In China, children learn smoking’s value early:

In dozens of rural villages in China’s western provinces, one of the first things primary school kids learn is what made their education possible: tobacco.

“On the gates of these schools, you’ll see slogans that say ‘Genius comes from hard work — Tobacco helps you become talented,’” said Xu Guihua, secretary general of the privately funded lobby group Chinese Association on Tobacco Control. The schools are sponsored by local units of China’s government-owned monopoly cigarette maker. “They are pinning their hopes on young people taking up smoking.”

Aren’t state-run businesses lovely?

China decided to create a tobacco monopoly in the 1980s when the industry supplied more than 10 percent of government revenue, said Wang Shiyong, the World Bank’s senior health specialist in Beijing. Today, tobacco contributes 6.7 percent, according to figures from Yang and Hu’s report.

It’s almost like the government has an interest in people smoking.

Greg Mankiw points out just how progressive our tax system is:

If you can remember only one fact, make it this one: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.

That’s from the Tax Policy Center, and I should also note that those are effective tax rates.

We can debate whether that rate should be higher, but it isn’t accurate to argue that the rich don’t pay a significant amount in taxes. They do, and they pay significantly more, whether measured as a percentage of income or in absolute terms.

It’s important to keep this in mind as we enter the 2012 campaign. We’re going to hear a lot more about how the rich don’t pay “their fair share.” Knowing the data helps make clear exactly what that means when used as a justification for higher taxes on the wealthy. This isn’t simply a case where the wealthy are paying an absurdly low percentage of tax revenues while the middle class and poor shoulder the burden.

“They don’t pay their fair share” isn’t an empirical claim. It’s a moral claim, and there’s a very high bar to clear when making that argument. Why isn’t nearly a third of their income fair and forty percent of income tax revenue for the top one percent fair? What percentage would be fair? By what standard do you define what is a fair percentage and what isn’t?

And that doesn’t even begin a much more immediate debate: is increasing taxes on the wealthy in order to fund a few more years of unsustainable government spending a desirable policy?

That phrase appeals to people because this recession is affecting the middle class and poor much, much more severely than it is the wealthy, and so placing more of the tax burden on them feels satisfying in some way—they’re going to be affected, too, just like us. But that doesn’t mean it’s the right thing to do morally, nor does it mean it’s the right policy.

I tend toward thinking that, long-term, we do need to raise taxes on the wealthy. But this must be a part of a much broader reform, which makes us solvent and successful in the future. This means substantially changing our entitlement programs so they are sustainable over the next century, not just the next decade. This means reforming our tax code with lower marginal rates, less exemptions, exclusions and deductions, and so it doesn’t require a tax professional to understand how much we owe.

Yes, higher taxes on the wealthy will likely need to be a part of comprehensive reform that makes us solvent. But it absolutely should not be used to paper over our structurally unsound spending for a few more years, nor as a campaign wedge and red meat.

It sure sounds like the Obama administration believe their “Buffet Rule” will pass:

Administration officials said Sunday night that they were not including any revenue from the Buffett Rule in Mr. Obama’s overall $3 trillion proposal, adding that it was more of a guiding principle the president will adopt as budget negotiations with Congress advance.
…
Under Mr. Obama’s proposal, $800 billion of the $1.5 trillion in tax increases would come from allowing the Bush-era tax cuts to expire. The other $700 billion, aides said, would come from a combination of closing loopholes and limiting deductions among individuals making more than $200,000 a year and families making more than $250,000.

So, they’ve made a proposal for a higher tax rate on individuals making more than a million dollars, but won’t include it in their tax proposal’s revenue estimates.

It’s sort of odd to say it’s “just math” when it’s not even a part of the calculation. Almost like there’s an entirely different kind of calculation going on.

Obama plans to pay for his jobs bill by raising taxes:

The chief provision announced by Lew would be to limit itemized deductions for individuals who make more than $200,000 a year and families that make more than $250,000, something the Obama administration has previously pushed to do through its budget proposals. Lew told reporters at the White House press briefing that this would raise about $400 billion.

