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Bald Eagle in Anchorage, Alaska

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Wednesday, July 18, 2018

The American Democratic Republic


Today's post is written by a guest author on this blog, my son.  This piece is the result of much reading, research, and thought, and reviewed by editors spanning three generations.  It is about one of the most important topics of our time, our political dysfunction and polarization.  Please take the time to read it.
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There are real boundaries beyond which our society and system of government can and will break down. There is a minimum level of solidarity required for a nation to survive with citizens rather than subjects, and a minimum level of social stability required for it to function. We can fall too far and merely avoiding disintegrating society is not enough. We must do far better, for ourselves, for the world, and for the future.

Part 1: How the American Democratic Republic Works

As others have already noted, our civil rights, government representation, and social solidarity are degrading. Understanding the mechanics of our republic and their weaknesses is necessary to understand how this degradation is occurring. Note, however, that alternative mechanics have their own different weaknesses. Replacing these mechanics is not a guarantee of revitalization although there might be opportunities for improvement.

The Voting System

The United States of America is a democratic republic. By district, representatives of the people are selected by the majority of eligible voters.
The United States almost exclusively uses first-past-the-pole voting – a winner-takes-all, plurality voting method. In combination with single-member districts, this results in a two-party system because only parties approximately as popular as the most popular party are competitively electable. If one party has about 50% popularity, then it is impossible for two more parties to also be realistically competitive.
The Democratic and Republican parties are not conspiring to keep out additional parties. "Elites" are not conspiring to have exactly two parties. Political patrons are not the source of the two-party system. A two-party system is merely the expected practical result of the current voting system.
In some districts, it's not even Democratic and Republican, but sometimes Libertarian and Republican, or Democratic and Green that are the top two parties – and thus are the only competitive parties capable of possibly winning election in that district at the time. If one party is sufficiently popular in a district, then no other party has a practical chance of winning.
Votes for third party candidates and independents aren't necessarily "wasted", but votes for candidates other than the two most likely to win are "wasted" as much as "extra" votes for the winner or any votes for the loser are "wasted" (insofar as they are more likely to be for a losing candidate). Such votes only communicate support for some value, policy, or proposal rather than deciding the winner of the election.
Only winners make policy.

Single-Member Districts (The U.S. is not Europe)

In Europe (or more specifically, in multi-member districts whose elections award proportional representation), people get to vote for whichever political parties they think best represent their interests. The elected representatives are then sent to the capital and must "form a government" – i.e. agree on which collection of political parties will cooperate to form a governing majority willing and able to vote together in order to accomplish governance. This process involves negotiation and usually involves the party with the most representatives, but not a majority of all representatives, agreeing to one or a few demands from a smaller party that is still large enough to form a majority coalition with the largest party. When these negotiations fail, American news headlines read [European Country] "fails to form a government" or "failed to form a governing coalition".
What would be fully formed political parties in Europe are instead sub-party political units in the United States. American major parties' compositions and coalitions change over time, but at any one time they tend to be led by a specific core constituency. These sub-party constituencies jostle for influence inside the major political parties, and through history they have occasionally withdrawn from one major party to support the other. For example, 1980-2016 saw the libertarian business sub-party (lower taxes, less regulation, smaller government) lead a coalition with the evangelical Christians and the "law and order" sub-parties.
In the United States, the voters instead of the representatives are expected to negotiate among themselves to come up with a workable governing coalition of interests, preferences, values, and policies. If you want your values and agenda to be represented in government, and for your policy preferences to be enacted, then you need to work to put your values and agenda into a winning (i.e. majority) platform at the level of government in which you are interested. If you do not like this situation, then you need to change the voting system.

The Primary and Caucus System


The specific platform and policies a party takes to the general election is decided through the pre-election primary and caucus system. In this system, candidates of the same party, each with a different emphasis on various issues, compete to represent the entire party in the general election. Depending on state law, sometimes all voters are allowed to vote in open primaries, sometimes voters are only allowed to vote in the primary election or caucus for the party for which they are currently registered, and sometimes party members vote in caucuses for delegates to a convention where the delegates then vote for a candidate for the general election.
The kinds of candidates brought to the general election by this system depend on the circumstances. Moderate candidates benefit from swing voters and competitive districts (where multiple parties have a reasonable chance of winning). Extreme candidates benefit from polarization, ideologues, and primary voters who are more concerned with signaling their identity than in winning the general election.
The current situation in the United States is unfortunately the latter for a couple reasons. First, turnout in primary elections is relatively low. This is problematic because ideologically polarized voters are far more motivated and more likely to participate. Second, almost everyone has a distorted view of the prevalence of their viewpoint. Voters tend to believe that the candidate most in tune with their viewpoint has the best chance of winning. So partisans in primaries and caucuses promote extreme candidates and blame general election losses on candidates' insufficient partisanship, instead of insufficient moderation. Even if the general electorate might prefer a moderate candidate, apathy toward the primaries and caucuses results in polarized candidates advancing to the general election.
The primary and caucus system exacerbates the effects of single-member districts on the candidate selection and election process. So does the fact that voters are typically barred from voting in primaries or participating in caucuses except for those of the party for which they are registered. Closed primaries and caucuses prevent voters from voting against the least desirable candidates in other parties while also voting for their most preferred candidate from their own party.

Gerrymandering

When there are districts instead of proportional representation, the district boundaries must be decided upon. And where there is a decision to be made, there is the opportunity to influence the outcome and result of the decision. Thus gerrymandering: the manipulation of electoral constituency boundaries so as to favor a desired outcome.
When successful, gerrymandering functionally eliminates the general election by ensuring that only the gerrymandered party's candidate can realistically get elected. This effectively disenfranchises everyone not registered as members of that party.
Preventing gerrymandering is a chicken-and-egg problem. Only the current majority party has the political power to avoid gerrymandering, but they would be the beneficiary of gerrymandering.
Gerrymandering exacerbates the effects of the primary and caucus system on the candidate selection and election process by reducing the competitiveness of districts (the likelihood that more than one party has a realistic chance of winning a given district).

