Back to Arkansas . . .

IN ONE "CLINTONMANIA" week in Arkansas, Matt Labash gathered enough material for a book and then condensed his perspective into a well-written, interesting article to share with the droves of people who were not there ("Clintonmania," Dec. 6). I reminded him that twice as many fans attend Arkansas Razorback football games every weekend.

Matt's persistent persuasiveness propelled me to a reunion I would otherwise have missed. In retrospect, I'm glad I went to the reunion, and glad that I took Matt with me, for three reasons. One, I would not have taken the time to drive all over town by myself, and it was an illustrative, if disappointing, eye-opener to see the changes in Hot Springs. Two, I reconnected with a woman I've long admired (not a Clinton fan either), and look forward to our next visit. Three, dealing with the small-minded people from my old high school class provided the personal satisfaction of popping a zit.

Dolly Kyle Browning
Dallas, TX

Defusing North Korea

SUGGESTIONS ON HOW to negotiate with North Korea are most persuasive when they incorporate practical experience and objective analysis of all relevant factors. Nicholas Eberstadt's "Tear Down This Tyranny" (Nov. 29) reflects too much reliance on unproven theory and not enough consideration of practical experience. In a word, it is impractical.

To resolve the North Korean nuclear issue, Eberstadt implicitly recommends a more confrontational U.S. policy approach that is not likely to bear fruit. North Korea has never succumbed to external pressure over the past 50 years, despite the wishes of foreign ideologues. Conversely, pressure tactics have strengthened the regime.

With respect to the six recommendations that Eberstadt makes, I will limit my comments to points four and five. The fourth recommendation that Washington "[work] around the pro-appeasement crowd in the South Korean government" offends on multiple levels. Calling on the U.S. government to intervene in South Korean domestic politics is inappropriate, to say the least, while the article's contempt for South Korean democracy is breathtaking. Confusing "appeasement" with thoughtful diplomacy is irresponsible. Ignoring the South Korean experience in negotiating with North Korea is not wise. We South Koreans fully recognize the difficulties of negotiating with Pyongyang, having conducted more such negotiations than any other nation. Aware of what approaches are likely to generate agreeable or counterproductive responses from North Koreans, we have a different view on how to deal with North Korea.

Eberstadt's fifth recommendation-- "Readying the nondiplomatic instruments for North Korea threat reduction"--seems to imply that the United States should unilaterally implement military measures to end North Korea's nuclear program. Such a recommendation ignores the consequences on U.S. allies in the region and other states as well as the subsequent implications for U.S. influence in the region. If the author is advocating war, can he wonder why North Korea would seek to improve its defense capabilities?

Peaceful resolution of the North Korean nuclear issue in a way that strengthens the ROK-U.S. alliance and preserves U.S. influence in the region will solidify President Bush's legacy far more effectively than will the suggestions outlined in the article. South Koreans and the government of President Roh Moo-hyun stand firmly with the United States in crafting policies to achieve these important objectives.

Soo-Dong O
Minister for Public Affairs
Embassy of the Republic of Korea
Washington, DC

The Right Reform

I INITIALLY THOUGHT THAT John D. Mueller's "Taxes, Social Security, and the Politics of Reform" (Nov. 29) was going to be a well-reasoned and sorely needed insertion of sober realism into conservative discussions of issues that are often prone to superficiality and triumphalism. Unfortunately, it turned out to be a missed opportunity, a woefully misinformed piece that employs the right rhetoric but draws entirely erroneous conclusions.

I'll leave it to others to correct Mueller's misstatement of the sources and implications of Social Security's unfunded liability. What was particularly galling was his misuse of human capital theory. Mueller was right to criticize many free-market analysts and pundits for ignoring the role that human capital formation plays in wealth creation. They mistakenly view income tax deductions, exemptions, and credits taken by families with children as some kind of special-interest gift or unwarranted intrusion into markets. In truth, these devices are attempts, however clumsy, to recognize the fact that at least part of the expense of child-rearing is properly thought of as an investment in future taxable earnings akin to investments in other kinds of income-generating assets. As such, they should be treated like IRA deposits: Either the principal or the return (in this case future earnings), but not both, should be subject to tax.

