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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Trump Will Reinvigorate NATO

In many precincts, there is this misleading suggestion that Donald Trump is backing off of America’s traditional support for NATO, a claim undermined by a reading of his actual position. Joint security pacts are only sustainable when all participants have security capabilities; Trump gets this. That is why NATO calls for each nation to spend 2% of GDP on defense to avoid free-riders. Otherwise, nations can rely on the defense capabilities of other nations. That isn’t collective security; it is one country providing a free, outsourced military for others.

Sadly, many nations are not spending the 2%, instead benefiting from the U.S. security umbrella without pulling their weight. That is unsustainable; even President Obama has called for more defense spending from NATO allies. Alliances, like personal friendships, are two-way streets. States like Estonia and Poland are meeting the minimum while those like Italy and Spain are in default. Italy, a wealthy country, spends less than 1% of GDP on defense. Germany, home to Europe’s top economy, is little better at a meager 1.2%. Relatively poor countries like Poland, Estonia, and Greece are meeting their NATO requirement while wealthy European states are gladly allowing their military to atrophy, enjoying a defense apparatus subsidized by the American taxpayer who is already carrying over $19 trillion in national debt.

Trump recognizes the 2% minimum is useless without enforcement mechanisms. Unless there are consequences for failing to spend 2% (either a fine or loss of membership), European nations will continue to ignore the requirement. Trump’s plan would simply put in penalties for falling short of 2% and would reinvigorate NATO. By forcing Europe to invest its military and thereby reconfirm its commitment to joint security, the alliance will be stronger and could more easily deter Russia. Putin sees a Europe with decaying powers and weak militaries; it is no wonder he is pursuing expansion. A weak Europe has given Putin room to expand, and by being lax on NATO enforcement, we have allowed Europe to weaken. Given NATO’s reliance on American power, we alone have the leverage to get the 23 members who inadequately invest in defense to meet their commitment. The result will be an energized NATO that makes Eastern Europe more not less safe.

Trump’s push for more NATO spending is the only way to stand up to Putin and protect our allies. Islamic terror, an Expansionist Russia, and a strengthening Iran are global problems. They require global responses. Europe should recognize this, especially after a string of terrorist attacks have hit Belgium, France, and now even Germany. Our current policy of blindly subsidizing many European powers has turned NATO from a collective defense pact into a bunch of nations free-riding on the US (and to a lesser extent the UK, Poland, Estonia, and Greece who are spending the 2%). Our European partners need to determine whether they want to help provide and enjoy collective security and meet their commitments.

Trump’s policy will return NATO to its original promise-a transatlantic alliance of democracies all providing for the security of each other. That will make NATO stronger and its collective defense mechanism more credible. Putin will no longer be able to devour the decaying carcass of Europe; instead, the Continent will be able to deter Putin and other aspiring powers like Russia and China. We can then deal with these nations from a position of strength, striking deals when possible and pushing back when necessary. America and the world will be better for it.

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.

Despite Cost and Blunders, GOP should stand firm on Scalia Replacement

In the aftermath of Justice Antonin Scalia’s passing, it can feel a bit crass discussing the political fallout; after all, he was a husband, father, and grand-father whose family is in mourning. However given the current balance of the court and titanic influence he leaves on legal thinking, the fact is we are entering one of most significant political battles in years, and while Senate Republicans have already made a tactical blunder, they must hold firm.

Whether you agree with his jurisprudence or not, it is indisputable that Scalia leaves behind a tremendous legal legacy. In 30 years on the court, he re-energized the textualist movement with harsh, impeccably worded dissents, groundbreaking majority opinions (ie Heller), and the occasional surprise (ie Emp Div HR OR v. Smith). Scalia is the father of much conservative legal thought, which makes the fight over his successor all the fiercer. On top of this, the Court now has 4 liberals and 4 conservatives (3 if you count Kennedy as a centrist). This means that the cases in which the Conservative wing would have prevailed 5-4 are now deadlocked 4-4. A liberal Obama Justice could feasibly swing the court to the left for years, guaranteeing the stability of Roe while endangering recent precedent on campaign finance, gun rights, and more.