Low Voter Choice in General Election Voting

All of these factors lead to the glaring systemic weakness of limited voter choice in the United States. When it comes time to actually vote in the general election, most of the politics and opportunity for citizen-led change has already passed and voters are effectively left at best with a choice of supporting A, supporting B, or protest (and living with the systemic choice of everyone else in all cases), and even that choice only practically exists for those living in competitive districts.

Polarization and Political Self-Segregation

But low choice is itself further exacerbated if the voters themselves are polarized and extreme in their views, values, and preferences. Gerrymandering isn't even necessary to create uncompetitive, single-party districts if people choose where to live based on their personal politics.
Fewer voters in the United States hold a mix of conservative Republican and progressive Democratic values now than in the past. Counties in the United States are increasingly partisan – very red or very blue, and less purple. The current trend is that polarization and partisanship are continuing to increase.
Polarization is our principal challenge because nothing about the mechanics threatens the stability of our collective society or the unity of our nation. Self-segregation is the outward manifestation of our failing solidarity. I believe that democratic mechanics cannot survive in an environment of different peoples who desire to be separate and believe others' differences to be so objectionable that they must be forcibly corrected. Ultimately, this is about us, who we choose to be, what we choose to value, and how we interact with others.

Part 2: Sustaining the American Experiment

The American Democratic Republic and the constitution on which it stands is worth preserving.
Sometimes the things that may or may not be true are the things a man needs to believe in the most. That people are basically good; that honor, courage, and virtue mean everything; that power and money, money and power mean nothing; that good always triumphs over evil; and I want you to remember this, that love... true love never dies. You remember that, boy. You remember that. Doesn't matter if it's true or not. You see, a man should believe in those things, because those are the things worth believing in.
-- Hub, in Secondhand Lions [2003]
The American Democratic Republic will survive only so long as enough Americans want the American Experiment to continue more than they want anything else.

Design Expectations

A republican, or free government, can only exist where the body of the people are virtuous, and where property is pretty equally divided; in such a government the people are the sovereign and their sense or opinion is the criterion of every public measure; for when this ceases to be the case, the nature of the government is changed, and an aristocracy, monarchy or despotism will rise on its ruin.
-- Samuel Bryan, the Anti-Federalist Papers, Centinel I [1787/10/05]
No system, no matter how simple or complex, can continue to exist and operate outside of its performance parameters, including governments. All system designs, including governments, rely on implicit and explicit assumptions and expectations about the operating conditions and environment.
The design foundation of the United States of America is the U.S. Constitution, specifying government of the people, by the people, and for the people of the United States of America. The phrasing is Lincoln's, and it refers to the Constitution's guarantee of a Republican form of government, the voting rights of citizens, and the preamble. That foundation has been built upon by American history and culture, expressing additional assumptions about and expectations of the government and its people, documented in the Declaration of Independence, the Federalist Papers, Presidential speeches, Supreme Court decisions, and other expressions of American progress.
Collectively, this corpus of evidence shows that the design of the American government relies strongly upon the cooperativeness of its people and the trustworthiness of the statesmen selected to be their representatives. This government design relies upon its participants – citizens, voters and representatives – to debate with each other instead of fighting when there is disagreement, and to voluntarily act in the best interests of the nation and all of its people rather than acting in self-interest at the expense of their neighbors and fellow citizens. Furthermore, effective functioning of the government requires that we honor both the spirit and the letter of the rules of the Constitution, and participate fairly in the conduct of elections and governance.
If these expectations are not met, if citizens vote to punish rather than to accommodate their neighbors, if politicians seek partisan success ahead of the concerns of the entire community, if special interests confuse their agendas with the best interests of the nation, then this form of government will fail.

The American Experiment

I say to you that our goal is freedom, and I believe we are going to get there because however much she strays away from it, the goal of America is freedom.
-- Martin Luther King, Jr., "Remaining Awake Through a Great Revolution" [ 1968/03/31]
What is the essence of America? The essence of America is finding and maintaining that perfect, delicate balance between freedom "to" and freedom "from."
-- Marilyn vos Savant, quoted in Women Know Everything! by Karen Weekes [2007]
The American Experiment is a unique, transformative concept of society: the idea that a nation can be built on a unified yet multifaceted culture based on ideas, laws, and trust, rather than on religious or ethnic identity and feudal loyalty. The American Experiment began with the creation of These United States of America, established itself and its shared values in the world as The United States of America, and the experiment continues by broadening the answer to "Who is an American?", expanding to include ever more of those with American values, merits, and virtues.

The Making of Americans

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
preamble to the Constitution of the United States of America [1788/06/21]
In my view, America is more than just a country; it is a set of ideals and a system of governance to support Americans’ liberties and our common good. Being American is about more than merely being a citizen of the United States; it is about choosing to live American values. Being American is belief and action, not just accident of birth. Americans are American by choice, by belief, and by deed rather than by birthright. This has been the case since the beginning; the founding fathers were born British, but chose to be Americans.
American values, merits, and virtues are readily identified in its founding documents and the supplemental material created throughout its history. A small sample of relevant quotes is included in Appendix 1.
Collectively, this corpus of evidence shows that being American demands a multitude of values, merits, and actions. Chief among them are personal integrity; care, responsibility, and respect for others; and working toward freedom and justice for all.
Few manage to live up to this calling perfectly, but the important fact is that many try. Being American is about striving to live up to whom we know we should be – every failure of any American is a reminder to all Americans to do better.

Partisanship

I am for freedom of religion, & against all maneuvres to bring about a legal ascendancy of one sect over another, for freedom of the press, and against all violations of the Constitution to silence by force and not by reason the complaints or criticisms, just or unjust, of our citizens against the conduct of their agents.
-- Thomas Jefferson, letter to Elbridge Gerry [1799/01/26]
If we do not learn to sacrifice small differences of opinion, we can never act together. Every man cannot have his way in all things. If his own opinion prevails at some times, he should acquiesce on seeing that of others preponderate at others. Without this mutual disposition we are disjointed individuals, but not a society.
-- Thomas Jefferson, letter to John Dickinson [1801/07/23]
The partisan rejects the design of the United States of America, treating it as an obstruction rather than as a foundation. Partisans frequently call themselves "true Americans", but they care more about imposing their values on other people than about upholding the rule-of-law and defending the rights and civil liberties of fellow citizens.
There is not one source of partisans. Every cause has zealots.
Some partisans will loudly voice values you agree with and energetically support your preferred policies. But they are revealed as extreme partisans when they advocate not just for themselves, but against American institutions. The health and independence of American institutions are necessary prerequisites to our system of checks and balances. The integrity and effectiveness of American institutions is necessary for the institutions' credibility.
In the past, extreme partisans believed in monarchy over self determination, they demanded slavery over inalienable rights, they preferred isolation to a world safe for democracy, they became enamored of authoritarians – fascists and communists –, and they denied the truth that all men are created equal. Even now, they endeavor to change America to fit their own image over the objections of those who defend the American experiment.

