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July 28, 2009
Thoughts on broadband strategy

The FCC received reply comments last week concerning the national broadband plan it is required -- pursuant to the stimulus legislation -- to deliver to Congress by Feb. 17, 2010.

In the attached reply comments of my own, I conclude:

  • The broadband market is delivering better services at lower prices. There is no evidence of a market failure which would justify additional regulation.

    I pointed out that just as the Sherman Act does not "give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition," according to the Supreme Court, the Commission would be wise not to insist that broadband providers alter their way of doing business just because it hopes some other approach might yield more consumer benefits. The pursuit of the "perfect" may prove elusive. Meanwhile, the "good" -- which presently exists in the form of a fast-charging, innovative market -- could be destroyed.

  • The Commssion should focus on non-regulatory strategies which have proven effective in promoting the adoption of broadband services.

    For example, a lot of Americans don't subscribe to broadband because they don't see the need for it or because they are concerned about the price. According to the Pew Research Center, 50 percent of dial-up and non-online users fall into the former category and 19 percent fall into the latter category.

    A public-private partnership in Kentucky discovered that the lack of a computer at home ranked even higher than the monthly service fee as a barrier to the adoption of household broadband. In Kentucky, the number of people actually using broadband jumped from 22% to 44% as a result of the partnership's efforts.

  • Common carrier regulation could interfere with innovation and legitimate network management.

    If government mandates that sellers have to charge everyone the same price, that potentially limits returns on investment (because some consumers are willing to pay more than others). If government says sellers can't serve some customers unless they can serve all customers, that potentially limits investment opportunities. Net neutrality regulation would potentially lead to these and perhaps other consequences.

    One such consequence might be to prevent network operators from proactively managing the network to reduce congestion and malicious traffic which lead to identity theft and cyber attacks.

  • There is no compelling evidence of excessive profits which would justify reregulation of the special access market.

    Purchasers of these high capacity services allege profiteering, but a more reasonable analysis has found that instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.

    If AT&T, Qwest and Verizon are earning excess profits, cable and fixed wireless competitors will be able to undercut their prices and capture market share. The higher the profits, the faster the entry.

    If regulation pushed special access prices lower, that would reduce the revenue investors could expect to earn from new competitive facilities. If investment won't be profitable, it won't be made.

June 30, 2009
Sales taxes are finished Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.

Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

Although sales taxes are an efficient way for state and local officials to raise lots of revenue, sales taxes are a vestige of the industrial age which are doomed to extinction in the information age.

Consumers don't have to buy goods and services locally. They can shop on the Internet from amongst retailers worldwide.

That means state and local governments face competition.

Just like Delaware chose to become the most hospitable jurisdiction for corporations, a state like Wyoming (notwithstanding the fact one of its senators is a champion of stepped-up sales tax enforcement) could choose to become the most favored location for online commerce.

Online merchants could establish a physical presence in Wyoming, and -- since most of their customers would reside in the other 49 states -- they wouldn't have to collect sales taxes on most of their sales.

Wyoming merchants could sell their products and services at very attractive prices to the entire country. Wyoming could become a FedEx and UPS distribution hub. Wyoming could become the most dynamic economy in the nation.

If Wyoming doesn't step up to the plate, some other state (or country) will.

Think about it: Sales taxes are doomed.

January 25, 2008
Work, Invent, Invest

Driving the economy are not dollars in peoples' pockets but the ideas in their heads. Not buying-power but incentives impel people to take risks and make efforts and investments. More dollars may even reduce peoples' incentives to work and invent and invest. Every dollar rebated to a consumer comes from another consumer or investor. You cannot increase spending power (real income) without first increasing output. Supply creates its own demand. Demand does not increase supply except to the extent that the demand symbolizes previous productive efforts that expanded output.

Democrats and wobbly Republicans are panicked by class rhetoric from lowering the top rates which most affect incentives. These top marginal rates yield all the revenue (the lower the rates the more the revenue--see Art Laffer's superb piece in today's Wall Street Journal). Therefore the pols lower "business" taxes, helping profitable established businesses compete against fast growing new businesses, such as our technology companies.

The fact is that the only way to get more revenues without hurting the economy is to lower the rates on the rich. Cutting corporate rates is an indirect way of doing it.

In the political debate it is worth recalling that so-called Bush's tax cuts on capital gains and dividends were in fact proposed by Bill Thomas on Ways and Means and merely signed by Bush, after he proposed wimpy phased reductions of income taxes. The Bushes all consult Yale Keynesians who know nothing about the economy. Bush's entire administration, including its ability to prosecute the war in Iraq while drastically reducing the deficit, was fueled by Bill Thomas's revenue gushing tax rate reductions on capital gains and dividends.

September 11, 2007
A Technology Tax Hike?

Check out my friend John Rutledge's new report for the U.S. Chamber on efforts to raise tax rates on "carried interest" -- i.e., venture capital and private equity. Rutledge shows that

Venture capital has had an extraordinary record in creating new businesses, new technologies, new business models, and new jobs. Venture-backed companies accounted for $2.3 trillion of revenue, 17.6% of GDP, and 10.4 million private sector jobs in 2006. Venture-backed companies grow faster, are more profitable, and hire more people.

and concludes that

Raising tax rates on the long-term capital gains of limited partnerships will drive capital offshore, reduce the productivity of American workers and the ability of US companies to compete in global markets. It will cost American jobs and reduce American incomes.

