It’s Time to Back Trump

Within the political and chattering class, some conservatives, describing themselves as part of the “Never Trump” movement, have attacked Donald Trump as a threat to the republic and the conservative movement while attacking GOP leaders who support him, like Marco Rubio and Paul Ryan, as sell-outs or charlatans. These attacks couldn’t be further from the truth. Most recently, Ohio Governor John Kasich has been generating headlines by distancing himself further from Trump, in an attempt to lay the groundwork for another run for the Presidency in 2020. Conservatives need to recognize that much, though not all, of what Trump has run on represents the future, not the demise, of the conservative movement. While he is an imperfect messenger, Hillary Clinton would likely do irreversible harm to this country, which is why conservatives must back Trump.

In April 1998, there were 17.64 million Americans working in the manufacturing sector; today that number is 12.28 million. Put another way, we’ve lost 800 jobs every day for 18 years. During this time, real median incomes have fallen, and the African-American poverty rate languishes over 25%.

The typical working American is worse off today than at the turn of the century; for this, both parties share blame. While economists focus on the lost decades nations like Japan have suffered, the simple fact is outside of Silicon Valley and the DC and NYC suburbs, much of America has suffered two lost decades as well, a symptom of a nation in decline.

Trump has refocused the debate around the plight of ordinary Americans, something conservatives have failed to do in recent years. Conservatism is an inherently populist ideology; we prefer giving power to everyday individuals than concentrate it in the hands of supposed experts. Conservatives have faith in the genius of every man and woman. Since 1988, that has been forgotten as the GOP became the Chamber of Commerce Party. Trump is rightly realigning the GOP around the working men and women of this country.

While Trump is imperfect, the general election is about who is the better candidate, making it a simple choice. Given his lack of a political record, there is some uncertainty about what he would do, but we can be certain of what Clinton will do. She will nominate liberals to the Supreme Court while he may nominate conservatives. Take even an area where Trump supposedly disagrees with orthodoxy: trade. Does anyone really believe the same government that has run VA hospitals so terribly negotiated perfect trade deals, particularly when we know China has amassed $3 trillion in reserves?

True, Trump lacks a foreign policy record and is something of a wildcard, but no record is better than a record littered with failure, from ISIS taking territory across the Middle East to China building militarized islands throughout the South China Sea. As Secretary of State, Hillary Clinton left a world on fire; no wonder global warming appears to be such a problem…

It is said every election, but in 2016, the stakes really could not be higher. Implicit in the Never Trump argument is the belief the damage of a Clinton Presidency is containable, which underappreciates the power of a party’s 3rd term in power. Controlling the White House for 12 years cements policies and structurally shifts the political center. The Roosevelt-Truman terms shifted the country left for two generations, making support for more entitlements and welfare the new political center as evidenced by Republicans eventual acceptance of Social Security. Similar, the three Reagan-Bush terms shifted the political center rightward for a generation on most economic issues with even Bill Clinton declaring the era of big government over.

Clinton will cement the leftward shift begun by Obama for a generation with Obamacare, political correctness, and new regulatory regimes across the economy becoming entrenched political facts, unlikely to be rolled back for years, if ever. For eight years, Obama has pushed our economy, society, and foreign policy footing into one that looks more like Europe. A Clinton Presidency makes a reversal from that path all but impossible. We see the results of Europe’s experiment, and they’re devastating: slow growth, high debt, chronic youth unemployment, and atrophying military power.

The race is tightening, and in the polling averages, Trump has taken the lead in Ohio and Iowa while other states like Florida, North Carolina, and Nevada are too close to call. With momentum at his back, now is the time for reluctant Republicans to get behind Trump. Whether Trump wins 85% or 90% of republican voters on November 8 could very well determine who wins the Presidency. Leaders like John Kasich must really ask themselves if they are willing to sow division and make it easier for Hillary Clinton to continue Obama’s disastrous policies as President.

Donald Trump is our last chance to turn back from the current path of decline and decay. Conservatives need to get behind the republican nominee or risk losing the country we all have fought so hard to build.

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Time to Unite Behind Trump

While the media focuses exclusively on deepening divides within the Republican Party, we need to take a step back and remember the stakes of this election. A certain Senator this evening exhorted voters to “vote their conscience.” Yes, his non-endorsement of Donald Trump was clear, but let’s consider what our conscience actually demands of us.

Does your conscience consider the fact 3,400 Americans, many of them children, have been killed in the past 8 years in the city of Chicago acceptable? How about the fact the unemployment rate for African-American teenagers has risen in 2016 to 31%? Or that economic growth, the ultimate engine for lifting people out of poverty and into the middle class, is running at the slowest pace in a peace-time recovery since World War II? Are you comfortable with the fact that after years of decline, the violent crime rate has been rising since early 2015? Can your conscience tolerate the fact that Radical Islam is on the march, poisoning the minds of millions, seeping into Europe and even this country, while stripping millions of Muslim women and gays in the Middle East of basic human rights and dignity?

Are we willing to accept that this is the best that America can be? If your conscience says, “yes, the status quo is acceptable,” then perhaps you should vote for Hillary Clinton. After all, she is not an agent of change. Rather, she is beholden to an entrenched donor and political class that will continue the policies of President Barack Obama. Moreover, this status quo will persist beyond her 4 year term as she appoints judges, regulators, commissioners, and civil servants who could serve decades beyond her final day in office. A Hillary Clinton Presidency will cement our current trajectory for a generation. However, even if you are comfortable with the status quo, does your conscience permit you to vote for a woman of Hillary Clinton’s character? Obama’s own FBI Director noted Clinton’s “extreme carelessness” as she attempted to keep her emails secret from voters while exposing our nation’s secrets to our enemies. She even told the mother of an American killed in Benghazi that a video was the cause of the attack while telling her own daughter and a foreign diplomat otherwise. If Hillary Clinton can’t be trusted to tell a grieving mother the truth, can she be trusted in the event of a national crisis?

