional profits. But nothing is easy in Congress today. Bipartisan efforts at tax reform are dead in the water for this term, with Senator Majority Leader Harry Reid stating that any reform he permits to come to the senate floor for a vote must include higher revenues in exchange for lower rates; a non starter for Republicans.

So what is the US government supposed to do to end a Mexican standoff with corporations that refuse to gratuitously pay taxes they can easily avoid? Diogenes believes that Congress should enact a one time only tax holiday in 2013 on corporate profits held abroad that are paid out as dividends in excess of 105% of those paid out in 2012. In other words, pay no corporate taxes on marginal increases in dividends paid out.

The profits repatriation dividend would:

  • stimulate the economy
  • increase the total amount of taxes paid
  • discourage corporations from moving more investments abroad

There is about $1.9 trillion held abroad as unrepatriated profits. The overwhelming bulk of those funds are held abroad to delay/defer the payment of US taxes rather than for operational needs. Let’s assume that $1.5 trillion would be returned to the US and paid out as dividends under the one time tax “holiday” being proposed. About 80% of American stocks are held individually by Americans or through mutual funds and retirement plans.  Not all taxpayers are in the highest brackets paying 39.6% federal taxes, but they own stocks so presumably most are above median income levels, so let’s assume a 25% federal rate. This one time event would/could generate $1.5 T  X  80% Individuals  X 25 % tax rate = $300 billion. And $1.2 trillion would be left over for Americans to save or spend. It’s a “free” stimulus!

We give most small businesses the option to file as LLCs or Subchapter S Corporations. These structures give liability limitation benefits to owners similar to those of larger corporations and still allow for a single level of taxation. Under the Diogenene proposal, we turn that policy inside out by offering the benefits of one level of taxation to companies that have already limited their liability.

In an ideal world, no tax regime should use one time gimmicks, but our tax code is dysfunctional. It does not raise taxes and it encourages our companies not to invest here. This proposal is not ideal, but it is better than other workable options right now. Perfection is the enemy of the good.

Equal pay for equal work has long been considered an international human right. 2013 marks the 50th anniversary of the US Equal Pay Act which states that “employers may not pay unequal wages to men and women who perform jobs that require substantially equal skill, effort and responsibility, and that are performed under similar working conditions within the same establishment.” Despite this law and others since, women in the American workforce earn only 77% on average of the earnings of men, so that it is rare to discover a situation where women are paid more than men for equal work.

Tennis professional tour events utilize a best of three sets format for both men and women for all tournaments except for the four “Grand Slam” major events (Wimbledon, the Australian, US and French Open championships). In these “majors”, the women play best of 3 sets as they always do, while the men play best of 5 sets. The lengthier format for men was once used for many other tournaments, but as most tournaments changed from grass to hard courts, the shorter format was adopted almost everywhere. Traditionalists managed to keep the format unchanged from amateur days for the majors and for Davis Cup play.

All of the grand slam tournaments have paid the men’s and women’s champions equal prize money since  2007. While few players dare to publicly disparage the equal pay, many believe it is unfair to the men not to be paid more, since they are playing more sets on the court. Furthermore, Wimbledon charges considerably more for tickets to the gentlemen’s final than for the ladies’ final, and it is argued that this reflects their relative appeal and should affect the prize money paid out to each gender.

The primary argument in favor of continuing best of 5 set matches at the majors is that the longer format is a bigger test of mental and physical endurance which more often allows the better players to prevail. Unfortunately the evidence does not support this theory. Best of 3 sets format was instituted for doubles at every tour event for the past several years. It was generally expected that the shorter formats would disadvantage the top teams, but there turned out to be no effect at all. The best players before the format change continued to top the rankings.

Diogenes believes the equal pay argument is a canard. Rather than considering paying women less, the question of pay should be re-framed as to what is best for tennis, and for the fans whose ticket purchases and TV viewership support the game? Clearly, what needs to be done is to amend men’s competitions in all events to best of three sets.

Almost nobody ever plays best of 5 set matches. 70% of all play in the US is on public courts where someone is usually waiting to take over your court after only an hour of play. Each set on the pro tour is far more grueling, and the players wear out with best of 5 sets matches. Almost every player who manages to win a long 5 set match at the majors goes on to lose in the next round to a fresher opponent.

