Friday, February 29, 2008

Delaying Tax Reform Delays Prosperity

How many southerners does it take to change a light bulb?

Actually, just one. However, it has long been a custom for gentlemen of the Confederacy to attend the changing ceremony and offer their recollections of the years of faithful service that the old bulb gave.

My favorite light bulb joke reminds me so much of West Virginia's attitude toward business tax reform -- 40 watts was good enough in Grandpa's day; 40 watts will do for ours.

"Unleashing Capitalism," Russell Sobel's collection of thought-provoking articles, makes it very clear that prosperity stops at the West Virginia state line. He has the pictures to prove it.

Some of the many reasons advanced in the book for our losing the battle of border warfare point to the state's taxation of businesses. And in this category, the business franchise tax and property tax are not really taxes at all -- they are instruments of punishment aimed at foolhardy capitalists.

Now that Sobel and his colleagues have exposed flaws in the business tax structure, the power brokers in state government have begun their defense of the status quo. This was not unexpected. But the defense they offer is pretty weak.

The party line defense is: If we cut business taxes now, the state just might need that revenue during an economic downturn in the future.

This defense for not cutting taxes works only when one condition has been met -- government spending has been trimmed to the bone, and there is nowhere else to cut. But such is not the case. Let's look at Clarksburg and Weston.

The state-owned, state-operated Veteran's Nursing Home and the public-private Stonewall Resort are two examples of the creative ways that our state wastes money. The state has no business running a nursing home, a mission that it proved it couldn't handle before the facility even opened. As a hotelier, the state had already lost tens of millions of dollars operating park lodges before dreaming up the Stonewall project.

If West Virginia politicians were farmers, they'd fertilize their fields with rock salt and then sit back and wait for a bumper crop of vine-ripened pickles and boughs of flossy sauerkraut. And when the crops predictably failed, they'd sow more salt.

We know that the business tax code is punitive. Toyota's incredibly successful engine factory in Putnam County owes its success to, in large part, special arrangements that allow for tax avoidance. The state tax code was the deal breaker -- no tax relief, no factory.

Before Toyota, we had the super tax credit model for picking winners. As I recall, this credit was the workaround for the notorious gross sales tax on business.

Whether you tax capital and inventory or a company's gross receipts makes little difference to the balance sheet. These types of taxes have the same effect in that they work against building the capital account.

Time and time again, we have seen substantial capital investment in plant and equipment as a result of the elimination (or very substantial reduction) of business taxes. Yet our state's leaders fail to comprehend the simple but obvious message -- reform the tax code for all businesses, and prosperity will follow.

My biggest concern regarding tax reform in West Virginia is the current notion that we must cautiously phase out a specific tax. This indicates to me that nobody in state government has a comprehensive tax plan. Such tentative phase-outs also can be translated as meaning that nobody understands the tax base well enough to even craft tax models for the future.

Business tax reform is the best way to create jobs. And it needs to happen sooner rather than later if we expect to keep the lights on.

Friday, February 8, 2008

Shapiro Brings Clarity to the Welfare State, Health Care

Book Review:

Is the welfare state justified?

Finally, there is a lucid answer to that question. I say lucid, because, in the past, the answer always has been given from the perspective of the bleeding-heart liberal or the "eat-cake" conservative.

The lucid answer that I refer to comes from the pen of Dr. Daniel Shapiro, professor of philosophy at West Virginia University. He has done a remarkable service for society with the publication of his new book "Is the Welfare State Justified?" (Cambridge University Press, 2007).

On seeing the book's cover, the first question I wanted Dr. Shapiro to answer was: Is the welfare state justifiable?

He dutifully answered me by defining the two most important social welfare programs that we have -- health care and retirement income. This is the first time that I have read anything regarding health and old age benefits wherein the author bothered with definitions. How novel!

Each of us will succumb to illness or injury in our lifetime, and we have come to expect medical care when we need it. The option of not helping the ill or the injured was settled long ago. We cannot stand idly by and watch others suffer.

Hippocrates offered pain relief to his patients by having them chew on willow bark. Today, the same drug (aspirin) is available over the counter. You may think my example as trivial. However, I chose aspirin for a reason. Going from doctor-prescribed herbs to self-medicating patients represents, at least in my mind, the quantum leap that has landed us in our current health care dilemma.

Once upon a time, there was one Hippocrates. Hence, health care was rationed as he could see only a limited number of patients. Today, we have Docs-in-a-Box available 24/7. Yet we believe health care is rationed too stringently. Is it?

Dr. Shapiro discusses the aspect of rationing health care in a thorough manner. But before diving in, he takes special care to educate the reader about what we refer to as private health insurance and government health care. We have neither private (market health insurance) nor government insurance (national health insurance). We have a hodgepodge system of health care options cobbled together as a result of federal and state legislation and state insurance regulations.

Make no mistake -- health care is rationed now and will continue to be rationed. Dr. Shapiro describes how both systems (market and national insurance) ration care and then makes his recommendation for the best plan.

"Is the Welfare State Justified?" also delves into the sources of retirement income. If we live long enough, we'll need some form of income subsidy. Should government (the taxpayer) bear the expense of old age benefits? Or should individuals (and their families) bear this responsibility?

Once again, the author points to a system that is neither a national plan nor a market plan. Our retirement plans have resulted from years of meddling with the tax code. And like my aspirin example, "if it feels good at the time, then chew on it" seems to be the way our government has dealt with the regulation and taxation of old-age income.

In the past 50 years, health care and retirement income have come to be viewed as entitlements. We know that Social Security and Medicare are bankrupting this nation. The situation is only going to get worse.

Medicare and Medicaid have survived this long on the kindness of cost-shifting their respective burdens to group health insurance policyholders. Social Security is failing based solely on demographics. We cannot tax today's youth enough to keep the Baby Boomers on the golf course.

Policymakers could right the ship in time before it sinks if they would consider Dr. Shapiro's analysis and recommendations. Because his arguments are based on the philosophy of social welfare, and not on the partisan politics of entitlements, Dr. Shapiro succeeds in understanding how to overhaul the welfare state.

By coincidence, I began reading "Is the Welfare State Justified?" just after re-reading "Theory of the Leisure Class" by Thorstein Veblen. Though written a century ago, Veblen understood exactly where society was headed. He coined the term "conspicuous consumption." High-priced goods and services sometimes are referred to as Veblen goods, meaning that people desire them more as their price increases. Thus, do you wonder why increases in health care costs outpace the general inflation rate?

I can only hope that our policymakers will read Dr. Shapiro's book. His insight on the philosophy of the welfare state outclasses anything that I have read prior.