Public Policy, Economics and Entrepreneurship: December 2007 Archives

One of the most potent shots in the arm for our entrepreneurial economy over the long-term would be fundamental tax reform. Cross-sector and cross-economy studies show the impact of tax rates and tax complexity on entrepreneurial activity. I am one who advocates that since our economy is now driven by entrepreneurs owning small businesses (just over 50% of GDP according to the most recent SBA estimate), it is now time to rethink our approach to taxes in this country.

So far only one major presidential candidate, Gov. Huckabee, is advocating a plan similar to the Fair Tax that had gained some traction over the past year. It replaces the income tax with a sales tax. Before the lefties out there start gnashing their teeth and wringing their hands, note that most plans being discussed have provisions to rebate a large portion of tax back automatically each year to, in effect, exempt lower and lower-middle families from the impact of any tax.

I saw this morning in a story from the LA Times sent to me by Andy Tabar that the mainstream media is launching some preemptive strikes. Let's take a closer look.

The opening paragraph frames the story quite nicely for the left:

Mike Huckabee, one of the most conservative Republicans in the 2008 presidential race, has embraced one of the most radical ideas on the campaign trail: a plan to abolish all federal income and payroll taxes and replace them with a single 23% national sales tax.

"One of the most conservative Republicans"? Given his position on many issues I would not call him conservative. I guess since most of the rest of the field seems to be big government, liberal Republicans, the relative positioning is correct. But conservative? Hardly!

Next line is also interesting:

The idea -- dubbed the "fair tax" by proponents -- ....

Do I sense a bit of irony in the writer's tone here?

Note that this story is a report on the 2008 campaign and not an editorial. Here is the writer's take on the tax reform movement:

The sales tax proposal has been around for years but languished on the fringes of practical politics and policy. Tax professionals generally regard the idea as impractical, regressive and even "crackpot," as one critic puts it.

For more on my view of the criteria of practicality, please see my recent debate with the NFIB over the wisdom of practicality and political expediency.

But, wait... The writer brings in an expert. She talks to tax professionals! No ox getting gored there! The last time we relied on tax professionals to fix the tax system was Pres. Reagan's so-called tax reform. All that act achieved was to lead to the doubling of the tax code -- now over 65,000 pages long.

The writer then goes on to paint this position as political suicide by citing examples of previous politicians who crashed and burned due to there support of tax reform. We see some hint of the oppositions strategy -- fear tactics. They will talk about an "added" 23% tax, failing to mention that the income tax goes away. Oh, and they also omit the key provision that exempts a large number of Americans from paying the tax through a simple across the board refund.

Then, as a final attempt to discredit, the author ties the plan to Scientology and Texas millionaires (they clearly must be the worst kind...). I kid you not:

Among the early advocates of a national sales tax were members of the Church of Scientology, a group that battled the IRS for years to gain recognition as a legitimate religious institution eligible for tax-exempt status.... [T]he issue was taken up by another group, Americans for Fair Taxation -- better known as Fairtax.org -- founded in 1995 by a group of Texas millionaires.

Please know that I do not endorse Gov. Huckabee. My approach has been to comment on and support positions, but not candidates. On taxes I like his proposed system, but note that he is silent on scaling back on the federal government and reducing the total tax burden. Remember that to fuel an entrepreneurial economy we need to not only simplify the system, but also cut the tax rates.

I received the following comment from Dr. Graboyes of the NFIB to my reply to his comments from my original post about their 10 healthcare principles. I would welcome your thoughts on this debate! Has the NFIB become part of the problem or am I being too idealistic and naive?

I believe Dr. Cornwall unintentionally validates my arguments rather than his own in that: (1) the "pragmatic" actions he describes are polar opposites of NFIB's current efforts; (2) the Cato Institute does not advocate a total retreat of government from health care; and (3) the solutions Dr. Cornwall offers are not solutions.

(1) In the 1940s, employer-sponsored health insurance arose from the private sector, not from the government. Private firms offered health insurance to circumvent the suffocating effects of wage-price controls.
The firms had found a loophole in the law, and federal government's role was to acquiesce, not to innovate. In the 1970s, the low-deductible policies Prof. Cornwall laments were private sector responses to Nixon-era public policies. In both cases, bad public policies led private firms to pursue problematic responses. NFIB's current strategy is to do the opposite: we want good public policies that lead private firms to take constructive actions.

