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Updated: 2 hours 17 min ago

In Tax Reform, Don’t Mess with Carried Interest

Wed, 09/06/2017 - 8:46pm

Originally published by the Washington Examiner on September 5, 2017.

Republican leadership is sending mixed messages about the treatment of carried interest in their coming overhaul of the tax code. Senate Majority Leader Mitch McConnell says all “preferences” should be looked at, including carried interest, while Treasury Secretary Steven Mnuchin said that the administration might now seek only to “close the loophole for hedge funds,” but would exempt “funds that do create jobs.” Mnuchin’s statement is a step in the right direction, and it hopefully means that the administration is abandoning its misguided attacks on carried interest.

For reference, the carried interest is the portion of an investment partnership’s return that is earned by a fund’s manager. It is treated the same as the portion earned by the other investors — as a capital gain. Contrary to popular claims, that’s no “loophole.” If the return is a long-term gain it is taxed at the long-term capital gains rate, but if it’s a short-term gain it’s taxed as ordinary income. The rules are already the same for everyone.

Carried interest also only applies if there is a positive return. Investors and managers alike risk earning nothing at all if they fail to make smart investments. And where the manager is guaranteed a flat fee, it’s treated already as ordinary income.

It’s important to note that capital gains are taxed at a lower rate to encourage investment in the economy. Since savings and investments are already double and even triple taxed compared to consumption, it would be better if capital gains weren’t taxed at all. After all, we need risk-takers to make new investments or start businesses to help grow the economy.

Despite then-candidate Trump’s campaign rhetoric railing against hedge funds “getting away with murder,” as well as the administration’s current position as expressed by Secretary Mnuchin, carried interest doesn’t actually have much to do with hedge funds. They rarely hold positions for more than a year, which means their returns are not often classified as long-term gains.

Carried interest matters much more for partnerships found in private equity and venture capital, both of which are crucial for getting new businesses off the ground. Making an exception for carried interest to treat it differently than other capital gains would mean billions taken out of the commercial real estate sector where partnerships are common.

Democrats have tried for years to raise taxes on carried interest and other types of capital gains as part of their tax and spend agenda. They recently introduced legislation that would force carried interest to be treated differently and taxed higher than other capital gains, which they call “fairness.” Democrats seem willing to do serious damage to the economy just to squeeze more revenue from the private sector to fund big government.

Unfortunately, President Trump agreed with Hillary Clinton during the campaign that taxes should be raised on carried interest. He even repeated the misconception that doing so would impact politically unpopular hedge funds. However, since carried interest doesn’t often apply to hedge funds, Mnuchin’s statement might be taken as an attempt for the administration to “retreat with honor.” The president gets to keep his campaign promise against hedge funds, while the more damaging aspects of a tax hike on carried interest are avoided. In the grand scheme of things that wouldn’t be bad, but it still represents an unnecessary gift to the left by chipping away at the rationale for taxing capital gains at a lower rate.

There are a lot of myths regarding carried interest, and it’s an easy issue to demagogue. But the fact of the matter is that the current tax treatment of carried interest is already fair. A destructive tax hike would not only create new distortions in the tax code, the opposite of what Republicans aim to achieve with comprehensive tax reform, but would do significant damage to the economy and add unnecessary barriers to job growth.

My First Pro-VAT Column, but with a Huge Caveat

Wed, 09/06/2017 - 12:46pm

Whenever I see an otherwise sensible person express support for a value-added tax, it triggers a Pavlovian response. And it’s not a favorable reaction.

But I just read a pro-VAT column and I liked it.

So what happened? Have I surrendered to big government? Did I ingest some magic mushrooms?

Actually, I think you’ll agree that I’m still the same lovable guy. Yes, Professor John Cochrane of the University of Chicago (also a Cato adjunct scholar) has a column in the Wall Street Journal that embraces a VAT. But unlike all of the others I just cited, he includes a condition that is mandatory, necessary, vital, and non-negotiable. It’s so important that it deserves the opposite of fine-print treatment.

…eliminate entirely the personal and corporate income tax, estate tax and all other federal taxes. …it is essential that the VAT replace rather than add to the current tax system, as it does in Europe.

Amen. John hits the nail on the head.

The VAT isn’t theoretically bad. Like the flat tax, it would have one rate. There also would be no double taxation of saving and investment. And it also can be designed to have no loopholes.

In other words, the good news is that the VAT – when compared to the internal revenue code – is a less-destructive way of generating revenue.

The bad news, though, is that the VAT is capable of generating a lot of revenue. And as we’ve seen in Europe, that’s a recipe for enabling a larger burden of government spending.

Which is why the idea of a VAT should only be on the table if the plan would first abolish all other federal taxes. Which is what John is proposing.

Except I’d take it one step farther. Just like I’ve argued when contemplating a national sales tax, I’d only allow the VAT if we first repeal the 16th Amendment and replace it with something so ironclad that even John Roberts and Ruth Bader Ginsberg couldn’t rule in favor of an income tax at some point in the future.

By the way, John is right that the economy would grow faster if the income tax was totally abolished. The current system is filled with warts.

Much of the current tax mess results from taxing income. Once the government taxes income, it must tax corporate income or people would incorporate to avoid paying taxes. Yet the right corporate tax rate is zero. Every cent of corporate tax comes from people via higher prices, lower wages, or lower payments to shareholders. And a corporate tax produces an army of lawyers and lobbyists demanding exemptions. An income tax also leads to taxes on capital income. Capital income taxes discourage saving and investment. But the government is forced to tax capital income because otherwise people can hide wages… The estate tax can take close to half a marginal dollar of wealth. This creates a strong incentive to blow the family money on a round-the-world cruise, to spend lavishly on lawyers, or to invest inefficiently to avoid the tax. …A reformed tax code should involve no deductions—including the holy trinity of mortgage interest, employer-provided health insurance, and charitable deductions. The interest groups for each of these deductions are strong. But if the government doesn’t tax income in the first place, these deductions vanish without a fight.

By the way, I will quibble with a couple of things he wrote.

First, I don’t necessarily think the correct corporate tax rate is zero. What’s important is eliminating either the corporate tax or the tax on dividends. That way the income is only taxed onceAnd since it’s probably administratively easier to tax the income once at the business level rather than once at the shareholder level, I’m not fixated on abolishing the corporate tax.

Second, it’s very important to get rid of double taxation (what he calls “capital income”), but you don’t need a VAT to make that happen. There’s no double taxation with a flat tax.

Third, he should have explicitly included the state and local tax deduction in his list of loopholes to abolish (I’m guessing he assumed it would be the first deduction on the chopping block and therefore didn’t need to be mentioned).

There’s another part of John’s column that deserves attention. He points out that you need to have small government if you want a low tax burden.

…if the federal government is going to spend 20% of gross domestic product, the VAT will sooner or later have to be about 20%. Tax reform is stymied because politicians mix arguments over the rates with arguments over the structure of taxes. This is a mistake. They should first agree to fix the structure of the tax code, and later argue about rates—and the spending those rates must support.

At the risk of being pedantic, I think the VAT rate would have to be significantly above 20 percent, both because the tax base will be smaller than GDP and also because there will be loopholes or rebates. But the point he’s making is spot on. You can’t have a low tax rate and a big government. I’ve made the same point when writing about Belgium and Germany, nations where middle-class taxpayers are pillaged because the welfare state is too big.

My bottom line on this issue is that Professor Cochrane has produced a column showing that a VAT is theoretically worth considering, but only if all other federal taxes are permanently abolished.

But since that’s not going to happen anytime soon, I don’t think there’s any reason to ease up on my dogmatic (and pragmatic) opposition to that levy.

P.S. My clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to know.

By Making it Easier to Fire Workers, Macron’s Reforms Will Encourage French Employers to Hire More Workers

Tue, 09/05/2017 - 12:33pm

I like France, in part because it’s a nice place to visit, but also because I’ve been able to use the country as an example of bad public policy.

It’s hard to pick which policy does the most damage. As a fiscal policy wonk, I’m tempted to blame France’s woes on high taxes and wasteful spending.

However, there’s a strong case that labor law is the worst feature of economic policy. France has all sorts of rules that “protect” employees, but the net effect is that workers suffer because these laws discourage entrepreneurs from creating jobs.

And even though I get a lot of mileage out of making France a bad example, I actually hope that the nation’s new government will move policy in the right direction. Indeed, this is why I wanted France’s current President, Emmanuel Macron, to get elected.

Yes, he used to be part of the previous socialist government that sought to make things worse rather than better. But I figured he was most likely to enact some pro-market reforms. And it appears my hopes may be realized, at least with regard to labor policy.

The BBC reports on why Macron wants reform, what he wants to do, and what likely will happen.

President Emmanuel Macron’s government has begun its drive to overhaul France’s rigid labour laws, vowing to “free up the energy of the workforce”. …France has an unemployment rate of 9.5%, double that of the other big European economies and Mr Macron has vowed to cut it to 7% by 2022.

Here’s what he is proposing.

The reforms aim to make it easier for bosses to hire and fire. …France’s labour code is some 3,000 pages long and is seen by many as a straitjacket for business. Among the biggest reforms, individual firms are to be offered more flexibility in negotiating wages and conditions. …If a business reached a deal with the majority of its workforce on working hours and pay that agreement would trump any agreement in the wider industry. …The government wants to facilitate deals at local level by encouraging companies with fewer than 50 employees to set up workers’ committees that can bypass unions. One of the thorniest problems for the government is how to make it easier for companies to dismiss staff. There is to be a cap on damages that can be awarded to workers for unfair dismissal. However, after months of consultations, ministers have agreed to increase the cap from their original proposal. The cap would be limited to three months’ pay for two years of work and 20 months’ pay for 30 years. Until now the minimum pay-out for two years’ employment was six months of salary.

And he’ll probably get what he wants, both because some of the bigger unions have decided to play ball and also because he’s been granted authority to unilaterally make changes.

Protests against the plan are expected next month, but two of the biggest unions say they will not take part. Jean-Claude Mailly, the leader of Force Ouvrière (FO), said that while the reforms were far from perfect, the government had carried out “real consultation” and FO would play no role in demonstrations on 12 September. The union with the biggest presence in the private sector, CFDT, said its members would not take to the streets either, although it was ultimately disappointed that its position was not reflected in the final text. …Mr Macron has already won parliamentary backing to push these reforms through by decree. An opinion poll on Wednesday showed that nine out of 10 French people agreed that their country’s labour code had to be reformed.

Dalibor Rohac of the American Enterprise Institute has some analysis of what’s been proposed.

…the National Assembly and Senate…authorized France’s government to amend the country’s byzantine labor code by executive orders… Prime Minister Édouard Philippe unveiled the details of the reform, divided into five decrees, on Thursday. So what exactly are they seeking to achieve? Perhaps most important is the introduction of caps on redundancy pay to those whose employment has been terminated without a just cause…stricter caps are introduced for small companies, for which large redundancy payments can be ruinous. It will also become easier for multinational companies to justify termination of employment on economic grounds. …it will be possible to downsize or close down French operations without having to subsidize them first from profits made overseas. …Companies with fewer than 20 employees will not have to rely on labor union representatives for their collective contracts. Subsidiaries of companies will have more freedom to offer temporary work contracts.

Dalibor is not overly impressed by this collection of changes.

…measured by the standards of what France needs, it is not much… The extent to which the reform elicits a strong reaction reflects purely the overregulated status quo, rather than the revolutionary nature of the proposed measures. …the government is doing something right, however timid.

The Wall Street Journal‘s editorial is a bit more optimistic.

French voters this spring gave themselves their best shot in a generation at reviving their moribund economy, and President Emmanuel Macron is now taking advantage of the opportunity. …the labor-market reforms he unveiled Thursday could remake the eurozone’s second-largest economy. …Mr. Macron will limit the severance payouts courts can mandate for fired workers. He will free small companies with nonunion workers from the straitjacket of national collective-bargaining agreements covering working hours, overtime pay, vacation benefits and the like. Companies will have more scope to negotiate labor deals at the firm level rather than being forced to abide by national agreements.

By reducing the potential cost of employing workers, the reforms will lead to more employment.

The severance overhaul will go a long way toward inducing businesses to hire more workers. Small- and medium-size French companies report pervasive fear of expanding their workforce lest they be stuck with problem employees or face ruinous expenses to lay off workers if economic conditions change.

And France desperately needs reform.

French unemployment is still 9.5% even at its five-year low. That’s double the rate in Germany, and French unemployment has become a social crisis, especially for young people frozen out of the job market. The jobless rate for French between age 15 and 24 is 25%—for those who haven’t moved to London or the U.S.

