H.R. 1 As Economic Policy Part 1 Considering The Bill As A Whole

The new Republican tax bill in 2017, H.R. 1, has been passed by Congress. In a series of posts, I will look at the likely economic impact on the bill, provision by provision.

Like any omnibus collection of different ideas, some are good and some are bad. In this first post, I'll address the combined impact of the bill as a whole.

At this level, the basic issues are twofold. 

First, H.R. 1 massively cuts tax revenues at a time when we need smaller deficits and more government investment in the economy. 

Second, H.R. 1 exacerbates economic inequality at a time when it is already dangerous high.

Combined Revenue Impact

H.R. 1 cuts taxes by an estimated $1.5 trillion over ten years. This is actually an underestimate. The loopholes in the bill cut revenues far more than a quick and dirty Congressional Budget Office (CBO) estimate can determine. And, many of the "expiring" provisions of the bill will be made permanent.

"Dynamic scoring" of the bill estimates that just shy of $500 billion of additional revenue over ten years will result from economic growth created by the bill. This is, at least, an order of magnitude too high and wildly optimistic. The empirical evidence flatly contradicts the notion that big tax cuts translate into economic growth. If anything, there is an inverse relationship between tax cuts and economic growth. And, as further posts in this series will demonstrate, many of the cuts have little or no economic development benefits and simply transfer wealth to the rich.

This is not what the U.S. economy needs.

The U.S. already has the second lowest tax burden relative to GDP of any nation in the OECD. Japan is lower only because much of its welfare state takes the form of employer provided job benefits as opposed to government spending. Excess levels of taxation are not what is wrong with the U.S. economy.

The U.S. also already has too high of a national debt and runs too much of an annual budget deficit. This tax cut increases this problem by titanic proportions. This increases interest rates, causes public debt to squeeze out private sector debt in competition for finite funds available for investment, undermines the creditworthiness of the United States government (which already took one credit rating hit when Republicans threatened a default on the national debt), and puts an undue burden on future generations at a time of a secular decrease in economic growth rates as technological gains plateau.

Further, reduced revenue will put pressure on increased government spending, and U.S. levels of public spending are already low by international standards. We don't invest enough in physical infrastructure like roads, bridges, the power grid, and the like. We don't invest enough in higher education. We have too many unmet health care needs and too many people in poverty. Our total government spending levels are also exaggerated by the fact that our military spending is far higher than any other country in the world, which implies that by international standards, our domestic government spending is even lower than a naive comparison of government spending as a percentage of GDP would imply.

The domestic example of Kansas, historical U.S. comparisons, and international comparisons beyond the OECD, all clearly show that a low tax, low government spending business model is detrimental to economic development, rather than encouraging economic development.

In general, reducing tax revenues and government spending at this time in the U.S. economy is bad policy.

Distributional Impact

H.R. 1 benefits the affluent tremendously, while providing little or no benefit to the less affluent. It will produce greater after tax income inequality.

The U.S. is already in an era of near record income inequality. The last time this happened, it triggered the Great Depression. The lack of shared participation  in economic growth has been a problem since the 1970s and this bill makes it worse.

In general, tax cuts for less affluent people put money into the economy because they increase consumer demand. These also increase funds available to invest in human capital and small businesses which are important drivers of economic growth. In contrast, increased consumption for the affluent is basically wasteful in term of overall economic well being (in addition to being a smaller share of tax cut wealth effects), the rich are already maximally invested in the human capital of their families, and there is no shortage of investment resources right now in the U.S. economy for either big businesses or the affluent.

Big tech companies and wealth individuals are sitting on hundreds of billions, if not trillions of dollars of cash that, in the current economy, they can't find anything worth investing in. The U.S. economy has a shortage of worthwhile investment opportunities that big business and the rich are willing to take a chance upon, not a shortage of funds to invest.

A winner take all economy also discourages a huge share of the workforce from even seriously trying to build businesses and wealth in an economy that is stacked against them, denying the economy their full efforts, and concentrating wealth in families that didn't earn that wealth or acquired it through mere luck and happenstance, means that the management of our available investment capital will be less wise.

Inequality also wastefully diverts money from genuinely beneficial consumption to gate keeping tasks and frivolous luxury spending that are of less value to our economy in ways that go beyond mere GDP than spending on consumption meeting more basic needs and simply pleasures and investments in human capital, by the less affluent.

And inequality has toxic political consequences, encouraging extremist ideologies closer to communism on the left and fascism on the right. We are already seeing this play out.

The political system should be mitigating inequalities driven by economic fundamentals as every other OECD economy does. Instead, this bill exacerbates them, make the tax bill itself unstable and weakening the political-economy generally.

India Doesn't Have Enough Civil Servants

Lately, there has been renewed interest in India’s lack of state capacity. One hardly need explain the dysfunction arising from this problem to the average Indian citizen. It is as pervasive and embedded as any other social, cultural or economic facet of Indian life. Yet, we continue to chug along and sometimes even manage to surprise ourselves—conducting free and fair elections for hundreds of millions of voters, or providing unique biometric identification to close to a billion people. So, it is not a complete failure.

Lant Pritchett famously labelled India a flailing state—one where “the head, that is the elite institutions at the national (and in some states) level remain sound and functional but that this head is no longer reliably connected via nerves and sinews to its own limbs.” . . .  

Almost all of India’s governance problems can find links to the lack of manpower in state services. India has only 12-15 judges per million compared to the US’ 110 per million. The immediate goal is to reach the law commission’s 50-judges-per-million recommendation. Similarly, India has about 129 policemen per 100,000 citizens—only Uganda fares worse. In order to meet the UN recommended ratio, India is short of half-a-million policemen. The situation for judges and the police also holds true for firemen, traffic police, garbage collectors, inspectors, engineers, bureaucrats, and so on.

From here. 

The author points to over-criminalization of what should be civil violations and obsolete bureaucracies as potential short term solutions, but I'm skeptical that this will matter much. Many better functioning states also have over-criminalization and obsolete bureaucracies, but fixing these things tends to be a trailing indicator of overall improvement, rather that a first line solution.