Maintaining America

Freedom is never more than one generation away from extinction. We didn’t pass it on to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free.
-- Ronald Reagan, address to the Phoenix Chamber of Commerce [1961/03/30]
The work of maintaining America is not the same as its defense by the armed services or its operation by the public services. The work of maintaining America is found in the day-to-day lives of its citizens and the politics of their interactions with each other. The maintenance is performed through the innumerable actions, large and small, of Americans trying their best to live up to American ideals.
America is maintained through voluntary cooperation – whether that is showing up to vote, supporting a non-profit, or assisting a neighbor with chores or errands. Voluntary cooperation is inhibited when people resort to conflict rather than debate, treat compromise as capitulation, or treat disagreement as war to be won rather than an opportunity to contribute to the search for truth.
America is maintained through respectful interaction – whether that is charitably engaging with political issues, tolerating other people's preferences and choices about what makes a good life well lived, or being polite to grumpy cashiers. Respectful interaction is obstructed when people deliberately misinform others, manipulatively argue against misrepresented positions, insult and denigrate opponents, or fail to recognize the rights of others and honor their choice to live differently.
America is maintained by upholding the spirit as well as the letter of the law – not just being a law-abiding individual, but actively self-regulating to save society the effort of regulation, and knowing when peaceful, civil disobedience is called for. The rule of law is corroded when people fail to abide by established process and uphold the validity of the outcome, especially including accepted methods of altering our processes. Peacefully accepting the results of our elections, and the rights and powers of those elected, is central to rule of law in a democratic republic.
America is maintained by acting with integrity and trust – integrity worthy of trust by fellow Americans, and trust of fellow Americans' integrity – whether that is investing to create real value rather than profiting at the expense of other people, preparing healthy food and eating food provided by others, manufacturing safe products and maintaining safe workplaces, or avoiding collisions while driving and trusting other motorists to do the same. Trust and integrity are undermined when people pursue profits that result in harm to society, seek power to the detriment of community, or otherwise create externalized costs borne by society at large and/or by future generations. Trust is a two-way street and must be given as well as earned.
America is maintained by pursuing values, not policies, and by honestly evaluating results – whether that is pursuing freedom by tolerating speech, pursuing justice with juries, or providing for the common defense with the military. Based on experience, these policies have been given practical legal limits in society’s best interest – prohibiting false advertising, guaranteeing legal representation to defendants, and restricting domestic use of the military. American governance is hobbled when policies are pursued without remembering the values they were intended to serve, and when programs are not monitored for results or programs are not revisited when results are poor.
America is maintained by Americans acting in the best interests of society even when they are discontent with their own lives, when they are disgruntled with their fellow citizens, or see opportunity for themselves at others' expense.
The system needs all of these things and more to keep working. There are many more ways to break the system than to keep it working.

Why America Matters 

Despite all of America’s specific problems, it is the oldest democracy in the world. With the exception of Canada, it has the deepest experience with trying to make a multiethnic democracy work. If the forces that are pulling us apart are strong enough to make democracy fail in this country, I fear that similar reasons will also prove strong enough to make democracy fail in most other countries in the world.
-- Yascha Mounk, comment about his book
The People vs. Democracy: Why Our Freedom Is in Danger and How to Save It [2018]
America’s values and behavior matter to the world. Ideologies do not rise and fall directly by chance. Their successes and failures are observed, and ideologies are adopted, amended, or abandoned accordingly.  It matters how America goes about achieving success. It matters that America honestly and transparently commits itself to the philosophy by which it has achieved so much.
The example of a successful democracy is the greatest fear of autocracies around the world. Examples of successful government by the people bolster ideologies of freedom and equality while undermining ideologies of authoritarianism, theocracy, ethnic domination, social hierarchy and control. The reverse is also true. Sophisticated governments understand the consequences. This is why Russia has tried to undermine and divide America. This is why China argues that it offers a “new type of political party system”. When America fails to live up to its ideals, it undermines the resolve in other nations to also pursue those ideals and behave in the best interest of humanity.
America must seek to improve in principle and in practice because it is the moral thing to do. We must avoid authoritarianism and its offer of false social stability. India should be inspired by America, not China; Europe should lean towards America, not Russia; Africa should find a role model in America, not the Middle East. With good reason, they will not do so if American society cannot lead by example – more efficient and effective government, more ethical justice, fairer opportunity, more charitable care, a more trustworthy public. When America vigorously pursues its ideals and improvement at home, everyone benefits – we current Americans get a better system for ourselves, non-Americans get an example of what works better, and the future inherits the better system.

The Best Option

Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.
-- Winston Churchill, in the House of Commons of the United Kingdom [1947/11/11]
This philosophy of liberty and equality, of inalienable rights to life, freedom, pursuit of happiness, secular representative democratic government, international cooperation, and rule of law for everyone is the only known foundation for multicultural peace – internal peace against civil war, and external peace against international war. Historically common alternative attempts at "peace" involved brutally enforced conformity and genocide. The rights of minorities are the precious sacrament by which peace is bought for all. The majority should always remember that it is composed of minorities itself and that every nation is a minority of Earth.
It is essential to the world that the American experiment succeeds, because the world is made of many different cultures, religions and ethnic identities. As technology makes the world smaller, these cultures will inevitably come into conflict, as they have throughout human history. If we hope to have a world without war and without mutual annihilation, then we need a working model for how to live together peacefully. The American Democratic Republic is that model, and we cannot allow it to fail.