Though the WSJ does recognize that the reforms are merely a modest step in the right direction.

France isn’t becoming a laissez-faire paradise. Even if Mr. Macron’s labor overhaul takes effect, the French workplace will still be considerably more regulated than America’s.

Let’s close with some excerpts from a story in the New York Times.

…the government announced sweeping changes on Thursday with the potential to radically shift the balance of power from workers to employers. …an invigorated France is considered critical to the survival of a European Union that is finally showing signs of revival after a lost decade. …Economists in France and across Europe expressed optimism about the new law… France has stagnated for years under chronically elevated unemployment and slow growth. The country’s strong worker protections and expensive benefits have been blamed by some for being at least partly at the root of the problem.

Wow, it must be bad if even the NYT is acknowledging that government is causing the economy to stutter.

Amazingly, the story even admits that economic liberalization is the right way to get more job creation.

Germany crossed that Rubicon in the 1990s under Chancellor Gerhard Schröder. …Roughly 15 years ago, “France and Germany had economies that were more or less comparable, and that ceased to be the case because the Germans wisely did micro-reforms and the French did not,” said Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations. So the French ended up with “high unemployment, which fed populism, and getting out of that trap is vital

For what it’s worth, I think the reference to German reforms is key.

Under a left-leaning government, Germany liberalized labor markets. The so-called Hartz reforms were a huge success, slashing the jobless rate by more than 50 percent.

I don’t know whether Macron’s reforms are as bold as what happened in Germany, but any movement in the right direction will create more employment.

P.S. If Macron wants to save France, he better deal with the tax system as well. The problems are nicely captured by two videos, one about how young people are fleeing the nation and another showing a Hollywood celebrity reacting when told about the tax burden.

P.P.S. Whenever I give a speech in France, I ask the audience whether their government (which consumes half of economic output) gives them more and better services than the Swiss government (which consumes about one-third of economic output). The answer is always an overwhelmingly no.

Free Enterprise: The World’s Only Successful Strategy for Poverty Reduction

Mon, 09/04/2017 - 12:21pm

In prior years, I’ve shared some videos with powerful messages with a common message. Grinding poverty used to be the normal human condition, but then rule of law and limited government enabled a dramatic increase in prosperity.

All these videos are worth watching. They show that misery used to be pervasive but then we became rich starting a couple of hundred years ago.

But there’s one shortcoming in these videos. They basically tell a story of how the western world became rich. In other words, they describe how North American and Western Europe went from agricultural poverty to middle class prosperity.

What about the rest of the world?

Well, there’s a good story to tell there as well, albeit it’s happened more recently. Back in 2014, I shared some data from Economic Freedom of the world showing how there was a substantial increase in global economic liberty starting about 1980.

Yes, there were improvements in western nations during that period (thanks to ReaganThatcher, etc), but there were also improvements in economic freedom elsewhere (collapse of the Soviet Empire, reforms in what used to be known as the Third World, etc).

In this video from Prager University, Arthur Brooks of the American Enterprise Institute explains that this shift to free enterprise is what produced greater prosperity all across the world.

By the way, folks on the left (see this Salon article) don’t like the fact that the world shifted in the direction of economic liberty.

They grouse that the developing world was subjected to a “Washington consensus” that imposed a “neoliberal” agenda (with neoliberal meaning “classical liberal“).

But here’s a visual showing how a shift to capitalism was great news for the less fortunate. The number of people in extreme poverty has dropped dramatically since the early 1990s.

I wish the data went back to 1980, but even these partial numbers are a tremendous confirmation of the hypothesis that free markets are the best way of helping the poor.

Taxpayers Are Getting Drowned by Government-Subsidized Flood Insurance

Sun, 09/03/2017 - 12:24pm

Government subsidies have an unfortunate habit of causing widespread economic damage and often result in huge burdens for taxpayers (though sometimes consumers are the ones getting pillaged).

The common thread is that government intervention interferes with the normal operation of the price system and thus leads to distortions since markets are prevented from functioning properly.

Let’s add another example, and it’s very timely because of the flooding in Texas. The federal government subsidizes flood insurance. And it does so in a way that is bad for taxpayers and bad for the environment, while also giving a windfall to rich people and putting lives at risk.

That’s an impressive list, even by government standards.

In a must-read column for USA Today, my old friend Jim Bovard is very critical of the program.

Hurricane Harvey…offers the clearest lesson why Congress should not perpetuate the federal National Flood Insurance Program (NFIP)… The ravages in Houston and elsewhere would be far less if the federal government had not offered massively subsidized flood insurance in high risk, environmentally perilous locales. …NFIP embraced a “flood-rebuild-repeat” model that has spawned an almost $25 billion debt.

And when Jim says “flood-rebuild-repeat,” he’s not joking.

NFIP paid to rebuild one Houston home 16 times in 18 years, spending almost a million dollars to perpetually restore a house worth less than $120,000. Harris County, Texas (which includes Houston), has almost 10,000 properties which have filed repetitive flood insurance damage claims. The Washington Post recently reported that a house “outside Baton Rouge, valued at $55,921, has flooded 40 times over the years, amassing $428,379 in claims.

And he points out that the program is reverse class warfare.

Flood insurance subsidies benefit well-off households, and payouts disproportionately go to areas with much higher than average home values. Working stiffs in Idaho and Oklahoma are taxed to underwrite mansions for the elite. …NBC News revealed in 2014 that FEMA revised its flood maps to give 95%+ discounted insurance premiums to “hundreds of oceanfront condo buildings and million-dollar homes,” including properties on its “repetitive loss list.”

My colleague Chris Edwards has a comprehensive study of the federal government’s role in disaster relief. Here’s some of what he wrote about the history of subsidized flood insurance.

In 1968 the National Flood Insurance Act offered federal insurance to properties at risk for flooding. A key justification by supporters of federal flood insurance was that it would alleviate the need to pass special aid legislation after each flood disaster. As it has turned out, however, taxpayers are now both subsidizing flood insurance and paying for special relief bills passed after floods. …NFIP was supposed to save taxpayers money by alleviating the need for Congress to pass emergency aid packages after floods. Taxpayers were also not supposed to be burdened by the program itself because insurance premiums were to cover the system’s costs. Also, the NFIP included floodplain regulations that are imposed on communities adopting the program. These regulations were supposed to mitigate the harm from floods. None of the promises panned out. …Most importantly, rather than reducing the nation’s flooding problems, the NFIP has likely made flood damage worse by encouraging more development in hazardous areas. Since 1970, the estimated number of Americans living in coastal areas designated as Special Flood Hazard Areas (SFHAs) by FEMA has increased from 10 million to more than 16 million. Subsidized flood insurance has backfired by helping to draw more people and development into flood zones.

To add insult to injury, the program is poorly run.

The GAO has had the NFIP on its “high-risk” list of troubled programs for years. …In recent years, the program has accumulated more than $24 billion in debt because payouts have far exceeded premiums. Today, the program is in financial crisis and taxpayers will likely bear the burden of its large debt. The NFIP’s financial shortcomings are typical of government-run businesses. Unlike private insurance, the NFIP charges artificially low rates, does not build capital surpluses, and does not purchase reinsurance to cover catastrophic losses. …The GAO says that “by design, NFIP is not an actuarially sound program.” …A 2011 insurance industry study found that overall NFIP premiums are only half the level needed to cover the system’s full costs, and property owners in high-risk areas pay just one-third of full market rates.

But the biggest problem is that the program encourages imprudent – and even dangerous – behavior.

…artificially low rates subsidize people to live in high-risk flood areas. …it has encouraged development in hazardous areas. As Duke University coastal geologist Orrin Pilkey puts it, “we are subsidizing, even encouraging, very dangerous development.” Federal flood insurance has incentivized individuals and developers to build in hazardous areas…more lives and property are put in harm’s way.

And the program has plenty of repeat business.

…some property owners repeatedly rebuild in hazardous locations knowing that the government will bail them out after each flood. Repetitive loss properties account for only about 1 percent of all policies, but are responsible for about one-third of all NFIP claims. …One Mississippi home valued at $69,900 has flooded 34 times since 1978, and the owner has received $663,000 in NFIP payments over the years.

Here’s a related image from Reddit’s libertarian page:

An article for The Week looks specifically at how the program lured the people of Houston into taking excessive risk.

Why would the practical, fiscally conservative people of Texas anchor their financial security in houses that are now literally underwater? …a major culprit is the Federal Emergency Management Agency (FEMA), and specifically its subsidiary, the National Flood Insurance Program (NFIP). …Well-meaning but drenched in perverse incentives, they are complicit in the horrifying destruction now racking the Texas gulf coast. …a normal insurance company would jack up the premium price to cover the high risk of floodplain construction, thus discouraging vulnerable building plans among those who cannot afford to cover the cost of disaster, the NFIP will insure this construction at a discount. …an artificially low premium like the NFIP offers cruelly deludes homeowners into believing their flood-prone houses are far safer than they are. …NFIP has taxpayers subsidizing unrealistically low premiums that incentivize new construction on dangerous land, and its discounts are available even to wealthy homeowners with pricey properties. “About 80 percent of NFIP households are in counties that rank in the top income quintile,” notes a recent report at Politico, and “[w]ealthier households also tend to receive larger subsidies.”

How do we solve this government-created problem?

With the same answer that Chris gave.

Axing the NFIP and transitioning back to private flood insurance, with its accurate risk signaling, is much overdue.

Writing for Reason, Ronald Bailey explains the perverse incentives created by the program.

The main lesson that the public and policymakers ought to learn from Harvey is: Don’t build in flood plains, and especially don’t rebuild in flood plains. Unfortunately, the flood insurance program teaches the exact opposite lesson, selling subsidized insurance whose premiums do not come close to covering the risks home and business owners in flood prone areas face. As a result, the NFIP is currently $25 billion in debt. Federally subsidized flood insurance represents a moral hazard, Kevin Starbuck, Assistant City Manager and former Emergency Management Coordinator for the City of Amarillo, argues, because it encourages people to take on more risk because taxpayers bear the cost of those hazards.

And, in many cases, bear those costs over and over and over again.

Federal Emergency Management Agency data shows that from 1978 through 2015, 3.8 percent of flood insurance policyholders have filed repetitively for losses that account for a disproportionate 35.5 percent of flood loss claims and 30.5 percent of claim payments, Starbuck says.

The solution, once again, is obvious.

…taxpayers should not be required to subsidize people who choose to build and live on flood plains. When Congress reauthorizes the NFIP, it should initiate a phase-in of charging grandfathered properties premiums commensurate with their risks. This will likely lower the market values of affected homes and businesses and thus send a strong signal to others to avoid building and living in such risky areas.

A couple of months ago, before Harvey, the Wall Street Journal presciently opined about the downside of government-provided flood insurance.

A classic example of government dysfunction is a federal insurance program that helps pay to drain basements in millions of America’s second homes. …The 1968 program insures more than $1 trillion in property, with about five million policies in 2016 for those who live in areas prone to flooding. The program is more than $24 billion in debt. One reason for the hole is that about 20% of policies are directly subsidized. More than 75% of such policies are in counties in the top 30% for home values, according to a Government Accountability Office analysis, and many dot the affluent coasts of Florida, California and Texas. In other words, this is a wealth transfer from low and middle-income families to the folks who own real estate on Nantucket. …The best reform would be to convert the program into a private operation, though Members of both parties would pile together like sandbags to block it.

The editorial noted that Representative Jeb Hensarling, Chairman of the Financial Services Committee, has tried to limit the program. Since he’s a Texan, it will be interesting to see if his pro-market principles remain in the aftermath of Harvey (based on his record, I’m guessing yes).

In another Reason column, Katherine Mangu-Ward put together a list of things politicians shouldn’t do once the storm is over.

Here are a few things Trump and his pals absolutely shouldn’t do in the immediate aftermath of the hurricane, but probably will: …Increase funding for the federal flood insurance program. When it comes time to rebuild, everyone will studiously avoid discussing the fact that maybe we shouldn’t be using a massive federal insurance program to incentivize building in areas that are repeatedly hit by storms. There’s a reason private insurers don’t offer policies to many coastal dwellers, and it ain’t “market failure.”

Needless to say, I’m not optimistic that her advice will be heeded.

Though you would think some Democrats would be on the correct side, if for no other reason than the program is a big fat subsidy for rich people.

One of those fat cats even confessed that the program is a boondoggle that lines his pockets. Here are some excerpts from a 2004 column by John Stossel.

