More Focus On The State/Local Income Tax Deduction

E.J. McMahon in today's New York Post adds his name to the list of those beginning to realize just what the elimination of the state/local income tax deduction would mean for New York.

Deduction curbs would hit New York harder than any state because,
thanks to their heavy state and local taxes, New York’s highest-income taxpayers
claim higher deductions than their counterparts elsewhere.

How about a few numbers:

As of 2010, New Yorkers earning $1 million or more generated 14 percent of
the entire nation’s federal individual income taxes in that bracket, according
to IRS data. So, 14 percent of any tax rate increase targeted solely at these
top earners would come from New York. . . .

That’s not all. Counting commuters from other states who are taxed by Albany
on wages and bonuses earned here, New York’s tax base accounted for 30 percent
of all the deductions for state and local taxes claimed by Americans earning $1
million or more as of 2010.

Whew! And we are less than 7% of the nation's population.

So is Senator Schumer going to get out front cynically protecting the highest-earning New Yorkers from this onrushing train even as he pretends to attack "the rich"? He has been uncharacteristically quiet lately, but I find this from a summary of a speech he gave back in October:

He suggested that it is important to protect some tax expenditures, such as
those for college education, retirement savings, mortgage interest, charitable
deductions, and state and local tax deductions.

Very clever there, Chuck, the way you bury the mention of the big money.

The second highest income tax state, California, will be with us on this one. Between the two of us, we're almost up to 20% of the population. You would think that the other 80% of the United States, if they are paying even the slightest attention, will catch on to us on this one. On the other hand, by the evidence of the voting patterns of the 18-29 year olds, it is difficult to underestimate the ease with which voters can be fooled on matters of money.

New York Leads The Way To Economic Suicide

Most of the states in the northeastern U.S. were founded by one or another group of religious dissenters, but not New York.  From its first days as a Dutch colony (New Amsterdam), New York was a commercial and trading city, where the denizens' first and foremost purpose was making money.

Today it seems that we hate the making of money, and our focus has become to punish it.  In other cities, they recognize that they have a limited number of wealth creators.  Most cities with a large and dominant employer or factory just don't systematically persecute that employer until it gives up and leaves.

In New York, our equivalent of the large and dominant factory is our main home town industry, the financial industry.   This industry creates vast amounts of wealth and pays far more than its proportionate share of taxes.  Most any city in the world would kill to have our financial industry.

So, needless to say, the way for a politician to get ahead in New York is to run against the financial industry.  Think Eliot Spitzer.  During his tenure as Attorney General (2003 - 06) he came up with a prosecution against essentially every major bank in New York.  Can anybody even remember the basis for the charges?  (Doesn't matter, but the main one was that having investment banking and research in the same institution led to biased research reports, or something like that.)  The banks paid over $1 billion of protection money.  Lots of press conferences!  Lots of headlines!  Next thing you know, Spitzer was elected governor.  Now his successor is trying the same strategy.  We'll see if it works.

Of course there is more than one way to attempt economic suicide, and in New York, caught up in  the trendy ideologies of the day, we're willing to try them all.  Joel Kotkin has a post today at New Geography called "The Blue-State Suicide Pact."  As readers here know, I have focused some on the state/local income tax deduction currently up for cut-back or elimination, and the disproportionate effect that that change would have on New York and the other deep blue states like California, New Jersey and Connecticut.  Kotkin takes a broader view, and looks at a wider swath of the proposed changes.  One by one they disproportionately affect the blue states, because disproportionately those states are where the highest concentrations of high earners live.

The people whose wallets will be drained in the new war on “the rich” are high-earning, but hardly plutocratic professionals like engineers, doctors, lawyers, small business owners and the like. Once seen as the bastion of the middle class, and exemplars of upward mobility, these people are emerging as the modern day “kulaks,” the affluent peasants ruthlessly targeted by Stalin in the early 1930s.

