Sunday, December 17, 2017

Opioids: How Many People Must a Pharmaceutical Company Kill Before It Becomes a Crime?

If an individual were to tell a lie and because of that act a person was to die, that individual would be considered to have committed a vile transgression and could be legally responsible for that death.  If a pharmaceutical company tells a lie to gain profit and tens of thousands of people die because of it, the drug company will likely be viewed as a successful business and stock prices will rise.  Any legal responsibility will merely consist of donating a few percent of its profits to the government as a fine.

The opioid epidemic that has engulfed the nation was the result of lies told by pharmaceutical companies.  Their behavior has been compared to that of the tobacco companies who misled the public for years about the known dangers associated with smoking.  The tobacco companies were eventually convinced to admit guilt and at least pay a severe financial penalty for their sins.  Mike Moore who was Mississippi’s attorney general at the time provides some insight into the process.  When the CEOs of the tobacco firms were asked what they wanted out of the settlement, they replied with this quote:

“We want to be able to go to cocktail parties and not have people come up and ask us why we are killing people.”

The producers of opioid drugs will not change their ways until the vilification of the companies and their executives reaches the level attained by the tobacco companies and their executives.

Let the vilification process begin.
The quote provided by Mike Moore was taken from an article in The New Yorker by Patrick Radden Keefe.  It was titled Empire of Pain in the paper version and re-titled online as The Family That Built an Empire of Pain.  The family in question is that of the Sacklers.  That name is better known for its public philanthropy than its family business, Purdue Pharma.

“The Brooklyn-born brothers Arthur, Mortimer, and Raymond Sackler, all physicians, donated lavishly during their lifetimes to an astounding range of institutions, many of which today bear the family name: the Sackler Gallery, in Washington; the Sackler Museum, at Harvard; the Sackler Center for Arts Education, at the Guggenheim; the Sackler Wing at the Louvre; and Sackler institutes and facilities at Columbia, Oxford, and a dozen other universities. The Sacklers have endowed professorships and underwritten medical research. The art scholar Thomas Lawton once likened the eldest brother, Arthur, to ‘a modern Medici’.”

What Keefe would prefer is that the Sacklers be remembered for their creation of the mass market for addictive opioids.

“The Sackler family’s ruthless promotion of opioids generated billions of dollars—and millions of addicts.”

There was a time not too long ago when doctors did not prescribe strong opioids except for painful terminal illnesses or for brief relief after an operation or other severe trauma.  It was believed that the danger of addiction was too high for regular use.  The opioid drugs had a definite medical value, but in such limited use the opportunity for profit was small.  Purdue developed a product called OxyContin which had oxycodone as the active ingredient.  Oxycodone is said to be twice as powerful as morphine.

“Oxycodone, which was inexpensive to produce, was already used in other drugs, such as Percodan (in which it is blended with aspirin) and Percocet (in which it is blended with Tylenol). Purdue developed a pill of pure oxycodone, with a time-release formula similar to that of MS Contin. The company decided to produce doses as low as ten milligrams, but also jumbo pills—eighty milligrams and a hundred and sixty milligrams—whose potency far exceeded that of any prescription opioid on the market. As Barry Meier writes, in ‘Pain Killer,’ ‘In terms of narcotic firepower, OxyContin was a nuclear weapon’.”

In order to make a lot of money from OxyContin Purdue had to counter the fear that opioids were highly addictive.  This they did by marketing their highly potent pills with the claim that the time release presentation virtually eliminated any concerns about addiction.  The claim was made that one pill every twelve hours would safely relieve pain, and therefore the pills could be used for almost any situation in which pain is an issue.  This would open up usage for relatively minor but chronic applications like arthritis, back pain and so on.

“The F.D.A. approved OxyContin in 1995, for use in treating moderate to severe pain. Purdue had conducted no clinical studies on how addictive or prone to abuse the drug might be. But the F.D.A., in an unusual step, approved a package insert for OxyContin which announced that the drug was safer than rival painkillers, because the patented delayed-absorption mechanism ‘is believed to reduce the abuse liability’.”

“The F.D.A. examiner who oversaw the process, Dr. Curtis Wright, left the agency shortly afterward. Within two years, he had taken a job at Purdue.”

Purdue’s first lie was to claim, without any evidence, that the addiction rate for OxyContin users was less than one percent.

“In 1999, a Purdue-funded study of patients who used OxyContin for headaches found that the addiction rate was thirteen per cent.”

The second lie was the claim that the time release format could provide 12 hours of pain relief, which if true would be a valuable marketing aid.

“But internal Purdue documents, which have emerged through litigation, show that even before the company received F.D.A. approval it was aware that not all patients who took OxyContin were achieving twelve-hour relief. A recent exposé by the Los Angeles Times revealed that the first patients to use OxyContin, in a study conducted by Purdue, were ninety women recovering from surgery in Puerto Rico. Roughly half the women required more medication before the twelve-hour mark. The study was never published. For Purdue, the business reason for obscuring such results was clear: the claim of twelve-hour relief was an invaluable marketing tool. But prescribing a pill on a twelve-hour schedule when, for many patients, it works for only eight is a recipe for withdrawal, addiction, and abuse. Notwithstanding Purdue’s claims, many people who were not drug abusers—and who took OxyContin exactly as their doctors instructed—began experiencing withdrawal symptoms between doses.”

