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Can Politicians Save the Welfare State by Urging – or even Subsidizing – More Baby-Making?

Mon, 03/06/2017 - 1:32pm

The tax-and-transfer welfare state is in deep trouble. I explained last year that the United States faces a very serious long-run challenge.

Many of our entitlement programs were created based on the assumption that we would always have an expanding population, as represented by a population pyramid. …however, we’ve seen major changes in demographic trends, including longer lifespans and falling birthrates. The combination of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as the baby boom generation moves into full retirement.

In other words, in the absence of genuine entitlement reform, America will have a Greek-style fiscal mess at some point in the future. Or, as I wrote yesterday, maybe we should call it a Japan-style mess.

Simply stated, we’re going to have too many people collecting benefits and too few people generating income.

The outlook is even worse in Europe. Indeed, the fiscal crisis has already started in many nations in Southern Europe. And the crisis will spread to many countries in Northern Europe. And it will hit Eastern Europe as well, notwithstanding some good economic reforms in that region.

Unfortunately, most politicians are reluctant to undertake the entitlement reforms that would avert this crisis.

So what’s their alternative solution? In many cases, they don’t have one. In other cases, they act as if higher tax burdens can solve the problem, even though that probably means even more people will be discouraged from productive lives and instead decide to ride in the wagon of government dependency (higher taxes also would enable even more spending, but that’s a separate story).

Another potential answer is sex. To be more specific, governments around the world are urging people to procreate more so that there will be additional future taxpayers to finance the welfare state.

I’m not kidding.

Let’s start with the new effort in Spain.

Europeans across the continent are having so many fewer babies that national populations from Scandinavia to the Mediterranean are skewing towards the older end of the spectrum, with not enough young, productive people to keep economies thriving and to look after the rest of the aging population. Spanish women have 1.3 children on average. In 2015, Spain’s death rate outstripped the birth rate… Edelmira Barreira Diz was appointed as “commissioner for the demographic challenge” last month.

I think “sex commissioner” would have been a better title. Heck, that probably would have enticed a certain former American president to apply for the position.

Here’s a chart from the story showing declining fertility rates.

There’s a similar effort for government-encouraged babies in Italy.

Italy is facing a dramatic demographic change, with increasingly fewer children being born. So the Health Ministry recently launched an ad campaign to remind people of Sept. 22 being “fertility day.” …another ad claiming that fertility was “a common good” — a comparison that reminded some of fascist propaganda from the 1920s which urged women to have more babies to support the nation. …As a social welfare state, Italy’s pensions system and economy relies on a certain number of younger people joining the workforce every year.

The Danish government also wants women to think they have an obligation to produce future taxpayers.

In Denmark, for instance, schoolchildren are now taught in class that they should have more babies. “…we just thought, maybe we should actually also tell them about how to get pregnant,” Marianne Lomholt, national director of Sex and Society, told the New York Times. …Denmark’s Education Ministry now has teachers talk not only about the dangers of sex and pregnancies, but also about their benefits.

Also in Denmark, private companies are jumping on this bandwagon (sexwagon?) of more sex as a solution to demographic-entitlement crisis.

Denmark has a sex problem. …not exactly a sex problem, per se. It’s more like a baby problem. …Denmark’s perennially low birth rate…has left people worried… “We are concerned. The fewer Danes means fewer people to support the aging population…” …can vacation sex save the Kingdom of Denmark? Spies thinks it can, so the company has sweetened the deal. According to its promotion, the company will give prizes to couples who get pregnant while on vacations purchased through them.

Given the grim demographic outlook in Japan, nobody should be surprised that the government there is agitating for more future taxpayers.

A comprehensive plan to reverse Japan’s crashing population numbers was unveiled on Thursday by a government task force… Shigeru Ishiba, minister in charge of overcoming population decline and reviving local economies, was more blunt. “Japan will die off” without proper countermeasures, he warned. …The strategy outlined in the government plan is to encourage young people to relocate to areas outside the major metropolitan regions by fostering jobs and economic growth in small local communities that are now in danger of simply disappearing for lack of inhabitants.

Huh?!? Japan’s repeated forays into Keynesian economics haven’t generated good results nationally, so I’m not holding my breath that this new campaign will be “fostering jobs and economic growth” in targeted communities.

For a final example, let’s shift to China, where a government that formerly forced women to have abortions is suddenly looking at ways to subsidize an extra child.

China is considering introducing birth rewards and subsidies to encourage people to have a second child… the country issued new guidelines in late 2015 allowing all parents to have two children amid growing concerns over the costs of supporting an aging population. …China began implementing its controversial “one-child policy” in the 1970s in order to limit population growth, but authorities are now concerned that the country’s dwindling workforce will not be able to support an increasingly aging population.

Since coerced redistribution isn’t nearly as odious as coerced abortion, I guess this is another sign of progress in China.

