Originally published by Townhall.com on March 23, 2017.
Republicans largely owe their current electoral dominance to the failed promises of Obamacare. President Obama promised lower costs and better access to care from his signature initiative, but the massive federal boondoggle that Democrats rammed through Congress provided exactly the opposite. Despite last-minute improvement to their bill, Republicans appear poised to repeat his mistake.
House Republicans plan to vote Thursday on the American Health Care Act (AHCA). Instead of the straight Obamacare repeal that Republicans passed in the last Congress, AHCA would partially repeal Obamacare and replace it with provisions only slightly less bad.
Instead of an individual mandate penalty, the Republican plan will allow insurers to charge an extra 30 percent for one year for those who wait until they are sick to purchase coverage. Instead of subsidies, Republicans offer refundable tax credits. It’s the same centralized approach with different names.
Missing from the AHCA are the free market reforms necessary to finally bring health care costs under control. Instead, the bill maintains the most destructive regulations contained within Obamacare, like its “community rating” price controls. These force insurers to charge healthy and sick people within a certain age range the same premium, and when combined with “guaranteed issue” requirements is what guarantees those with pre-existing conditions can acquire new coverage. It also only allows the difference in premiums between young and old to vary by a ratio of 3:1.
Community rating controls have made premiums very expensive for the healthy, causing many to avoid coverage. That, in turn, causes prices to go up and more healthy people to leave the market. This is known as a “death spiral.”
AHCA keeps the price controls, with a small expansion of the age-rating bands from 3:1 to 5:1. That’s not enough to reverse the cost increases resulting from community rating and other government mandates, which is why Republicans want to create a new federal handout in the form of refundable tax credit for those who purchase insurance. Ironically, there’s no functional difference between the credits and the individual mandate penalties that Republicans vociferously complained about under Obamacare. In either case, not purchasing insurance means a higher tax bill.
What the health care system needs is more market competition, not new types of government control. There would be little need for Obamacare’s subsidies or AHCA’s tax credits if prices were lower to begin with, and that can only happen by getting the government out of the way.
The percentage of health care spending that is paid for directly by consumers is about 10 percent, an all-time low. Instead, most medical payments are made by third-parties, whether it be insurance companies or the government. The result is a system that lacks price transparency and competition, leading to waste, inefficiency, and ever increasing prices.
It’s no coincide that areas in which consumers exercise more control, like cosmetic or LASIK surgeries, see much flatter price trajectories. Real reform would require abandoning the government mandates and tax distortions which have morphed health insurance—intended to hedge against catastrophic financial loss—into a form of medical prepayment. Insofar as Republicans might fear and seek to mitigate a potential electoral backlash, assistance could be offered to those with limited means—or who have certain pre-existing condititions—in ways that don’t distort the market price system, such as through subsidized health savings accounts. But since costs will be lower, and insurance cheaper as it won’t be forced to do everything regardless of consumer need, most will actually be able to afford health care on their own.
Republican leadership has attempted to bring wayward conservatives on board with the AHCA with some last minute modifications to the bill. In particular, they have addressed some of the complaints about its failure to address Obamacare’s Medicaid expansion by block-granting the program and leaving it up to states to find the most cost-effective ways to cover those in need. It’s a good improvement, but it is not enough.
Standing in between Republican leadership and a looming disaster is the House Freedom Caucus. Chaired by Congressman Mark Meadows, the group’s roughly 40 members have the power to prevent passage of AHCA in the House, and most have indicated strong opposition to the legislation.
To distract from its shortcomings, Republican leadership touts the tax cutting aspects of the AHCA. There’s no doubt that Americans would benefit from eliminating Obamacare’s many tax hikes. But if the plan fails to solve the fundamental issues plaguing the nation’s healthcare system, Republicans will be setting themselves up for an early exit from power.
Worse than that, they would be giving Democrats all the opportunity they need to enact something even worse than Obamacare like government-controlled single payer. The Freedom Caucus taking a stand for principle over the temptation to pass anything in an attempt to claim fulfillment—albeit in only the most superficial ways—of a key Republican campaign promise to repeal Obamacare, might be all that stands in the way of that eventual outcome.
The annual budget for our bloated and sclerotic federal government consumes about $4 trillion of America’s economic output, yet President Trump so far has not proposed to reduce that overall spending burden by even one penny.
A few programs are targeted for cuts, to be sure, but I explained last week, that “taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.” More worrisome, I also pointed out that his budget proposal is “silent on the very important issues of tax reform and entitlement reform.”
All things considered, you would think that statists, special interest groups, and other denizens of the D.C. swamp would be happy with Trump’s timid budget.
Not exactly. There’s so much wailing and screaming about “savage” and “draconian” budget cuts, you would think the ghost of Ronald Reagan is haunting Washington.
Much of this whining is kabuki theater and political posturing as various beneficiaries (including the bureaucrats, lobbyists, contractors, and other insiders) make lots of noise as part of their never-ending campaigns to get ever-larger slices of the budget pie.
And nothing demonstrates the vapidity of this process more than the imbroglio over the Meals on Wheels program. Based on news reports, the immediate assumption is that Trump’s budget is going to starve needy seniors by ending delivery of meals.
Here’s how CNN characterized the proposal.
The preliminary outline for President Donald Trump’s 2018 budget could slash some funding for a program that provides meals for older, impoverished Americans.
“Slash”? That sounds ominous. Sounds like a cut of 40 percent, 50 percent, or 60 percent!
And a flack for Meals on Wheels added her two cents, painting a picture of doom and despair for hungry seniors.
…spokeswoman Jenny Bertolette said, “It is difficult to imagine a scenario in which they will not be significantly and negatively impacted if the President’s budget were enacted.”
Oh no, “significantly and negatively impacted” sounds brutal. How many tens of thousands of seniors will starve?
Only near the bottom of the story do we learn that this is all nonsense. All that Trump proposed, as part of his plan to shift some spending from the domestic budget to the defense budget, is to shut down a pork-riddled and scandal-plaguedprogram at the Department of Housing Development. However, because a tiny fraction of community development block grants get used for Meals on Wheels, interest groups and leftist journalists decided to concoct a story about hungry old people.
In reality, the national office (appropriately) gets almost all its money from private donations and almost all the subsidies to the local branches are from a separate program.
About 3% of the budget for Meals on Wheels’ national office comes from government grants (84% comes from individual contributions and grants from corporations and foundations)… The Older Americans Act, as a function of the US Department of Health and Human Services, …covers 35% of the costs for the visits, safety checks and meals that the local agencies dole out to 2.4 million senior citizens, Bertolette said.
In other words, CNN engaged in what is now known as fake news, publishing a story designed to advance an agenda rather than to inform readers.
My colleague Walter Olson wrote a very apt summary for National Review.
The story that Trump’s budget would kill the Meals on Wheels program was too good to check. But it was false. …it wouldn’t have taken long for reporters to find and provide some needed context to the relationship between federal block grant programs, specifically Community Development Block Grants (CDBG), and the popular Meals on Wheels program. …From Thursday’s conversation in the press, it was easy to assume that block grant programs — CDBG and similar block grants for community services and social services — are the main source of federal funding for Meals on Wheels. Not so.
And if you want some accurate journalism, the editorial page of Investor’s Business Daily has a superb explanation.
What Trump’s budget does propose is cutting is the corruption-prone Community Development Block Grant program, run out of Housing and Urban Development. Some, but not all, state and local governments use a tiny portion of that grant money, at their own discretion, to “augment funding for Meals on Wheels,” according to the statement. …So what’s really going on? As Meals on Wheels America explained, some Community Development Block Grant money does end up going to some of the local Meals on Wheels programs. But it’s a small amount. HUD’s own website shows that just 1% of CDBG grant money goes to the broad category of “senior services.” And 0.17% goes to “food banks.” …All of this information was easily available to anyone reporting on this story, or anyone commenting on it, which would have prevented the false claims about the Meals on Wheels program from spreading in the first place. But why bother reporting facts when you can make up a story…?
The IBD editorial then shifted to what should be the real lesson from this make-believe controversy
…this fake budget-cutting story ended up revealing how programs like Meals on Wheels can survive without federal help. As soon as the story started to spread, donations began pouring into Meals on Wheels. In two days, the charity got more than $100,000 in donations — 50 times more than they’d normally receive. Clearly, individuals are ready, willing and eager to support this program once they perceive a need. Isn’t this how charity is supposed to work, with people donating their own time, money and resources to causes they feel are important, rather than sitting back and expecting the federal government to do it for them?
At the risk of being flippant, Libertarian Jesus would approve that message.
But to be more serious, IBD raises an important point that deserves some attention. Some Republicans think the appropriate response to CNN‘s demagoguery is to point out that Meals on Wheels gets the overwhelming share of its federal subsidies from the Older Americans Act rather than CDBG.
In reality, the correct lesson is that the federal government shouldn’t be subsidizing Meals on Wheels. Or any redistribution program that purports to help people on the state and local level.
There’s a constitutional argument against federal involvement. There’s a fiscal argument against federal involvement. There’s a diversity argument against federal involvement. And there’s a demographic argument against federal involvement.
But there’s also a common-sense argument against federal involvement. And that gives me an excuse to introduce my Third Theorem of Government. Simply stated, it’s a recipe for waste to launder money through Washington.
P.P.S. I started today’s column by noting that Trump hasn’t proposed “even one penny” of lower spending. That’s disappointing, of course, but the news is not all bad. The President has endorsed the Obamacare reform legislation in the House of Representatives, and while that legislation does not solve the real problem in our nation’s health sector, at least it does lower the burden of taxes and spending.
In part, because there would be no distorting tax breaks that lure people into making decisions based on tax considerations rather than economic merit.
But we’d also enjoy more growth because there would be no more double taxation. Under a flat tax, the death tax is abolished, the capital gains tax is abolished, there’s no double taxation on savings, the second layer of tax on dividends is eliminated, and depreciation is replaced by expensing.