When doctors began complaining that patients who took their medicine exactly as directed were coming in complaining of withdrawal symptoms (“itching, nausea, and the shakes”), Purdue came up with another lie.  They responded by utilizing a concept called “pseudo-addiction.”  The explanation for the patients’ response was not that the pills weren’t working as advertized, but that the dosage was not large enough.  The response to signs of addiction was to prescribe more OxyContin.

“As a pain-management pamphlet distributed by Purdue explained, pseudo-addiction ‘seems similar to addiction, but is due to unrelieved pain.’ The pamphlet continued, ‘Misunderstanding of this phenomenon may lead the clinician to inappropriately stigmatize the patient with the label “addict.”’ Pseudo-addiction generally stopped once the pain was relieved—‘often through an increase in opioid dose’.”

Long-term use of opioids such as OxyContin was a disaster in the making.  The very nature of opioids was such that the body would gradually develop a tolerance and more would be needed to produce the same effect.  That might be a negative in terms of health outcomes, but it is the ideal situation for a drug company: a pill for a chronic condition that provides no cure, and leads to a need for ever more pills as time goes on.

“David Juurlink, the Toronto doctor, told me that opioids are problematic even for users who don’t succumb to addiction. ‘Opioids really do afford pain relief—initially,’ he said. ‘But that relief tends to diminish over time. That’s, in part, why people increase the dose. They are chasing pain relief from a drug that has failed. I see all these people who are convinced they are one of the “legitimate” pain patients. They’re on a massive dose of opioids, and they’re telling me they need this medication, which is clearly doing them harm. For many of them, the primary benefit of therapy, at this point, is not going into withdrawal.”

Providing pills containing so much of an opioid was an open invitation for abuse.  Purdue even explained how the abuse might be accomplished in its packaging material.

“Almost immediately after OxyContin’s release, there were signs that people were abusing it in rural areas like Maine and Appalachia. If you ground the pills up and snorted them, or dissolved them in liquid and injected them, you could override the time-release mechanism and deliver a huge narcotic payload all at once. Perversely, users could learn about such methods by reading a warning label that came with each prescription, which said, ‘Taking broken, chewed or crushed OxyContin tablets could lead to the rapid release and absorption of a potentially toxic dose’.”

Purdue was aware that its pills were being used in ways that were illegal.

“For years, it had maintained a contract with I.M.S., a little-known company, co-founded by Arthur Sackler, that furnished its clients with fine-grained information about the prescribing habits of individual doctors. Purdue’s sales representatives used the data to figure out which doctors to target.”

“Purdue, using I.M.S. data….targeted populations that were susceptible to its product. Mitchel Denham, the Kentucky lawyer, told me that Purdue pinpointed ‘communities where there is a lot of poverty and a lack of education and opportunity,’ adding, ‘They were looking at numbers that showed these people have work-related injuries, they go to the doctor more often, they get treatment for pain’.”

Purdue had the information to identify where doctors were overprescribing opioids, but claimed it was not their job to assess “how well a physician practices medicine.” 

“But overprescribing generated tremendous revenue for the company. According to four people I spoke with, at Purdue such prescribers were given a name that Las Vegas casinos reserve for their most prized gamblers: whales.”

Purdue has continuously fought against any move to restrict access to its drug, using arguments lifted from the NRA on why guns are safe: it is people who are not safe.

“Confronted with the prospect of modest, commonsense measures that might in any way impinge on the prescribing of painkillers, Purdue and its various allies have responded with alarm, suggesting that such steps will deny law-abiding pain patients access to medicine they desperately need. Mark Sullivan, a psychiatrist at the University of Washington, distilled the argument of Purdue: ‘Our product isn’t dangerous—it’s people who are dangerous’.”

Purdue has been taken to court over its methods many times and has admitted guilt.

“In 2006, Purdue settled with Hanly’s clients, for seventy-five million dollars. Shortly afterward, the company pleaded guilty, in a case brought by federal prosecutors in Virginia, to criminal charges of misbranding, and acknowledged that Purdue had marketed OxyContin ‘with the intent to defraud or mislead.’ (Rudolph Giuliani had tried, on Purdue’s behalf, to get the lead prosecutor to scuttle the case.) Michael Friedman, the executive vice-president, pleaded guilty to a criminal misdemeanor, as did Howard Udell and the company’s chief medical officer, Paul Goldenheim.”

“They all received probation, and were ordered, collectively, to pay nearly thirty-five million dollars in fines. Purdue agreed to pay an additional six hundred million. Given the billions of dollars that the Sacklers and Purdue had reaped from OxyContin, some observers felt that the company had got off easy. Arlen Specter, the Republican senator from Pennsylvania, remarked that such fines amounted to ‘expensive licenses for criminal misconduct’.”

Purdue has claimed all along that its only goal was to insure that the supply of opioids for people who were in pain not be restricted.  Its executives were the good guys.  But the increased awareness of its role in the opioid epidemic has not changed company policy for the better. 

In 2010, Purdue reformulated its pill so that when anyone tried to grind it up the result was not usable powder, but a “gummy substance.”  This was a move to limit abuse, but it was also a move to maintain a patent and to eliminate competition from generic drugs.  The new formulation was considered patentable and gained FDA approval, with the FDA lauding it for its “abuse deterrent” properties.

“Purdue had long denied that the original OxyContin was especially prone to abuse. But, upon receiving its patents for the reformulated drug, the company filed papers with the F.D.A., asking the agency to refuse to accept generic versions of the original formulation—because they were unsafe. The F.D.A., ever obliging, agreed, blocking any low-cost generic competition for Purdue. For more than a year, Purdue continued to sell the original formulation of OxyContin in Canada. According to a recent study, OxyContin sales in Windsor, Ontario—just across the border from Detroit—suddenly quadrupled, a clear indication that the pills were being purchased for the U.S. black market.”