And who is leading the charge for these changes?  Why, the heavily Democratic congressional delegations of the main blue states:  New York, California, Connecticut, New Jersey, Illinois.

Consider the main tax changes on the table:

(1) Raise top marginal rates.  That hits mainly the highest income people, disproportionately concentrated in the deep blue states.

(2) Restrict home mortgage interest deduction.  The highest housing prices are in the big cities in the deep blue states:  New York, LA, San Francisco and vicinity.

(3) Restrict or eliminate the state/local income tax deduction.  Well over half of the value of this deduction goes to just New York and California, and within those states, to residents of the heavily Democratic major cities, New York, LA, San Francisco and Silicon Valley.

Why do we bring this upon ourselves?  I guess we need to do penance for our sins.  I can't think of any other reason.

Meanwhile, from today's headlines, Citibank announced another 11,000 layoffs (not all in New York).  Their total of employees is down from 375,000 in 2007 to 262,000 today.  Not direct cause and effect, but constant persecution can't be good for them.

The Second Circuit Stands Up For Free Speech

In a victory that has been decades in coming, the Second Circuit has reversed a conviction of a pharmaceutical salesman for promoting so-called "off-label" uses of an FDA approved drug.  The opinion is available at this link via the Washington Legal Foundation, which has done important work in this area.

I have been incredulous for many years that the FDA thinks it has the right to restrict the truthful statements of pharmaceutical companies about their products after the drugs have been specifically approved as to safety and effectiveness.  Under extremely dubious statutory authority (read the Second Circuit opinion to find out how dubious) the FDA goes after drug marketers not just civilly, but criminally, for daring to inform doctors about uses of the drugs, often derived from published medical literature.

Here's a link to an article I wrote in 1999, "Top Ten Federal Government Efforts To Suppress Free Speech," identifying the FDA's off-label marketing restrictions as the number one such effort, and charitably describing the FDA as "the most Stalinist of Federal agencies."  Same has been true ever since.

The off-label marketing restrictions are probably the most lucrative government shake-down of the private sector out there.  Years ago the prosecutors figured out that, despite the obvious First Amendment problems and pitifully weak legal theories involved with the off-label marketing campaign, the pharmaceutical companies could not risk a conviction, and would cave every time for big bucks.  Here's a Bloomberg News article from 2009 listing one gigantic settlement after another:  $430 million from Pfizer in 2004, $1.19 billion from Pfizer in 2009, other settlements from Eli Lilly and Bristol-Myers Squibb totaling multiple billions.

This time they got a poor individual in their cross-hairs; but an individual can sometimes be in a position to suffer the conviction and take the appeal.

Hard to tell from the Second Circuit's opinion if they have actually put an end to the entire program.  They go off on narrower grounds than they might have.  Shouldn't there be some penalty on the prosecutors for bringing these types of cases?  Perhaps at least a remedial course on the First Amendment?

The Climate Campaign Hits A Dead End. Now What?

Justin Gillis and John Broder of the New York Times -- both veteran climate campaigners -- report yesterday on the matter of carbon dioxide and the ongoing climate conference of nearly 200 nations going on in Doha, Qatar.  The article is filled with the usual scare lines.  ("Further increases in carbon dioxide are likely to have a profound effect on climate, scientists say, leading to higher seas and greater coastal flooding, more intense weather disasters like droughts and heat waves, and an extreme acidification of the ocean.")  But the article appears on page A-6 of the print edition, and on the bottom at that.  Does it seem that no one is paying attention any more?

The climate campaign has hit a dead end.  After throwing enormous resources for decades into the  campaign, the forces of environmentalism have driven into a blind alley, undoubtedly doing serious damage to the movement along the way.

Let's analyze what has happened. 