In the wonky jargon of public finance economists, this means we would have a “consumption-based” system, which is just another way of saying that income would be taxed only one time. No longer would the internal revenue code discourage capital formation by imposing a higher effective tax rate on income that is saved and invested (compared to the tax rate on income that is consumed).
Indeed, this is the feature of tax reform that probably generates the most growth. As I explain in this video on capital gains taxation, all economic theories – even Marxism and socialism – agree that capital formation is a key to long-run prosperity.
But that doesn’t mean there’s an easy path for reform. The Hill reports on some of the conflicts that may sabotage legislation this year.
The fight over a border-adjustment tax isn’t the only challenge for Republicans in their push for tax reform. …Notably, some business groups have criticized the proposal to do away with the deduction for businesses’ net interest expenses. …the blueprint does not specifically discuss how the carried interest that fund managers receive would be taxed. Under current law, carried interest is taxed as capital gains, rather than at the higher rates for ordinary income. During the presidential race, Trump repeatedly said he wanted to eliminate the carried interest tax break, and Office of Management and Budget Director Mick Mulvaney told CNN on Sunday that Trump still plans to do this. Many Democrats also want carried interest to be taxed as ordinary income.
The border-adjustment tax is probably the biggest threat to tax reform, but the debate over “carried interest” also could be a problem since Trump endorsed a higher tax burden on this type of capital gain during the campaign.
Here are some excerpts from a recent news report.
Donald Trump vowed to stick up for Main Street over Wall Street — that line helped get him elected. But the new president has already hit a roadblock, with fellow Republicans who control Congress balking at Trump’s pledge to close a loophole that allows hedge fund and private equity managers to pay lower taxes on investment management fees. …The White House declined to comment on the status of negotiations between Trump and congressional Republicans over the carried-interest provision. …U.S. Rep. Jim Himes, D-Conn., a House Financial Services Committee member and former Goldman Sachs executive, said there is chaos on the tax reform front. “That’s on the list of dozens of things where there is disagreement between the president and the Republican majority in Congress,” Himes said.
Regarding the specific debate over carried interest, I’ve already explained why I prefer current law over Trump’s proposal.
Today I want to focus on the “story behind the story.” One of my main concerns is that the fight over the tax treatment of carried interest is merely a proxy for a larger campaign to increase the tax burden on all capital gains.
For instance, the ranking Democrat on the Senate Finance Committee openly uses the issue of carried interest as a wedge to advocate a huge increase in the overall tax rate on capital gains.
Of course, when you talk about the carried interest loophole, you’re talking about capital gains. And when you talk about capital gains, you’re talking about the biggest tax shelter of all – the one hiding in plain sight. Today the capital gains tax rate is 23.8 percent. …treat[ing] income from wages and wealth the same way. In my view, that’s a formula that ought to be repeated.
The statists at the Organization for Economic Cooperation and Development also advocate higher taxes on carried interest as part of a broader campaign for higher capital gains taxes.
Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options… Examining ways to tax capital income at the personal level at slightly progressive rates, and align top capital and labour income tax rates.
It would be an overstatement to say that everyone who wants higher taxes on carried interest wants higher taxes on all forms of capital gains. But it is accurate to assert that every advocate of higher taxes on capital gains wants higher taxes on carried interest.
For those wanting more information, here’s the Center for Freedom and Prosperity’s video on carried interest.
Last but not least, wonky readers may be interested in learning that carried interest partnerships can be traced all the way back to medieval Venice.
Start-up merchants needed investors, and investors needed some incentive to finance the merchants. For the investor, there was the risk of their investment literally sailing out of the harbor never to be seen again. The Venetian government solved this problem by creating one of the first examples of a joint stock company, the “colleganza.” The colleganza was a contract between the investor and the merchant willing to do the travel. The investor put up the money to buy the goods and hire the ship, and the merchant made the trip to sell the goods and then buy new foreign goods that could then be brought back and sold to Venetians. Profits were then split between the merchant and investor according to the agreements in the contract.
Fortunately for the merchants and investors of that era, neither income taxes nor capital gains taxes existed.
P.S. Italy didn’t have any sort of permanent income tax until 1864. Indeed, most modern nations didn’t impose these punitive levies until the late 1800s and early 1900s. The United States managed to hold out until that awful dreary day in 1913. It’s worth noting that the U.S. and other nations managed to become rich and prosperous prior to the adoption of those income taxes. And it’s also worth noting that the rapid growth of the 18th century occurred when the burden of government spending was very modest and there was almost no redistribution spending.
P.P.S. Now that we have income taxes (and the bigger governments enabled by those levies), the only silver lining is that governments have compensated for bad fiscal policy with better policy in other areas.
Now let’s look at what’s happening in Asia.
The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.
Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.
More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.
Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.
But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.
More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.
Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.
I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.
And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).
To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.
Especially automatic increases in the retirement age based on life expectancy.
One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.
Here’s a table showing the AAMs that already exist.
Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”
This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.
It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.
…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.
From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.
The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.
Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix.
For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.
But I’m nitpicking.
Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.
By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.
To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.
That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.
That idea periodically gets floated in the United States. Here’s some of what I wrotein 2011.
Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.
I made a related observation about this approach back in 2012.
…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.
P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.
Center for Freedom and Prosperity
For Immediate Release
Tuesday, March 21, 2017
Coalition Letter to Congress: Repeal FATCA
(Washington, D.C., Tuesday, March 21, 2017) A coalition of 23 taxpayer protection and grassroots organizations sent a letter today urging Congressional leadership to include repeal of the Foreign Account Tax Compliance Act (FATCA) as part of comprehensive tax reform. Co-authored by the Center for Freedom and Prosperity and the Campaign to Repeal FATCA, the letter highlights the path of destruction that FATCA has carved through the international financial sector.
Link to Repeal FATCA letter:
The letter makes 5 key points: 1) FATCA fails in its primary goal to catch wealthy tax cheats; 2) It ensnares innocent Americans with excessive reporting requirements and draconian penalties for the slightest oversights; 3) It makes U.S. citizens living and working abroad toxic assets in the eyes of both financial institutions and employers; 4) Its compliance costs far outstrip the revenue it collects; and 5) It encourages other nations and international organizations to pursue aggressive tax grabs that threaten American businesses and the global economy.
Several signers of the letter and other tax experts offered the following comments on FATCA:
CF&P President Andrew Quinlan commented, “It’s time to turn the page on this failed experiment in global financial surveillance. Congress should acknowledge the overwhelming evidence which shows that low, pro-growth tax rates and a simplified tax code are the proven ways to encourage greater tax compliance. America, and the world, will be better off without FATCA.”
Dan Mitchell, a Cato Institute Senior Fellow, noted, “FATCA arguably is the worst provision in the entire tax code, undermining U.S. competitiveness and setting the stage for foreign attempts to tax activity in the United States.”
Grover Norquist, President of Americans for Tax Reform, said, “FATCA is the Alternative Minimum Tax (AMT) for Americans overseas–an intrusive, complicated, painful and unfair tax regime designed to be massive overkill in hunting for coins between the cushions. We are finally abolishing AMT–after 48 years–in Trump’s tax reform package. We should put FATCA to sleep at the same time.”
Nigel Green, CEO of deVere Group, said, “Every government has a right to see its laws enforced and tax evasion investigated and prosecuted. That’s not what FATCA does, though. It has punished everybody, innocent as well as guilty, and consumers and taxpayers worldwide. It’s a windfall for the compliance industry and no one else. Repeal FATCA!”
Pete Sepp, President of the National Taxpayers Union, said, “Comprehensive tax reform legislation is critical not only for what it enacts, but also for what it repeals. One item that should be a top priority on the repeal agenda is FATCA, an uneconomic, unadministrable, and unfair law. Our people and businesses abroad are being increasingly harassed by other countries’ ravenous revenue collectors, and FATCA only provides political fodder for foreign tax agencies to lean harder on those Americans. But even without this factor, FATCA would be problematic for our competitive position abroad by freezing U.S. small businesses out of banking and financial resources overseas. FATCA is a failure, and tax reform can put an end to this misery.”
David Williams, President of the Taxpayers Protection Alliance, said, “Repealing FATCA is critical to preserving the financial privacy of U.S. citizens, which we’ve seen eroded by federal agencies like the Internal Revenue Service. The repeal of FATCA will also help to preserve and strengthen the financial freedoms and choices of all Americans.
Brian Garst, Director of Policy and Communications for CF&P, added, “America ought to be ashamed for inflicting FATCA upon the world. The only respectable option now is to repeal FATCA and beg forgiveness.”
Representatives of the following 23 organizations signed the coalition letter:
Center for Freedom and Prosperity; Campaign to Repeal FATCA; Americans for Tax Reform; National Taxpayers Union; American Commitment; Taxpayers Protection Alliance; Competitive Enterprise Institute; Frontiers of Freedom; R Street Institute; 60 Plus Association; The Market Institute; FreedomWorks; Center for Individual Freedom; Sovereign Society Freedom Alliance; Institute for Liberty; Institute for Policy Innovation; The National Tax Limitation Committee; Americans for Limited Government; Citizen Outreach; National Center for Policy Analysis; Campaign for Liberty; Jeffersonian Project; Small Business and Entrepreneurship Council
And it’s a straightforward exercise (at least conceptually) to argue that regulations should pass some sort of cost-benefit test.
What’s not so easy, however, is getting folks to grasp the overall impact of red tape on growth and living standards. After all, most normal people don’t want to learn about wonky concepts such as the production possibilities frontier. And I also doubt there are many people who are interested in the technical challenge of how to measure the aggregate impact of thousand of rules and restrictions.
But these issues matter. A lot. According to Economic Freedom or the World, the regulatory burden is just as important as the fiscal burden when determining a nation’s competitiveness and economic outlook. Simply stated, our living standards are determined by productivity, which is determined by how wisely labor and capital are combined to generate output.
