As part of an otherwise very good tax reform plan, House Republicans have proposed to modify the corporate income tax so that it becomes a “destination-based cash-flow tax.”
For those not familiar with wonky inside-the-beltway tax terminology, there are three main things to understand about this proposal.
I’m a big fan of the first two provisions, but I’m very hostile to the third item.
I don’t like it because I worry it sets the stage for a value-added tax. I don’t like it because it is designed to undermine tax competition. I don’t like it because it has a protectionist stench and presumably violates America’s trade commitments. I don’t like it because that part of the plan only exists because politicians aren’t willing to engage in more spending restraint. And I don’t like it because politicians should try to reinvent the wheel when we already know the right way to do tax reform.
Heck, I feel like the Dr. Seuss character who lists all the ways he would not like green eggs and ham. Except I can state with complete certainty I wouldn’t change my mind if I was suddenly forced to take a bite of this new tax.
Today, I’m going to augment my economic arguments by noting that the plan also is turning into a political liability. Here are some excerpts from a news report in the Wall Street Journal about opposition in the business community.
A linchpin of the House Republicans’ tax plan, an approach called “border adjustment,” has split Republicans and fractured the business world into competing coalitions before a bill has even been drafted. …There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.
And The Hill reports that grassroots organizations also are up in arms.
Americans for Prosperity is stepping up its efforts to advocate against a proposal from House Republicans to tax imports and exempt exports, as lawmakers are increasingly raising concerns about the proposal. …AFP has hundreds of volunteers and staff who are making phone calls about the proposal. The group has about 100 meetings set up with Congress members and their staff for next week, while Congress is in recess.
Meanwhile, the Economist reports that the plan is causing uncertainty around the world.
To offset a border-adjusted tax of 20%—the rate favoured by House Republicans—the greenback would need to rise fully 25%, enough to destabilise emerging markets burdened with dollar-denominated debts. If the dollar stayed put and wages and prices rose 25% instead, the Federal Reserve would have to decide how to respond to an unprecedented surge in inflation. Why tolerate such disruption?
Holman Jenkins of the Wall Street Journal has a devastating take on the issue.
Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane. And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow. The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports.
Last but not least, John Tamny outlines some of the political downsides at Real Clear Markets.
…the House of Representatives…is aggressively promoting a…tax on imports. …When we get up and go to work each day, our work is what we exchange for what we don’t have, including voluminous goods and services produced for us around the world. …Party members are proudly seeking a tax on our work. …Only the “stupid” Party could come up with something so injurious to every American, to the American economy, and to its growth-focused brand. But that’s where we are at the moment. The Party that attained majorities with its tax cutting reputation is aggressively seeking to shed its growth brand through the introduction of tax hikes meant to give politicians even more of what we the people produce. If so, the majority Party can kiss its majority goodbye. It will have earned its minority status.
For what it’s worth, I think John overstates the case against the plan. The additional revenue from border-adjustable tax provision would be used to cut taxes elsewhere. Heck, the plan is actually a significant net tax cut.
But John is right when you look at the issue through a political lens. If the DBCFT actually began to move through the legislative process, opponents would start running commercials about the “GOP scheme to impose new consumption tax on Americans.” Journalists (most of whom dislike Republicans) would have a field day publicizing reports about the “GOP plan to raise average family tax bill by hundreds of dollars.”
Such charges would be ignoring the other side of the equation, of course, but that’s how politics works.
All of which brings me back to one of my original points. We already know that the flat tax is the gold standard of tax reform. And we already know the various ways of moving the tax code in that direction.
My advice is that Republicans abandon the border-adjustable provision and focus on lowering tax rates, reducing double taxation, and cutting back on loopholes. Such ideas are economically sounder and politically safer.
This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.
But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?
To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.
They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.
Here’s what Englund and Lundberg wrote.
The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.
They then explain why they include payroll taxes in their calculations.
The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.
Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.
They then explain why they include a measure of consumption taxation.
One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.
Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.
And when you begin to add everything together, you get the most accurate measure of government greed.
Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.
Here’s their data for various developed nation.
Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.
And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.
Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.
For what it’s worth, the United States does fairly well when compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.
By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.
Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.
In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.
Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.
P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.
P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.
All forms of statism are despicable because they’re morally and practically evil.
They’re morally evil since they’re based on coercion. And they’re practically evil since they deliver such awful results for ordinary people.
The good news is that some forms of statism are widely discredited. Outside of universities, you don’t find many people who defend and advocate communism. And other than a few lonely cranks, you don’t find many people who defend and advocate national socialism and other forms of fascism.
But for some inexplicable reason, you still find some folks who harbor positive feelings about socialism.
To be sure, that opens up a bunch of questions, such as whether they even understand that socialism – at least in theory – involves government ownership and operation of the means of production. Such as the United Kingdom in the post-WWII era.
For what it’s worth, the fans of Bernie Sanders probably don’t understand anything about economics (goes without saying, right?) and they probably think that socialism is simply a system with lots of redistribution. Such as modern Denmark (even though that nation is just as market-oriented as the United States).
I’m not sure how we educate these people, and I doubt these three photos will have much impact on them, but I chuckled when this showed up in my inbox.
If that’s the case, the first is actually an image showing the destructive impact of the welfare state and the third is actually an image the benefits of insider cronyism, but let’s not get hung up on details. The real point is that corrupt insiders are the only real beneficiaries of big government.
P.S. And even though self-proclaimed socialists pontificate about sharing and compassion, their ideology actually promotes a bad kind of selfishness.
I’ve written many times that Washington is both a corrupt city and a corrupting city. My point is that decent people go into government and all too often wind up losing their ethical values as they learn to “play the game.”
I often joke that these are people who start out thinking Washington is a cesspool but eventually decide it’s a hot tub.
During the presidential campaign, Trump said he wanted to “drain the swamp,” which is similar to my cesspool example. My concern is that El Presidente may not understand (or perhaps not even care) that shrinking the size and scope of government is the only effective way to reduce Washington corruption.
In any event, we’re soon going to get a very strong sign about whether Trump was serious. With Republicans on Capitol Hill divided on how to deal with this cronyist institution, Trump basically has the tie-breaking vote on the issue.
In other words, he has the power to shut down this geyser of corporate welfare. But will he?
According to Susan Ferrechio of the Washington Examiner, Trump may choose to wallow in the swamp rather than drain it.
President Trump now may be in favor of the Export-Import Bank, according to Republican lawmakers who met with him privately Thursday, even though Trump once condemned the bank as corporate welfare.
Veronique de Rugy of the Mercatus Center is one on the Ex-Im Bank’s most tenacious opponents, and she’s very worried.
…if the reports are true that Trump has decided to support the restoration of the crony Export-Import Bank’s full lending authority, it would be akin to the president deciding to instead happily bathe in the swamp and gargle the muck. …If true, the news is only “great” for Boeing, GE, and the other major recipients of Ex-Im’s corporate welfare. It is also at odds with his campaign promises since much of the way the program works is that it gives cheap loans — backed by Americans all over the country — to foreign companies in China, Russia, Saudi Arabia, and the UAE. Restoring Ex-Im’s full lending-authority powers is renewing the policy to give cheap loans backed by workers in the Rust Belt to companies like Ryanair ($4 billion in guarantee loans over ten years) and Emirates Airlines ($3.9 billion over ten years) so they can have a large competitive advantage over U.S. domestic airlines like Delta and United. It continued to subsidize the large and prosperous state-owned Mexican oil company PEMEX ($9.7 billion over ten years). Seriously? That’s president Trump’s vision of draining the swamp?
Ugh. It will be very disappointing if Trump chooses corporate welfare over taxpayers.
What presumably matters most, though, is whether a bad decision on the Ex-Im Bank is a deviation or a harbinger of four years of cronyism.
In other words, when the dust settles, will the net effect of Trump’s policies be a bigger swamp or smaller swamp?
The New York Times opined that Trump is basically replacing one set of insiders with another set of insiders, which implies a bigger swamp.