True to the American spirit of perpetually seeking national betterment, perhaps your conscience says the status quo isn’t good enough, that we can do better. That we can turn a safety net that merely makes poverty more palatable into a safety trampoline which makes poverty less prevalent. That we should give all parents choice where their children go to school to end the vicious circle of entrenched poverty. That we can accelerate growth by returning power and freedom to the most innovate citizenry the world has ever known. That we have a leader who is unafraid to call out evil in the world by its true name and work to eradicate it, instead of merely downplaying it.

Doing better requires doing something else. It requires voting not for an all-talk-no-action entrenched DC elite but for an outsider who is a doer not a talker. Doesn’t our conscience demand a vote for Donald Trump? We need a President who will cease to accept the decline into mediocrity that is our present course. Would we not rather have Paul Ryan as a governing partner with a Republican White House than as a leader of the opposition against yet another Democrat President who is simply presenting the same old ideas in new packaging?

If we believe conservative principles will make American lives better, we have a moral imperative to vote for the candidate most likely to institute them. Without a doubt, that candidate is Donald Trump, helped by his fantastic running mate, Mike Pence, and a partner in Congress in Speaker Ryan. I will vote my conscience, and it demands a vote for Donald Trump.

He offers change. She offer more of the same. He will return power to ordinary people and to the markets to free up the economy, boost working Americans, and improve social mobility. She will continue the same top-heavy policies that have seen weakened growth and ever-rising inequality. He will restore strength around the world after a President who has let American power recede by backing off red lines, downplaying Radical Islamic terror, and letting China expand in the South China Sea. Her foreign policy? Well, let’s put it this way: if global warming is such a major problem, perhaps the fact Secretary of State Hillary Clinton left a world on fire shares some of the blame.

Let’s unite and win in 2016.

Iowa Thoughts and Implications

Finally after months of polling and debates, voters actually entered the process with Senator Ted Cruz delivering a bit of a surprise by defeating Donald Trump while Senator Marco Rubio came in a solid 3rd. As you can see from my tweet below, I both underestimated Rubio’s strength (he finished at 23%) and mixed up Trump and Cruz. With these results in hand, I’ve also adjusted my nomination probabilities with Rubio taking a slight lead over Trump and Cruz. Pre-Iowa, Trump sat at 45%, which reflected a 50/50 chance he would win the caucus, meaning his win probability was bound to move sizably one way or the other. Given his finish, his probability had to move lower while Cruz now has a clear path through the March 1 SEC Primary and Rubio is well positioned to consolidate “establishment” support. Below are some retrospective and prospective takeaways from Iowa.

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The retrospectives:

  1. Fundamentals matter: Trump tried to ignore the basic tenets of an Iowa campaign, forgoing a sizable ground game or paid media until the closing weeks whereas Cruz amassed a volunteer army and ultimately did a superior job of translating his support to votes. Trump is a unique candidate for sure but is not immune to political realities.
  2. Trump should’ve done the debate: Trump lost late-deciders 2 to 1 to Rubio, and his failure to attend the FOX debate is likely culpable for this deficit. Sure, he could’ve bombed at the debate and done equally poor with late deciders, but since he lost when skipping the debate, he had nothing to lose by showing up. A mistake.
  3. Bush and Christie wasted their time. Both men spent some time, which is a limited resource for all candidates, and money in Iowa but had nothing to show for it, finishing at 3% and 2%, no better than Kasich who eschewed Iowa to focus on New Hampshire. These two should have just focused on New Hampshire as well. Half-hearted campaigning in Iowa never works.
  4. Peak at the right moment. Marco Rubio soared the final week, which helped him exceed expectations and generate a positive media narrative. Had the caucus been last Monday, he would not have fared as well. Life and politics is all about timing.
  5. There are many anti-Trump voters. Turnout surged to 185k, which I would’ve guessed carried Trump to victory. While Trump brought many supporters into the process, he also seemed to bring detractors into it with Rubio and Cruz getting more votes than any previous Iowa winner. The intensity of opinions, both for and against Trump, means high turnout does not necessarily help Trump.
  6. Trump’s ego and big bet cost him. Iowa was never a good fit for Trump given its caucus structure and evangelical core. He could’ve credibly downplayed Iowa and focused on New Hampshire, perhaps only paying attention the final week to secure a stronger 2nd place finish and get a positive media story (a la Rubio). Instead, Trump’s winner take all attitude took hold and he went all-out to win an unfriendly state while publicly raising expectations, which backfired, leaving him more wounded than had he downplayed its importance. Now had he won Iowa, he would be the overwhelming favorite with a real chance of functionally running the table, so Trump decided to place a big bet on Iowa. That is understandable, but it didn’t work out, wounding the national frontrunner.

Prospective views:

