Robert Rubin

Topics: Budget
15 Jan 1995

From: "DG Ervan Darnell"

Robert Rubin, the new Secretary of the Treasury, was interviewed on "This
Week with David Brinkley" today. Maybe I have him confused with someone
else, but I thought he came from a Wall Street background. If so, he is
living proof that either high government posts will cause people to become
complete sell-outs or that knowing how to make money on Wall Street has
nothing to do with understanding how the economy really works (or both).

The first guest was Dick Armey who defended his flat tax as well as saying
we should end income tax withholding. I was pleasantly surprised to hear
the latter (I have argued for it in the past). I wonder if Armey would be
willing to abolish employer 'contributions' too?

Rubin followed. Brinkley asked him, since he was opposed to the flat tax,
what to do with a tax code that was absurdly complex and wasted lots of time
to handle. Rubin's response was that the tax code was not too complex! No,
really, he said "*not* too complex". He went on to say that the tax code
was a good tool for implementing public policy, listing the home mortgage
deduction as an example. My neigbors were pausing over the final "1" key on
their telephones from the anguished screams they heard in my house.

It is precisely what is wrong with the tax code is that it allows for
dishonest policy. It makes it possible to fund something by allowing a
deduction for some activity then raising everyone's tax rates later. This
is usually sold as a tax cut. It is no such thing. It is a subsidy of one
group at the cost of pilfering another. Just imagine the debate if congress
had to cut food stamps or raise the taxes on people making <$20K/year to
write a check to people buying a summer vacation home on a Minnesota lake.
That is the net effect of the home mortgage deduction (of course, the idea
that the government is actually helping the poor is pretty dumb, regardless).

And, of course, the frictional costs of filling out the tax forms are
tremendous and the economic distortions of misallocations of capital in
search of tax shelters disastrous. Worrying about actually doing the right
thing runs a far distant second to preserving regulatory tools that can be
used to buy votes.

On the flat tax specifically, he said it would be "unfair" because the rich
would pay less and middle income persons would pay more. Why is that
unfair? How is it that the current "progressive" tax system is fair? This
is his argument: the status quo is fair. That's just a non-argument; there
is no rational basis given. By that reasoning we should return the 19th
century system of no income tax because it would be preserving the status
quo (okay, we should return to that system, but not for the reason that it
was once the status quo). BTW, the truth of the assertion that it would
shift the burden is not entirely obvious because of the large (and changing)
personal exemption.

Rubin was asked about Dick Armey's suggestion that income tax withholding be
eliminated. His response was that it was a political manuever designed to
produce a particular effect and that it would unbalance the debate on the
tax code. Yes, it is designed to produce a particular effect: honest
taxation, no doubt a very scary thought to liberals. It would 'unbalance'
the debate because once people had to face how badly the government is
screwing them, a lot of liberal programs would have a harder time surviving.
This is just like Rubin's policy opposing simplifying the tax code. If
policies had to be honestly paid for, it would be harder to implement them.
He consistently opposes honesty in government.

There is another common thread here too, preserving the status quo. Just
like the status quo tax structure is "fair" so is the current process of
being deceptive about policy. Balance is defined as where we are and not
based on any neutral principles. If there were any fairness to it, the
basis could be presented and defended. The absence of that indicates that
the argument at hand is simply an attempt to avoid the real issue and as
such indicates the position being defended is in fact unfair, just the
opposite of what is claimed. Rubin has clearly exposed the liberal
position: 'Yes, we intend to take your money because we know better what to
do with it. Yes, we intend to lie to you about the fact that we are doing
it. Yes, we intend to hide its effects because the truth would only confuse
you.' Well, Mr. Rubin, I'm not confused in the least about what you are doing.

On the $40G loan guarantee to Mexico, Rubin defended it as saying that it
was a loan guarantee and not a gift. Furthermore, the U.S. was charging
Mexico for the guarantee based on a 'hard nosed economic' analysis. George
Will asked the obvious question if this implicitly meant that the market was
irrational (since it did not extend a loan or loan guarantee under the same
terms as the U.S. government did). Rubin faced it head on and said that
'yes the market was acting on short term psychology instead of fundamentals
and that the government was making a rational economic decision.' This
rational economic decision was no doubt arrived at by the
strategic-helium-reserve department. Will remarked that it seemed more like
"giving the drunk another drink." I think that sums it up pretty well.