Mr. Trump may be out to challenge one establishment — the liberal elite — but he is installing one of his own, filled with tycoons, Wall Street heavyweights, cronies and a new rank of shadowy wealthy “advisers” unaccountable to anyone but him. …Take first the Goldman Sachs crowd. The Trump campaign lambasted global financiers, led by Goldman, as having “robbed our working class,” but here come two of the alleged miscreants: Gary Cohn, Goldman’s president, named to lead the National Economic Council, and Steven Mnuchin, named as Treasury secretary. …Standing in the rain during Mr. Trump’s inaugural speech, farmers and factory workers, truckers, nurses and housekeepers greeted his anti-establishment words by cheering “Drain the Swamp!” even as the new president was standing knee-deep in a swamp of his own.
I’m skeptical of Trump, and I’m waiting to see whether Gary Cohn and Steven Mnuchin will be friends for taxpayers, so I’m far from a cheerleader for the current administration.
Here’s another potential indicator of what may happen to the swamp under Trump’s reign.
Bloomberg reports that two former Trump campaign officials, Corey Lewandowski and Barry Bennett have cashed in by setting up a lobbying firm to take advantage of their connections.
The arrival of a new president typically means a gold rush for Washington lobbyists as companies, foreign governments, and interest groups scramble for access and influence in the administration. Trump’s arrival promises to be different—at least according to Trump. Throughout the campaign, he lambasted the capital as a den of insider corruption and repeatedly vowed to “drain the swamp,” a phrase second only in the Trump lexicon to “make America great again.” …Trump’s well-advertised disdain for lobbying might seem to augur poorly for a firm seeking to peddle influence. …“Business,” Lewandowski says, “has been very, very good.”
This rubs me the wrong way. I don’t want lobbyists to get rich.
But, to be fair, not all lobbying is bad. Many industries hire “representation” because they want to protect themselves from taxes and regulation. And they have a constitutional right to “petition” the government and contribute money, so I definitely don’t want to criminalize lobbying.
But as I’ve said over and over again, I’d like a much smaller government so that interest groups don’t have an incentive to do either the right kind of lobbying (self-protection) or the wrong kind of lobbying (seeking to obtain unearned wealth via the coercive power of government).
Here’s one final story about the oleaginous nature of Washington.
Wells Fargo is giving a big payout to Elaine Chao, the new Secretary of Transportation.
Chao, who joined Wells Fargo as a board member in 2011, has collected deferred stock options — a compensation perk generally designed as a long-term retention strategy — that she would not be able to cash out if she left the firm to work for a competitor. Her financial disclosure notes that she will receive a “cash payout for my deferred stock compensation” upon confirmation as Secretary of Transportation. The document discloses that the payments will continue throughout her time in government, if she is confirmed. The payouts will begin in July 2017 and continue yearly through 2021. But Wells Fargo, like several banks and defense contractors, provides a special clause in its standard executive employment contract that offers flexibility for awarding compensation if executives leave the bank to enter “government service.” Such clauses, critics say, are structured to incentivize the so-called “reverse revolving door” of private sector officials burrowing into government. …Golden parachutes for executives leaving firms to enter government dogged several Obama administration officials. Jack Lew, upon leaving Citigroup to join the Obama administration in 2009, was given a cash payout as part of his incentive and retention awards that wouldn’t have been paid if he had left the firm to join a competitor or under ordinary circumstances. But Lew’s Citigroup contract stipulated that there was an exception for leaving to work in a “full time high level position with the U.S. government or regulatory body.” Goldman Sachs, Morgan Stanley, and Northrop Grumman are among the other firms that have offered special financial rewards to executives who leave to enter government.
This rubs me the wrong way, just as it rubbed me the wrong way when one of Obama’s cabinet appointees got a similar payout.
But the more I think about it, the real question isn’t whether government officials get to keep stock options and other forms of deferred compensation when they jump to the government.
What bothers me much more is why companies feel that it’s in their interest to hire people closely connected to government. What value did Jacob Lew bring to Citigroup? What value did Chao bring to Wells Fargo?
I suspect that the answer has a lot to do with financial institutions wanting people who can pick up the phone and extract favors and information from senior officials in government.
For what it’s worth, I’m not a fan of Lew because he pushed for statism while at Treasury. By contrast, I am a fan of Chao because she was one of the few bright spots during the generally statist Bush years.
But I don’t want a system where private companies feel like they should hire either one of them simply because they have connections in Washington.
I hope that Trump will change this perverse set of incentives by “draining the swamp.” But unless he reduces the size and scope of government, the problem will get worse rather than better.
The Hill reports that the Consumer Financial Protection Bureau (CFPB), Elizabeth Warren’s brainchild, is “under siege by all three branches of the government.” Congressional Republicans have long opposed the agency that was created when Democrats were in control, arguing that it has too much power and too little accountability. President Trump has likewise expressed his displeasure with Dodd-Frank–the massive financial reform legislation that created the CFPB–throughout the campaign and again after taking office.
CFPB receives independent funding from the Federal Reserve, which weakens Congressional oversight. Unlike other federal agencies, its director also cannot be removed at-will be the president. There must first be a finding of “inefficiency, neglect of duty, or malfeasance in office.”
An appeals court ruled this structure to be unconstitutional last October, but the ruling was recently vacated pending rehearing before the full D.C. Circuit Court of Appeals. Instead of waiting for the case to be heard on May 24, however, Congress should probably just scrap the failed experiment altogether, as companion bills from Sen. Ted Cruz and his Texas counterpart Rep. John Ratcliffe would do.
The extremely overpaid bureaucrats at the CFPB have been wreaking havoc since the agency was created. They worked with other agencies, in what is known as Operation Choke Point, to target lawful businesses in industries disliked by the previous administration. They’ve tried to wipe out the small-dollar loan industry and leave the poor and the unbanked without access to credit in the name of protecting them. It has attempted to undermine consumers with an anti-arbitration rule that would only benefit class action lawyers, and now it evens wants to weaken attorney-client privilege.
There are other legislative approaches out there that would reform, rather than abolish, the CFPB. To be sure, these could be big steps in the right direction as well. But the burden should be on the CFPB to first demonstrate how it has benefited consumers, and not just bureaucrats and special interests. If they can do so then maybe there’s something worthwhile to salvage with a major organizational overhaul. Otherwise, the CFPB should be thrown out with the rest of the last administration’s garbage.
Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.
Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.
Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.
The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).
Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.
I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.
But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!
Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.
But I’m digressing. Let’s look at Pierre’s new rankings.
As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.
The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.
So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.
But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.
As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.
P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).
P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.
This article appeared on the Daily Caller on February 14, 2017.
Republicans control the White House and both chambers of Congress for the first time in a decade. That might not be true for long, however, if they give into the voices within the party and other special interests now calling for a carbon tax. Americans elected Republicans to cut taxes, not to raise them.
If you’re confused as to why Republicans would ever consider raising Americans’ energy bills, you’re not alone. However, the pitch recently made by some veteran beltway Republicans calling themselves the Climate Leadership Council (CLC) is just seductive enough to be dangerous.
The CLC, which includes former Secretary of State James Baker, is trying to convince the Trump administration to trade repeal of Obama’s Clean Power Plan and other costly EPA regulations supposedly aimed at reducing carbon emissions in exchange for a new carbon tax. But what kind of trade is it really, when the Clean Power Plan is already floundering and the administration can remove overly burdensome regulations all on its own?
A $300 billion annual tax on carbon, which is what they are asking for, would mean an immediate 36 cent per gallon increase in the cost of gasoline. That would also be just the beginning, as they want the tax to increase over time.
We’re supposed to take comfort in the promise that the revenues raised by the tax would be rebated to taxpayers—in theory reducing fossil fuel consumption without hitting our pocketbooks—but such assurances simply cannot be counted upon.
There would obviously be administrative costs to shuffling all this money around, for one thing, and future politicians would inevitably redirect the funds toward pet political projects and vote-buying schemes.
Even worse, once Democrats return to power much of the regulatory relief “traded” for the tax will likely be undone. We’ll be right back where we started with overly burdensome environmental regulations and a new tax on consumers to go with them.
That’s why it makes zero sense for Republicans to do the heavy lifting on their behalf by being the ones to impose this new tax on the American people and suffer the electoral consequences.
Those pushing for a carbon tax argue that something must be done to stop “climate change,” and that this is the most market-friendly option available.
But it’s rather telling that the environmental groups themselves often don’t act as if they truly believe it is necessary. When the state of Washington was considering a ballot initiative in November to impose a tax on carbon emissions, many environmental groups opposed it because other taxes would have been lowered to offset the levy. They were more concerned about growing government than the environment.