(2) The Cato Institute is, as Prof. Cornwall notes, "about as market-oriented as they come." No doubt, NFIB's positions on health care reform will not be entirely to Cato's liking. But, contrary to Prof.
Cornwall's claim, even Cato doesn't advocate a total retreat of government from health care. In "Sinking SCHIP: A First Step toward Stopping the Growth of Government Health Programs," Michael Cannon urges health care deregulation "thereby allowing government health programs to focus on those patients who most need assistance." That sounds like reducing government's role, not eliminating it. In "Crisis of Abundance," Cato scholar Arnold Kling offers a market-oriented plan that cuts the government's proportion of health care spending, but does not eliminate it. (I reviewed the book favorably at:
http://www.nabe.com/publib/be/0704/reviews.html) As long as government has some role in the mix, distortions will be present, and second-best solutions will be inevitable. The tough part of the debate is figuring out what that second-best is and not settling for less. It is there that free-market proponents will disagree.

(3) My previous posting asked Prof. Cornwall "[W]hat proposals would you take to Congress and the state legislatures? We're looking for specifics, and we'd be glad to listen." His response was: "Give the consumers control of their health care dollars. Remove the employer from the health care system. What a way to truly put small business on a level playing field with big corporations. Tear down government barriers to a truly free health care system - deregulate health care. ... We can reform Medicaid like we reformed federal welfare. Shift that money back to the state in block grants free of federal mandates. We can deregulate health care just as we deregulated so many other powerful industries during the Reagan era."

Good, thought-provoking ideas. But they're bumper stickers, not specifics. Let me suggest an experiment: Put the above suggestions in a letter on university stationery. Send a copy to each of the 535 members of Congress and 7,000+ state legislators. Ask each recipient for a mere 30 minutes of time to discuss the ideas. Now calculate two variables: X = the number of "thank you for your interest" letters signed by legislative interns and Y = the number of legislators willing to meet with you. My guess is that X will be at least 100 times Y.

When I'm a college professor, I can advocate any fantasy health care system my imagination desires. NFIB doesn't have that luxury. NFIB represents 350,000 member firms, their employees, and the larger community of small businesses. Sweeping philosophical declarations won't protect their livelihoods. Prof. Cornwall says: "Don't tell me that such fundamental change is not pragmatic or realistic." Well, sometimes we have to tell you that; NFIB can't demand all or nothing. We have to remember Voltaire's, "The perfect is the enemy of the good."

On the other hand, it's tempting to let pragmatism to turn to sloth and timidity. So Prof. Cornwall and others like him do a great public service by pushing us to achieve as much as we can and not settle for less than what is possible. Thanks to him for his advice and willingness to talk.

Friends, even good friends, do sometimes disagree.

I truly appreciate the time and thought that Dr. Graboyes put into his comment on my recent post on the NFIB's principles for health care reform. Let me try to respond.

The position the NFIB has taken is a pragmatic one. I concede that it may be the best among available pragmatic solutions. I would argue that our health care mess -- we both agree that the current system is a mess -- is a result of decades of pragmatism. World War II was ending. Wage controls that had been put in place to keep inflation in check. The federal government, labor and large corporations decided that offering health care benefits was not a violation of wage controls. So a pragmatic solution was to create a system of employer sponsored health insurance as a way to increase compensation without increasing actual wages. It was a pragmatic economic shift.

Fast forward a couple of decades. President Nixon had instituted wage controls once again to stave off the inflationary pressures in our economy. This time the pragmatic solution was to enrich health care benefits. We moved from a major medical system (what is now called a high-deductible plan) to one of very low deductibles. Again this enhancement of compensation was a pragmatic way around wage controls.

Inflation, at least in health care, is once again rampant. And once again, we hear calls for compromise and pragmatism.

I agree with Dr. Graboyes. Our current health care system is not free enterprise. It is one based on a system of rent seeking behavior on the part of corporate medicine, physician and hospital lobbyists, health insurance corporations, and labor. I would like to see how these principles will take us down the road to liberty.