The problem is that Mueller failed to draw the right lesson from this insight. He concluded that moving to a consumption-based tax system would discriminate against human capital in favor of physical or financial capital. Not at all. A true consumption-based tax system would treat investment in all its forms as future consumption, and thus exclude it from today's tax base to avoid double taxation. Over the past 15 years, many free-market writers and institutions have come up with a number of policies, such as IRA-like savings accounts for health care and education expenses, that can properly be used as part of a consumed-income tax model to accomplish this kind of tax reform. It is true that some on the right don't understand their function and mistakenly consider them deviations from market neutrality. Advocates of a national sales tax, in particular, have failed to think through what would have to be exempt from their new tax (part of college tuition and medical bills, for example) in order to maintain neutrality regarding present and future consumption. They need to be confronted about this problem, but Mueller didn't even try.

Instead, he articulated ideas for income taxation and Social Security that would retain many of the tax biases and redistributionist elements of the current system. They also seemed remarkably antiquated, as was Mueller's odd contention that stock ownership is a claim on physical property while Social Security is essentially "a share in a diversified human capital mutual fund." In today's financial markets, much of the value of a security is derived from the corporation's ability to attract, train, and retain highly productive employees. Investing in stocks is most certainly a way to invest in human capital, which is largely formed in expectation of higher earnings from employers, and sometimes with direct funding from current or prospective employers. Indeed, on-the-job training remains a more productive investment of dollars than formal education is in many instances. Mueller asserted that a college degree "roughly [doubles] average annual earnings," which is an excellent example of the fallacy of the average: While college is a great financial investment for some, especially those going into highly paid professions requiring advanced degrees, it is not a particularly productive investment for many others who attend largely because government has made it appear artificially inexpensive.

Mueller later advocated a spectacularly bad idea: "reforming" the income-tax code by imposing more tax at the business level so that "tens of millions of people . . . would no longer have a personal relationship with the IRS every April" except for those getting a "human maintenance" rebate check. This would take us 180 degrees in the wrong direction by further camouflaging the costs of big government. Americans need more of a "personal relationship" with the IRS, not less, so they will come to appreciate how much of their income it is taking each year, and in what screwy manner. We need to change and ultimately eliminate withholding, so that voters write personal checks directly to Washington instead of getting welcome "rebate" checks from Washington. Mueller's tax reform would be economically and politically disastrous.

One can only hope that Republican leaders in Washington will not fall for Mueller's policy prescriptions, which constitute a fundamental betrayal of the principles they have articulated in their campaigns and would do little to advance the causes of economic growth, smaller government, and greater personal freedom.

John Hood
John Locke Foundation
Raleigh, NC

JOHN D. MUELLER RESPONDS: John Hood was a valiant but impetuous Confederate general who lost his army by attacking adversaries before learning their positions as well as they knew his. General Hood's namesake has put himself in a similar predicament.

Let's start with Social Security, to which Mr. Hood gives short shrift. I wrote, "While a financial account is essentially a claim on property, a pay-as-you-go Social Security retirement pension amounts to a share in a diversified human capital mutual fund." Mr. Hood summarizes this as "Mueller's odd contention that stock ownership is a claim on physical property while Social Security is essentially 'a share in a diversified human capital mutual fund.'"

The argument that Mr. Hood premised on misplacing "essentially" and inserting "physical" is unimportant but not unanticipated. Some employee skills are specific to a firm (like knowing at which golf course to find the vice president on Wednesday afternoons), and the training cost is borne by shareholders, since employees cannot earn money with the knowledge in a job at another firm. But most skills are transferable (including all skills acquired by formal education and general training), and in a competitive market the return is received by workers, not by shareholders "investing in stocks." Hence "essentially." Mr. Hood's dyspepsia at the "misuse of human capital theory" can be relieved by closer attention to its use.

More interesting is the part Mr. Hood reported correctly. Instead of disputing my description, he abandoned the field, saying, "I'll leave it to others to correct Mueller's misstatement of the sources and implications of Social Security's unfunded liability." Well, why? Mr. Hood has written a book discussing Social Security at length. He retreated, dear reader, because my 16-word description unwittingly exploded Mr. Hood's elaborate ideology about Social Security and exposed its glaring inconsistency with his ideology of taxation.