The administration would tax the income investment fund managers make, known as “carried interest,” as regular income instead of as capital gains, which has a low 15 percent tax rate. This is another longstanding administration goal that has been resisted by Wall Street as well as some Democrats.

Raising taxes dampens whatever stimulus effects his jobs bill would have, and it makes it all but impossible that Republicans will support it.

Nice re-election campaign strategy, though. “We tried to fix it, but they wouldn’t let us.”

…Then it must be. Paul Samuelson, 1967:

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eight wonder of the world — compound interest. A growing nation is the greatest Ponzi game ever contrived.

But I suppose Paul Samuelson, too, is just a crackpot.

The Economist’s Schumpeter blog:

American companies are sitting on a gigantic pile of cash; Apple alone has $76 billion in the bank. Why won’t corporate America invest in America? It does not help that domestic demand is feeble, and that the global economy is in turmoil. But American politicians deserve some of the blame. Their unpredictability erodes confidence. The gulf between American business and the Obama White House is growing ever wider, as business-friendly insiders (such as Larry Summers, an economic adviser) leave the administration. Even more dangerously, the gulf between business and the rest of the country is widening: opinion polls show that American businesspeople are losing faith in their country even as ordinary Americans are losing faith in business.

I’ve heard anecdotes of very, very large banks that aren’t lending at all right now to not-insignificant companies due to market and political uncertainties. There’s very good reason to think that at least part of our economic weakness is due to it, and it’s only getting worse.

Michael Pento:

Krugman argued that inflation would address our debt problem by reducing our bill in current dollar terms and that the Second World War was a giant stimulus plan that actually worked. Thankfully, he added the refrain, “Hopefully we don’t need a world war to get there,” but I sensed a tinge of regret in his voice. After all, the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.

The truth is that wars are a miserable misallocation of capital and usually leave financial ruin in their wake. The US did not boom in the ’50s because we fought World War II, but because we resoundingly won. It was the byproduct of having an unscathed manufacturing base, solid infrastructure, an intact military, most of the world’s gold, and the only reserve currency.

Not all work is work you want. What you’re allocating capital toward matters.

S&P downgraded U.S. debt and now, apparently, Congress wants to strike back:

Rep. Dennis Kucinich (D., Ohio), a member of the House oversight committee, requested documents Tuesday from S&P’s parent company, McGraw-Hill Cos., seeking information on whether it could have benefited financially from the credit rater’s decision. Another Democrat, Massachusetts Rep. John Tierney, called on Chairman Darrell Issa (R., Calif.) to convene a hearing to investigate “the motivation and decision-making process” that led to S&P’s decision.

So, the federal government creates the credit rating agency oligopoly, and now when one of them dares to downgrade the federal government’s debt, they seek regulatory retaliation. Lovely.

Warren Buffet calls for higher taxes for those with over $1 million in income:

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

He cites his own effective tax rate from last year—17.4 percent—as an example of how the rich are under taxed and should, as others have phrased it, pay their “fair share.” His argument isn’t simply that the federal government needs higher revenues and the wealthy are a good source for tax revenues; he’s making a moral argument that they are not paying as much as they should.

There’s two immediate problems with this argument. First, Reihan Salam noted last year, the top 1 percent—household incomes over $1.2 million—were responsible for more than 40 percent of federal income tax revenue in 2007. It simply isn’t the case that low and middle income households are bearing the burden of supporting the federal government’s costs.

Second, AEI’s Alan Viard shows that to raise another $1 trillion over a decade by raising taxes on incomes greater than $1 million per year, the highest marginal tax rate—35 percent—would need to rise to 57 percent. The wealthy aren’t some sort of untapped source of revenue that we can just begin utilizing and paper over our long-term fiscal disaster, as some seem to think.

a tax increase on wealthy individuals may be a part of a solution to our deficit, but it isn’t the solution, nor is it a get-out-of-jail-free card for our entitlement programs and discretionary government spending. There are no easy choices for solving our fiscal disaster.