Dr. Graboyes says, “100% private is not going to happen, and one is hard-pressed to find any market-oriented think tank that advocates total retreat of government from health care.” This is just not true. For example, the Cato Institute is about as market-oriented as they come. Michael F. Cannon in an article published at the Cato Institutes's website said the following:

In a field dominated by lefties and rent-seeking weasels whose unifying goal is to provide health insurance to everyone, it is easy to get caught up in universal coverage fever. Even erstwhile conservatives have been seduced into thinking we can achieve universal coverage in a free-market way.

Yet a free market would not provide health insurance to all; some people are uninsurable, others don't want health insurance. National Review made the point nicely: "to achieve universal coverage would require either having the government provide it to everyone or forcing everyone to buy it." Either way, government calls the shots. If conservatives adopt universal coverage as their goal, the left will have already won.

Dr. Graboyes asks for another solution.

Give the consumers control of their health care dollars. Remove the employer from the health care system. What a way to truly put small business on a level playing filed with big corporations. Tear down government barriers to a truly free health care system - deregulate health care. Don't tell me that such fundamental change is not pragmatic or realistic. We can reform Medicaid like we reformed federal welfare. Shift that money back to the state in block grants free of federal mandates. We can deregulate health care just as we deregulated so many other powerful industries during the Reagan era.

Will it be uncomfortable? Yes. Will it be painful? Yes. But we have created a critically ill health care system that needs powerful medicine to return to wellness.

I have had the pleasure to interact with the 502nd Infantry Regiment that is working to bring entrepreneurial economic development to Iraq. It is part of the story that is just not getting reported.

My main contact has been Major Tim Collier, on the right of this picture from Camp Victory, Iraq. He is part of team working to help rebuild the economy from the ground up.

The goal of this operation is to begin the rebuilding process of the basic economic infrastructure and to help develop distribution channels for trade.

The initial focus is on the carpet industry. One local business hopes to produce a world class reproduction of the famed Pazdyk Carpet, acknowledged to be the oldest hand knotted rug in the world. The plan is to knot ten of these carpets over the next six months.

Below is a picture of the loom being used in this business and the carpet that they are reproducing.

Helping to rebuild the Iraqi economy will be a slow process. By focusing on free enterprise and small business ownership, a future of sustainable economic growth is possible.

I wrote the other day that I was concerned with the direction the NFIB was taking regarding their position on health care reform. My reading of the tea leaves was correct. They have released their "Principles for Health Care Reform."

They list ten principles: universal, private, affordable, unbiased, competitive, portable, transparent, efficient, evidence-based, and realistic.

A few of these words need to be examined.

Realistic is generally a word policy people use when they plan to tweak the current system and engage in compromise. I have never understood the logic of tweaking a fundamentally flawed model. And it is often unwise to compromise on our principles -- that seems oxymoronic to me. A principle is a firmly held belief. I thought the NFIB stands for free enterprise as a fundamental principle. Why compromise that principle when it comes to health care?

It is interesting that they chose to list universal as their first principle. Understand that the word universal has become a code word for a federalized system. They may try to hide that fact behind having private aspects to it, but universal in the world of policy means mandated. And for health care, that means a socialized system.

Think I am reading too much into this? Here is what they have to say about their principle of private:

To the greatest extent possible, Americans should receive their health insurance and health care through the private sector.

"To the greatest extend possible"??? You can drive a freight train through that loop hole! Liberty is a foundational principle in our system. It is sad that we seem to be finding more and more convenient reasons to compromise on our freedoms, particularly our economic freedoms.

I guarantee that their principle of efficient can never happen by "realistically" tweaking the system and making it a federally controlled and planned mandated system. And while we are talking about efficiency, let's see how they intend to achieve efficiency:

Health care policy should encourage an appropriate level of spending on health care. Laws, regulations and insurance arrangements should direct health care spending to those goods and services that will maximize health.

You got it. We will let the federal government regulate efficiency. I guess that makes sense. The federal government is bastion of efficiency, after all.

Generally I have been on the same side of issues with the NFIB. Their stand on regulatory flexibility is to be commended. Their stand on Kelo and property rights is also on the mark. Their approach to health care reform stands in stark fundamental contrast with those two positions.

The Democrats in Congress are talking about cutting taxes. On the surface that sounds like good news for small business. However, their plan is not a simple one -- nor is it permanent.