A Warning of the Alternative, and a Plea

If the American Democratic Republic fails, I am pessimistic that whatever comes next will embody the values with which this nation was founded. This nation broadcast hope for all people when it denounced tyranny, rejected slavery, delivered the world from Fascism, defended the world against totalitarianism, rebuilt its enemies into friends and allies, and accepted people of every race, creed, and origin as Americans, equal to all who came before them.
Our execution has not been perfect, and our human pursuit of our ideals has been even less so. We must aim to do much better in the future, but no other values or system of government has brought so much peace and prosperity to the world as American democracy.
If we cannot live and let live, if we fail at the hard work of compromising such that we and our fellow citizens may freely choose how to pursue happiness differently, then society will enter into a vicious downward spiral of violence and retaliation which makes liberty, equality, and democracy impossible to sustain.
We must govern without repression. We must win without destroying the opposition. We must not abuse power by gerrymandering, disenfranchising the opposition, harassing opponents through selective law enforcement, or subverting the judicial system through partisan processes. This is what it means to "play fair by the spirit of the rules" in a democracy.
"Being peaceful" is less noteworthy when the powerful majority does it, but it is not less important. "Being peaceful in the face of incentives not to be" is the foundation of civilization.
The point here is not to convince national leaders of anything. My hope is to convince normal Americans to behave better than could be expected, because we need to behave better than can be expected. Be respectful. Be skeptical and don't share outrageous nonsense. Forgive neighbors, your fellow Americans, who read other news and watch other media, even though we now have trouble agreeing on a shared, objective reality. Trust each other and each others' intentions to be good. This will be especially challenging in the face of a plague of bad information from media companies who have failed to live up to their newfound responsibilities, and weaponized mistrust wielded by foreign adversaries and domestic partisans.
If we do not make our way back to being better Americans, then others among us will follow the darker path to cycles of repression and rebellion – partisan oppression of voting rights and against fair and equal representation in government; protests in the form of strikes, sabotage, and arson; suppression of media, discourse, and speech; riots and bombings; massacres and brutality by law enforcement; assassinations, local uprisings, and revolts; use of the military against civilians. It is a tragically well-traveled road in human history. The United States of America is not immune – see Appendix 2. People have been acting like they do not remember history. Understand that offending, insulting, disrespecting, and repressing people eventually escalates to violence.
We can and we must do better.
We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land, will yet swell the chorus of the Union when again touched, as surely they will be, by the better angels of our nature.
-- Abraham Lincoln, First Inaugural Address [1861/03/04]

Tuesday, December 12, 2017

Corporate Tax Cuts in the Republican 2017 Tax Reform Bill

The Republican-controlled Congress is in the final stages of writing the most sweeping tax changes in forty years.  The Senate version of the tax bill is 487 pages, which is hardly the sweeping simplification promised by Republicans, and too long to easily summarize in this paragraph.  Business taxes are affected far more than individual taxes. Specifics of the tax bill are summarized at the end of this article.

The main focus of the tax reform is lower taxes for corporations.  The pretext is that lower taxes on corporations will result in economic growth, but the real goal is to lower taxes on unearned income.  Profits saved through lower taxes will flow through corporations to shareholders, including Republican Party donors.  The expectation of higher dividends and capital gains has driven the stock market by more than 25% since the election.

Most, if not all, serious economic reviews of the tax plan do not support the expectation of higher economic growth.  The Congressional Joint Committee on Taxation concluded that the bill would only add marginally to economic growth, while adding one trillion dollars to the US Federal debt, even after accounting for the additional tax revenue resulting from growth.  And both private and JCT analyses conclude that tax benefits will accrue to the wealthiest Americans, with poorer Americans losing money.

As my son pointed out, the simple truth is that this tax bill is a "Red versus Blue" tax bill.  What the tax bill accomplishes is just short of cutting a $500 check to every Republican, and sending a $500 tax bill to every Democrat.  My son writes, "There are some hand-wavey claims about how it is good for gullible people, but I don't know anyone serious who believes any of that."  The provisions of this bill would not survive a change in control of the Government.  But how long can the country peaceably survive, lurching from policy to policy with every change of a percentage point in national polls?
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Justification for 2017 Corporate Tax Cut
The rationale for the deep cut in corporate taxes is based on the idea that higher after-tax profits for corporations will result in a higher rate of economic growth.  Also, the argument is that a higher rate of growth will be shared by wage-earners in the form of higher take-home pay.
Let’s look at that idea.

United States Corporate Taxes Compared to the OECD
In justifying the corporate tax cut, both of Alaska's Senators have said that American corporate taxes are "among the highest in the world".  They believe those high taxes render our corporations noncompetitive in global markets. As this blog has previously noted, a quick trip to the OECD database shows that idea is simply false.  Although US nominal corporate taxes are comparatively high, the corporate tax actually paid in the United States is less than the average for the OECD.   
GDP Growth, Corporate Taxes, After-Tax Profits and Wages
The general premise that higher after-tax corporate profits lead to higher economic growth is false.
The premise that higher after-tax corporate profits lead to higher wages is also false.
First we need some context.  American economic growth has been declining since World War II.
This is especially evident when we look at non-recessionary periods.  This chart has deleted all quarters with negative GDP growth.
Wages have declined since World War II, as a share of gross domestic income, GDI (or similarly, GPD).
Let's look at Corporate After-Tax Profits.  We can see that profits have soared since the 1980s as a share of GDP.  Higher corporate profits since 2004 (excepting the recession year) have not produced higher GDP growth, or higher wages.
Corporate taxes have also fallen as a percent of GDP, coincident with a falling rate of growth.
But the rise in After-Tax Profits has not resulted in a higher rate of economic growth, or higher wages for workers.  The argument that lower taxes will result in higher economic growth appears to be void.
--
Tax Cuts and the Reagan Economy
The final argument for tax cuts is that tax cuts worked in the past.  The basis for that claim is generally in the mythology surrounding tax cuts enacted in 1981 and 1987 during the Reagan administration.  Close examination proves that economic growth during the Reagan administration was not extraordinary, and the growth that did occur was largely due to other factors. The actual performance of those tax cuts is complicated by eleven tax hikes that were also passed during the Reagan years, for the purpose of restoring lost revenues.