But I’m not sure that will be enough to produce enough future taxpayers for China. Or any other nation.

The only sustainable welfare state, given modern demographics, is no welfare state.

Or, to be more accurate, the right approach is to start with the default assumption that people are responsible for saving and investing to support themselves in retirement. There are lots of nations that now have systems of personal retirement accounts, and this puts them in much stronger position than nations that rely solely on tax-and-transfer entitlement schemes. Hong Kong is a good example, as are Chile and Australia.

By the way, countries with private social security systems have safety-net programs for destitute seniors, but that’s far more affordable than automatic payments to everyone in retirement.

P.S. On a related note, there’s a big debate in academic circles about whether the welfare state (specifically young-to-old redistribution) actually sows the seed of its own destruction by inducing lower fertility rates. Ramesh Ponnuru of National Review summarized some of the evidence for this hypothesis back in 2012.

A 2005 paper for the National Bureau of Economic Research by economists Michele Boldrin, Mariacristina De Nardi, and Larry E. Jones points out that “the size and timing of the growth in government pension systems” matches up nicely with fertility trends in the U.S. and Europe. They expanded on both sides of the Atlantic Ocean, and fertility fell on both sides, after World War II; and they expanded more in Europe, where fertility fell further. In their model, entitlements account for roughly half of the decline in fertility, and 60 percent of the difference between European and American fertility. When a pension system expands by 10 percent of GDP, the average number of children per woman drops by 0.7 to 1.6. “These findings are highly statistically significant and fairly robust to the inclusion of other possible explanatory variables.” A 2007 paper by Isaac Ehrlich and Jinyoung Kim, also for the NBER, reached similar conclusions, finding that pension programs explained a little under half of the decline in fertility rates, and a little more than half of the decline in marriage rates, in developed countries between 1965 and 1989. One implication of this finding is that pension programs have contributed to their own financial woes by suppressing fertility.

Some researchers have concluded that other types of redistribution spending can boost fertility, though other scholars are more skeptical.

I haven’t studied this literature on subsidized babies enough to have a strong opinion.

For what it’s worth, I suspect the government can provide enough handouts to induce motherhood (heck, one of the motives for the welfare reform that was adopted during Bill Clinton’s presidency was a concern that the old system was encouraging women to have children out of wedlock).

But I’m very doubtful that such policies would fix the demographic/entitlement crisis that threatens most nations. In part, because I’m skeptical about the ability of governments to cause large shifts in fertility, but also because recreating a population pyramid only works if the additional children wind up being productive workers in the private sector.

In other words, the goal isn’t really a population pyramid as much as it’s a shift in the ratio of producers versus dependents in a nation.

As such, if many of the babies induced by handouts come from mothers that rely on welfare, and if those children are less likely to grow up to be net payers of tax rather than net consumers of tax, then baby subsidies are not going to solve the problem.

Does America Share Japan’s Grim Future?

Sun, 03/05/2017 - 2:49pm

When I warn about the fiscal and economic consequences of America’s poorly designed entitlement programs (as well as the impact of demographic changes), I regularly suggest that the United States is on a path to become Greece.

Because of Greece’s horrible economy, this link has obvious rhetorical appeal.

But there’s another nation that may be a more accurate “role model” of America’s future. This other country, like the United States, is big, relatively rich, and has its own currency.

For these and other reasons, in an article for The Hill, I suggest that Japan is the nation that may offer the most relevant warning signs. I explain first that Japan shows the failure of Keynesian economics.

…ever since a property bubble burst in the late 1980s, Japan’s economy has been in the doldrums, and its politicians deserve much of the blame. They’ve engaged in repeated binges of so-called Keynesian stimulus. But running up the national credit card hasn’t worked any better in Japan than it did for President Barack Obama. Instead of economic rejuvenation, Japan is now saddled with record levels of debt.

In other words, Japan already is a basket case and may be the next Greece. And all this foolish policy has been cheered on by the IMF.

I then highlight how Japan shows why a value-added tax is a huge mistake.

Japan’s politicians also decided to impose a value-added tax (VAT) on the nation. As so often happens when a VAT gets adopted, it turns into a money machine, as legislators start ratcheting the rate higher and higher. That happened in Europe back in the 1960s and 1970s, and it’s happening in Japan today.

And regular readers know my paranoid fear of the VAT taking hold in the United States.

But here’s the main lesson in the column.

The combination of demographic changes and redistribution programs is a recipe for fiscal crisis.

…the biggest economic threat to the country is the way Japan’s welfare state interacts with demographic changes. It’s not that the welfare state is enormous, particularly compared with European nations, but the system is becoming an ever-increasing burden because the Japanese people are living longer and having fewer children. …America faces some of the same problems. …if we don’t reform our entitlement programs, it’s just a matter of time before we also have a fiscal crisis.