…the biggest welfare queens are the already wealthy. Their lobbyists fawn over politicians, giving them little bits of money — campaign contributions, plane trips, dinners, golf outings — in exchange for huge chunks of taxpayers’ money.

John then confesses that he put his snout if the taxpayer trough.

I got some of your money too. …In 1980 I built a wonderful beach house. Four bedrooms — every room with a view of the Atlantic Ocean. It was an absurd place to build, right on the edge of the ocean. All that stood between my house and ruin was a hundred feet of sand. My father told me: “Don’t do it; it’s too risky. No one should build so close to an ocean.” But I built anyway. Why? As my eager-for-the-business architect said, “Why not? If the ocean destroys your house, the government will pay for a new one.” What? Why would the government do that? Why would it encourage people to build in such risky places? That would be insane. But the architect was right. If the ocean took my house, Uncle Sam would pay to replace it under the National Flood Insurance Program. Since private insurers weren’t dumb enough to sell cheap insurance to people who built on the edges of oceans or rivers, Congress decided the government should step in and do it. …I did have to pay insurance premiums, but they were dirt cheap — mine never exceeded a few hundred dollars a year.

Lots of rich people like this subsidy.

The insurance, of course, has encouraged more people to build on the edges of rivers and oceans. …Subsidized insurance goes to movie stars in Malibu, to rich people in Kennebunkport (where the Bush family has its vacation compound), to rich people in Hyannis (where the Kennedy family has its), and to all sorts of people like me who ought to be paying our own way.

John was even an example of the “flood-rebuild-repeat” syndrome.

…just four years after I built my house, a two-day northeaster swept away my first floor. …After the water receded, the government bought me a new first floor. Federal flood insurance payments are like buying drunken drivers new cars after they wreck theirs. I never invited you taxpayers to my home. You shouldn’t have to pay for my ocean view.

More than once!

On New Year’s Day, 1995, …The ocean had knocked down my government-approved flood-resistant pilings and eaten my house. It was an upsetting loss for me, but financially I made out just fine. You paid for the house — and its contents.

Though now another rich person will get the subsidy.

I could have rebuilt the beach house and possibly ripped you taxpayers off again, but I’d had enough. I sold the land. Now someone’s built an even bigger house on my old property. Bet we’ll soon have to pay for that one, too.

Let’s close with some systematic data on the regressivity of the program.

Two of my other colleagues, Ike Brannon and Ari Blask, authored a study on the flood insurance program. They covered lots of material, but here’s what they wrote about poor-to-rich redistribution.

Wealthier households benefit disproportionately from the reduced average cost of flood insurance brought about by government intervention. Of course, not all NFIP-insured properties are high value, but insured homes are on average more valuable than noninsured homes. …In 2007, the Congressional Budget Office (CBO) published a report containing statistics on the average and median values of properties in the NFIP. …The median value of properties in the NFIP exceeded the median value of an American home across all four categories, as shown in Table 1. …40 percent of coastal properties receiving subsidies were worth more than $500,000 and 12 percent were worth more than $1 million. …Comparisons of NFIP premiums with potential private premiums show that NFIP policyholders with the most risk exposure tend to receive the largest subsidy, with 80 percent of explicit subsidy recipients living in counties in the top income quintile.

And here’s Table 1 from their study.

My guide to having an ethical bleeding heart is very straightforward.

If taking money from rich people to give to poor people is wrong, then taking money from poor people to line the pockets of rich people is utterly reprehensible.

I’ll write in the near future about why the federal government shouldn’t be involved in disaster relief. But I wanted to specifically highlight the wretched impact of subsidized flood insurance because it is such a perverse example of how government promotes unjust inequality.

Can Republicans Learn from Reagan, Transcend Class Warfare, and Focus on Growth-Oriented Tax Policy?

Sat, 09/02/2017 - 12:15pm

Why were the Reagan tax cuts so successful? Why did the economy rebound so dramatically from the malaise of the 1970s?

The easy answer is that we got better tax policy, especially lower marginal tax rates on personal and business income. Those lower rates reduced the “price” of engaging in productive behavior, which led to more work, saving, investment, and entrepreneurship.

That’s right, but there’s a story behind the story. Reagan’s tax policy (especially the Economic Recovery Tax Act of 1981) was good because the President and his team ignored the class-warfare crowd. They didn’t care whether all income groups got the same degree of tax relief. They didn’t care about static distribution tables. They didn’t care about complaints that “the rich” benefited.

They simply wanted to reduce the onerous barriers that the tax system imposed on the economy. They understood – and this is critically important – that faster growth was the best way to help everyone in America, including the less fortunate.

Kimberley Strassel of the Wall Street Journal thinks that Donald Trump may be taking the same approach. Her column today basically argues that the President is making a supply-side case for growth. She starts by taking a shot at self-styled “reform conservatives.”

In May 2014, a broad collection of thinkers and politicians gathered in Washington to celebrate a new conservative “manifesto.” The document called for replacing stodgy old Reaganite economics with warmer, fuzzier handouts to the middle class.

She’s happy Trump isn’t following their advice (and I largely agree).

Donald Trump must have missed the memo. …Mr. Trump wants to make Reagan-style tax reform great again.

The class-warfare crowd is not happy about Trump’s pro-growth message, Kimberley writes.

The left saw this clearly, which explains its furious and frustrated reaction to the speech. …Democratic strategist Robert Shrum railed in a Politico piece that the “plutocrat” Mr. Trump was pitching a tax cut for “corporations and the top 1 percent” yet was getting away with a “perverted populism.” …Mr. Trump is selling pro-growth policies—something his party has forgotten how to do. …The left has defined the tax debate for decades in terms of pure class warfare. Republicans have so often been cast as stooges for the rich that the GOP is scared to make the full-throated case for a freer and fairer tax system. …Mr. Trump isn’t playing this game—and that’s why the left is unhappy. The president wants to reduce business tax rates significantly… He wants to simplify the tax code in a way that will eliminate many cherished carve-outs. …his address was largely a hymn to supply-side economics, stunning Democrats who believed they’d forever dispelled such voodoo. …Mr. Trump busted up the left’s class-warfare model. He didn’t make tax reform about blue-collar workers fighting corporate America. Instead it was a question of “our workers” and “our companies” and “our country” competing against China. He noted that America’s high tax rates force companies to move overseas. He directly and correctly tied corporate rate cuts to prosperity for workers, noting that tax reform would “keep jobs in America, create jobs in America,” and lead to higher wages.

Amen. That’s the point I made last week about investment being the key to prosperity for ordinary people.

Ms. Strassel concludes by putting pressure on Congress to do its job and get a bill to the President’s desk.

His opening salvo has given Republicans the cover to push ahead, as well as valuable pointers on selling growth economics. If they can’t get the job done—with the power they now have in Washington—they’d best admit the Democrats’ class-warfare “populism” has won.

I largely agree with Kimberley’s analysis. Trump’s message of jobs, growth, and competitiveness is spot on. His proposal for a 15 percent corporate rate would be very good for the economy. And I also agree with her that it’s up to congressional Republicans to move the ball over the goal line.

But I also think she’s giving Trump too much credit. As I point out in this interview, the Administration isn’t really playing a major role in the negotiations. The folks on Capitol Hill are doing the real work while the President is waiting around for a bill to sign.

Moreover, I’ve been repeatedly warning that there are some very difficult issues that Congress needs to decide.

Since big companies will benefit from a lower corporate rate, will there be similar tax relief for small businesses that file using “Schedule C” of the individual income tax? That’s a good idea, but there are big revenue implications.

Since Republicans (and this definitely includes Trump) are weak on spending, will they achieve deficit neutrality (necessary for permanent reform) by eliminating loopholes? That’s a good idea, but interest groups will resist.

Unfortunately, the White House isn’t offering much help on these issues. The President simply wants big tax cuts and is leaving these tough decisions to everyone else.

P.S. I should have been more specific in the interview. I said we would have a flat tax in my “fantasy world” but that I would settle for partial reform in my “ideal world.” I was grading on a curve, so I want to redeem myself. Here’s how things really rank.

P.P.S. I’m very hopeful that lawmakers will get rid of the deduction for state and local taxes. Not only would that provide some revenue that can be used for pro-growth changes, but it also would get rid of a very unfair distortion that enables higher taxes in states such as IllinoisCaliforniaNew YorkNew Jersey, and Connecticut.

P.P.P.S. I have no objection to family-oriented tax relief and other policies that target middle-class taxpayers. Such provisions are politically useful since they expand the coalition of supporters. But I want policy makers to understand that economic growth is the best way of helping everyone – including the poor. That’s why supply-side provisions should be the primary focus of any tax package.

P.P.P.P.S. The class-warfare crowd doesn’t like lower tax rates on upper-income taxpayers. They argue that rich people won’t pay enough and that the government will be starved of revenue. Yet they have no answer when I show them this IRS data. Or this data from the United Kingdom. Or this data from France.

Greek Government’s Moral Bankruptcy on Soviet Terror Generates Strong Response from Estonia

Fri, 09/01/2017 - 12:39pm

I like the Baltic nations, as illustrated by what I wrote last year.

I’m a big fan of…Estonia, Latvia, and Lithuania. These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economiesOne key to their relative success is tax policy. All three nations have flat taxes. And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

No wonder the Baltic nations are doing a good job of achieving economic convergence.

I’ve specifically praised Estonia on several occasions.

Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD. …Estonia…may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman.

Indeed, I strongly recommend this TV program that explored the country’s improbable success. And here’s some data showing that Estonia is leading the Baltics in convergence.

Now I have a new reason to admire Estonia. Having experienced the brutality of both fascism and communism, they have little tolerance for those who make excuses for totalitarianism. And the issue has become newsworthy since Greece decided to boycott a ceremony to remember the victims of communism and fascism.

Estonian Minister of Justice Urmas Reinsalu responded to his Greek counterpart, Stavros Kontonis following the uproar caused by the decision by Greece to not participate in the recent European Day of Remembrance for Victims of Stalinism and Nazism in Estonia.

The letter sent by Reinsalu is a masterpiece of moral clarity. He unambiguously condemns all ideologies that are contrary to free societies. Let’s look at some excerpts.

Our values are human rights, democracy and the rule of low, to which I see no alternative. This is why I am opposed to any ideology or any political movement that negates these values or which treads upon them once it has assumed power. In this regard there is no difference between Nazism, Fascism or Communism.

Amen. That’s basically what I wrote just a few days ago.

Reinsalu points out that free societies (sometimes called liberal democracies, with “liberal” used in the “classical liberal” sense) don’t oppress people, which is inherent with fascist and communist regimes.

Condemnation of crimes against humanity must be particularly important for us as ministers of justice whose task it is to uphold law and justice. …Every person, irrespective of his or her skin colour, national or ethnic origin, occupation or socio-economic status, has the right to live in dignity within the framework of a democratic state based on the rule of law. All dictatorships – be they Nazi, Fascist or Communist – have robbed millions of their own citizens but also citizens of conquered states and subjugated peoples.

The Estonian Justice Minister refers to the bitter experience of his nation.

Unlike Greece, Estonia has the experience of living under two occupations, under two totalitarian dictatorships. …In light of the experience of my country and people, I strongly dispute your claim that Communism also had positive aspects. ……in 1949, …the communist regime deported nearly 2 percent of the population of Estonia only because they as individual farmers refused to go along with the Communist agricultural experiment and join a collective farm. This was in addition to the tens of thousands who had already been imprisoned in the Gulag prison camps or deported and exiled earlier. Thousands more would follow, taken into prison up to mid-1950.

He points out that communism is incompatible with freedom.

…it is not possible to build freedom, democracy and the rule of law on the foundation of Communist ideology. …this has been attempted… This has always culminated in economic disaster and the gradual destruction of the rule of law…there are also countries and peoples for whom the price of a lesson in Communism has been millions of human lives.

The bottom line, he writes, is that all forms of totalitarianism should be summarily rejected.

…we must condemn all attempts or actions that incite others to destroy peoples or societal groups…there is no need to differentiate. It makes no difference to a victim if he is murdered in the name of a better future for the Aryan race or because he belongs to a social class that has no place in a Communist society. We must remember all of the victims of all totalitarian and authoritarian dictatorships.

Kudos for Minister Reinsalu. He doesn’t shrink from telling the truth about communism and other forms of dictatorship.

None of this should be interpreted to mean that western societies are perfect. Heck, I spend most of my time criticizing bad policy in the United States and other western nations. But there’s no moral equivalence.

Here’s Reinsalu’s entire letter, which contains additional points.