The number of prescriptions for OxyContin diminished when the new formulation became available, but it can still be abused.  All one has to do is swallow the pills.  Ever looking for new customers, Purdue sought and received approval from the worthless FDA to market its pill to children as young as eleven years of age.  Continuing the analogy with the tobacco industry, as its domestic business slumped, it chose to spread the opioid epidemic worldwide.

“As OxyContin spread outside the U.S., the pattern of dysfunction repeated itself: to map the geographic distribution of the drug was also to map a rash of addiction, abuse, and death. But the Sackler family has only increased its efforts abroad, and is now pushing the drug, through a Purdue-related company called Mundipharma, into Asia, Latin America, and the Middle East.”

“In May, several members of Congress wrote to the World Health Organization, urging it to help stop the spread of OxyContin, and mentioning the Sackler family by name. “The international health community has a rare opportunity to see the future,” they wrote. “Do not allow Purdue to walk away from the tragedy they have inflicted on countless American families simply to find new markets and new victims elsewhere.” David Kessler, the former F.D.A. commissioner, believes that the destigmatization of opioids in the U.S. represents one of the ‘great mistakes’ of modern medicine.”

The nation seems completely incapable of putting corporate criminals in jail.  What then is our option?  Recall the comment from Mike Moore about tobacco executives tiring of being asked why they continue to kill people.  How often does the Sackler family get confronted with such a question?  How often do people assemble in front of a Sackler philanthropy and announce their displeasure that a family of mass murderers is being honored by its existence.  If the Sacklers can’t be imprisoned, their lives can at least be made uncomfortable.  Moore seems to believe this approach might work again.

“Moore feels that the Sackler family, as the initial author and a prime beneficiary of the epidemic, should be publicly shamed. “I don’t call it Purdue. I call it the Sackler Company,” he said. ‘They are the main culprit. They duped the F.D.A., saying it lasted twelve hours. They lied about the addictive properties. And they did all this to grow the opioid market, to make it O.K. to jump in the water. Then some of these other companies, they saw that the water was warm, and they said, “O.K., we can jump in, too.”  There may be significant legal distinctions between a tobacco company and an opioid producer, but to Moore the ethical parallel is unmistakable: ‘They’re both profiting by killing people’.”

Thursday, December 14, 2017

Flat-Rate Taxation History Tells Us Only Progressive Taxation Works

Taxing income at a flat rate, where everyone pays at the same rate no matter the income level, is a bad idea that refuses to die.  In the 2016 campaign for the Republican nomination for president no less than four candidates proposed taking the country to some version of that scheme.  T. R. Reid examines the consequences of such an approach in his recent book A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.  Unbeknownst to most of us, a number of countries in central Europe have actually tried such a plan.  Reid provides some background on the concept and lets us know how that approach worked when actually put into practice.

One reason that flat-rate proposals continue to be promoted is that they are very popular with people possessing the money required to purchase the allegiance of politicians.  The hope is always the same: that the public would be deceived by the misleading appearance of fairness for what is really a tax break for the wealthy and a transfer of tax burden to those with lower incomes.

“….flat-tax plans have generally been promoted by high-income taxpayers, by the think tanks and political candidates they fund, and by their supporters in Congress.  Of all the advocates, the most visible and exuberant has been Steve Forbes, an extremely high-income taxpayer who inherited a family business (Forbes magazine) and a family fortune from his father, Malcolm Forbes.  Steve Forbes ran twice, on a flat-tax platform, for the Republican nomination for president….He wrote a book about his plan, titled Flat Tax Revolution….”

Forbes suggested a flat tax of about 17% on all earned income that would be accompanied by an elimination of most other taxes and tax deductions.  This would have led to a severe shortfall in government revenue, but we were told to not worry.  Republicans turned then to a scam that they have continued to promote no matter how many times it has been proven to be false.

“So they came up with an argument that says cutting taxes wouldn’t reduce the revenues that fund government programs.  ‘A flat tax that combines stark simplicity with a tax cut would generate more, not less, government revenue,’ Forbes maintained in his book.  This would occur, the advocates say, because lower taxes would have a dynamic impact on the economy, prompting people to work more, to start new companies, to do more business.  With this flat-tax boom, people’s incomes would grow so much that they would end up paying more taxes, even at sharply lower rates.  By the same reasoning, a tax increase would lead people to work less and thus shrink the economy.”

Republicans are still pushing this concept today as they strive to lower taxes for the wealthy while claiming revenue would increase from enhanced economic growth.  Today it is referred to as “dynamic scoring.”  Their problem now is finding credible economists who will endorse this nonsense.

To learn how a flat tax approach works in practice, Reid provides the experience of the central European countries that were suddenly released from communist control with the dissolution of the Soviet Union.  These countries had to quickly acquire the structures needed for a modern economy and a modern government.  In the process Estonia decided to utilize the simplest income tax system possible: a flat tax, even though all the economic advisors counseled against it. 

“In 1994, the….government dropped Estonia’s three-bracket progressive income tax structure and replaced it with a single 26% tax rate that applied to both personal income and corporate profits.  This….was electrifying news for proponents of the flat tax in the West; it immediately made an obscure place called Estonia stand out from all the other former Soviet states."

At the time, income was low and there did not yet exist a wealthy class in the nation; the flat rate made little difference.  But Estonia grew, and as all countries that begin growing from a very low level, the rates of growth were impressive.  The Estonians managed their economy well and took advantage of their low wages relative to the western European nations.