After agreeing with my critique of "consumption"-taxers' definitions of investment, Mr. Hood wrongly suggests that I do or should think that all income-generating investment in people or property "should be treated like IRA deposits: Either the principal or the return . . . but not both, should be subject to tax." But I did not propose that labor compensation resulting from earlier investment in child rearing and education that was not tax-deductible should be tax-free for the rest of those workers' lives. I proposed instead that there be "no double taxation of any income" (as of some dividends). It's not "double taxation" to pay last year's tax on last year's income and this year's tax on this year's income.

The easiest way to dispose of Mr. Hood's tax plan is to take it seriously. As it happens, I did so a couple of years ago for the author of one of the many "consumption" taxes. Assuming that all federal income, payroll, estate, and gift taxes would be replaced--and poverty-level "human maintenance" exempted (as that fellow proposed)--it turned out that the tax rate on what Mr. Hood calls "true consumption" was a flat 61 percent (or 43 percent inclusive of the tax, as income tax rates are usually calculated).

To a narrow base and high tax rates, Mr. Hood adds endless complexity and government intrusion, by switching from consumption as using-up (of property) to enjoyment in using (by people). This is why he would exempt all investment in income-earning property, but " part of the expense of child-rearing" and " part of college tuition and medical bills" (emphasis added). Just as we may use a computer either to run a business or play games, and drive a car for business or pleasure, we may use our faculties for earning income or enjoying ourselves--or (a possibility Mr. Hood did not conceive) both at once. As he noted in a column last year, "many students may choose to specialize in low-paying but rewarding subjects." By this principle, if Mr. Hood judges that a student enjoys learning, there's no tuition deduction. But then why not apply the same rule to, say, the deduction for a company car?

Finally, Mr. Hood insists that most Americans are wrong to want the simplicity of not having to file income tax returns, or having their taxes withheld by their employers. "Americans need more of a 'personal relationship' with the IRS, not less," he declares; and "we need to change and ultimately eliminate withholding, so that voters write personal checks directly to Washington instead of getting welcome 'rebate' checks from Washington." And he thinks my tax reform would be "politically disastrous"?

Why should Congress enact a 16 percent or 18 percent flat tax rate on all income, with taxes rebated on poverty-level "human maintenance" and most taxpayers not having to file a tax return, merely because people want such a plan? Mr. Hood says they need a 43 percent (or 61 percent) tax, with deductions allowed only after convincing the IRS that your studies weren't "rewarding" and that you worked on spreadsheets rather than playing computer games. Political catnip!

As Ronald Reagan (who reformed the income tax and pay-as-you-go Social Security) put it in the 1977 speech with which I began my article: "If there is any ideological fanaticism in American political life, it is to be found among the enemies of freedom on the left or right--those who would sacrifice principle to theory, those who worship only the god of political, social, and economic abstractions, ignoring the realities of everyday life. They are not conservatives."

That's Rall, Folks!

REGARDING THE SCRAPBOOK's recent item on Ted Rall (Dec. 6): A fellow Air Force historian introduced me to the guilty pleasure of reading Rall's columns and viewing his hideous cartoons a couple of years ago. Before that, I had naively assumed that no one could manage Rall's combination of viciousness, elitism, and sheer ugliness.

We've since had our favorites; the slimy attack on Pat Tillman after his death in Afghanistan sticks out particularly in my mind. Sometimes it is necessary to be reminded what sort of person makes up the opposition. Recently Rall wrote a column that demeaned even those Americans who gave their lives in World War II.

It's good to see Ted Rall and his "work" getting more attention. The more people know, the better. Thanks for bringing his views to THE WEEKLY STANDARD's wider audience.

Bill Brockman
Atlanta, GA

Canadian Bacon

AS A CANADIAN SUBSCRIBER, I was quite pleased to see THE SCRAPBOOK (Dec. 6) note the expulsion of Carolyn Parrish from the Canadian Liberal party caucus. Unfortunately, the reason for her expulsion was not her anti-American diatribes. Even when commenting on her most recent destruction of President Bush in effigy, the prime minister would only express disappointment. It was not until after that incident, when Ms. Parrish gave a radio interview in which she expressed utter disdain for the prime minister and explained that she wouldn't give a damn if he and the party lost the next election, that she was booted from the government.

Anti-Americanism keeps the Liberal party in power, and hence is tolerated or promoted. Disloyalty is not.

David K. Mulvale
Toronto, Ontario