See the executive summary here and the full report here.

August 10, 2007
A Tax on Innovation

See Don Luskin's great column this morning on why we should eliminate the capital gains tax. Luskin nicely documents the virtuous cascading effects of innovation, both for the economy and for tax receipts.

While eliminating the cap-gains tax may well induce companies like Microsoft to generate additional taxable activity, there's a more important opportunity here. Eliminating the cap-gains tax will cause the economy to generate more innovators like Microsoft.

For each new Microsoft, the cost to government would mean $40 billion in foregone revenues. But for those new Microsofts that wouldn't have existed otherwise, the payoff would mean raking in $268 billion.

Bruce Bartlett offered another angle on capital gains last week, with a useful analogy:

The great economist Irving Fisher came up with an analogy that precisely delineates the basic difference between income and capital. Think of a fruit-bearing tree. The tree both grows and yields fruit on an annual basis. The tree is effectively a capital asset, the fruit is the income, and growth of the size of the tree -- which will yield more fruit in the future -- is like a capital gain.

The fruit can be taxed without hurting the tree or diminishing its capital -- its ability to grow and bear more fruit in the future. But taxing a capital gain is like sawing off limbs of the tree. That diminishes its capital value and inhibits the tree's ability to produce fruit; that is to say, future income.

-Bret Swanson

June 15, 2007
Richard Rahn on how to sabotage the U.S. economy

If foreign adversaries wanted to undermine the U.S. economy they would find it very simple, writes Richard Rahn. Target a few key industries and induce hapless bureaucrats to tax and regulate the industries until they are uncompetitive. Which industries are key?

[T]he computer, Internet and wireless industries, coupled with the world's most productive financial engineering, have provided much of the U.S. economic growth for the last quarter-century.

Here is how you, as an agent of a foreign government, make the industries noncompetitive:

The IPO market in the U.S. is drying up and moving to other countries. Venture capital firms are shutting down or reducing their investments. Legislation, such as the Sarbanes-Oxley bill, has made it prohibitively expensive to take a company public.

Restrictions on stock options, regulations requiring their expensing, and excessive auditing costs required by the Securities and Exchange Commission have taken away the profit potential and driven up the expenses for any exit strategy. If you cannot exit, you will not enter.

Congress and state and local governments have saddled the wireless industry with equally destructive and stupid taxes. The average wireless tax burden is about 14 percent in the U.S. compared to the approximate 7 percent tax rate on other goods and services, not counting the income, property and all the other taxes paid by companies. Discriminatory taxation against a product that greatly adds to the productivity of business and makes all of our lives better by giving pleasure and greatly reducing the time response to medical and other emergencies is not the product of clear thinking minds.

In a rare show of good judgment, Congress passed a moratorium on Internet taxation a few years ago. But some in Congress now want to allow state and local governments to tax parts of Internet services, and have proposed weakening the Internet tax ban. They argue that state and local governments need money, even though those tax collections are at an all-time high as a percentage of gross domestic product (GDP), and much of what states and localities spend is wasted,

May 24, 2007
State and local tax collectors have ambitious plans for taxing Internet

The Senate Commerce Committee's hearing Wednesday on the Internet tax moratorium demonstrates the necessity of making the ban on state and local taxation of Internet access services permanent. Another temporary extension simply guarantees opponents another chance to overturn it down the road, and creates the possibility they can win new concessions in the meantime.

The hearing showed than opponents are still determined to gut the moratorium. Harley Duncan, the Washington representative of state and local tax administrators, rehashed the old argument that the moratorium is unnecessary, because "the economic evidence is that state taxation of Internet access charges has little or nothing to do with the adoption of Internet services by consumers or the deployment of services by industry." And he cites a new Government Accountability Office conclusion that taxing Internet access is "not a statistically significant factor influencing the adoption of broadband service at the 5 percent level. It was statistically significant at the 10 percent level." Even assuming this conclusion is valid, it still doesn't mean anything. Because once states and localities are allowed to impose taxes on Internet access, they won't hold the line at 5 percent.

To get an idea what states and localities might do with Internet access, just consider what they do with telecommunications. Right now, for instance, Jeff Dircksen of the National Taxpayer Union & Foundation notes that the are pushing the combined tax burden on cellphone services above 20 percent.

Local and state governments believe wireless taxes, fees, and surcharges are a "cash cow" for the 21st Century. Yet, they fail to consider that the total wireless tax and fee burden can exceed 20 percent in some areas -- a higher effective tax rate than the typical middle-class consumer pays on a 1040 federal income tax return.

Annabelle Canning with Verizon Communications points to a 1999 study by the Committee on State Taxation which found that consumers of telecommunications services paid effective state and local tax rates that were "more than twice those imposed on taxable goods sold by general business (13.74% vs. 6%)." She also cited a Heartland Institute conclusion that consumers of cable TV, wireless and wireline phone service paid an average of 13.5% in taxes, more than two times the 6.6% average sales tax rate.

The taxes on telecom, cable and wireless include franchise taxes, utility taxes, line access and right-of-way charges, 911 fees, relay charges, and maintenance surcharges, according to Dircksen. He notes that there are approximately 11,000 state and local governmental entities that could levy taxes or fees on telecommunication activities, according to the National Conference of State Legislatures. Canning mentioned that the typical communications service provider was required to file "seven to eight times as many tax returns compared to those filed by typical businesses (63,879 vs. 8,951 annually)."

