Archives for October 2009

Enviros’ Deafening Silence on the Estate Tax

(A previous version of this article appeared in The Christian Science Monitor.)

The Obama administration aims to prevent the demise of an institution that encourages the destruction of wildlife habitat and open space. And in this legislative battle, the major environmental organizations are nowhere to be found.

At issue is the notoriously perverse incentive that forces people to sell their pristine land to developers: the estate tax.

If you own land, a business, or other high-value assets, when you die the government may take a substantial portion of that for itself, depending on the total dollar amount the assets. In the past, the government would allow one’s heirs to keep up to $600,000 of the assets, and slap a 55 percent tax on anything above that amount. Beginning in 1998 the exemption started to rise with each new year; currently it is $3.5 million.

It is scheduled to be completely phased out in 2010 and then permanently reinstated at the $1 million exemption level in 2011 when the Bush tax cuts are due to expire. Supporters of death-tax repeal are hoping that a zero death tax in 2010 would result in political support for permanent repeal. But if the Obama administration gets its way, those hopes will be dashed.

The administration has proposed not completely phasing it out in 2010 after all, which would quash any political momentum for repeal. Instead, the $3.5 million exemption level would be maintained in 2010 and thereafter. Congress still needs to act on this – expected by the end of 2009.

One of the most sinister effects of the estate tax is the needless loss of millions of acres of farmland, forestland, and wildlife habitat. When a landowner dies, his or her heirs are often shocked to find out that they must pay huge sums to the government within nine months of the death, based on the value of the land. To pay the money, they are typically forced to sell the land – often to developers.

A particular problem is the breakup of contiguous tracks of land, which are necessary for larger animals to forage and roam.

A 2000 study by the U.S. Forest Service’s Southern Research Station found that about 1.3 million acres per year of forestland had to be sold to pay the estate tax, and of the land sold, 29 percent was developed or converted to other uses. And 2.6 million acres of trees are chopped down each year to pay the estate tax. To be sure, those acreage numbers now could be lower because of the gradual phase-out of the estate tax, but in 2011 if the estate tax is reinstated, the numbers will likely shoot up again.

One would think the major environmental organizations would be clamoring for the permanent repeal of the estate tax.

But this is not the case. Most such organizations are silent on the issue. Some, such as Friends of the Earth, even support the estate tax. A spokesperson there told me that heirs would sell their land to developers anyway, even if there were no estate tax.

While some selling still would take place, the question is, would more selling be going on with the estate tax, or without it? It’s the former. After all, the tax gives most families no option but to sell. Without the tax, a large percentage of those families undoubtedly would choose to keep and preserve their land.

The FoE spokesperson also noted, presumably with a straight face (we spoke over the phone), that the estate tax encourages conservation (!) through conservation easements. These are where landowners get some tax relief in exchange for preserving their land. It is certainly plausible that an easement could induce some heirs to preserve their land, who otherwise would have sold it if there were no estate tax. But conservation easements are complex undertakings; most landowners and heirs do not go through the time and expense of setting them up. The result: far more land subject to the estate tax is sold than placed into easements.

In 1998 – the latest year for which I found statistics – the Office of Management and Budget estimated that deductions for conservation easements over the ensuing five years (1999-2003) would reduce estate tax revenue by less than two-tenths of one percentage point (0.18 percent).

Two New York Democratic members of Congress certainly seem to believe the estate tax is taking a toll on the environment. Concerned about dwindling open space on Long Island, Senator Charles Schumer and Congressman Tim Bishop put forward a bill several years ago that would defer the estate tax for those who agree to not sell their land to developers.

I suspect that a big reason for environmental groups’ support for or silence on the issue has to do with other factors. Most employees of and donors to major environmental groups hail from the left side of the political spectrum, where anything that reeks of tax cuts for the rich is anathema. Even for those organizations sympathetic to repealing the estate tax, publicly supporting that could alienate much of their donor base.

R.J. Smith of the Competitive Enterprise Institute said that in the 1970s, environmental organizations began to get captured by the left. Convinced that the source of environmental degradation was a free-market society based on private property rights, young radicals migrated into traditional conservation organizations like the National Audubon Society. He said they eventually took them over and moved their basic philosophy toward a hostility toward free markets.

And slapping huge tax on what a rich person owns when he dies is certainly being hostile to free markets.

The estate tax flap amply demonstrates that the major environmental groups and their donors are redistributionists before they’re environmentalists. If they truly were serious about helping the environment, they wouldn’t let their desire to sock it to the rich get the better of their desire to help the environment.