The elites may be functional in some respects, but they clearly aren't raising funds for and expending enough money on state administration, and that is quintessentially a problem at the top, and not in the detail.

Measuring Gerrymandering

Over the last few years, there has been an unprecedented outpouring of scholarship on partisan gerrymandering. Much of this work has sought either to introduce new measures of gerrymandering or to analyze a metric — the efficiency gap — that we previously developed. In this Article, we reframe this debate by presenting a series of criteria that can be used to evaluate gerrymandering metrics: (1) consistency with the efficiency principle; (2) distinctness from other electoral values; (3) breadth of scope; and (4) correspondence with electoral history. We then apply these criteria to both the efficiency gap and other measures. The efficiency gap complies with the criteria under all circumstances. Other metrics, in contrast, often violate the efficiency principle and cannot be used in certain electoral settings.

Nicholas Stephanopoulos and Eric McGhee, "The Measure of a Metric: The Debate Over Quantifying Partisan Gerrymandering", Stanford Law Review, Forthcoming (November 30, 2017).

H.R. 1 In A Nutshell

A 51 page summary from the Joint Committee On Taxation summarizes the most significant provisions of the House and Senate Amendment versions of H.R. 1 which a Conference Committee will begin to discuss on Wednesday in the hope of producing a final report by the end of this week and enactment into law before Christmas.

A 34 page paper by a team of 13 tax professions explains 32 major loopholes in H.R. 1. This suggests that its revenue costs will be far greater than anticipated by the Congressional Budget Office.

The Wall Street Journal rails against the restoration of the Alternative Minimum Tax in the Senate Amendment.

A tax professor writing an Op-Ed in the New York Times calls the tax breaks for passthrough tax entities the "Single Worst Proposal Every Made In The History Of The Income Tax."

The Senate Amendment creates marginal tax rates of 85% to more than 100% for some people.

Emily Dickinson's Lawless Cake

In life, Emily Dickinson was better known for her baking than her poetry (which she often composed on scraps of paper in the kitchen while baking). And, this one was one of her signature recipes.

Black Cake: 

2 pounds Flour—
2 Sugar—
2 Butter—
19 Eggs—
5 pounds Raisins—
1 ½ Currants
1 ½ Citron
½ pint Brandy
½ — Molasses—
2 Nutmegs—
5 teaspoons
Cloves—Mace—Cinnamon
2 teaspoons Soda— 

Beat Butter and Sugar together—
Add Eggs without beating—and beat the mixture again—
Bake 2½ or three hours, in Cake pans, or 5 to 6 hours in Milk pan, if full— 

The Library of America blog notes that the Dickinson family had several “lawless cake” recipes, and that Emily’s father “would eat no bread except that baked by her.” All I have to say is that 19 eggs is lawless indeed. So is the fact that, once baked, but before the brandy was poured in, this cake weighed almost 20 pounds. NB: The Washington Postpublished an updated version of the recipe in 1995, apparently more suited for “20th-century palates.” That one only calls for 13 eggs.

H.R. 1 Is Budget Busting And Handles Corporate Taxation Badly

While no 497 page tax bill is completely devoid of good ideas, on the whole, both the House and Senate versions of H.R. 1 which are now being hashed out in committee, are very bad bills. In this post, I'll focus on three problems with it (there are many more): the fact that it reduces revenues, the fact that it mishandles C corporation taxation, and the fact that it mishandles pass through entity taxation.

The two current versions of H.R. 1 reduce federal revenues by about $1,400 billion to $1,500 billion over ten years. 

Even with the most optimistic estimates of increased tax collections due to economic growth, it still increases the deficit by at least $1,000 billion.

There are public purposes of existential importance, like fending off a foreign invasion or fighting a civil war, which could very well be worth some combination of spending cuts and increased deficits elsewhere. 

But, reducing the tax burden on, for example, profitable, predominantly publicly held, frequently multinational corporations, slashing taxes on the repatriation of tax free foreign assets, and on heirs in families with net worths in excess of $11 million per couple (at least half of which is income that never has been and never will be subject to income tax of any kind), does not justify spending cuts or deficit spending of this magnitude.

Overall, the United States has some of the lowest combined tax rates in the OECD. Only Japan (where a lot of services provided by government are provided by employers as fringe benefits) and developing and third world countries is there less taxation than the U.S. relative to the size of the economy. High overall levels of taxation are not a problem with the U.S. economy.

There are problems with how we tax C corporations (overwhelmingly publicly held companies), but the solution of H.R. 1 is not the right one.

Graduated Corporate Tax Rates Make No Sense

One problem is that graduated tax rates do not now, and never had, made sense for corporations, since corporate income tells you nothing about the total income of its shareholders (upon which progressive tax rates are justified on the theory that increased income had diminishing marginal utility). A corporation with $50,000 income could be owned by a pauper or a billionaire.

Corporate tax rates should be a single flat rate and already are in the case of Personal Service Corporations established by doctors and lawyers for their practices, for example.

Double Taxation At The Corporate And Shareholder Levels Is A Problem, But H.R. 1 Is Not The Solution

Another problem is that it imposes double taxation, once at 35% at the corporate level, and another 20% for the highest income shareholders and 15% for most other shareholders with under $467,000 of income in the case of a married couple filing jointly and $415,000 for single shareholders (and more in the case of short term capital gains or "unqualified dividends") at the shareholder level at capital gains or "qualified dividends", for a combined top rate of 48% on corporate income that is realized at the shareholder level (44.75% for shareholders with under $467,000 of income for a married couple filing jointly). This compares to a top shareholder income tax rate of 39.6% on the ordinary income of individuals, trusts and estate.

The proposed reduction in the top corporate tax rate to 20% under both version of H.R. 1 brings the combined corporate and shareholder rates to 36% for shareholders in the 20% capital gains tax bracket and 32% for shareholders in the 15% capital gains tax bracket. 