  1. New Hampshire is make or break for Trump. Losing Iowa is not fatal for Trump given a 20% lead in New Hampshire (though it will likely shrink), and both Hillary Clinton and John McCain bounced back here after weak 2008 Iowa showings. With the establishment lane likely to stay somewhat divided next Tuesday, Trump should be able to prevail here even if his support dips below the current 30-35% level in the polls. NH is basically must win for Trump though. To lose this state given his current lead would seriously damage his narrative and could cause his voters in South Carolina to consider Cruz. While Trump could fight beyond NH should he lose, he would likely be a mortally wounded candidate with declining support. Conversely if he holds on, Trump will have a win on the board and some momentum headed into South Carolina and the South on March 1, which seem hospitable to him. Candidates inevitably face adversity, and this is Trump’s key test. His concession speech last night was gracious and suggests he is ready for the test. If he can pass it, Trump could exit New Hampshire in strong position. At this point, I think Trump is the clear favorite in New Hampshire.
  2. Rubio vs. the Governors. Bush, Kasich, and Christie will be going hard against Rubio who has a chance to consolidate the establishment lane in NH and get a strong second showing. The four are a combined 40-45% in most polls, so if Rubio could push their combined support down to 20%, he has a path to 25%, which should be good for a strong second place showing. The governors won’t go down without a fight and will likely focus on Rubio’s lack of experience, policy shifts, and lack of time in NH campaigning. Saturday’s debate will also be fierce. Christie is already fading, and Rubio is positioned to take many Bush supporters. Kasich supporters have a more independent bend and could prove stickier. Of the three governors, Kasich seems best positioned to fight Rubio for top of the establishment lane in NH. At this point, it seems likely Christie will drop out after NH, Kasich will barring a 2nd place or strong 3rd place finish, and Bush seems determined to stick it out through South Carolina despite his unviability. (NB: I have donated to the Kasich campaign)
  3. Rubio may want a Trump victory. Let’s say Trump implodes, leaving Rubio and Cruz as the two main remaining contenders. That would probably translate to a romp on March 1 when the South votes with a good chance Cruz could nearly sweep, especially with his large cash balance and strong organization. Cruz is simply a better fit for the South than Rubio and could rattle off numerous 60-40% victories that night. While the delegates are proportional keeping Rubio close, Cruz could have a head of steam that gives him momentum when less hospitable states start voting March 15 and later, propelling him to upset victories. While Rubio could fight it out for a while, Cruz’s momentum could leave a Rubio charge coming up short. However if Trump wins NH, he would be viable on March 1, likely splitting the vote with Cruz. This could lead to numerous victors and help Rubio carry some states in the SEC. Suddenly, Cruz would not have the same momentum, and when March 15 rolls around, Rubio would be positioned for a bigger night, and buoyed by Florida’s 99 delegates, on a cleaner path to the majority. It is hard to argue that winning NH is bad for Rubio, but he could still be very well/better positioned should he finish 2nd to Trump. The presence of both Santorum and Gingrich helped Romney; the same could be said of Trump and Cruz for Rubio (though Trump and Cruz are more formidable and Rubio has wider appeal than Romney).
  4. Rubio is the frontrunner. The establishment hates Cruz, and Trump’s favorability numbers are not great. Meanwhile, Rubio is well positioned to consolidate the establishment (not that the term means much) lane with a strong NH finish. Rubio has the momentum to force Christie out after NH, and while Jeb is not viable, he will likely stick it out until South Carolina. Kasich voters could prove tougher to cannibalize this week, and Kasich could play well in the Upper Midwest if he shows well in NH, the one thorn in Rubio’s side. Otherwise, Rubio appears the most acceptable candidate to the broadest swath of the party. While Cruz and Trump may be dividing and conquering, Rubio has a path to sneak by them by March 15, by consolidating the establishment lanes and holding close on March 1. If he can do that, the map becomes quite favorable. It is still early and very uncertain, but I would prefer to be in Rubio’s position than anyone else’s.

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National Review’s Useless, Misguided War on Trump

On Thursday night, National Review launched a broadside on Republican frontrunner Donald Trump, urging voters to shun him, and the editors solicited editorials from 22 prominent conservative personalities doing the same. The editorials range from well-reasoned critiques to unhinged attacks, culminating in this final take from the editors: “Donald Trump is a menace to American conservatism who would take the work of generations and trample it underfoot in behalf of a populism as heedless and crude as the Donald himself.” Sadly, these editorials are little more than a shout into the anti-Trump echo chamber rather than being a compelling argument to current Trump supporters that they should support someone else. All this does is allow members of a pundit class which too often criticizes rather than offer solutions (criticizing is far easier) to feel comfortable that at least they “warned the base” while staring aghast at the popular will of voters (at least according to current public polling).

For years, conservatives have rightly lambasted liberal media bias because straight news should be delivered without opinion and opinion pieces should be fair and rooted in reality (ie just because a piece is “opinion” does not make the use of misleading statistics to validate a point justified). However, we must apply the same scrutiny to biases we agree with as with bias we disagree with it. On this account, hypocrisy (on both sides) run rampant because it is easier to forgive the missteps of kindred souls. Sadly, personal dislike towards the subject can lower the quality of discourse, and on this count, it does feel like authors of this “National Review Symposium” are suffering a bit from Trump Derangement Syndrome, letting personal animus bleed into their writings, causing them to overstate their case and the danger Trump poses.

I am no Trump supporter and am extremely unlikely to vote for him in a primary (though at this stage, I would support him in a general election vs. Hillary Clinton), but I still feel like we should be fair to him. It is increasingly difficult to find such analysis; there is merely hate and love, few rational pieces. My main sticking point with Trump is his “Muslim ban,” which to me manages to be impractical, irrational, and immoral, but one can feel that way while agreeing with him that politicians are beholden to the donor class. changed his mind. Any voter is free to find these answers unsatisfactory and choose someone else; however, I question the sweeping argument that those “new” to conservatism are unfit to lead it. With the standard caveat that Trump is no Ronald Reagan, the fact is Reagan was an FDR-supporting, New Deal Democrat who left the party in 1962 and ran as a conservative for California Governor in 1966. Based on the arguments in the symposium, it seems the writers would have opposed Reagan in 1966, questioning his sincerity. In fact, I hope they would have; otherwise, they would be holding Trump to a different standard, which is unfair. As Reagan showed though, sometimes betting on a new face can work very well.

Voting for Trump is definitely a wager, given his flip-flops, but he is not alone on this account. Rubio and Cruz are first-term Senators (like Obama) with no major accomplishments in the Senate—voting for them is clearly a gamble. Jeb Bush hasn’t held office for a decade and is comically inept at making an argument. An effective user of the bully pulpit he would not be. Christie’s second term has left much to be desired. In my estimation, Kasich has the strongest record, though some will question his Medicaid expansion (full disclosure: I have donated to the Kasich campaign). Candidates are human beings; they will be flawed. Voters must decide what assets they seek and what flaws are acceptable. It is easy to oppose candidates by focusing on the flaws, which is what National Review did on Trump. Did the writers have the willingness to stand together and support someone else? Of course not. That’d be hard.