Patrick Chisholm is editor of PolicyDynamics.

Punishing the Wealthy Punishes Us All

(A previous version of this article appeared in The Christian Science Monitor.)

Lest there be any confusion about the overarching philosophy of Barack Obama, his presidential campaign and his policy proposals thus far have cleared that up: income redistribution and penalization of the rich. Though emotionally appealing to many, this philosophy hurts all Americans in the long run.

Pre-presidency, from his remarks on using the Supreme Court to redistribute wealth, to his “spread the wealth” comment to Joe the Plumber, to his plans to cut taxes on all but the top 5 percent of workers, Obama’s strongest and most consistent campaign message was that the rich aren’t taxed enough. His actions – and inactions – as president have borne this out. They include attempts to reduce a tax deduction for charitable contributions by high-income taxpayers, increase various taxes on various industries and on large estates, allow the top two income tax rates rise to 36 and 39.6 percent respectively in 2011 when the Bush tax cuts expire, and lower the already-modest amount of taxes the bottom 50 percent of income earners pay, and increase subsidies to them.

The most alarming proposal is in the latest health care bill, which phases out health benefits as one’s income goes up. When combined with other tax policies, it would amount to an estimated 70 percent marginal tax rate – i.e. for each additional dollar you earn, 70 cents of it is taxed away.

This is a true class warfare-style strategy: punishing the rich and rewarding the non-rich. It would be terrible for our economy and hurt the rich, poor, and middle class alike.

The reason America’s standard of living is high – and why our poor would be considered middle class in the majority of other countries – is because we produce so many goods and services per person. Monetary rewards, and/or a desire to break out of one’s current economic class, are largely what motivate us to produce those goods and services.

Raising taxes on the rich reduces those monetary rewards, which in turn lowers the incentive to work harder or smarter. That’s bad enough. To raise taxes on the rich while reducing them on the middle class – and increasing subsidies to the middle class – reduces that incentive even more.

It’s akin to your boss cutting your pay if you put in longer hours, and raising your pay if you work shorter hours.

Actually, lowering taxes on the middle class and raising them on the rich harms economic growth even more than leaving middle-class tax rates in tact while raising them on the wealthy. It results in a higher marginal tax rate – the tax rate on what you earn above a certain dollar amount. It is marginal tax rates – not overall tax rates – that so affect our incentive to produce. Why put in extra work if the extra income that comes with it is going to be taxed higher?

As the Wall Street Journal noted, “small-business people – and the number of small businesses – live or die by marginal rate changes.”

A study by Martin Feldstein and Daniel Feenberg of the National Bureau of Economic Research found that following the 1993 tax increases, high-income taxpayers reported 8.5 percent less taxable income that year than they would have if their tax rates had not increased. This is largely because, along with shifting compensation from taxable cash to untaxed fringe benefits, people such as the self-employed and senior executives can reduce their taxable earnings by a combination of working fewer hours and taking more vacations – i.e., fewer goods and services produced.

The ill effects of slower economic growth particularly play out over the long term. Europe, with its high marginal tax rates, serves as a good example. In 1973, per-capita income for the United States was about 26 percent higher than that of Germany. After three and a half decades of slower growth in Germany, the gap had widened to 32 percent. The numbers for France are similar.

Per-capita income of Germany and France is about the same as that of our least-wealthy state, Mississippi. A study by Edward Prescott of the Federal Reserve Bank of Minneapolis concludes that Europe’s higher taxes account for almost all the difference in labor force participation rates between Europe and the United States. As taxes have risen over the past three decades, European workers have responded by working less.

There are plenty of other good reasons not to penalize rich people. They are by far the biggest savers. Were it not for their savings, there would be little money available for the rest of us for housing loans, education loans, or car loans. Funds for productive investment by businesses also would be scarce. And most people owe their jobs to a rich person – the owner of the business they work for. (Though many business owners certainly are not rich.)

It’s not as if the rich are undertaxed. According to 2007 figures – the latest year of available data – the top 1 percent of taxpayers pay 40 percent of all individual income taxes. The left lambasted the Bush tax cuts because the top 1 percent’s taxes were reduced along with those of everyone else who pay taxes. Well of course – if you cut taxes on everyone, people paying most of the taxes will be affected.

Barack Obama’s message is loud and clear: penalize the wealthy, and reduce the incentive to become wealthy. That would harm the long-term well-being of Americans of all stripes.

Patrick Chisholm is editor of PolicyDynamics.