The H.R. 1 Rate Is Too Low

The H.R. 1 rate of 20% is (unjustifiably) lower than ordinary income tax rates even when combined corporate and shareholder level taxes are considered. 

Parity for the combined rate would be reached at approximately a flat 25% corporate tax rate, which would be 40% combined for those in the 20% capital gains tax bracket (v. a 39.6% top personal income tax rate on ordinary income), and 36.25% for those in the 15% capital gains tax bracket.

There is no good reason to tax income at a lower combined rate because it was earned in a C corporation rather than a pass through entity or as wage or salary or other forms of investment income (e.g. interest on debt).

H.R. 1 Increases The Incentive To Retain Earnings To Defer Or Eliminate Shareholder Level Taxes

This encourages corporations to retain earnings or pay out earnings as executive compensation, rather than distributing it as dividends to shareholders, because that defers shareholder taxation indefinitely for shareholders who do not sell their shares and instead, either hold their shares until death (at which point all taxes accrued on untaxed capital gains in the shares are forgiven and not taxed to either the decedent or to the decedent's heirs at death or at any time in the future) or transfer them during life by gift (which does not trigger capital gains taxation but does not result in the abatement of taxes accrued on untaxed capital gains either).

Note also that a lack of dividends or capital gains does not mean that shareholders are denied an ability to use their stock wealth to finance consumption, because they can still take out margin loans against the stock without trigger capital gains taxation in most circumstances (so long as they don't default on the loans).

A strong tax incentive for corporations to retain earnings or to pay out earnings as executive compensation is also a problem because it means that shareholders don't have an opportunity to shift funds from the corporation that earned them (which may not be the use of the funds with the highest likely returns going forward) to some other investment that brings higher returns, leading to economic inefficiency and reduced productivity in the economy.

The concerns about tax deferral and inefficiency are present even when corporate and individual tax rate are fully integrated, to some extent, any time that retained earnings are taxed more lightly than distributed earnings.

A Higher Corporate Level Tax Rate Combined With Corporate and Shareholder Level Integration Is The Right Solution

The solution is to integrate taxes at the corporation and the individual level, not to reduce corporate level income taxes. Corporate income should be taxed at a tax rate equal to the top tax rate paid by its shareholders, and in practice, at the top individual income tax rate of 39.6%.

There are a several ways to integrate corporate and personal income taxes. Two of the most attractive are as follows:

Corporate Tax Integration With A Dividend Withholding Tax Model

One is to treat corporate income taxes as withholding tax from future dividends, with dividend payments distributed with a taxable amount equal to the actual cash distributed grossed up to reflect the fact that the cash distribution is net of a 39.6% withholding tax, and then to give shareholders a 39.6% withholding tax credit just as you would for wages.

This model works fine at the federal level, but doesn't extrapolate well to the state level, where there is not identity between the states where withholding tax credits are earned, and the states where shareholders pay their taxes. Also, if non-resident alien shareholders and charities are not allowed to benefit from refunds of the withholding tax, it prevents corporate earnings from going completely untaxed at that point because they have tax exempt owners.

Corporate Tax Integration With A Dividends Paid Deduction Model

An alternative means of integration, which isn't quite as mathematically perfect, but is simpler, is more easily generalized to state and local income taxation, and is already used for complex trusts (i.e. trusts that can choose between retaining and distributing their income from year to year), is to give corporations a deduction from corporate income for dividends paid just as they do for interest. 

This could be subject to a withholding tax when made to non-resident alien shareholders to prevent this U.S. source corporate income from escaping taxation entirely if distributed.

The Benefits Of Corporate Tax Integration

Either approach ends the inefficient economic bias in favor of physical or financial capital over human capital.

Either approach ends the ability to defer income taxation, in part, indefinitely by retaining earnings and not selling stock.

Either approach ends the macroeconomically inefficient bias in favor of retaining earnings.

Either of these corporate tax integration approaches also ends a strong bias in the tax code in favor of debt over equity financing of publicly held corporations, which is very transparent in the case of a deduction for dividends paid, and is present, although far less obviously, in the case of a dividend withholding concept corporate tax regime.

Either of these corporate tax integration approaches would greatly simplify corporate tax law, which contains a variety of complex, yet ineffectual, means of encouraging companies not to retain earnings.

The real drive behind the persistent pressure to lower tax rates on capital gains and dividends has been to reduce the compared corporate and shareholder tax rates relative to the single rate that applies to ordinary income. And, another plus of integrating corporate taxation at the corporate and shareholder levels is that it would take a lot of the pressure of the desire to have an irrational preference for capital gains in the tax code, which inefficiently prefers income from physical and financial capital over income from human capital.

Pass through taxation isn't broken and shouldn't be fixed.

Pass through taxation, which is employed by almost all closely held companies in the United States, (except small and medium sized closely held C corporations which pay all income for which corporate taxes can't be eliminated with tax credits or for which tax rates can't be reduced with lower graduated tax rates applicable to small C corporations, in compensation to owner-shareholders, and foreign owned C corporations which don't pay U.S. income taxes on their dividends and capital gains), is exactly what it should be from a tax policy perspective. Owners of passthrough entities are taxes in the same amount they would have been if they did their share of the entity's business themselves.

Tax breaks for the self-employed relative to wage and salary earners have no rational basis, and also ignore the fact that wage and salary earners almost always report all of their income and pay tax on it as they go through withholding, while self-employed pass through entity owners already routinely underreport their revenues, inappropriate take expenses which are not allowed by law, and often don't pay their taxes on time.

Tax breaks for the self-employed also inappropriately favor physical and financial capital relative to human capital.

The tax breaks for pass through entities in H.R. 1 are simply a give away to self-employed entity owners who are much more affluent than the general public, particularly in the House bill which provides a tax break only to entity owners taxed at marginal rates above 25%.

The pass through entity tax breaks in H.R. 1 take a system that isn't broke and breaks it in favor of the affluent.