Much of the attack on Trump continues to center around his populism, which just boggles the mind. If a candidate isn’t focused on improving the lives of working people and middle class, why are they running? Rather than attack Trump personally, which will merely cause his supporters to tune out, we should embrace his populist focus but argue that different solutions will help Americans more. For instance, a bigger EITC and more progressive code would be a more effective tax plan than Trump’s. On this front, the symposium comes up woefully short. Trump plans are attacked but alternative are not offered. What’s the point of this? Even if Trump’s plans stink, what’s to say others have better plans? After all, Cruz’s European VAT plan is seemingly designed to hurt workers to the benefit of corporations and their owners (read: donors). All we hear from most candidates is a rehash of 1980 economic policy as though the problems have not changed since then. Trump is one of the few to be intellectually honest enough to suggest we try some different policies.

In particular, they signal out Trump’s trade rhetoric, and while not all of his China claims are backed by fact, toughness with China and the threat of some trade restrictions are not inherently anti-conservative. Chinese companies steal our intellectual property, often don’t pay what they owe American companies, get state sponsorship, and the government hacks into our companies to steal trade secrets. While we focus on the currency that is the least egregious thing China does. Should we ignore these actions, which have hurt American workers, in the name of free trade? That seems asinine. Ultimately, the President’s job is to better the country. Heck, even Reagan expanded farm subsidies for exports to the Soviet Union to help U.S. farmers. The rise of China has greatly lowered U.S. inflation, thereby increasing growth indirectly by boosting our purchasing power, but it has not driven much growth directly. Unless, the other country plays fair, free trade for the sake of it isn’t wise or good for the public. That does not mean a 45% tariff is the right policy response, just that mindlessly supporting free trade is neither conservative nor good policy.

Absolute rigidity is a sign of intellectual smallness not of adherence to principles. Opposing the bank bailouts of 2008 (which turned a profit, mind you) is not conservative; they saved this country from Depression. They are one of the few economic policies for which George Bush deserves praise. To criticize Trump for supporting them is laughable. Maybe letting the financial system implode is theoretically conservative, but how is ruining the lives of 100 million people the right thing to do? Again, it is easy to shout from the bleachers when you don’t have to solve the mess transpiring on the field.

Trump is the only leading candidate who consistently speaks to the needs of the middle and working class, demographics the GOP desperately needs to do better with, and there is a greater battle in conservativism here. While Trump is out of the orthodoxy on many issues, many “conservative” intellectuals and politicians have abandoned conservative’s populist roots over the past 15 years, focusing too much on top marginal tax rates, defending things like the carried interest loophole, and emphasizing the elimination of the estate tax. Fundamentally, conservatism is rooted in an optimism of the capacity of ordinary people, which is why we prefer to leave them with power rather than hoard the power among a band of so-called experts within government. In some circles, this optimism in the public has morphed into a simple disdain for government and emphasis on total adherence to principles.

There is a greater war within conservatism between the doctrinaire elites (think George Will) and the pragmatic populists (think Bill O’Reilly), and this National Review-Trump feud is just the latest battle. Trump is an imperfect vessel for his side but the sneering of NRO won’t sway anyone, just entrench both sides further. Being a doctrinaire is easy when on the sidelines critiquing those in the arena, but the fact remains that at the federal level, establishment conservatives and liberals have failed for 15 years to help the middle class. America does its best when pragmatic populists like Reagan lead it, and we should hope this side wins the war for conservatism.

At least Trump is emphasizing the needs of workers. That’s more than most candidates can say. Let’s embrace his focus, prove to those making under $50,000 that conservatives actually care about them (which we have failed to do), and offer different, compelling solutions. What the National Review did surely helped to stroke egos, but it didn’t boost the discourse. It’s high time we realize conservatism’s failures post-Reagan have created Trump. He’s a reminder we’ve lost our way. Directing our ire at him is a waste of time, direct it at the leaders (ie George W Bush), pundits (George Will), and rent-seeking donors whose intellectual rigidity and outdated policies have failed.

Median wages are lower than 15 years ago. Unlike Trump, that is actually something to be embarrassed about and have an emergency symposium on.

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A Conservative Argument for the Estate Tax

On this “Giving Tuesday,” Mark Zuckerberg announced in a public letter to his just-born daughter that he and his wife would be donating 99% of their Facebook stock. The gift is aimed at advancing “human potential and promote equality for all children in the next generation.” This gift is a massive commitment of $45 billion (at Facebook’s current share price) that has the potential to truly better the world. Don’t feel too badly for their daughter, Max, who is still in-line to get about $450 million (at today’s market price), or about 2x Mitt Romney’s net worth.

In light of Zuckerberg’s action, it seemed pertinent to briefly discuss the estate tax, and why I actually think conservatives should support it (despite deftly dubbing it the “death tax”) as I have alluded to in the past. My view is admittedly out of the orthodoxy and runs counter to our slate of Republican Presidential contenders who want to eliminate the tax.

Briefly before delving into my argument, I would emphasize my support for an estate tax in principle and not for our idiotically concocted one. Under current law, all estates beyond $5.4 million pay the same marginal tax rate of 40%. A small business owner with $30 million faces the same marginal rate as Warren Buffett, which is absurd. A primary concern of mine (and all conservatives…hopefully) is the ability of the super-wealthy to maintain their status for generations, which cannot be done at $30 million but can be at $30 billion. That small business owner or farmer also likely has less liquid wealth, and heirs could be forced to sell to pay the taxman, which argues for a lower initial rate. For illustrative purposes, I would propose a progressive estate tax of perhaps 15% for $5-15 million, 25% for $15-25 million, 35% for $25-$50 million, 50% for $50-$250 million, and 70% for $250 million and higher. I would also allow one’s tax burden to be nullified by charitable donations. That would mean the Zuckerberg estate would face no estate tax liability as it is donating over 70% to charity.