This is how we can expect state and local government to handle the taxation of Internet access services if given the chance.

"Bundled" and "Acquired" Services

If Duncan can't eliminate the moratorium, he'd like to gut it. In his Senate testimony, he suggested changing the definition of "Internet access" to make it clear that an Internet service provider cannot "bundle" other types of Internet services, content and information (some of which may be currently taxable) into a package of "Internet access" and claim that the state would be preempted from taxing any part of that package.

There is also a controversy over so-called "acquired" services. Basically, opponents want to apply the moratorium only to retail services while allowing wholesale services to be taxed. The effect is to allow taxation of the Internet backbone. Unfortunately, GAO has bought-off on this interpretation. Their testimony, which includes the following diagram, claims that the Internet tax moratorium did not apply to Internet backbone services (described as "acquired" services).


The bottom line is that the Internet tax moratorium helps keep the price consumers pay for broadband as low as possible, and affordability is usually a key factor when consumers make a purchasing decision. If we didn't have the moratorium, we might be forced to consider subsidizing broadband to make it ubiquitous. Duncan's testimony makes it clear that's exactly what the tax administrators recommend.

Online Sales Taxes

States and localities are prohibited from taxing "remote sales" by virtue of a Supreme Court ruling, not the Internet Tax Moratorium. Duncan requested enactment of Federal legislation to authorize states to require remote sellers to collect sales and use taxes on goods and services sold into the state. The Supreme Court's Bellas Hess rule has been around since 1967. State and local officials have been trying, without success, to overturn it ever since. If they were to ever succeed, they would surely discover that the Internet provides a lot of opportunities for tax avoidance and evasion. That would only lead to more regulation which would stifle innovation.

Policymakers have more serious things to talk about than debate these same issues every few years; that's why Congress needs to make the Internet Tax Moratorium permanent.

April 13, 2007
Give IRS keys to the Internet?

The IRS likes to talk about how it's primarily concerned with improving taxpayer services, particularly this time of year. But don't be fooled. Earlier this year, the Bush Administration proposed to require "brokers" to report online sales of tangible personal property to the IRS.

This is really another giant surveillance program, like the trial balloon the administration has previously floated to require internet service providers to retain customer data to combat crimes committed against children (as I've discussed here and here). In both cases, the government is trying to harness the unique capacity of the Internet to identify and document conduct in ways that were never feasible nor possible before -- in this case ordinary commercial transactions that just happen to be conducted online. According to press coverage, the proposal is specifically aimed at online auctions (see this and this).

One problem with these seemingly well-intentioned proposals for leveraging Internet capabilities to reduce crime is the proverbial slippery slope. The Internet can be used to collect, store and cross-reference potentially limitless information about each one of us -- our day-to-day activities, our associations, our spending habits, even our thoughts. If for example the government wanted to control Medicare and Medicaid costs by identifying who smokes, who drinks, and who doesn't follow the government's dietary, exercise or safe-sex guidelines, it will increasingly become possible for the government to do that. Is the only criteria going to be whether the government could save money from imposing surveillance mandates on the private sector (which would operate indiscriminately against the innocent and the guilty alike) versus spending more for law enforcement (which must respect basic civil liberties) or other government programs? There might be little cause for worry if innocence were it's "own shield" (but it isn't), or if the government could be trusted to safeguard personal information (but it can't). Not only do government agents falsely accuse people (remember when Senator Edward M. Kennedy's name showed up on the government's terrorist watch list?), they also lose their laptops every day.

The latest idea, innocuously entitled "Expand Broker Information Reporting," is described on page 65 of a publication entitled "General Explanations of the Administration's Fiscal Year 2008 Revenue Proposals," and is one of five proposals for tighter information reporting. Another would require the organizations who process credit and debit card payments for merchants ("merchant acquiring banks") to report to the IRS the gross reimbursement payments made to merchants.

Brokers like eBay and Amazon would be required to collect social security numbers and file IRS "information returns" identifying gross proceeds from the sale of tangible personal property. The proposal has a de minimis exception ("would apply only with respect to a customer for whom the broker has handled 100 or more separate transactions generating at least $5,000 in gross proceeds in a year") but, honestly, this is designed to divide potential opposition and will get ratcheted back as compliance costs decline for the brokers or for any number of other reasons.

The proposal assumes online buyers and sellers require the assistance of U.S. middlemen like eBay and Amazon. But any seller who wants to sidestep this information reporting requirement could easily use an off-shore middleman or set up their own shop on the web. As they say, our tax system ultimately relies on voluntary compliance. Just how big of a problem are we talking about here? I was surprised to learn, from a recent Government Accountability Office report, most taxpayers not subject to information reporting pay their taxes anyway.

Past IRS data have shown that independent contractors report 97 percent of the income that appears on information returns, while contractors that do not receive these returns report only 83 percent of income.

Senate Finance Ranking Member Chuck Grassley (R-IA) agrees that most taxpayers pay their taxes and further points out that "a significant amount of noncompliance is unintentional." Grassley wisely points out that, " in our zeal to get at the tax gap we cannot wreck the lives of the honest taxpayers. We can't be like a fellow who tears down his house to get at a mouse."

The proposal received criticism in the GAO report, which notes that "the dollar amounts expected to be raised are quite small." I conclude this is a reason not to do it at all, although some might not see it that way. A bureaucrat might propose to solve this problem by requiring that more commercial activity be conducted online, since it is easier to track that way.