The Limits Of Cheap Construction

FastCompany magazine features a new approach to building a decent quality house (basically a modern cottage) for just $20,000 of construction costs for the structure itself. It is a one bedroom, one bath house that would occupy half of a city lot and is too small to get zoning approval without a waiver from planning officials, probably well under 1000 square feet with no basement or garage. But, it turns out that there is a lot more that goes into a house than construction costs.

What would it actually cost to build one in Colorado on a for profit basis?

My estimates for Castle Rock in Douglas County, Colorado ($200,000 with $1,650 per month of housing related costs) and for Denver, Colorado ($160,000 with $1,400 of housing related costs) are spelled out below. 

The Castle Rock housing cost is more expensive than existing one bedroom apartments in Castle Rock by $519 a month, so it would make no improvement in housing affordability, even considering the benefits of owning versus renting.

The Denver housing cost would be pretty much identical to existing one bedroom apartment rents (with with a hedge against rising rents and an eventual path to own the home and pocket appreciation in its value over time).

Honestly, you can probably already get a one bedroom, one bathroom single wide manufactured house which is uglier and shoddier (with a shorter useful life and more risk of storm damage), for about the same price ($22,000) which would actually have fewer building code issues due to federal regulations prohibiting anti-manufactured housing building codes, for a comparable price without any major innovations in construction methods.

This is pretty much the rock bottom of what you could do in terms of single family home housing affordability in cities with jobs in abundance that is achieved through reduced construction costs, which you can see is pretty modest even with state of the art efforts to reduce construction costs. But, the real gold in the affordable housing game is to find a way to tweak zoning laws and building codes that are barriers to affordable housing.

In contrast, if these kinds of houses could be added as accessory dwelling units (granny flats) by existing Denver home owners in areas zoned only for single family homes, this could be an extremely affordable option ($950 a month) opening up one bedroom units that could rent for about $450 a month (32%) less than the existing average one bedroom rent. Renters in these accessory dwelling units would get a quality residence that looks nice and is sturdy in a decent existing neighborhood which is probably safe and has decent schools, that would only need minimal new infrastructure to meet the needs of its growing population.

It would expand diversity in residential neighborhoods, without creating a concentration of poverty (since more than half of residents in these neighborhoods would be existing single family home owners who are much more affluent) and would probably involve better than average tenant vetting (since owners are finding a single tenant who will live in their backyard). It would also fix a serious affordable housing shortage in Denver where housing costs are growing because new construction can't keep up with new people moving to Denver, and would put downward pressure on rents for all units in the city, including conventional apartments.

Castle Rock, Colorado as a single family home on a normal sized residential lot.

Build a house like that in Castle Rock, Colorado and your sticker price to a buyer purchasing it new is closer to $200,000:

* $80,000 for a water tap hook up

* $20,000 to build the structure

* $5,000 for a foundation 

* $2,000 per unit for xeriscaping

* $50,000 for the lot

* $12,000 for a realtor to sell it when you're done,

* $20,000 per house profit (10% which you need to in order to make it worth a developer's time)

* $8,000 per unit for development fees (to pay for municipal improvements like sidewalks, parks, storm sewer extensions, city road extensions and school infrastructure)

* $3,000 per unit for haggling with the building code inspector and getting a zoning variance for the size of the house and setting up an HOA which land use officials would require. 

There are big economies of scale if you build more in the HOA and entitlements department, but it is harder to get a zoning variance if you build a lot of units in one neighborhood, since suburbanites fear that affordable housing means crime and bad schools. 

Still this is affordable in an area where low end single family homes cost $300,000 to $500,000 each.  On the plus side, this solves your too small to get a mortgage problem (it isn't cost effective and there isn't a financing infrastructure in place to get a $16,000 mortgage).

Suppose that the buyer gets a 30 year fixed rate mortgage with 4% interest, no points, and a 5% down payment plus all closing costs (about $2,500) out of pocket.

Our buyer has to come up with $12,500 ($10,000 down and $2,500 closing costs), roughly a full three month emergency fund's worth for someone with an income high enough to afford it.

You could get an owner's monthly payment for buyers with good credit down to $1,650. This breaks down on a monthly basis as:

* $955 principal and interest

* $100 property taxes

* $100 homeowner's insurance

* $140 gas and electric bills

* $115 internet service

* $  45water, sewer, and trash pickup with xeriscaping

* $  50 HOA dues

* $145 allowance for modest home and xeriscape landscaping maintenance

This is quite a bit more than the average rent for a one bedroom, one bath apartment in Castle Rock of $1,131 a month.

A working class couple holding down one full time minimum wage job ($10.40 per hour in Colorado) at $20,800 per year would make $41,600 per year combined (a lower middle class single person working full time at $20.80 per hour would be in the same position). A couple (or individual as the case might be) could afford that monthly payment.

There'd be no room for kids beyond maybe on infant though, but modest income empty nesters or young couples or same sex couples or single people in their 20s or 30s, could be good fits to the situation.

Denver, Colorado on half of a normal residential sized lot.

Build a house like that in Denver, Colorado and your sticker price is closer to $160,000, because the land is more expensive, but the infrastructure is in place and you wouldn't need an HOA.

* $100,000 for the lot

* $20,000 to build the structure

* $5,000 for a foundation 

* $2,000 per unit for xeriscaping

* $12,000 for a realtor to sell it when you're done,

* $16,000 per house profit (10% which you need to in order to make it worth a developer's time)

* $5,000 per unit for haggling with the building code inspector and getting a zoning variance for the size of the house. 

You could cut the 5% down payment and closing costs combined to about $10,500 ($8,000 down and $2,500 closing costs), again the entire emergency fund of a family that could afford it.

You could get the monthly cost to about $1,400 a month (no HOA and a smaller principal and interest payment) which includes some payment of principal on the mortgage every month and hedges against Denver's rapidly rising rents with a fixed rate mortgage. 

This compares to an average rental cost for a one bedroom apartment in Denver of $1,390 a month, pretty much the same cost as renting.

It might be possible to afford with this a combined income of $34,000 a year, which is possible on two minimum wage jobs (on 40 hours a week and one 25 hours a week), or one $17 an hour full time job. 