To be sure, as I note in the article, Japan’s demographic outlook is worse. And that nation’s hostility to any immigration (even from high-skilled people) means that Japan can’t compensate (as America has to some degree) for low birth rates by expanding its population.

Indeed, the demographic situation in Japan is so grim that social scientists have actually estimated the date on which the Japanese people become extinct.

Mark August 16, 3766 on your calendar. According to…researchers at Tohoku University, that’s the date Japan’s population will dwindle to one. For 25 years, the country has had falling fertility rates, coinciding with widespread aging. The worrisome trend has now reached a critical mass known as a “demographic time bomb.” When that happens, a vicious cycle of low spending and low fertility can cause entire generations to shrink — or disappear completely.

Though I guess none of us will know whether this prediction is true unless we live another 1750 years. But it doesn’t matter if the estimate is perfect. Japan’s demographic outlook is very grim.

By the way, the problem of aging populations and misguided entitlements exists in almost every developed nation.

But I mentioned in the article for The Hill that there are two exceptions. Hong Kong and Singapore have extremely low birthrates and aging populations. But neither jurisdiction faces a fiscal crisis for the simple reason that people largely are responsible for saving for their own retirement.

And that, of course, is the main lesson. The United States desperately needs genuine entitlement reform. While I’m not overflowing with optimism about Trump’s view on these issues, hope springs eternal.

P.S. In yesterday’s column about Germany, I listed bizarre policies in Germany in the postscripts. My favorite example from Japan is the regulation of coffee enemas. And the Japanese government has even proven incompetent at giving away money.

Story about German “Poverty” Features World’s Most Dishonest Headline or World’s Most Clueless Headline

Sat, 03/04/2017 - 12:38pm

As I peruse the news, I periodically see headlines that are misleading in some fashion.

And if the headline is sufficiently off-key or bizarre, I feel compelled to grouse.

Now I have a new example, though I’m not sure whether to call it dishonest or clueless.

The EU Observer has a brief report that poverty has reached record levels in Germany.

Despite a booming economy, 12.9 million people in Germany were living below the poverty line in 2015, the Equal Welfare Association reported on Thursday. Based on figures from the Federal Statistical Office the alliance found a record high poverty rate of 15.7 percent in 2015.

By the way, I can’t resist pointing out that there is no “booming economy” in Germany. Growth in 2016 was only 1.9 percent.

Yes, that’s decent by European standards of stagnation and decline, but it’s far from impressive in any other context.

But I’m digressing. Let’s get back to the main point of today’s column.

As you can see from the story’s headline, the implication is that lots of people are left behind and mired in deprivation even though the economy is moving forward.

But there’s a problem with both the story and the headline.

If you read carefully, it turns out that both the story (and the study that triggered the story) have nothing to do with poverty.

No link at all. None. Zero. Nada. Zilch.

I’m not joking. There’s no estimate of the number of people below some measure of a German poverty line. There’s no calculation of any sort about living standards. Instead, this story (and the underlying report) are about the distribution of income.

…people [are] defined as poor when living on an income less than 60 percent of that of the median German household.

One might be tempted at this point to dismiss this as a bit of journalistic sloppiness. Indeed, one might even conclude that this is a story about nothing.

After all, noting that some people are below 60 percent of the median income level is about as newsworthy as a report saying that half of people are above average and half are below average.

But there actually is a story here. Though it’s not about poverty. Instead, it’s about an ongoing statist campaign to redefine poverty to mean unequal distribution of income.

I’m not joking. For instance, the bureaucrats at the Paris-based Organization for Economic Cooperation and Development actually put out a study claiming that there was more poverty in the United States than in nations such as Greece, Portugal, and Turkey.

How could they make such a preposterous claim? Easy, the OECD bureaucrats didn’t measure poverty. Instead, they concocted a measure of the degree to which various countries are close to the left-wing dream of equal incomes.

And the Obama Administration also tried to manipulate poverty statistics in the United States in hopes of pushing this statist agenda of coerced equality.

Robert Rector of the Heritage Foundation wrote about what Obama tried to do.

…the Obama administration…measure, which has little or nothing to do with actual poverty, will serve as the propaganda tool in Obama’s endless quest to “spread the wealth.” …The current poverty measure counts absolute purchasing power — how much steak and potatoes you can buy. The new measure will count comparative purchasing power — how much steak and potatoes you can buy relative to other people. …In other words, Obama will employ a statistical trick to ensure that “the poor will always be with you,” no matter how much better off they get in absolute terms. …The weird new poverty measure will produce very odd results. For example, if the real income of every single American were to magically triple over night, the new poverty measure would show there had been no drop in “poverty,” because the poverty income threshold would also triple. …Another paradox of the new poverty measure is that countries such as Bangladesh and Albania will have lower poverty rates than the United States, even though the actual living conditions in those countries are extremely bad.

Even moderates such as Robert Samuelson recognized that Obama’s agenda was absurd. Here is some of what he wrote.