I’ll close by elaborating on one of his points. Reinsalu wrote about the miserable track record of communism and made some powerful points.

But I think he was too diplomatic. He should have highlighted the jaw-dropping body count of communist regimes.

He did mention some of the horrid policies of the Soviet Union (perhaps more than 60 million victims), but he also could have listed the incomprehensible misery that communism caused in places such as CubaCambodia, and North Korea. Or China back in the Mao era.

That being said, his letter is a very powerful indictment of the moral bankruptcy of his Greek counterpart (which perhaps isn’t a surprise given the ideology of the Syriza government).

And it’s also an indictment of all of the apologists for communist tyranny.

NDAA WATCH: Can Space Flight Rise Above Parochial Politics?

Thu, 08/31/2017 - 6:39pm

Originally published by Townhall on August 28, 2017.

Sen. Rand Paul (R-KY) often says that there is an unholy alliance between the right and left that conspires to spend more of our money at every turn. He’s absolutely right. Big Brother has spent taxpayer money on everything from a $500,000 study to determine if smiling in selfies makes you happier to an over $2 million research project analyzing what makes the perfect first date. Politicians from both parties are motivated to please campaign donors and provide the bacon for their home districts, so they all shake hands and agree to spend more on everything.

While Congress’ rampant fiscal irresponsibility is terrible on all fronts, there’s an extra element of danger added for matters relating to national defense. Time and time again, Washington ignores defense experts and instead appropriates money for wasteful, inefficient technology, jeopardizing the security of the American people by reducing the available funds for more pressing needs.

Consider the Abrams tank. A few years ago, the Army begged Congress to stop funding half a billion dollars for tanks that it doesn’t need. But Rep. Jim Jordan (R-OH), whose district happens to manufacture those tanks, and other Ohio representatives would not let up and overrode the defense chiefs to serve their own parochial interests.

To streamline the budget that same year, the Armed Forces also planned on retiring outdated materials that they no longer had any use for – among them: Ticonderoga class cruisers, C-130 and C-5A cargo aircrafts, B-1 bombers, and unmanned aerial vehicles. Yet most of their requests were ignored by Congress, which put in the NDAA that “none of the funds authorized” can be used “to retire, inactivate, or place in storage a cruiser or dock landingship.” Other mandates were similarly used to ensure that unnecessary items would remain funded.

Fast forward to the present, and it’s clear that members of Congress have become no less shameless in their efforts to prioritize defense procurements for their districts and donors. Sen. John McCain (R-AZ) has enjoyed a rather cozy relationship with SpaceX CEO Elon Musk, who has donated generous sums to the McCain Institute as well as the Senator’s campaigns. To please his rain man, McCain works tirelessly to introduce amendments, earmarks, and other provisions that shield Musk’s government-funded empire from competition.

Last year, McCain introduced an amendment to the NDAA that would have completely banned the use of Russian rocket engines to launch satellites into space, conveniently leaving SpaceX as one of the only remaining qualified providers. While everyone’s goal is to phase out the use of Russian rockets, the Air Force has been clear: until competing engines are fully developed in just a few short years, the RD-180, which 56 percent of EELV launches will rely on until FY 2020, remains necessary. To McCain’s dismay, Congress agreed and passed an amendment that will retain funding for the RD-180 until 2022.

McCain has not given up. He made defense leaders sweat by trying the same trick a few months ago, attempting to use the Russian hysteria in today’s political climate to his advantage by sticking the ban in a Russian sanctions bill. Again, he failed.

Now, though, the chance he’ll succeed in facilitating a government-created monopoly for SpaceX has hit an all-time high. The 2018 NDAA includes two provisions — Section 1612 and Section 1615 – that will limit funding “of new rocket engines for the Air Force’s Evolved Expendable Launch Vehicle (EELV) program”, as well as prohibit “the Pentagon procurement of transponder services on commercial satellites launched on Russian rockets.”

Yet again, this is just fancy lingo for protecting SpaceX. Right now, there are only three major launch systems — SpaceX’s Falcon 9, and United Launch Alliance’s (ULA) Delta IV and Atlas V. The Delta IV is outdated and being phased out, while ULA is also looking to phase out the use of the Atlas V since it uses some Russian rockets.

ULA is in the process of creating a new launch vehicle that would replace these two and adequately compete with SpaceX’s Falcon 9 in just a few short years. The DOD has already saved taxpayers $300 million with its strategy for developing new launch systems, yet some in Congress are again looking to throw these cost savings away by intervening and cutting off funding to protect their pal Elon Musk.

The Trump Administration, Department of Defense, and Air Force have already expressed heavy disapproval with these sections of the NDAA. The White House said they will “limit domestic competition, which will increase taxpayer costs by several billions of dollars through FY 2027 and stifle innovation.” The biggest kicker is that by suspending funding for the new launch system, Congress will be risking delays in ending the use of Russian engines.

Thankfully, Rep. Mike Coffman (R-CO) has an amendment on the table that will completely scrap Section 1615 and allow the Air Force’s continued competitive investment in domestic launch systems.

Congress must stop overriding the Pentagon’s judgment calls for self-serving political reasons. SpaceX has certainly been a boon to space travel, but every company is more efficient in the face of competition. We can and should protect taxpayers by ensuring the business interests of yet another large congressional campaign donor are not put above the security needs of the country. Passing the Coffman amendment would be a great first step in this regard.

Disagreeing with Liberal Socialism, Despising Marxist Socialism

Thu, 08/31/2017 - 12:29pm

wrote last week about evil of totalitarian ideologies such as communism and fascism and pointed out that both antifa and Nazis should be treated with complete disdain and ostracism.

And that led me to find common ground with my left-of-center friends, even though I don’t like many of their policies.

I don’t like redistribution…programs are financed with taxes and that the internal revenue code is enforced by coercion…if you catch me in a cranky mood, I’ll be like the stereotypical libertarian at Thanksgiving dinner and wax poetic about what’s wrong with the system. That being said, I much prefer the coercion found in western democracies compared to the totalitarian versions of coercion found in many other parts of the world. At least we have the rule of law, which limits (however imperfectly) capricious abuse by government officials. …our Constitution still protects many personal liberties, things that can’t be taken for granted in some places. Moreover, there is only a trivially small risk of getting abused by the state in western nations because you have unpopular views. And there’s little danger of persecution by government (at least nowadays) based on factors such as race and religion. This is what makes liberal democracy a good form of government (with “liberal” in this case being a reference to classical liberalism rather than the modern version). Unfortunately, there are some people in America that don’t believe in these principles.

Now let’s look at an aspect of this issue from a left-of-center perspective.

Writing for the New Republic, John Judis analyzes the different types of socialism. He starts with some personal history of his time as a socialist activist.

In the early 1970s, I was a founding member of the New American Movement, a socialist group… Five years later, I was finished with…socialist organizing. …nobody seemed to know how socialism—which meant, to me, democratic ownership and control of the “means of production”—would actually work… Would it mean total nationalization of the economy? …wouldn’t that put too much political power in the state? The realization that a nationalized economy might also be profoundly inefficient, and disastrously slow to keep up with global markets, only surfaced later with the Soviet Union’s collapse. But even then, by the mid-1970s, I was wondering what being a socialist really meant in the United States.

He then notes that socialism has made a comeback, at least if some opinion polls(but not others) and the campaign of Bernie Sanders are any indication.

…much to my surprise, socialism is making a comeback. The key event has been the campaign of self-identified democratic socialist Bernie Sanders, who almost won the Democratic nomination and is now reputedly the most popular politician in America. Several opinion polls have also found that young people now think favorably of socialism and ill of capitalism… For the first time since the ‘60s, socialism looks like a politics with a future in the United States.

But Judis notes that it’s unclear what socialism means.

The old nostrums about ownership and control of the means of production simply don’t resonate in 2017. …In the 2016 campaign, however, Sanders began to define a socialism that could grow… I think there is an important place for the kind of democratic socialism that Sanders espoused.

He says there are many flavors of socialism, but ultimately puts them in two camps.

There is no scientific definition of socialism… It’s a political tradition with many different flavors—Marxist, Christian, social-democratic, Fabian, Owenite, Leninist, Maoist. In looking at the choices facing American socialists now, …a choice between a socialism rooted in Marx’s apocalyptical promise of revolution, or the abolition of capitalism and a socialism that works more gradually toward the incorporation of public power and economic equality within capitalism. One could be called “Marxist socialism” and the other “social democratic”—or, to borrow from John Maynard Keynes, “liberal socialism.”

And “liberal socialism” basically means capitalism combined with European-style redistributionism.

In Western Europe, …socialists were forced to define their objectives more clearly. And what has emerged is a liberal conception of socialism. …social democracy has probably reached its acme in the Nordic countries, where the left has ruled governments for most of last half-century. …That’s not Marx’s vision of socialism, or even Debs’s. In Europe, workers have significant say in what companies do. They don’t control or own them. Private property endures. …private capital is given leave to gain profits through higher productivity, even if that results in layoffs and bankruptcies. But the government is able to extract a large share of the economic surplus that these firms create in order to fund a full-blown welfare state.

Which means “liberal socialism” is, well, liberalism (the modern version, i.e., statism, though Thomas Sowell has a more unflattering term to describe it).

By the standards of Marxist socialism, this kind of social democracy appears to be nothing more than an attenuated form of capitalism. …But…As the Soviet experiment with blanket nationalization showed, it can’t adjust to the rapid changes in industry created by the introduction of automation and information technology. …the market is a better indicator of prices than government planning. …the older Marxist model of socialism may not even be compatible with popular democracy. …What’s the difference between this kind of socialist politics and garden-variety liberalism? Not much. …American socialists need to do what the Europeans did after World War II and bid goodbye to the Marxist vision of democratic control and ownership of the means of production. They need to recognize that what is necessary now—and also conceivable—is not to abolish capitalism, but to create socialism within it.

For what it’s worth, the leftists I know are believers in “liberal democracy,” which is good, and they also are believers in “liberal socialism,” which is good, at least when compared to “Marxist socialism.” Sort of like comparing Barack Obama and Hillary Clinton to Nicolás Maduro and Kim Jong Un.

I disagree with Obama and Clinton, of course, and I would argue that what they want is bad compared to small-government capitalism.

But I utterly despise the totalitarian regimes in Venezuela and North Korea.

Let’s conclude by highlighting a key difference between “liberal socialists” and supporters of small government. My leftist friends are content to allow capitalism so long as they can impose high taxes on “economic surplus” to finance lots of redistribution.

They think that such policies don’t cause significant economic harm. I try to explain to them that punishing success and subsidizing dependency is not a good recipe for long-run prosperity. And I also tell them that demographic changes make their policies very unsustainable.

But at least these decent people on the left are not totalitarians. So when I look at this amusing image from Reddit‘s libertarian page, I agree that everyone who supports big government is a collectivist of sorts. But “Social Democracy” (assuming that’s akin to “liberal socialism”) is not really the same creature as the other forms of collectivism (assuming “social justice” is akin to antifa).

Which is why this image is more accurate.

 

 

The bottom line is that Nordic-style big government is misguided, but state-über-alles totalitarianism is irredeemably horrible.

Will Unresolved Issues Sink Tax Reform?

Wed, 08/30/2017 - 12:21pm

While I realize there’s zero hope of ripping up America’s awful tax code and getting a simple and fair flat tax, I’m nonetheless hopeful that there will be some meaningful incremental changes as part of the current effort to achieve some sort of tax reform.

A package that lowers the corporate rate, replaces depreciation with expensing, and ends the death tax would be very good for growth, and those good reforms could be at least partially financed by eliminating the state and local tax deduction and curtailing business interest deductions so that debt and equity are on a level playing field.

All that sounds good, and a package like this should be feasible since Republicans control both Congress and the White House (especially now that the BAT is off the table), but I warn in this interview that there are lots of big obstacles that could cause tax reform to become a disaster akin to the Obamacare repeal effort.

Here’s my list of conflicts that need to be solved in order to get some sort of plan through Congress and on to the President’s desk.

