Illinois judges

We elect our Illinois  judges, and vote periodically to retain them, all of which doesn’t seem to improve their quality over what we might get from “merit” selection.  In theory it could, but who, except some local lawyers and victims, knows anything about the various judges?  At election time some of the former do publish evaluations, which seem to affect 5% or 10% of the vote and might be reliable.

But now there’s a place where we can all share our experience and views on individual judges. Judgepedia is a rather sparse wiki right now, but it could be the right place to record your experiences, or even just what you read in “in the papers.”  There seems to be a page for every judge in the state (and nationwide too?), with a map of the “circuits” and a link for each.

Vague ideas about the income tax

Many of us have a vague idea that the income tax is more or less “progressive,” meaning that those with higher incomes pay a larger share of income than those with smaller incomes.  Of course there are some unfair loopholes, but on the whole these people would like to see the income tax cover a greater share of government revenues. Of course, those of us who actually look at how taxes work know that the income tax makes no sense at all, and is only very vaguely related to income.

In fact, a new-to-me report shows that among the richest (top quintile of income), effective average tax rates range from less than 3.8% (for the cleverest 10% of these affluent taxpayers) to 18.6% (for the most tax-burdened tenth of this group).  For the “middle class” (third quintile), the range is from -4.5% (meaning that refundable tax credits exceed otherwise-taxable income) to 9%.  (Exactly what definition of income applies here is not clear; it’s based on the “Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-4),” which I haven’t examined.)

Of course this weirdness is the result of many “loopholes” and special provisions.  In theory it would be possible to eliminate them and come up with a simpler tax, but in front of each loophole stands a lobbyist (and/or a legislator favored by a lobbyist).  U S Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) have introduced S-3018, which will do away with many(pdf) (but not all(pdf)) of these provisions.

The mortgage interest deduction stays, which maintains a subsidy for real estate speculation. The deduction for corporate-paid interest would be limited to the amount in excess of inflation, which appears to mean that a corporation, upon issuing fixed-rate bonds, would have no way to know in advance how much interest they’ll be able to deduct.  Perhaps this will encourage inflation-indexed bonds?  Also, it is not clear what the effect  would be if we enter an (unlikely) deflationary period.

I see this as simply one more illustration that the tax on earned income (including revenue from investments in real capital) is a hopeless mess.  A tax on privilege (or, what is effectively similar, on the income from privilege) would be much more straightforward and encourage balanced economic growth.  Unfortunately, those who hold privilege have great resources to fund lobbyists and other professionals to block to adoption of such a tax.

ht Forbes via Yglesias (indirectly from Felix Salmon)

100% mortgages still available…

… at Prairie Park in Beecher, courtesy Uncle Sam. And, with the $8,000 credit Uncle also provides, you’ll take out some cash right away!

I guess the target market is folks who can’t save a few thousand dollars for a down payment. Or maybe the purpose is to keep some construction workers employed, builders solvent, and housing finance gangsters profitable. It’s a Department of Agriculture program, thus the houses are remote enough that any big increase in gasoline prices will be a problem.  (This DOA site indicates that 50,000 homes will be 100% financed, funded by the American Recovery and Reinvestment Act.)

I thought that, at least for a little while, the authorities would pretend to have learned the lesson, that poor people have better uses for their energy and money than becoming highly-leveraged “homeowners.” Silly me.

Illinois Fiscal Rehab

Our friends over at the Civic Federation on Monday issued a “Fiscal Rehabilitation Plan for the State of Illinois.”  It has a pretty decent summary of where we stand financially, and by what route we got here.  The short version of this is, we are in deep doo doo.  And in recent years, the doo doo has been spread around in confusing ways, making it harder to trace the problem.  But now, no question about it, we have retiree benefit liabilities far beyond the funds available to pay them, debt has been increasing, and programs for the poor are facing increasing burdens with decreasing resources, while tax revenues have been slipping. (The report doesn’t discuss infrastructure needs.)

The report, funded by some of Chicago’s wealthiest foundations, recommends freezing or cutting funds for  State programs, reducing pension obligations to the extent possible, raising the personal income tax 67% and corporate tax 33%, and removing a few relatively minor tax breaks.  It also suggests that pension income be taxed and that the State move toward taxing consumer services.  Despite these tax increases and ongoing national economic difficulty, it pretends that the income and sales tax bases will not decrease.

Of course this is a dumb plan.  Frozen or reduced expenditures will be inadequate to meet the State’s needs. Increased rates of tax on productive activity will cause some of that activity to leave Illinois, or simply not to occur.   When they see their income become subject to tax, some pensioners will choose to move out of state– and the ones best able to leave are the affluent ones, who pay sales and property tax and don’t so much burden public services.

But the State is in a fiscal hole, so if I don’t like the Civic Federation’s plan shouldn’t I suggest one of my own?  Despite the lack of foundation funding, that is what I shall do.

I won’t comment much on the expenditure side. Probably some pension cutbacks are appropriate, and there is surely plenty of fraud and waste in many programs (tho catching it is difficult).   Some programs certainly could be eliminated, but the big ones– education, transportation, aid to those unable to work– are necessary in some form.  Also, there is an existing debt of about  $25 billion, plus $66 billion in unfunded retiree liabilities (for past years). So we need a lot of revenue.  How to get it?