This would be very competitive with rent for a one bedroom apartment for a working class couple or lower middle class individual.

Denver, Colorado as a Granny Flat rented by the existing home owner.

The economics would change dramatically if Denver allowed owners of home currently zoned single family to build accessor dwelling units of this size with straight zoning on their lots either for family, or to rent, financed by the existing home owner with a home equity loan on the existing home for the entire amount.

It turns out that affordability is all about leveraging the sunk costs of existing infrastructure and maximizing the efficiency with which we use valuable city land (which is valuable precisely because it is developed).

Total cost: $40,000

* $20,000 to build the structure

* $10,000 for new utility hookups (water, sanitary sewer, natural gas, cable, electricity)

* $5,000 for a foundation 

* $2,000 per unit for xeriscaping

* $2,500 per unit for zoning and building compliance, getting a new mail box, etc.

* $   500 HELOC charges

The monthly additional principal and interest payment would be $190 a month, and once you add additional property taxes and insurance costs, and an allowance for additional maintenance you are up to maybe $240 a month, add $560 a month for utilities for the new units, and the owner's marginal monthly cost for the new unit is $800 a month.

The owners might very well be wiling to rent this one bedroom, one bath stand alone unit in their backyard for $950 a month, netting a profit of $1,800 a year plus all principal payments on the loan and increasing the value of the owners' home in the long run by at least $40,000 for no significant out of pocket costs not financed by the rent. This is an investment many homeowners in Denver would be happy to make. It would also potentially facilitate housing an extended family since as an adult child who still lives at home, or a parent or parents living with their children on a pretty affordable basis.

This compares to an average rental cost for a one bedroom apartment in Denver of $1,390 a month, so it would be much more affordable (32%) than existing market rent rentals.

This would be challenging to afford for working class individual holding down a full time minimum wage job ($10.40 per hour in Colorado) at $20,800 per year. Ideally, a renter would have at least $26,000 a year of income which would imply a full time job at $13 a year, which is still very much a working class job in Colorado. Alternately, you could have have a couple holding two part-time minimum wage jobs each working 25 hours a week, or perhaps one working 30 hours a week and the other working 20 hours a week, which would be very doable.

UK v. US Legislative Productivity

The parliament in the U.K. passes something on the order of 30 to 40 statutes in a two year session. In the 1970s, it was closer to ca. 80 per two year session.

About three-quarters of those bills are "government bills" sponsored by the Prime Minister and his or her cabinet. Only about a quarter of the bills that pass are sponsored by individual legislators as opposed to as part of a cabinet program of legislation. Only about one in 100 individual legislators gets legislation passed in a given session.

Keep in mind that the parliament in the U.K. is serving, for England at least, as not only the equivalent of Congress in the U.S., but also as the equivalent of a state legislature, and is also serving some of the roles served by local governments in the U.S. because local governments in the U.K. have far less autonomy than in the U.S.

Yet, Congress passes 300 to 600 or so bills per two year session, and a typical state legislature passes hundreds of bills per year, and local governments that have autonomy lacking in the U.K. also pass a significant amount of legislation. Taking the 114th Session of Congress as an example, many of those bills are trivialities, but far more than 30-40 of them involve matters of substance. Fore example, by my count, there were 100 bills passed in the 114th Session that were more than extensions of existing programs, symbolic and naming legislation, directions regarding how administration discretion should be authorized, or appropriations, and were instead substantive legislation.

Apparently there are alternatives to parliamentary legislation in the U.K. such as "statutory instruments or Orders in Council" and government agencies simply have more authority than in the U.S., but it isn't as if the United States does not empower its agencies to pass regulations and its heads of government to pass executive orders.

Cepholopods!

Octopus mural at the entrance of MSKU - Faculty of Aquaculture (in Turkey). 

Credit: Ketrina Yim — with Josh Sommerfeld andSonia Margot Huambachano Castro.

Quote of the Day

“Sexual harassers for the Second Amendment” isn’t a compelling cultural message. If you make vile people your champions, you can’t be surprised if Americans begin to associate the cause with its advocates. . . . An angry, defiant, and dishonest credibly accused child abuser is a disaster, a walking commercial for the other side. His one vote out of 100 simply isn’t worth the cost.

From David French at The National Review (a magazine of conservative opinion).

Not Giving Up Yet

I’ve made it pretty clear I take a dim view of the prospects for this liberal democracy of ours over the next generation or so.

- Razib Khan 

He's certainly not the only pessimist out there. And there is absolutely reason to feel that way.

In Poland, 60,000 neo-Nazis marched in its streets on its independence day. This dark movement has also made gains in Czechia, Hungary, and France. The U.K. has voted to leave the E.U. Spain's reaction to the Catalan independence is little more than naked brutality. A Nobel peace prize winner who attained political power after decades of repression has launched a campaign of mass rape, genocidal murder and ethnic cleansing directed at one of Burma's ethnic minorities. North Korea has brought us to the brink of a nuclear World War III. There are slave markets again in Libya. Even as ISIS is almost defeated in Iraq and Syria, the movement it represents is thriving and deadly in the African Sahel. Most of the revolutions of the Arab Spring failed and left repressive dictatorships in place in their wake.

In American politics, the madmen have seized control of the asylum. Bizarro world nut cases who are detached from reality and viciously hateful like Donald Trump and Roy Moore win support from the Republican grass roots. The Republican herd chases all manner of policies long proven to be just plain wrong as a matter of empirical evidence and so many of them really are morally deplorable. The NRA's grip on our nation's politics is unshaken by a rising tide of mass murders. Solid science is stubbornly dismissed in policy making, foxes are placed everywhere to guard the hen houses, and the involvement of Russian autocrats in the highest level of the current administration is shocking.

Despite every reason for pessimism, deep down, the hope is still burning. Liberal democracy can't afford to rest on its laurels, but necessity is driving a steely determination to fight back. We know what the promised land looks like and aren't willing to abandon it. We know what works and aren't divorced from reality. We are holding together an incredibly diverse coalition as the right fractures despite its homogeneity.