Anyway, Senate Finance Chairman Max Baucus (D-MT) has also criticized the proposal for not raising enough money, and suggested that the administration ought to be emphasizing traditional audits.

The IRS says that it gets a four-to-one return on investment in tax enforcement. For every $1 it spends, it gets $4 back in additional taxes collected. So, it would make sense for the administration to propose an IRS budget that would take advantage of that four-to-one return. But they have not. And the tax gulf just keeps growing.

But the administration has good reason to proceed cautiously in stepping up the IRS's enforcement activities, which has been tried before and has led to serious abuses. Remember the Taxpayer's Bill of Rights?

Another approach, as highlighted by GAO, would be to simplify the tax code.

Simplifying the tax code or fundamental tax reform has the potential to reduce the tax gap by billions of dollars. IRS has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap.

Simplification sounds like a good thing in the abstract, but the term is usually employed as a euphemism for sucking billions of dollars out of the private sector to fund bigger government.


See, e.g.: "IRS' Case of the Missing Laptops," by Declan McCullagh ("The IRS has lost or misplaced 2,332 laptop computers, desktop computers and servers over three years, according to a recent report by Treasury Department auditors. They concluded it's a persistent problem: The IRS has "reported a material weakness in inventory controls" every year since 1983.")

See also: "Database snafu puts US Senator on terror watch list," by Thomas C. Greene ("US Senator Ted Kennedy was prohibited from flying because his name sparked a terror alert, the Associated Press reports. Apparently, the Senator's name came up on a terrorist watch list, or no-fly list, while attempting to board a US Airways shuttle out of Washington.")

April 6, 2007
"National strategy" for broadband?

Japan has 7.2 million all-fiber broadband subscribers who pay $34 per month and incumbent providers NTT East and NTT West have only a 66% market share. According to Takashi Ebihara, a Senior Director in the Corporate Strategy Department at Japan's NTT East Corp. and currently a Visiting Fellow at the Center for Strategic and International Studies here in Washington, Japan has the "fastest and least expensive" broadband in the world and non-incumbent CLECs have a "reasonable" market share. Ebihara was speaking at the Information Technology and Innovation Foundation, and his presentation can be found here. Ebihara said government strategy played a significant role. Local loop unbundling and line sharing led to fierce competition in DSL, which forced the incumbents to move to fiber-to-the premises.

Others have taken a slightly different view. Nobuo Ikeda, formerly a Senior Fellow with Japan's Research Institute of Economy, Trade and Industry, says that the "success of Japan's broadband has been brought about by such accidental combination of a Softbank's risky investment and NTT's strategic mistakes." Ebihara acknowledges that the results of the unbundling regulation have been "mixed" in terms of competitors investing in their own local switching and last-mile facilities, as the U.S. discovered for itself.

The whole point of Ebihara's lecture was that the U.S. doesn't have what he and others consider a national broadband strategy. Never mind that Verizon already plans to spend $23 billion to construct an all-fiber broadband network, which will pass up to 18 million homes by 2010, according to USATODAY. And AT&T is spending $4.6 billion to deploy VDSL to 19 million homes by 2008.

Viewed in hindsight, and not because the Bush Administration has done a particularly good job touting its own success, a clear strategy emerges. It consists mainly of relief from unbundling regulation for fiber deployments; flexibility to offer broadband services a common-carrier basis, a non-common carrier basis, or some combination of both; and national guidance for local franchising authorities.

When, on Feb. 20, 2003, the FCC set new rules for telephone network unbundling which freed fiber-to-the-home loops, hybrid fiber-copper loops and line-sharing from the unbundling obligations of incumbent carriers, then-SBC Communications (now AT&T) and Verizon quickly responded. Verizon announced it would begin installing fiber to the premises (FTTP) in Keller, Tex. and that it planned to pass "about 1 million homes in parts of nine states with this new technology by the end of the year." SBC outlined its own plans to deploy fiber to nodes (FTTN) within 5,000 feet of existing customers in order to deliver 20 to 25 Mbps DSL downstream to every home (amd that it would construct fiber to the premises for all new builds. SBC projected that FTTN deployment can be completed in one-fourth the time required for an FTTP overbuild and with about one-fifth the capital investment. Verizon subsequently announced it would hire between 3,000 and 5,000 new employees by the end of 2005 to help build the new network, on which it planned to spend $800 million that year. And that it planned to pass two million additional homes in 2006.

It may look like these major investment decisions didn't depend on subsequent deregulatory actions -- such as the Jun. 27, 2005 decision of the Supreme Court in NCTA v. Brand X Internet Services -- clearing the way for the FCC, on Aug. 5, 2005, to eliminate the requirement for telephone companies to share their DSL services with competitors. The FCC decision finally put DSL on an equal regulatory footing with cable modem services. However, it began to emerge as early as 1998 -- in an FCC Report to Congress -- that asymmetric regulation between the broadband offerings of the telephone companies versus their competitors would be impossible to sustain as a matter of logic. A decision by the U.S. Court of Appeals for the Ninth Circuit in 2000 all but confirmed this. Thus, it was possible to foresee that either cable would have to be regulated or the phone companies would have to be deregulated. When cable modem service achieved a higher market penetration than DSL, and given the Bush administration's preference for less regulation, it became possible to anticipate that DSL would ultimately be deregulated.

