"Country Before Party"

No phrase in the public discourse infuriates us more than “country before party.”

Over and over again (including yesterday in his campaign stop in Detroit) we hear President Obama ask “if congressional Republicans will put country before party”, followed up swiftly as #countrybeforeparty in White House tweets.

What exactly does President Obama mean by this? Is he suggesting that Republicans are purposefully making decisions that they know will harm the country? Does he really believe that before a vote, Congressman Joe Republican is sitting at his desk debating between a “yea” vote that is best for the country and a “nay” vote that is bad for the country but somehow best for his party?

We’d urge the Obama administration to provide an example of a decision that hurt the country but served to advance the political party that made that decision. They can’t because it defies logic. The successes and failures of a political party are inextricably linked to the successes and failures of the country as a whole. President Obama only has to look back to the election results in 2010 for a perfect example of this relationship. A Democratic super-majority failed the country, and as a result, suffered huge electoral losses en route to losing control of the House. As the country goes, so goes the political party in charge.

Therefore, it sounds like “country before party” is really just code for “do what we say, we know best.”

As difficult as it might be for President Obama and his fellow Democrats to accept (despite the glaring evidence of two and a half years of legislative and executive ineptitude), they don’t have all the answers. In reality, Joe Republican disagrees with Democrats simply because he doesn’t believe their approach will help the country. Joe Republican does not disagree with the Democrats just because he’s a Republican, he disagrees because he doesn’t believe in, or subscribe to, the specific ideals and principles encapsulated in the Democrats’ proposals.

Suggesting that politicians, not to mention the country as a whole, blindly follow their President at the expense of standing up for their ideals and principles reeks of desperation with hints of dictatorship. This strain of thought, while perhaps a convenient excuse for an unsuccessful President, is neither reality nor democratic (note the lower case “d”). If anything, the passionate debate in Washington, while not very efficient in addressing our problems, is a sign that our democracy is alive and well. We have faith (perhaps naively) that the primary motivation for any politician, whether Republican, Democrat or Independent, is to govern in a way that best promotes a safe and prosperous country.

Time will tell which party, or group of individuals (e.g. Independents), usher in growth and prosperity. However, we know for certain that whomever the public see as the usher will be in a position for huge gains in electoral influence.

Dreaming of Plurality

We’ve just returned from the future – December 18th, 2012 to be exact – and the lead story in the newspaper we picked up for "investment advice" said the following:

WASHINGTON - The Electoral College has voted and, as predicted by the general election results, no candidate received the 270 votes required to be elected as President of the United States. President Obama received 213 votes, Governor Romney received 165 votes and Mayor Bloomberg received 160 votes as every state adhered to their usual practice of voting in line with their state’s election results.

Per the rules of the Twelfth Amendment of the Constitution, the election is now in the hands of the House of Representatives who, for the first time since 1825, will be required to choose the President. Each state’s delegation is permitted only one vote (no vote for the District of Columbia) and the candidate who receives 26 or more votes will become the President-elect. The House will continue voting until a candidate receives 26 votes.

Despite receiving a plurality of the popular vote, it will be virtually impossible for President Obama to receive the 26 votes necessary to get re-elected given the large Republican majority in the House (33 state delegations have Republican majorities).

While President Obama’s outlook is bleak, the outlook for the other two candidates is less clear. The ultimate result will depend on whether House Republicans decide to remain loyal to the Republican Party nominee or whether they will remain loyal to their constituents’ votes. If they remain loyal to the Republican Party, Governor Romney has a clear path to the White House; however, if the delegates remain loyal to their constituents’ votes, it will be a battle between Governor Romney supporters, Mayor Bloomberg supporters, and potentially even Democratic state delegates. The wild card in this voting process is the Democratic states, who, knowing that a vote for President Obama is a wasted vote, could vote for Mayor Bloomberg in an attempt to prevent the more conservative Governor Romney from reaching the Presidency.