We aren't winning every battle, but we are winning some elections that have long seemed impossibly out of reach and are winning legislative battles by turning the handful of establishment Republicans who have had enough of this insanity. Saudi Arabia's recklessly bold new crown prince is taking on his nation's religious conservatives knowing that they are holding his country back. The military in Zimbabwe is ousting a dictator. Technology is continuing to develop and it has a liberal bias. Years of judicial appointments are restraining Trump's effort to run roughshod over legal and political norms. The ranks of the secular are growing, while the ranks of the religious, especially white Christians, are waning.

Long before the Civil War, the North was in a dominant position over the South, because the productivity advantage that it developed from water wheels grossly outmatched what the South attempted to gain with slave labor. Something similar is true today. The left may have a slight popular vote majority that gerrymandering and vote suppression can overcome. But, in terms of economic power, the vastly more economically productive blue cities tower over the economically stagnant red rural areas. And, ultimately, the Marxists are right in noticing that economic power usually prevails politically in the end.

They say that it is darkest before dawn. So far, I'm still willing to believe that.

(And, to be clear, I understand that Razib is no liberal. But, he does recognize the virtues of liberal democracy, another thing entirely, as so many on the right these days do not.)

Stray Bankruptcy and Insovlency Ideas

I've noted some of these things before, but I'm jotting down some stray ideas on bankruptcy and insolvency law reform in one play without a lot of elaboration and support as a reminder to follow up on them in greater depth at some point.

1. There are certain classes of debt that should be subordinate:

a. Exemplary damages.
b. Default interest in excess of non-default interest rates or statutory interest rates where no non-default interest rates is stated.
c. Late fees.
d. Civil and criminal fines.
e. Penalties such as tax penalties.

Basically, everyone should have what their basic obligations are paid before anyone gets something extra and there should not be an incentive to burden defaulting debtors which could actually lead to a tipping point that sends them into insolvency or bankruptcy simply for the strategic reason of getting ahead of other creditors.

2. Debts owed to insiders should be subordinate to debts owed to outsiders harmonizing the law of preferences and CUFTA and common law rules. This would still be prior to the statutorily subordinated debts mentioned above.

3. Trade credit of businesses should have priority over long term debt, not just selected wage and services debts.

4. Limited liability entities, at least if they are publicly held or subsidiaries or affiliated of publicly held companies, should be required to be bonded as to trade creditors so that only long term creditors are taking credit risk and are doing so consciously. All limited liability entities should also be required to have adequate insurance determined in some formulatic way.

5. Ordinary income tax debt should not have priority over other creditors. Tax priority ought to be limited to taxes subject to perfected liens, property tax liens, and withheld taxes where there is a trust fund obligations (e.g. withholding taxes on employees).

6. The non-dischargeability of student loans under current law is too severe. It should not apply to loans to attend schools that are unaccredited during attendance or to loan balances not yet repaid for schools that lose their accreditation before they are paid in full. Loans for attendance at accredited schools from which the student graduates should lose their exemption from discharge at the end of the originally contemplated amortization period of the loan. The standard for hardship discharges of student loan debt should be lower in cases where the student did not graduate and in cases where the student did not obtain licensure and/or employment in the student's chosen field following a pre-professional course of instruction. For example, the hardship standard should be lower for someone who does not pass the bar exam following law school than for one who does.

7. Cram downs of personal residences and of personal vehicles should be allowed in personal Chapter 11s and in Chapter 13.

8. There should be a streamlined reorganization process for Chapter 11 reorganizations that extinguish all equity, extinguishes all subordinated debt if it would not reasonably have been paid in a Chapter 7, and converts non-trade credit general creditors into equity holders, that does not disturb the operations of the company at all.

9. The amount of future income contributions to a bankruptcy estate that are required should generally be fixed at a certain percentage of income for a certain period of time. To mirror non-bankruptcy law, an amount equal to 25% of income in excess of 30 hours a week at minimum wage (the maximum wage garnishment for ordinary debts) for three years (the low end of existing Chapter 13 plans) should be normative, with exemptions more or less identical to wage garnishment exemptions, generalized to self-employment. There might be exceptions to including future income, for example, for disability, but they should be fairly narrow. This might greatly reduce the distinction between Chapter 7 and Chapter 13.

10. It should be easier to declare non-dischargeable debts not discharged than the strict deadlines and definitions and standards of proof of current law.

11. A new chapter should be added to allow a stay to be obtained by insolvent probate estates.

12. Exemption from discharge for fraud debts should be limited to out of pocket losses and not a benefit of the bargain measure.

Gun Ownership Rates And Well Regulated Militias

Gun Ownership and Conscription

Four of the five countries with the highest civilian gun ownership rates in the world (Yemen, Switzerland, Finland and Cyprus) have mandatory military service for men. So does Austria, which is also in the top ten. In these countries, the link between the existence of a "well regulated militia" and bearing arms is direct and obvious.

Among countries without mandatory military service, the rates of civilian gun ownership per 100 residents are (numbers eyeballed from chart above):

* United States 89

* Saudi Arabia 35

* Iraq 34

* Uruguay 32

* Canada 31

Only four countries in the world without military service have even one-third of the civilian gun ownership rates of the United States.