 

  1. Tax Code Efficiency

As some government spending is required and 100% debt funding is unsustainable, we have to tax. The conversation turns to how much we have to tax (dependent on how much we spend) and how we structure our tax code to generate the requisite revenue. Some liberals have this fixation on a “fair” tax code with no discernible definition of fairness. Conservatives focus on an efficient tax code, which is to say the code that has the least retardant impact on growth. Such a tax code would allow the economy to perform the best, all else equal, and help the poor and middle class improve their standing and their standard of living.

This requires taxing the least productive segments the most and most productive the least. Plus as we need to generate a certain amount of revenue, the decision to tax one party is in a sense a decision to not tax another (dynamic scoring adjusted). The estate tax generates about $20 billion in revenue per year or less than 1% of total federal revenue, so it isn’t particularly big (though I would put forth that $20 billion is still a lot of money, call me old-fashioned). If we want to generate the same aggregate revenue, we would have to increase other taxes by that $20 billion. One could argue income and corporate taxes are on today’s productivity whereas an estate tax is on the accumulated productivity of the past. Which tax would appear to drag on economic growth more?

From a different perspective, the estate tax in a sense takes money away from the ensuing generations (the heirs), and as I explain in point 2, it is very uncertain they will use the funds in a productive fashion whereas income is more clearly associated with productivity. Whom would you rather tax if you want a tax code that is likely to impact productivity the least? While there are individual exceptions no doubt, in aggregate, the estate tax targets less productive capital (from either vantage point), meaning we can tax more productive capital and labor less (to the tune of about $20 billion/year), which at the margins should support growth. (In full disclosure, I would note the Tax Foundation seems to disagree with me, though I would suggest it overstates the productivity of the estate capital taxed).

I would also note that I actually hope my estate tax generates no revenue because individuals choose to donate to charity in lieu of paying a tax to the government as my concept would allow. On the whole, charities can be far more productive users of capital than government bureaucracy. While this would lead to lower revenue, it would alleviate the welfare burden on our government, allowing spending to fall (in all likelihood more than the tax revenue shortfall).

2. Capitalism Requires Meritocracy and Efficient Use of Capital

For a capitalist society to work efficiently, individuals and organizations need to benefit based on merits. The most talented should do better and accumulate wealth because they are superior allocators of capital. It is a good thing Warren Buffett has $75 billion and your Uncle Billy doesn’t because Buffett is more adept at making wise investments and is more likely to pursue projects that generate value. Individuals should rise and fall based in large part on their ability and willingness to work hard.

Large estates are large because someone had a talent and was able to generate value. A just and efficient society is glad and benefits from their accumulation of wealth. However, there is no guarantee their children are equally talented/hard-working. Without an estate tax, those funds can be passed down to a generation that wastes the funds (the Paris Hilton’s of the world if you will). Now, some inheritors do tremendous things with the inheritance, but just as many (more I would argue) do not. In aggregate, society does best when capital is tied with those who are the best allocators of it not those with the best last name.

The American Dream is founded on the idea anyone with enough hard work can rise in society. An aristocracy enjoying the fruits of past generations’ labor can stifle advancement and lead to economic malaise, undermining the advancement of others. That isn’t a capitalist or conservative society. It is a corporatist society benefitting entrenched, status quo players. If we really thought passing down things blindly was so great, why did we ever revolt against monarchial rule? The American experiment is directly juxtaposed to aristocracy, which can arise without an estate tax.

Now, this is not to suggest passing down money is bad. It is wonderful to give one’s children the ability to do anything (problems arise when they have so much they can afford to do nothing). The ability to provide a better life for one’s children, even after one’s passing, can be a key motivator that increases productivity. The danger doesn’t lie in someone passing down $5 million, which can easily be wasted in a generation (or shorter), the danger is in the $5 billion passed down that can let numerous generations ride on the coattails of success. That is why a progressive estate tax is far more rational as it more directly deals with the meritocracy issue without punishing parents for wanting to give their kids and grandkids more opportunity.

Inherited wealth on a large scale can breed laziness and an under-productive over-class in an extreme. For families to rise, some inevitably must fall. An estate tax actually helps to engender meritocracy and thereby enhance growth over time.

3. The wealthy are already disbursing their estates to society

Since launching several years ago, Bill Gates and Warren Buffett’s The Giving Pledge has been a stunning success, getting 138 billionaires to pledge half their wealth (or more) to charity. Again, these participants, under my conception of an estate tax, would essentially face no estate tax liability, since I would fully credit any charitable contributions against the theoretical tax liability. It is telling that so many of the most fortunate choose to give away the vast majority of their wealth. They are beneficiaries of my second point (meritocracy) and understand the importance of preserving that structure, rather than letting future generations fritter away their hard earned wealth. Of course beyond the pledge, countless wealthy individuals are exceptionally generous as well.

Now admittedly, not everyone is a member of the pledge, and some would probably prefer to pass on everything. However, there is some wisdom to the crowd—that is a basic tenet of market economics. For instance, stock prices are fairly efficient and good (probably the best) barometers of fair value because a wide crowd, everyone in capital markets, is buying and selling to the crowd-determined appropriate price. History has proven it hard to beat. Perhaps, the actions of the world’s richest signals the proper policy? While I wouldn’t blindly follow the crowd, it does merit some thought. Moreover, given how much wealth is being donated anyway, the estate tax, if done right, will actually be used in very few instances.

4. It really isn’t double taxation

A common refrain conservatives use against the estate tax is that it is double taxation (taxing already taxed income). That is a bit simplistic, and I would note much of our tax structure, including sales tax, some income taxes, some capital gains taxes etc. are double-taxes. If possible, eliminating all forms of double-taxation would require increased taxation on primary forms of income (unless you are willing to shed hundreds of billion in revenue per year). It isn’t clear that is a preferable system.