…the new definition has strange consequences. Suppose that all Americans doubled their incomes tomorrow, and suppose that their spending on food, clothing, housing and utilities also doubled. That would seem to signify less poverty — but not by the new poverty measure. It wouldn’t decline, because the poverty threshold would go up as spending went up. Many Americans would find this weird: People get richer but “poverty” stays stuck.

To put this all in context, the left isn’t merely motivated by a desire to exaggerate and misstate poverty. That simply the means to an end.

What they want is more redistribution and higher tax rates. The OECD openly admitted that was the goal in another report. Much as all the fixation about inequality in America is simply a tool to advocate bigger government.

P.S. Germany is an example of a rational welfare state. While the public sector is far too large, the country has enjoyed occasional periods of genuine spending restraint and German politicians wisely avoided a Keynesian spending binge during the last recession.

P.P.S. Though Germany also has its share of crazy government activity, including a big green-energy boondoggle. And lots of goofy actions, such as ticketing a one-armed man for having a bicycle with only one handlebar brake, taxing homeowners today for a street that was built beginning in the 1930s, making streetwalkers pay a tax by using parking meters, and spending 30 times as much to enforce a tax as is collected.

Will the International Nightmare of FATCA Finally Be Repealed?

Fri, 03/03/2017 - 12:05pm

Republicans promised voters all sorts of pro-growth reforms. They assured us that they learned a lesson about the dangers of expanding government and calling it “compassionate conservatism.”

Give us control of both Congress and the White House, they said before the election, and we’ll move our agenda to limit government and drain the swamp in Washington.

  • Repeal Obamacare!
  • Cut tax rates!
  • Slash wasteful spending!
  • Reform entitlements!
  • Eliminate senseless red tape!

Of course, now that they’re in power, they’re getting cold feet. It now appears there will be reform of the disastrous Obamacare law, but not full repeal. Moreover, tax cuts are being jeopardized by a risky scheme for a $1 trillion “border-adjustable” tax hike. Based on Trump’s recent address to Congress, I’m also not holding my breath for much-needed spending cuts and entitlement reform. And it’s unclear whether we’ll see much progress cutting back on the mountains of regulation hindering economic vitality.

Even the easy promises may not be fulfilled.

The Foreign Account Tax Compliance Act (FATCA) is an odious law enacted back in 2010 when the left controlled all the levers of power. It’s horrible legislation that threatens the rest of the world with financial protectionism (a 30 percent levy on all money flowing out of the United States) unless foreign governments and foreign financial institutions agree to serve as deputy tax collectors for America’s anti-competitive worldwide tax system.

That’s the bad news.

The good news is that the Republican platform endorses the repeal of this onerous law.

But will GOPers deliver on that promise? Especially if the left unleashes the kind of demagoguery we often see in Congress and that we saw from Obama during the 2008 campaign?

I guess time will tell, but if the goal is good policy (and keeping promises), this law deserves to be tossed in the trash.

I’ve previously explained that FATCA is so brutal that it has led many overseas Americans to give up their citizenship simply because FATCA made their lives miserable. They couldn’t open bank accounts. They had trouble finding places to manage their investments. Even retirement accounts became a nightmare.

Some people said that these difficulties were just temporary and would disappear once everyone learned how the law operated.

Hardly. Let’s start with some data from a Bloomberg story that should be a wake-up call for the crowd in Washington.

The number of Americans renouncing their citizenship rose to a new record of 5,411 last year, up 26 percent from 2015, according to the latest government data. …Since Fatca came into being, annual totals for Americans renouncing citizenship have reached their four highest historic levels.

And here’s a chart showing this dismal trend.

The Wall Street Journal opines on this issue today.

…the Foreign Account Tax Compliance Act (Fatca) became law in 2010 to go after fat cats stashing money abroad, these pages have reported that it has led the IRS to treat law-abiding Americans as criminals. …Under Fatca, Americans must now report overseas holdings of more than $50,000 even if they owe no taxes, or else face crushing fines. For foreign financial institutions, the penalty for not giving the IRS what it wants to know about their American clients is a 30% withholding penalty on any U.S.-sourced payment to these institutions. …With the GOP controlling Congress and White House, the time is ripe for Republicans to make good on their pledge and give Fatca the heave-ho.

Amazingly, even the “taxpayer advocate” at the IRS recognizes the law is a disgrace, reversing the presumption of innocence in the Constitution.

The IRS has adopted an enforcement-oriented regime with respect to international taxpayers. Its operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise.

This is a remarkable development. I’ve groused before that the IRS’s taxpayer advocate has a bad habit of advocating for the IRS rather than the American people, so FATCA must be really bad to generate a report that actually defends the rights of taxpayers.

It’s also bad news for financial institutions.

An article in the Economist has some very remarkable admissions, including the fact that compliance costs will be at least twice as high as the tax revenue that ostensibly is being generated.