  • Carried interest – Trump wants to impose a higher capital gains tax on a specific type of investment, but this irks many congressional GOPers who have long understood that any capital gains tax is a form of double taxation and should be abolished. The issue apparently has some symbolic importance to the President and it could become a major stumbling block if he digs in his heels.
  • Tax cut or revenue neutrality – Budget rules basically require that tax cuts expire after 10 years. To avoid this outcome (which would undermine the pro-growth impact of any reforms), many lawmakers want a revenue-neutral package that could be permanent. But that means coming up with tax increases to offset tax cuts. That’s okay if undesirable tax preferences are being eliminated to produce more revenue, but defenders of those loopholes will then lobby against the plan.
  • Big business vs small business – Everyone agrees that America’s high corporate tax rate is bad news for competitiveness and should be reduced. The vast majority of small businesses, however, pay taxes through “Schedule C” of the individual income tax, so they want lower personal rates to match lower corporate rates. That’s a good idea, of course, but would have major revenue implications and complicate the effort to achieve revenue neutrality.
  • Budget balance – Republicans have long claimed that a major goal is balancing the budget within 10 years. That’s certainly achievable with a modest amount of spending restraintAnd it’s even relatively simple to have a big tax cut and still achieve balance in 10 years with a bit of extra spending discipline. That’s the good news. The bad news is that there’s very little appetite for spending restraint in the White House or Capitol Hill, and this may hinder the passage of a tax plan.
  • Middle-class tax relief – The main focus of the tax plan is boosting growth and competitiveness by reducing the burden on businesses and investment. That’s laudable, but critics will say “the rich” will get most of the tax relief. And even though the rich already pay most of the taxes and even though the rest of us will benefit from faster growth, Republicans are sensitive to that line of attack. So they will want to include some sort of provision designed for the middle class, but that will have major revenue implications and complicate the effort to achieve revenue neutrality.

There’s another complicating factor. At the risk of understatement, President Trump generates controversy. And this means he doesn’t have much power to use the bully pulpit.

Though I point out in this interview that this doesn’t necessarily cripple tax reform since the President’s most important role is to simply sign the legislation.

Before the 2016 election, I was somewhat optimistic about tax reform.

A few months ago, I was very pessimistic.

I now think something will happen, if for no other reason than Republicans desperately want to achieve something after botching Obamacare repeal.

FCC Should Empower Private Sector to Bring Broadband to Rural America

Tue, 08/29/2017 - 12:11pm

Originally published by Townhall on August 28, 2017.

It’s difficult to participate in the modern world without access to affordable, high-speed internet. As the economy becomes increasingly digital and solutions to everyday problems continue to be found more and more online, lack of access to broadband threatens to leave millions behind.

While much progress in expanding access has been made, growth in broadband adoption has slowed in recent years. The FCC’s 2016 Broadband Progress Report estimates 34 million Americans, 10% of the population, lack access to the minimum broadband speed of 25Mbps. Further, over 46 million homes have access only to a single broadband provider and thus lack the price-reducing benefits of market competition.

Much of the challenge in spreading high-speed internet is due to the sheer size of the nation and the low population density of so much of the heartland. It has not typically been economical to build the infrastructure needed to provide broadband access to much of rural America. Thankfully, that need no longer be the case.

The FCC is in the process of repacking the broadcast spectrum to make way for more wireless broadband. As part of this process, “white spaces” found between TV channels will be available for public use. And one exciting possible use for this spectrum is to deliver broadband to rural America.

Many Americans already benefit from unlicensed spectrum through the use of Wi-Fi. However, Wi-Fi operates at very high frequencies and thus cannot travel far, often not even entirely throughout a single home. TV white spaces, on the other hand, are found at lower frequencies where a broadband internet connection can cover 9 miles.

Microsoft recently unveiled a rural broadband initiative to leverage private investment and use TV white spaces to expand broadband access to rural America. But Microsoft and other companies first need regulatory certainty before that investment can be unleashed.

The FCC can provide the certainty needed simply by finalizing several rules currently under consideration that would preserve three white spaces channels in every market for public use. Knowing that access to this spectrum will be assured going forward will allow private sector innovation to solve a pressing public problem. Economic analysis suggests doing so could lead to $28.4 billion in additional output per year and an increase of about 358,000 jobs.

Broadcasters are fighting to convince the FCC to close off public access to these critical unlicensed bands. Despite controlling 92 percent of the spectrum in the tv band, heavily subsidized broadcasters are pulling out all the stops, even spreading unsubstantiated scaremongering about potential interference with medical devices, to deny the preservation of just a tiny bit of spectrum to help expand broadband access to millions of Americans.

Thankfully, a large, bipartisan Congressional coalition is calling on the FCC to ignore these special interest pleas and help make expanding broadband through TV white spaces a reality. And FCC Commissioner Ajit Pai has spoken repeatedly about the need to expand broadband access. He and the FCC need to stick to their guns in the face of special-interested pleading and finalizing the rules to preserve tv white spaces for public access.

Personal Accounts Are the Best Way to Ensure Safe and Secure Retirement Income

Tue, 08/29/2017 - 12:04pm

Most people understand that there’s a Social Security crisis, but they only know half the story.

The part of the crisis they grasp is that the program is basically bankrupt, though I doubt many of them realize that the long-run shortfall is a staggering $44 trillion.

The part of the crisis that generally is overlooked is that the program is a lousy deal for workers. They pay record amounts of tax into the system in exchange for a shaky promise of a modest monthly check. For all intents and purposes, they are being charged for a steak, but they’re getting a hamburger (with Medicare, by contrast, people are charged for a hamburger and they receive a hamburger but taxpayers pay for a steak that nobody gets).

For groups with lower-than-average life expectancy, such as poor people and minorities, Social Security is even worse. They pay into the system throughout their working lives, but then they don’t live long enough to collect a decent amount of benefits.

I narrated a video that was partly focused on how people could have more retirement income if we shifted to a system of personal retirement accounts, but this video from Learn Liberty directly addresses this issue.

By the way, I have one minor complaint with this excellent video. Social Security is not “forced savings.” There’s no money set aside. Yes, there’s a “trust fund,” but it contains nothing but IOUs. And if you don’t believe me, see what the Clinton Administration wrote back in 1999.

It would be more accurate to say the system is a pay-as-you-go, tax-and-transfer entitlement.

But I’m digressing, so let’s focus on some potentially good news. Americans actually have a pretty good track record of saving for their own retirement. Indeed, total pension assets (measured as a share of economic output) in the United States rival those of nations that have mandatory private retirement systems.

So it presumably shouldn’t be that difficult to transition to a private retirement system in America, which was a key takeaway from a column in the Wall Street Journal last week by Andrew Biggs of the American Enterprise Institute.

He starts with a pessimistic observation on how major politicians have addressed the crisis:

During last year’s presidential campaign, the candidates promised not to cut Social Security benefits (Donald Trump) and even to increase them (Hillary Clinton). …the Trump administration should reconsider its pledge not to cut Social Security benefits. The program is 25% underfunded over the long term, the Congressional Budget Office projects.

But the good news is that many Americans already are saving for retirement, so it wouldn’t be disruptive to extend personal retirement accounts to the entire population.

…private plans such as 401(k)s have allowed more people than ever to save for retirement…61% of workers… Contributions to private plans have…risen from an average 5.8% of wages in 1975 to 8% in 2014. …in 1984 only 23% of households received benefits from private retirement plans. By 2007 that had risen to 45%. Moreover, during the same period the benefits that the median household received from private plans rose by 141% above inflation, versus only 25% for Social Security benefits.

This is a system that should be expanded, with a prudent transition from a bankrupt Social Security system to a safer and more lucrative system of personal retirement accounts.

And that would be a much better outcome than what the current system will give us.

…Scandinavian-level tax rates or multi-trillion dollar unfunded entitlement liabilities.

P.S. Responding to those who worry about stock market downturns and the implications for retirement income, my colleague Mike Tanner showed that even people retiring after the 2008 crash would have been better off with personal retirement accounts.

Teaching Economics to Texans: Three Cheers (and Three Videos) for Price Gouging

Mon, 08/28/2017 - 12:49pm

I generally use Texas as a good example when discussing public policy. Particularly compared to places such as California.

I like the sensible attitude about guns, but the absence of an income tax is particularly admirable when considering economic issues, and I confess to being greatly amused when I read about jobs and investment escaping high-tax states like California and moving to the Lone Star State.

But being more pro-market than California is a low bar to clear. And I’ve written that government is too big in Texas.

And now, because of Hurricane Harvey, I have another reason to criticize the state.

Texas has a law against “price gouging,” which means politicians there (just like the politicians in places like Venezuela) think they should get to determine what’s a fair price rather than allow (gasp!) a free market.

The state’s Republican Attorney General is even highlighting his state’s support for this perverse example of price controls.

>Price gouging by Texas merchants in the path of Hurricane Harvey has drawn the attention of Texas Attorney General Ken Paxton, who said Saturday that his office is looking into such cases. …”We’ll be dealing with those people as we find them,” he said. …Paxton issued a warning about price gouging Friday as the hurricane approached the Texas coast. Texas law prohibits businesses from charging exorbitant prices for gasoline, food, water, clothing and lodging during declared disasters.

Paxton is right about Texas law, but he is threatening to enforce a terrible policy.

To help explain why Texas law is bad and why the Attorney General is misguided, here’s a video from John Stossel on so-called price gouging.

It’s disgusting that Mississippi arrested John. The guy should have received a medal for putting his money at risk to serve others.

To augment Stossel’s analysis, here’s a video from Learn Liberty that explains why politicians shouldn’t interfere with the price system.

And here’s Walter Williams discussing the role of “windfall profits” and how high returns encourage the reallocation of resources in ways that benefit consumers.

The bottom line on this issue is that buyers understandably want low prices, particularly in emergency situations.

But that makes no economic sense. However, since buyers generally outnumber sellers, politicians will always have an incentive to demagogue on the issue.

I’m not surprised when we get economic illiteracy from certain politicians. Nonetheless, it’s very disappointing when Texas lawmakers sink to that level. I hope Mr. Paxton at least is feeling guilty.

Limiting Taxpayer-Financed Vacations and Political Junkets

Sun, 08/27/2017 - 12:37pm

When I write about politicians in their role as politicians (rather than their policy prescriptions), it’s usually to mock them for venality, corruption, immorality, sleazeincompetence, or hypocrisy.

Today, I want to plead with them to exercise self-restraint. Some folks may have seen the stories about President Trump using up the Secret Service budget because of all his vacation trips to his various resorts.

There’s nothing illegal about his actions, but I wish Trump (as well as his predecessors and successors) would sometimes pause and think about whether they’re squandering other people’s money.

But since it’s highly unrealistic to expect politicians to have empathy for taxpayers, maybe we need some reforms. Here’s some of what I wrote in a column for Fortune.

…the Secret Service is way over budget because of President Donald Trump’s frequent vacations… It’s easy to zing Trump for being a hypocrite, as he previously complained about the cost and duration of President Barack Obama’s vacations. …But let’s look at this issue from the perspective of taxpayers. Every time the president hops on Air Force One for a weekend getaway at one of his resorts, that involves a major shift of manpower by the Secret Service, along with major outlays for travel, lodging, and other costs. …it’s time to consider some sensible reforms that could limit the agency’s burden on taxpayers.

I came up with a couple of ideas, which could be implemented by attaching conditions to the spending bills that fund the White House and the Secret Service.

…Congress should put an annual limit on expenditures for unofficial White House travel. …the average American gets 10 paid vacation days a year. …Presidents are not average, of course, so they should get taxpayer-financed protection for around four weeks of vacation. Any more than that would still have a Secret Service detail, but the president would have to pick up the incremental expenses… There should also be similar restrictions for the presidential family, especially with regard to overseas business trips. If Trump’s children feel it is necessary to go overseas to sign a deal, then the company at the very least should pay half the cost for Secret Service protection.

In other words, if the President wants to go to one of his golf clubs every weekend, he would always have full protection from the Secret Service, but he would pay for the added expense. It could come from his own pocket, or from his campaign coffers.

I don’t care, so long as there’s a limit on how much taxpayer are hit.

But what if Trump takes more official trips? Wouldn’t that require more money for the Secret Service?

That’s possible, but I also suggested in the article another way to save money that wouldn’t sacrifice security.

Another reasonable reform would be to…protect taxpayers by limiting the number of other administration staffers that go on junkets. …cut in half the number of political advisors, speechwriters, and flunkies that have turned White House trips into costly boondoggles.

The bottom line is that presidential junkets shouldn’t turn into an excuse to have hundreds of non-Secret Service staffers tagging along at high cost.

And I stressed in the article that I’m not picking on Trump.

They would be permanent reforms to address the systemic problem of wasteful spending and administrative bloat in Washington. This problem existed before the current president. And in the absence of reform, it will be an issue with future administrations.

To emphasize this point, here are some excerpts from a 2014 article from the U.K.-based Guardian (h/t: Mark Steyn) about the excesses of one of Obama’s European trips.