At its start in the 1980s the climate campaign seemed to be the perfect focus for the environmental movement.  World temperatures showed at least some level of increase over the previous century, There was a plausible physical hypothesis to attribute the increase in temperatures to carbon dioxide emissions from human use of fossil fuel energy, and using that hypothesis to project future temperatures led to predictions of extreme warming and climate disaster.  The obvious solution was to decrease carbon emissions into the atmosphere, but the entire economies of the developed countries ran on fossil fuel energy.  Among big fossil fuel users, the United States was by far number one, with Europe not too far behind.   How to decrease carbon emissions?  The U.N. got into the act with the Kyoto Protocol, a so-called "cap and trade" scheme, administered by the U.N., whereby the developed countries would be forced to buy limited amounts of carbon permits from the third world to keep their economies going.  By the mid-90s it was all falling into place:  looming restrictions on the developed countries for the sin of wealth; vast new powers to the U.N.; enormous transfers of wealth via the U.N. from the developed to the undeveloped countries; and, along the way, saving the planet.  Every environmental organization fell in line behind the campaign, not to mention loads of other big-government-loving groups.

And then it all went terribly wrong.  We'll take it in steps.

Step 1.  The United States Senate declined to ratify the Kyoto Protocol.  China, India and other third world countries with growth potential were smart enough to see what was coming and got themselves excused.

Step 2.  China's economy took off.  India's also started growing dramatically, as did some others like Mexico and Brazil.  China started going on a coal-power binge, building a new coal power plant every week or so.  By about 2005, China passed the U.S. as the number one carbon emitter.

Step 3.  Natural gas "fracking" hit the U.S.  Gas became cheaper relative to coal in the U.S.  Natural gas emits less carbon per unit of energy produced than does coal.  Next thing you know, U.S. emissions started dropping, although the U.S. had never agreed to the Kyoto wealth transfers.  By 2010, the IEA had China's carbon emissions 35% above those of the U.S., and the gap continues to widen.

Step 4.  Around about 1998, temperatures (as measured by the only trustworthy source - satellites) stopped increasing.  Since then, even as worldwide carbon emissions have soared, temperatures have been essentially flat, and the 1998 peak has not been exceeded for over 14 years.  But the hypothesized carbon-temperature physical mechanism should work without any delay of that magnitude.  Suddenly the carbon-temperature link was not so obvious. 

Step 5.  Skeptics raised numerous questions about the supposed certainty of the carbon-temperature link.  Could feedbacks be negative?  Could other mechanisms, such as the sun or ocean currents, have the dominant role in climate forcings?  With every year that the hiatus in temperature increases has continued, the seeming confidence of the climateers has become more and more dubious.

Step 6.  Environmentalists touted new "renewable" energy sources to replace the fossil fuels.  Turns out that all of them need endless subsidies, and, even with subsidies, none of them work.  Because much of the time the wind does not blow or the sun does not shine, an entire network of backup fossil fuel plants is required.  Result: more than double the cost for the same power!

Step 7.  As temperatures refused to rise, the guardians of the surface (i.e., non-satellite) temperature data, all of whom are committed climate campaigners (e.g., James Hansen of NASA GISS here in Manhattan), began to cook the data to prove their case.  A release of e-mails in 2009 showed the climate campaigners working together to exclude dissenting views from the published literature.  And a small army of volunteers with access to the internet arose to keep the temperature czars honest.  Prominent among these volunteers have been Stephen McIntyre of climateaudit, Anthony Watts of wattsupwiththat, Steven Goddard of stevengoddard.wordpress, and Jeff Id (Condon) of the Air Vent.   To give just one example, Goddard embarked on a program to compare U.S. raw temperature data to "adjusted" data as put out by U.S. government agencies.  Result: the so-called "adjustments" uniformly lower older temperatures and raise newer ones to create a record of warming when the underlying data show cooling.  All efforts to get explanations from the temperature czars are met only with silence.  Informed members of the public are rightly suspicious of fraud. 

