‘Equitable’ Tax Plan Just Won’t Cut It

It’s normal in a political year for candidates to talk about an “equitable” tax system.

If you are on the far left of the Democratic Party and in control of both houses of Congress it is now time for you put your more “equitable” tax plan into place. The people who put Democrats in office, the left, have been complaining the rich keep getting richer and the poor keep getting poorer.

The truth is all boats have risen since the post-9/11 tax cuts of 2001.

But don’t let facts get in the way of a good political fight. No matter how well the economy has grown because of the tax cuts, you can not convince someone who believes the government’s jobs is to redistribute the wealth of others in order to make a more “equal” society.

If a country’s corporate tax rates are too high it will not attract that capital. When Ronald Reagan came into office and lowered personal tax rates from 70% to 28%, the U.S. became one the most competitive places on the planet to invest.

What the left does not realize is what the rest of the world has figured out: Lower personal and corporate taxes create jobs, which in turn grow the economy so everyone has a better standard of living.

When looking at the largest 30 economies in the world, who would think that since the Reagan tax cuts in the ’80s, the U.S. has gone from being one of the most competitive in the world to now, according to the Washington, D.C.-based Tax Foundation. Previously high tax rate countries like Sweden, Denmark and Norway have corporate tax rates 50% less than the U.S.

Our tax rates are 50% higher than “socialist” Scandinavia, and the Democrats still want to raise the rate! Europe and the former Soviet bloc countries have figured out lower tax rate
s actually bring in more revenue as a percentage of the Gross Domestic Product (GDP) than do higher taxes. In fact, while the U.S. collects 2.2% of GDP in corporate taxes, the other 29 countries collect 3.1% of GDP with much lower rates.

With world tax rates down, any increase in the U.S. rate will move more capital offshore, hurt the economy, and put people out of work. No matter; I predict higher taxes in the near future. The 2001 tax cuts have sunset provisions that if Congress does not act to extend, will automatically raise rates to pre-2001 levels. With Democrats squealing for a more equal tax system, do not expect to see any legislation that would keep taxes from going up, let alone legislation to lower taxes.

What is a concern for the country is a much bigger problem for the people of California. California has some of the highest tax rates in the country. Not only are we losing jobs to other countries, we are losing jobs to 0% tax states like Nevada, Texas and Florida.

Jobs are not the only thing we are losing. We are also losing some of our most productive citizens. Two baby boom business acquaintances in as many weeks have told me they are leaving California solely because of the high tax rates here and moving to 0% tax states. As one of them said: “When we were raising our son, I just paid my taxes and did not complain … I no longer feel I am getting anything out of sending that six-figure check each year.”

Expect more baby boomers to come to the same conclusion. These taxpayers are not the type California can afford to lose. You need 10 families of four making $80,000 per year to replace one high income earner who leaves for a more tax-friendly environment.

While politicians try to create a more “equitable” tax system, people and capital around the world will vote with their feet and move to where they think it is a more equitable system.

Mortgage Woes Not Taxpayers' Problem

This week has seen turmoil for the financial markets. The seeds of this turmoil started right here in Orange County, which is ground zero for the sub-prime mortgage industry.

These are loans to buy or refinance homes for less-than-creditworthy borrowers. The chickens have come home to roost, as many borrowers cannot or will not make their payments. Many of the homes purchased in the last couple of years are worth less than what is owed.

Unlike in the past, these homes were sold with 100% financing. Any drop in value and the loan is underwater.

In Econ 101 you learn very quickly that people and businesses will do what is rational. In the last two to three years what has been rational for lenders is to make what may look like risky loans — zero down payments, bad credit, etc. Because the property that these loans were secured against was rising in value, the lenders were always secure.

In case of a default, the lender could always recoup the loan amount from the sale of the property.In most cases, if a borrower got behind they would sell the house on the open market and put cash in their pocket.

Lending and borrowing have intrinsic risks to both parties. Let's look at the rational decisions each party made at the time the loan was given.