There will be urgency to this battle as the Twelfth Amendment requires that a President be selected before March 4th, the failure of which will result in the Vice President being named as President.

The Vice President will be selected by the Senate following a similar procedure, except that all Senators are permitted to vote and only the candidates with the top two Electoral College votes are eligible. Therefore, only Vice President Biden and Governor Pawlenty are permitted on the ballot, and with a clear Democratic majority in the Senate, it’s almost certain that Vice President Biden will have 4 more years in One Observatory Circle.

Both the House and the Senate have called sessions to hold the special elections tomorrow at 10am.

Imagine the chaos this election result would produce? Cable TV could spontaneously combust at the mere possibility of this scenario. Democrats would be up in arms about losing another election after receiving the most votes and Republicans would be fuming about the entrance of a right-leaning independent into the race, poaching votes from their nominee, a la Ross Perot (even though they would likely win any House vote).

We’d love it.

This would solidify the viability of an independent or third party candidate in our way- too-polarized world of politics. The 2012 election is shaping up as the perfect venue for this to occur. Numerous Democrats are unhappy with President Obama, Governor Romney (or whoever wins the Republican primary) will be too far to the right for many moderate Republicans, and independents are itching for the chance to vote for a reasonable candidate who’s not beholden to the pure and strict Democratic or Republican views on life. Even if Mayor Bloomberg (or Governor Huntsman or any other fiscal conservative who is too moderate and reasonable for the Republican primary) fails to win the general election outright, they will have set the stage for independents to confidently run as such in their local elections – whether it is for city councils, state legislatures, seats in Congress or future Presidential elections.

The 2012 election could go down in the history books as the year independent candidates became relevant and took their rightful spot alongside the out-dated duopoly of the Democratic and Republican parties.

We hope our trip in the flux-capacitor-powered Delorean was real and not just a naively optimistic dream…

Warren Buffett's Missing Facts and $3,000 Gallon of Milk

The antipopulist.com has great admiration for Warren Buffett, but we take issue with the completeness of his high profile op-ed in Sunday’s New York Times. After reading the headline, we immediately knew that it would be latched onto by President Obama and the media, and posted as a link 4,354 times on our Facebook and Twitter accounts as a “we told you so” for increased taxes on “millionaires and billionaires.”

We’re not even close to being affected by Mr. Buffett’s proposal, and are not opposed to increased tax revenue if done in a responsible and balanced manner, but it’s important to keep this issue in perspective.

Higher taxes on 0.2% of the population is a lazy and populist political solution to a major and complex fiscal problem.  As we’ve mentioned before, these taxes would have a limited impact on the deficit and only serve to distract from the real cuts and reforms required to reduce long-term deficits.

To help complete the analysis, here are some key points, derived from IRS data (i.e. cold hard facts), that everyone needs to keep in mind when referencing Mr. Buffett’s piece - points that you are unlikely to see in other media stories or populist rhetoric on TV:

• The 245,107 households that earned more than $1 million make up roughly 0.2% of total tax returns filed, yet provide roughly 28% of total income taxes paid into the US Treasury. These taxes were paid on earnings that amount to 15% of total adjusted gross income (AGI). 0.2% of the population making 15% of total AGI is stunning, but having that same 0.2% pay 28% of the total tax bill is even more stunning, especially when the current political argument for higher taxes for “millionaires and billionaires” is made under the guise of “fairness.”
• The top income tax bracket has a rate of 35%. We’d like to understand how his employees have effective tax rates of 33% to 41% with an average of 36%. I’m sure there is a very good reason for this, likely resulting from Mr. Buffett’s convenient and incredibly misleading inclusion of payroll taxes paid by the employees and on behalf of the employees. Most of these taxes are only paid on the first $100,000 or so of income and are paid (in theory) to fund the future benefits of Social Security, Medicare, Unemployment Insurance, etc. No different than the insurance premiums that Mr. Buffett has built his fortune on. This cost results in an insignificant rounding error in Mr. Buffett’s effective tax rate, but has a larger impact on his staff’s (who presumably make significantly less than Mr. Buffett) effective tax rate. The comparison is very misleading because Mr. Buffett will receive the exact same Social Security, Medicare, Unemployment (HA!) benefits as his employees. Why should he pay more for the same benefit? Because he can? It’s the logical equivalent of charging Mr. Buffett $3,000 for a gallon of milk because he earned 1,000 times more than the average household. 
• Mr. Buffett’s personal effective tax rate is not representative of the 0.2% of the population that made more than $1 million in 2008, nor is it representative of his 399 peers in the “super-rich” club.  Based on this data, we estimate that those who made over $1 million paid an effective tax rate, as a group, of approximately 23%, and according to Mr. Buffett, his peers had an effective rate of roughly 22% (as compared to an effective rate of roughly 10% for the remaining 99.8% of taxpayers). Other than citing the capital gains and carried interest tax rate of 15%, Mr. Buffett does not explain why his effective tax rate is 25% less than his peers. It’s bad science and bad policy to rely on one man’s tax return to justify a change in the tax code that affects 245,107 or more people. 
• Regarding the 15% capital gains tax, Mr. Buffett has repeatedly failed to address the interaction between capital gains taxes and corporate taxes. In theory, capital gains taxes are lower than the marginal rates because the investors economic gain has already been taxed (at least) once at the corporate level. Any distributions of those net gains (i.e. total gains less corporate tax paid) are taxed again in individual tax returns as capital gains. Using a very simplistic example, if the capital gains tax rate was 35% (same as corporate tax rate, and the highest individual rate), a $100 economic gain would result in an after tax benefit of $42.25 for the investor. $35 ($100 *35%) would be paid in corporate taxes, and $22.75 ($65*35%) would be paid in income tax. Therefore, the government will receive $57.75 for every $100 of economic gain generated by business activity. For the mathematically challenged, that’s a 57.75% tax rate on economic activity. This becomes infinitely more complicated due to the unwieldy US tax code, but the concept remains valid. Look to Europe to see the results of that level of taxation. Carried interest is a complex issue that we’re not qualified to comment on, but it’s an immaterial issue as it relates to the US debt problem. 
• The antipopulist.com is full of CPA’s and we still can’t figure out all these various taxes, deductions, exclusions and special rates. This has nothing to do with Mr. Buffett’s op-ed, but it speaks volumes to the unnecessarily complex, voluminous, out-dated and special interest laden US tax code.
• Mr. Buffett identifies who should pay more, but does not suggest how much more they should pay. 10% more, 25% more, 50% more, 100% more? This seems like a very important aspect of the debate. For the record, the government could take every last cent from those making over $1 million dollars (i.e. a 100% effective tax rate), and ignoring the devastating impacts of that property grab on incomes and the economy, that tax revenue would still not cover the single year deficit projected for 2011. 
• If he feels his tax contribution is too small, Mr. Buffett is free to write a check to the IRS. 
• Mr. Buffett fails to mention the impact a higher tax rate would have on his charitable giving programs. He’s pledged to give huge amounts of his fortune to charity – wouldn’t a higher effective tax rate take money away from that fortune, and therefore away from his charities? I’d like to hear Mr. Buffett’s views on who will make more effective use of his fortune, the US government or his preferred charities. If Mr. Buffett wanted to provide $100 million to improve education, who would he want spending that money – Congress and the Department of Education or the Bill and Melinda Gates Foundation? 
• Here is a summary of the IRS income tax data referenced above, we think it’s quite interesting:

Again, could Mr. Buffett afford to pay more in taxes? Absolutely. Would a sensible and reasonable increase in tax rates on those making over $1 million have devastating impacts on the economy? Probably not. Would that same increase make a noticeable dent in the budget crisis? No. Is it a political winner to scapegoat “millionaires and billionaires” while at the same time asking them to pay even more in taxes? Might be, but that’s why we’re here.