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Geoff Lawrence Moves On and Up

6/27/2017

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For now, this is the last regular column that will carry the Ron and Geoff byline.  Geoff is leaving the Assistant Controller’s job July 1 for a new one.
James Smack, the Deputy Controller, will join Ron in the weekly column beginning next week.  Geoff will make guest appearances now and then, we anticipate.
Ron and James know Geoff has done an outstanding job as Assistant Controller and as a co-columnist, and he’s been a joy to work with.  He’s a fine human being with a great wife and two priceless children.  He’s a top-flight analyst with a superb intellect, a fine manager and leader, a gifted writer and ideal colleague.
The Controller’s office, the State of Nevada, and the voters and taxpayers are suffering a great loss in his leaving.
He was forced out of his job by the malicious and vindictive actions of Governor Brian Sandoval and the statists in both parties in the legislature because his work and Ron’s for the public interest had too long been too big a problem for them.  It was pure retribution against Geoff and Ron.
When Ira Hansen was Assembly Speaker designate in November 2014, he hired Geoff as the majority caucus’s chief policy and economic consultant.  It was an inspired choice.  Geoff had already compiled a long, legendary record as the top policy and economic analyst at the Nevada Policy Research Institute and elsewhere.  As a former Assemblyman, Ron knows the caucus has not seen Geoff’s like before or since.
But Sandoval and his political thugs organized the ouster of Hansen because, as a staunch limited-government conservative, he threatened their tax-hiking agenda.  During a mugging to try to convince Hansen to go, one of Sandoval’s complaints was that Hansen had hired Geoff.  During Geoff's time with NPRI, he had publicly criticized the systematic cronyism within Sandoval's office, and Sandoval had not forgotten.
When John Hambrick and Paul Anderson got control of the caucus after the coup, they did the bidding of the statists in the Republican Establishment and cashiered Geoff.  What they didn’t know was Geoff and Ron had expected this and already agreed Geoff would take Assistant Controller’s job.
With the help of some principled and courageous Republicans in the legislature, plus some outstanding professionals and other citizens, Geoff and Ron crafted an alternative budget that would have avoided the unnecessary tax increases the Establishment forces in both parties wanted to pass.  After legislative counsel blessed the alternate budget as legally sound, it passed a legislative hearing without a scratch.  So, Sandoval and the Establishment ignored it for the rest of the session because they had already promised the predatory special interests they serve the biggest tax and spending increases in Nevada history.
Ron and Geoff then worked with the folks who had helped with the alternate budget and others to craft the Commerce Tax referendum in 2015.  The referendum survived a furious assault by the governor's allies at the trial court.  On appeal, the Supreme Court found a political rationale to kill the effort: They said the description of effect, written originally by the legislative general counsel, was defective for not telling voters that rescinding the tax would mean the state would have slightly less to spend in the future.  The condescension of such progressives, holding that mere voters would not understand just that intended result, is stunning.
So the governor used his budget this year to cut Geoff’s position with the pretext of an assumed reorganization of some state administrative functions.  Sandoval's statist allies in the legislature nixed that proposed reorganization, but they all studiously ignored that fact and agreed to cut Geoff’s position anyway.
By aggressively representing the public interest, Geoff and Ron had been too much a thorn in their sides.  So, they had to pay with the loss of Geoff’s position.
Geoff was offered a better job in another state agency, but had an even better option as Chief Financial Officer with a publicly traded private firm.  Geoff says he won't miss the small-mindedness and vindictiveness of the political world.
Ron kept Geoff in the byline for this last column because he was a full partner throughout their collaboration.  Thanks and Godspeed, Geoff.
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Federal Taxes: Lower Corporate Rates, Use AMT as a Lifeboat

