Wednesday, March 19, 2014

A Brief History of Tax Deductions

The American health care system is a puzzle you cannot understand unless you understand how income taxes worked from 1945 to 1987. This is not a topic most children learned at their mother's knee, since only the top earners ("the 1%," as we now know them) had to pay the top rates. If your grandfather was a multi-millionaire and a story-teller, you can skip the next three paragraphs. If you're like the rest of us, read on...

America won World War II by out-producing every other nation on the planet. By the end of the war, we were rolling one new ship out every day. But all that production cost money, and the money came from taxes--graduated income taxes that took more from people who made more. The top earners in 1944 paid 94% of each additional dollar in federal income taxes.

We don't talk much about this astonishingly high level of taxation nowadays, but I was reminded of it recently as I have been reading through the "Nero Wolfe" detective stories. Nero Wolfe is an obnoxious, overweight, orchid-growing genius who hates to work and never leaves his Manhattan home on business. Rex Stout, who wrote the Wolfe books, published his first detective story in 1933 and then turned out two or three books a year for decades. Reading all the Wolfe books in order is like reliving an entire generation of urban life, death... and taxes.

One gets to know a lot about taxes in the books. Wolfe only works when he has to, and charges "obscene" fees for his services. But he hardly ever takes a job in the last part of the year--as soon as he reaches the top bracket, he pretty much refuses to work.

Not all American workers after World War II were obese neurotic millionaires, but many people in the workforce had the same problem--the more they earned, the less they kept. Union members fought for higher wages, only to find a great big hole in their paycheck when they took it home. Labor and management put their heads together and discovered a loophole that would let them keep more of their money out of the hands of the government--instead of paying more in wages (which would be taxed), companies started providing health insurance benefits (which were not taxed). This made sense for top executives, who only took home pennies from each additional dollar, and it made sense for union members, too.

With business and labor both firmly in favor of tax-free employer-provided health insurance, Congress chose to leave the loophole open, and most of country ran right through it. The vast majority of Americans get their health insurance from their employer nowadays, even though the original reason for doing so has all but disappeared. The top tax rates are under 40% now, and half of all Americans pay nothing at all in federal income tax.

Congress "created" our current system of employer-provided health care by doing nothing while American ingenuity figured out how to save money despite the tax laws. I am now predicting five more years of political gridlock on the health care front--enough time for a whole new generation of Americans to figure out how to stay healthy and save money all over again.

Wednesday, March 5, 2014

The Buck Stops Later

Our President made the news this week--rebuking Russia for invading a neighboring country, submitting a "budget" spending money we don't have, and delaying another round of healthcare changes that might hurt people just before elections next November. In each of these cases, the President put today's bills on tomorrow's tab.

Hillary was in the White House last time we had a balanced budget, and hopes to be there again next time it happens--but Obama's latest "budget" makes that job several trillion dollars harder. He has loaded it up with election year goodies that may help a few endangered Democrats in 2014 but leaves the Democratic ticket in 2016 behind the economic eight-ball.

Dollars aren't the only kind of capital our President is spending, though. He's spending down our international influence even faster. Our nation has invested trillions in defense since we entered World War II in 1941, making us the world's only superpower when the Soviet Union collapsed fifty years later, in 1991. Obama has traded that strength for global approval since the day he took office. He got a Nobel Peace Prize for this approach--but did he make the world a safer place? Events in the Ukraine say "no"--and Hillary, who was ordered to "reset" our relationship with Russia, now has to figure out how to re-reset if she becomes President. How do you put the Russian bear back in the cage that Obama dismantled?

That job would be easier if we didn't need the "bear" to like us--but Obama asked for Russia's help to solve our other problems. Obama's "red line" painted him into a corner in Syria until Russia bailed him out. Obama insists that he will never let Iran get nuclear weapons--but Russia seems to be all that stands between the world and that particular nightmare.

The problem with Russia is big, but it's just part of the problem. China has been rattling swords as well, leaving Taiwan nervous and Tibet hopeless. Saudi Arabia and Israel have well-nigh given up on America's power to keep the peace, making the Middle East a much more dangerous place. After all Obama's efforts to "be nice," Iraq and Afghanistan prefer Al Qaeda and the Taliban to America. Back in 1998, all that President Bill Clinton could do about terrorist training camps in Afghanistan was fire drones at them. In 2018, twenty years later, President Hillary Clinton may be right back where her husband was.

But this assumes that Hillary gets elected. The third objectionable way Obama pays his bills is purely political. How many times has the President taken credit for the popular parts of his signature achievement while pushing the pain down until after the next election? This week's "surprise" was that insurance companies can keep offering "junk policies" a little longer--just long enough to keep the bad news out of voters' mailboxes until after this November's elections. That's just long enough to give the President a chance at saving Democratic control of the US Senate for another cycle, but it comes at a cost to the next Democrat who wants to be President. When all those Obamacare bills finally come due, it won't be this President who pays the political price.

When Obama ran for office in 2008, young Americans responded to his vision with unprecedented enthusiasm. When he ran in 2012, Hispanics surged to the polls for him.  Some political observers concluded that Republicans were doomed to be the declining party of old, white, English speaking men. Since October 1, 2013, however, "" has shredded his support among young and Hispanic voters. Where are the "young invincibles" who were supposed to sign up for new (and more expensive) government-mandated health insurance? Hispanics have been alienated by the laughable, late "Spanglish" website that was supposed to help them to get government benefits that are only available for citizens without asking nosey questions about their immigration status. With tax penalties just around the corner, these young and Hispanic Americans have no good reason to vote for Democrats.

When Obama took over from President George W. Bush in January, 2009, he promised a "transparent administration" that would protect our privacy. Five years later, the government knows much more about Americans--and Americans know much less about their government. The public's trust is any President's most precious asset--ask George H. W. Bush, whose "read my lips" line cost him a second term in office. What will Obama's "lie of the year" cost the next Democratic candidate for his office?

Obama is burning through capital--financial, diplomatic, and political--at everyone else's expense. Republicans may be able to reign in his spending if they take the Senate in November, but he still has three more years to make life miserable for his successor, whoever he or she may be.

If I were Hillary Clinton, I'd start complaining now!