With this in mind, a new study from the European Central Bank helpfully examines the degree to which regulation hinders the efficient allocation of those factors of production.
The focus of this paper is on the…misallocation of labour and capital in eight macro-sectors (which include manufacturing and services) for five large euro-area countries (Belgium, France, Germany, Italy and Spain) during the period 2002-2012. …The paper then investigates the potential determinants of changes in input misallocation by looking at traditional structural determinants, namely restrictive product and labour market regulations. …regulations that shelter firms from competition might result in poor allocation of resources because low productive firms will keep operating instead of downsizing or exiting. Similarly, stringent labour market regulation, in the form of high hiring and firing costs, might also thwart resource allocation.
For those who are interested in such things, the study looks at what drives improvements in productivity. Is it firms becoming more efficient because of competition, or is “reallocation” as weak companies vanish and dynamic new firms emerge?
The short answer, as illustrated by the table, is that both play a role.
Here are some of the issues considered in the ECB study.
In our full empirical specification, as well as initial conditions in misallocation, …we first examine the role of two structural factors, i.e. changes in both product and labour market regulations. In the presence of high barriers to entry, unproductive firms are able to survive and therefore retain productive resources which are not shifted to the most efficient firms in a given industry (Schiantarelli 2008; Restuccia and Rogerson 2013; Andrews and Cingano 2014). Furthermore, more stringent employment regulation might prevent firms from adjusting their workforce to optimal levels, therefore hampering the efficient reallocation of workers across firms (Haltiwanger, Scarpetta and Schweizer 2014; Bartelsman, Gautier and de Wind 2011). Moreover, in the labour misallocation regressions we also include an interaction term between the changes in product and labour market regulations.
Here are their estimates of both product market regulation and labor market regulation for selected nations.
It’s good to see that there’s a slight trend toward less regulation of product markets. A few nations have modestly reduced regulation of labor markets, but the most interesting observation is that this is an area where the United States has a major advantage. Only Germany is even close to America in allowing markets to operate with a high level of freedom.
Having examined the issues covered by the study, let’s now consider the results.
All discussed capital misallocation results are robust to the inclusion of market distortions, i.e. to regulatory and credit constraints. …The general decline in PMR over the period considered dampened capital misallocation dynamics… Stricter product market regulation is found to have led to higher labour misallocation growth. But we also find that more stringent labour market regulations positively correlate with labour misallocation growth, particularly in sectors characterized by more stringent product market regulations. Thus, these results support the idea that the positive effect of the tightness of PMR on labour misallocation growth is amplified if also EPL becomes more restrictive. Seen from an inverse perspective, the gains in the allocative efficiency of labour are larger if both kinds of regulation are jointly loosened.
Here’s the bottom line.
Our results therefore suggest that in order to foster a more efficient within-sector allocation of inputs across firms structural reforms, such as those lowering entry barriers for firms, removing size-contingent regulations that prevent firms from reaching their optimal size and enhancing bankruptcy regulations that facilitate the exit of unproductive firms, would be warranted. The loosening of PMR and EPL in recent years in some countries has proven to dampen misallocation dynamics, yet there is still room for further reductions, as shown for example when comparing the level of regulation with that in the U.S.
Unfortunately, I don’t expect that this study will have any sort of impact on the debate. The people who already understand the negative impact of regulation now have more evidence about the value of unfettered markets and creative destruction.
But the politicians and interest groups won’t care. They are interested in accumulating power and obtaining unearned benefits. To the extent that they would even bother to read the study, they would conclude that they should fight extra hard to preserve the status quo since they will realize that there are fewer favors to distribute when genuine capitalism is allowed to operate.
An essential part of a free market economy is the price system. The competitive pricing of goods and services transmits information to producers and consumers and creates incentives for the efficient allocation of resources. Just as the circulatory system or nervous system enables our bodies to function.
This is why “paycheck fairness” proposals to address the supposed “gender pay gap” are so risky for prosperity. It’s no exaggeration to say that these “comparable worth” schemes are designed to empower bureaucrats and politicians to override market forces.
What makes all this especially frustrating is there is no systemic discrimination against females in the workplace.
One of the leading scholars in this field is Christina Hoff Summers of the American Enterprise Institute. She has dissected the data and demonstrated that there is no pay gap once factors such as occupational choice and work hours are added to the equation. And now she has a must-watch video on the subject from Prager University.
All of her data is very compelling, but the most persuasive part of the video is at the beginning when she asks why profit-seeking businesses don’t fire men and hire women if there really is a wage gap.
Statists might respond that businesses are part of some evil patriarchy and that there’s some sort of oligopolistic conspiracy to forego income in order to oppress females. But if that’s what they really think, why don’t these leftists start their own businesses and take advantage of the supposed pay gap? Not only would they earn large profits, but they would also bankrupt existing firms that ostensibly are engaging in discrimination.
Sounds like a win-win, right?
And if they respond by saying that they don’t happen to have business skills because they chose to study more enlightened topics while in school, then ask them why progressive companies from France or Sweden aren’t entering the American market and earning lots of business?
Or are they part of the patriarchal conspiracy as well? Like almost all theories based on conspiracies, this is nonsense.
Let’s close with some wisdom on this issue from one of my colleagues at the Cato Institute. Vanessa Brown Calder cites a considerable amount of data on occupational choice, but also focuses on quality-of-life and family issues.
…women are considerably more likely to absorb more care-taker responsibilities within their families, and these roles demand associated career trade-offs. Sheryl Sandberg’s Lean In describes 43% of highly-qualified women with children as leaving their careers or off-ramping for a period of time. And a recent Harvard Business Review report describes women as being more likely than men to make decisions “to accommodate family responsibilities, such as limiting (work-related) travel, choosing a more flexible job, slowing down the pace of one’s career, making a lateral move, leaving a job, or declining to work toward a promotion.” It’s fair to assume that such interruptions impact long-term wages substantially. In fact, when researchers try to control for these differences, the wage gap virtually disappears. …It’s likely that other, more nuanced but documented differences, like spending fewer hours on paid work per week would explain some of the remaining five percent pay differential.
The philoso-raptor agrees.
P.P.S. Even the Obama-era Council of Economic Advisers had enough integrity to disavow the feminist pay-gap numbers.
All that he’s proposing is to rearrange the allocation of annually appropriated spending (the so-called discretionary outlays).
Here’s a chart from a summary prepared by the Committee for a Responsible Federal Budget. As you can see, the federal Leviathan does not shrink in size.
It’s possible, of course, to applaud this shift from domestic discretionary to defense discretionary. Or to criticize the reallocation. But nobody can pretend the net result is smaller government.
My view, for what it’s worth, is that we should accept all the domestic reductions but not boost the defense budget (the U.S. already has a very large military budget compared to potential adversaries).
And speaking of domestic reductions, the main focus of today’s column is to highlight one of my favorite program terminations in Trump’s plan (yesterday’s example was the National Endowment for the Arts). The President has proposed to eliminate all taxpayer handouts for the Corporation for Public Broadcasting (CPB), which is the entity that subsidizes National Public Radio (NPR) and the Public Broadcasting Service (PBS).
This is music to my ears. As I wrote more than six years ago,
Even if we had a giant budget surplus, federal subsidies for the Corporation for Public Broadcasting would be misguided and improper. In an environment where excessive federal spending is strangling growth and threatening the nation’s solvency, the argument to defund PBS and NPR is even stronger…the fact that PBS and NPR have a statist bias is another argument for getting rid of taxpayer subsidies, but that’s barely a blip on my radar screen. It wouldn’t matter if government TV and radio was genuinely fair and balanced. Taxpayers should not subsidize broadcasting of any kind, period.
This should be a slam-dunk issue for congressional Republicans. Even milquetoast GOPers like Mitt Romney have said it’s time for NPR and PBS to be self-supporting.
But the best analysis, as usual, comes from the Cato Institute. Here are some excerpts from a study written by my colleague Trevor Burrus.
Assailed from all sides with allegations of bias, charges of political influence, and threats to defund their operations, public broadcasters have responded with everything from outright denial to personnel changes, but never have they squarely faced the fundamental problem: government-funded media companies are inherently problematic and impossible to reconcile with either the First Amendment or a government of constitutionally limited powers. The Constitution does not give Congress the power to create media companies, and we should heed the Founders’ wisdom on this matter. …before the Corporation for Public Broadcasting was created, nonprofit, noncommercial media stations enjoyed a vibrant existence, remaining free to criticize current policies and exhibit whatever bias they wished. Yet today…, public broadcasting suffers the main downside of public funding—political influence and control—yet enjoys little of the upside—a significant taxpayer contribution that would relieve it of the need to seek corporate underwriting and listener donations. But the limited taxpayer funding also shows that defunding can be relatively painless. Public broadcasting not only can survive on its own, it can thrive—and be free.
And Cato’s David Boaz adds another important point, which is that government-subsidized broadcasting is another odious example (Export-Import Bank, agriculture subsidies, TARP bailout, etc) of how government coercion is used to provide goodies to upper-income people at the expense of those with more modest levels of income.
Public broadcasting subsidizes the rich. A PBS survey shows that its viewers are 44 percent more likely than the average American to make more than $150,000 a year, 57 percent more likely to own a vacation home, and 177 percent more likely to have investments worth more than $150,000. Why should middle-class taxpayers be subsidizing the news and entertainment of the rich?
By the way, these numbers are more than 10 years old, so more recent data surely would show that an ever greater share of fans are part of an economic elite that easily can afford to privately finance PBS programming.
By the way, there already has been some self-privatization, as John Stossel reports in his Reason column
New York ran a photo of Big Bird, or rather a protester dressed as Big Bird, wearing a sign saying “Keep your mitts off me!” What New York doesn’t say is that the picture is three years old, and Big Bird’s employer, “Sesame Street,” no longer gets government funds. We confronted the article writer, Eric Levitz. He said, “Big Bird has long functioned as a symbol of public broadcasting … Still, considering Sesame Street‘s switch to HBO, I concede that some could have been misled.” You bet. Big Bird doesn’t need government help. Sesame Street is so rich that it paid one of its performers more than $800,000.