The FCC didn't enact national guidelines for local franchise authorities until Dec. 20, 2006, however there was a long history of abuses by local franchise authorities. In a report to Congress in 1990 the FCC said that "in order '[t]o encourage more robust competition in the local video marketplace, the Congress should ... forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service.'" Despite howls of protest from local officials, Congress imposed limits on the franchise authorities in the Cable Act of 1992. Similar abuses began showing up when the telephone companies looked serious about upgrading their broadband services. After months of discussion, the FCC began the proceeding which resulted in the current guidelines in Nov. 2005.

There's more to be done. Spectrum policy, in particular, remains mired in special-interest broadcaster and public safety politics and must be fully sorted out. But it's not clear the U.S. should follow the costly Japanese model, with its heavy reliance on tax breaks, debt guarantees and subsidies (see, e.g., this). And don't forget that Japan had zero interest rates. Industrial policy leads to higher costs, because taxpayers are footing the bill. It also relies on policymakers, who usually understand the least about technology. Consider this poignant example, as noted by Philip J. Weiser:

It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.

March 15, 2007
Digital Prosperity Report Concludes IT Investment Critical

Policy makers should recognize information technology as the centerpiece of economic policy and develop their plans accordingly, concludes the Digital Prosperity study published this week by the Information Technology and Innovation Foundation.

"In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth," writes Foundation president, Dr. Robert D. Atkinson, author of the study.

Atkinson is a widely respected economist who formerly served as project director of the Congressional Office of Technology Assessment, and is the former director of the Progressive Policy Institute's Technology and New Economy Project of the centrist Democratic Leadership Council.

Based on reviews of other studies, and Atkinson's own research, the report maintains, "IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity" in the United States.

Continue reading "Digital Prosperity Report Concludes IT Investment Critical" »

January 18, 2007
Savings: Ben Bernanke on Behavior

This morning Fed Chairman Ben Bernanke testified on the budget, trade, and savings gaps -- the "triple deficits." He believes the trade deficit is mostly caused by the savings deficit. Overseas consumers save a lot. Americans save very little -- at least according to the conventional measures. Foreigners invest their savings in America. Americans buy lots of foreign goods. To the point of over-consumption, or spending "beyond our means," say many economists and other preachy observers. Thus the trade deficit.

Bernanke deserves some credit for not hyperventilating about the trade gap. But he does think it's a "problem." Increasing American savings, Bernanke says, is the solution. Bernanke referred several times to new research in "behavioral economics," a relatively new field that, among other things, looks at factors that affect consumer or business behavior beyond traditional incentives like taxes. Bernanke offered the example of 401(k)s savings accounts. He said that even though the tax incentives of 401(k)s are substantial, many employees do not take advantage of the opportunity. But, Bernanke said, research shows that if employers automatically enroll their employees in the 401(k) from the start and allow them to opt out, rather than opt in, the employees are much more likely to remain in the plan. Maybe this automatic 401(k) approach is one way to increase American savings.

Continue reading "Savings: Ben Bernanke on Behavior" »

January 9, 2007
Rube Pozen's Herky Jerky PIN Machine

What a complicated mess! See the new and improved version of Robert Pozen's Social Security scheme.


Although a Democrat, Pozen provided the blueprint for President Bush's failed Social Security push in 2005. Now Pozen is back with new gears, widgets, and valves designed to make sure balance and "solvency" are achieved over the next 75 years. Added to the benefit-cutting mechanism of "Progressive Price Indexing" are now "Longevity Indexing" and a 2% Surtax not just on the upper class but the middle class too.

He throws out one attractive idea to Republicans -- eliminating the income cap on Roth IRAs so individuals could invest any amount of after-tax income with no future tax hit. But does anyone think such a "giveaway to the rich" is possible under the new Congress? Anyway, the ultimate Roth IRA is just the elimination of the capital gains tax, which is where we should really be headed.

The proliferation of government sanctioned savings accounts is out of control -- IRAs, Roth IRAs, 401(k)s, Keoughs, 529s, state college funds....Stop already! Who has time to manage all these accounts, with all their different rules and regulations? Just eliminate taxes on capital and let us pool our investments tax-free for all our long term needs -- from retirement to education to entrepreneurial business activity.

America is a wealthy country and getting wealthier all the time. U.S. household assets now total some $67 tillion yielding a net worth of $54 trillion. A much better approach was suggested by George Gilder last week: avoid any "solutions" to Social Security that rely on tax increases that choke off today's opportunities in an overly precise and futile effort to balance the accounting ledgers in the year 2082 or whatever. Instead, pursue the opportunities of global growth. Only this strategy will produce the new incomes, asset gains, and additional borrowing power necessary to allow us to pay for our own retirements and health care.

-Bret Swanson

January 4, 2007
Strengthen the Internet tax moratorium

Sen. Ron Wyden

The Permanent Internet Tax Freedom Act (S. 156) was introcuced by Senators Ron Wyden (D-OR), John McCain (R-AZ) and John Sununu (R-NH) to prohibit: (1) taxes on Internet access, (2) double taxation of a product or service bought over the Internet, and (3) discriminatory taxes that treat Internet purchases differently from other types of sales. The bill is a good start, but doesn't go far enough. For one thing, it does nothing to reduce disciminatory taxation of telephone, cable and wirless services. Wyden cites these taxes as a justification for his legislation,

If you want to figure out how much discriminatory taxes could be, just look at your phone bill. Taxes and government fees already add as much as 20 percent in surcharges to consumer's telephone bills.