Let’s look at the Reagan economy.
First, the “economic boom” of the Reagan years looks less spectacular when viewed in the context of the total post-war economy.  American economic growth has been falling steadily since World War II, part of a general structural problem in the U.S. economy, reflected in GDP growth, wages as a share of the economy, and the time required for recovery after recessions.  [That should be the topic of another blog post.]  There were really only two years during the Reagan administration that had economic growth above the long-term, non-recessionary trend (1983 and 1984).
Still, the Reagan administration was marked by a period of fairly persistent and strong growth.  There are three reasons for that growth. 
1)      Interest Rates
I believe that the main reason for sustained growth during the Reagan years was falling interest rates.  Interest rates reached a singular, extraordinary peak in 1981 (see chart).  The Volcker Federal reserve had largely quelled inflation by 1981, and began to let interest rates fall.  The extraordinarily high interest rates at the peak probably caused the multiple recessions of 1980 – 1982.  As interest rates fell, economic growth which had been bottled up by high rates was released.  I believe the influence of falling rates far exceeded the influence of lower taxes.
2)      Serendipity
Secondly, there is simply the matter of good timing.  The Reagan administration was faced with recessions in 1981 and 1982, but afterwards enjoyed the benefit of the typical eight-to-ten year business cycle.  There is no particular policy which can be attributed to this aspect of success, except luck.  [See previous chart, with indicated recessions.
3)      Tax Cuts
Tax cuts do provide stimulus to the economy, and the Reagan tax cuts of 1981 were appropriately given during an economic recession.  Ultimately, though, tax cuts are literally borrowing against the future, and must someday be paid back in terms of later economic growth.  I believe that it is best to run budgetary surpluses when there is strength in the economy, to allow the government the ability to incur deficits when the economy is weak, without fear of destabilizing the economy.  The Reagan administration never fully funded the government to pay for the deficits it incurred.

The 2017 Republican Tax Reform Plan
The Republican Tax Plan passed by the House and the Senate must now be reconciled into a single bill.  The bills are very similar in scope, and the process should not result in significant changes to the plans, except where major errors are discovered in the assumptions and provisions of the bill.

My main objections to the plan are as follows:
1)      Debt
The plan runs large federal deficits, at a time when the total Federal debt is approaching 100% of annual GDP, and interest payments are starting to become a significant part of annual spending.
2)      Timing
The plan cuts taxes at a time of full employment, when fiscal policy should be to run surpluses.  
3)      Corporate Taxes
The plan awards long-term tax relief to corporations, at a time when corporate taxes are already low; corporate earnings are already soaring, and no gains in GDP have been observed.
4)      Lack of Middle-Class Tax Relief/Benefits for Unearned Income
Individual tax relief in the plan will accrue mostly to high income families, particularly those with unearned income.  The corporate tax reduction will flow through to investors, much more directly than to wage-earners.  The plan will not result in long-term tax relief for wage-earners, whose share of gross domestic income has been falling for 47 years.
5)      Abolishes ACA Individual Mandate
The tax plan eliminates the individual mandate aspect of the Affordable Care Act.  It is considered an important facet of the act, in encouraging younger people to participate in the insurance pool.  

Conclusion
The Republican tax plan is based on false ideas:  that American corporate taxes are higher than other countries; that higher corporate taxes produce higher economic growth and higher wages; that general tax cuts during the Reagan administration produced extraordinary growth.  All of these ideas can be demonstrated to be false, using economic data available to anyone.

The Republican tax plan will probably become law.  I expect that it is unlikely to survive the next administration and Congress.  But the debts incurred before it is overturned will last for a generation.

A copy of this post is available on my Science and Policy blog.
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Appendix
Summary of Important Changes in the Republican Tax Reform Bill
Business Tax Changes
1) Drops the nominal corporate income tax rate from 35% to 20%.  The current Senate bill, perhaps through an oversight, keeps the minimum corporate tax at 20%, eliminating exemptions by default.  It is expected that the reconciliation bill will restore those exemptions, dropping the actual corporate rate below 20%.
2) The tax rate for “pass-through” small businesses is reduced, excepting service businesses such as lawyers, accountants, and doctors.  The amount of the reduction is to be determined in reconciliation.
3)  Rules for expensing, rather than capitalizing, spending are relaxed, allowing quicker realization of tax benefits from business investment.
4)  Repatriated profits from foreign operations would be taxed at a much lower rate than US profits.  Cash assets would be taxed at 10% (Senate) or 14% (House), while non-cash assets would be taxed at 5% (Senate) or 7.5% (House). 

Individual Tax Changes
5) All classes of individual taxpayers will see a tax reduction in the near term, but those reductions will expire in ten years.  On the other hand, business tax reductions will be permanent.
6) The standard deduction is doubled, but personal exemptions are eliminated.  Child tax credits are increased, but the full value is only available to those with higher income to offset taxes.  For large families, the child tax credit may not fully offset the loss of personal exemptions.
7)  State & local tax deductions are eliminated; casualty loss deductions are eliminated.  The mortgage interest deduction is retained for all but the largest mortgages.
8) The estate tax may be eliminated, or the minimum threshold for the estate tax may be doubled.
9)  The individual mandate tax of the ACA is repealed.  Some fear that this will destabilize the insurance markets, by removing a large number of younger, healthy individuals from the insurance pool.
10) The fate of the Alternative Minimum Tax will be determined in reconciliation.
11) Waived tuition, common for graduate students, will now be taxed.  Colleges with very large endowments will have some earnings taxed.

Other
12) Drilling will be allowed in the Arctic National Wildlife Refuge Area 1002, which was originally set aside for consideration for oil development.
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Appendix 2
As this blog has previously noted, American Federal taxes are among the lowest in the world, in direct contrast to Republican claims that American taxes are among the highest in the world.  Here is data from OECD and the World Bank, showing the relative ranking of American Federal taxes compared to other countries.  
United States Federal taxes as a share of GDP, compared to 34 OECD countries.
United States Federal taxes compared to 123 other countries; data from World Bank.
Countries with lower Federal taxes than the United States are Ethiopia, Pakistan, India, Afghanistan, Bangladesh, Central African Republic, West Bank and Gaza, Lithuania, Oman, Nigeria, Bahrain, Estonia, United Arab Emirates.