6/13/2017

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As economists and public interest advocates, we’re very interested in the federal tax code and the various ways in which it creates, destroys or distorts economic incentives.
The federal corporate income tax has been a huge deterrent for companies to reinvest profits earned abroad back into America.  In the early 1990s, democratizing nations in Eastern Europe launched a round of global tax competition to attract industry by slashing corporate income tax rates.
Estonia began by eliminating taxes entirely on retained corporate earnings.  Moldova and others soon followed suit and Western European nations responded by lowering their own rates.
The United States is the only remaining industrialized nation that hasn’t lowered its corporate tax rates during this wave of global tax competition.  So, it now has the highest statutory corporate tax rate in the developed world at 39.1 percent, according to a recent report from the Congressional Budget Office.
This punitive tax cost of doing business in the United States leads American firms to leave profits earned by their foreign subsidiaries offshore and reinvest them in foreign markets rather than investing at home.  Apple and General Electric each hold hundreds of billions of dollars in earnings offshore.  American firms in total hold $2.6 trillion in offshore earnings, more than one-eighth of our economy. 
Other companies, like Tyco and Fruit of the Loom, have relocated their corporate headquarters to other nations altogether in order to benefit from better tax laws.
The United States needs to reestablish itself as the preferred place to do business and destination for global investment by dramatically lowering corporate income tax rates.  President Trump has suggested a top statutory rate of 15 percent.  That would be a huge step in the right direction.
But we differ slightly with other reformers’ ideas we’ve heard.  In particular, the president has suggested that repealing the Alternative Minimum Tax (AMT) would substantially reduce compliance burdens faced by American businesses and households. 
Congress originally created a minimum tax in 1969 after then-Treasury Secretary Joseph Barr showed 155 high-income households paid no federal income tax because they were able to maximize deductions and exemptions.  The current AMT was formalized as a parallel tax system to the regular system as part of President Reagan’s 1982 tax reform.
Under the AMT, for both households and businesses, most exemptions and deductions are disallowed and a low, flat tax rate is assessed on all income.  If the tax due under the AMT exceeds the calculated amount of tax due under the ordinary income tax rules, then taxpayers pay the AMT instead.
Tax economists generally emphasize a few guiding principles for tax reform (besides low rates and a broad base).  First, to minimize compliance costs, taxes should be easy to understand and file.  Second, taxpayers in similar financial circumstances should receive similar treatment, while those in different financial circumstances should receive roughly proportional treatment.  Third, tax policy should not distort behavior by making certain transactions subject to multiple levels of taxation or especially to punitive taxation.  Finally, the tax burden should transparent and visible.
We certainly agree with Trump and others that the current tax code is needlessly cumbersome in large part because of the need to calculate taxes under two completely different systems.  However, if tax reform were to meet all the stated objectives listed above, the tax would look like the AMT, not the regular income tax.
That’s why we see the AMT not as a problem to be eliminated, but as a likely vehicle for federal tax reform.  Comprehensive tax reform is very difficult because big and small businesses and other interested parties all want to include different, sometimes incompatible, elements.
But the AMT is a flat, low-rate tax already written into law.  By itself, it’s easy to comply with, creates few distortions, and imparts greater equity than the regular income tax.  Repeal of the regular tax code would cause all filers to default to the AMT.  And no one would pay more under the AMT than they currently do, although many filers would experience a dramatic reduction in tax burden.
The AMT can be a lifeboat for federal tax reform efforts that have floundered for decades.  It’s just another gift of the Reagan legacy.
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The Secret to Success

6/6/2017

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The Secret to Success
By Ron Knecht and Geoffrey Lawrence – 6June2017
Some people seem to have it all.
During our lives, we’ve noticed that many successful people we know in business also find time to stay physically fit, eat healthy diets, read broadly, soak up culture and stay well informed.  And make a great home life for their children.  The success of many high achieving people often isn’t confined to just one area of life but extends to a number of dimensions.
We often try to emulate these role models, and what we’ve learned is relatively simple: Successes and struggles in life stem much from the habits people adopt.  People who plan their time and dedicate it to achieving different things throughout each day tend to lead happy, balanced and prosperous lives.
We were reminded of this lesson in a different way recently when we came across a revealing statistic from the National Endowment for Financial Education: About 70 percent of lottery winners go broke within seven years of winning.  Many actually wind up in worse shape than before they won.  Rates of addiction and suicide are alarmingly high among this group, even though they’re commonly called “lucky.”
Financially educated individuals tend not to play out of recognition that the odds of winning are lower than being struck by lightning; so with near certainty the outcome will be the loss of a dollar.  It’s better to invest that dollar into an income-producing asset like stocks or bonds.
Likewise, wealthy folks tend not play both because they understand this principle and because they have no immediate desperate need for money.  In most cases, a thorough understanding of the low odds of winning such games leads them to habits that keep them from desperation.
So lotteries involve what economists call “adverse selection” of players:  that is, they tend to be played primarily by less financially sophisticated and wealthy individuals.  Academic research confirms this, noting that lottery spending is concentrated heavily among the lowest third of households by income.  Also, lottery players tend to come from younger age demographics, people who presumably also have less financial experience.
As a result, people who win (against ridiculous odds) often instantly come into a large fortune without having developed healthy and productive habits.  In fact, academic studies show a strong correlation between gambling pathology and alcohol or drug abuse. 
In other words, many lottery players (and winners) have developed extremely unproductive and personally destructive lifestyle habits that don’t necessarily disappear when they win.  To the contrary, lottery winnings often fuel these habits for a time, until the winnings are exhausted. 
Lottery winners also frequently pay heavy amounts of taxes due to their lack of financial sophistication.  Many winners, for instance, make large gifts to their friends or show off with profligate purchases without realizing all the tax consequences, such as gifts being taxable to the giver and not the recipient.  Others make imprudent or uninformed investments that don’t pan out.
A notable study in 1978 found lottery winners characterized themselves as less happy and less fulfilled than other randomly selected people.
These are sad cases.  But they reinforce to us the lesson that happiness and success in life depend on the adoption of healthy and productive habits, including regular and disciplined study of a wide range of topics.
Recognizing the adverse selection inherent to lotteries, winners are effectively case studies in what happens when wealth is randomly bestowed upon an individual with poor habits.  Statistics show that within a short time his poor habits will again render him poor.  But healthy and productive habits have elevated many folks from humble beginnings to high levels of wealth and success.
That’s why we teach our children to choose heroes based on the richness of their habits and discipline and not the richness of their bank account.  Poor habits cause even the largest family fortunes to wane.  Justin Bieber and Miley Cyrus will not be held up to Geoff’s children as role models and Ron’s 15-year-old daughter rejected them herself (without any coaching) some time ago.
Nathaniel Hawthorne said, “Families are always rising and falling in America.”  However, some families, such as the Adams family of Massachusetts, seem to pass along good habits and success from one generation to another.
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    *Opinions expressed here may or may not reflect the views of the Lyon County Republican Central Committee. 

    Author

    Ron Knecht has served as Nevada Controller, a higher education regent, legislator and economist. He can be reached at RonKnecht@aol.com.  
     

     

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