Continue reading "Strengthen the Internet tax moratorium" »

December 6, 2006
Capgains update -- $100 billion windfall

Via Don Luskin, It now looks like the 2003 capital gains tax rate reduction will yield some $100 billion in "unexpected" revenues, at least if you go by CBO estmiators. This over a period of just three years. CBO had estimated that 2006 capgains revenue would be less than 2002 levels -- $54 billion versus $57 billion. But in addition to higher revenues the last few years, FY2006 receipts could reach $98, close to double CBO's original projection that relied on its perpetually wrong static model.

Of course, these numbers only reflect the windfall to government accounts, not the more important rise in the accounts of American investors.

-Bret Swanson

P.S. Also watch Luskin hilariously tweaking Paul Krugman for predicting "nine out of the last zero recessions."

October 18, 2006
Talk about shifting rationales

Also via Don Luskin, we note our favorite hedge fund commentators GaveKal Research on the Bush tax cuts, and Paul Krugman's shifting criticisms:

"As religious readers of Paul Krugman (the New York Times columnist), we had expected the Bush tax cuts to be an unmitigated disaster. Because of President Bush's "fiscal recklessness" we thought, in 2003, that the US would stay in a recession.

"Then we felt that the recovery would be a profitless recovery. When the profits hit record highs, we then feared that the recovery would be jobless. When the US economy ended up creating more jobs than anyone had thought possible, we fell back on our default position, namely that the Bush tax cuts had endangered the US fiscal position and that we were set to leave mountains of debt to grand-kids etc... (at least the US, unlike Japan or ever larger parts of Europe, has grand-kids to leave debt to!).

"And today, here we are, with our back against the wall as tax receipts in the US are absolutely booming. Maybe, instead of reading Mr Krugman, we should have remembered what Milton Friedman once told us: "I've never met a tax cut I did not like". If so, we may have been able to foresee that, over the past six quarters, tax receipts have been growing at 2.5x the growth rate of US nominal GDP?"

Gavekal Research

The new, new argument, of course, is that the "benefits" of the tax cuts have not been "evenly distributed," when guaged by the erroneous measures of narrow wage rates and "how much John Doe got back in tax breaks." Wages always follow profit increases, and wages have now begun to rise, and will likely continue doing so with low unemployment (4.6%) signalling a tight labor market. Also, many workers who pay little or no income taxes in the first place -- and thus could not get a "tax cut" -- have seen large increases in their retirement savings and home values.

GaveKal has a great little self-published paperback book on globalization and structural changes in the U.S. economy. It's called Our Brave New World. You should read it.

-Bret Swanson

Tax Cut Verdict

Our friend Don Luskin links to a wonderful summary of the positive economic effects of the 2003 Bush tax cuts. As a sample, Dan Clifton of the American Shareholder Association, who compiled the numbers, notes that since the '03 capital gains and dividend rate reductions, U.S. household wealth has risen $14,374,330,000,000 -- that's 14 trillion.

It must be said that part of this rise is due to an overly accommodative Fed and the resulting inflation and weaker dollar. Nevertheless, a huge success.

-Bret Swanson

October 2, 2006
Voters reject discriminatory phone tax

Local officials think they're so smart. In Corvallis, Oregon, for example, the city council approved a 5% tax on telecommunications services. The council said the money would be used to pay for equipment for the city's fire department, including emergency vehicles. But in reality the additional revenue allows the city to fund less popular programs. Local officials everywhere cite the few worthy activities they perform to justify their tax proposals, knowing that new revenue will free up existing revenue that would otherwise have to be spent on the popular programs anyway. The officials can divert the existing money to the programs voters perceive as questionable, wasteful or of a lower priority. City officials apparently believe that the citizens who elect them are complete idiots.

Fortunately, Oregon allows citizen initiatives and referendums. A referendum to repeal the tax was filed, and the citizens of Corvallis voted for repeal by a 2 to 1 margin, proving that these local officials aren't representing their constituents very well. And guess what, a member of the the city council confirms that the city will purchase necessary equipment for the fire department anyway.

Sadly, city officials throughout the country are trying to impose disciminatory taxes on telecommnuications to fund their clients the teachers and the social services, as described in a great paper from Americans for Tax Reform. But the good news is that telecom reform legislation in the Senate includes a provision by Senator John McCain (R-AZ) that would impose a 3 year moratorium.

See: "Voters hang up on cell tax: City Council's telecommunications tax gets slammed by voters," by Kyle Odegard, Corvallis Gazette-Times, Sept. 20, 2006

See: "State Tax Trends Over Twenty-Five Years: Tax Increases Down, Revenue Sources Shifting," by Daniel Clifton and Elizabeth Karasmeighan, Americans for Tax Reform, Aug. 2006

August 25, 2006
Telecom taxes: The Golden Goose

State and local lawmakers learned in the 1990s that large, broad-based tax increases are political losers and that they redistribute taxpayers (to lower taxing jurisdictions) rather than redistributing income. Hence, the growing interest in targeting tax increases to divide taxpayers into smaller groups and minimize voter backlash. Tobacco and alcohol are the favorites, but the same thing is happening in telecom and housing. These are some of the findings from a study by Daniel Clifton and Elizabeth Karasmeighan for Americans for Tax Reform.

According to Tom Tauke, "broadband and, in particular, wireless services are increasingly viewed by state and local governments as the golden goose for raising new revenue. The state and local tax burden on communications is now two and a half times what it is for other businesses ... Today in some states, taxes on cell phones exceed that of liquor and tobacco."