Now some estates are as classically argued “double taxed,” but most of the largest estates are not. Most large estates come from entrepreneurs and business founders whose wealth is the equity in their business. This wealth is not taxed prior to death. To illustrate, let’s take the case of Mark Zuckerberg and assume he died Monday before deciding to donate money. He has $45 billion in Facebook stock, but this wealth has never been taxed because it is paper wealth. We tax income (which his Facebook holdings are not) and realized capital gains, and since he is still holding FB shares, the gains are unrealized. When he dies (in the hypothetical), he has actually never been taxed on his wealth. The estate tax would be his first tax not a double tax. Most large estates are similar; much of the estate tax revenue is primary not double taxation.

Plus under current law, the cost-basis of an estate is “stepped-up,” meaning that $45 billion capital gain disappears as his heir marks up the cost-basis to the market price at death. If you eliminate the estate tax without eliminating the step-up feature, his wealth is never once taxed as it passes generation by generation. Meanwhile, workers and W-2 earners (almost all Americans) pay taxes every paycheck. That does not strike me as an efficient structure. Now, we want to incentivize entrepreneurship as they create jobs but no taxation is a bit much. Plus, our current system, in which taxes are deferred until gains are realized, is already an incentive as it lowers the present value of an entrepreneur’s tax bill relative to an employee.

Even if double taxation is inherently bad, which is far from clear and would require a far more drastic overhaul likely resulting in a large consumption tax (which has many negative side-effects), much of the estate tax revenue, particularly from the largest estates, is not a double tax but actually a primary tax. The true picture is a bit more complicated than the political talking points suggest (how unusual!).

5. The confiscation argument against the estate tax doesn’t hold

One constant argument against the estate tax is that it is the confiscation of hard earned wealth, which the government should not be in the business of doing. We could use that rationale for any tax however. The income tax also confiscates the earnings of individuals. Taxation is inherently coercive (optional taxes tend not to generate much revenue), so unless one is willing to argue against all taxes, it is hard to justifiably singling out the estate tax. In any functioning society, there has to be some taxation to pay for public goods. Someone worth $10 billion can still pass down over $3 billion after taxes/charity, which is still a tremendous sum despite my highly progressive proposal. Every tax is by its nature confiscatory and coercive. It is inconsistent to use this argument, often put forth by conservatives sadly, to oppose an estate tax while supporting other taxes.

 

Recognizing this can be an emotional issue for some, hopefully, these arguments at least give pause for further reflection. People of good will and of different political persuasions can disagree on this issue as I don’t see the estate tax as a clear conservative/liberal issue despite how our political parties use it. Ultimately, conservatism is best served when we push for comprehensive tax reform that, yes, includes a reformed estate tax. A conservative-oriented, merit-based society that has an efficient tax code actually necessitates an estate tax, and the two most frequent criticisms of the taxes are a bit lacking.

Death to the death tax is neither conservative nor wise policy.

Taxing in the 21st Century

Several Republican Presidential candidates (Trump, Bush, Rubio, Paul, Kasich, Jindal, Santorum, and Cruz to name a few) have outlined fairly specific tax plans aimed at accelerating U.S. economic growth. Most follow a similar pattern of eliminating deductions and lowering rates, which has worked quite well in the past (the Reagan Recovery being the standout example as seen in Chart 1). While the impulse to dust off the Reagan playbook is quite strong given the empirical data, conservatives really need to aggressively rethink how we tax and be careful not to knee-jerk back to past solutions. It is on this point where Sen. Ted Cruz’s tax plan stands out and should be applauded. While I have reservations about how the specifics of his tax plan, he has shown the greatest willingness to move away from the orthodoxy and rethink the nature of our tax code (more on his plan will follow)

Chart 1

r v o vc

With each passing day, the Reagan era grows more distant (an admitted redundancy that is still important to remember), and reflexively returning to his playbook is fraught with political danger (more and more voters were not old enough to cast a ballot for him) and policy danger. Conservatives need to do a better job delineating solutions from principles. Principles are what we believe (and as such are relatively unchanging) whereas solutions are how we implement principles (and as such change as the problems change). It is a disservice to Reagan’s legacy to simply suggest cutting marginal rates is the best answer to a slow economy as this implies there is a magic formula that would solve any problem.

The genius of the Reagan Administration was its ability to take conservative principles and apply them to policies to craft specific solutions to the problems of the day. We need to keep these principles, but today’s problems may necessitate different solutions. In brief as conservatives, we believe in returning power to the individual and away from the collective. Ultimately, individuals make better decisions regarding their own lives than a bunch of bureaucrats can hope to. This means entrusting power in the people and keeping government interference to a minimum.

Armed with these beliefs, Reagan focused his tax relief on capital. In 1981, the US was suffering from high unemployment and high inflation (stagflation). Reagan took over an economy that was treating capital poorly. As can be seen in the following chart, labor was gaining share in the economy—at the expense of capital, leading to a retrenchment in investment. There was a supply of capital crisis. When capital is treated poorly (ie 70% marginal tax rates and windfall profit taxes), holders of capital are less likely to invest it. When you don’t see capital investment, an economy grows too tight, sending prices skyrocketing (Chart 3, NB inflation is inverted). As prices soared, consumer confidence fell, leading to less spending and subsequently an even worse environment for investing.

Chart 2

obama econ

Chart 3

pce

Recognizing the supply problem the economy faced, Reagan freed up capital by rolling back regulations and focusing tax cuts on top marginal rates (bringing them down from 70% to 50% and later 28%). Reagan’s capital-aimed economic policies worked remarkably well, bringing inflation down and consumer confidence back (Chart 3) while economic growth soared (Chart 1). Reagan took conservative principles (empowering the individual rather than the collective) and applied them to the problems of the day (unfavorable policies inhibiting capital and causing an inflation shock) to create policies that bettered the lives of Americans.