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References
Summaries of the Republican Tax Plan
Washington Post
Forbes
CNN

Economic Reviews of the Tax Plan
Tax Policy Center – the plan will ultimately raise taxes on more than half of Americans.
University of Chicago Survey – only one out of 42 economists believes that the plan will significantly grow the economy.
University of Pennsylvanian/Wharton review – the tax plan will add about $1.3 trillion to the national debt.

This article attempts to put lipstick on a pig.  The article acknowledges that economic growth from the tax plan will be small, “but significant”.  The article recognizes that slower growth has occurred in the past two decades, when progressively slower growth has actually been going on for seven decades.  The article gives no explanation for why growth is slower now than in the past, or why tax cuts at a time of full employment will help. 

A Federal tax expert says that the tax plan is stupid.

Historical Data
OECD tax on corporate profits
US corporate tax among the lowest in the OECD

Corporate Tax as share of GDP

Source of federal revenue

FRED

Wednesday, November 22, 2017

Let's Talk About the Other Issues Concerning Roy Moore

Roy Moore’s campaign  for U.S. has become enveloped in a scandal involving his sexual misconduct with teenage girls, which occurred about 35 to 40 years ago.  What is lost in this discussion is Moore’s unfitness for office on a raft of other issues, including judicial misconduct, financial corruption, opposition to the separation of Church and State, LGBT intolerance, opposition to civil rights, Islamophobia, climate-change denial, opposition to science, birtherism, support for neo-Confederates, and irrational religious views. 

It concerns me that the pedophilia issue is the only issue in front of the electorate.  It is disturbing to me that other issues are not judged to be significant, and that the pedophilia charge is the only one to arouse serious opposition among mainstream Republicans.
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Roy Stewart Moore is a Republican candidate for the United States Senate.  Moore will compete in a special election to be held December 12, 2017, being held to fill the seat formerly held by Jeff Sessions, who was chosen to be U.S. Attorney General.

Roy Moore’s campaign has been subject to nation-wide criticism over allegations that he pursued sexual encounters with a number of teenage girls while in his 30s.  The allegations are supported by multiple accusations and credible circumstantial evidence.  Moore is now 70 years old.  Polling data shows that Moore has lost about 9% of his support due to the scandal, and that the election is now a toss-up between Moore and his Democratic opponent, Doug Jones.  The pedophilia scandal has dominated national discussion. 

What is lost in the discussion about Roy Moore is the rest of story.  Yes, many believe he is clearly unqualified for office, because of his behavior 35 years ago.  But why is no one talking about the other reasons that Roy Moore is unqualified to be a U.S. Senator?

Judicial Misconduct
Moore was twice removed from office as the Chief Justice of the Supreme Court of Alabama.  The first event occurred in 2003, after Moore had placed a monument to the Ten Commandments in the state judicial building.  Moore defied a Federal court order to remove the monument, and was removed from office by a state judicial council.  The second event occurred in 2016, after Moore rejected the authority of the U.S. Supreme Court ruling legalizing same-sex marriage, and ordered probate judges and state employees to disregard the ruling.   Again, the state judicial council removed Moore from office.

Financial Corruption
Moore is the founder of a charitable foundation, The Foundation for Moral Law.  Between 2007 and 2012, Moore collected over $1,000,000 in compensation from the group, which he did not publicly disclose.  The compensation was also in excess of what the foundation revealed in its tax filings, but was documented in internal documents.  Moore also accepted a promissory note from the foundation for an additional $540,000, or an equal stake in the foundation’s most valuable real-estate asset.  The foundation further provided Moore health-care benefits, travel expenses and a personal bodyguard.  Moore’s two children and wife were also on the payroll of the foundation.  These payments appear to be in violation of IRS regulations prohibiting the use of a charity for the private benefit or enrichment of an individual, but have not been challenged in court.

Religious Intolerance
Moore is most widely known for advocating the placement of the Ten Commandments in courtrooms, which is generally regarded as violating the Constitution’s ban on the establishment of a state religion.  Consider – could a Hindu woman expect a fair trial in a courtroom which declares “You shall have no other God before me?”  Perhaps that is the point.

Moore is also on record as saying that Muslims should be banned from serving in Congress, and voiced nonsensical opposition to non-existent Sharia law in the United States.

LGBT Intolerance
Moore supports laws to make homosexuality illegal, and has issued rulings denying rights to homosexuals.  As mentioned above, Moore defied Supreme Court and Federal Court rulings legalizing same-sex marriage.  Moore holds the view that transgender people have no rights.    

Other Issues
Roy Moore has a history of extreme statements and actions.  At one time or another, Moore indicated his position on the following list of issues.
  • Opposes civil rights and the 1965 voting rights act.
  • Rejects the separation of Church and State.
  • Opposes pre-school education on the grounds that it teaches liberalism.
  • Believes that the 2001 terrorist attacks were divine punishment for accepting gays in society.
  • Denies human-caused climate change.
  • Leading figure in the “birther” controversy.
  • Denies evolution.
  • Hosted Neo-Confederate events at Moore’s foundation.
  • Spoke of the United States as an evil empire.

Conclusion
Moore is clearly unfit for office, especially for the U.S. Senate.  It seems to me that the public discussion of his candidacy should include all of the issues, as well as the charge of pedophilia.   

I believe that mainstream Republicans are deeply divided on Moore’s candidacy.  They recognize Moore’s absolute unfitness for office, and in many ways would prefer that the Democrat win this election.  On the other hand, Republicans realize that the election of the Democrat will endanger the mainstream Republican agenda.  And for that, they will put up with anything.


References





Thursday, November 9, 2017

Tax Reform

Once again, I have written to a staffer for Senator Dan Sullivan, Alaska Republican.  This month's epistle was regarding tax policy, and the ongoing Republican effort to enact tax reform.

Tax reform is deeply needed in the United States, but the direction of Republican reform seems entirely driven by the desire of wealthy political donors for lower taxes.  Representative Chris Collins of New York commented, "My donors are basically saying, 'Get it done or don’t ever call me again."

I believe that the process of reform should be an open process, subject to hearings, testimony, consideration of evidence, and compromise, but the Republican party is pursuing a closed process, without bipartisan input or debate.