The fan experience would also be enhanced by shortening matches. Except for die-hard fans, who wants to spend four or five hours watching long five set matches? For many viewers, a decisive third set climax two hours in would be just great.

A serendipitous byproduct of shortening the men’s format in the majors would be an increased incentive for the top players to participate in doubles at the slams. At other longer events where players do not have singles matches every day such as at Miami and Indian Wells, the top singles players also play doubles to the delight of the fans. Few do so in the slams because they fear the longer format.

Tennis is one of the only sports followed and played by both men and women, together and separately. The ATP Tour needs to adopt the best of 3 sets format for all events, including the majors. It would be a boon for players and the fans, and it’s the right thing to do to signal the sport’s commitment to support and practice equal pay for equal work.

Like many New Yorkers, Diogenes was surprised by last month’s return to the political arena of Anthony Weiner. A former congressman from Queens, only two years ago Weiner resigned in disgrace after sending lewd photographs of his “little Anthony” to six different women he met on the internet even as his wife was about to bear their child. When reports came out, Weiner then proceeded to lie about it, claiming that his account had been hacked by someone else and he was being framed. When this lie was exposed, Weiner continued to claim that he was fully capable of representing his constituents before being pressed to resign by the House Democratic leadership.

After the scandal broke, Democratic candidates who had received contributions from Weiner donated those funds to charity. Republicans called for Weiner to return unspent funds to donors. But Mr. Weiner simply held on to the money, presumably contemplating a return to politics. He claims that while he was away from the public eye, he did a lot of thinking and learned a few things that have made him more mature.

In jumping into the New York mayoral race, Weiner entered a crowded field of Democratic contenders. Despite his scandal, Weiner has two advantages over his rivals. He has the highest name recognition of all the candidates, and retains about $4.3 million in campaign funds left over from fundraising for an aborted 2009 mayoral run. That money remains eligible for one-time matching funds from the city of about $1.5 million in the upcoming 2013 election. According to Bonny Tsang, press aide at the city’s Campaign Finance Board, if Weiner had decided not to run this year, his 2009 funds would not enter the matching program, which provides six public dollars for every eligible dollar raised. Weiner can hold onto the money indefinitely, as long as he files the proper disclosures according to the deadlines. The money can also be given to charity, contributed to other campaigns or given it back to donors, the Finance Board said.

A Marist College poll conducted late last month found that 53% of voters said Mr. Weiner deserved a second chance, while only 39% said he lacked the character to be mayor. His immediate support of about 19% put him in second place amongst the Democratic primary contenders. Weiner claims that he will outwork all the other candidates, and will win the election. Political insiders and some cynics believe the 2013 campaign is more likely intended to rehabilitate his reputation by inuring the public to his sexting episode so that he can run and win in a future election, or perhaps jump start a lucrative consulting business.

In sports as in life, fundamental and hugely important aspects of our character are only truly revealed when we are put under pressure. Sooner or later a crisis will occur for anyone holding office. When that moment arrives, we want our elected leaders to function well. Anthony Weiner argues that he should be given a second chance to hold our trust. But he has shown that under pressure, he lacks the intestinal fortitude to own up to his mistakes.

Our leaders should be role models for our children to emulate if we are to continue to have a civil society. They should have a history of integrity so that when crises arise, we can trust them to do what is best for all rather than what gains them advantage. Compare Anthony Weiner’s response to being caught in sexual scandal with that of General David Petraeus, who was serving as CIA Director last November when an extramarital affair with his biographer was discovered. The general immediately admitted his involvement and resigned.

The 19th century legal concept of moral turpitude typically was only loosely defined, but has been described as “act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen, or to society in general, contrary to the accepted and customary rule of right and duty between man and man.” Anthony Weiner’s scandalous behavior was tawdry even by today’s lax standards. Even worse were his lies after being found out. He should be allowed to move on with his life, but his actions after being exposed should disqualify him permanently from holding public office as someone who simply cannot be trusted. New Yorkers can easily do better.