California’s high speed rail project is way over budget:

For the second time since voters approved California’s massive bullet train project, the state on Tuesday raised the total price tag for the first stretch by several billion dollars — and now the cost for the entire rail line is on pace to skyrocket to an eye-popping $60 billion to $80 billion or even more.

The project was supposed to cost $33 billion.

I hear it’s going to be really fast, though.

Jeff Bezos has a few excellent ideas for how to reform our patent system:

Much (much, much, much) remains to be worked out, but here’s an outline of what I have in mind:

1. That the patent laws should recognize that business method and software patents are fundamentally different than other kinds of patents.

2. That business method and software patents should have a much shorter lifespan than the current 17 years — I would propose 3 to 5 years. This isn’t like drug companies, which need long patent windows because of clinical testing, or like complicated physical processes, where you might have to tool up and build factories. Especially in the age of the Internet, a good software innovation can catch a lot of wind in 3 or 5 years.

3. That when the law changes, this new lifespan should take effect retroactively so that we don’t have to wait 17 years for the current patents to enter the public domain.

4. That for business method and software patents there be a short (maybe 1 month?) public comment period before the patent number is issued. This would give the Internet community the opportunity to provide prior art references to the patent examiners at a time when it could really help. (Thanks to my friend Brewster Kahle for this suggestion.)

Two and four are brilliant. Reducing patent lifespans to 3-5 years would instantly make our current patent problems much smaller, because not only would patents be invalidated rather quickly, but because their lifespan is so short, people would have much less reason to file them in the first place.

By the way, note the date on this.

The 11th Circuit Court of Appeals ruled today that the Obama administration’shealth care reform’s individual mandate is unconstitutional because it is not covered by the Commerce Clause:

“This economic mandate represents a wholly novel and potentially unbounded assertion of congressional authority: the ability to compel Americans to purchase an expensive health insurance product they have elected not to buy, and to make them re-purchase that insurance product every month for their entire lives,” the panel majority wrote in the 304-page decision.

This is the first appellate court to rule against health care reform, and it’s notable that one of two judges that ruled against it was appointed by President Bill Clinton.

The White House responded with a blog post:

The individual responsibility provision – the main part of the law at issue in these cases – is constitutional. Those who claim this provision exceeds Congress’ power to regulate interstate commerce are incorrect. Individuals who choose to go without health insurance are making an economic decision that affects all of us – when people without insurance obtain health care they cannot pay for, those with insurance and taxpayers are often left to pick up the tab.

Their logic is that the individual mandate—which requires all individuals to purchase health insurance under penalty of law—is constitutional under the commerce clause because it is an economic decision that affects others. That logic is laughably bad.

As I wrote earlier this year, if the only determinant for whether some activity can be regulated is if it has an economic effect on other people, then Congress can effectively regulate anything it chooses. In the aggregate, choosing not to purchase a computer will lead to higher prices for everyone else (because greater economies of scale cannot be reached), and less innovation (because companies have less capital to put toward R&D and less potential profit to justify developing new technologies). If we follow the White House’s logic here, Congress can force every individual in America to purchase a computer, or be fined, to ensure computers are affordably priced and innovation continues.

If that’s the case, there’s very little Congress can’t regulate or compel individuals to do. That’s what the White House is legally justifying. That’s absurd and, worse, it’s dangerous.

Marco Arment:

If someone threatens your small business with a patent lawsuit, it doesn’t matter whether the patent is valid. Because for you to prove that it’s invalid would take far more time and money than you probably have. The only sensible course of action, the path taken by almost everyone threatened by patent litigation, is to settle with the patent-holder as quickly as possible for whatever amount of money they demand.

In practice, therefore, an issued patent is a valid patent as long as the patent-holder doesn’t try to sue anyone too large. (And even the largest corporations usually settle.)

There’s been a rash of cancer drug shortages, including drugs used to treat leukemia, lymphoma, and testicular cancer. These shortages aren’t due to shortages of raw materials used to make them. They’re due to Medicare regulation introduced in the Bush administration’s Medicare prescription drug bill.