"Today in some states, taxes on cell phones exceed that of liquor and tobacco."

Broadband and cellphone providers don't pay these taxes, of course. They are merely tax collectors. Unfortunately, the taxes lead to higher prices for broadband and cellphone services, which lowers demand, as Tauke points out. Lower demand is bad for innovation, the economy and the future spending plans of politicians and social service advocates.

Clifton and Karasmeighan recommend that states limit spending to the rate of population growth plus inflation to ensure that revenue gains during upturns can be used to offset losses during recessions. They also recommend that states reduce their reliance on volatile revenue sources such as capital gains and dividends. States used temporary surges in capital gains revenue in the 1990s to increase spending permanently. When the stock market declined, states lost 80% of this revenue but kept spending anyway. Many fooled voters into raising taxes to cover the "unforseen" gap.

State and local tax policies are one of the chief threats to investment and innovation in the tech sector today.


See: "State Tax Trends Over Twenty-Five Years: Tax Increases Down, Revenue Sources Shifting," by Daniel Clifton and Elizabeth Karasmeighan, Americans for Tax Reform, Aug. 2006

See: "Staying Ahead of the Broadband Curve," Remarks by Tom Tauke, Executive Vice President -- Public Affairs, Policy and Communications, Verizon Communications, at the Progress & Freedom Foundation's Aspen Summit, Aug. 22, 2006

See: "The Excessive State and Local Tax Burden on Wireless Telecommunications Service," by Scott Mackey, Economist, Kimbell-Sherman-Ellis, Jun. 2004

July 17, 2006
Kinsley sees supply-side light!

It took brain surgery for columnist Michael Kinsley to finally grasp the contrarian economic truth of the Laffer Curve. Upon arising from the procedure where dime sized holes were drilled, and wires inserted, in his head, Kinsley's first words were:

"Well, of course, when you cut taxes, government revenues go up. Why couldn't I see that before?"

Mr. Kinsley has our best wishes for recovery, but already he appears keener than ever.

-Bret Swanson

May 18, 2006
"Where's The Outrage?"

Sen. Ted Stevens (R-AK) rightly worries that current universal service mechanisms are unsustainable as consumers migrate to Internet phone services that are lightly taxed and regulated (these services clearly should contribute their fair share). Stevens and others also believe that rural America won't get broadband services without subsidies (we can't know this for sure, because we have never tried the alternative approach of removing all of the barriers to competition and investment).

Anyway, while Internet content and conduit providers obsess over net neutrality, something equally harmful is lurking in the shadows. A little noticed provision in the Senate's "staff working draft" designed to expand the universal service funding base could have profound consequences.

Currently, consumers of "telecommunications" services contribute billions of dollars to subsidize telephone service in rural areas. "Telecommunications" include telephone, cell phone and, for the moment, DSL services. DSL has been deregulated, and the requirement that it contribute to universal service is temporary. VoIP contributes a small amount, but nothing like a fair share. The Senate staff draft expands the category of contributors and ensures that they all pay equally. Its true that the Internet backbone would not contribute to universal service, but so what? Everything that travels to or from the public Internet would pay.

Here's how this looks:

''(1) CONTRIBUTION MECHANISM.-- ''(A) IN GENERAL.--Each communications service provider shall contribute as provided in this subsection to support universal service."
''COMMUNICATIONS SERVICE.--The term 'communications service' means telecommunications service, broadband service, or IP-enabled voice service (whether offered separately or as part of a bundle of services)."
''(A) BROADBAND SERVICE.--The term 'broadband service' means any service used for transmission of information of a user's choosing with a transmission speed of at least 200 kilobits per second in at least 1 direction, regardless of the transmission medium or technology employed, that connects to the public Internet for a fee directly-- ''(i) to the public; or ''(ii) to such classes of users as to be effectively available directly to the public."
Setting aside the issue of VoIP -- whose free ride should clearly end -- advocates of expanding the funding base sound like tax collectors when they argue that spreading the burden will lower the individual contributions. Contributions that are set low initially are, of course, much easier to raise in the future. And that will happpen, because there are no limits on the growth of most of the universal service funding mechanisms.

January 27, 2006
Rubinomics, RIP (maybe...we hope...please?)

Don Luskin has the goods on the terrific 2003 capital gains tax cut and the increased government revenues it yielded.

Bottom line: The Congressional Budget Office predicted the 2003 capital gains tax rate cut from 20% to 15% would reduce capital gains revenues by $26 billion when in fact those revenues have increased by $27 billion over the baseline projection, for a total CBO botch of $53 billion.

Wasn't it just earlier this week that former Treasury Secretary and current Citigroup director Robert Rubin was giving us another lecture how in order to become more competitive and prepare for a future of intense globalization the U.S. needs to raise tax rates? Sorry, Bob, the new numbers, as have all the old numbers, disprove your weird high-tax, root-canal, negative-sum theories.

-Bret Swanson

December 29, 2005
Deng Redux -- cutting taxes on Chinese farmers

China will completely eliminate agricultural taxes on its famers over the next 5 years, even though 28 of 31 provinces have already done so. Deng Xiaoping first cut taxes on peasants in 1979, instituting a small quota that went to the government but allowing peasants to keep all additional output. Under this "household responsibility system," the marginal tax rate on farming was thus zero, and after decades of chronic "famine," Chinese agriculture boomed. Over the last decade, however, many local officials across the country had begun charging fees and taxes on farmers, leading to widespread rural unrest or at least frustration. Now Beijing will continue Deng's tradition of low tax rates that has been fundamental to the nation's 27-year boom.