The lenders charge interest and fees for the loans. They enjoy great profits on loaning money at higher rates than their cost of funds. What about the borrower/home buyer? They made a rational decision to buy the home with no money down. They risked nothing because they put nothing down. They also got a tax deduction to subsidize their payments.

Clearly, looking back now, we can see that these buyers, with nothing to lose, bid up property prices.

Part of today's drop in prices is just the lack of buyers who were buying with no money down. Now that these people are out of the market, prices have come down.

Now we hear from presidential hopefuls and other politicians on the left that the U.S. taxpayer should bail out these borrowers because they did not know what they were doing. Their argument is that it is mean-spirited not to help them keep their home.

Don't get me wrong: If a lender wants to negotiate a loan with a borrower for a lower interest rate or payments, I am fine with that. In many cases it is in the lenders' best interest to keep the borrower in the house and get some payments.

But a government bailout would be the worst thing that could happen.

First off, taxpayers would not only be bailing out homeowners but also billion-dollar banks that made these bad loans.

Taxpayers shouldn't be bailing out lenders or home buyers who got in over their heads and bought houses they couldn't afford. The only way to have a free market is to allow people's bad decisions to have consequences. If not, people will always take a risk if someone bails them out.

In the name of home ownership, the left wants taxpayers to subsidize risk for multinational billion-dollar businesses. This is called privatizing profit but socializing loss.

If the loan is good and the house goes up in value, the government does not get the gain. We only take the losses. Not a good way to run a railroad.

Being what human nature is, we will always have excesses in the market. People have short memories. Real estate markets will always go up too high and come down too low.

There is one big difference between the last real estate downturn in the late '80s and now. Back then, the government-insured banks took the hits and the taxpayers picked up the tab to the tune of hundreds of billions of dollars; socialized losses. This time, the private sector is taking the hits. Let's keep it that way.

City Hall Land Talks Not Smart

It is heating up here in Newport Beach as proponents of the "City Hall in the Park" initiative gather their signatures. Meanwhile, the City Council majority is getting plans ready to build a $5 million passive park on the same site.

City Councilman Keith Curry, who penned a column against the initiative, called me to discuss our differences on the issue. Before I talk about our differences, let me say Curry is an engaging advocate for not locating the City Hall next to the library on Avocado Avenue. He thinks the OCTA site up the street would be a better location for City Hall. Though I completely disagree with him on this issue, the people of Newport should be glad to have a councilman of his caliber representing them. Curry comes out of the John Moorlach mold: elected officials not afraid to speak their minds.

My issues are simple: What is doable, and how much will it cost the taxpayers? To that end, the city has commissioned a study known to all as the DMJM study. What the study says is Newport would save $10 million building on the land next to the library. You would think that might settle the issue. That isn't chump change.

This $10 million in savings does not take into account the fact that the land is already owned by the city. If you read my previous column, you will remember I valued the land at $21 million. That would make a savings of $31 million to the taxpayers by voting for the initiative.

The opposition disagrees, saying the city is required to replace the park land somewhere else in the city and therefore you cannot count the $21 million savings. Really? Last time I drove by the site it was still a vacant lot, not a park.

They might have some argument had a park already been built; but it is not. The city is under no obligation that a majority vote of the council can't solve.

Now let's look at what is doable: On the library site, we do not have to negotiate price or terms with anyone. We already own it. The other site is owned by OCTA. Has anyone even asked OCTA what they think? Last I checked, the property was being used for buses. OCTA has in no way, shape or form approved selling, relocating or swapping any site with the city.

And the property the city wants to swap with OCTA is owned by the Irvine Co. Do we have a price for that parcel? Will they even sell it?

I have done enough negotiations in my life to know you do not want to get yourself into any negotiations involving two other parties that have no reason to do anything.

Why would OCTA want to move the bus transfer station? If you do not think they know how to negotiate, ask the bus drivers who just ended their strike.

Let's not fool ourselves. This issue will be on the ballot, and like it or not, the citizens of Newport Beach will be making the decision.

The City Council should slow down on plans to build a park until the voters have had a chance to speak. That vote will give the council all the direction it needs.