Which brings us to the current Doha conference.  Seems like no meaningful agreement will be reached.   Well, consider how the ground has shifted.  Twenty years ago the climate campaign looked like sure-thing science and the perfect vehicle to enhance the power of the U.N., punish the U.S. for its success, and transfer wealth from the first world to the third.  Now the climate campaigners keep talking as if some evidence supports their case, but it gets less convincing all the time.   Moreover, to get anywhere with their cause they must  somehow convince China to give up on industrialization and keep its coal in the ground -- not happening.  And is China to be a payor in the big wealth transfer? -- also not happening. 

And most important:  there are still several billion people in this world who lack electricity and automobiles and would like them.  Can they have them or not?  To continue the climate campaign the environmental movement must admit that its goal is to keep the poor poor.

Lots of voices over the past few weeks have blamed Hurricane Sandy on supposed global warming.  Have they noticed that this game is over?

How Does A 25 Year Old Look At Economic Policy In The Age Of Obama?

Since the election, I've been trying to ponder the worldview of the twenty-somethings who voted for the re-election of Barack Obama.  According to a nationwide exit poll conducted by Edison Research, the 18 to 29 cohort voted for Obama by 60% to 36%.  Is there any possible theory that can make sense of this overwhelming support?

The obvious hypothesis is that the twenty-somethings accepted Obama's sales pitch.  A fair summary of that pitch was: "free stuff."  Prominent examples touted during the campaign included:  stay on your parents' health care until you are 26; SNAP (food stamps) for all; extend unemployment insurance again and then again; continue a subsidy for student loan interest; add lots of subsidies for the uninsured under Obamacare.  Sandra Fluke toured the country for the campaign stressing the importance of contraceptives available under health care plans without any deductible  - that could save you $100 per year right there!

Meanwhile, did any twenty-somethings notice that on the current trajectory of public spending, the 18-29 cohort is completely screwed?  Government debt, entitlement and insurance obligations are rapidly accumulating up to a crushing level, and Obama is doing absolutely nothing about it.  Forget the fake $16 trillion cash in cash out basis debt -- soon to be at least $20 trillion after four more years of Obama -- that everyone cites.  The twenty-somethings also must pay for their own $1 trillion of student loans, and the retirements (social security and Medicare) of the baby boom generation, and must discharge every other unaccounted-for insurance obligation the government has taken on (readers of this blog are familiar with the long list).  Add those obligations to the bonded debt and the real number faced by the twenty-somethings is at least $100 trillion. Obama resists the very idea of touching any of these accumulating obligations.

Since there are about 60 million people in the 18-29 cohort, $100 trillion of total obligations comes to about $1.7 million apiece.  Compared to this gigantic hole being dug for the twenty-somethings, the "free stuff" on offer in the campaign was completely insignificant.  The $1.7 million per head is a fair approximation of the total lifetime earnings that one of these twenty-somethings can hope to achieve.  And don't forget, the Federal government will still need to pay its ongoing expenses as well; and so will the states and local governments.  It's not looking like there's going to be much left for food.  Sorry!  But you did save $100 on your contraceptives.

A letter to the editor of Barron's, making its way today around the internet, summarizes the intergenerational transfer that the twenty-somethings have signed on for with their votes for Obama:

This 50-something, white, conservative Republican wishes to thank America’s youth for sacrificing their financial futures and standard of living so that boomers, such as my wife and I, can look forward to a long and comfy retirement, which we could easily have afforded on our own. Now we have the youth as our guarantors and providers of a little something extra. . . . 

Prior to Obama’s re-election, I believed that it was morally wrong for my generation to pass a crushing national debt on to the next one. . . . With the president’s electoral crushing of Mitt Romney [with overwhelming support from the 18-29 cohort], my overriding sense of morality and guilt have vanished. Thank you, kids!