Last but not least, here’s a video from Reason that looks at how government-run broadcasting is driven by the interests of the stations rather than consumers.
P.S. Big Bird apparently wasn’t a big fan of Barack Obama, at least according to this bit of satire.
President Trump has released his budget blueprint. From a big picture perspective, the size of government won’t change. He’s kicking the can down the road on entitlements, which is obviously disappointing for people who can add and subtract. He does cut some domestic programs, but taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.
But I’m going to be optimistic today (the glass isn’t 9/10ths empty, it’s 1/10th full). Let’s look at the good parts of his budget.
First, some background. Redistribution is bad public policy since it simultaneously encourages inactivity and dependency among recipients and discourages activity and initiative by taxpayers.
That’s the standard argument against conventional handouts such as welfare, food stamps, Medicaid, EITC, and housing subsidies. The plethora of such programs in Washington is bad news for both taxpayers and poor people.
But there’s another type of redistribution that’s far worse, and that’s when politicians use the coercive power of government to take money from lower-income people in order to provide goodies for upper-income people.
This is why I am so unrelentingly hostile to programs like the Export-Import Bank, agriculture subsidies, so-called disaster relief, green-energy scams like Solyndra, and Fannie Mae/Freddie Mac subsidies.
Indeed, I even developed a “Bleeding Heart Rule” back in 2012 to describe how such giveaways are morally reprehensible.
Now let’s add another program to the list.
The National Endowment of the Arts is a federal program that subsidizes art, with upper-income people reaping the vast majority of the benefits.
That’s the bad news. The good news is that President Trump is proposing to defund this elitist bureaucracy.
Before explaining why the program should be abolished, let’s look at the case for federal involvement. This is how the NEA describes its mission.
The National Endowment for the Arts is an independent federal agency that funds, promotes, and strengthens the creative capacity of our communities by providing all Americans with diverse opportunities for arts participation.
That sounds noble. But are we really supposed to believe that our communities won’t have any creative capacity without some handouts from the federal government to museums and other politically connected organizations that primarily serve rich people?
And for those of us who have this old-fashioned notion that the federal government should be constrained by the Constitution, it’s also worth noting that art subsidies are not one of the enumerated powers in Article 1, Section 8.
Here is the pro-NEA argument from a column in the New York Times.
Sadly, it has become clear that the N.E.A. is, once again, under threat of being abolished… The N.E.A.’s budget is comparatively minuscule — $148 million last year, or 0.004 percent of the total federal budget — while the arts sector it supports employs millions of Americans and generates billions each year in revenue and tax dollars. …the N.E.A., founded in 1965, serves three critical functions: It promotes the arts; it distributes and stimulates funding; and it administers a program that minimizes the costs of insuring arts exhibitions through indemnity agreements backed by the government. …The grants, of course, receive the most attention, if not as much as they deserve. Thousands are distributed in all 50 states, reaching every congressional district, urban and rural, rich and poor. …They support live theater for schools; music, dance and jazz festivals; poetry and literary events; arts programs for war veterans; and, of course, museum exhibitions.
This actually makes my point. The NEA spends $148 million per year, which is just a tiny fraction of what is spent by the private sector.
In other words, we had museums, plays, music festivals, and art programs before the NEA was created and all of those activities will exist if the NEA is abolished.
All that will change is that politicians and bureaucrats won’t be doling out special grants to select institutions and insiders that have figured out how the manipulate the system.
The column also has some absurd hyperbole.
I fear that this current call to abolish the N.E.A. is the beginning of a new assault on artistic activity. Arts and cultural programming challenges, provokes and entertains; it enhances our lives. Eliminating the N.E.A. would in essence eliminate investment by the American government in the curiosity and intelligence of its citizens.
The author actually wants readers to conclude that a failure to subsidize is somehow akin to an assault on artistic creativity. Oh, and don’t forget that our curiosity and intelligence somehow will suffer.
Here’s a story about an interest group that wants to keep the gravy train on the tracks.
The heads of five Boston arts museums are pushing back against feared Trump administration cuts to the National Endowment for the Arts and the National Endowment for the Humanities. The museums’ directors say in an open letter that the agencies…help foster knowledge of the arts, create cultural exchanges, generate jobs and tourism, and educate young people. They say NEA and NEH funding has been instrumental at each of the Boston museums.
My immediate reaction is that there are lots of rich people and well-heeled companies in Boston. Surely NEA handouts can be replaced if these museum directors are remotely competent.
I’ll also take a wild guess that the directors of these five museums earn an average of more than $500,000 per year. Perhaps it’s not right for them to be using tax dollars to be part of the top 1 percent. Heck, trimming their own salaries might be an easy place for them to get some cost savings.
But enough from me. Let’s look at what some others have written about the NEA. Let’s start with George Will’s assessment.
…attempting to abolish the NEA is a fight worth having, never mind the certain futility of the fight. …Government breeds advocacy groups that lobby it to do what it wants to do anyway — expand what it is doing. The myriad entities with financial interests in preserving the NEA cloyingly call themselves the “arts community,” a clever branding that other grasping factions should emulate… The “arts community” has its pitter-patter down pat. The rhetorical cotton candy — sugary, jargon-clotted arts gush — asserts that the arts nurture “civically valuable dispositions” and a sense of “community and connectedness.” And, of course, “diversity” and “self-esteem.” Americans supposedly suffer from a scarcity of both. …the NEA’s effects are regressive, funding programs that are…“generally enjoyed by people of higher income levels, making them a wealth transfer from poorer to wealthier.” …Americans’ voluntary contributions to arts organizations (“arts/culture/humanities” institutions reaped $17 billion in 2015) dwarf the NEA’s subventions, which would be replaced if those who actually use the organizations — many of them supported by state- and local-government arts councils — are as enthusiastic about them as they claim to be. The idea that the arts will wither away if the NEA goes away is risible.
Now let’s hear from members of the “arts community” who understand that art doesn’t require handouts.
We’ll start with Patrick Courrielche, who wrote in the Wall Street Journal about the need to free the arts from federal dependence.
The NEA, created in 1965, has become politically tainted and ill-equipped to handle today’s challenges. Mr. Trump and Congress should ax it as soon as possible. …For the American arts to flourish—and for art to reach all Americans—artists must be able to make a living from their efforts.
And a theater director from Brooklyn explains in the Federalist why the art world will be better off without the NEA.
…as Trump prepares to spike the ball and end the game by axing the NEA, there is reason to be optimistic that this decision will be very good for the arts in America. …Arts institutions, which receive the bulwark of NEA funding, are failing badly at reaching new audiences, and losing ground. This is a direct result of the perverse market incentives our nonprofit arts system creates… As the artistic director of an unsubsidized theater company in New York City for more than a decade, I had to compete in a closed marketplace, where wealthy gatekeepers and the government rather than ticket sales pay the bills. …The industry receives more free money than it did a decade ago, and has fewer attendees. That is a broken system by any estimation. …Taking away free government money for the arts won’t make art disappear. After all, art is older than government. It will force artists and arts organizations to finally come to terms with their market realities. Audiences are better than experts at deciding what art is good or important. If a piece of art is so good that nobody to wants to pay for it, maybe it isn’t all that good. …In the American tradition, vaudeville, jazz, standup comedy, and many other art forms were created and grew within the free market, free from government assistance. Under this system there was a tremendous appetite for high art among Americans… President Trump is wise to get the government out of the art game, and all of us will be better off for his decision.
Here’s another artist, writing for PJ Media, about the benefits of ending federal handouts.
For over a decade as a theatre artist, my salary was made possible by taxpayers funding the arts. …In hindsight, and after much reflection and a better understanding of economics, I am truly sorry, and ask the taxpayer to forgive my thievery. However, spilled milk can’t be put back into the bottle. That doesn’t mean that we have to keep spilling the milk, though. It’s way past time to defund and shutter the National Endowment for the Arts. … The NEA and their supporters will trot out research about how many dollars are added to local economies due to things like theatres, symphonies, and museums. Of course, as almost every person with at least half a semester of Economics under their belt is screaming, the NEA’s argument embraces the broken window fallacy. The economic stimulus felt and supposedly generated by the arts community comes at the expense of other markets. …The National Endowment for the Arts model artificially props up mostly unwanted markets by using tax dollars that get funneled through inefficient and wasteful bureaucracies. …What it does to the arts is create a marketplace that supports bad art. …Don’t misunderstand, I love art. Like, a lot. And I’m willing to pay for it, as are many other patrons of the arts. If the National Endowment for the Arts were to be defunded and shuttered, it would help clear the deck of bad art that people aren’t willing to pay the real cost for. …art does enhance life, but having your life enhanced at the expense of others is not a right. People don’t have a right to other people’s money just so they can watch a play or visit a museum. …It’s time for the National Endowment for the Art to be defunded and shuttered.
Since I started today’s column with optimism, I’ll be balanced and end with pessimism. I very much doubt that Congress will defund the NEA bureaucracy.
In part, this is a classic example of “public choice.” The recipients of the handouts have strong incentives to mobilize and lobby to keep their goodies. Taxpayers, by contrast, mostly will be disengaged because their share of the cost is trivial.
But it gets worse. The NEA also is very clever. A Senator once told me that it was difficult to vote against the bureaucracy because the “arts community” cleverly placed the wives of major donors on local arts councils. That made it difficult to vote against the NEA, though this Senator did say that making this tough vote would be worthwhile. Yes, there would be some short-term grousing by interest groups (and donor wives) if the agency actually was shut down, but that would quickly dissipate as people saw the arts were able to survive and thrive without sucking at the federal teat.
For the sake of the nation, let’s hope most lawmakers think this way.