When you buy something at a local store, the merchant automatically tacks on state and local sales tax to the item’s purchase price. When items are purchased online taxes are not included in the total purchase price unless the vendor is located in the same state as the customer.  Let’s say you want to save some money and purchase an I-Pad Mini from E-Bay for example, because the listed price is $39 less than the $329 list price from Apple. If the vendor is from Georgia and you are in New York, you would not incur and sales tax. But if the vendor is in NY, you would be charged 8.875% , or $25.74 on this purchase.

Why aren’t internet sales taxed now?

States and localities fund their operations from a variety of other taxes and fees including property taxes, income taxes, gasoline taxes, corporate taxes, usage fees (tolls, parking, water, garbage), and federal grants to administer programs such as Medicare and Medicaid. 45 of America’s 50 states have some sort of retail sales tax. The highest state tax is California’s 7.5%, but local sales taxes can add as much as another 3% in many locales.

The US Congress is currently considering new legislation to tax online retail transactions that have until now been largely free of sales taxes. This is because in 1992 the Supreme Court in  Quill  Corp. Vs. North Dakota ruled that a business must have a physical presence in a state for that state to require it to collect sales taxes, in part because of the complexities of doing so.  It was the late pre internet age and the ruling referred to mail order retailers. The court explicitly stated that Congress can overrule the decision through legislation. Today, if an online retailer does not collect sales tax at the time of purchase, the consumer is supposed to pay the sales or “use” taxes on such purchases directly to the state when filing annual tax returns. This happens so rarely that Congress is now considering legislation to collect these “lost tax receipts”.

How much are we talking about?

Purchasing merchandise across state lines was historically limited to catalog buying and comprised only a small portion of retail sales. However, the growth of E-commerce has increased at more than twice the rate as bricks and mortar retail sales for 10 years, and now accounts for 5.5% of all retail sales. Internet sales are trending at a rate approaching $250 billion/year.

Local retailers and their many organizations have for several years supported efforts to tax online sales. They claim that online retailers have an unfair advantage when they do not charge consumers taxes. The congressional initiative known as the Marketplace Fairness Act (MFA) is the latest effort to tax internet sales. It will require all retailers with sales over $1 million/year to use “simplifying” software from the Streamlined Sales Tax Project (SSTP), which will be instantaneously able to sort through the thousands of taxing entities and calculate taxes for each locale in order to collect, report and remit local sales taxes for each one. If enacted, all internet sales other than from very small vendors will be taxed regardless of the location of the vendor. The MFA is estimated to generate from $11 billion to as much as $24 billion to state and local governments. Shown below is the relative impact upon consumers in the various states.

Why the MFA is not good legislation

Proponents claim that sales taxes are merely one of several methods to fund local and state governments. But sales taxes in most locales are a way that these governments mitigate property taxes. In terms of “fairness”, sales taxes are far more regressive than property taxes, which are disproportionally imposed upon our wealthier citizens.

An internet tax allocates sales from each retailer to each state and local entity. Yet it also creates the framework for a federal sales tax, or VAT. Lawmakers salivate at the prospects for a “new” revenue stream. Those seeking more limited government are strenuously opposed.

More troubling than the prospect of additional taxes is that an internet tax would be an egregious violation of federalism, in that states would be able to enforce their tax laws outside their borders. Online retailers would be remitting taxes to governments where they are unrepresented, and local citizens would be precluded from voting with their wallets by purchasing from vendors who do not charge those taxes.

A privacy concern related to internet taxes is that the SSTP software creates a vast new database which could be used to track any individual’s purchases. At some point, a security breach is a massive risk which could make this information available to unauthorized parties. Potential government usage of the data is more dangerous. Diogenes is entirely uncomfortable with this.

Internet retailers may not have to pay local taxes, but this  advantage is mostly mitigated by two factors. First, shipping charges are often about equal to sales taxes. Secondly, ordering online requires consumers to wait for their merchandise, and many shoppers require the instant gratification that local shops provide.

Diogenes believes that the case for taxing internet sales with the MFA is not at all persuasive. It is contrary to good public policy in that it taxes citizens without representation or benefit. It creates privacy concerns. It creates the framework for a new federal VAT.  Evening the playing field with local retailers is not a valid reason to take billions more in taxes from Americans.