Given the stakes, Senate Republicans must be very careful in how they proceed. Scalia’s death comes at an odd time. Had a vacancy arisen 5 months ago, the “lame duck” argument would be very weak, and the Senate would have been compelled to confirm a qualified nominee (elections do have consequences). If a vacancy had arisen 6 months from now, the decision not to act on a nomine would be on exceedingly firm ground as Obama would be a truly lame duck with an election right around the corner. Now, the timing of 9 months prior to the election gives credence to both arguments on whether to act or not (Kennedy in 1988 provides precedent to act while Fortas in 1968 is precedent not to act). Ultimately, this is really a new situation, unless you deem how congresses acted 50, 80, or 150 years ago to be very relevant to the present day.

With the court so evenly split, the GOP should likely delay, but the politics are bad. Republicans have only worsened the situation as well. On Saturday, Majority Leader Mitch McConnell said, “this vacancy should not be filled until we have a new president.” The Senate will not move on an Obama nominee, and the GOP almost certainly has the votes to sustain any filibuster. With 54 seats, they would have to suffer 14 defections, which is almost unthinkable, especially with vulnerable Senators up for re-election like Pat Toomey and Kelly Ayotte currently backing McConnell’s position. While the GOP should delay this until the next President, the way they are going about it is a mistake.

Republicans should have waited for Obama to formally nominate someone and then found specific reasons to oppose that candidate. Now, any specific criticisms can more easily be written off as an after the fact rationale from a bunch of obstructionists. Announcing opposition now is akin to shooting first, asking questions later. It is almost certain that the Obama nominee (whether it be Loretta Lynch, Sri Srinivasan, or someone else) will have enough flaws to justify delaying confirmation until the next President, and under the miniscule chance Obama makes a consensus choice, that nominee would deserve a fair hearing. In an effort to appease the Ted Cruz kamikaze wing of the party, McConnell has made it easier for democrats to label republicans as obstructionists and sway independents in the 2016 election.

In all likelihood, this political fight will have a limited impact on the 2016 election, but if anything, it hurts republicans. That said it can be worth losing political points when waging an important fight. The fact is few voters ever cite the nomination of Supreme Court justices as their most important issue (even though this power is one of the President’s greatest), and that is unlikely to change. It is hard to imagine more than 10% of Americans seeing this as their top issue, and such voters are likely high propensity, partisan ones. This is to say that they likely vote anyway and are not persuadable. On the margin, some democrat and some republican voters may be more energized, but they would have voted anyway. Scalia’s death may energize some voters, but it won’t swing the outcome in any meaningful way. However, this fight will make it easier for democrats to make the obstructionist argument (particularly if Ted Cruz become the nominee), which on the margins could swing some independents to the democrats. The Supreme Court does not work as a stand-alone issue to sway independents, but it can be used as part of a broader narrative against republicans. In particular, if Ayotte, Toomey, and Johnson get weak-kneed, that is a sign the political cost of this fight is growing.

Obama has every right to nominate someone, and the GOP should hold hearings for that nominee. However, there should not be hesitation to oppose him or her and keep that person off the bench given the high stakes of this vote in a divided court. The GOP should’ve waited for the nomination announcement to come out in opposition to avoid the “blind obstructionist” label, but that is water under the bridge at this point. With the Supreme Court in the balance, this is a fight worth having, even if there is a slight political price to be paid.

Justice Scalia’s guiding philosophy was driven by the goal of making the text of the law pre-eminent so that who the presiding Jude is does not matter. It is a sad twist of irony then how much of a fight there will be over who succeeds him. Equally, one is left to question the fragility of our republic that the death of one Judge can have such earth-shattering (partisans might say cataclysmic or bountiful) consequences.

 

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Feckless Actions That Caused a Firestorm

Earlier today, President Obama unveiled a batch of executive branch actions with the purported intention of cutting gun violence. While too often castigating his opponents on the issue as either heartless or in the pocket of the gun lobby, on the whole, the President offered an impassioned, compelling argument for more action on the gun issue, capped off by Obama startlingly and powerfully shedding tears as he discussed the horrific Newtown murders. Unsurprisingly, many in the GOP were up in arms (a sample: Trump, Cruz, Ryan, Price), and depressingly, some commentators even suggested Obama’s tears were fake.

Many on the right have put themselves in the position of simultaneously arguing President Obama’s actions won’t do anything yet pose existential threats to our constitution and the 2nd Amendment (this seems to be the NRA’s argument), which is a difficult if not impossible case to make. Sadly, by so quickly rushing to politicize the issue, many Republicans have shed the high ground as Obama’s orders are toothless, intended to rev up a political base needing motivation ahead of an Election. Will they solve the problem? No. Are they legal though? Almost certainly.