What about a land value tax? Now, nobody knows what the land of our State is worth, but we know for sure that it isn’t moving away.  It might be $2 trillion.  Suppose we were to tax that at, say 1% of value.  That’s $20 billion/year, more than the total raised by the State sales, corporate and personal income taxes. That bails us out of the debt in a few years, allowing eventual elimination of these other taxes.

Is it fair? It’s more fair than asking hardworking people to share their salaries with the State, then pay again when they purchase things.  (The Illinois sales tax originated, in 1933, as a way to eliminate the real estate tax.) It’s not just fairer, but also smarter, than telling employers and retirees that if they stay in Illinois, the State will take a share, an increasing share, of their income..

I have a special affinity for taxing farmland, because I look at listings like this 210-acre farm where real estate tax is only 1/10th of 1% of value.  Others pay even less.  It’s quite legal, tax preferences for “farmland” even tho the owners in most cases are investors, not farmers.  There are plenty of urban examples, too, some illustrated here.

Although Civic Federation’s recommendations are foolish, I think descriptive portions of the report are pretty good.  Two things I learned are, first, that the number of State employees has dropped about 20% in the past decade, and second, that expenditures on “Corrections” are only about $1.1 billion/year. It still would be a good idea to let all the innocent people out of prison, but that’s not going to solve our budget problem. However, if we raise taxes as the Civic Federation suggests, those released, as well as the rest of us, are unlikely to be able to find jobs.

Inequality vs. economic growth

Henry George notes that existence of privileged classes tends to reduce economic growth, because the rich must spend nonproductive effort stealing from the poor and protecting their gains, while the poor spend nonproductive effort trying to defend themselves.  And he noted that a large part of the labor force will comprise “idlers and those who minister to them.”

Something approximating the former category has recently been termed “guard labor” and some work has been done toward measuring it.  A comparison of U S states indicates that the proportion is higher where inequality is greater.  Cross-national comparison shows some correlation to polarization and political conflict.  A proposal is even made for something like a “citizens dividend,” tho the funding source isn’t identified.  Also, NYT column about costs of inequality here.

HT to Max Keiser (video).

70 Senators agreed with Joe Stack

The main issue Joe Stack seemed to have with IRS when he crashed his plane into their offices yesterday was the “Section 1706” provision which made it difficult for “information technology professionals” to work as independent contractors. NY Times’ David Cay Johnston reports that 70 U S Senators, including original sponsor Moynihan, had agreed it raised little or no revenue and should be repealed, but somehow it survived.  Johnston also says it originated as a favor to IBM.

Is it inevitable that anything like a tax on earned income must become so complex that it virtually can’t be fixed, even when “everybody” agrees how it should be done?

Measuring the costs of political corruption

Trying to do some investment research, I got diverted to a couple of articles from the Review of Financial Studies.

In Corruption, Political Connections, and Municipal Finance, the authors assert that “Higher state corruption is associated with greater credit risk and higher bond yields.”  They apparently can measure the corruption and the cost; however the actual article is behind a paywall. I wonder if their results allow us to estimate how many dollars Illinoisans pay in higher debt service due to our political culture, or if the current estimate of “lots and lots” is sufficient.

Do Politically Connected Boards Affect Firm Value? might not seem to be a question worth asking, but it’s nice that academics have, they say, hand-classified corporate board members as “politically connected” to either of the two dominant U S parties. They find that nomination of a politically-connected individual to a board tends to increase stock prices, and that after the 2000 election, stocks associated with Republican boards went up, whereas those associated with Democrats went down.  Again, I cannot see the original article.

How corporate taxes caused the crash

Well, not entirely, but the deductibility of interest and the nondeductibility of dividends certainly encouraged corporations to borrow more than they otherwise would have.  Combined with tax incentives, interest payments were effectively subsidized more than 100%, as explained here.

Why are drug costs so high?

Apparently the cost of research and development isn’t the cause.

Large drug companies simply can’t afford to keep spending as much as they are now, when about 10% to 20% of revenue goes to R&D

That’s 10-20% of drug company revenue, not including the markup your pharmacy and “health insurance” company add.  I wonder how much of the remaining 80-90% is spent, directly or indirectly, on lobbying and enhancing their privileges.

Stumbling onto another land value tax endorsement

Just happened to find it while searching for something else in a Florida library

The killer argument in favour of a national tax on land values for any modern government relates to the effect of globalisation on the tax base. The ability of companies to shift their operations from one tax jurisdiction to another in a world of increasingly mobile capital means that the corporate tax base is likely to erode. This is taking longer to happen than intuition might suggest, but the logic of capital mobility and of transfer pricing by large corporations makes it inevitable. Rich private individuals are similarly prone to shift residence and domicile to minimise their tax liabilities. But it is much harder to shift factories, offices, shops and houses, and impossible to move the ground on which they are built.

The article also includes a prescient observation regarding the housing bubble

Better still, the effect on the housing market would be inherently countercyclical. When house prices and land values are rising, the tax would admittedly with a delay act as a dampener on the boom.

source: One tax to untangle this unholy mess.(real property taxes).
Estates Gazette (Feb 28, 2004): p.50.