Other solutions

Some believe that internet retailers should pay some sales taxes, albeit at lesser rates because of their better ecological footprint and diminished use of local services. After all, online sales don’t need more cops or streets paved or other costs which support local retail. Internet sales also allow for efficient warehousing and delivery which could reduce America’s carbon footprint.

There is an alternative solution to an internet sales tax than that proposed by the Marketplace Fairness Act. Diogenes believes that internet sales could and should be taxed at the rate in effect at the location of the vendor, in the same way that sales at local retailers are taxed. There would be no reports to file, data to be collected, violation of federalism or infrastructure created for other new taxes. A consequence of this solution would be that many smaller internet vendors might relocate to one of the five states that do not levy sales taxes. This “competition” between the states is a wonderful benefit for all citizens to make use of…or not.

Where We Are

One of the amazing aspects of the American experience has been the ability to reconstruct our society over multiple generations by incorporating immigrants who do not share the religious, cultural or ethnic makeup of those already here. This great “melting pot” has turned settlers from all over the world into citizens even as they have changed what it means to be an American. The majority of children in our public schools are already racial minorities, and over the next couple of generations, as the chart below shows, our entire population will be majority minority.

In the not so distant past, overt racial, gender and religious discrimination were the norm in America. Comprehensive reforms in the 1960s such as the Civil Rights Act , the Voting Rights Act, the Equal Employment Opportunity Commission, and Affirmative Action Programs were enacted to reduce racial discrimination and increase diversity in our society. Fifty years later the fact of a black President and black Attorney General presents strong support for the assertion that we have come a long way towards reducing discrimination against racial minorities in housing, education, the workplace and politics. The progress was painful, hard earned and took too long. But today virtually every organization in America, be it private, public or non-profit, has minorities at virtually all levels, even if they may be underrepresented in the C-Suites. Although far from eradicated, discrimination now is mostly covert. Perhaps this is because interracial social interaction was rare 50 years ago and is peaceful, easy and routine today. Based on demographics alone, our collective progress is likely to continue for years to come, obviating the need for aggressive new policies to increase diversity.

Disparate Impact

The Senate is considering President Obama’s nominee for Secretary of Labor, Thomas Perez. He faced tough questioning by Republican senators, but will likely be confirmed. Mr. Perez is currently serving as Assistant Attorney General for the Civil Rights Division of the United States Department of Justice. He has been actively involved in promoting the continued use of Disparate Impact (DI) to determine if discrimination has occurred. DI states that the government and private litigants can rely on statistics and other measures to show that policies have a disparate impact on minorities, even if they lack proof of intentional discrimination.

Mr. Perez has attracted Congressional scrutiny for his involvement in an ethically questionable quid pro quo with the city of St. Paul in which he agreed to have the Justice Department drop a False Claims Act suit potentially worth $200 million to taxpayers in exchange for having St. Paul withdraw a case challenging DI before the Supreme Court. Mr. Perez may be a sincere crusader for the oppressed, but his sharp elbows in sustaining DI bespeak a desire to achieve a result by any means necessary. Although DI has been primarily applied to housing by HUD,  applying this theory in other realms would result in unintended and bizarre consequences.

“If a business, agency or school has standards for hiring, promoting, admissions or offering a mortgage that aren’t being met by individuals in some racial and ethnic groups, there are three things that can be done. First, the standards can be relaxed for those groups. That is what racial preferences do. Second, the government can attack the standards themselves. That is what the disparate-impact approach to enforcement does. Third, one can examine why a disproportionate number of individuals in some groups aren’t meeting the standards—such as failing public schools or being born out of wedlock—and do something about it. …Disparate impact makes illegal what any rational person would not define as discrimination. And by forcing a change in neutral standards for hiring, renting and the like in order to count outcomes by race, it actually causes discrimination.” Roger Clegg, WSJ 2/25/13

In 2003, the Supreme Court (Grutter v. Bollinger) permitted educational institutions to consider race as a factor when admitting students, but ruled that quotas are unconstitutional. Since then some states (California, Washington & Michigan) have banned affirmative action policies outright. So relaxing standards as a means to continue racial preferences is unlikely in the future. The third option mentioned above to increase racial diversity would require real progress in our schools and other social programs…which brings us back to Disparate Impact.