FATCA’s intrusiveness has caused concern among banks and fund managers. It raises big questions about data privacy. Compliance costs, mostly borne overseas, are likely to be at least double the revenue that the law will generate for America. The necessary overhauls of systems and procedures and the extra digging around to identify American clients could add $100m or more to a large bank’s administrative costs. No wonder bankers have dubbed FATCA the Fear And Total Confusion Act. An OECD tax official describes the law as “awful, in a way, like a nuclear bomb” but also sees it as “a remarkable leap forward for transparency”. …A further concern is the risk of misuse of information by corrupt administrations, or rogue government employees, such as the sale of personal financial data to would-be kidnappers.

It’s also revealing that an OECD bureaucrat thinks that an “awful…nuclear bomb” can be seen as a “remarkable leap forward.” I guess that’s the attitude we should expect from leftist bureaucrats who are exempt from paying tax on their own bloated salaries.

But I call it disgusting and I desperately hope that Trump gets rid of the subsidies that American taxpayers send to this parasitical Paris-based bureaucracy.

But I’m digressing.

Let’s now focus on how the law is an attack on the sovereignty of other nations (and how it creates a precedent that will be used to attack America’s fiscal sovereignty).

Some leftists justify this wretched law by saying it only targets so-called tax havens. But Trinidad and Tobago is hardly in that category. Yet because FATCA applies to the entire world, a senior official in that country very much hopes Trump will follow through on promises in the Republican platform to repeal the misguided legislation.

Kamla Persad-Bissessar, the leader of the opposition coalition in parliament, recently…discovered that the GOP had called for repeal of the Foreign Account Tax Compliance Act, or Fatca, which is best understood as a license for IRS imperialism. …Mrs. Persad-Bissessar wrote Donald Trump in January asking if he will keep this promise. …Mrs. Persad-Bissessar, a former prime minister, wants to know because the Trinidad and Tobago parliament is now considering changing the nation’s laws to accommodate Fatca.

Repeal would be good for T&T, but it also would be good for the USA.

Americans have an even bigger stake in the answer. …the law has become another example of gross federal overreach, adding another burden on Americans overseas who are already paying taxes where they live. The 2010 law has almost no parallel anywhere, for good reason. While most nations limit their taxes to income earned within their borders, the U.S. is among the smaller group of nations that taxes its citizens on global income. …The roughly eight million Americans working overseas have been hit hardest by this bad law. Some foreign banks and financial institutions have responded simply by refusing to take American customers, on grounds that Fatca requirements are more trouble than the business is worth. For similar reasons others do not want Americans as business partners. Many others of modest means who owe no U.S. taxes can still find themselves hit by hefty fines and penalties because they have fallen afoul of the reporting requirements.

Heck, even if the law isn’t repealed, Trump can defang it.

…the whole Fatca edifice has been built on the intergovernmental agreements that Treasury has negotiated with more than 100 countries—agreements for which there is no statutory authority or Congressional ratification. Mr. Trump could take the teeth out of Fatca by announcing he has suspended negotiations for future agreements and won’t enforce the ones we have. …Let’s hope President Trump gives the answer that Americans deserve, by making clear he intends to deliver on the GOP pledge to dismantle a bad law that never should have been passed.

Amen.

The law is also running into problems in Israel, another nation that hardly fits the “tax haven” definition. A Forbes columnist has a dismal assessment of this intrusive and destructive law.

…the Israeli High Court’s temporary injunction against the enforcement of America’s controversial global tax law FATCA should serve as “a wake-up call” for other nations to rethink enforcing this “toxic, flawed and imperialistic legislation,” according to the boss of a leading independent financial firm that advises high-net-worth individuals (HNWI’s) and expats globally. …“Justice Meltzer’s action should be championed,” deVere’s Green asserts, who is an outspoken critic of FATCA. “His wise caution should serve as a wake-up call for other countries to rethink enforcing this toxic, flawed, damaging legislation that is being imposed on sovereign states around the world by the U.S.” …FATCA could indeed be described as a “masterclass” in fiscal imperialism and unintended consequences. But also of concern is that the US is increasingly secret in matters of financial data. It’s no wonder some have labelled it “horrific” and a nightmare for financial institutions. …Perhaps unsurprisingly there a growing trend and an overwhelming number of U.S. citizens are giving up their American citizenship (citizenship abdications), which has been revealed by the U.S. Treasury Department. And, according to a survey conducted in early 2015 by deVere itself almost three quarters (73%) of Americans living overseas expressed the view that they were tempted to relinquish their U.S. passports.

Canada also is unhappy that the U.S. is engaging in an extraterritorial revenue grab.