From James Pethokoukis at US News:

Time to prime the pump? Democrats sure think so. "There was an overwhelming consensus that the time has come to stimulate the economy" is what Barney Frank, chair of the House Financial Services Committee, told Bloomberg News yesterday. This stimulus would presumably be done through targeted tax cuts, tax rebates, or increased government spending. All temporary measures to give the economy a quick boost. All quaint throwbacks to old-fashioned, Keynesian, demand-side, "put money in people's pockets" thinking. And all unlikely to give the politicians the "bang for the buck" they might hope for.

Pethokoukis offers a pretty compelling history and economics lesson to support his point. Worth a read!

This morning I attended a small business summit sponsored by the new mayor of Nashville, Karl Dean. An overflow crowd heard remarks from the Mayor, the state director of NFIB Jim Brown, and the head of the Nashville Chamber of Commerce Ralph Schulz on the needs of the over 530,000 small businesses here in Tennessee.

Jim Brown of the NFIB talked about the need for less regulation on small business -- a good goal that boosts start-up activity. He also talked about the need for lower taxes and how -- another noble goal. However, in the same breath he warned us that the current tax shortfalls we are seeing across the country as the economy slows do not bode well for entrepreneurs. It seems that there is a disturbing pattern during times like these. Local and state governments go after more revenue from small business owners through taxes and fees to offset the overall drop in sales tax revenues.

But then came a major disconnect for me when he shifted his remarks to health care. Rather than trust the free markets that he so strongly advocates for on behalf of his small business members, Brown applauded our Governor's expansion of the state-run health insurance program to include small businesses through a new program called "CoverTN."

We are seeing this across the country. It started when large corporations such as Walmart began to lead the charge for a federal government healthcare program as a fix for the current healthcare crisis. Large corporations began to signal that they would support a nationalized healthcare policy. Then, advocates for small businesses began to fall right in line.

It amazes me that those who advocate lower taxes and less regulation on one hand are willing to support the enactment of a national healthcare plan that would create a gigantic bureaucratic black-hole of taxes on the other hand. Governmental meddling in healthcare delivery and payment in large part created the healthcare system crisis. So now we are willing to hand the entire healthcare system over to that same government lock, stock and barrel in the name of political expediency?

We have been watching the growing pessimism of small business owners over the past few months as seen through the NFIB's monthly survey. It now looks like the Federal Reserve is the Grinch that has stolen entrepreneurs' Christmas.

Reaction by small-business owners to Federal Reserve rate cuts in September and October sent the National Federation of Independent Business Small-Business Optimism Index down 1.8 points to 94.4 in November -- the lowest reading since 1993. Seventy percent of the index decline came from two index components, the outlook for real sales and the outlook for business conditions in six months.

"Things were looking good on Main Street until the Fed warned that the economy was at risk of sinking," said NFIB Chief Economist William Dunkelberg. "That warning had credibility, and the logical response was to cut hiring, capital spending and other growth-related activities. And indeed that occurred in the last 12 days of September and continued into October and November. In general, small-business owner expectations that were on the rise before the Fed announcement fell after the announcement, and have drifted to lower levels since."

One bit of good news is that the credit debacle that is behind much our current economic woes is not effecting credit conditions for small businesses. In fact, credit conditions continue to look normal. Regular borrowing activity was reported by 32 percent of the owners, four points below October but typical of readings since inflation ceased being the number one business problem 15 years ago. The net percent of owners reporting loans harder to get in recent months rose one point to a net 7 percent, typical of readings for the past several years.

Once again we are letting politicians and lobbyists set policy for the economy. The business missteps and outright greed from the mortgage and real estate industry is what created this mess. But, rather than let the market work this out, we are going for another bail-out.

Worst of all, these policy decisions coming out of Washington (including the President's misguided consumer mortgage bail-out) are clearly hurting the one true and sustainable strength in our economy -- the small business sector. If left to the market to sort out, we would have had a fairly short, albeit painful correction. However, the unintended consequences of the Fed's actions and possible bail-outs from Washington will be the probability of a long-term hit on small business growth that could actually create the economic downturn these folks claim they are trying to prevent.

Ben Cunningham writes about Sen. Kerry's desire to "help" small business at his blog TaxingTennessee.

LEAVE US ALONE!!! For the love of all that is good and healthy.... why do politicians actually believe they can "help" us...the LAST thing in the entire universe that small business needs is the idiots in Congress "helping" them.