Gun Ownership and The Death Penalty

There is considerable overlap between the countries with the highest gun ownership rates and those with the most executions per capita (source data available to download here). The raw numbers of executions per country in 2016 are as follows:

1. China 1,000s
2. Nigeria 527
3. Pakistan 360+
4. Bangladesh 245+
5. Egypt 237+
6. Thailand 216
7. Cameroon 160+
8. Iraq 145+
9. India 136
10. Lebanon 126
11. Zambia 101
12. Democratic Republic of the Congo 93+

13. Sri Lanka 79+
14. Viet Nam 63+
15. Indonesia 60+
16. Somalia 60 (Puntland 45; Somaliland 8; and Federal Government of Somalia 7)
17. Algeria 50
18. Kuwait 49
19. Tunisia 44
20. Saudi Arabia 40+
21. Malaysia 36+
22. USA 32
23. Mali 30
24. United Arab Emirates 26
25. Kenya 24+
26. Palestine (State of) 21, Hamas authorities, Gaza
27. Sudan 21+
28. Tanzania 19
29. Ghana 17
30. Jordan 13
31. Niger 11
32. Zimbabwe 8
33. Singapore 7+
34. Morocco/Western Sahara 6
35. Liberia 5+
36. Sierra Leone 5
37. Afghanistan 4+
38. Belarus 4 (Sole European Country to execute anyone in 2016).
39. Qatar 4
40. Barbados 3
41. Laos 3+
42. Myanmar 3+
43. Japan 3
44. Ethiopia 2
45. Maldives 2
46. Taiwan 2
47. Trinidad and Tobago 2
48. Libya 1+
49. Guyana 1
50. Kazakhstan 1
51. Malawi 1
52. Papua New Guinea 1
53. Iran +
54. North Korea +
55. South Sudan +

Policy Differences Dramatically Impact Gun Homicide Rates

From here.

Local Government Involves Real Money

The annual budget of the City and County of Denver is larger than the annual budgets of 90 countries (counting autonomous dependencies separately). There are about 137 countries with larger annual budgets.

Immigrants Save Dying Rural Areas

Immigration isn't just the solution for rust belt cities. It also revitalizes dying rural areas.

2017 Denver Election Results

All of the ballot issues facing Denver voters in 2017, including Issue 300, the Green Roofs initiative, a long list of bond measures, and a name change for a Denver government department all passed.

Issue 300, an initiated ordinance won 52% of the vote. Referenda 2A to 2H each got more than two-thirds of the vote.

In the four Denver school board races the outcomes were as follows:

"Reformer" Barbara O'Brian won re-election in the at large race with 42% of the vote in a three way contest against a teacher's union backed candidate, Robert Speth, and another challenger, Julie Banuelos.

In District 2, incumbent "reformer" Angela Cobian defeated Xochitl "Sochi" Gaytan with 54% of the vote.

In District 3,  Carrie A. Olson, backed by the teacher's union, defeated incumbent "reformer" Mike Johnson with 52% of the vote.

In District 4, Jennifer Bacon, backed by the teacher's union, defeated incumbent "reformer" Rachele Espiritu and Tay Anderson, a teenager who just graduated from high school, with 43% of the vote in the three way race.

The U.S. Department of Defense System For Developing New Weapons Sucks

Richard B. Levine provides a brief but useful history of the many failures and rare successes of the U.S. Department of Defense in developing new weapons systems in the last several decades.

It is an ugly history of projects that are over budget, behind schedule, and terminated at the cusp of production or with greatly reduced numbers of units produced that drive up per unit costs dramatically.

The present procurement process is pocked by the cancellation of new weapons on the cusp of production. This has resulted, since the beginning of this century, in dead-weight losses approaching $60 billion, which equates to hundreds of billions of dollars of planned and expected programs that the U.S. military never fielded. 

Examples of cancelled programs include the XM2001 Crusader howitzer: $2 billion was spent before cancellation in 2002; the Crusader was to be superseded by the proposed XM1203 non-line-of-sight cannon; it, too, was cancelled, in 2009, after expenditures of at least $18 billion in development and termination costs, including the cancellation of its sister, FCS vehicles. In all these new programs, not one operational unit was fielded. 

The RAH-66 Comanche, begun in 1982, was terminated in 2004 after no operational helicopters were produced; program costs exceeded $6.9 billion, plus a half-billion dollars in termination fees that the government was obligated to pay the prime contractors. The Comanche was superseded by the development of the ARH-70 Arapaho, which, too, was not produced, despite the expenditure of millions. 

Other important programs such as the F-22 were terminated after very small, inefficient buys. 750 Raptors were originally planned to cost $26.2 billion; the program was cancelled after 187 operational aircraft were built at a cost of over $67 billion. The Zumwalt-class was to have been a 32-ship program; this was reduced to a procurement of three vessels in 2009, thus requiring that the development costs of $9.6 billion be spread over just three ships. Total program costs, for the three ships, stand at $22.5 billion, though per-ship costs were estimated originally to be approximately $2.5 billion, given a full program buy.

The list is certainly not comprehensive. 

The Sea Wolf attack submarine program was terminated after a greatly reduced purchase relative to the original plan. The Marines have struggled to field a new armored amphibious personnel carrier for decades. A suite of new XM small arms for the Army was cancelled. Most of the mine sweeping fleet of the U.S. Navy was dispensed with before the replacement Littoral Combat Ship modules were in service. The B-1 bomber program was cut short at far fewer units than planned. A nearly operational combat drone equivalent to fighter aircraft has been proven for both aircraft carrier and Air Force versions.

We can get far more for our money as a nation with our defense dollars than we do.

Video Recordings And Crime

Commercial Video and Crime

Someone shot and killed three people, seemingly at random, in a Walmart in Thornton, Colorado yesterday evening.

Because the store and its parking lot are covered with cameras, primarily intended to catch shoplifters, we can say with great confidence that the man arrested, a 47 year old man by the name of Scott Ostrem, is very likely the man who committed the shooting, even though this is one of the very rare cases where a multiple homicide shooter did not die in the act and was not captured at the scene of the crime.

His actions from the time he entered the store, to the shooting in the store, to his departure from the store in his vehicle, were all caught on camera, and the quality of security video has increased greatly from the days when it was introduced.

Whether or not Ostrem is guilty of a homicide crime, and which homicide crime he is guilty of, may depend upon a potential insanity defense and questions of the nature of his intent. But, there will be no reasonable basis upon which to doubt that he was the shooter whose firearm killed the three victims.