Some 7m Americans outside the country (1m of them in Canada), along with an unknown number of “US persons”, are now caught in FATCA’s net. …Ms Hillis is fighting back through the courts. She and Gwen Deegan, an artist who has lived in Canada since she was five, filed a suit claiming that the Canadian government’s co-operation with FATCA violates a tax treaty and constitutional protections against discrimination. …If Ms Hillis and Ms Deegan win in court, Canada’s government will face an awkward choice between complying with the decision and exposing Canadian banks to huge penalties. The Alliance for the Defence of Canadian Sovereignty, which is paying the women’s legal expenses, has harvested donations from China, Vatican City and beyond.

These examples are why I wrote back in 2011 that Obama united the world…in opposition to bad US policy.

An article from CNBC highlights how bad the law is.

With an estimated 9 million Americans currently living overseas, the U.S expatriate community is comprised of a wide variety of people from all walks of life. ..The one nagging truth that is both common and unique to all of these individuals? They remain effectively fettered to the U.S. tax system. Unlike almost every other tax regime in the world, the U.S. taxes its citizens no matter where they reside. Thus, even if you expect never to return, you should expect to have to file an annual tax return. …As many expats can attest, it has become more difficult to open or maintain a bank account overseas without having to sign an IRS Form W-9 or other U.S. tax-related documentation. This increasingly common bank procedure is a result of the Foreign Account Tax Compliance Act, which requires foreign banks and other financial institutions, among other things, to gather and report information to the IRS about their U.S. customers or face stiff tax-withholding penalties on U.S. investments.

The last sentence is that excerpt deserves some attention. The FATCA law is so onerous that it is advantageous for many to simply not invest in the American economy.

And that means less growth and prosperity for the rest of us.

But that’s just part of the story.

Because the United States has imposed this awful law on the rest of the world, other nations now want to do the same thing. Indeed, the tax-aholics at the OECD have modified a Multilateral Convention and turned it into an Orwellian regime for promiscuous collection and sharing of data by almost every government. This scheme, sometimes referred to as the Global Account Tax Compliance Act because of its similarity to FATCA (I call it a nascent World Tax Organization), will boomerang on America because of the presumption that we’re obliged to change our tax and privacy laws so that foreign governments can tax investments in the United States.

Thankfully, Senator Rand Paul heroically is blocking this evil pact.

Let’s close with a semi-amusing description of FATCA.

But if you prefer my more dour approach, here’s what I said a few years ago about FATCA for a Chinese network.

I’ve been criticizing this awful legislation from the beginning. Hopefully Congress and the Trump Administration will give me one less thing to worry about.

Nine Positive and Eight Negative Observations from Trump’s Speech

Thu, 03/02/2017 - 11:00am

President Trump gave his first address to a joint session of Congress the other night.

The one thing I can say with great confidence, based on applause patterns, is that it didn’t generate the same spirit of bipartisan good will as the Pope’s address back in 2015.

But let’s set aside the Republican-vs-Democrat silliness and focus on public policy.

What was good in Trump’s speech? Overall, there were nine things that seemed positive.

These are the three things that got my blood pumping.

  1. Lower corporate tax rate – Trump didn’t specifically reference the 15-percent rate he mentioned in the campaign, but he aggressively argued for a big drop in America’s punitive corporate tax rate.
  2. Obamacare repeal – The president effectively outlined how Obamacare is a disaster for taxpayers, for consumers, for the economy, and for the healthcare system.
  3. Food and Drug Administration – Trump correctly criticized the bureaucrats at the FDA for stifling medical progress. I think it’s safe to assume that bureaucracy will be better behaved for the next four years. Maybe we’ll even get rid of the milk police.

What was hopeful about Trump’s speech?

Quite a bit, actually. Here are six things that caught my attention where it’s possible that we’ll see progress.

  1. Jobs – President Trump correctly diagnosed the problem of dismal labor force participation. It remains to be seen whether the net effect of his policies is more job creation.
  2. Washington corruption – I like that he focused on trying to clean up Washington, but I don’t think a handful of restrictions that make it hard for Administration officials to become lobbyists will make a difference. You need to shrink government to “drain the swamp.”
  3. Obamacare replacement – While the repeal message was strong, the replace message was fuzzy. It seems Trump wants more of everything, but at lower cost. That’s what a free market can deliver, but I worry that’s not quite what he has in mind. In the back of my mind, I’m worried that I was right five years ago when I predictedthat Obamacare would decimate the Democrats politically but nonetheless be a long-fun victory for statism.
  4. Medicaid reform – We didn’t get the necessary specifics, but the President definitely used rhetoric that suggests he is not going to be an obstacle to at least this slice of entitlement reform. I feel good about the soft prediction I made two months ago.
  5. School choice – Trump’s comments on education were very uplifting. At the very least, the White House will use the bully pulpit to promote choices for parents rather than throwing more money into a failed system. It would be great if there was some follow-up, ideally leading to the abolition of the Department of Education.
  6. High-skilled immigration – I was surprised that the President said nice things about skilled immigration. Maybe this is a positive sign for the EB-5 program and other job-creating initiatives that are designed to attract successful investors and entrepreneurs to the United States.