And so I wrote to my Senator's staffer again with a sense of futility, despairing of receiving responsible government from Republicans.  But for the reader's consideration, here's my letter, and my priorities for tax reform.  For brevity, I placed my highest priorities in bullet points at the beginning.
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1)       Fully fund the federal government now.  Stop stealing from our children.
2)      Drastically simplify the tax system.
3)      Make everyone pay something.  Make rich people pay more.
4)      Tax unearned income higher than earned income. 
5)      Treat all capital earnings the same.  Eliminate special rules for trusts, S corporations, REITs, limited partnerships, hedge funds.   Treat personal capital earnings (short-term gains, long-term gains and dividends) the same.
6)      Tax foreign business profits in the same year that they are earned.
7)      Eliminate corporate tax loopholes.
8)      Tax unrealized capital gains on financial assets at death.  Keep the estate tax at 40% for estates larger than $10 million per couple.
9)      Place Social Security and Medicare taxes on unearned income at the same rate as wage income.  Eliminate the earning caps on Social Security and Medicare taxes.
10)  Stop lying about how American taxes are higher than other countries.  Correct lies when other people say them. 


Deficit Spending
I ask that you fully fund the Federal Government now.

During Senator Sullivan’s town hall meeting, the Senator expressed serious anxiety regarding the size of the US government debt.  I agree with the Senator on this point.  Debt held by the public is now about $14 trillion, or 76% of GDP.  Gross National Debt is about $20 trillion, or 106% of GDP.  Debt levels over 100% of GDP have been implicated in a number of foreign financial crises, such as Greece, Italy, Portugal, Argentina, and others.  Interest payments are rising as a percentage of the Federal budget, leaving less money for actual beneficial spending. 

Deficit spending is sometimes necessary to stimulate the economy.  But a balance sheet overloaded by debt allows policy makers no flexibility to deal with future crises.  Economic theory says that deficit spending is needed in an economy with high unemployment; an economy at full employment has no need for stimulus.  Deficit spending in an economy at full employment will simply result in inflation.

We’ve been systematically underfunding the Federal government for 40 years.  If this deficit spending was going to produce an economic miracle, it would have happened already.  We should raise taxes to run a surplus until our debt is under control.

Deficit spending, when it is not required for economic stimulus, is immoral.  Like all borrowing, it is taking benefits today, which must be paid for in the future.  The difference with Federal borrowing is that the people who enjoy the benefits of today’s spending will not pay those debts.  These debts will be paid by our children.  By deficit spending, we are literally stealing from our children. 

Any tax plan approved by the Senate should decrease the Federal debt.

Tax Simplification
I agree with Republicans that taxes are too complicated.  I support any reasonable effort to reduce the complexity of taxes, and to ease filing.  It is important that we improve the public perception that our taxes are fair.  I would recommend that the 40% of the population currently not paying income tax pay something, but with corresponding cuts in payroll taxes to mitigate the impact of these taxes on working families.  I would support the phased elimination of many deductions, including the home mortgage interest deduction.  In general, I support changes to reduce the use of the tax code for social engineering, and more to simply fund the government.

Trusts, S Corporations, REITS, limited partnerships and other special kinds of capital ownership should be eliminated, as far as tax law is concerned.  All capital should be treated the same for tax simplification.

I see no reason why unearned income should be exempted from the Social Security and Medicare taxes. 

Earned Income vs. Unearned Income
Work is an American virtue.  Physical productivity is the necessary foundation of our economy and earned wages support American families.  But those wages have decreased for the past two decades, in real terms and as a percentage of the economy (Federal Reserve database, https://fred.stlouisfed.org/ ).  Difficulties faced by young wage-earners are reflected in later marriage ages, later first children, more prevalent emotional difficulties, despair, drug addiction and deaths. 

I would note that any cut in the corporate business tax is implicitly a tax cut on unearned income, as profits pass through to shareholders. 

Changes in our tax law should reduce taxes on wages and increase the taxes on unearned income. 

Estate Tax
Eliminating the estate tax would leave a gaping hole in the taxation of unrealized capital gains.  All unrealized capital gains on financial assets should be taxed at the time of death, and the cost basis re-set for the heirs.  Retain the estate tax for financial assets on estates worth over $10 million per couple.  

Business Taxes
As I document below, American business taxes are already lower than 2/3 of the countries in the OECD.  I have no strong objection to lowering business taxes, but ask that those taxes be replaced by other revenue, so as not to increase the Federal debt.

Corporate tax loopholes (or incentives) should be eliminated, to bring the actual tax paid in line with the nominal tax rate.

I think that foreign business profits should be taxed in the year that they are earned, and not deferred until repatriation. 

I recommend a carbon tax scaled to volume of carbon emitted by each carbon fuel, and acknowledgement that climate change is a major hazard for the United States, and caused primarily by human CO2 emissions.  I would be happy to talk about that in person, to anyone who is not convinced of this point.  A carbon tax should provide additional revenue to allow some of the tax reductions desired by Republicans.

Social Security and Medicare
Tax unearned income at the same rate as earned income.  Remove the earnings caps on Social Security and Medicare taxes.  [Given the opportunity, I would restructure Social Security.  But that is a topic for another post.]

Truth -- American Taxes Compared to Other Countries
I would conclude by noting that the Republican justification for tax reform is based upon outright lies. 

In Donald Trump’s acceptance speech for the Republican nomination, he stated that America is among the most highly taxed countries in the world.  This is the complete opposite of truth.  Anyone with an Internet connection can look at the OECD statistical page (https://data.oecd.org/), and see that the US has almost the lowest Federal tax burden of the industrialized world, and is in the lowest third in terms of total tax burden.   Similarly, you can go to the World Bank database and see that the US Federal tax burden is lower than over 100 countries, and higher than only a handful of third-world countries (http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS).

In Senator Sullivan’s town hall meeting, the Senator said that the US business tax was the highest in the world.  This is deceptive, and since the Senator is a knowledgeable person, I have to conclude that his statement is deliberately deceptive.  It is true that the nominal US business tax rate is higher than other nations, but it is easy enough to check the revenue collected from businesses, and compare to total domestic business profits.  The actual tax paid is far lower than the nominal rate.  Further, you can go again to the OECD database.  The countries with lower business taxes than the United States are Slovenia, Latvia, Turkey, Greece, Germany, Poland, Hungary, Italy, Estonia, France and Finland (2014 & 2015).  The remaining 21 countries – two-thirds of the OECD – have higher business taxes than the United States. https://data.oecd.org/tax/tax-on-corporate-profits.htm

I will judge the Senator’s honor by how well he speaks the truth, and how he speaks out to correct falsehoods when they are used to justify government policies. *


*  You might think me presumptuous to judge the Senator.  I write another blog with the theme that God should be judged according to the standards of reason and justice.  It is not that I have the right to judge.  It is rather that all figures of authority are subject to judgment according to truth, reason and justice.  I think that was the basis of the American Declaration of Independence.  