That’s no great surprise, as even the EPA’s own models show that entirely eliminating all carbon emissions in the United States—an impractical and undesirable goal—would reduce warming by little more than a tenth of a degree by the end of the century.
It’s easy to understand why someone like Elon Musk—who is also whispering about the tax to President Trump—wants to impose new taxes on Americans. His electric car company, Tesla, would benefit by making traditional gas vehicles more expensive. But the rest of Americans who aren’t billionaires and can’t count on crony handouts from government would lose big, which is why it’s very puzzling that Republicans would be seriously considering the political and economic loser that is a carbon tax.
The Index of Economic Freedom is my favorite annual publication from the Heritage Foundation. It’s a rich source of information, using dozens of data sources, about economic liberty around the world.
I first wrote about the Index back in 2010 and shared the bad news that the U.S. score dropped dramatically in Obama’s first year.
Well, the new Index lets us see the net effect of Obama’s entire tenure. The worse news is that the U.S. score has dropped to 75.1 on a 0-100 scale. And the worst news is that this represents America’s lowest score in the twenty-plus years that the Index has been published.
The United States is ranked #17 in the latest Index. We’re only in the “Mostly Free” category, behind Luxembourg and the Netherlands and tied with Denmark.
The top-ranked jurisdiction, once again, is Hong Kong. And what’s really amazing is that Hong Kong actually increased it score. Indeed, all five nations in the “Free” category managed to increase overall economic freedom.
By the way, Cuba jumped 4.1 points last year, so maybe Fidel’s death is the beginning of some much-needed liberalization.
America’s best score is for “regulatory efficiency,” which helps to explain why the U.S. gets a top-10 score from the World Bank’s Doing Business.
Let’s close by comparing the United States with Hong Kong. This charts shows how our scores have changes over time, and also shows the average score for the entire world.
The biggest takeaway is that the U.S. basically is halfway between Hong Kong and the world average.
The great unknown, of course, is whether America’s score will go up or down under Trump.
I’m not a big fan of Donald Trump, mostly because I fear his populist instincts will deter him from policies that we need (such as entitlement reform) while luring him to support policies that are misguided (more federal transportation spending).
And, for what it’s worth, I’ll freely acknowledge that Trump’s election is having a very good effect on my leftist friends. Because they fear the new occupant of the White House, they’re now much more sympathetic to the notion that there should be limits on the power of the federal government and they’re acknowledging that maybe federalism isn’t such a bad idea after all.
Indeed, some of them are so supportive of limiting the impact of Washington that they’re considering secession! The L.A. Daily News reports on a growing campaign in the Golden State.
“Yes California,” a pro-secession group, filed paperwork with the state attorney general in November for a proposed 2018 ballot measure to strike language in the state constitution binding California to the United States. …If its ballot measure succeeds, Yes California would pursue a 2019 vote to declare the state’s independence. …Talk of California secession is nothing new. But it gained momentum after Donald Trump’s election. Hillary Clinton got 62 percent of California’s vote in defeating Trump… According to Yes California, a path to secession exists through the U.S.-ratified United Nations charter.
By the way, I thought cozying up to Moscow was a bad thing now. But since the Yes California crowd is even trying to establish relations with Putin-land, I guess coziness is in the eye of the beholder.
…the group announced the opening of a “cultural center” in Moscow.
Anyhow, the folks at Salon are somewhat supportive of “CalExit.”
…it’s time for the media to stop dismissing the idea as a zany left coast response to the newly elected Republican federal government. …secession could be a reality in our lifetime. …Californians could expect to initiate advanced-level progress in racial justice…free of restriction an independent California could actually demonstrate the success of progressive values in action… It’s difficult to say whether California’s rich Democrats in coastal enclaves would be down with paying reparations if the independent nation were scrapping its ties to the U.S. and its colonial past.
But a column in the L.A. Times by Conor Friedersdorf says statist values would suffer if California became independent.
Blue America would lose its biggest source of electoral votes in all future elections. The Senate would have two fewer Democrats. The House of Representatives would lose 38 Democrats and just 14 Republicans. The U.S. 9th Circuit Court of Appeals, among the most liberal in the nation, would be changed irrevocably. And the U.S. as a whole would suddenly be a lot less ethnically diverse than it is today. For those reasons, Trump, Senate Majority Leader Mitch McConnell, Speaker of the House Paul Ryan, Republicans with White House ambitions, opponents of legalizing marijuana, advocates of criminalizing abortion and various white nationalist groups might all conclude –– for different reasons –– that they would benefit politically from a separation, even as liberals and progressives across America would correctly see it as a catastrophe.
Which may explain why many folks on the right are cheering for secession. Here are some excerpts from another column in the L.A. Times.
…judging by the letters we’ve received from across the country on the burgeoning secessionist movement known as “Calexit,” some readers would be happy see us go — or at least take pleasure in watching our deep-blue state suffer… I have some advice to the sane citizens of California: Members of the middle class should start planning their own exit. When California loses all those billions from the federal government, the politicians are going to need to find money elsewhere, and you know Hollywood’s millionaires aren’t going to provide it. They’ll move to their mountain homes in Wyoming or elsewhere. You think all those new billionaires in Silicon Valley will eagerly part with their money? Think again. They’ll hide their wealth in tax shelters. The refugees and illegal immigrants on the receiving end of California’s generous benefits aren’t going to provide needed tax revenues, so the politicians will target the middle class.
Simply stated, you can’t have a cradle-to-grave welfare state unless the middle class is so over-taxed that they have to rely on government for healthcare, education, retirement, and just about everything else.
Let’s keep our focus on California secession, which I support both as a matter of self-determination and as a matter of public policy.
With regards to policy, I think it will be very interesting to see how a state with huge natural advantages (coast, weather, mineral resources, agricultural land, etc) can endure bad policy.
And there’s already plenty of bad policy in the state.
A big part of the problem is that the public sector in California is wildly overcompensated. Kevin Williamson explains.
State and local government spending adds up to nearly 20 percent of California’s economic output, while thriftier states such as Texas and New Hampshire spend less than 15 percent. …California’s government, like the federal government and most other state and local governments, spends its money on salaries, benefits, pensions, and other forms of employee compensation. The numbers are contentious — for obvious political reasons — but it is estimated that something between half and 80 percent of California’s state and local spending ultimately goes to employee compensation. …The first and smaller problem is that many government workers are paid too much. …The second and larger problem with public-sector workers is that there are a whole lot of them. …When politicians talk about “investments,” we think they mean bridges and research laboratories and canals to bring water to central California. But what they are investing in is dependency. In California, that means creating a lot of full-time jobs for Democrats.
But it’s not just that there are too many bureaucrats and that they are overpaid. They also become a big burden when they retire.
Here’s some additional evidence of the mess in California.
California is already paying $5.38 billion to the California Public Employees’ Retirement System this year, and in fiscal year 2018 the state will need to add at least $200 million more. By fiscal year 2024 the annual tab will increase at least $2 billion from current levels. This all comes on top of increases already scheduled under the system, according to Governor Jerry Brown’s finance department. …California’s revenue is volatile because it draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market. The top 1 percent of earners — who tend to own shares — accounted for nearly half of the state’s personal income-tax collections in 2014.
And the big tax hikes that will be imposed on the middle class will add to the misery they already suffer. Here’s more evidence of how the middle class is being eviscerated.
…the gap between what Californians pay versus the rest of the country has nearly doubled to about 50%. This translates into a staggering bill. Although California uses 2.6% less electricity annually from the power grid now than in 2008, residential and business customers together pay $6.8 billion more for power than they did then. …“California has this tradition of astonishingly bad decisions,” said McCullough, the energy consultant. “They build and charge the ratepayers. There’s nothing dishonest about it. There’s nothing complicated. It’s just bad planning.”
Victor David Hanson bemoans the outlook for his state.
The state is currently experiencing another perfect storm of increased crime, decreased incarceration, still ongoing illegal immigration, and record poverty. All that is energized by a strapped middle class that is still fleeing the overregulated and overtaxed state, while the arriving poor take their places in hopes of generous entitlements, jobs servicing the elite, and government employment. …Go to a U-Haul trailer franchise in the state. The rental-trailer-return rates of going into California are a fraction of those going out. Surely never in civilization’s history have so many been so willing to leave a natural paradise. …What makes the law-abiding leave California is not just the sanctimoniousness, the high taxes, or the criminality. It is always the insult added to injury. We suffer not only from the highest basket of income, sales, and gas taxes in the nation, but also from nearly the worst schools and infrastructure. We have the costliest entitlements and the most entitled.