Fast-forwarding to the present day, we have conservatives offering a variety of tax plans aiming to spur growth. When looking at tax plans, we need to drill down to the basics and ask the question: why we tax? The answer is simple: to fund government expenditures. There are some things government must spend money on (ie defense), and we cannot sustainably borrow money to pay for everything. Depending on the speed one wants to bring down our debt load, tax revenue likely needs to be 17.5-20.5% of GDP on average over the medium term.

It then becomes a matter of constructing a tax code that has the best impact on the economy over the medium term. In a sense, offering a tax break to one group needs to be offset by taxing another group; for instance, opting against an estate tax (which many conservatives call for) would cost revenue that needs to be made up elsewhere. On the other hand, eliminating ineffective deductions (the deductibility of corporate interest expense perhaps?) helps to fund tax breaks elsewhere. Ultimately, we would build a tax system that generates the necessary revenue while having the best economic impact, and this tax code could be dramatically different from our current convoluted mess (spoiler alert: it would be).

Most importantly, the efficient tax code would change over time because our economy is ever-changing. While conservatives should continue to push for as low of a tax burden as possible with a simple code that leaves individuals with as much power as possible, how that translates into marginal rates, deductions, and so forth can change a bit. Reagan faced an economy that treated capital poorly, and so, he lessened capital’s tax burden. Today’s economy is far different. Under Obama (as you can see in Chart 2), labor has done absolutely terrible, losing share to capital. This decline helps to explain why aggregate economic statistics (like 5% unemployment) seem out of whack with how most in the middle class feel. As such, it is critical to build a tax code that incentivizes work to get people back into the work force and working. This requires creative thinking from expanding the earned income tax credit, to contemplating the implications of a negative marginal tax rate bracket, and closing loopholes that provide little economic bang for the buck.

On the whole, it is hard to look at most of the Republican tax plans and not believe they would be better than the status quo, though none is without flaws. Most plans (like Rubio, Bush, and Kasich) stick relatively close to traditional conservative orthodoxy, but Cruz’s stands out. Cruz basically throws out the current system, has a 10% income flat tax, and a 16% business flat tax. Per the Tax Foundation, the Cruz plan costs about $3.6 trillion over a decade, but based on their view that the economy will be 13% larger (a plausible but definitely not unfriendly view), they see it only costing $770 billion. The US, in aggregate, is certainly not under-taxed, so there is nothing wrong with a tax plan that offers a moderate tax cut like Cruz’s does. I would note (that based on my rudimentary number-crunching) most of the growth driven revenue gains would be realized at the back end of the decade with years 9 and 10 generating up to $1 trillion of the incremental $2.8 trillion in revenue. Essentially, the revenue hit is not $77 billion/year, rather, it is much larger upfront and shrinks, possibly even gaining revenue at the tail end.

At first glance, it looks like Cruz provides labor with a massive tax cut, given the low 10% rate that for a family of 4 kicks in after 36k. However, his business tax would tax both profits and payrolls. So an employee earning $100,000 would pay a 10% flat tax, but his employer would also pay a 16% tax ($16,000). Under current law, the Social Security payroll tax is only 6.2%, so Cruz is really using a tax increase on payrolls to fund cuts elsewhere. Frankly relative to current law, Cruz is providing a dis-incentive to employee people.

Alongside this, Cruz would allow for the immediate expensing of equipment. Put in simple terms, buying a robot would not be subject to a 16% tax but hiring a worker would be. We continue to see a push towards automation in the economy. While painful for the worker being automated out, this is a good thing. I think we would all agree that on net ATMs have been a positive, even though they were a negative for bank tellers. Businesses should automate when the underlying economics make sense, but we don’t want decisions being made for tax purposes. An economy functions most efficiently when capital is allocated based on underlying economics and not tax implications. When taxes start changing allocation decisions, a government is picking winners and losers, which more often than not ends badly (how’d that Solyndra loan work out?).

Now, the government should not actively impede automation as this would leave the US poorly positioned in world trade and slow growth. The tax code should be neutral on the matter, and let economic reality be the determinant. Amazingly, this is one of the few things our current code does somewhat well. Employers pay a payroll tax but can deduct payroll immediately while purchases of equipment are deducted over multiple years (ignoring temporary tax breaks). When calculating the present value of the tax implications of the decision (a worker or machine), they roughly cancel out (or come fairly close), meaning that business owner would choose the economically wisest.

Cruz’s plan tilts the playing field away from workers and towards capital, incentivizing automation. Now if the pre-tax economics of hiring a worker or automating are the same, a business would choose to automate because it receives more favorable tax treatment. Interestingly, there is a pretty good case to be made that this plan would have worked particularly well in 1980 when the cost of capital was too high. Similar to Reagan’s steep marginal rate cuts, the Cruz plan would incentivize investing and have increased aggregate supply to bring inflation under control.

While Cruz’s plan benefits from original thinking, it solves past problems and would likely exacerbate the trend in chart 2 where labor has lost ground under Obama. This is one reason why I think the Tax Foundation’s growth expectations could be a bit optimistic. The Foundation does say the capital stock rises 44%, which makes sense as lower taxation would create more capital. The fact it grows 3x the economy does show the diminishing return of excess capital in the current environment. In fact, the issues with our capital stock could be dealt with more simply and just as effectively in two strokes. First, stop taxing repatriated profits at 35%, which would bring back $2 trillion. Second, Dodd-Frank has disincentivized bank lending, and as such, banks are carrying $2.5 trillion in excess cash. Roll back some of these regulations, and banks would be free to increase lending to small business and others, which would push growth faster.

Cruz (and others) are fighting the last war, focusing tax cuts in places where they will provide less growth. Reagan’s ingenuity was not that he lowered taxes but that he recognized the problems he was facing and structured his tax cuts in a way to solve those problems. Labor and capital supply an economy, and he faced a capital crisis. By fixing that, he put us on a path for 25 years of prosperity. Today, capital is doing well, and our crisis is on the labor front. Labor force participation is lower than it should be, wage stagnation is real, and capital has done fairly well with the top doing very well under Obama (who has helped exacerbate the very inequality he rails against). Again, the solution to this problem is not to punish the top to subsidize everyone else as that slows growth over time. However while Reagan tried to stimulate capital, we need to stimulate labor. This means debating a larger EITC, considering negative marginal rates, incentivizing job training, and eliminating certain loopholes (like carried interest and interest deductibility) to fund lower marginal rates. It also means keeping capital gains taxes and rethinking total opposition to the estate tax (or at least the stepped-up basis).