Fatal flaws in the DI theory can be seen in two policy outcomes that follow from its use. In our national prison population blacks are about three times as likely to be incarcerated as whites as compared to their numbers in America’s total population. Hispanics are about 50% more likely to be in jail than whites. Informed citizens realize that crime occurs by and between racial minorities in disproportionate rates because of a host of constantly shifting social and economic factors, not because blacks and Hispanics are more prone to criminal behavior. If we applied DI without making other structural changes to our society and forced our prison population to reflect the  greater citizenry, would our streets be nearly as safe?

Using DI in education can also lead to dubious outcomes. Blacks are under represented in the NY gifted and talented program outcomes even as Asian minorities are wildly over represented. Since the testing and standards for the test were developed by many people of many races, how could this be? Many cultural factors influence academic and economic success by various ethnicity. The beauty of our system is that the numbers will continue to change over time. Mandating racially representative results would make a mockery of gifted and talented programs which are by definition based on merit.

Why It Matters

Diogenes believes disparate impact is contrary to standards of fairness and equality upon which our society is based. The wonder of America is that our government truly seeks to create equal opportunity for every citizen. Virtually all of us support some concept of a safety net, but our government has never before advocated equal outcomes. Disparate Impact entirely reverses the proposition that we all need to struggle to achieve our places within society. The idea that all organizations should have quotas based on statistical ethnic representation within the greater population enshrines racism rather than merit. That’s just not the American way.

Current US Immigration Policy

There is huge demand in the world to emigrate to another country. A 2012 Gallup Poll found that 640 million people, about 13% of the world’s adults, would like to leave their country of birth permanently. About 150 million of them list the US as their top choice destination.

The United States has the most welcoming immigration policy in the world in terms of numbers, with about a million people coming here legally every year. About two thirds of these immigrants are being reunited with family members who are already legally here. The balance of those million legal immigrants are split between slightly more of those who were granted legal status for humanitarian reasons (political or religious persecution abroad) and somewhat less of those granted visas on the basis of their employment skills. Most other developed nations have greater percentages of skilled worker immigrants than does the US, because it is almost a canon amongst policymakers worldwide that highly skilled workers will create jobs for others.

US Work Visa Programs

There are several non-immigrant work visas issued to foreigners.  The best known of these are H-1B visas which are strictly limited to employment by the sponsoring employer.  Theoretically, this program provides a safety valve for employers to hire workers with specialized knowledge from around the globe whenever permanent residents or citizens are not available to do such work.

Congressional policy is to award 65,000 H-1B visas to employers each year. If there is heavy demand, an additional 20,000 H-1B visas for those having masters or higher degrees from US academic institutions are made available. This limit on H-1B visas has been in place for more than two decades now. If the US Customs and Immigration Service  (USCIS) receives more visa petitions than it can accept, a lottery system is used to randomly select the number required to reach the limit. This year’s lottery is the second since 2008. In recent years the cap has been reached between 73 and 300 days.

Although the H-1B visa is a non-immigrant visa, it is one of the few visa categories recognized as dual intent, meaning an H-1B holder can have legal immigration intent (apply for and obtain the green card) while still a holder of the visa. In the past, the employment-based green card process took only a few years, less than the duration of the H-1B visa itself. Recently the legal employment-based immigration process has backlogged and retrogressed to the extent that it now takes many years for skilled professional applicants to obtain green cards. Because the duration of the H-1B visa hasn’t changed, this has meant that many more H-1B visa holders must renew their visas in one or three-year increments for continued legal status while their green card application is in process.

Problems With the Program

Even detractors of the H-1B visa program concede that it can fill important roles, including encouraging talented foreigners to permanently relocate to the United States. Critics want to require employers to prove that they’ve tried to recruit Americans before applying for foreign workers, and make sure that H-1B workers get paid as much as Americans do for comparable jobs.