-Bret Swanson

October 12, 2005
The Tax Reform Swamp

"The President’s Advisory Panel on Middle Class Tax Hikes"

That's what the Free Enterprise Fund is calling the Tax Reform Commission that met for the 11th time this year on Tuesday. The meeting focused on ways to limit the home mortgage deduction, thus raising revenue to "pay for" the elimination of the Alternative Minimum Tax (AMT). Although we don't yet know what the Panel's final report will say when it is released on November 1, it looks like its recommendations will be much less ambitious than many of us would like -- and less ambitious than the U.S. economy needs.

News accounts today suggest that the major "reform" will be elimination of the AMT in return for limits on the mortgage deduction, employer health plan deductions, and other similar items. Maybe some further tinkering, but not much more. This is tax reform? Such a narrow and small-minded (not to mention politically and economically dumb) effort is hardly even worthy of the low regard heretofore achieved by Presidential commissions. Watching some of the hearing on C-Span, it seemed the focus was on the U.S. housing market and Americans' lust for large homes.

Yes, we need to eliminate the AMT -- really the alternative maximum tax because they make you pay either the regular tax or the AMT, whichever is more. It will begin hitting more and more middle class families in the coming years. But because the AMT will hit mostly coastal blue states, many Democrats would have been persuaded to go along with AMT elimination anyway. AMT elimination should be just a part of major tax reform; it shouldn't be the whole reform. It's also fine with me if we do away with the mortgage interest deduction, provided the rest of the reform is comprehensive and thoughtful enough to compensate for the negative impact of the loss of the deduction.

The most important item in tax reform is to slash the marginal tax rates on income and capital, preferably eliminating taxes on capital altogether. The Panel heard from many distinguished economists and policy experts who favor a number of plans that do this. The Panel could easily just have mailed Steve Forbes's new book, The Flat Tax Revolution, to 1600 Pennsylvania Ave. and called it a day. Or go with Arthur Laffer's solution, which really minimizes tax rates: a dual tax with very low rates, one on personal income (properly defined) and the other on business value added. We're talking maybe 9 percent on each. Two taxes applied to the same broad base captures GDP twice and allows you to really get the rates down, thus minimizing economic distortions. Other plans based on a national sales tax can achieve similar economic efficiencies, though many quibble with implementation issues. Any of these would be far better than the current system.

Coming out of yesterday's hearing, most pundits today focused on the feasibility and economic effects of a mortgage deduction limitation. But conservatives should not get bogged down in this diversionary backwater, as they did on the minutiae of Social Security "solvency." They are missing the ocean of possibilities to which a big, bold tax reform could lead. Only a focus on top line growth and opportunity can win these debates, where so many politicians, lobbyists, and demand-side economists have so much to lose. Playing in their zero-sum swamp is a losing strategy.

Let's recap: Social Security reform, which focused on ugly benefit cuts and ignored the wealth creating possibilities of personal accounts (or just plain reduction of the payroll tax), was a disaster this year. Our stance toward China, which favors currency instability and possible trade restrictions to seek some elusive "balance of trade," is self destructive. Katrina spending has pushed back indefinitely the elimination of the death tax and extension of the 2003 tax cuts. Now if tax reform goes down also, we will have squandered all of our best opportunities to prepare and propel the American economy into the next era of intense globalization. The flat tax is sweeping the world, and America is stuck talking about square footage and static scoring.

Let's hope former Sen. Connie Mack and his Panel pull a Flat Tax rabbit out of the Revenue Code quicksand.

-Bret Swanson

P.S. As long as we must talk about the mortgage deduction, let's consider Arthur Laffer's solution, which is both economically and politically sound. Allow deductions for interest expense. But tax interest income. Simple. And it saves the mortgage deduction that worries so many.

July 8, 2005
Repeal the Telephone Excise Tax

Senator Rick Santorum (R-Pa.) and Congressman Gary G. Miller (R-Calif.) have introduced the Federal Telephone Excise Tax Repeal Act of 2005 (S.321; H.R. 1898). Taxes which target communications services are one of the reasons that 15 other countries enjoyed faster broadband deployment than the U.S. on a per capita basis in 2004 (Click here to see the rankings). Eliminating this tax ought to be a high priority.

Currently, the tax applies to telephone and teletypewriter services that existed in 1965 when the statute’s current definitions were enacted. Since that time, “numerous questions have arisen,” according to the IRS, concerning the applicability of the tax to newer services. The IRS issued a notice of proposed rulemaking last year in an effort to make the tax easier to collect.

Earlier this year, Congress’ influential Joint Committee on Taxation (JCT) suggested various options for “updating” the tax. The options would ensure that some or all of the following services would pay: VoIP, cellular and satellite telephone services, the communications component of cable and satellite television services, broadband and dial-up Internet access services, paging services, and more. To its credit, JCT acknowledged that, “Any excise tax distorts consumer decisions, and taxing new services and new technologies makes them more expensive, and, therefore, may slow their development.” But this tax raises billions of dollars, and revenue considerations usually trump sound tax policy. That's why previous efforts to repeal it have failed.

Congressman Miller is correct when he says it is time to "hang up" on the Telephone Excise Tax.

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