Reagan’s principles and the tenets of supply-side economics are as relevant as ever, but conservatives need to engage in further debate about how those principles apply to today’s challenges. The best answer could be wholesale change to the tax code (like Cruz has boldly suggested) or sticking a bit closer to the status quo. Taxes at the end of the day are a means to an end, a way to fund government while creating the conditions for the most robust growth. This requires an analysis of what breaks provide the least value and what taxes slow growth the most in today’s economy (and then eliminating those breaks to fund the elimination of those taxes!). It also requires a deeper debate on what part of the supply curve needs the stimulus. Admittedly, stimulating labor, without doing so at the expense of capital, is a challenge but not an insurmountable one (pairing labor-focused cuts with fewer deductions, a quasi-territorial corporate system, modified Dodd-Frank, and reformed estate tax is our best bet in my estimation).

Conservatives need to do a better job explaining how our principles and faith in the American people rather than government translate into solutions for today and are not merely regurgitated answers to the problems of 35 years ago. That is a pre-requisite for winning elections, and more importantly, it is the only way to actually make the American public better off. Re-examining our tax orthodoxy is a good place to start. Hats off to Senator Cruz for doing just that. While I would question the specifics of his plan, he is starting a debate we very much need to have.

We Need Paul Ryan

Well, it’s safe to say the House Republican Caucus has descended into total disarray after Majority Leader Kevin McCarthy unceremoniously bowed out of the Speaker’s race. While I continue to believe Boehner stepping aside was a good thing (or at least a necessary action given the loss of trust—fair or not—amongst conservative members), the situation has descended from bad to worse as seemingly no qualified candidate is interested in what may be the most thankless job in Washington.

It’s clear now that McCarthy’s horrible Benghazi remarks undermined his ability to win over skeptical anti-establishment figures like those in the self-described Freedom Caucus. Whoever the next Speaker is, he or she needs to be an adept spokesperson for the party and conservative principles. Realizing he could no more effectively govern than Boehner has, McCarthy did what was best for his country, institution, and party by stepping aside.

Now, it is a question of who steps forward to lead what often seems to be an ungovernable caucus that is now suffering from virtually unprecedented internal strife (if not civil war). The tension between the establishment and right flank of the caucus has been building for years, especially since the ill-fated shutdown of 2013 that achieved nothing. The establishment sees the “conservatives” as uncompromising idealists who fail to bend to political realities while the “conservatives” see the establishment as wimps unwilling to fight for campaign promises. Both sides are partly right and partly wrong.

Until the party can unify, chaos will persist, but these divides are bridgeable. Most of these intra-party disputes revolve around tactics not policy (ie virtually all republicans want to defund Planned Parenthood, the question is how best to go about it). We need a Speaker who has the support of the establishment and the trust of conservatives. Conservatives saw in Boehner (and by extension McCarthy) a leader unwilling to fight; again whether this is fair or not is almost irrelevant because perception becomes reality. By losing the trust of conservatives, he lost their buy-in on key measures, making it impossible to have any leverage in negotiations with Democrats.

Given the sheer duration of this intra-party battle, few members have the capacity to earn the support and trust of all GOP representatives, which is why Paul Ryan needs to step up and lead. Ryan has proven himself to be a thoughtful policymaker with a bold vision of what a conservative America can look like as witnessed by his budget plans. Ryan has the ability to maintain the support of the “Boehner core” while winning the trust of the anti-establishment to negotiate seriously with the President.

Ryan’s conservative bona fides are all but untouchable with budget plans that have shaped the core of conservative fiscal thinking, and he also has the proven ability to cut a deal when necessary as he did with Senator Patty Murray to partly deal with sequestration. He is the man best positioned to unify and lead the party—in fact with the possible exception of Trey Gowdy it is unclear to me any other House member could build the necessary support to be Speaker. Plus, despite some suggestions to the contrary, the idea of selecting someone who isn’t a member of Congress as Speaker is short-sided. What does it say about a party that has over 240 members and can’t find a suitable person to lead; having an unelected individual be the face of the party is politically perilous.

Sadly, it is clear Ryan does not want the job and would prefer to stay Chair of Ways and Mean, a perch from which he can negotiate tax reform with the next President. Plus, becoming Speaker would require significant personal sacrifice, keeping him from his family as he has to fundraise and campaign for fellow members. However, at this moment, this country needs Ryan as Speaker so that we can have a Congress that functions to some degree. As Speaker, Ryan would still be heavily involved in tax reform and any other major policy initiatives. Plus, the Republicans will likely maintain control of the House through the 2020 election, meaning Ryan could easily be Speaker for north of 7 years (if not longer), which would give him the ability to shape the course this nation takes to a larger degree than as a committee chair. Since he is only 45, he could be a major force in DC for quite a while and still have a plausible path to the Presidency, should it interest him.

America and Republicans need Paul Ryan, and while the personal and family sacrifices are real, I hope he is able to find a way to “yes.” At the moment, republicans look like buffoons, and should this continue, 2016 election prospects could start to dim. After all if the GOP can’t even pick a Speaker, how can we expect voters to entrust us to govern the country? The Republicans still have a chance to steal a victory from the jaws of a humiliating defeat if we can find a Speaker whom the caucus will follow. Given his ability to articulate a conservative vision, unify the caucus, regain the trust of conservatives (both in the Caucus and in the Grassroots), and work with Democrats when necessary, Paul Ryan is the best if not the only choice for Speaker.

Representative Ryan, your country and your party are clamoring for you. Please say yes.