The policy reason we have the H-1B program is that brilliant foreigners increase American competitiveness worldwide. However, most of today’s H-1B workers don’t remain in the US. In February, ComputerWorld reported that the top 10 users of H-1B visas last year were all offshore outsourcing firms such as Tata and Infosys. Together these firms hired nearly half of all H-1B workers, and less than 3 percent of them applied to become permanent residents. “The H-1B worker learns the job and then rotates back to the home country and takes the work with him,” explains Ron Hira, an immigration expert who teaches at the Rochester Institute of Technology. India’s former commerce secretary once dubbed the H-1B the “outsourcing visa.”

Reform Ideas

There is currently much discussion in Congress about immigration reform, mostly to address what to do about the 11 million+ illegal residents already here and to deal with temporary “guest workers”.  Congress should, but probably won’t, use this as an opportunity to deal with the problem of trained and talented people around the world who want to emigrate to the US, but are restricted from doing so by the byzantine rules of our immigration policy. Because they are unable to initially qualify for green card resident visas, many use work visas to get themselves into the country first and only later attempt to qualify for resident status. Hence the unexpected focus on the H-1B visa program.

In January, a bipartisan group of 10 senators introduced the Immigration Innovation Act (aka I-Squared Act) to raise the H-1B visa numbers to 115,000 next year and to 300,000 in later years. It is a great idea to increase the number of talented immigrant visas.  Current law limits the granting of these visas to no more than 7% of the skilled immigrant total from any one country, thereby increasing the wait times by years for those from high population countries such as India and China. But if the current program has been hijacked by outsourcing firms to train replacement workers, why would we possibly want expand the numbers of a flawed current program which would increase the harm to America?

Some from both sides of the aisle have long called on USCIS to “staple a green card to the diploma of every STEM graduate”. This isn’t a bad idea, but there are already 1.8 million American engineering graduates that are either unemployed or not working in engineering, so it’s not as if there are any shortages of BS degree holders. And around 2/3 of foreign PhD STEM graduates remain here five years after school, so it would appear that opportunities to stay already exist for them.

Diogenes believes that the best and most easily implemented reform would be to change the H-1B program to award visas to individuals around the world (via a lottery of all qualified applicants) rather than to companies. Lottery winners could have six months to get here, and would have to obtain employment within six months of their arrival. Job changes should be readily permitted to keep companies from paying legal foreign workers less than Americans. Awarding H-1B visas to individuals instead of employers would also disincentivize offshore sourcing firms from taking advantage of our immigration policies as they harm our economy, because those workers would no longer be so easily coerced to return to their home countries if they could easily change employers and remain here. Those who applied for these visas would have self selected to be aggressive, trained and talented additions to the American workforce.

Why Most Antipoverty Programs are Not Effective

In Part 1 Diogenes discussed in economic terms what it means to be poor in America and reviewed federal programs for those in need. After 50 years of effort and spending at a rate of about $600 billion/year, more Americans are poor than when the programs began. An old adage states that “insanity is repeating the same mistakes and expecting different results.” Here we will look at a policy alternative to current approaches.

The primary reason for the failure of governmental poverty programs is an “agency problem.” The antipoverty bureaucracy has itself often become an impediment to those who would try to climb out of poverty because of disincentives for working. We have agencies that try to insure that those receiving aid it use it for “correct” purposes (milk, not beer).  Such attempts always fail because nobody spends somebody else’s money as carefully as their own. And then there is the cost of the agency. For example, the food stamps program (SNAP) has program costs of about 12%.

Add in waste and poor management, and today America cumulatively spends more on poverty programs than it would cost to raise the income of every American above the poverty level. Even assuming NO income for the 46.2 million Americans in poverty, and multiplying by the $11,170 per capita that is the level below which per capita poverty is defined, would cost about $514 billion. The costs would be considerably less if we gave this aid on a household income basis.

The only enduring cure for poverty is increasing production of goods and services which result in greater demand for labor, because ultimately jobs are needed to pull people out of poverty no matter how good government antipoverty programs are. In other words, free markets are the ultimate antipoverty programs.