Thank goodness for Tom Coburn...he is all that is standing between us and the tyranny of the good intentions of our government.

Amen!!!!!

The primary reason for the decline in the number of small businesses providing health insurance appears to be that owners of new firms are reluctant to introduce health benefits, according to a National Federation of Independent Business Small-Business Poll released today. The poll on purchasing health insurance found that 52 percent of small-business owners do not offer either employee health insurance or an insurance purchase subsidy.

"It's much better for employee morale if a small-business owner never offers health benefits, than it is to offer them and then be forced to take it away because it is too expensive to continue," said William J. Dennis, NFIB's senior research fellow. "Small-business owners experience considerable turmoil in their early years. They often experience cash flow problems and are reluctant to incur additional expenses such as health insurance. What's new to this picture is that it appears that new small-business owners are waiting longer or choosing not to offer health insurance benefits to their employees at all."

Excluding those who switch insurers or go out of business, very few small employers drop health insurance benefits all together, about 1- 2 percent of the population annually.

For the 47 percent of small employers who do offer some type of employee health benefit, 36 percent offer insurance to all or most full-time employees, 5 percent offer insurance to some or a few full-time employees, and 6 percent offer premium reimbursement to employees who purchase health insurance on their own.

According to the poll, the owner or manager is the person most likely to shop on behalf of the firm for health insurance, and they rely heavily on insurance agents or brokers for guidance This does not always serve them well. Survey data found that agents/brokers did not raise the subject of Health Savings Accounts (HSAs) in 59 percent of cases involving their discussion of employee health insurance with small employers.

"This poll tells us that if small-business owners want to know about all of their health insurance options, they need to conduct their own research. They need to be able to ask their insurance agents very pointed questions about HSAs and other health insurance options," said Dennis.

I know this is wishful thinking on my part, but with over half of our workers employed in small businesses perhaps it is time to uncouple health insurance from our tax code. The system we now have in America is based on the economy of the mid-1900s when most workers were employed by large corporations (one in five worked for Fortune 500 during that era). Health insurance for employees was a loop-whole to that unions and corporations concocted to get around wage freezes post World War II. This same alliance used Nixon's wage freeze as a reason to move from high-deductible major medical plans to low deductible insurance plans.

Just as economic crises created the mess that is now our health insurance system, perhaps the impending train wreck that is today's health insurance model in the US can lead us to a consumer driven free-market model.

I have not blogged in a while about any post-Kelo cases on eminent domain, but this one from Missouri caught my attention. The NFIB has take a strong position on this case.

The Missouri Supreme Court will be deciding a critically important case for all property owners. The court is being asked to determine if an unchartered city or county in Missouri can use eminent domain to take property belonging to a private business.

Only 2.9 percent of Missouri’s cities are constitutionally chartered, and two thirds of current eminent domain cases involve unchartered municipalities. A victory in the Missouri Supreme Court would therefore halt the majority of eminent domain takings in Missouri and could influence eminent domain cases in other states. Since the U.S. Supreme Court's devastating decision in Kelo v. New London, which opened the door for widespread eminent domain abuse

The case before the court is City of Arnold v. Tourkakis. In this case, the City of Arnold seeks to condemn the business property of Dr. Homer Tourkakis, a local dentist, who has owned the property for over 20 years. This is yet another example of how the Kelo decision has eroded the fundamental right of property that is foundational to our economy.

Dr. Tourkakis argues that since Arnold is not chartered under the Missouri constitution, it does not have the power to take private property through the use of eminent domain.

The state Circuit Court found in favor of Dr. Tourkakis and issued two interesting holdings: 1) that the Kelo-esque goal of the city's actions - to make way for the building of a shopping center - does not constitute a "public use" under the Missouri constitution, and 2) that the Missouri constitution does not allow unchartered cities and counties to utilize the constitutional taking power.

"If the Supreme Court of Missouri upholds the Circuit Judge’s decision, it would simultaneously end every taking by an unchartered city and county, and would also establish that Missouri does not accept the standard for public use that the Kelo case set out nationally," Karen Harned, executive director of NFIB's Legal Foundation. "This would be a resounding victory for property owners in Missouri and hopefully will influence other state courts to look closely at how their state constitutions' limit eminent domain uses in their states."