The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.
Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected – including me in the column I wrote on this topic last year for Time.
But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.
Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.
But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.
Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.
Here’s how the reform was characterized by an Asian news outlet.
Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.
Here’s how Bloomberg/BNA described the new initiative.
Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.
Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the ghouls at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?
Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.
But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.
There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate. In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.
Though there are other options, as David Schrieberg explained for Forbes.
Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.
If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.
In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.
Originally published by Washington Examiner on March 2, 2017.
With President Trump in office and Republicans in full control of Congress, the prospects for major reforms to the tax code are the highest they’ve been since the Reagan era. Reform might not only mean lower tax burdens on individuals and businesses, but it could also lead to changes in how taxes are filed and collected. One idea Republicans should absolutely avoid is expanding IRS power to prepare tax returns on behalf of taxpayers.
Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., have said the IRS should engage in its own tax preparation services, similar to those offered by private companies, though the IRS would make it available for free. This may sound like a reasonable idea, but it is rife with problems. Chief among them is the huge conflict of interest it would create for the IRS.
The IRS exists to collect tax revenue for the government. It answers to the president and Congress, both of whom are primarily concerned with raising money to fund government programs. In contrast, tax preparers answer to their customers, who are interested in paying as little tax as legally possible.
These two objectives are clearly at odds.
Preparation work done by the IRS is likely to reflect their organizational agenda, not that of taxpayers. This will lead to higher than necessary tax payments on average, making this proposal a de facto tax increase. That’s the opposite of what Congressional Republicans should hope to achieve with this year’s reform effort.
There is also reason to question the ability of the IRS to competently accomplish the task of preparing tax returns. For decades, studies have found that IRS help centers provide an unacceptably high rate of false information when responding to taxpayer questions. The agency also has a history of overcharging interest and other fees.
Private tax preparation companies obviously make mistakes, too. After all, the tax code is extremely complex. But competition for customers gives them strong incentive to invest in getting it right. A preparation program run by the IRS, however, would have no such incentive and would make it harder for private solutions not subsidized by the government to fairly compete.
Finally, it’s vitally important to maintain our system of voluntary tax compliance. Voluntary in this case doesn’t mean that compliance is optional, but rather that the IRS does not directly assess taxes against each individual nor audit every single return. The key benefit of this system is that taxpayers are exposed to the cost of the tax code as they fill out their forms each year. Though there is room for improvement to make the full costs of the tax system more transparent, taxpayers generally see first hand how much taxes are impacting them, which is useful information when entering the voting booth.
While announcing her proposal, Warren suggested that it should be made easier for Americans to file their taxes. On that point, she is entirely correct. However, simplifying the tax code is the best way to do that, not to grant the IRS even more control over individual tax returns. The standing separation between tax collection and compliance services needs to be maintained.
As I wrote yesterday (and have pontificated about on many occasions), the main problem with America’s healthcare system is that various government interventions (Medicare, Medicaid, Obamacare, tax code’s healthcare exclusion, etc) have created a system where people – for all intents and purposes – buy healthcare with other people’s money.
And as Milton Friedman wisely observed, that approach (known as “third-party payer”) undermines normal market incentives for lower costs. Indeed, it’s a green light for ever-higher costs, which is exactly what we see in the parts of the healthcare system where government programs or insurance companies pick up most of the tab.
For what it’s worth, I’m not overflowing with confidence that the new Obamacare-replacement proposal from Republicans will have much impact on the third-party payer crisis. And it probably doesn’t solve some of the Obamacare-specific warts in the system. If you want to get depressed about those issues, read what Michael Cannon, Philip Klein, and Christopher Jacobs have written about the new GOP plan.
But healthcare in America is also a fiscal issue. And if we’re just looking at the impact of the American Health Care Act on the burden of government spending and taxes, I’m a bit more cheerful.
The Congressional Budget Office released its official score on the impact of the legislation. Here’s the excerpt that warmed my heart.
Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion. The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance. … parts of the legislation would repeal or delay many of the changes the ACA made to the Internal Revenue Code… Those with the largest budgetary effects include: • Repealing the surtax on certain high-income taxpayers’ net investment income; • Repealing the increase in the Hospital Insurance payroll tax rate for certain high-income taxpayers; • Repealing the annual fee on health insurance providers; and • Delaying when the excise tax imposed on some health insurance plans with high premiums would go into effect.
And fellow wonks will be interested in this table.
By the way, the “two cheers” in the title may be a bit too generous. After all, there should be full reform of Medicare and Medicaid. Though I suppose some of that can happen (at least Medicaid, hopefully) as part of the regular budget process.
It’s also unfortunate that Republicans are creating a new refundable tax credit (and when you see the term “refundable tax credit,” that generally is a sneaky euphemism for more government spending that is laundered through the tax code, sort of like the EITC) to replace some of the Obamacare subsidies that are being repealed.
So it’s far from ideal.
For those who want to see the glass as being half-full rather than half-empty, however, Ryan Ellis has a very upbeat assessment in a column for Forbes.
It’s a net spending cut of over $1.2 trillion and a net tax cut of nearly $900 billion over the next decade. …the score shows that the AHCA would be a large and permanent tax cut for families and employers….This should lower the tax revenue baseline considerably, perhaps even by half a percentage point of the economy.
I like starving the beast, so I agree this is a good thing.
And I also agree with Ryan that the resulting lower tax burden on dividends and capital gains is very positive. After all, double taxation is probably the most pernicious feature of the internal revenue code.
The most pro-growth tax cut in the bill is the elimination of the so-called “NIIT” or “net investment income tax.” It adds on a 3.8 percentage point surtax on savers and investors. By eliminating NIIT, the bill cuts the capital gains and dividends tax from 23.8 percent in 2017 to 20 percent in 2018 and beyond. …The contribution limit to HSAs is doubled, from nearly $7000 for families today to $14,000 starting in 2018.
But I’ll close with some sad news. If the legislation is approved, that probably means no more Obamacare-related humor. If this makes you sad, you can easily spend about 30 minutes enjoying Obamacare cartoons, videos, and jokes by clicking here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.
I shared last year a matrix to illustrate Milton Friedman’s great insight about the superior results achieved by markets compared to government.
Incentives explain why markets work best. When you spend your own money on yourself (box 1), you try to maximize quality while minimizing cost. And that drives the businesses that are competing for your money to constantly seek more efficient ways of producing better products at better prices.
Governments, by contrast, don’t worry about efficiency or cost (box 4).
Today, though, let’s use Friedman’s matrix to understand the shortcomings of the US healthcare system. Way back in 2009, I opined that the most important chart in healthcare was the one showing that American consumers directly paid for less than 12 percent of health expenditures.
For all intents and purposes, instead of buying healthcare with their own money, they use other people’s money (box 2), a phenomenon known as third-party payer. And because most of their health expenses are financed by either government (thanks to Medicare, Medicaid, Obamacare, etc) or insurance companies (thanks to the tax code’s healthcare exclusion), consumers focus only on quality and don’t care much about cost.
Well, we know healthcare has become more expensive. But do we know why?
The answer, at least in part, is that consumers are directly financing an even smaller percentage of their healthcare expenses. In other words, the distortions caused by third-party payer have become worse.
Here’s the most-recent data from the federal government’s Centers for Medicare and Medicaid Services (specifically the National Health Expenditures by type of service and source of funds, CY 1960-2015). Consumers are now paying only 10.5 percent of healthcare costs.
Now let’s consider the issue of efficiency.
Are we getting better healthcare for all the money that’s being spent?
That doesn’t seem to be the case. Here’s another chart from the archives. It compares per-capita health spending in various nations with average life expectancy.
As you can see, the United States is not getting more bang for the buck. And I very much doubt an updated version of those numbers would show anything different.
Heck, we even have more government spending on healthcare, per capita, than many nations with fully nationalized systems.
So if we’re not buying better health outcomes with all this money, what are we getting?
The blunt answer is bureaucracy and inefficiency. Here are some excerpts I shared years ago from a column by Robert Samuelson.
There are 9 times more clerical workers in health care than there are physicians, and twice as many clerical workers as registered nurses. This investment has not paid off in superior outcomes or better customer service, however. …Every analysis of medical care that has been done highlights the significant waste of resources in providing care. Consider a few examples: one study found that physicians spent on average of 142 hours annually interacting with health plans, at an estimated cost to practices of $68,274 per physician (Casalino et al., 2009). Another study found that 35 percent of nurses’ time in medical/surgical units of hospitals was spent on documentation (Hendrich et al., 2008).
Let’s close with a chart from a left-wing group that wants a single-payer system.
And this chart clearly makes a compelling case that the current approach in the United States is very wasteful.
For what it’s worth, I’m slightly skeptical about the veracity of the numbers. Why, for instance, would there be a sudden explosion of administrators starting about 1990?
But even if the data is overstated, I’m sure the numbers are still bad. We see the same thing in other areas of our economy where government-instigated third-party payer enables waste and featherbedding. Higher education is an especially shocking example.
The real issue is how to solve the problem. Our leftist friends think a single-payer healthcare system would solve the problem, but that would be akin to nationalizing grocery stores to deal with the inefficiencies created by food stamps and agriculture subsidies.
The real answer, as Julie Borowski explains in this video, is unraveling all the government interventions that caused the problem in the first place.
And if you want another video on the topic, here’s a Dutch expert making similar points. I also recommend this clever cartoon video that explains third-party payer. And this Reason video on how costs are lower when actual markets operate.
We have passed the 50th full day of the Trump Presidency.
In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.
Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.
Heck, Trump hasn’t even told us what he really thinks on some of these issues.
In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.
I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.
You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!
In this second interview, which occurred a couple of days later, I start the conversation by fretting about how the border-adjustable tax could kill the chances of getting good tax policy.