“As long as the local and global economies were growing, or at least fairly stable, the flat tax nations of eastern Europe were doing well.  Many were attracting investment; the combination of a low, flat-rate tax system, cheap labor rates, and minimal government regulation drew in large sums of foreign money.”

Other neighboring nations wished to follow Estonia’s example and assumed a flat tax was an important component of its success.  Reid lists the countries that moved to a flat tax and the year the move occurred: Estonia (1994), Lithuania (1995), Latvia (1995), Russia (2001), Ukraine (2003), Serbia (2003), Slovakia (2004), Georgia (2005), Romania (2005), Czech Republic (2008), Bulgaria (2008).

“‘At the stroke of a pen,’ the Economist reported, ‘this tiny Baltic nation transformed itself from backwater to bellwether, emulated by its neighbors and envied by conservatives in America who long to flatten their own country’s taxes’.”

Just providing jobs for a poor country is sufficient at first, but once the jobs come then pensions and healthcare and a host of other issues need to be addressed.  The role of government must increase as well as the revenue needed to run it.  Also, natural economic evolution produced an unequal income distribution with a significant collection of wealthy elites.  In raising taxes with a flat tax, a few percent increase will barely affect the wealthy, but at the lower incomes the tax becomes unbearable and more and more people must be relieved of the full tax rate.  It becomes a very inefficient way to increase revenue.

“In practice, you can’t find a single tax rate that is high enough to raise the revenues you need but low enough for average working people to afford.  As a fiscal matter, governments needed the higher revenues that would come from imposing higher taxes on the upper brackets.  As a political matter, there was also a question of fairness.  The boom years at the start of the twenty-first century had created a class of ‘oligarchs’….in many of the former Soviet countries.  This created political demands to go after the wealthy and make them pay more.”

After the Great Recession some sources of funds began to disappear as other nations cut back on investments and began to consider the eastern European countries more as competitors than countries in need of assistance.

“Financial aid from the European Union, which had been substantial for all of eastern Europe in the first post-Soviet years, began to dry up.  The rich nations of western Europe, watching the low tax countries to their east luring away wealth and investment, were no longer willing to finance nations they viewed as economic competitors.”

In order to keep the flat-tax structure, nations had to increase revenue by increasing taxes in other ways.

“They raised the VAT rate which increased consumer prices; nearly all the eastern European countries have sales taxes in the range of 20%.  Hungary imposed the world’s highest rate of sales tax, 27%, to make up for the revenue shortfall of its flat-rate income tax.”

“Most of the flat-tax countries jacked up their Social Security taxes.  In the United States, the Social Security tax on wages is 15%, with half paid by the worker and half paid by the employer.  By comparison, Estonia had to raise its Social Security tax to 34%, all of it paid by the employer.  The payroll tax for Social Security in Slovakia went to 47.6%, paid mostly by the employer; in the Czech Republic, the tax was 45.5%, with the worker paying 11.5% and the employer paying 34%.”

Economists argue that the best tax system is the one that produces the least economic disincentives.  Jacking up the sales tax inhibits consumption; jacking up the Social Security tax inhibits hiring.  This seems a high price to pay for maintaining a system that mainly benefits the wealthy.  In the fallout from the Great Recession, people are very conscious of the fact that the wealthy seemed to have fared better than the average citizen and think it is time for them to pay a greater share.

Slovakia and the Czech Republic have already added some progressivity into their income tax structure, and other countries seem to be headed in that direction.  Estonia is still reluctant to give up on what had become its signature characteristic; but the pressures are building.  Reid provides a summary quote from Professor Victor Forsberg, an economist at Estonia’s University of Tartu.

“’I don’t think there is a single serious economist in this country who would advocate keeping the flat-rate tax,’ said Victor Forsberg….’You have to look at what we pay for it.  To make up for the lost revenue, we had to raise the VAT tax to 20%.  That discourages people from buying.  To make up for the lost revenue, we have to charge employers 34% of any worker’s wages to fund our social and health-care programs.  No wonder we have an unemployment problem!  Anybody who wants to hire you has to pay not only your salary but an additional 34% to the government’.”

“’What we don’t need is a single rate of tax for everybody,’ the professor continued, his voice rising.  ‘What we do need is to reduce the Social Security taxes, to make it cheaper to hire and get people back to work!  What we need is a lower sales tax, to get people to spend!  And the way you pay for all that is the way every wealthy country in the world does it—with progressive taxes!’”

The interested reader might find the following articles informative:

Sunday, December 10, 2017

Trump’s Authority to Launch Nuclear Weapons

During the 2016 campaign for the presidency the authority the president has over the use of our nuclear weapons became a topic of considerable interest.  Concern was driven by the fact that Donald Trump could become our next president and could gain control over those weapons.  Could a psychologically unstable and perhaps demented person launch a nuclear weapon based solely on his own initiative was the question.  Several articles appeared in the media essentially claiming that yes he could.  An article from titled If President Trump decided to use nukes, he could do it easily was an example.  The implication was that the president had the authority to do almost any damned thing he wanted to do.

Trump has now been president for almost a year and the concerns about his mental state have not subsided; rather, they have been augmented by a perceived lack of knowledge and understanding on his part of what a nuclear explosive is and what it is capable of doing.  The ongoing exchange of schoolboy taunts and threats between Trump and North Korea’s leader have served to elevate the level of concern even further.  Recent articles have come out raising anew the question of the extent of authority an incompetent president might have in initiating the use of nuclear weapons.  Garry Wills wrote Big Rocket Man for the New York Review of Books and Adam Schatz produced The President and the Bomb for the London Review of Books.  Both authors expressed the concern that there was no mechanism in place to stop Trump from impulsively launching an unwarranted nuclear attack.