Little wonder, as Hans Bader explains, businesses continue to flee the state.
Nestlé USA, “the maker of Häagen-Dazs, Baby Ruth, Lean Cuisine, and dozens of other mass brands,” is moving its U.S. headquarters from California to Virginia. It is among many businesses that have left California in recent years. In 2010, Northrop Grumman Corp. moved its headquarters out of California, leaving the state that gave birth to the aerospace industry without a single major military contractor based there. Last Spring, the parent company of Carl’s Jr., founded in Anaheim, California, 60 years ago, relocated its headquarters to Nashville, Tennessee, where there is no state income tax. …reported the San Jose Mercury News in June 2016. “During the 12 months ending June 30, the number of people leaving California for another state exceeded by 61,100 the number who moved here from elsewhere in the U.S., according to state Finance Department statistics. ‘They are tired of the expense of living here. They are tired of the state of California and the endless taxes here,’ said Scott McElfresh, a certified moving consultant. ‘People are getting soaked every time they turn around.’” …For businesses, the worst is yet to come. California is increasing its minimum wage over the next several years to $15 per hour. …the increase will ultimately cost California 700,000 jobs. An economist at Moody’s calculated that 31,000 to 160,000 California manufacturing jobs will be lost. California taxes may rise further, to deal with a rising state budget deficit over the next decade. The deficit is rising in part due to California’s unusually high state welfare spending which grew about twice as fast in California in 2016 as in the U.S. as a whole. California also spends its transportation dollars very poorly, and it is wasting billions on a high-speed rail boondoggle that few people will ride.
So unless the politicians in Sacramento decide to erect a barbed wire fence around the border (maybe we shouldn’t joke), the state’s feudalistic economic system will be unsustainable.
Though there is an alternative scenario. Perhaps independence will have a sobering effect on the state’s kleptocrats and they’ll recognize the importance of quasi-sensible policy once California is an independent nation.
When there are lots of competing jurisdictions, there’s pressure on all politicians to be rational stationary bandits rather than predatory roving bandits.
Since I’m always reading and writing about government policies, both in America and around the world, I’m frequently reminded of H.L. Mencken’s famous observation about the shortcomings of “tolerable” government.
If you take a close look at the world’s freest economies, you quickly learn that they are highly ranked mostly because of the even-worse governments elsewhere.
Even places such as Switzerland have some misguided policies.
But there’s a silver lining to this dark cloud. The incompetence, mendacity, and cronyism that exists all over the world means that I’ll never run out of things to write about.
So let’s enjoy a new edition of Great Moments in Foreign Government.
We’ll start with the utterly predictable failure of an entitlement program in the United Kingdom.
The government must stop ‘nannying’ British parents and do away with universal free childcare, a new report has urged. Families most in need of help are not getting it because Government subsidies are poorly targeted, the Institute of Economic Affairs publication said. Many families on average earnings are spending more than a third of their net income on childcare, the report claimed, saying too much regulation in the sector has hiked prices. …One study has estimated that keeping parents in work costs £65,000 per job, the report claimed, describing current policy as ‘costly and inefficient’. …home-based childminders are priced out of the sector, it said. Co-author of the report Len Shackleton, an editorial research fellow at the Institute of Economic Affairs, said: ‘Government interventions in the childcare sector have resulted in both British families and taxpayers bearing a heavy burden of expensive provision.
I’m totally shocked, just like Inspector Renault in Casablanca.
I’m still waiting for an example of a government “solution” that makes a problem better rather than worse.
Let’s now turn to Germany. I’ve previously referenced the country’s intelligence community because the BND managed to lose the blueprints for its costly new headquarters building.
But apparently the incompetence goes well beyond architecture. Another German intelligence division, the BfV, had an Islamic terrorist on staff. Here are some excerpts from a report in the Washington Post.
German intelligence agents noticed an unusual user in a chat room known as a digital hideout for Islamic militants. The man claimed to be one of them — and said he was a German spy. He was offering to help Islamists infiltrate his agency’s defenses to stage a strike. Agents lured him into a private chat, and he gave away so many details about the spy agency — and his own directives within it to thwart Islamists — that they quickly identified him, arresting the 51-year-old the next day. Only then would the extent of his double life become clear. The German citizen of Spanish descent confessed to secretly converting to Islam in 2014. From there, his story took a stranger turn. Officials ran a check on the online alias he assumed in radical chat rooms.
And they found out that the terrorist had a rather colorful past.
The married father of four had used it before — as recently as 2011 — as his stage name for acting in gay pornographic films. …which could cast a fresh light on the judgment and vetting of the German intelligence agency at a critical time.
These revelations have generated some concern, as one might expect.
News of the case sparked a storm of outrage in Germany, even as critics said it raised serious questions about the country’s bureaucratically named domestic spy agency, known as the Federal Office for the Protection of the Constitution (BfV). …“It’s not only a rather bizarre, but also a quite scary, story that an agency, whose central role it is to engage in counterespionage, hired an Islamist who potentially had access to classified information, who might have even tried to spread Islamist propaganda and to recruit others to let themselves be hired by and possibly launch an attack” against the domestic intelligence agency, said Hans-Christian Ströbele, a member of the Parliamentary Control Committee that oversees the work of the German intelligence services.
You won’t be surprised to learn that the German government is not alone. The U.K. government also has hired terrorists to work in anti-terrorism divisions.
The only saving grace is that terrorists sometimes display similar levels of incompetence, as illustrated in the postscripts of this column.
Let’s close with a trip to Canada. Our friends to the north generally are a sensible bunch, but you can find plenty of senseless policies, particularly in the French-speaking areas.
And I’m not sure whether to laugh or cry about this example of bureaucratic extortion.
A Camrose man is ticked about his ticket — a $465 traffic violation issued by Edmonton police — for having a cracked driver’s licence. Dave Balay admits he’s guilty of having a small crack in his licence. But he doesn’t think the penalty fits the crime. He was returning home from visiting a friend Wednesday evening when he was pulled over on Anthony Henday Drive. …He gave the officer his driver’s licence, registration and insurance card. …”He came back, and the younger policeman said he was going to give me a ticket for my driver’s licence being mutilated,” said Balay. “I said, ‘Mutilated? I didn’t even know there was such a thing.’ Then he gave me a ticket for $465.” The mutilation referred to was a crack in the top left corner of Balay’s licence. “Maybe not even quite an inch long,” said Balay, adding the crack doesn’t obstruct any pertinent information. …”I think I outright laughed, and said, ‘Seriously? Four-hundred-and-sixty-five bucks for this crack?’ [The officer] said, ‘It’s a mutilated licence.’ …”Had I scratched out my eyes or drawn a mustache on my face, or scratched out the licence number or something, then, yeah, give me a ticket for that. That should be an offence.”
But the local government says Mr. Balay should be grateful that he was treated with such kindness.
Edmonton police released a statement Friday suggesting the officer actually gave Balay a break. According to the statement, the officer had grounds to lay a careless driving charge, which carries a fine of $543 and six demerit points. But because Balay was co-operative, the officer issued a lesser fine for a cracked driver’s licence.
Though Mr. Balay doesn’t think he’s been given a break.
Balay said he won’t pay the fine, even if that means serving jail time or community service. “I don’t have $465,” he said. “…I do some part-time substitute teaching, supply teacher. It’s a week’s wage.”
Good for Mr. Balay. Hopefully the publicity that he’s getting will force the revenue-hungry bureaucrats in Edmonton to back down.
Meanwhile, this story adds to my ambivalence about Canada. On the minus side of the ledger, there are absurd policies granting special rights to alcoholics, inane harassment of kids selling worms or lemonade, fines on parents who don’t give their kids carbs at lunchtime, and punishment for kids who protect classmates from knife-wielding bullies.
Then again, Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, regulatory budgeting, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.
Though things are now heading in the wrong direction, which is unfortunate for our northern neighbors.
One of the unfortunate features of Washington is that people often wind up in places that bring out their worst behaviors.