What We Should Do

Diogenes believes that America should implement a Guaranteed Minimum Income (GMI). Also known as a Negative Income Tax (NIT), a GMI would provide baseline support to which all would be entitled. Diogenes would define this as the federally defined household income poverty level of $23,050 for a family of four, plus $1. Adjustments up or down would be made for additional children and for each state’s cost of living.  The GMI would be implemented through the tax code utilizing IRS infrastructure.

The GMI is not a new idea. Milton Friedman advocated for a NIT in the early 1960s. Legislation was first proposed during the Nixon administration, and had support from both liberals and conservatives along with a long list of recipients of Nobel Prizes in Economics and other economists, but ultimately did not pass Congress.

Almost all other antipoverty programs should be phased out in order to pay for the GMI. The GMI would be far more efficient than welfare, food stamps, subsidized housing, unemployment benefits, and the 47 different federal job training programs. The GMI should be progressively phased out at a rate of 50% reduction of benefits per dollar of income, so as to incentivize Americans to find any sort of work at any wage.

The GMI would also necessitate a repeal of minimum wage laws, as all workers would already be guaranteed a base income just above the poverty level. Any work income would incrementally reduce government assistance even as the workers’ household income rose to median levels. Reducing the costs of unskilled labor would encourage business to hire more workers, providing crucial entry level jobs that are priced away with existing minimum wage laws.

At first blush, the move to a GMI might appear to be a radical shift away from the status quo. However, the GMI would be a dramatic expansion of perhaps the single most efficacious federal antipoverty program, the Earned Income Tax Credit (EITC). Congress first implemented the EITC in 1975 to offset the burden of social security taxes for the working poor, in order to provide greater incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. According to the IRS, the total cost of the EITC was $61 billion in 2011, and program costs were less than 1%. It helped move 6.6 million Americans, half of them children, out of poverty. In 2013, the maximum credit to a married couple filing jointly with three children is $6,044. The credit phases out as income increases to about the national median income level.

Why This Hasn’t Been Done Before

Diogenes proposes to dramatically expand the single best program we have and replace lots of programs that do not work. The incremental cost would be nothing because the change would redirect current antipoverty funding. And if the program succeeds, it’s cost would decline. So who would disagree? For starters, the entire federal antipoverty bureaucracy who would lose their jobs. Unlike the private sector, government is rarely reorganized when the results yield fewer jobs.

Historically, government antipoverty programs have seemed reluctant to give cash aid to the poor. For example, food stamps have value restricted to consumable products excluding alcohol, as if aid recipients didn’t know how to spend what funds they have. The moral legitimization of the welfare system requires that recipients use aid to support lifestyles that comport in some rough sense with the idea of a good life held by taxpayers who provide the funds. In the minds of many, it’s one thing to provide a safety net, and another to support those who just don’t want to work. The counter argument is that by keeping a GMI at a less than “comfortable” level for able bodied Americans, incentives to work would dramatically increase.

Others might argue that there are other problems with a GMI:

  • The incentive to work is reduced, however marginally, by providing any level of guaranteed income.
  • If government lowers the minimum guaranteed level below an absolute safety net, we don’t fulfill our societal imperative to provide for all who are unable, for whatever reason, to provide for themselves.
  • By having only a gradual phaseout of support as income grows, we invariably will pay (some) benefits to those above the poverty level.
  • Whatever the initial level of a GMI, politicians will continue to raise the amount until it eventually bankrupts us. Just look at Social Security, welfare and the Income Tax for examples.

The rebuttal to these arguments is that living at the no work GMI base level is pretty tough in America. No one would want that kind of life if they could reasonably easily augment it. Raising lower than median incomes to the median level (about $51,000 for a family of four), would be an excellent use of American resources. Because of income inequality, this measure is far below the mean income, and we are already spending at the cost of a GMI with far less effective programs. A limit to future spending largesse could be enshrined in the legislation by defining the base income to $1 over the poverty level and by pegging the phaseout of the GMI to an upper limit just below the median income.

A GMI would not be a perfect program, but the perfect is not to be found. It would be a significant improvement over current antipoverty programs and would not cost taxpayers a dime. Isn’t that something virtually everyone wants?