Dash Cam Video And Law Enforcement Liability

Video recordings are also significantly increasing the extent to which law enforcement officers are prosecuted and sued for crimes, even when they lie about the facts. For example, as the official synopsis of an opinion in the United States Court of Appeals for the 9th Circuit yesterday explained:

The panel held that in this case, a jury could reasonably conclude that Higgins could have sufficiently protected himself and others after Zion fell by pointing his gun at Zion and pulling the trigger only if Zion attempted to flee or attack. Although Higgins testified that Zion was trying to get up, the panel determined that in light of the video footage to the contrary, the issue of whether Zion attempted to flee or attack involved a dispute of fact that had to be resolved by a jury.

The relevant portion of the opinion itself says (legal citations omitted, emphasis added):

Plaintiff doesn’t challenge Higgins’s initial nine-round volley, but does challenge the second volley (fired at close range while Zion was lying on the ground) and the head stomping. By the time of the second volley, Higgins had shot at Zion nine times at relatively close range and Zion had dropped to the ground. In the video, Zion appears to have been wounded and is making no threatening gestures. Lopez Video 3:04. While Higgins couldn’t be sure that Zion wasn’t bluffing or only temporarily subdued, Zion was lying on the ground and so was not in a position where he could easily harm anyone or flee. A reasonable jury could find that Zion was no longer an immediate threat, and that Higgins should have held his fire unless and until Zion showed signs of danger or flight. Or, a jury could find that the second round of bullets was justified, but not the head-stomping. 

Defendants argue that Higgins’s continued use of deadly force was reasonable because Zion was still moving. They quote Plumhoff v. Rickard: “[I]f police officers are justified in firing at a suspect in order to end a severe threat to public safety, the officers need not stop shooting until the threat has ended.” But terminating a threat doesn’t necessarily mean terminating the suspect. If the suspect is on the ground and appears wounded, he may no longer pose a threat; a reasonable officer would reassess the situation rather than continue shooting. This is particularly true when the suspect wields a knife rather than a firearm.2 In our case, a jury could reasonably conclude that Higgins could have sufficiently protected himself and others after Zion fell by pointing his gun at Zion and pulling the trigger only if Zion attempted to flee or attack. 

Higgins testified that Zion was trying to get up. But we “may not simply accept what may be a self-serving account by the police officer.” This is especially so where there is contrary evidence. In the video, Zion shows no signs of getting up. Lopez Video 3:01. This is a dispute of fact that must be resolved by a jury.

[2] It may be that, once on the ground, Zion had dropped the knife. Whether the knife was still in Zion’s hand or within his reach, and whether Higgins thought Zion was still armed, are factual questions that only a jury can resolve.

In the days before video of these incidents was frequently available, this excessive force lawsuit would very likely have been dismissed on the strength of the law enforcement officer's sworn lie in videotapes that the trial court had apparently sealed.

Even with video, the trial court judge granted summary judgment in favor of the police officer in the face of video evidence flatly contradicting the officer's testimony:

What happened next is captured in two videos taken by cameras mounted on the dashboards of the two police cruisers.1 Zion is seen running toward the apartment complex. Lopez Video 2:58. Higgins shoots at him from about fifteen feet away. Higgins Video 3:25. Nine shots are heard and Zion falls to the ground. Lopez Video 2:54. Higgins then runs to where Zion has fallen and fires nine more rounds at Zion’s body from a distance of about four feet, emptying his weapon. Id. at 3:00–03. Zion curls up on his side. Id. Higgins pauses and walks in a circle. Id. at 3:05. Zion is still moving. Id. at 3:00–12. Higgins then takes a running start and stomps on Zion’s head three times. Id. at 3:11–20. 

Zion died at the scene. His mother brought suit under 42 U.S.C. § 1983, claiming Higgins used excessive force. She also claims Higgins deprived her of her child without due process. She raised a separate substantive due process claim on Zion’s behalf, municipal liability claims and various state law claims. The district court granted summary judgment to defendants on all claims.

[1] The videos can be viewed at https://www.ca9.uscourts.gov/media/ 15-56705/evidence/Lopez (Lopez Video) and https://www.ca9.uscourts. gov/media/15-56705/evidence/Higgins (Higgins Video).

The appellate opinion also ordered that: "The videos—Exhibits A and B—shall be unsealed."

The simple truth is that the trial judge in this case (Central District of California District Judge James V. Selna) to whom the case has been remanded, a George W. Bush appointee, has no business serving as a judge in this case after ignoring the fact that two video recordings flatly contradicted the police officer's testimony and nonetheless finding his testimony to be credible. This dishonest and reprehensible conduct by judges in cases involving police officers, is, unfortunately, all too common.

The Tax Cut and Jobs Act (H.R. 1): The Estate Tax Provisions

House Republicans have released the full text of their tax bill, a good summary of which is available at the Tax Foundation.

In the area of estate planing, the bill increase the exemption from the estate tax, which is currently $5.49 million for 2017 per person, per lifetime for taxable gifts and all assets owned at death (for estate tax purposes) combined, with unused portions inheritable by a surviving spouse, to $10 million (indexed for inflation) for the years 2018 through 2023. After that the estate and generation skipping transfer tax are abolished and only a gift tax with a $10 million lifetime exclusion remains. The step up in basis of capital assets at death remains.

So, there is a tax break for heirs of estates of more than $11 million (which is 100% for estate of less than $20 million) for six years, followed by a complete elimination of the estate tax for people who die in 2024, if Congress doesn't change its mind before then.

Since indefinite deferral of rolled over capital gains from real estate are retained and the step up in basis at death is retained, this means that a married real estate investor can make up to $20 million of capital gains from real estate investments in a lifetime, entirely tax free, and pass those gains onto his or her children entirely tax free who can the liquidate the real estate and spend it any way that they like.

For the vast majority of Americans, who expect to have a family net worth of under $11,000,000, the new estate tax law changes nothing.

The incentive to make charitable gifts from large estates is further reduced.

The threshold at which it starts makes sense from a tax perspective to make gifts during life rather than at death (which I call the transition from the "Scrooge" regime to the "Santa Claus" regime) shifts from about $14 million of net worth to about $25 million of net worth.