The classic example is Jack Kemp, who did great work as a member of Congress to push a supply-side agenda of low marginal tax rates and less double taxation. Indeed, it’s no exaggeration to say that the Reagan tax cuts were made possible by Kemp’s yeoman efforts. But when President George H.W. Bush brought Kemp into his cabinet back in 1989, it wasn’t to head up the Treasury Department. It was to be Secretary of Housing and Urban Development, a department that shouldn’t even exist. And because Kemp was weak on spending issues, he predictably and unfortunately presided over an expansion of HUD’s budget. If he was at Treasury, by contrast, he may have been able to stop Bush’s disastrous read-my-lips tax deal.
Another example is that Republicans members of Congress from farm states generally favor small government. So if they wind up on committees that deal with overall fiscal issues, they usually are allies in the effort to restrain Leviathan. Unfortunately, they more often wind up on the Agriculture Committee, which means they accumulate power and expertise in the area where they are least likely to favor free markets and limited government. They net effect is that they may still have a decent voting record, but their actual impact on public policy will be harmful. The same thing happens with Republicans who get on the transportation committees.
Today’s example is Attorney General Jeff Sessions. When he was Chairman of the Senate Budget Committee, he was an ally in the fight against big government. He favored decentralization. He supported rolling back the welfare state. He favored entitlement reform. He supported tax cuts. He used his power and position to try to do the right thing. But when Trump asked Sessions to join his cabinet, it wasn’t to head the Office of Management and Budget, a position that would have been a good fit. Instead, Trump picked him to be Attorney General, which is problematical because Sessions is an advocate of the failed War on Drugs. And he’s also a supporter of “asset forfeiture,” which occurs when governments steal money and property from citizens without convicting them of any crime. Or sometimes without even charging them with a crime.
I’m not joking. This happens with distressing regularity. It’s called “policing for profit.”
In poor nations, a corrupt cop will stop motorists to shake them down for pocket change. In the United States, we’ve legalized a bigger version of that sleazy behavior. George Will shared a reprehensible example last December.
The Sourovelises’ son, who lived at home, was arrested for selling a small amount of drugs away from home. Soon there was a knock on their door by police who said, “We’re here to take your house” and “You’re going to be living on the street” and “We do this every day.” The Sourovelises’ doors were locked with screws and their utilities were cut off. They had paid off the mortgage on their $350,000 home, making it a tempting target for policing for profit. Nationwide, proceeds from sales of seized property (homes, cars, etc.) go to the seizers. And under a federal program, state and local law enforcement can partner with federal authorities in forfeiture and reap up to 80 percent of the proceeds. This is called — more Orwellian newspeak — “equitable sharing.” No crime had been committed in the Sourovelises’ house, but the title of the case against them was “Commonwealth of Pennsylvania v. 12011 Ferndale Street.” Somehow, a crime had been committed by the house. In civil forfeiture, it suffices that property is suspected of having been involved in a crime. Once seized, the property’s owners bear the burden of proving their property’s innocence.
The good news is that there’s a growing desire to stop governments from stealing.
Indeed, Will points out that there was “a 2015 Senate Judiciary Committee hearing on forfeiture abuses.”
Unfortunately, not everybody at the hearing agreed that it’s wrong for governments to arbitrarily engage in theft.
…one senator said “taking and seizing and forfeiting, through a government judicial process, illegal gains from criminal enterprises is not wrong,” and neither is law enforcement enriching itself from this. …this senator asserted an unverifiable number: “Ninety-five percent” of forfeitures involve people who have “done nothing in their lives but sell dope.” This senator said it should not be more difficult for “government to take money from a drug dealer than it is for a businessperson to defend themselves in a lawsuit.” In seizing property suspected of involvement in a crime, government “should not have a burden of proof higher than in a normal civil case.”
The Senator who made these statements was Jeff Sessions.
And, as George Will explains, the then-Senator missed a few points.
In civil forfeiture there usually is no proper “judicial process.” There is no way of knowing how many forfeitures involve criminals because the government takes property without even charging anyone with a crime. The government’s vast prosecutorial resources are one reason it properly bears the burden of proving criminal culpability “beyond a reasonable doubt.” A sued businessperson does not have assets taken until he or she has lost in a trial, whereas civil forfeiture takes property without a trial and the property owner must wage a protracted, complex, and expensive fight to get it returned.
The Wall Street Journal also opined about the new Attorney General’s indefensible position.
The all-too-common practice allows law enforcement to take private property without due process and has become a cash cow for state and local police and prosecutors. …Assets are often seized—and never returned—without any judicial process or court supervision. Unlike criminal forfeiture, civil forfeiture doesn’t require a criminal conviction or even charges. According to the Virginia-based Institute for Justice, which tracks forfeitures, 13% of all forfeitures done by the Justice Department between 1997 and 2013 were in criminal cases while 87% were civil forfeitures. And 88% of those forfeitures were done by an administrative agency, not a court. …The lack of procedural protection coupled with financial incentives has turned policing for profit into a slush fund for governments hungry for cash, and the payouts too often come at the expense of civil liberties. We’d like to hear what Mr. Sessions thinks of the practice today.
Sadly, it doesn’t appear that President Trump is on the right side either.
In a new column on the topic, George Will addresses this unfortunate development.
There is no reason for the sheriffs to want to reform a racket that lines their pockets. For the rest of us, strengthening the rule of law and eliminating moral hazard are each sufficient reasons. Civil forfeiture is the power to seize property suspected of being produced by, or involved in, crime. If property is suspected of being involved in criminal activity, law enforcement can seize it. Once seized, the property’s owners bear the burden of proving that they were not involved in such activity, which can be a costly and protracted procedure. So, civil forfeiture proceeds on the guilty-until-proven-innocent principle. Civil forfeiture forces property owners, often people of modest means, to hire lawyers and do battle against a government with unlimited resources. And here is why the sheriffs probably purred contentedly when Trump endorsed civil forfeiture law — if something so devoid of due process can be dignified as law: Predatory law enforcement agencies can pocket the proceeds from the sale of property they seize.
The folks at Reason have a new video on Trump’s support for theft-by-government.
By the way, I hold out some hope that Trump may not be completely bad on the issue. It’s possible that he’s never considered the issue and doesn’t understand that it involves over-the-top government thuggery. He may simply think it’s some sort of procedural issue involving good cops against bad crooks.
So perhaps when he is briefed on what the issue really means, he’ll be in favor of protecting Americans from the kind of horrible abuse that the Dehko family experienced. Or the mistreatment of Carole Hinders. Or the ransacking of Joseph Rivers. Or the brutalization of Thomas Williams.
I could continue, but I think you get the point.
Let’s close, though, with some good news. I wrote two years ago about the case of Charles Clarke, who had $11,000 that was stolen by government. Thanks to the Institute for Justice, that stolen money has been returned.
Charles Clarke, the college student who was robbed of $11,000 in cash by cops at the Cincinnati/Northern Kentucky International Airport two years ago, will get his money back with interest under an agreement he reached with the Justice Department this week. …To keep the money, the government theoretically had to show that it more likely than not came from selling drugs or was intended to buy them. But that burden applied only if Clarke had the means to challenge the forfeiture once the government had taken his savings. Innocent owners often find that standing up for their rights costs more than the value of the property they are trying to get back. Luckily for Clarke, he had the Institute for Justice in his corner.
And the other bit of good news is that New Mexico has curtailed the disgusting practice of asset forfeiture. Hopefully Trump won’t try to destroy the careers of the lawmakers who decided the Constitution was more important than lining the pockets of the bureaucracy.
I don’t have strong views on global warming. Or climate change, or whatever it’s being called today.
But I’ve generally been skeptical about government action for the simple reason that the people making the most noise are statists who would use any excuse to increase the size and power of government. To be blunt, I simply don’t trust them. In Washington, they’re called watermelons – green on the outside (identifying as environmentalists) but red on the inside (pushing a statist agenda).
But there are some sensible people who think some sort of government involvement is necessary and appropriate.
George Schultz and James Baker, two former Secretaries of State, argue for a new carbon tax in a Wall Street Journal column as part of an agenda that also makes changes to regulation and government spending.