One of the difficulties in addressing this issue is that the mechanisms in place are not known to the people writing about them—including myself.  The people who know are not about to publicly acknowledge the procedures they adhere to.  One must rely on incidents from the past and experiences of people who have had incomplete knowledge about the process of nuclear authorization.  Most of what is discussed is based on what is presumed known of presidential authority in the case of an ongoing nuclear attack on the United States by another power.  In that situation, where mere minutes are available to initiate a response, absolute authority to launch by a single person, the president, is the only option.  The concern with Trump is that he will go rogue and launch an attack on his own initiative with no credible threat justifying such an act.  That is a completely different situation in which his presidential authority could come up against limitations.  In such a situation it would have been foolish to give unlimited authority to a single individual.  One has to assume that after seventy years of wrestling with these issues a system that makes sense would have been developed.

Wikipedia is usually a credible source of information, but in this case it illustrates the risk in drawing conclusions from dubious sources.  Under the rubric of “National Command Authority” its knowledge is summarized in two brief paragraphs, one of which is merely a definition of the term.  The second is as follows.

“Only the President can direct the use of nuclear weapons by U.S. armed forces, including the Single Integrated Operational Command (SIOP). While the President does have unilateral authority as commander-in-chief to order that nuclear weapons be used for any reason at any time, the actual procedures and technical systems in place for authorizing the execution of a launch order requires a secondary confirmation under a two-man rule, as the President's order is subject to secondary confirmation by the Secretary of Defense. If the Secretary of Defense does not concur, then the President may in his sole discretion fire the Secretary. The Secretary of Defense has legal authority to approve the order, but cannot veto it.  The Secretary of Defense succession plan designates numerous individuals that may serve after a President removes his or her predecessor.  Traditionally, a civilian United States officer must countersign a Presidential order or resign.”

The notion that a two-man rule is in place at the presidential level while our country is presumed to be under a nuclear attack with only a few minutes available to take action seems dubious.  At that point there is no time to waste in discussing the plan to move forward.  As a practical matter, the decision that an actual attack is underway must have already been vetted through the Secretary of Defense or his/her representative.  Before the president even hears about the situation, the system has decided that this is real, in which case the president and his advisors should have already gamed out what to do when this occurs.  The idea that the Secretary of Defense could decide to change his mind about the appropriate course of action forcing everyone to wait until a search is initiated to find the next person on the succession list seems ridiculous.

The paragraph from Wikipedia quoted above lists three references to support it.  One is the article referred to earlier, one is from Politico, and the third is from the New York Times.  None of these articles offer any hard sources for any of their conclusions.  In fact, only the article makes the claim about a two-man rule being in place; the other two disagree with this assertion.  So much for reliability in what you read.

The above situation assumes that at least one nuclear weapon is headed towards the United States.  When that is not the case, there is time to have a more leisurely process in place, and one would hope that at least a two-man rule is active, and there are mechanisms whereby others can provide counsel.  It would make no sense to assign the president unquestionable authority in this case.

Some hope of enforced sanity is obtained from a few remarkable comments coming from General John Hyten, head of the U.S. strategic Command (STRATCOM), the entity responsible for operational control of our strategic nuclear weapons.  As reported by Kathryn Watson under the heading Top General says he would resist ‘illegal’ nuke order from Trump (11/18/2017).

“Air Force Gen. John Hyten, commander of the U.S. Strategic Command (STRATCOM), told an audience at the Halifax International Security Forum in Halifax, Nova Scotia, on Saturday that he has given a lot of thought to what he would say if Mr. Trump ordered a strike he considered unlawful.” 

"’I provide advice to the president, he will tell me what to do,’ Hyten added. ‘And if it's illegal, guess what's going to happen? I'm going to say, 'Mr. President, that's illegal.' And guess what he's going to do? He's going to say, “What would be legal?” And we'll come up options, with a mix of capabilities to respond to whatever the situation is, and that's the way it works. It's not that complicated’."

The notion that the president can “put his finger on the nuclear button” seems misleading.  The “nuclear football” that is always nearby the president is apparently a device that allows the president to authenticate his presence and set up a communication link with those who have operational control.  General Hyten’s comments suggest that the president can’t press the button, somebody else has that responsibility.  And that someone else, Hyten for example, seems to have procedures in place that must be followed before acquiescing to whatever the president might wish to do.  It is interesting that the general used the word “illegal” with respect to potential actions Trump might wish to take.  That implies there is a code of ethics written down somewhere with respect to the usage of nuclear weapons.

“Hyten said he has been trained every year for decades in the law of armed conflict, which takes into account specific factors to determine legality -- necessity, distinction, proportionality, unnecessary suffering and more. Running through scenarios of how to react in the event of an illegal order is standard practice, he said.”

"’If you execute an unlawful order, you will go to jail. You could go to jail for the rest of your life,’ Hyten said.”

Whether Hyten is in a position to say “hell no” to a president is not clear, but the fact that he refers to the penalty for acquiescing to an “illegal” usage suggests he might have the justification to do just that.

It would seem that the nation’s leaders have put in place a system that has anticipated the existence of a rogue president.

It seems one fool is not sufficient to start a nuclear war, so perhaps we should relax a bit.  It seems it would take a number of fools to stumble into a nuclear conflict…..well…. maybe we should be at least a little worried. 