And here’s what was negative about Trump’s remarks.

We’ll start with the five things that left me feeling somewhat pessimistic that we’ll have bigger government when the dust settles.

  1. Transportation infrastructure – The President wants a lot of money spent on infrastructure. Fortunately, he was careful not to say that the federal government will be the sole source of the new spending. But I worry that we’ll get a bigger and more wasteful Department of Transportation at the end of the process.
  2. Border-adjustable taxation – It’s troubling that Trump recycled the myth that foreign nations discriminate against American products when they impose value-added taxes on their citizens. It may be an indication that he will sign on to the misguided “border-adjustable tax” in an otherwise pro-growth House tax plan.
  3. Veterans – Trump said he wants to take care of veterans. That’s a good idea, and the ideal solution is to abolish the Veterans Administration. I’m worried, though, Trump will simply throw good money after bad by padding the budget of a bloated and incompetent bureaucracy that rewarded itself with bonuses after putting veterans on secret waiting lists.
  4. Immigration – Notwithstanding the positive comments about skilled immigrants, his overall tone was very anti-immigration. Given that so many immigrant groups from all over the world prosper enormously in the United States (and thus generate benefits for the rest of us), it would have been better if he has a more welcoming attitude while focusing instead on restricting access to the welfare state.
  5. Pentagon blank check – President Trump gave a mixed message. He criticized the heavy cost of needless overseas interventionism, yet then urged more money for a bureaucracy-heavy Pentagon. Yet why spend even more money if there aren’t going to be any more nation building exercises?

What was really disappointing about Trump’s speech? Here’s my list of three things that were unambiguously depressing.

  1. Protectionism – The president seems determined to harm American consumers and undermine America’s economy. Let’s hope these policies don’t lead to a global trade war like in the 1930s.
  2. Childcare Entitlement – Federal subsidies have resulted in higher costs and inefficiency in health care and higher education. Trump now wants to cause the same problems in childcare. This won’t end well.
  3. Paid Parental Leave – When even columnists for the New York Times confess that this type of policy backfires on women by making them less attractive to employers, it’s bizarre that it would be endorsed by a Republican president.

So what’s the bottom line?

To be blunt, beats the heck out of me.

I wondered back during the campaign whether Trump is a big-government Republican or a small-government conservative. I contemplated the same question when he got elected. And also when he got inaugurated.

Last night’s speech left me still wondering, though it’s safe to say Trump does not share Reagan’s instinctive understanding that government is the problem rather than solution.

That doesn’t necessarily mean we’ll get bad policy over the next four years. But there’s no guarantee we’ll get good policy, either.

Great Moments in Local Government

Wed, 03/01/2017 - 11:00am

I focus most of my ire on the federal government because bad policy from Washington is the biggest threat to our nation’s freedom and prosperity.

But we also get plenty of bad policy from other levels of government. I periodically focus on the foibles of states such as California, Illinois, and New York.

Today, though, let’s contemplate the inane policies of local government.

I’ve shared plenty of examples in the post, even to the point of putting together two contests (here and here) to pick the craziest action by a local government.

Politicians and bureaucrats in cities and towns do lots of big things that are bad, such as creating massive unfunded liabilities, providing crappy schools, turning law enforcement into back-door tax collectors, and trying to turn children into wusses.

And they do lots of small things that are bad, such as shutting down children’s lemonade stands, arresting people for saving rafters from drowning, fining people for rescuing children from savage dog attacks, leaving a dead body in a pool for two days, requiring permits to be a bum, poisoning water supplies, and paying bureaucrats not to work for 12 years.

Let’s augment these lists.

As reported by the Chicago Sun-Times, here’s an example of Chicago cronyism.

A real estate venture created by President Barack Obama’s onetime boss and a nephew of former Mayor Richard M. Daley squandered $68 million it was given to invest on behalf of pension plans for Chicago teachers, cops, city employees and transit workers… The five public pension funds haven’t made a dime on the investments they made nearly a decade ago… In fact, the financially troubled pension plans have lost most of the money they gave DV Urban… Though the pension funds lost out, DV Urban and its affiliated companies got about $9 million of the pension money for management fees.

Not that this should be a surprise. Being a Daley relative has commonly been a route to undeserved riches. And the same can be said about being an Obama crony.

Speaking of government greed, here are some excerpts from a very depressing Forbes column about shakedowns of poor people in Los Angeles.