…there is mounting evidence of problems with the atmosphere that are growing too compelling to ignore. …The responsible and conservative response should be to take out an insurance policy. Doing so need not rely on heavy-handed, growth-inhibiting government regulations. Instead, a climate solution should be based on a sound economic analysis that embodies the conservative principles of free markets and limited government. We suggest…creating a gradually increasing carbon tax…, returning the tax proceeds to the American people in the form of dividends. And…rolling back government regulations once such a system is in place.
A multi-author column in the New York Times, including Professors Greg Mankiw and Martin Feldstein from Harvard, also puts forward the argument for this plan.
On-again-off-again regulation is a poor way to protect the environment. And by creating needless uncertainty for businesses that are planning long-term capital investments, it is also a poor way to promote robust economic growth. By contrast, an ideal climate policy would reduce carbon emissions, limit regulatory intrusion, promote economic growth, help working-class Americans and prove durable when the political winds change. …Our plan is…the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints. …the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments. …regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.
They perceive this plan as being very popular.
Environmentalists should like the long-overdue commitment to carbon pricing. Growth advocates should embrace the reduced regulation and increased policy certainty, which would encourage long-term investments, especially in clean technologies. Libertarians should applaud a plan premised on getting the incentives right and government out of the way.
I hate to be the skunk at the party, but I’m a libertarian and I’m not applauding. I explain some of my concerns about the general concept in this interview.
In the plus column, there would be a tax cut and a regulatory rollback. In the minus column, there would be a new tax. So two good ideas and one bad idea, right? Sounds like a good deal in theory, even if you can’t trust politicians in the real world.
However, the plan that’s being promoted by Schultz, Baker, Feldstein, Mankiw, etc, doesn’t have two good ideas and one bad idea. They have the good regulatory reduction and the bad carbon tax, but instead of using the revenue to finance a good tax cut such as eliminating the capital gains tax or getting rid of the corporate income tax, they want to create universal handouts.
They want us to believe that this money, starting at $2,000 for a family of four, would be akin to some sort of tax rebate.
That’s utter nonsense, if not outright prevarication. This is a new redistribution program. Sort of like the “basic income” scheme being promoted by some folks.
And it creates a very worrisome dynamic since people will have an incentive to support ever-higher carbon taxes in order to get ever-larger checks from the government. Heck, the plan being pushed explicitly envisions such an outcome.
The libertarian approach to crime is both simple and sensible.
In other words, be “tough on crime,” but make sure there’s a morally just system.
And I should consider adding a fourth principle, which is that laws shouldn’t be a way for governments to pad their budgets with unfair fines and other cash penalties.
With this in mind, let’s explore a practical example of why it’s a good idea to make sure governments respect due process and civil liberties. I wrote last year about how the Justice Department wrongly asserted that it has the right, without following due process, to reach outside America’s borders to obtain personal information.
In part, the bureaucrats at DOJ are exploiting an old law that doesn’t provide clear guidance on how to deal with modern electronic communication and data storage. Fortunately, that’s something that should be easy to fix.
Veronique de Rugy of the Mercatus Center correctly identifies the key issue in a column for Reason, starting with the fact that courts fortunately are not giving the feds a blank check.
…the Justice Department…asserted that a U.S. search warrant should carry jurisdiction over the data of an Irish citizen being stored on a server in Ireland simply because it is owned by Microsoft, an American corporation. Thank goodness the federal appeals court has now rejected the government’s attempt… The outcome affirms a landmark defense of privacy rights against law enforcement overreach and clearly establishes that the U.S. government does not have jurisdiction over the entire world. It also removes a major threat to the competitiveness of U.S.-based multinational companies, which must operate under the privacy rules of the countries in which they operate. Many of those countries unsurprisingly take a dim view of U.S. government efforts to pry into the lives of their citizens.
But it would be good if lawmakers modified the law so that it reflects today’s world.
Members of Congress, however, shouldn’t count on either the courts or the Trump administration. Instead, they could address the fundamental issue. The root of the problem is a common one. A law—the Electronic Communications Privacy Act—was enacted in 1986 to address issues raised by the technology at the time, and Congress never bothered to update it despite significant advancements in the decades since. …This has also resulted in massive privacy blind spots—such as the ECPA’s considering emails held by a third party for over 180 days to be abandoned, allowing them to be accessed with a simple subpoena instead of a judge-issued warrant. Also of concern is that the process for working with foreign governments when investigations cross jurisdictions—through mutual legal assistance treaties, or MLATs—has been seen by officials as too cumbersome to pursue. Excessive bureaucratic red tape, in other words, has encouraged investigators to engage in a troubling power grab.
And there was legislation last Congress to address these problems, with a new version already introduced in the new Congress.
…a bill, the International Communications Privacy Act, that sought to resolve both of these issues. It would have updated privacy rules to acknowledge modern technological reality by doing away with such silly provisions as the 180-day rule. It also would have streamlined MLAT procedures to make international cooperation more practical. Another bill, the Email Privacy Act, was just reintroduced in the current Congress and would also update the ECPA.
Amazing the House already has approved the legislation.
The House of Representatives today approved by voice vote the Email Privacy Act (H.R. 387) to protect Americans’ privacy and public safety in the digital age. …a statement from House Judiciary Committee Chairman Bob Goodlatte (R-Va.) applauding passage of the bill. …“The U.S. Constitution protects Americans’ property from unreasonable searches and seizures and we must ensure that this principle continues to thrive in the digital age. …As technology has far-outpaced the Electronic Communications Privacy Act of 1986, the Email Privacy Act modernizes this decades-old law to establish a uniform warrant requirement to acquire stored electronic communications in criminal investigations. These updates to the law will better safeguard Americans’ constitutional rights while also protecting law enforcement’s ability to fight crime. As the House again has overwhelmingly approved this bill, it’s time for the Senate to take up this bipartisan legislation and send it to the President’s desk to become law.”
The tech community is happy about this progress, though it’s also concerned the Senate once again will be the stumbling block.
…the reintroduced Email Privacy Act easily passed the House via a voice vote, showing that our Congressional Members still recognize how important this is. Of course, now it gets to go back to the Senate, and we saw how well that worked last year. And then we have to believe that President Trump will sign the bill. …It’s great that Rep. Kevin Yoder, along with Reps. Jared Polis, Bob Goodlatte, John Conyers, Ted Poe, Suzan DelBene, Will Hurd, Jerry Nadler, Doug Collins and Judy Chu keep pushing this bill. …the fact that they’re willing to support basic 4th Amendment concepts for email is worthy of recognition. Now, hopefully, the Senate won’t try to muck it up again.
I guess we’ll see whether there’s progress this year or next year.
In the meantime, let’s hope that lawmakers are guided by the three principles of good criminal justice policy.
P.P.S. Since courts almost always grant search warrants, I’ve never understood why law enforcement officials want to get around this constitutional principle. Moreover, I’ve never seen any evidence that the fight against real crime somehow is compromised by having to comply with the 4th Amendment. So now, perhaps, you’ll understand why I’m willing (albeit only on one occasion) to side with Ruth Bader Ginsburg over Clarence Thomas.
When I debate one of my leftist friends about deficits, it’s often a strange experience because none of us actually care that much about red ink.
And folks on the left want bigger government, so they argue for tax hikes to enable more spending and redistribution.
I feel that I have an advantage in these debates, though, because I share my table of nations that have achieved great results when nominal spending grows by less than 2 percent per year.
The table shows that nations practicing spending restraint for multi-year periods reduce the problem of excessive government and also address the symptom of red ink.
I then ask my leftist buddies to please share their table showing nations that got good results from tax increases. And the response is…awkward silence, followed by attempts to change the subject. I often think you can even hear crickets chirping in the background.
I point this out because I now have another nation to add to my collection.
From the start of last decade up through the 2009-2010 fiscal year, government spending in the United Kingdom grew by 7.1 percent annually, far faster than the growth of the economy’s productive sector. As a result, an ever-greater share of the private economy was being diverted to politicians and bureaucrats.
Beginning with the 2010-2011 fiscal year, however, officials started complying with my Golden Rule and outlays since then have grown by an average of 1.6 percent per year.
And as you can see from this chart prepared by the Institute for Fiscal Studies, this modest level of fiscal restraint has paid big dividends. The burden of government spending has significantly declined, falling from 45 percent of national income to 40 percent of national income.
This means more resources in private hands, which means better economic performance.