In the latter part of the interview, the discussion shifts to infrastructure and I make the rare point that we should copy Europe and get the private sector more involved (it’s generally a good idea to do the opposite of Europe, to be sure, but there are a small handful of other areas – including corporate tax rates, Social Security, and privatized postal services – where various European countries are ahead of us).
The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.
I call it the “First Theorem of Government,” and I think it accurately reflects the real purpose and operation of government. Except I probably should have added lobbyists and contractors. And it goes without saying (though I probably should have said it anyhow) that politicians are the main beneficiaries of this odious racket.
I think this theorem has stood the test of time. It works just as well when Republicans are in charge as it does when Democrats are in charge.
But it doesn’t describe everything.
For instance, Republicans have won landslide elections in recent years by promising that they will repeal Obamacare the moment they’re in charge. Well, now they control both Congress and the White House and their muscular rhetoric has magically transformed into anemic legislation.
This is very disappointing and perhaps I’ll share some of Michael Cannon’s work in future columns about the policy details, but today I want to focus on why GOP toughness has turned into mush.
In part, this is simply a reflection of the fact the rhetoric of politicians is always bolder than their legislation (I didn’t agree with 98 percent of what was said by Mario Cuomo, the former Governor of New York, but he was correct that “You campaign in poetry. You govern in prose.”)
But that’s just a small part of the problem. The real issue is that it’s relatively easy for GOP politicians to battle against proposed handouts and it’s very difficult to battle against existing handouts. That’s because government goodies are like a drug. Recipients quickly get hooked and they will fight much harder to preserve handouts than they will to get them in the first place.
And that’s the basic insight of the “Second Theorem of Government.”
Here’s a recent interview on FBN. The topic is the Republican reluctance to fully repeal Obamacare. I only got two soundbites, and they both occur in the first half of the discussion, but you can see why I was motivated to put forth the new theorem.
Simply stated, I’m disappointed, but I’m more resigned than agitated because this development was so sadly predictable.
And here are a couple of follow-up observations. I guess we’ll call them corollaries to the theorem.
For these reasons (as well as other corollaries to my theorem), I’m not brimming with optimism that we’ll get real Obamacare repeal this year. Or even substantive Obamacare reform.
P.S. Now you know what I speculated many years ago that Obamacare would be a long-run victory for the left even though Democrats lost many elections because of it. I sometimes hate when I’m right.
What’s the right way to define good tax policy? There are several possible answers to that question, including the all-important observation that the goal should be to only collect the amount of revenue needed to finance the legitimate functions of government, and not one penny above that amount.
But what if we want a more targeted definition? A simple principle to shape our understanding of tax policy?
I’m partial to what I wrote last year.
…the essential insight of supply-side economics…when you tax something, you get less of it.
I’m not claiming this is my idea, by the way. It’s been around for a long time.
Indeed, it’s rumored that Reagan shared a version of this wisdom.
I don’t know if the Gipper actually said those exact words, but his grasp of tax policy was very impressive. And the changes he made led to very good results, even if folks on the left still refuse to believe the IRS data showing that Reagan’s lower tax rates on the rich generated more revenue.
In any event, our friends on the nanny-state left actually understand this principle when it suits their purposes. They propose sugar taxes, soda taxes, carbon taxes, housing taxes, tanning taxes, tobacco taxes, and even “adult entertainment” taxes with the explicit goal of using the tax code to reduce the consumption of things they don’t like.
I don’t like the idea of government trying to dictate people do with their own money, but these so-called sin taxes generally are successful because supply-siders are right about taxes impacting incentives.
But that doesn’t mean it’s always popular when statist governments impose such policies. At least not in Belarus, according to a story from RFERL.
Protests over a new tax aimed at reducing social welfare spread beyond the Belarusian capital, as thousands took to the streets in Homel and other towns. Along with similar protests two days earlier in Minsk, the February 19 demonstrations were some of the largest in the country in years. In Homel, near the border with Russia, at least 1,000 people marched and chanted slogans against the measure, known as the “Law Against Social Parasites.”
But what are “social parasites” and what does the law do?
…the law…requires people who were employed fewer than 183 days in a calendar year to pay a tax of about $200. …The measure is aimed at combating what President Alyaksandr Lukashenka has called “social parasitism.”
For what it’s worth, the Washington Post reports that the government had to back down.
The protesters won. On Thursday, Lukashenko announced that he won’t enforce the measure this year, though he’s not scrapping it. “We will not collect this money for 2016 from those who were meant to pay it,” he told the state news agency Belta. Those who have already paid will get a rebate if they get a job this year. The law, signed into effect in 2015, is reminiscent of Soviet-era crackdowns against the jobless, who undermined the state’s portrayal of a “workers’ paradise.”
That’s good news.
If people can somehow survive without working (assuming they’re not mooching off taxpayers, which is something that should be discouraged), more power to them. It’s not the life I would want, but it’s not the role of government to tax them if they don’t work. Or if they simply choose to work 182 days per year.
Mr. Lukashenko should concentrate instead on taking the heavy foot of government off the neck of his people. According to the most-recent Index of Economic Freedom, Belarus is only ranked #104, with especially weak scores for “rule of law” and “open markets.”
P.P.S. Given the low freedom ranking for Belarus, I suspect the real parasites in that country (just like in the U.S.) are the various interest groups that are feeding from the government trough.
P.P.P.S. On an amusing note, here’s the satirical British video on killing the poor instead of taxing them.
Republicans in Congress aren’t quite as aggressive. The House GOP plan envisions a 20 percent corporate tax rate, while Senate Republicans have yet to coalesce around a specific plan.
Notwithstanding the absence of a unified approach, you would think that the stage is set for a big reduction in America’s anti-competitive corporate tax rate, which is the highest in the developed world (if not the entire world) and creates big disadvantages for American workers and companies.
While I am hopeful something will happen, there are lots of potential pitfalls, including the “border-adjustable tax” in the House plan. This risky revenue-raiser has created needless opposition from major segments of the business community and could sabotage the entire process. And I also worry that momentum for tax cuts and tax reform will erode if Trump doesn’t get serious about spending restraint.
What makes this especially frustrating is that so many other nations have successfully slashed their corporate tax rates and the results are uniformly positive.
My colleague Chris Edwards recently shared the findings from an illuminating study published by the London-based Centre for Policy Studies. It examines what’s happened in the United Kingdom as the corporate tax rates has dropped from 35 percent to 20 percent over the past 30 years. Here’s some of what Chris wrote about this report.
New evidence comes from Britain… It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury. …the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.”
And keep in mind that GDP today is significantly greater in part because of a better corporate tax system.
Here’s the chart from the CPS study, showing the results over the past three decades.
The results from the most-recent round of corporate rate cuts are especially strong.
In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. …But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!
None of this should be a surprise.
Big reductions in the Irish corporate tax rate also led to an uptick in corporate receipts as a share of economic output. And remember that the economy has boomed, so the Irish government is collecting a bigger slice of a much bigger pie.
Would we get similar results in the United States?
According to experts, the answer is yes. Scholars at the American Enterprise Institute estimate that the revenue-maximizing corporate tax rate for the United States is about 25 percent. And Tax Foundation experts calculate that the revenue-maximizing rate even lower, down around 15 percent.
I’d be satisfied (temporarily) if we split the difference between those two estimates and cut the rate to 20 percent.
Let’s close with some dare-to-hope speculation from Joseph Sternberg of the Wall Street Journal about what might happen in Europe if Trump significantly drops the U.S. corporate tax rate.
Donald Trump says many things that alarm Europeans, but one of the bigger fright lines may have come in last week’s address to Congress: “Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.” What’s scary here to European ears is…the idea that tax policy is now fair game when it comes to global competitiveness. …One of the biggest political gifts Barack Obama gave European leaders was support for their notion that low tax rates are unfair and that taxpayers who benefit from them are somehow crooked. Europeans pushed that line among themselves for years, complaining about low Irish corporate rates, for instance. The taboo on tax competition is central to the political economy of Europe’s welfare states… Mr. Obama…backed global efforts against “base erosion and profit shifting,” meaning legal and efficient corporate tax planning. The goal was to obstruct competition among governments… The question now is how much longer Europe could resist widespread tax reform if Mr. Trump brings in a 20% corporate rate alongside rapid deregulation—or what the consequences will be in terms of social-spending trade-offs to a new round of tax cutting. Dare to dream that Mr. Trump manages to trigger a new debate about competitiveness in Europe.
Amen. I’m a huge fan of tax competition because it pressures politicians to do the right thing even though they would prefer bad policy. And I also like the dig at the OECD’s anti-growth “BEPS” initiative.
P.S. I want the government to collect less revenue and spend less money, so the fact that a lower corporate tax rate might boost revenue is not a selling point. Instead, it simply tells us that the rate should be further reduced. Remember, it’s a bad idea to be at the revenue-maximizing point on the Laffer Curve (though that’s better than being on the downward-sloping side of the Curve, which is insanely self-destructive).
By contrast, the story of the government is inefficiency and waste as interest groups figure out how to grab ever-larger amounts of unmerited goodies, often while doing less and less.
Sadly, the government seems to be most inefficient in areas where we all hope for good results. Education is a powerful (and sad) example.
A story in the LA Weekly is a perfect illustration of this phenomenon.
A little more than a decade ago, something unexpected happened. The district’s enrollment, which peaked in 2004 at just under 750,000, began to drop. …Today, LAUSD’s enrollment is around 514,000, a number that the district estimates will fall below half a million by 2018.
Anyone want to guess whether this means less spending?
Of course not.
L.A. Unified’s costs have not gone down. They’ve gone up. This year’s $7.59 billion budget is half a billion dollars more than last year’s. …Today, the district has more than 60,000 employees, fewer than half of whom are teachers. …LAUSD’s administrative staff had grown 22 percent over the previous five years. Over that same period of time, the number of teachers had dropped by 9 percent.
If these trends continue, maybe we’ll get an example of “peak bureaucracy,” with a giant workforce that does absolutely nothing!
