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Trivia Tidbit Of The Day: Part 442 -- Economic Cluelessness.

Soaking Economic Populism-

Bi-partisanship. Isn't it grand?

Bipartisan automatically means good, in the minds of many, especially in the media today.

Exhibit A: McCain/Feingold. Cleaning up politics is the way to go. It's bipartisan!

Exhibit B: Sarbanes/Oxley. Think about Enron. Plus, it's bipartisan!

Enter Iowa Republican Chuck Grassley and Montana Democrat Max Baucus, prepared to fix the terrible problem of private equity firms adjusting their behavior to avoid excessive taxes and penalties:

Under current federal law, these performance fees are treated as capital-gains income, since they represent asset appreciation rather than income flow. This tax treatment allows private-equity partnerships to be far more competitive internationally than if they were subject to the steeper corporate or personal income-tax rate of 35 percent (plus state income taxes of about 5 percent). This rate is well above the average world corporate tax rate of 27.1 percent and the European Union average rate of 25.8 percent, according to the latest survey by KPMG.

Current law allows partnerships with passive income to retain their tax treatment when they are publicly traded. Active income, such as management fees, is taxed at the corporate rate. This structure was created in 1987 as a way to allow partnerships sell public stock without being unduly burdened by higher taxes that peers outside of the public markets do not have to pay.

Baucus and Grassley are recklessly referring to this structure as a loophole, and have introduced legislation to specifically carve out private-equity firms.

This kind of post-Enron populist policy sentiment in the United States may very well hasten New York City's fall from the ranks of the great financial centers of the world. Money goes where it is treated well. Right now, it's migrating to places like London and Hong Kong.

And what even prompted Grassley and Baucus to become so concerned about this issue? As entrenched members of the Washington elite, they simply have taken it upon themselves to maximize government revenue, which, in turn, maximizes their power and prestige even further. It will be so much easier to pay for the entitlement tsunami later, if people just get used to higher taxes now. Think about all of those farm subsidies these guys are assuredly dreaming up right now, to be inserted into the next Farm Bill. Who is going to pay for all of that glorious pork? Literal pork. And corn.

That's something you notice very quickly when dealing with people who have been in government for ages. They constantly think in terms of "how much money are we going to lose" when it comes to tax relief. They're also looking for ways to increase revenues in a hurry, without upsetting the voters too much. What better way to boost government revenues than to soak the small percentage of rich at the top.

Who would even notice, anyway?

And while we're at it, why not extend that percentage out a bit. Maybe the top 20%. Or even top 40%. How about just any family making above, say, 75 thousand dollars a year? After all, that's where the bulk of revenue comes from already:

Unfortunately, the government seems more interested in maximizing revenue the easy way than in maximizing the conditions (prosperity) that simultaneously bring in plenty of revenue AND lead to the need for less government in the first place.

Many Americans today not only do not pay high taxes, they don't pay ANY taxes. And tens of millions more low income Americans actually pay negative taxes, via the earned income tax credit.

Last year on the campaign trail I talked to one of these folks, a registered voter not much younger than myself, at a relatively prestigious collegiate institution. He told me (and I am paraphrasing, here):

I don't get why anyone can be worried about taxes. I mean, like, my refund check this year was 600 dollars.

We talked about how much he paid in taxes before that. He had no idea.

We talked about the fact that different income brackets not only pay more, they pay more as a percentage of what they make. That was entirely new to him.

We talked about how his refund on what was likely a small amount withheld was fairly atypical. He just plain disagreed. Old people who know the system probably get way more than 600 dollars back, he asserted.

Then he said something I think about every now and then:

Why do rich people need so much money, anyway?

It was an illuminating moment.

Why indeed. Why is there ever any incentive for anyone to do anything better than mediocre?

He was no union socialist type, nor a beatnik intellectual fruitcake, just a normal upper-middle class college kid without a clue. There are kajillions of people out there just like him. At least half a kajillion of them are voters.

It is precisely this sort of democratic populism that led George Mason economist Bryan Caplan to write The Myth of the Rational Voter: Why Democracies Choose Bad Policies and make this general claim:

...ordinary voters harbor irrational beliefs and personal biases that interfere with making sound economic policy choices. According to Caplan, the problems with democracy are, in a sense, due to too much democracy.

While Caplan probably goes too far in assailing regular folks for their misguided economic opinions, it is easy to see how he could be so frustrated. Even after such an tumultuous election in 2006, I still sense a substantial amount of frustration out there among hardcore activist types, once-every-4-year-voter types, and everyone in between, all over the ideological spectrum.

Unfortunately, I think this is because people are arguing like ships passing in the night. Nobody is even speaking the same language, and far too few have even a rudimentary understanding of the most basic economic principles that have made America so superior to most other nations.

But, hey, these days it's bipartisan.

Previous Trivia Tidbit: Teachers Have Untenable Job Security.

Posted by Will Franklin · 20 June 2007 11:39 AM

Comments

Posted by: k2aggie07 at June 20, 2007 01:16 PM

Posted by: zsa zsa at June 20, 2007 01:42 PM

Posted by: Hoodlumman at June 21, 2007 09:29 AM

Posted by: k2aggie07 at June 21, 2007 10:44 AM

Posted by: Assistant Village Idiot at June 22, 2007 02:30 PM