Though allow me to now share some caveats. Fiscal policy is only a small piece of what determines good policy, just 20 percent of a nation’s grade according to Economic Freedom of the World.
So spending restraint should be accompanied by free trade, sound money, a sensible regulatory structure, and good governance. Moreover, as we see from the tragedy of Greece, spending restraint doesn’t even lead to good fiscal policy if it’s accompanied by huge tax increases.
Fortunately, the United Kingdom is reasonably sensible, which explains why the country is ranked #10 by EFW. Though it’s worth noting that it gets its lowest score for “size of government,” so the recent bit of good news about spending restraint needs to be the start of a long journey.
P.S. The United States got great results thanks to spending restraint between 2009-2014. It will be interesting to see whether Republicans get better results with Trump in the White House.
What best symbolizes France’s statist political culture?
Those are good examples, to be sure, but I’ve actually already shared an everything-you-need-to-know story dealing with lavish perks for France’s protected bureaucrat class.
But there’s no rule that says I can’t have multiple everything-you-need-to-know anecdotes.
Here’s a story that reveals why France is in trouble. The Wall Street Journal reports that a French presidential candidate is arguing people shouldn’t get upset that he used taxpayer money to give his wife a no-show job because a big chunk of the money then went back to the government because of punitive taxes.
François Fillon…apologiz[ed] to the country for having employed his wife and children as parliamentary aides while rejecting accusations the jobs were phony. …Mr. Fillon characterized it as unfair for media reports to state his wife received nearly a million euros over a 15-year period, saying after taxes her monthly average income came to only €3,677 ($3,964). …The privileges traditionally available to France’s ruling class were exposed with rare candor.
So I guess Fillon wants people to think it’s okay to divert funds to family members if they “only” pocket about $48,000 per year after paying taxes.
This is disgusting. At least Fillon should have wasted taxpayer money more elegantly, like France’s current president, who doesn’t have much hair but still gave his stylist big bucks.
What makes Fillon’s story especially amusing is that he is the candidate trying to appeal to French voters who want to reduce the role of the state.
Considering that two of his major opponents are Marine Le Pen, a big-government populist, and Benoît Hamon, a socialist who favors a taxpayer-provided basic income for everyone, maybe Fillon actually is the only choice for French voters with libertarian impulses, but that’s a rather sad commentary on the state of French politics. So I don’t even know if I’ll endorse a candidate like I did back in 2012.
What makes the situation particularly tragic is that the fiscal mess in France has become so bad that even parts of the government are concluding that some market-based reforms are necessary.
Corporation tax in France is too far above the European average, according to a report by the French Court of Auditors. The experts said a cut from 33.3% to 25% would allow companies to compete with their European counterparts. EurActiv France reports. The amount of tax paid by businesses in France has been steadily climbing for the last two decades. Today, they pay the highest rates in Europe. But this growth has not been good for the country, according to a report published by the Court… France has not always been a high tax jurisdiction, compared to other EU countries. In 1995 it was more or less at the European average. But it has steadily increased over the last 20 years. At the same time, other EU member states have been moving in the opposite direction. According to the report, most member states have lowered tax on business revenues, or have imminent plans to do so. The UK, for example plans to cut corporation tax to 17% by 2020. The average tax rate paid by EU companies fell from 33% in 1999 to 25% in 2015.
France’s suicidal fiscal regime is why – with my tongue planted firmly in cheek – I agreed with Paul Krugman back in 2013 that there is a plot against France. But I pointed out the conspirators against France were the nation’s politicians.
P.S. Actually, perhaps the story that tells you everything you need to know about France was the poll last decade revealing that more than half the population would flee to America if they had the opportunity.
Today, let’s look at a practical, real-world example.
I wrote a column for The Hill looking at why Greece is a fiscal and economic train wreck. I have lots of interesting background and history in the article, including the fact that Greece got into the mess by overspending and also explaining that politicians like Merkel only got involved because they wanted to bail out their domestic banks that foolishly lent lots of money to the Greek government.
But the most newsworthy part of my column was to expose the fact that “austerity” hasn’t worked in Greece because the private sector has been suffocated by giant tax hikes.
…the troika…imposed the wrong kind of fiscal reforms. …what mostly happened is that Greek politicians dramatically increased the nation’s already punitive tax burden. The Organization for Economic Cooperation and Development’s fiscal database tells a very ugly story. …on the eve of the crisis, the tax burden in Greece totaled 38.9 percent of GDP. This year, taxes are projected to reach 52.0 percent of economic output. Every major tax in Greece has been dramatically increased, including personal income taxes, corporate income taxes, value-added taxes, and property taxes. It’s been a taxpalooza… What’s happened on the spending side of the fiscal ledger? Have there been “savage” and “draconian” budget cuts? …there have been some cuts, but the burden of government spending is still a heavy weight on the Greek economy. Outlays totaled 54.1 percent of GDP in 2009 and now government is consuming 52.2 percent of economic output.
For what it’s worth, the spending numbers would look better if the economy was stronger. In other words, Greece’s performance wouldn’t be so dismal if GDP was growing rather than shrinking.
And that’s why tax increases are so misguided. They give politicians an excuse to avoid much-needed spending cuts while also hindering growth, investment and job creation.
Let’s close by reviewing Greece’s performance according to Economic Freedom of the World. The overall score for Greece has dropped slightly since 2009, but the real story is that the nation’s fiscal score has dramatically worsened, falling from 5.61 to 4.66 on a 0-10 scale. In other words, during a period of time in which Greece was supposed to sober up and become more fiscally responsible, the politicians engaged in an orgy of tax hikes and Greece went from a failing grade for fiscal policy to a miserably failing grade.
Here’s a the relevant graph from the EFW website. As you can see, the score has been dropping for a decade, not just since 2009.
This is remarkable result. Greek politicians should have been pushing the nation’s fiscal score to at least 7 out of 10, if not 8 out of 10. Instead, the score has gone in the wrong direction because of tax increases.
Though I don’t expect Hillary and Bernie to learn the right lesson.
P.S. For more information, here’s my five-picture explanation of the Greek mess.
Back in the 1980s, I would get very agitated when folks made excuses for brutal communist regimes by asserting that the United States also did bad things. This “moral equivalence” argument is now being recycled by Donald Trump, who basically excuses Putin’s brutality because America supposedly isn’t in any position to throw stones.
Here’s the interview, set to start at the point where Trump discusses Putin.
This is wrong. Absurdly wrong.
Though let’s start by acknowledging that the United States is far from perfect. Our history includes black eyes such as slavery, mistreatment of native populations, incomplete legal rights for women, internment of Japanese-Americans, Jim Crow laws, persecution of gays, and other sins.
Even today, we have plenty of bad policies that restrict human liberty, often exacerbated by examples of thuggish actions by government.
But, at the risk of sounding jingoistic and patriotic, the United States began with a wonderful set of ideals and our history largely reflects a struggle to extend those ideals to the entire population.
Now let’s look at Putin.
When I tweeted my column about Russia’s flat tax, I screwed up by making a joke about the Trump-Putin “bro-mance.” I got savaged on Twitter by people who accused me of somehow endorsing (or at least accepting) the many repressive policies that exist in Russia.
The silver lining to Trump’s disturbing interview is that it gives me an opportunity to make clear my disapproval of both Putin and the silly doctrine of moral equivalence.
With regards to Russia’s president, do we have any reason to believe that he is motivated by the principles of classical liberalism? Does anyone think he wants to make Russia a free society? That he respects human rights and the rule of law?
Heck, even Trump didn’t dispute the premise that he’s a killer.
Moreover, how can anyone believe in moral equivalence when there’s a huge gap between the United States and Russia on measures of liberty.
Consider, for instance, the Human Freedom Index. As you can see, the United States is far from perfect. We’re ranked #23 for overall freedom, #28 for personal freedom, and #16 for economic freedom.
But we look good compared to Russia, which is #115 for overall freedom, #110 for personal freedom, and #102 for economic freedom.
And the Freedom House rankings show an equally dramatic difference.
The United States has a score of 90 on a 0-100 scale, with the highest rating for political rights and civil liberties.
Russia, by contrast, only has a score of 22 and gets the next-to-last rating for political rights and civil liberties.
To conclude, some folks sometimes say the continuing imperfections in the United States mean that there’s only a “difference in degree” between us and Russia.
My response is that if the “difference in degree” is large, then you also have a “difference in kind.”