President Barack Obama’s visit on Tuesday will strain the city like never before with €10m ($10.4m, £8.4m) of Belgian money being spent to cover his 24 hours in the country. The president will arrive on Tuesday night with a 900-strong entourage, including 45 vehicles and three cargo planes.

The article didn’t say how many of the 900 staffers were Secret Service agents, but I’m guessing maybe 200 or 300. Heck, even if it was 400 or 500, why did taxpayers have to pick up the tab for another 400 or 500 (or more) staffers who weren’t there for security-related reasons?

Yes, presidents need to have staff to conduct business, but we live in a world with advanced communications technology.

I’m a former congressional staffer, and I’ve had lots of friends work for various administrations, so I understand that a nice overseas trip can be fun for people who otherwise toil in obscurity.

But as the risk of being a curmudgeon, I don’t want taxpayers to foot the bill. I want there to be a mentality of frugality. And if politicians won’t adopt that mentality (and they almost certainly won’t, as shown by this example), then it would be nice to attach some strings to limit their excesses.

P.S. I grouse about goodies for American politicians, but I’d probably be even more upset if I was a taxpayer in Europe.

Can President Macron Save France?

Sat, 08/26/2017 - 12:27pm

Back in April, I looked at the candidates running for the French presidency and half-jokingly wondered which one would win the right to preside over the country’s decline.

But once the field was winnowed to two candidates, Emmanuel Macron and Marine Le Pen, I wrote that voters should pick the socialist over the socialist. My title was sarcastic, but I was making a serious point that Marine Le Pen had a very statist platform, whereas I cited evidence that Macron had some sensible proposals.

Mr. Macron aims to rebalance the economy by cutting 120,000 public sector jobs, streamlining the pension system and dropping state spending back to 52 percent of G.D.P. Mr. Macron leads an emerging centrist consensus that recognizes that…the main obstacle retarding France’s economy is its attachment to a welfare state culture of…generous benefits. …Mr. Macron…once said that stifling taxes threaten to turn France into “Cuba without the sun”.

Indeed, in addition to the reforms listed in the Macron has proposed to lower France’s corporate tax rate to 25 percent, and he also wants to liberalize labor markets.

All of which seems rather surreal. After all, Macron was a minister in the failed socialist government of Francois Hollande, so who would have thought that we would be the one to lead an effort to shrink the burden of government?

Yet consider the fiscal agenda President Macron is pushing.

France’s 2018 budget will focus on cutting taxes to boost economic activity as the government seeks to cement its support among the business community, Prime Minister Edouard Philippe said. …Philippe told RTL Radio on Wednesday he wants to lower levies that “hurt the competitiveness of our country.” Government ministries this week received letters setting out their spending limits for 2018. President Emmanuel Macron is seeking cuts of 20 billion euros ($23 billion) and tax reductions of 11 billion euros next year… “We have to get out of the spiral of public spending,” government spokesman Christophe Castaner said in a separate interview on France Inter. “France has been addicted to ever increasing spending, paid for by taxes.”

Wow. I wish the Republicans in Washington were as sensible as these French socialists (actually, since they created a new party, it would be more accurate to say they are former socialists).

But there are precedents for this kind of surprise. It was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand. And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.

That’s the good news.

The bad news is that French voters may have buyer’s remorse.

The Wall Street Journal recently opined on this topic.

…the question isn’t whether Emmanuel Macron can save France. The question is whether France can save itself. Voters have the best chance in a generation to revive an economy in decline, yet they seem to quail at the critical moment. …voters are having second thoughts about economic reform. Mr. Macron’s approval started falling in July after he announced plans to cut housing benefits—by €5 a month for each recipient. Feminists are in arms over his plan to reduce the government’s women’s-rights budget to €20 million ($23.6 million) from €30 million. That’s before he gets to the labor reforms that will dominate the autumn.

Shifting from the editorial page, the WSJ has a report on the growing opposition to reform.

As Emmanuel Macron sets out to shake up France’s rigid labor market, the young president is losing the public support he may need to weather protests by the country’s powerful unions. …Mr. Macron will have to tread carefully in rolling out his labor reforms in September. For months, the 39-year-old president has been in talks with powerful labor unions in a bid to contain planned street protests. Now the prospect is growing that the ranks of those demonstrations could swell with students, retirees and other segments of French society… Mr. Macron’s government wants to make it easier for French firms to hire and fire workers. …The hard-left General Confederation of Labor, France’s most militant union, is already calling for strikes and demonstrations.

It’s not surprising, of course, to see opposition from those seeking to protect their privileges.

Though it theoretically shouldn’t matter since Macron’s party has a huge majority in the French Assembly.

That being said, politicians do have a habit of buckling when faced with voter unrest.

And Macron is committing some unforced errors, as reported by the U.K.-based Telegraph.

Emmanuel Macron spent €26,000 (£24,000) on makeup during his first three months as president of France, it has emerged. …Le Point reported that his personal makeup artist – referred to only as Natacha M – put in two bills, one for €10,000 and another for €16,000.The Elysee Palace defended the high fee saying: “We called in a contracter as a matter of urgency”. The same makeup artist also applied foundation to Mr Macron during his presidential campaign. Aides said that spending on makeup would be “significantly reduced”. …Le Point put the overall figure for Mr Hollande’s makeup at €30,000 per quarter. Nicolas Sarkozy, meanwhile, paid a whopping €8,000 per month for his, according to Vanity Fair.

Since it appears that these costs are borne by taxpayers, this is all rather depressing.

Macron, however, at least can claim that he’s not the most frivolous with other people’s money. Monsieur Hollande won the prize for waste when you add his hairdresser to the equation.

…all these sums pale into comparison with the £99,000 Mr Hollande paid his personal barber. The huge amount sparked accusations of “shampoo Socialism”. …The hairdresser, Olivier Benhamou, was hired to work at the Elysée Palace in 2012 for the duration of Mr Hollande’s five-year term.  Mr Benhamou also reportedly enjoyed a housing allowance and family benefits.

As I wrote about this last year and suggested that this narcissistic waste made Hollande eligible to win the “Politician of the Year” contest.

But let’s shift back to the serious issue of economic liberalization.

To be blunt, France’s economy is suffocating from statism. I’m not even sure what’s the biggest problem.

The answer is “all of the above,” with is why France desperately needs pro-market reform.

We’ll learn later this year whether Macron can save his country.

P.S. 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.

To Fight Cronyism, Let’s Have Separation of Business and State

Fri, 08/25/2017 - 12:17pm

In my 30-plus years in Washington, I’ve lived through some very bad pieces of legislation.

But the most depressing experience was probably the TARP bailout. In part, it was depressing because bad government policy created the conditions for the crisis, so it was frustrating to see the crowd in Washington blame capitalism (in effect, a repeat of what happened in the 1930s).

Far more depressing, however, was the policy response. Thanks largely to the influence of Treasury Secretary Hank Paulson, the Bush Administration decided to bail out the big firms on Wall Street rather than use “FDIC resolution,” which would have bailed out depositors but at least shut down big institutions that were insolvent.

In other words, TARP was pure cronyism. Wall Street firms had “invested” in Washington by giving lots of contributions to politicians and TARP was their payoff.

With this background, you’ll understand why I asserted in this interview that the dissolution of two business advisory councils is the silver lining to the black cloud of Charlottesville.

Since that was just one segment of a longer interview and I didn’t get a chance to elaborate, here are some excerpts from an article in Harvard Business Review by Robert Litan and Ian Hathaway about the connection between anemic productivity numbers (which I wrote about last week) and cronyism.

Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work. In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors. Most people think of entrepreneurship as being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living. Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.

That’s the theory.

What about evidence? Well, Obamacare could be considered a case study since it basically was a giveaway to big pharmaceutical firms and big health insurance companies.

But the authors look at the issue more broadly to see if there is an economy-wide problem.

Do we…see a rise in unproductive entrepreneurship, as Baumol theorized? …James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.

This is very depressing.

I don’t want companies to do well because the CEOs cozy up to politicians. If entrepreneurs and corporations are going to be rolling in money, I want that to happen because they are providing valued goods and services to consumers.

wrote about Bessen’s research last year. It’s very unsettling to think that companies make more money because of political connections than they do from research and development.

There are two reasons this is troubling.

First, it means slower growth because government intervention is undermining the efficient allocation of labor and capital that occurs with productive entrepreneurship.

Second, cronyism is very corrosive because people equate business with capitalism, so their support for capitalism declines when they see companies getting special favors.

I wish ordinary people understood that big business and free enterprise are not the same thing.

Though I fully understand their disdain for certain big companies. Consider the way a select handful of big companies use the Export-Import Bank to obtain undeserved profits. How about the way big agri-businesses rip off consumers with the ethanol scam. Don’t forget H&R Block is trying to get the IRS to drive competitors out of the market. Big Sugar also gets a sweet deal by investing in politicians. Another example is the way major electronics firms enriched themselves by getting Washington to ban incandescent light bulbs. Needless to say, we can’t overlook Obama’s corrupt green-energy programs that fattened the wallets of well-connected donors. And General Motors became Government Motors thanks to politicians fleecing ordinary Americans.

The bottom line is that it’s time to save capitalism from the rent seekers in the business community.

Peas in a Pod: Nazi = Antifa = Collectivist = Fascist = Communist

Thu, 08/24/2017 - 12:10pm

At the risk of making myself unpopular with some of my fellow libertarians, not all forms of government coercion are created equal.

I don’t like redistribution in the United States. I recognize that such programs are financed with taxes and that the internal revenue code is enforced by coercion (if you don’t believe me, see what happens when you choose not to comply with our supposedly voluntary system). And if you catch me in a cranky mood, I’ll be like the stereotypical libertarian at Thanksgiving dinner and wax poetic about what’s wrong with the system.

That being said, I much prefer the coercion found in western democracies compared to the totalitarian versions of coercion found in many other parts of the world.

At least we have the rule of law, which limits (however imperfectly) capricious abuse by government officials. That’s not the case in many countries. Our courts also are generally independent and our Constitution still protects many personal liberties, things that can’t be taken for granted in some places.

Moreover, there is only a trivially small risk of getting abused by the state in western nations because you have unpopular views. And there’s little danger of persecution by government (at least nowadays) based on factors such as race and religion.

This is what makes liberal democracy a good form of government (with “liberal” in this case being a reference to classical liberalism rather than the modern version).

Unfortunately, there are some people in America that don’t believe in these principles. They call themselves all sorts of names, from white nationalist to antifa, but they share the common bond of totalitarianism.

J.D. Tuccille has an article for Reason that elaborates on this link.

Take a side? You bet. …advocates of a free, open, and liberal society are a side—the correct side—and the left-wing and right-wing thugs battling in the streets are nothing more than rival siblings from a dysfunctional illiberal family.

Losers who march with Nazi flags unquestionably deserve scorn. They represent a totalitarian ideology that subjugates individual rights to state power.

And Tuccille is rightly critical of Trump for giving even a shred of aid and comfort to such people.

But that doesn’t mean the counter-protestors (or, to be more accurate, a subsection of them) are praiseworthy. Indeed, some of them are similarly violent and evil. Tuccille lists some of the totalitarian efforts by folks on the hard left.

In June, James Hodgkinson opened fire on Republican members of Congress gathered for a baseball practice. …the supporter of Occupy Wall Street and former Bernie Sanders volunteer sent six people, including Rep. Steve Scalise (R-LA), to the hospital… Before that, left-wing protesters violently shut down a Middlebury College speech by Charles Murray, injuring Professor Alison Stanger in the process, rioted over a speech by professional provocateur Milo Yiannopoulos, and forced the cancellation of a Republican parade in Portland, Oregon, with promises that “the police cannot stop us from shutting down roads.” They boast of their contempt for free speech.

He closes with a rejection of the “whataboutism” argument, which is being used by some to suppress criticism of the violent left.

…for those of us already calling out the violent bigots flaunting Nazi imagery, it’s not whataboutism to point out that an alleged alternative isn’t actually an alternative at all—it’s just another version of the same thing. …There’s no reason to favor one illiberal force over another when our country has a long history based on much different, and much better, political principles. …Despite our many differences over specific policies, most Americans have traditionally supported the side of liberty, tolerance, free speech, and peaceful political change, within broad parameters. That side is in opposition to the violent, authoritarian thugs of the right and of the left.

Here’s an Imgur image from Reddit’s libertarian page that sums up my thinking.

In the interests of accuracy, I am partly sympathetic to the folks involved with Black Lives Matter. I get very upset when I read about low-income minorities suffering because politicians at the local level use cops to generate revenue rather than to protect against bad guys.