So are the twenty-somethings just dumb -- selling their votes for $100 each while they get stuck with a per capita obligation of around $1.7 million?   I like to believe that voters in the aggregate are not dumb, so I'm searching for an alternative theory.  The best alternative theory that I have imagined to explain the votes of these young people is this: when you are in a Ponzi scheme, the best thing you can hope for is that it implodes as soon as possible.  The longer it goes on, the more will be lost and the more destructive the final implosion will be.   Perhaps Obama is just crazy (or incompetent) enough to blow this whole thing sky high in the next four years.  This theory is not completely crazy.  A prompt implosion of our existing entitlement Ponzi scheme would not be a bad result for the 18-29 cohort.  They could stop paying for the entitlements now in return for the entitlements not being around for them when their turn comes.  Probably very few of them expect the entitlements as currently configured to last another 30+ years anyway.

But that's attributing a level of cynicism and sophistication to the twenty-somethings that I don't believe they had in this vote.   And is there a plausible scenario in which the United States has a prompt implosion that enables leaving the unsustainable obligations behind?  Unfortunately, when a sovereign can pay its obligations in its own currency, history does not offer many examples of prompt and total implosion.  (The best example may be Russia after the Soviet Union, and the restart from that implosion is not an example that is worthy of emulating.)  The far more common scenario is protracted, slow, painful decline.  Think Argentina -- from one of the richest countries in the world to lower middle class over 70 years, with multiple bouts of extreme but not quite hyper inflation along the way.  Our future? 

Conclusion:  If I were 25 I would be shouting from the rooftops that this must end now!  Are any of them going to wake up any time soon?

Don't Try Showing Up The Regulators

In the minds of the regulators, there is no worse behavior than not showing them sufficient deference and servility, sometimes known as lese majeste.  So what if the various regulatory bureaucracies that litter our lives have never accomplished anything worthwhile?  So what if the highly-regulated like Madoff frequently give full access to their files to the SEC and still conduct multi-billion dollar frauds without fear of detection?  The people must submit!

Latest to incur the wrath of the regulators is Intrade, the internet political betting site, based in Ireland, where up until now you could place a bet on the outcome of elections for president, senate, governorships, and so on.  Intrade has established a well-deserved reputation for accuracy of its predictions.  In the weeks before the recent election, they had Obama to win trading in the range of 60 to 70, versus Romney at 30 to 40.  And I have never heard any allegation that they failed to pay off appropriately.  A useful service, with full financial integrity, completely outside the control of the regulators -- We can't have that!

According to this press release, on November 26 the Commodity Futures Trading Commission sued in Federal court in Washington to shut Intrade down, at least as to taking bets from Americans.  Reason?  "The CFTC's ban on off-exchange options trading."  Here is the quote from the CFTC's Director of Enforcement:

It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations.

Perhaps it never occurred to you that a contract betting on the outcome of a political election is a "commodity option"?  Clearly, you have not read the pages of impenetrable definitions in the Commodity Exchange Act or the CFTC's regulations, nor have you followed the vast expansions of CFTC jurisdiction in the infamous Dodd-Frank law.  If you had, you would have known that "commodities" under the jurisdiction of the CFTC include not just things, but also "all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in [sic]," but of course, "except onions."  Does a contract betting on the presidential election seem like an onion to you?  OK, proceed.

It is quite clear that Intrade and CFTC regulation are completely incompatible.  Not only does the CFTC require that all trading take place on one of its exchanges, but also they only allow the trading of contracts as to which they have vetted the terms word by word.  Intrade uses the internet and creates hundreds of contracts for specific races in short periods of time.   Too bad, that won't work.  You are gone.

Meanwhile, I can state with one hundred percent certainty that there are right now multiple Ponzi schemes in regulated enterprises operating right under the CFTC's nose and the CFTC is missing every one of them.  Those schemes will come to light when the operators run out of new investor funds, and not before.  When a big enough one blows up, the CFTC will promptly call for stricter regulation to better enable them to "police the markets," or something like that.

Intrade was showing them up.  Now Intrade, and the American people, are the losers.  Can anyone give a reason why the CFTC should not be eliminated?