There is no moral equivalence.
P.S. On a separate topic, you won’t be surprised by this report from the Washington Times.
More than half of IRS employees found to have intentionally cheated on their taxes last year were allowed to keep their jobs, according to numbers released by the inspector general that suggest the agency is still reluctant to punish its own staffers for breaking tax laws.
Yet another example of hypocrisy in government. I’ve noted the IRS has thieving employees, incompetent employees, thuggish employees, brainless employees, protectionist employees, wasteful employees, and victimizing employees. Now it has slapped-on-the-hand employees.
I’m obviously a big fan of a simple and fair flat tax.
But I also am very much motivated by the moral case for tax reform. It offends me that we have 70,000-plus pages of special favors for the friends and contributors of politicians. I value the rule of law, so I want everyone in America to play by the same rules.
And I confess that I’m jealous that other nations have adopted this common-sense reform while we’re still stuck with a punitive and unfair internal revenue code.
But the silver lining to this dark cloud is that we can learn from the experiences of other nations.
A recent report looks at what’s happened in Russia following the introduction of the flat tax.
On December 23, 2016, in his annual end-of-year press conference, Russian President Vladimir Putin said that despite his “many doubts” at the initial stage of introducing a flat 13-percent personal income tax in 2001, tax reform in Russia has been a major success. …Putin claimed that in 2001, when the tax reform was introduced, he was “concerned that the budget would lose revenue, because those who earn more would have to pay less.” He said he was also concerned “whether social justice would be ensured and so on.” However, as the reform gained traction, “personal-income tax collection has increased – pay attention – seven times,” Putin said. …Daniel Mitchell, a senior fellow at the Cato Institute, told Polygraph.info that two factors contributed to a significant increase in personal income tax revenue: “the low rate made tax evasion and avoidance much less attractive, and increased incentives to earn income.”
I appreciated the chance to talk to the reporter and get quoted in the story, but I am naturally suspicious about the claims of government officials. So I wondered about Putin’s claim about a seven-fold increase in income tax receipts.
I know there were good results in the first few years after reform. I authored a CF&P study last decade, and there was data at the time showing an impressive increase in revenues from the personal income tax. That data certainly bolstered the argument for tax reform.
But we now have almost another full decade of data. Has the Russian flat tax continued to produce good results? Is the low tax rate continuing to encourage both the earning of income and reporting of income?
To answer these questions, I had my intern cull through various IMF Article IV consultation reports on Russia to get up-to-date data on personal income tax receipts in Russia. And what did I learn? Was Putin wrong?
Yes, Putin’s claim of a seven-fold increase in tax receipts was completely misleading. There was actually a 10-fold jump in personal income tax revenue.
In other words, the flat tax is a success. In today’s Washington, you would say the Russian government is winning bigly.
But there are caveats.
Let’s look at another example. Writing for Forbes, Fahim Mostafa explains that the Hungarian flat tax also has been a big success.
A fair number of Eastern European nations have…chosen this system of taxation over its progressive counterpart. Among the latest to join this club is Hungary, replacing progressive rates from 17% to 32% with a flat tax of 16% on income effective from 2012 onward… There is reason to believe that the implementation of this system has largely benefited the Eastern European nation. …The results from the following years have been remarkable. Total government revenue in 2015 (the last year for which OECD data is available at this time) stood at 23.8% higher than the maximum prior to the flat tax reform… According to the OECD, public debt in Hungary has been decreasing steadily since 2011. Increased revenues allow for this debt to be paid. …The flat tax has boosted consumption in Hungary, greatly increasing taxes collected from sales. Total tax revenue has shot up despite the massive cuts made to income tax. Politicians seeking to implement this policy in their own nation would do well to point out the example of Hungary.
I’ll add two comments.
First, the same caveats I applied to Russia apply to Hungary. The country is ranked #57 from Economic Freedom of the World, so it’s great that there’s a successful flat tax, but a lot more reform is needed for Hungary to become a role model for overall market-friendly reform.
Second, the author should probably make a change to the column. Instead of writing that “tax revenue has shot up despite the massive cuts,” it might be more accurate to write that “tax revenue has shot up because of the massive cuts.”
Yes, every so often you can find examples of nations being on the downward-sloping portion of the Laffer Curve, either because tax rates are ridiculously high (the U.S. before Reagan) or because a nation is developing or transitioning and needs low tax burdens to boost growth and encourage compliance.
It’s never my goal to boost revenue for governments, of course, but there’s surely a lesson to be learned about the benefits of low tax rates when both taxpayers and the government wind up with more money.
I’m glad that Donald Trump wants faster growth. The American people shouldn’t have to settle for the kind of anemic economic performance that the nation endured during the Obama years.
But does he understand the right recipe for prosperity?
That’s an open question. At times, Trump makes Obama-style arguments about the Keynesian elixir of government infrastructure spending. But at other times, he talks about lowering taxes and reducing the burden of red tape.
I don’t know what’s he’s ultimately going to decide, but, as the late Yogi Berra might say, the debate over “stimulus” is deja vu all over again. Supporters of Keynesianism (a.k.a., the economic version of a perpetual motion machine) want us to believe that government can make the country more prosperous with a borrow-and-spend agenda.
At the risk of understatement, I disagree with that free-lunch ideology. And I discussed this issue in a recent France24 appearance. I was on via satellite, so there was an awkward delay in my responses, but I hopefully made clear that real stimulus is generated by policies that make government smaller and unleash the private sector.
For today, though, I want to focus on Keynesian economics and the best way to “stimulate” growth.
The question I always ask my Keynesian friends is to provide a success story. I don’t even ask for a bunch of good examples (like I provide when explaining how spending restraint yields good results). All I ask is that they show one nation, anywhere in the world, at any point in history, where the borrow-and-spend approach produced a good economy.
Simply stated, there are success stories. And the reason they don’t exist is because Keynesian economics doesn’t work.
Though the Keynesians invariably respond with the rather lame argument that their spending schemes mitigated bad outcomes. And they even assert that good outcomes would have been achieved if only there was even more spending.
Since you’re probably laughing after reading that, let’s close with a bit of explicit Keynesian-themed humor.
I’ve always thought this Scott Stantis cartoon best captures why Keynesian economics is misguided. Simply stated, it’s silly to think that the private sector is going to perform better if politicians are increasing the burden of government spending.
But I’m also amused by cartoons that expose the fact that Keynesian economics is based on the notion that you can become richer by redistributing money within an economy. Sort of like taking money out of your right pocket and putting it in your left pocket and thinking that you now have more money.
Expanding on this theme, here’s a new addition for our collection of Keynesian humor. It’s courtesy of Don Boudreaux at Cafe Hayek, and it shows the Keynesian plan to charge the economy (pun intended). You don’t need to know a lot about electricity to realize this isn’t a very practical approach.
Is this an unfair jab? Maybe, but don’t forget that Keynesians are the folks who think it’s good for growth to pay people to dig holes and then pay them to fill the holes. Or, in Krugman’s case, to hope for alien attacks. No wonder it’s so easy to mock them.
P.S. If you want to learn more about Keynesian economics, this CF&P video I narrated is a good place to start.
P.P.S. And if you like Keynesian videos, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.
House Republicans, as part of a generally laudable tax reform plan, want to replace the corporate income tax with a “destination-based cash-flow tax.”
I’ve addressed that topic a couple of times.
I had a chance to speak about the DBCFT to a gathering put on by the Washington International Trade Association. I hit on all my main reasons for being worried about the border adjustable provisions.
For those who want additional information, I was preceded on the panel by Gordon Gray of the American Action Forum and followed by John Veroneau of Covington and Burling (and formerly with the Office of U.S. Trade Representative). You can watch the entire event by clicking here.
Regarding my remarks, I think the most relevant thing I said was when I shared new data from the Congressional Budget Office and pointed out that we can simultaneously balance the budget within 10 years and have a $3 trillion tax cut if politicians simply exercise a modest bit of spending restraint and limit annual budget increases to 1.96 per year.
And the most important thing that I said was when I warned that proponents of good policy should never do anything that might create the conditions for a value-added tax in the United States. Some people say the most important rule to remember is to never feed gremlins after midnight, but I think it’s even more important not to give politicians a new source of revenue.
Unless, of course, you want bigger government and more red ink.