Thursday, December 7, 2017

How a Value-Added Tax (VAT) Works, and Why Governments—Except for the USA—Love It

We continue to mine T. R. Reid’s wonderful book studying tax systems in use around the world: A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.  The subject here will be the value-added tax or VAT with which most of us only become familiar when we travel overseas.  It seems the United States is one of the few countries that has chosen to not implement one.  Reid quotes a Professor Richard Bird of the University of Toronto to provide some perspective.

“Professor Bird, who has helped design tax regimes for numerous countries, told me that ‘a VAT, or its twin a GST [Goods and Services Tax], is an absolutely essential element of any tax structure today.  To set up a tax structure anywhere that didn’t include a VAT would be malpractice; it would be like creating a health-care system without hospitals.  That’s why every responsible Finance Ministry has used it.”

The VAT was created mainly to solve the problem of tax dodging by French businesses.  Is this something that the US should be concerned about?  You bet!  Kenneth Rogoff, in his book The Curse of Cash, provides us with some startling data.   One realizes that the tax authorities will target suspicious tax returns for an audit.  However, they can also target tax returns for an audit randomly in order to poll the economy to estimate the extent to which tax avoidance activities affect revenue.

“The IRS has used these extensive audits, combined with an array of other information (e.g., investigations into high-income-earner tax shelters) to arrive at an overall estimate of unpaid taxes.  For 2006, the most recent year reported, the IRS found that the ‘tax gap’—the difference between taxes voluntarily paid and taxes due—was $450 billion.  This comprises tax evasion in many different sectors, including underreporting of business income, wage income, and rental income.”

“Of the $450 billion, the IRS expected to recover $65 billion, leaving a net tax gap of $385 billion.  Put differently, roughly 14% of estimated 2006 federal taxes, or 2.7% of 2006 GDP, will never be paid.”

One might suspect that this activity goes on at levels where cash is not the logical means of transaction, but that would be wrong.  It seems a staggering number of small businesses use cash transactions as a means of hiding income.

“By far the most important area of tax noncompliance comes from underreporting of business income by individuals who conduct a significant share of their transactions in cash.  The problem extends to individuals operating as partnerships or small corporations.  Overall, small business owners report less than half their income and account for 52% of the tax gap.”

And the problem is even worse when state and local taxes are included.  Rogoff states that state and local taxes provide revenue at a level of about two thirds of federal revenue.

“Most states have income taxes (where noncompliance is presumably similar to that for the federal income tax), as well as sales taxes, where the scale for noncompliance in cash transactions is enormous.”

Rogoff was focused on cash as a vehicle for committing crime, but the real problem is that there is no mechanism in place for providing tax collectors with a record off what transactions actually took place.

It was the Frenchman, Maurice Lauré, who took up the task of inventing a system whereby records would be generated and business participants would willingly report all of their transactions.  The beauty of the system he developed was that it created the incentive for businesses to obey the tax laws.

Before explaining how a VAT works, we must compare it with a standard “sales tax” as applied across the US.  The sales tax is only applied at the end of a sequence of transactions involved in producing a product.  Consider a chair purchased for $200 by a consumer where the sales tax is 10%.  That person pays $220 for the chair and leaves unconcerned about whether or not the $20 she paid in taxes actually gets transferred to the government.  As Rogoff’s data shows, much of it doesn’t.

Lauré’s approach would break down that transaction and apply the 10% tax at each step in the production of that chair, but credit each participant for taxes already paid before moving forward. 

Let’s use the chair as an example of how value-added taxes work.  Company A buys wood from a supplier valued at $50.  He adds the tax and pays the supplier $55.  The supplier owes the government $5.  Company A fabricates the chair and sells it company B who will stain and finish it for $100 plus $10 in tax.  Company A is responsible for tax of $10 minus a credit for the $5 it paid in tax for the wood.  It transfers $5 to the government.  Company B then sells the finished chair to company C who will sell it to a consumer for $150 plus $15 in tax.  Company B transfers $15 minus its $10 credit to the government.  When the product is sold to a consumer for $200 plus $20 in tax, Company C owes the government $20 minus its credit of $15.  The net result is that the tax collector receives $20 on a $200 purchase, just as in a sales-tax transaction.  The price of the chair to the consumer would have increased to $220along the way to cover the cost of the tax, but the consumer would not explicitly be paying the tax.  The difference with a value-added tax is that each business participating in the chair’s production has the incentive to make sure all other participants record their taxable transactions so that each can claim their credit for taxes already paid.  If someone chooses to try to cheat, there will be a record that will allow the tax collector to detect it.

“….Lauré’s new tax on commercial transactions worked so well that it began to spread to other countries; Europe’s nascent Common Market (which became the European Union) made the value-added tax mandatory for all its member nations in 1967, on the theory that a unified market should have a unified tax structure.  Fairly quickly, the idea was taken up in South America and Africa, in the fast-growing ‘Tiger economies’ of East Asia, and then, somewhat later, in former British colonies like Australia, New Zealand and Canada.  By 2016, some 175 of the planet’s 200 countries had a value-added tax or a goods and services tax, which is another name for the same thing.”

The VAT is an important source of revenue for nations and it allows them to lower income and other taxes that taxpayers dislike and economists view as providing economic distortions (incentives for economic inefficiencies).

“This form of taxation brings in about 20% of all government revenue in the world; among the members of the OECD, the club of rich nations, VAT payments constitute 33% of all tax revenue.  For many countries, the VAT has become the most important single tax; in France, Lauré’s invention generates about 40% of revenues.”