Based on his famous chart, the late Andrew Coulson probably wouldn’t be too surprised by that outcome.
There’s also lots of waste and inefficiency when Uncle Sam gets involved. With great fanfare, President Obama spent buckets of money to supposedly boost government schools. The results were predictably bad.
It was such a failure than even a story in the Washington Post admitted the money was wasted (in other words, there wasn’t enough lipstick to make the pig look attractive).
One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis. Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not. …The School Improvement Grants program…received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015… Arne Duncan, Obama’s education secretary from 2009 to 2016, said his aim was to turn around 1,000 schools every year for five years. ..The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”
It was a “bet,” but he used our money. And he lost. Or, to be more accurate, taxpayers lost. And children lost.
Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash. …Smarick said he had never seen such a huge investment produce zero results. …Results from the School Improvement Grants have shored up previous research showing that pouring money into dysfunctional schools and systems does not work.
Indeed, I’ve seen this movie before. Many times. Bush’s no-bureaucrat-left-behind initiative flopped. Obama’s latest initiative flopped. Common Core also failed. Various schemes at the state level to dump more money into government schools also lead to failure. Local initiative to spend more don’t lead to good results, either.
Gee, it’s almost as if a social scientist (or anybody with a greater-than-room-temperature IQ) could draw a logical conclusion from these repeated failures.
And, to be fair, some folks on the left have begun to wake up. Consider this recent study by Jonathan Rothwell, published by Brookings, which has some very sobering findings.
…the productivity of the education sector depends on the relationship between how much it generates in value—learning, in this case—relative to its costs. Unfortunately, productivity is way down. …This weak performance is even more disturbing given that the U.S. spends more on education, on a per student basis, than almost any other country. So what’s going wrong? …In primary and secondary public education, where price increases have been less dramatic, there has been a decline in bureaucratic efficiency. The number of students for every district-level administrator fell from 519 in 1980 to 365 in 2012. Principals and assistant principals managed 382 students in 1980 but only 294 in 2012.
The conclusion is stark.
Declining education productivity disproportionately harms the poor. …unlike their affluent peers, low-income parents lack the resources to overcome weak quality by home-schooling their children or hiring private tutors. Over the last 30 to 40 years, the United States has invested heavily in education, with little to show for it. The result is a society with more inequality and less economic growth; a high price.
Incidentally, even private money is largely wasted when it goes into government schools. Facebook’s founder famously donated $100 million to Newark’s schools back in 2010.
So how did that work out? As a Washington Post columnist explained, the funds that went to government schools was basically money down the toilet.
It is a story of the earnest young billionaire whose conviction that the key to fixing schools is paying the best teachers well collided with the reality of seniority protections not only written into teacher contracts but also embedded in state law.
But there is a bit of good news. Some of the money helped enable charter schools.
there is a more optimistic way to interpret the Newark experience, much of which has to do with the success of the city’s fast-growing charter schools. …The reasons are obvious. Unencumbered by bureaucracy and legacy labor costs, charters can devote far more resources to students, providing the kind of wraparound services that students like Beyah need. An analysis by Advocates for Children of New Jersey noted “a substantial and persistent achievement gap” between students at charter and traditional public schools: “For example, while 71 percent of charter school students in Newark passed third-grade language arts tests in 2013-14 — higher than the state average of 66 percent — only 41 percent of students in Newark traditional public schools passed those tests.”
The Wall Street Journal also opined about this topic.
‘What happened with the $100 million that Newark’s schools got from Facebook’s Mark Zuckerberg?” asks a recent headline. “Not much” is the short answer. …The Facebook founder negotiated his gift with New Jersey Gov. Chris Christie and then-Mayor Cory Booker in 2010, and it flowed into Newark’s public-school system shortly thereafter. The bulk of the funds supported consultants and the salaries and pensions of teachers and administrators, so the donation only reinforced the bureaucratic and political ills that have long plagued public education in the Garden State.
The editorial explains that this isn’t the first time a wealthy philanthropist squandered money on government schools.
In 1993, philanthropist Walter Annenberg sought to improve education by awarding $500 million to America’s public schools. …But the $1.1 billion in spending that resulted, thanks to matching grants, accomplished little. An assessment by the Consortium on Chicago School Research on the schools that received funds reached a dismal conclusion: “Findings from large-scale survey analyses, longitudinal field research, and student achievement test score analyses reveal that . . . there is little evidence of an overall Annenberg school improvement effect.” The report did not explain why the campaign failed, but the reason is fairly obvious: The funds wound up in the hands of the unions, administrators and political figures who created the problems in the first place.
Fortunately, not all rich people believe in wasting money. Some of them actually want to help kids succeed.
In 1998, John Walton and Ted Forstmann each gave $50 million to fund scholarships for low-income children to attend private schools. More than 140,000 students have attended schools with graduation and college matriculation rates that exceed 90% instead of going to the failing schools in their neighborhoods. Earlier this summer, hedge-fund manager John Paulson pledged $8.5 million to the Success Academy charter-school network, where 93% of students are proficient in math, compared with 35% of their traditional public-school peers. His gift will allow more such schools to open. The financier Stephen Schwarzman and his wife, Christine, a former attorney, donated $40 million to help endow the Inner-City Scholarship Fund, which provides financial aid to needy children attending Catholic schools in the Archdiocese of New York.
Which is a good segue into the real lesson for today about the type of reforms that actually could boost education.
I’ve shared in the past very strong evidence about how school choice delivers better education results.
Which is what everyone should expect since competition is superior to monopoly.
Well, as explained in another Wall street Journal editorial, it also generates superior results at lower cost. Especially when you factor in the long-run benefits.
…a study shows that Milwaukee’s landmark voucher program will save taxpayers hundreds of millions of dollars. …the Wisconsin Institute for Law and Liberty, a nonprofit that advocates for limited government and education reform, decided to look at the relative cost and benefits of choice schools. And, what do you know, it found that students participating in Milwaukee’s voucher program will provide the city, state and students nearly $500 million in economic benefits through 2035 thanks to higher graduation and lower crime rates. …More education translates into higher incomes, more tax revenue and a lower likelihood of reliance on government welfare or other payments. Meanwhile, greater economic opportunity also prevents young adults from turning to crime.
Wow. It’s not just that it costs less to educate children in private schools. There’s also a big long-run payoff from having more productive (and law-abiding) citizens.
That’s a real multiplier effect, unlike the nonsense we get from Keynesian stimulus schemes.
P.S. School choice doesn’t automatically mean every child will be an educational success, but evidence from Sweden, Chile, and the Netherlands shows good results after breaking up state-run education monopolies.
And there’s growing evidence that it also works in the limited cases where it exists in the United States.
P.P.S. Or we can just stick with the status quo, which involves spending more money, per student, than any other nation while getting dismal results.
P.P.P.S. This is a depressing post, so let’s close with a bit of humor showing the evolution of math lessons in government schools.
P.P.P.P.S. If you want some unintentional humor, the New York Times thinks that education spending has been reduced.
Once of the reasons that tax increases in Washington are such a bad idea (and one of the reasons why a value-added tax is an especially bad idea) is that the prospect of additional tax revenue kills any possibility of genuine entitlement reform. Simply stated, politicians won’t do the heavy lifting of fixing those programs if they think can use a tax hike to prop up the current system for a few more years.
However, if we don’t fix the entitlements, the United States faces a very grim fiscal future regardless of new revenue because the burden of government spending will be expanding faster than the growth of the private economy.
Indeed, tax hikes presumably will accelerate the problems by weakening economic performance, creating an even bigger gap between the growth of government spending and the growth of productive output. Sort of a double violation of my Golden Rule.
Well, the same thing is happening in Illinois.
That state is a fiscal disaster. Taxes already are high, government spending already is excessive, and promises of lavish future benefits for government bureaucrats have created a mountain of unfunded liabilities. To make matters worse, there’s a never-ending trickle of taxpayers fleeing to other states, thus making the long-run outlook even worse.
A column in today’s Wall Street Journal discusses this unfolding disaster.
…what about the state’s fiscal apocalypse, which is not only happening right now but has plunged Illinois into a bona fide financial disaster? …the state has amassed $11 billion in unpaid bills—predicted to climb to more than $27 billion by the end of 2019. Illinois is facing the worst pension crisis of any U.S. state, with unfunded obligations totaling $130 billion, according to the state’s Commission on Government Forecasting and Accountability. That amounts to about $10,000 in debt for each resident. …Illinois also had the lowest credit rating among the 50 states as of October, when Moody’s Investors Service downgraded it again… Given all this, it’s no surprise that people are leaving. In 2016 Illinois lost more residents than any other state—for the third consecutive year. A total of 37,508 people fled, leaving the state’s population at its lowest level in nearly a decade.
By the way, the net payers of tax are the ones leaving, not the net consumers of tax. And every time one of the geese with golden eggs decides to fly away, Illinois falls deeper into a hole.
I discussed this phenomenon in a column for The Hill.
…there are some very uncompetitive, high-tax states, such as Illinois, that are in deep trouble due to internal migration.Most people have focused on the overall population loss of 37,508 in Illinois, but the number that should worry state politicians is, on net, a staggering 114,144 people left for other states. Only New York (another high-tax state with a grim future) lost more people to internal migration.Of course, what really matters, at least from a fiscal perspective, is the type of person who leaves. Data from the internal revenue service shows that states like Illinois are losing people with above-average incomes. In other words, the net taxpayers are escaping.
And don’t forget that Illinois is increasingly uncompetitive compared to neighboring states.
Here’s a blurb from a Wall Street Journal editorial in January,
Nearby Kentucky passed a right-to-work law last week and Missouri is expected to take up similar legislation in coming weeks. …this would leave Illinois, a non-right-to-work state, as an island with undesirable labor laws surrounded by states including Michigan, Indiana and Wisconsin that provide more worker choice and business flexibility.
I have some theoretical problems with right-to-work laws, but the WSJ is correct that private employers tend to avoid states where unions wield a lot of power.