Ezekiel Emanuel—not exactly someone concerned about technocratic health care regulation—explains why:

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

There will always be unintended consequences when we attempt to control complex systems. Those regulations seem, on their face, to be perfectly logical, but what effect they will have is rarely understood before they are implemented.

Emanuel begins his editorial by quipping that Obama administration critics must be disappointed they can’t pin these shortages on Obama, but this is a perfect example of concerns critics—including me—had about the President’s health care reform. The PPACA’s main cost control mechanism is the Independent Payment Advisory Board (IPAB), an unelected board with the power to reduce Medicare payments to providers, and there is no reason to think they won’t fall into this same trap.

Emanuel seems blind to the similarities between these regulations introduced by the Bush administration and the IPAB; he says these shortages are caused by government interfering with natural market functions, yet he is a large proponent of an unelected board of technocrats with the power to decide what drugs and treatments are and are not supported by Medicare.

(Via Megan McArdle.)

The Wall Street Journal:

We think the larger problem with S&P, Moody’s and Fitch is that they make no distinction over how a nation balances its books—whether through tax increases or spending reductions. Like the International Monetary Fund, the raters care only about balance.

This takes too little account of the need for faster economic growth, which is the only real path out of a debt crisis. Britain’s government has earned rater approval for its fiscal consolidation, but its increases in VAT and income tax rates are hurting its tepid recovery. Letting the credit raters dictate tax increases is the road to an austerity trap.

For a family, how much income they need is determined by how much they want to spend. If they want a nice home, big television, decent car, and a yearly family vacation, then they need to make enough money each year to cover that and put away some each year for retirement. It’s relatively simple: how much money you need to make depends on how much you want to spend.

It’s an easy analogy to make for government—government, too, should make enough money each year to cover their expenditures. They need to be fiscally responsible just like every family in America. Therefore, since we’ve committed ourselves to this current level of spending, we should simply raise taxes to match it.

Good rhetoric, maybe, but government and families are not the same thing. Families make money because the heads of household are working—that is, creating value—and earning income as a result. For them, the only downside to making more money is that may mean less time with their family.

But governments do not make money, they take it from individuals and organizations to fund their operation. Taxes, of course, are necessary for government to function, but at best, taxes are a necessary evil. Taxes, then, aren’t the default answer, but the last resort—the solution when we have no other.

Even if we set aside the moral issues involved with taxation (see here for more discussion on that issue), though, there are others. Taxation inherently distorts society from where it would naturally be. The mortgage interest deduction, for example, encourages people to purchase homes rather than rent. The tax system also encourages employer-provided health insurance and discourages individual health insurance plans. Employer-provided insurance disconnects the individual from making cost decisions related to health care and thus has contributed to our rising health care costs.

There are numerous other examples as well; marginal tax rates can lead to perverse decisions related to work. That’s why, when trying to get our public finances in order, we must first consider whether our current spending programs are wise or not. If they aren’t, they should be restructured or eliminated. Then, if there is no other choice, tax increases should be considered.

Democrats are fond of saying that our current budget deficit is caused primarily by tax cuts passed by the Bush administration. That isn’t true, however—the current deficit is caused primarily by a reduction in tax revenue coupled with increased spending. Bush not only cut taxes, but happily signed an expansion of Medicare (that Democrats were all too happy with at the time), an increase in defense spending, and two wars. The issue here isn’t that he cut taxes; the issue is he cut taxes while also expanding government spending. That’s what’s irresponsible.

Moreover, the causes of our current budget deficit are not the causes of our long-term budget deficit, which is what’s really looming over us. Long-term, entitlement spending is the problem. Medicare costs, specifically, will continue to grow at a dangerous rate, and unless we get Medicare spending under control, we will go bankrupt as a nation.

The answer is not higher taxes. The answer is more responsible spending, and if we can’t get there without unacceptably harming the poor by reducing spending, then tax increases should be considered. But it isn’t the first solution. It’s the last resort.