The VAT is usually buried in the price of the item purchased where it is easily forgotten about rather than tacked on at the end where it is a constant reminder to the taxpayer.  Countries can also choose to provide VAT-free prices on goods that are exported, a benefit that is familiar to aggressive shoppers in other countries.  This also provides an advantage when competing with the United States in international markets.

The VAT has some disadvantages which probably contribute to the lack of interest exhibited by the United States.  Since the tax is generally applied to all purchases, it is regressive in nature because the lower income individuals will have it applied to a higher portion of their income.  This can dealt with in a number of ways, but the simplest approach is to remove the undesirable aspect of regressiveness with tax credits for those with low incomes through the income tax.  The implementation also requires some initial investment, but that is soon more than paid for by the increased efficiency of collection.  For a federal system with state and local sales taxes, some effort is required for a federal tax to be included, but other countries such as Canada, New Zealand, Australia, and Great Britain have already figured out ways to do it.

Liberals in the US have demonstrated a lack of interest in a VAT because it is intrinsically regressive in nature.  Conservatives in the US have opposed it because it is too efficient at collecting taxes (Reid chose to title his chapter on VATS “The money Machine”).  Since it is not applied explicitly at the time of purchase, taxpayers tend to forget about it.  Also, since prices vary continuously from market factors and overall inflation, small changes in the tax rate could generate a lot of government revenue without even being noticed by the public.  Conservatives would find such a tax to be exceedingly dangerous in the wrong hands.  However, the price conservatives pay in avoiding a VAT is higher income taxes.

The most recent study of a US Vat was generated by a study group formed by George W. Bush in 2005 tasked with making the tax code “fairer, simpler, and more efficient.”

“In an earlier version of its report, the advisory panel had proposed a revamped federal income tax, with a progressive rate structure of 15% for the lowest brackets and then additional brackets 25%, 28%, and 33% for people at higher incomes.  But if the United States adopted a 15% VAT on purchases, the income tax could be slashed to two brackets: 5% for lower income families and 15% for taxpayers above the median income.  With a top rate of 15%, few taxpayers would find it necessary or productive to invest in complicated tax avoidance schemes, so compliance would go up and IRS administrative costs would go down.”

Reid points out that by 2005 we had already embarked on a path of irreconcilable partisanship and the study group was, in the end, unable to come up with a consensus on whether to recommend a VAT.

Is there any chance for positive changes in the US tax code aimed at fairness and efficiency?  Not any time soon, but perhaps there is hope that a VAT might be reconsidered in the future.  It would only require that both conservatives and liberals pause, step back, and reconsider the advantages of a VAT.  Reid provides us with this take on the situation from Lawrence Summers.

“The former Treasury secretary Lawrence Summers offered a tongue-in-cheek prediction of when that would happen.  ‘Liberals think the VAT is regressive,’ Summers said, ‘and conservatives think it’s a money machine.  If they reverse their positions, the VAT may happen’.”

The interested reader might find the following articles informative:

Sunday, December 3, 2017

Simplifying the Paying of Taxes—and Saving a Lot of Money

While people will always argue about who should be paying what level of taxes, all would agree that the very process of paying taxes is painful, needlessly complicated, time consuming, and becoming expensive as more people are forced to seek help in filing their returns.  T. R. Reid addresses this issue at length in his recent book: A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.  In it, he tells us that the tax code does not have to be as complicated as it has become, and that there are other filing mechanisms that are much more accommodating for the taxpayer.  Reid’s goal is to survey systems in place in other countries and determine the approaches that would benefit the United States.  We have a lot to learn from other countries.

Much of our problem arises from the complexity built into tax code.

“The U.S. tax code has grown so huge that nobody really knows how long it is.  During the 2016 presidential campaign, candidates routinely cited a figure of seventy-three thousand pages—a number that seems to include thirty-five hundred pages of the law itself, plus another seventy thousand pages of regulations.”

We tend to curse the IRS when we struggle with our forms, but the real culprits are our representatives in Congress.

“Members of Congress love to harangue the IRS bureaucrats about lengthy tax forms and unfair rules and complex instructions—but of course the IRS isn’t responsible for the length, the fairness, or the complexity of our tax code.  It is Congress that writes the tax laws.  It’s Congress that adds hundreds of new exemptions, allowances, credits, and calculations to the tax code every year.  It was Congress that decided to give the IRS the responsibility for managing the health insurance subsidies flowing to millions of Americans under the Affordable Care Act (Obamacare)—and then cut the agency’s staff after assigning it this major new task.  It was Congress that assigned to the IRS the management of the earned income tax credit (EITC), which has become one of the nation’s largest support programs for low-income Americans.  It was Congress that crafted the much-hated alternative minimum tax, which spawned whole new levels of complexity, and hours of additional work, for millions of families.  And yet congressmen and senators can’t seem to resist pointing angry fingers at the IRS, as if someone else had created the legislative monster that is the U.S. tax code.”

Reid points out the perversity of a code which burdens those least able to afford tax-paying assistance with some of the most complex filing procedures.  He uses the EITC, which provides a payment to support low-income workers and families, as an example.