And maybe some of the other groups happen to be on the right side of some random issues (for all I know, maybe Nazis and commies oppose Trump’s foolish choice to expand U.S. intervention in Afghanistan).

But as a general rule, what animates the groups in the above photo is that they want to impose – even by violence – some form of totalitarian government. Yes, they may hate each other, but only in the sense that two street gangs may be vicious rivals because they each want control over some turf.

Here’s a video that examines the preposterous (and presumably politically motivated) assertion that there’s some sort of common ground between Nazis are liberty-oriented groups such as the Tea Party.

Let’s look at an example at the common link between socialism and fascism. The Library of Economics and Liberty has a very insightful article on Mussolini’s hostility to capitalism.

Consider some of the components of fascist economics: central planning, heavy state subsidies, protectionism (high tariffs), steep levels of nationalization, rampant cronyism, large deficits, high government spending, bank and industry bailouts, overlapping bureaucracy, massive social welfare programs, crushing national debt, bouts of inflation and “a highly regulated, multiclass, integrated national economic structure.” …Benito Mussolini identified his economic policies with “state capitalism”—the exact phrase that Vladimir Lenin used to usher in his New Economic Policy (NEP). …Lenin’s revised Marxism culminated in “socialist-lite” policies that helped inspire Mussolini to craft his own Italian-style fascism with a right-wing socialist twist. Thus, one could argue that Lenin’s politics were the first modern-day version of fascism and state-corporatism. Economist Ludwig von Mises, who fled the Nazi conquest of Europe, contended that the “economic program of Italian Fascism did not differ from the program of British Guild Socialism as propagated by the most eminent British and European socialists.”

Want more proof? Well, let’s look at what Mussolini actually wrote.

Interestingly, Mussolini found much of John Maynard Keynes’s economic theories consistent with fascism, writing: “Fascism entirely agrees with Mr. Maynard Keynes… In fact, Mr. Keynes’ excellent little book, The End of Laissez-Faire (l926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud.” …In his “Doctrine of Fascism,” Mussolini wrote: “The Fascist conception of life accepts the individual only in so far as his interests coincide with the State. . . . Fascism reasserts the rights of the state. If classical liberalism spells individualism, Fascism spells government.” …In May 1934, …Mussolini declared, “Three-fourths of [the] Italian economy, industrial and agricultural, is in the hands of the state.”

To be fair, it is possible to believe in lots of statism without being a totalitarian. For example, there are true-believing socialists in western nations who believe in confiscatory taxation, nationalization of industry, and all sorts of other wildly misguided policies. But, to their credit, they accept election results and don’t believe in killing, or even assaulting, their political opponents.

The bottom line is that well-meaning people from the right, left, and center should be united in their defense of liberal democracy.

On a practical level, there are a couple of implications.

It would be good if people on the right and left argued within the bounds of decency. Yes, I’ll call my opponents big-government statists and they’ll call me a heartless capitalist. I’ll say they’re trying to create dependency for political advantage and they’ll say I’m a tool of the Koch brothers. That’s normal fun and games.

But we should reserve our really negative rhetoric for the thugs who genuinely favor totalitarianism. And the two big political parties should be especially vigilant about disowning and criticizing the groups that are perceived as being indirectly on their side. As such, Republicans should condemn Nazis and like-minded groups. And Democrats should condemn antifa and like-minded groups.

As for the rest of us, we should try to be like Daryl Davis and Matthew Stevenson.

P.S. Since I believe in freedom and the rule of law, I don’t think totalitarian-minded groups should be randomly persecuted. If some nutty leftists want to set up a commune based on “from each according to ability, to each according to needs,” that’s fine with me so long as they aren’t trying to oppress others. Similarly, if some dumb rednecks decide to set up an Aryan compound in some isolated forest, that’s none of my business so long as they don’t try to infringe upon the rights of other. We can and should criticize such people, of course, but don’t arrest them for having warped hearts.

Why Is the Trump Administration AWOL on the IRS?

Wed, 08/23/2017 - 12:00pm

Whether I like what’s happening (getting rid of Operation Choke Point) or don’t like what’s happening (expanding civil asset forfeiture), it appears that the Justice Department under Attorney General Jeff Sessions is willing to make decisions.

With one very puzzling exception.

No steps have been taken to reverse the Obama-era policy of stonewalling to hide evidence of IRS scandals. Everything seems to be on auto-pilot.

The Wall Street Journal opined about the issue today and is justifiably frustrated.

The Obama Justice Department dismissed the IRS political targeting scandal as no big deal, and the Trump Administration hasn’t been any better. …These are basic questions of political accountability, even if the IRS has stonewalled since 2013. President Obama continued to spin that the targeting was the result of some “boneheaded” IRS line officers in Cincinnati who didn’t understand tax law. Yet Congressional investigations have uncovered clear evidence that the targeting was ordered and directed out of Washington. Former director of Exempt Organizations Lois Lerner was at the center of that Washington effort, but the IRS allowed her to retire with benefits. She invoked the Fifth Amendment before Congress. One of her principal deputies, Holly Paz, has submitted to a deposition in separate litigation, but the judge has sealed her testimony after she claimed she faced threats. The Acting Commissioner of the IRS at the time, Stephen Miller, stepped down in the wake of the scandal, but as far as anyone outside the IRS knows, no other IRS employee has been held to account. Even if the culprits were “rogue employees,” as the IRS claims, the public deserves to know what happened. …The Trump Administration also has a duty to provide some answers. The Justice Department and IRS have continued to resist the lawsuits as doggedly as they did in the Obama era. Attorney General Jeff Sessions can change that… Seven years is too long to wait for answers over abuses of the government’s taxing power.

This is spot on. It’s outrageous that the Obama Administration weaponized and politicized the IRS. But it’s also absurdly incompetent that the Trump Administration isn’t cleaning up the mess.

I understand why the bureaucrats at the Justice Department instinctively (and probably ideologically) want to protect their counterparts at the IRS. But, as the WSJ stated, there’s no reason why Attorney General Sessions isn’t using his authority to change policy.

The President’s failure to fire the ethically tainted IRS Commissioner is a troubling sign that the problem isn’t limited to the Justice Department.

One of Republicans’ least favorite Obama administration officials remains in his position: IRS Commissioner John Koskinen. Some Republicans lawmakers have asked President Trump to ask for Koskinen’s resignation. The commissioner’s term expires in November, but he has said he would step aside sooner if asked by the president. …Koskinen to lead the IRS in 2013, not long after it was revealed that the agency had subjected Tea Party groups’ applications for tax-exempt status to extra scrutiny and delays. …Many Republicans accuse Koskinen of impeding congressional investigations into the political-targeting scandal. They argue that he made false and misleading statements under oath and didn’t comply with a subpoena. During the last months of Obama’s presidency, some House Republicans pushed for a vote on Koskinen’s impeachment… Since Trump has taken office, there have been calls from GOP lawmakers for Koskinen to step down. Days after Trump’s inauguration, Republican Study Committee (RSC) Chairman Mark Walker (R-N.C.) and more than 50 other lawmakers sent a letter urging Trump to fire Koskinen “in the most expedient manner practicable.” …It’s unclear why Trump hasn’t ousted Koskinen or if he plans to do so in the future.

Very disappointing. I’m not a fan of conspiracy theories, but this almost leads me to wonder whether Koskinen has some damaging information on Trump.

Incidentally, the Justice Department may be dragging its feet and the White House may have cold feet, but the Treasury Department is overtly on the wrong side. And the problem starts at the top, resulting in praise for the Treasury Secretary from the pro-IRS forces at the New York Times.

President Trump’s Treasury secretary, Steven Mnuchin, knows that investing in the Internal Revenue Service yields significant returns… And he’s right: Every dollar spent on the agency returns $4 in revenue for the federal government, and as much as $10 when invested in enforcement activities. …At his confirmation hearings in January, Mr. Mnuchin bemoaned the cuts to the I.R.S. budget over the last seven years. The agency “is under-resourced to perform its duties,” he said, adding that further cuts “will indeed hamper our ability to collect revenue.” He also acknowledged that money spent on the I.R.S. is a good investment: “To the extent that we add resources, we can collect more money.” …his faith in the I.R.S. work force prompted one of his congressional interrogators to call it “refreshing” to hear someone “praise the employees at the Treasury Department.”

Yet should we give more money to a bureaucracy that has a big enough budget to finance this kind of reprehensible behavior?

The Internal Revenue Service has seized millions of dollars in cash from individuals and businesses that obtained the money legally, according to a new Treasury Department inspector general’s report. …individuals and businesses are required to report all bank deposits greater than $10,000 to federal authorities. Intentionally splitting up large sums of cash into sub-$10,000 amounts to avoid that reporting requirement is known as “structuring” and is illegal under the federal Bank Secrecy Act. But many business owners engaged in perfectly legal activities may be unaware of the law. Others are covered by insurance policies that don’t cover cash losses greater than $10,000. Still others simply want to avoid extra paperwork, and keep their deposits less than $10,000 on the advice of bank employees or colleagues. …The reporting requirements were enacted to detect serious criminal activity, such as drug dealing and terrorism.

I’m very skeptical that these intrusive anti-money laundering laws are successful by any metric, but I’m nauseated that the main effect is to give IRS bureaucrats carte blanche to steal money from law-abiding people.

The IRS pursued hundreds of cases from 2012 to 2015 on suspicion of structuring, but with no indications of connections to any criminal activity. Simply depositing cash in sums of less than $10,000 was all that it took to arouse agents’ suspicions, leading to the eventual seizure and forfeiture of millions of dollars in cash from people not otherwise suspected of criminal activity. The IG took a random sample of 278 IRS forfeiture actions in cases where structuring was the primary basis for seizure. The report found that in 91 percent of those cases, the individuals and business had obtained their money legally.

But here’s the part that’s most outrageous.

Innocent people weren’t the byproducts of a campaign to get bad guys. They were the targets.

…the report found that the pattern of seizures — targeting businesses that had obtained their money legally — was deliberate. “One of the reasons why legal source cases were pursued was that the Department of Justice had encouraged task forces to engage in ‘quick hits,’ where property was more quickly seized and more quickly resolved through negotiation, rather than pursuing cases with other criminal activity (such as drug trafficking and money laundering), which are more time-consuming,” according to the news release. In most cases, the report found, agents followed a protocol of “seize first, ask questions later.” Agents only questioned individuals and business owners after they had already seized their money.

In any event, the Trump Administration’s failure to deal with the problem seems to have emboldened the tax collection agency.

Despite promises to Congress, the Internal Revenue Service has yet to take advantage of a red-flag alert system designed to prevent it from rehiring past employees with blots on their records, a watchdog found. …the Treasury Inspector General for Tax Administration found that more than 200 of 2,000-plus former employees “whom the IRS rehired between January 2015 and March 2016 had been previously terminated or separated from the tax agency while under investigation,” according to a report released on Thursday.

And keep in mind that IRS bureaucrats awarded themselves big bonuses in response to the scandal.

By the way, the problem isn’t limited to the executive branch.

Republicans in 2015 (after they had control of both the House and Senate!) decided that the best response to IRS scandals was to increase the agency’s budget. I’m not joking (and I’m also not happy). At the risk of being redundant, only the Stupid Party could be that stupid.

sarcastically wrote four years ago that we should be thankful that Obama reminded the American people that the IRS isn’t trustworthy. Little did I realize that Republicans would fumble a golden opportunity to deal with the mess once they got power.

Time to Celebrate America’s Enormous Capital Surplus with the Rest of the World

Tue, 08/22/2017 - 12:00pm

What’s the worst government statistic, based on whether it distracts from sound thinking and encourages bad policy?

Well, I definitely think gross domestic income is a better measure than gross domestic product if we want insights on growth, so I’m not a big fan of GDP data.

I’m even less enthused about the Gini Coefficient because measures of inequality lead some people to mistakenly think of the economy as a fixed pie, or to falsely think that lots of income for a rich person somehow implies less income for the rest of us. And that then encourages some people to focus on redistribution (i.e., change how the pie is sliced) when it will be far better for the poor if policy makers focus on growth (i.e., expand the size of the pie).

But if you want to know the most unfortunate piece of economic data, I actually gave the answer to this question last year.

…the worst government statistic is the “trade deficit.”This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And we’re not talking chump change. Foreigners are “voting with their dollars” by making huge investments in the American economy.

According the Commerce Department data, the value of these investments is now well above $10 trillion. Yes, that trillion with a “t.”

That’s something we should celebrate. But you don’t have to believe me.