Bring Back Human Intelligence

(A previous version of this article appeared in The Christian Science Monitor. TIDES World Press Update placed it under its “Articles of Significant Import” heading. TIDES stands for the Translingual Information Detection, Extraction and Summarization program, a U.S. Defense Advanced Research Projects Agency – DARPA – research effort.)

The democratization of technology is generally a wonderful thing. The Internet, powerful computers, cellular phones and other such devices, which were once available only to governments or a select few, are now available to almost anyone. But with this comes the nagging thought that deadly technologies are also widely available. One no longer needs a standing army to carry out mass destruction; individuals or small groups of bad guys can generate untold suffering, be it through the use of conventional or unconventional weapons.

Such groups thrive on guerrilla warfare tactics. They blend in with the civilian population and launch surprise attacks, as happened on September 11, 2001.

Given this reality, the role of intelligence gathering in uncovering terrorist plots has taken on a dramatic new significance. The CIA, FBI, and other agencies that employ human intelligence – or HUMINT, in the feds’ parlance – are our first line of defense against the new enemy. They arguably have become the most important function of the U.S. government.

The key to busting up terrorist plots is by infiltrating the groups with real-live humans; satellite photos and other electronic gizmos are not nearly enough.

But America’s HUMINT capabilities weakened significantly during the past few decades, accelerating in the 1990s and suffering a further blow in 2009 with the Obama administration’s decision to appoint a special prosecutor to investigate CIA interrogators.

It started with the Church Committee investigation in the 1970s, which was an effort to expose and correct some of the CIA’s excesses during the Cold War. But in view of the enemy we are up against now, the changes went too far.

In the aftermath of the Church Committee investigation, scores of Middle East case officers were laid off or forced to retire. The Foreign Intelligence Surveillance Act (FISA) of 1978 imposed strict rules on intelligence gathering, and created large bureaucratic hoops that CIA and FBI officers had to go through before they could wiretap suspected terrorists. In fact, FISA-related obstacles were largely responsible for the FBI’s decision not to search the computer and apartment of Zacarias Moussaoui (the alleged “20th hijacker”) prior to September 11.

In the mid-1990s the intelligence agencies’ hands became even more tied. The Aldridge Ames spy case resulted in a purge at the CIA, making the remaining case officers reluctant to get to know foreigners out of fear of becoming a suspect, according to Robert Baer, a former CIA field officer and author of See No Evil: The True Story of a Ground Soldier in the CIA’s War on Terrorism.

Aggravating the situation were 1995 CIA guidelines associated with the practice of gleaning information from foreigners with questionable human rights backgrounds, leading to multiple layers of bureaucracy whenever a case officer wanted to recruit an asset. A new Director of Operations in 1995 fired all “access agents” – foreigners who have access to potential intelligence sources – according to Baer. By 1995, HUMINT reports on many Islamic terrorist groups slowed to a trickle.

The culture of political correctness affected the intelligence community as well. Especially at the FBI, agents were reluctant to conduct surveillance on ethnic Arabs out of fear of being accused of racial profiling.

A U.S. News and World Report article carried the disturbing revelation that in the months prior to September 11, the bin Laden unit at FBI headquarters turned down a request from one of its field offices to send a confidential informant to participate in an Al Qaeda training camp. There is no word from the FBI on why the request was rejected, but the incident is not surprising in light of the atmosphere within the intelligence community at the time.

Though collecting HUMINT is supposed to be the CIA’s chief function, fewer than 10 percent of its employees work outside of the United States, according to the book The Human Factor: Inside the CIA’s Dysfunctional Intelligence Culture by Ishmael Jones.

And now its job is even harder. The majority of its HUMINT reports since 9/11 reportedly have come from prisoner interrogations. In addition to the negative impact on CIA morale, the Obama administration decision likely will result in less information and/or less valuable information gleaned from interrogations.

Bureaucracies are susceptible to sclerosis over the course of their lifetimes – a gradual weakening of their original mission amid a steady accumulation of rules, regulations, politics, political correctness, lawsuits, careerism, and administration (much of it imposed by Congress). Our intelligence agencies are not immune.

Obviously, the shock of September 11 prompted the hiring of a lot more Arabic-speakers. And fortunately, the 1995 CIA guidelines on recruiting foreign agents have been significantly loosened, according to an Agency spokesman. FISA has been loosened as well, but not nearly enough. U.S. intelligence operations are still subject to a labyrinth of rules and regulations deriving from Congress and the executive branch. Considering the extreme danger the country is facing, policymakers have a lot more to do to facilitate the gathering of HUMINT.

Patrick Chisholm is editor of PolicyDynamics.