“The instruction book for low-income taxpayers hoping to get this benefit (Publication 596) is fifty-nine pages long.  The book lists fifteen separate conditions, spread over three chapters, that you have to meet to claim the credit….The whole thing is so complicated that the error rate is 27%, which means one out of four filers, and the IRS, have to spend even more time trying to get it right.  This has prompted a mini-industry of tax fraud, with shysters going door-to-door in low-rent neighborhoods offering to fill out the EITC forms (for a fee of course) whether the client actually qualifies or not.  Similarly the tax credits for people buying health insurance on the ObamaCare exchanges are generally aimed at low-income taxpayers and are also ridiculously complicated.”

The IRS has the appearance of being an efficient agency in that its cost for collecting taxes compares with the best in the world at that task.  However, it does that by putting the burden of tax filing completely on the taxpayer.

“While the tax agency spends $11.4 billion, American taxpayers end up paying vastly more just to file their annual returns.  The Office of the Taxpayer Advocate says American families spend 3.16 billion hours each year getting their taxes done—gathering the data, keeping records, and filling out forms; businesses spend about 2.9 billion hours on the same tasks….At an average wage, those 6 billion hours devoted to filing tax returns represent about $400 billion per year of working time; six billion hours is the equivalent of 3.1 million people working forty hours per week, fifty weeks per year.  In terms of time and cost, just paying our taxes has become one of the biggest industries in the United States.”

The complexity of the process is such that very few people remain who attempt to perform the task on their own.

“Because the system is so complicated, hardly any Americans still fill out Form 1040 by themselves….Today, barely 10% of Americans do their own tax returns.  About 60% of all individual taxpayers hire tax-preparation agencies to do the work for them; another 30% buy tax-preparation software each year to get them through the process.  The IRS says an average family at medium income shells out about $260 per year for tax-preparation services; those with higher incomes can easily pay ten times as much.”

One of the curious features of filling out income tax forms is that you are spending a lot of time giving the IRS information it already has.  Given that, and the possibility that an effort could be made to arrive at revenue-neutral simplifications, and a small expansion of reporting requirements could be made, one should be able to arrive at a system in which the IRS fills out your tax forms for you and just sends you a summary to approve or dispute.  That is just what other countries have done, with more of them pursuing that goal.

Consider Japan’s system of tax collection.

“Japan’s equivalent of the IRS, Kokuzeicho, gathers all the pertinent data for each worker—income, taxable benefits, number of personal exemptions, tax withheld, and so on—and then computes how much the worker owes in tax, down to the last yen.  Because Japan uses a system known as ‘precision withholding,’ with the amount changing whenever pay goes up or down, most people withhold the exact amount due.  In early March, Kokuzeicho sends a postcard to every citizen that sets forth all this information: how much you earned, how much tax you owe, how much tax you’ve already paid through withholding.  If you’ve paid in more tax than you owe, Kouzeicho deposits the refund amount in your bank account; if you did not withhold enough, the agency takes the tax that’s due from your bank account.  If the figures on the postcard look about right, the taxpayer does nothing.  The tax has been computed and paid already.  If the numbers look wrong, you go into the local tax office and try to straighten things out.  As a result, paying income tax is a totally automatic process for about 80% of Japanese households, requiring no more than reading a postcard once a year.”

Britain has a system that is similar to that in Japan.  In fact it maintains a bureau called the U.K. Office of Tax Simplification (OTS).

“….the office has made some four hundred formal proposals to simplify either the tax code or the tax return forms and 50% of them have been implemented, at least in part.”

“The U.K. has established a system rather like Japan’s, with Her Majesty’s Revenue and Customs filling in the tax return with data it has received from employers, banks, brokerage houses, charitable recipients and so on.  The Brits also use a ‘precision withholding’ system, called Pay as You Earn, or PAYE, which takes into account wages and benefits, Social Security and health-care deductions, student loan deductions, and various other adjustments to income.  With that, most British wage earners find their yearly total tax withholding just about equals the tax they owe; in 2014, according to the Office of Tax Simplification, only one in five Brits had to file a tax return.”

Reid lists a number of countries that have followed or are beginning to follow the path taken by Japan and the U.K.: the Netherlands, Denmark, Sweden, Spain, and Portugal.

Implementing such a system in the United States would be much easier if the tax code were simpler: there basically would be less data to collect.  It would be expensive to move in this direction, but the data indicates that a simpler system increases compliance with tax laws; the initiative would soon pay for itself with increased revenue.

Reid points out that such a system already exists as a trial project in California for state taxes.

“California has launched what it calls an ‘experimental’ program known as CalFile in which the revenue department will send you a state tax return that is already filled in; if the numbers look right, you sign it, and the work is done.  If they don’t, you send back the return with your changes.  The state has never spent much money to publicize this system, so it is poorly known and little used.  But of the ninety thousand Californians who did file through this prefilled form in 2012, 98% subsequently told pollsters that they loved it and would definitely use it again.”

Such a system could be implemented in the United States.  There is no reason, other than politics, why software like the commercial tax filing programs couldn’t be implemented by the IRS thus saving the public billions of dollars in unnecessary expenses.  But many of our legislators are not in the business of representing their constituents; rather, they are tasked to represent the corporations that feed them money for reelection campaigns.

“It turns out that the complexity of the U.S. tax system is a money maker for some large companies.  So they have lobbied strenuously, and successfully, against all efforts to simplify the tax code.  The ‘Tax Complexity Lobby,’ as Forbes magazine called it, includes tax-preparation firms like H&R Block and Jackson Hewitt, as well as companies that make tax-preparation software.”

“The biggest spender in the anti-simplification camp is Intuit, the maker of Turbotax, the top-selling tax software program.”

Yes, the United States continues to strive to be “exceptional,” whether for the good or the bad.

The interested reader might find the following articles informative:

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