Let’s see what other have to say, starting with Professor Walter Williams.

There cannot be a trade deficit in a true economic sense. Let’s examine this. I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer. My grocer buys more from his wholesaler than his wholesaler buys from him. But there is really no trade imbalance, whether my grocer is down the street, in Canada or, God forbid, in China. Here is what happens: When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls by $100. For my grocer, it is the opposite. His goods account falls by $100, but his capital account rises by $100. Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance. That is true whether we are talking about domestic trade or we are talking about foreign trade.

Of course, it’s not surprising that a scholar like Walter Williams is on the right side and puts forth sound arguments.

But it is a bit of a shock when an elected official does the same thing. So I was very impressed when I saw this column in the Washington Post from Senator James Lankford of Oklahoma.

…the administration has…emphasized its desire to reduce the trade deficit… This is a faulty assumption but one that has unfortunately found its way into mainstream political dialogue. Trade deficits are not always bad for U.S. workers and consumers.

Senator Lankford points out a very important reason why Americans buy more from Mexicans than vice-versa.

For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that.

But the Oklahoma lawmakers also echoes what others have said about capital flows.

Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. …this foreign cash…is a positive for our economy. When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy. It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers.

Michael Strain of the American Enterprise Institute adds to the discussion.

Foreigners purchase U.S. stocks, bonds and currency. Foreigners invest directly in the United States… Generally speaking, this is good. It is a vote of confidence in the United States economy and, in some sense, in our nation as a whole. …we should think of foreign investment as increasing wages and economic growth by making workers and firms more productive.

But if President Trump succeeds in limiting the ability of Americans to buy from foreign producers, he will also limit the ability of foreigners to invest in America’s economic future.

…when the president and his administration attack the trade deficit, they are attacking foreign investment in the United States. …when we import capital from abroad, we run a trade deficit. Trade deficits and capital flows from abroad go hand in hand. …If the president wants to significantly reduce the trade deficit, he also wants to significantly reduce inflows of foreign capital. Waging a war on the trade deficit is waging a war on foreign investment.

Here’s what Kevin Williamson wrote about this topic for National Review.

…investing in the United States…is a very attractive proposition, which is…the main reason why we have trade deficits. Trade deficits are partly a question of consumer preference…but they are not mainly a question of consumer preference. They are mainly a question of investor preference — and investors prefer the United States, which is why there is almost twice as much foreign direct investment in the United States as in China, even though China’s economy has grown at a much faster rate over the past 20 years. …When Walmart orders $1 million worth of flip-flops from a Chinese concern, those Chinese gentlemen receive 1 million delicious U.S. dollars, which they are very happy and grateful to have. But what can you do with U.S. dollars? You can buy stuff from U.S. companies or you can buy assets from sellers who take U.S. dollars, which ultimately means U.S.-based investments. …But it isn’t only the Chinese. The Japanese, the British, the Germans and the other Europeans, the Canadians, the Mexicans, and practically everybody else in the world with a little bit of coin to invest likes to buy American assets. And why wouldn’t they? The American economy is the most wondrous thing human beings have ever managed to do… Trade deficits don’t happen because the wily Japanese juke us on trade policy. They happen because intelligent people holding a fistful of dollars very often decide to forgo the consumption of American consumer goods in order to invest in American assets. In economics terms, what this means is that the trade deficit is a mirror image of the capital surplus.

By the way, there are two ways that foreigners invest in the American economy.

Most of their money is for “passive” or “indirect” investments, which is simply a way of saying that they buy lots of stocks and bonds.

Those investments are very important for our economy. As I wrote just a few days ago, investment is what leads to productivity growth, and that’s how we earn higher wages and get higher living standards.

But foreigners also engage in “direct” investments, such as BMW building a factory in South Carolina. Mark Perry of the American Enterprise Institute points out that this also is a recipe for lots of job creation.

Since I’ve shared a lot of information on why a capital surplus is good, I supposed I should share some information explaining why protectionism is bad.

We’ll start with a column from the Wall Street Journal that looks at the impact of protectionist policies in Brazil and Argentina.

For decades, South America’s two largest economies have tried to shield their workers from global trade, largely through high tariffs and regulations that promote domestic production over imports. The World Bank ranks Argentina and Brazil among the world’s most closed big economies. …These protectionist policies have…come at a huge cost to consumers, who now pay higher prices, and to taxpayers, who underwrite the subsidies. …air conditioners and other products are…sold for two to three times the market price of other countries. The cost to Argentina’s taxpayers of these jobs is steep: up to $72,000 per factory worker a year… But for ordinary Argentines, the products’ price tag can be hefty. An unlocked Samsung J7 smartphone sells for $240 in the U.S. but costs nearly $500 in Buenos Aires. …Brazil’s long history of protectionism bred complacency… Consider Brazil’s auto industry, until recently one of the world’s 10 largest. Shielded for decades by high tariffs, it has devolved into a peddler of rinky-dink hatchbacks… And for Brazilian consumers, cars are far pricier: A new Volkswagen Gol Comfortline lists in Brazil at $15,231—nearly twice as much as in Mexico, which has low tariffs and an efficient car industry.

George Will looks at the cost of similar (but thankfully mostly in the past) policies in the United States.

…there are more than 45 million Americans in poverty, “stretching every dollar they have.” The apparel industry employs 135,000 Americans. Can one really justify tariffs that increase the price of clothing for the 45 million in order to save some of the 135,000 low-wage jobs? …A three-year, 15 percent tariff enabled domestic producers to raise their prices, thereby raising the costs of many American manufacturers. By one estimate, each U.S. job “saved” cost $550,000 as the average bolt-nut-screw worker was earning $23,000 annually. …Ronald Reagan imposed “voluntary restraints” on Japanese automobile exports, thereby creating 44,100 U.S. jobs. But the cost to consumers was $8.5 billion in higher prices, or $193,000 per job created, six times the average annual pay of a U.S. autoworker. And there were job losses in sectors of the economy into which the $8.5 billion of consumer spending could not flow. …In 2012, Barack Obama boasted that “over a thousand Americans are working today because we stopped a surge in Chinese tires.” But this cost about $900,000 per job, paid by American purchasers of vehicles and tires. And the Peterson Institute for International Economics says that this money taken from consumers reduced their spending on other retail goods, bringing the net job loss from the job-saving tire tariffs to around 2,500.

Let’s close with some good news.

Here’s a poll showing that Americans are increasingly supportive of trade.

I don’t know why the numbers have improved so much since 2008, but I’m happy with the outcome.

And one of the big reasons I’m happy is that the global shift to more open trade has been very beneficial to the global economy.

Indeed, expanded openness to trade in the post-World War II era has helped offset the damage caused by a bigger fiscal burden.

And more trade has been very good for the poor, as Deirdre McCloskey explains in this video.

I’ll close by recycling my column that challenges protectionists with eight questions. I wrote that column also six years ago and I still haven’t received any good answers.

The Much-Deserved End of Obama’s Operation Choke Point

Mon, 08/21/2017 - 12:14pm

Trump has been President for more than 200 days and those of us who want more economic liberty don’t have many reasons to be happy.

Obamacare hasn’t been repealed, the tax code hasn’t been reformed, and wasteful spending hasn’t been cut.

The only glimmer of hope is that Trump has eased up on the regulatory burden. More should be happening, of course, but we are seeing some small steps in the right direction.

Let’s share one positive development.

Professor Tony Lima of California State University opined back in January in the Wall Street Journal that Trump could unilaterally boost growth by ending a reprehensible policy known as “Operation Choke Point.”

…the Trump administration could shut down Operation Choke Point. This program, enforced by the Federal Deposit Insurance Corp., targets “risky” banking customers and pressures banks to deny them credit. It’s unnecessary: If these industries are really risky, banks would not want their business. The real purpose of Operation Choke Point is to target industries that are out of favor…, among them: Coin dealers, money-transfer networks and payday lenders. Sales of ammunition and firearms (Second Amendment, anyone?) and fireworks (legal in some states). …Other legal goods and services such as surveillance equipment, telemarketing, tobacco and dating services. …Denying credit hampers an industry’s growth. Eliminating Operation Choke Point would encourage growth. It costs nothing. And someday it may reduce enforcement spending.

And Professor Charles Calomiris from Columbia University echoed those views a few weeks later.

Imagine you have a thriving business and one morning you get a call from your banker explaining that he can no longer service your accounts. …That’s what happened to many business owners as the result of an Obama administration policy called Operation Choke Point. In 2011 the Federal Deposit Insurance Corp. warned banks of heightened regulatory risks from doing business with certain merchants. A total of 30 undesirable merchant categories were affected…the FDIC explained that banks with such clients were putting themselves at risk of “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.” Other FDIC regulatory guidelines pointed to difficulties banks with high “reputation risk” could have receiving approval for acquisitions.

Keep in mind, by the way, that Congress didn’t pass a law mandating discrimination against and harassment of these merchants.

The Washington bureaucracy, along with ideologues in the Obama Administration, simply decided to impose an onerous new policy.

In effect, the paper pushers were telling financial institutions “nice business, shame if anything happened to it.”

But at least when mobsters engage in that kind of a shakedown, there’s no illusion about what’s happening.

Professor Calomiris explained that this regulatory initiative of the Obama Administration made no sense economically.

It is rather comical that regulators would use the excuse of regulatory risk management to punish banks. Banks are in the business of gauging risk and have every incentive to avoid customer relationships that could hurt their reputation. Regulators, on the other hand, have shown themselves unwilling or unable to acknowledge risk, the most obvious example being the subprime mortgage crisis in 2008.

And he also explained why Operation Choke Point was such a reprehensible violation of the rule of law.

The FDIC’s regulators never engaged in formal rule-making or announced penalties for banks serving undesirable clients. Such rule-making likely would have been defeated in congressional debate or under the Administrative Procedures Act. Instead, regulators chose to rely on informal decrees called “guidance.” …Financial regulators find regulatory guidance particularly expedient because it spares them the burden of soliciting comments, holding hearings, defining violations, setting forth procedures for ascertaining violations, and defining penalties for ignoring the guidance. Regulators prefer this veil of secrecy because it maximizes their discretionary power and places the unpredictable and discriminatory costs on banks and their customers.

Well, we have some good news.

The Trump Administration has just reversed this terrible Obama policy. Politico has some of the details.

The Justice Department has committed to ending a controversial Obama-era program that discourages banks from doing business with a range of companies, from payday lenders to gun retailers. The move hands a big victory to Republican lawmakers who charged that the initiative — dubbed “Operation Choke Point” — was hurting legitimate businesses. …House Judiciary Chairman Bob Goodlatte…and House Financial Services Chairman Jeb Hensarling (R-Texas), along with Reps. Tom Marino (R-Pa.), Blaine Luetkemeyer (R-Mo.) and Darrell Issa (R-Calif.) praised the department in a joint statement. “We applaud the Trump Justice Department for decisively ending Operation Choke Point,” they said. “The Obama Administration created this ill-advised program to suffocate legitimate businesses to which it was ideologically opposed by intimidating financial institutions into denying banking services to those businesses.”

And Eric Boehm of Reason is pleased by this development.

A financial dragnet that ensnared porn stars, gun dealers, payday lenders, and other politically disfavored small businesses has been shut down. Operation Choke Point launched in 2012… It quickly morphed into a questionably constitutional attack on a wide range of entrepreneurs who found their assets frozen or their bank accounts closed because they were considered “high-risk” for fraud. …Assistant Attorney General Stephen Boyd called Operation Choke Point “a misguided initiative” and confirmed that DOJ was closing those investigations… “Law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,” Boyd wrote. …The repudiation of Operation Choke Point is a welcome development, says Walter Olson, a senior fellow at the libertarian Cato Institute.

shared a video last year that explained Operation Choke Point in just one minute. But that just scratched the surface, so here’s a video from Reason that explains in greater detail why Operation Choke Point was so repulsive.

Kudos to the Trump Administration for reversing this awful policy.

But hopefully this is just the first step. Regulators are still squeezing financial institutions in an attempt to discourage them from doing business with low-tax jurisdictions. This policy of “de-risking” exists even though so-called tax havens generally have tighter laws against dirty money than the United States.

Trump should put an end to that misguided policy.

Ultimately, what’s really needed is a complete rethink of money-laundering laws and regulations.

Amazingly, some politicians actually want to make these laws even worse. Ideally, Trump will move completely in the other direction.

P.S. While it’s good that Trump has reversed Operation Choke Point, his Administration has moved in the wrong direction on civil forfeiture policy. One step forward and one step backwards is not a recipe for more growth and prosperity.

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