Also, we can’t forget that the main city in Illinois has its own set of problems.
As discussed in an article for the American Thinker, Chicago adds crime and corruption to the mix.
Chicago has become the icon of bloody violence on its streets, but corruption also is part of its misery… Chicago’s city government is known for much more than just its one-sidedness. From Mayor Richard J. Daley’s well known rackets of yesteryear to former U.S House representative Jesse Jackson, Jr. (who just last year completed his prison sentence after having pleaded guilty to multiple federal charges including fraud, conspiracy, wire fraud, criminal forfeiture, and more), the list of Democrats committing and getting caught committing fraud, taking bribes, running scams, and other malfeasance while in office is very long. …As reported by Gazette.com, “according to Illinois corruption researchers Dick Simpson and Thomas Gradel, more than 30 Chicago aldermen have been convicted of crimes since 1973, most of them on bribery and extortion charges. “More than 1,000 public officials and businessmen in Illinois have been convicted of public corruption since 1970, including imprisoned former Gov. Rod Blagojevich. But corruption among politicians on Chicago’s premier lawmaking body has been ‘particularly persistent’, the researchers wrote in an anti-corruption report.”
Gee, what a surprise. Politicians create big government in part so they have lots of goodies to distribute, and they then use those goodies to extort money from people.
Hmmm…, where have I seen that message before?
But let’s not get distracted. We’ve now established that Illinois is a giant mess. We also know that the state can only be saved if there is both short-run spending restraint and long-run spending restraint (to deal with unaffordable benefits promised to the state’s massive bureaucracy). Though we also know that the chances of getting those necessary reforms will evaporate if tax hikes are an option.
So is anybody surprised that the state’s supposedly anti-tax governor is getting seduced/pressured into throwing taxpayers under the bus?
The Wall Street Journal opines on this development.
Illinois Governor Bruce Rauner has been trying to pull the Land of Lincoln out of economic decline…, and it’s a losing battle. After two years without a state budget, Mr. Rauner is now bending as Democrats promise to hold the budget hostage if he doesn’t sign a tax increase. In his State of the State address last week, Mr. Rauner said he was open to “consider revenue increases” in conjunction with “job-creating changes” in pursuit of a budget deal. He endorsed negotiations underway with state lawmakers to craft a “grand bargain”…the speech was greeted with derision by the state’s Springfield mafia that assumes it now has the Governor where it wants him. …The deal now being crafted in the state Senate would increase the state’s flat income-tax rate to somewhere around 5% from the current 3.75%. …Democrats are still peddling that they can tax their way out of Illinois’s economic decline, while taxpayers are picking up and heading to neighboring states.
Incidentally, there was a temporary hike in the tax to 5 percent a few years ago. How did that work out?
…the years of an elevated income tax produced one of the country’s weakest state economic recoveries, with bond-rating declines in Chicago and staggering deficits statewide. …Senate President John Cullerton said the point of the temporary hike was to pay pensions, “pay off our debt [and] to have enough money to pay the interest on that debt.” But the roughly $31 billion it generated made hardly a dent. Since 2011 the unfunded pension liability in Illinois has grown by $47 billion, even as the tax hike was mostly spent on pensions.
Here’s the bottom line. Governor Rauner made a huge mistake by stating that he would “consider revenue increases.”
Illinois, after all, is not suffering from inadequate tax collections.
Moreover, now that Rauner has waved the white flag, there’s a near-zero chance that he’ll be able to get something in exchange such as a Colorado-style spending cap or much-need constitutional reform to control pension expenditures.
Instead, higher revenues will trigger even more wasteful outlays (as leftists in the state sometimes accidentally admit).
I guess there’s still a chance he’ll do what’s best for the state and reject tax hikes, but as of now it looks like Rauner will be the next winner of the Charlie Brown Award.
P.P.S. Illinois is a terrible state for gun rights, and it even persecutes people who use guns to fight crime. The only silver lining to that dark cloud is this amusing example of left-wing social science.
While President Trump apparently intends to waste taxpayer money for more childcare subsidies and presumably is going to duck the critical issue of entitlement reform, there is some good news for advocates of limited government and fiscal responsibility. According to a recent news report, he’s not a big fan of outlays for foreign aid.
The White House budget director confirmed Saturday that the Trump administration will propose “fairly dramatic reductions” in the U.S. foreign aid budget later this month. …news outlets reported earlier this week that the administration plans to propose to Congress cuts in the budgets for the U.S. State Department and Agency for International Development by about one third. …The United States spends just over $50 billion annually on the State Department and USAID.
Trump’s skepticism of foreign aid is highly appropriate. Indeed, he’s probably being too soft on the budget for foreign aid.
Government-to-government handouts have a terrible track record. Indeed, the main impact of such transfers is to undermine good reform and enrich corrupt elites in poor nations.
Moreover, if the goal is to actually create prosperity in developing countries, there is no substitute for free markets and limited government.
Let’s look at some additional evidence about the harmful impact of aid.
We’ll start with a rather amazing admission from a 2016 study published by the International Monetary Fund.
Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. …we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. …we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.
Wow, I’m not a big fan of the IMF, but you have to give the authors credit for honesty. They admit that aid is especially harmful in nations that are also receiving IMF bailouts.
But the main takeaway is that foreign governments simply use foreign aid money as an excuse to raise and spend their own money. That outcome presumably should irk leftists. From my perspective, such nations have too much spending, regardless of whether it’s being financed by their own taxpayers or foreign taxpayers.
Instead, these nations should be copying the small-government policies that enabled western nations to move from agricultural poverty to middle-class prosperity.
Let’s consider a couple of real-world examples.
We’ll start in South Sudan, where aid has subsidized awful behavior. Ian Birrell explains in an article for CapX.
…the fledgling state stumbles from the savagery of civil war into the horror of famine. …sadly these events also illustrate another example of the dismal failure of Western aid policies. …our politicians would be wise to stop spouting their usual nonsense about saving the world’s poor and start considering the corrosion caused by the billions already poured in to this failed state, pursuing naive ideas about state building based on floods of cash. …Experts such as the academic Alex de Waal say “looting food aid was elevated to military strategy” by militia commanders who later controlled the country. Despite these activities, $1 billion a year was handed over in aid in the years before independence, rising to $1.4 billion following arrival as the 193rd nation represented at the UN. …An estimated $4 billion was missing “or simply put, stolen”… But still aid poured in, leading to public spending per capita more than three times the levels seen in neighbouring Kenya. …there was a fake ministry of finance to deal with gullible donors and well-meaning armies of advisers, while the real version carried on under the generals with its backdoor dealings. …For all the fine words and good intentions, the West has ended up assisting and empowering a callous kleptocracy – again.
The bottom line is that foreign aid enabled and subsidized an awful government doing awful things.
Now let’s look at another African jurisdiction, only this one has been neglected by the international community.
But as Negash Tekie explains in another article of CapX, benign neglect can be a positive thing.
Over the years, the West has spent many millions to help stabilise the Horn of Africa, and alleviate the grinding poverty of many of its residents. …In Somalia, meanwhile, the international community is still trying – as it has for decades – to build a functioning government. Yet despite massive amounts in aid, …there is little hope of either building resilient and inclusive state institutions. What a stark contrast there is with neighbouring Somaliland. …Somaliland is, admittedly, desperately poor… But it is, in a volatile region, a beacon of security and stability. …Somaliland…claimed its independence from Somalia in May 1991, amid the chaos of the civil war there. But international bodies, and the African Union, have refused to recognise it.
But this absence of recognition has been a blessing in disguise.
The result has been that, without international aid and support, Somaliland has had to fall back on its own resources. In contrast to other African nations, state-building programmes and public services have been entirely financed by domestic income, rather than being supported by international donors. …countries that are dependent on aid can afford to neglect tax collection, countries without it are forced to use taxation appropriately. In 1990-2000, the Somaliland ministry of finance reported that “95 per cent of the resource that finance the activities are locally mobilised, mostly through taxation”. Not only are taxes collected in a non-coercive manner… For example, in early 2000s the government attempted to increase taxes on the private sector and proposed a VAT rate of 30 per cent, but the business sector lobbied against it and the policy was reversed. …A number of aid experts have argued that heavy dependence on external assistance undermines democracy, creates a dependency culture, diminishes political accountability and makes the state more accountable to donors than its own citizens.Somaliland is an example that…the inhabitants of the Horn of Africa can still build functioning states. …Somaliland is a lesson to the world in how to achieve successful state-building without aid.
Somaliland is far from a success story, and the article acknowledges big problems with drought, Chinese influence, and other factors, but at least there are some positive developments.
The key lesson is that the absence of aid has a very sobering effect.
So I’m crossing my fingers that Somaliland stays independent and begins to prosper.
Let’s close by sharing a startling confession by a former senior aid bureaucrat in the United Kingdom.
Foreign aid spending is “out of control” and the department responsible for it should be abolished, according to its own former minister of state. …Grant Shapps, who was second-in-command at the Department for International Development (DfID) until 14 months ago, attacked its “profoundly worrying” tendency to “shovel cash out of the door”. …Shapps, whose criticisms are unprecedented from a former insider, said he had “agonised” for more than a year about going public. …He described how, in the Foreign Office, he would protest to African dictators about their “denial of human rights and democratic values” but “then, with my DfID hat on, I would rifle through my red box [of ministerial papers] to find cheques for hundreds of millions of pounds payable to the same countries. …Money was thrown at wasteful multilateral aid providers, such as the European Union and the United Nations, to reach the required spending level.
Too bad we don’t have enough ethical bureaucrats to blow the whistle on similar examples of waste and corruption in America’s foreign-aid system (though at least we have two former officials who were in charge of the federal government’s asset-forfeiture office and now say it should be shut down).
P.S. Next time leftists want to make a satirical video attacking libertarianism, they should use Somaliland rather than Somalia.