Aside from some uncontroversial actions on mental health, the thrust of the executive actions are focused on what it means to be a gun dealer. The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) is clarifying what it means to be a gun dealer, namely whether or not a gun-seller has to get a background check on the gun-buyer. Given Obama’s directive, the ATF has attempted to guide sellers whether they need to seek a license and thereby get background checks, and it’s a mess.

Obama is not to blame for why the rules are a mess. Congress is because it consistently writes vague laws, leaving it to the Executive Branch to fill in the details. By doing so, the Congress abdicates its legislative authority to the regulatory bodies under the President. Congress has no grounds to write intentionally vague laws and then complain over the interpretation. Here is the text of the law Obama is clarifying:

The term “dealer” means (A) any person engaged in the business of selling firearms at wholesale or retail, (B) any person engaged in the business of repairing firearms or of making or fitting special barrels, stocks, or trigger mechanisms to firearms, or (C) any person who is a pawnbroker. The term “licensed dealer” means any dealer who is licensed under the provisions of this chapter.

….The term “engaged in the business” means—

as applied to a dealer in firearms, as defined in section 921(a)(11)(A), a person who devotes time, attention, and labor to dealing in firearms as a regular course of trade or business with the principal objective of livelihood and profit through the repetitive purchase and resale of firearms, but such term shall not include a person who makes occasional sales, exchanges, or purchases of firearms for the enhancement of a personal collection or for a hobby, or who sells all or part of his personal collection of firearms

In plain English, if you occasionally sell a firearm, you do not need to get a license. This exception, created by Congress, is what is referred to as the “gun show loophole” as at gun shows some individuals may decide to sell a gun or trade with another collector to enhance a collection. However, those who make a business selling guns have to follow the same legal procedures whether selling in their store or at a show. There is no exception for all sales at gun shows—the gun show loophole is really a misnomer.

The law begs the question though: when does occasional cease to be occasional? When does having a hobby turn into a business? We would all probably agree that selling 1 gun per year counts as occasional but selling 3,000 would not. However, Congress has left a massive gray zone; they intentionally ducked the issue, avoiding controversy, and passed it off to the President. There is no numerical definition for occasional, and Obama does not attempt to set one. There is as plausible an argument to be made that 50 sales ceases to be occasional as 100 sales. Don’t be surprised if different Presidents enforce at different levels; Congress’s vagueness and cowardice has empowered the Executive to do just that.

Obama is essentially telling his ATF to be more stringent in its enforcement of occasional, which Congress has granted him the right to do. Obama is not threatening our Constitutional balance of power; rather, Congress has abdicated its constitutionally prescribed ones, signing them over to the President. This is not the act of an Imperial President but the result of an Impotent Legislature. If Congress does not feel the intent of their words are being enforced, they have the ability to pass a new law more clearly stating what “on occasion” means, thereby restricting the President’s discretion. Barring that, what Obama did was perfectly legal. It also isn’t dangerous to our Constitution; unless one wants to argue existing laws and their gray area unjustly infringe upon the Second Amendment, a tough sell both in the court of public opinion and in the court of law.

These actions barely move the needle and will have next to no impact on gun crime as so few gun sales will be impacted. Few mass murderers purchased guns in a sale that would have been regulated differently thanks to these changes. This is political theater with the President trying to show he is doing something to rev his base while implicitly acknowledging to do something more sweeping Democrats need to take congress, meaning those who want tighter gun control have to get out and vote. I think it is clear that Obama wants to fundamentally change our gun laws, but (unlike on immigration and soon perhaps GITMO), he recognized his limits and acted within them. It makes for good base politics but will have an imperceptible impact on gun violence.

Instead of attacking Obama for showmanship and impotence while acknowledging that in his heart he wants to see lower gun violence (and arguing he is just pushing the wrong proposals), some on the right reflexively and sadly attacked his motives, suggested he was destroying and 2nd amendment, and lamented the uselessness of his actions. Again, the second and third points seem incoherent when paired together. This is an example of Republicans politicizing the issue as much as the President to enthuse their own base ahead of an election.

Sadly, it increasingly seems like both sides lack the will for a substantive discourse on this (and other) issues, preferring to gin up their respective bases rather than making persuasive arguments and finding common ground. We keep yelling past each on guns, achieving nothing. Meanwhile, China lands planes on disputed islands in the South China Sea, Iran and Saudi Arabia inch closer to conflict, and North Korea may have conducted a nuclear test. No wonder people hate politics.

 

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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.