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The section on Estate Taxes was revised 12/2/2017, returning the proposed estate tax to something similar to current law, but reducing the tax from 55% to 40% of assets over $10 million per couple.

Monday, October 23, 2017

The Republican Dilemma

I posted this last night, 10/23/2017, around midnight Alaska time.  This morning, Senator Jeff Flake, R - Arizona, announced he "would not be complicit", and that he would not seek re-election.
Senator Bob Corker and Donald Trump

Republicans have a problem.  For two decades, Republicans have relied on inflammatory populist themes to motivate their base, to encourage donations, and to win elections.  These themes, taken together, define what it means to be a modern American conservative: ever-lower taxes; cuts to government programs for the poor; authoritarian nationalism, with support for military and police; opposition to immigrants, Latinos, Muslims and blacks; opposition to gay rights; opposition to abortion; adoption of Religious-Right Christian principles in government; aggressive foreign policy; opposition to any restrictions on guns; denial of climate change and any remedial policies; and uncompromising opposition to any program favored by Democrats.

Those themes resonated strongly with conservative voters.  The message, particularly uncompromising opposition to Democrats, was reinforced by a relentless propaganda campaign by right-wing media, notably Fox News and Breitbart.  That campaign put every story through a political lens, and produced a seriously distorted world-view that was accepted as fact by conservative voters.  The range of stories lost any sense of being grounded in truth; rather, the only measure of news was how well it confirmed conservative biases.  Confirmation bias is extremely powerful at strengthening existing beliefs.  Social media played a part, too, producing an echo-chamber feedback that pushed conservatives to ever-more extreme positions.  Conservatives also became more extreme in their opposition to Democrats.

The problem is that voters elected a President who will actually do the things they promised.

The Republican Dilemma. 
Here is the Republican Dilemma in a nutshell.  The issues that Republicans used to rile and galvanize their base are largely nonsense, and thoughtful Republicans knew that these policies would be destructive, bad government.  There are a number of thoughtful and prominent Republicans – John McCain, Ben Sasse, Jeb and George W. Bush, and media commentators like Joe Scarborough and David Frum, who have disavowed major parts of the Trump administration’s program.  Moderate Republicans Pat Tiberi, Dave Reichert, Charlie Dent, and Bob Corker have all announced plans to leave Congress, citing frustration with current policies.  These thoughtful Republicans sat silent while right-wing media ballyhooed far-right issues because it brought in votes, and helped the party win elections.  But the Republican Party has now elected high officials, including the president, who actually believe the nonsense spouted daily on Fox News, and are intent on enacting these policies as the law of the land.  Thoughtful Republicans are frightened. 

During the Obama administration, Republicans could easily disparage the five-nation treaty with Iran which dismantled that country’s nuclear program.  They knew that their criticism would not endanger the deal.  The alternatives – to either allow Iran to develop a nuclear weapon within 18 months, or to start World War III – did not have to be taken seriously.  Now, with a bellicose and erratic president, they have to seriously consider the possibility that the aggressive actions they’ve recommended for years will actually result in a major war, possibly a nuclear war or World War, involving North Korea, China, Russia, as well as Iran.  I consider it likely that any first strike by the United States on North Korea or Iran will be met with aggressive actions by China and Russia, although not necessarily in the same theater.  China may invade Taiwan; Russia may invade Ukraine and the Baltic republics.  Both will almost certainly support and arm America’s enemies around the globe: Iran, North Korea, possibly Venezuela, the Taliban and terrorist organizations. 

The same thing holds for less crucial issues.  Republicans, while publicly denying Climate Change, ensured that NASA’s climate-monitoring programs were funded through the Congressional budget process.  But they are now faced with a President who is unlikely to perform those programs.  Republican fiscal conservatives are faced with a President who is demanding major tax cuts for wealthy individuals and corporations, cuts that will drastically increase the nation’s debt.  The have a President who is determined to build a wall on the border with Mexico, that is vehemently opposed by Mexicans and most Americans.  They have a President who is determined to sever international trade deals, which will cripple the international supply chains of America’s major manufacturing companies. 

We have a sitting Secretary of State who has openly called the President a “f**king moron”, and a leading Senator who says that the White House is “adult day care”, and only a handful of officials “separate the country from chaos”.   A former Republican President and a former Republican Presidential candidate have sharply repudiated the administration’s policies.  Republicans have a President and a political base that are ready for the Party to do all of the things it has promised for many years.  And I believe that serious, thoughtful Republicans in the party must be terrified.  
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References:
Trump governs by disruption.  Takes actions promised during campaign, regardless of impacts.  Acts like a tyrant, pushing criticism and pain to all who oppose him.
Promised to dismantle government, and is doing it.

Bannon declares war on establishment GOP

Trump listens to the most extreme views; whatever gives him confirmation bias to his populist preconceptions.  Tom Cotton epitomizes conservative trolls on the Internet, who cherry-pick bits and pieces of information to refute sound arguments based on deeper fundamental analyses.

Text of George W. Bush’s speech at the Spirit of Liberty event in New York.  Bush’s speech rebuked the populist “America First” theme of the Trump administration, and the inflammatory anti-immigrant rhetoric the president has used to rally his base.


Moderate Republicans Pat Tiberi, Dave Reichert, Charlie Dent, and Bob Corker have announced plans to leave Congress, in what is seen as a sign of frustration with the administration and far-right wing of the party. 

Timeline of deteriorating relationship between Bob Corker and Donald Trump.

Up to 10 million Americans saw paid Russian ads on Facebook.

Russian Twitter accounts received wide distribution and exposure through traditional media. 

Republican tax plans already face opposition.

Retiring Senator Corker is voicing doubts about Trump that are held by other Republicans, but only spoken in private.