An unbuckled seat belt caused Gloria Mata Alvarado to lose her driver’s license. When her husband was driving Mata to a doctor’s appointment for her gastritis in August 2012, her stomach began hurting. For relief, Mata adjusted her seat belt. But a police officer saw her take off the belt and cited her. …In court, Mata was ordered to pay $712, almost half the monthly income for her and her husband. (Both are on disability.) After telling the judge that she couldn’t pay the fine because of her limited means, a judge graciously reduced the fine—to $600. Unable to pay, her license was ultimately suspended. …In Los Angeles County alone, nearly 200,000 drivers had their licenses suspended simply because they failed to pay fines or appear in court. Statewide, from 2006 to 2013, the California Department of Motor Vehicles suspended more than 4.2 million driver’s licenses for those reasons… Throughout the Golden State, motorists are routinely nickeled-and-dimed in traffic court. Looking to raise revenue, state lawmakers slapped on additional fees and surcharges to the base fines for traffic tickets. For instance, the fine for failing to signal or running a stop sign is $35. But after all the surcharges and fees have been imposed, that fine soars to $238. Likewise, a $20 ticket for using a cell phone while driving balloons to $162, while a $100 traffic ticket for failing to carry proof of car insurance actually costs $490. Even worse, failing to pay can trigger an additional $300 “civil assessment” fee. So for many low-income Angelenos, a $20, $35 or $100 ticket can easily become $462, $538, and $815 respectively. …Notably, the courts themselves receive the collected civil assessment penalties, granting them a strong financial incentive to levy fees.

This sickens me. I hate the thought of poor people having their lives made worse because of venal and greedy government.

Especially when many (probably most) of the infractions are for things that don’t actually promote or protect public safety.

At the very least, the fines (and accompanying fees) should be slashed. Though I recognize this could result in more cities being like Detroit, which actually spends more administering parking tickets than it collects in revenue.

Maybe the answer is to levy fines based on income. If a lot of middle class and rich people suddenly experienced severe financial discomfort like the poor, that might generate enough pressure to shut down these revenue-raising scams.

Let’s now travel up the coast to enjoy a classic case of government incompetence from San Francisco.

last year, SFMTA officials excitedly unveiled the first of sixty brand new electric trolley buses purchased by the city of San Francisco. …these $1.1 million-a-piece vehicles were touted as a crucial investment in a public transit system still running buses 20-plus-years old. There’s just one problem: The 60-foot buses can’t go up San Francisco’s hills. In fact, the buses were never designed to handle our iconic hills — anything over a 10 percent grade wears down motor components. …the New Flyer buses also struggle to meet Muni’s internal acceleration standards on inclines of 5 to 10 percent — sometimes taking double the time during tests to accelerate to required speeds on the slight inclines.

But at least the buses are electric, which means they have zero emissions, so the nitwits in San Francisco can feel virtuous (though it does require them to pretend electricity magically appears from nowhere rather than emissions-producing power plants).

This story reminds me of the streetcar boondoggle in DC.

Now let’s go to another city famous for bad policy.

New York City has been padding its budget by ticketing cars that are parked legally.

As of late 2008, in NYC you can park in front of a sidewalk pedestrian ramp, as long as it’s not connected to a crosswalk. …I’ve got a pedestrian ramp leading to nowhere particular in the middle of my block in Brooklyn, and on occasion I have parked there.  Despite the fact that it is legal, I’ve been ticketed for parking there.  Though I get the tickets dismissed, it’s a waste of everybody’s time. And that got me wondering- How common is it for the police to give tickets to cars legally parked in front of pedestrian ramps?

What the reporter discovered is shocking.

…thanks to NYC’s Open Data portal, I was able to look at the most common parking spots in the City where cars were ticketed for blocking pedestrian ramps. …What I found when I dove into the data surprised me.  To start, I found the top address where this ticket were given: in front of 575 Ocean Avenue in Brooklyn, where over $48,000 in parking fines were issued in the last 2.5 years. … the spot, (or really spots since there are two ramps), are legal, since they are in the middle of the block, with no crosswalk.  $48,000 in tickets at a legally parked spot, and that is just the last 2.5 years.

The next top spots on the list had the same story to tell.

1705 Canton Avenue in Brooklyn, 273 Tickets, $45,045: Legal. 270-05 76 Avenue in Queens, 256 Tickets ($42,440) Legal. 143-49 Cherry Ave, Queens, 246 Tickets, ($40,590).  Legal. …I started to skip down the list.  This spot in Battery Park, ranked #16 on my list and the top spot in Manhattan, had 116 tickets ($19,140) and turned out to be legal. …I started to skip down the list faster and faster.  Take #1000 in my top list, at 1059 Virginia Avenue, where 8 tickets had been given ($1320).  It is a classic T intersection, meaning it’s legal. …I then selected 30 random spots that had received 5 or more tickets over the time period, and based on Google Maps found that all of them appeared to be legal parking spots!

The good news is that this exposé supposedly is forcing the city to stop this type of illegal ticket, so some stories actually do have a happy ending.

The next step hopefully will deal with extortionate fines for the horrible crime of…gasp…idling for more than three minutes!

But not all stories end well.

Here’s a jaw-dropping report of bureaucratic abuse from Sarasota, Florida.

At 90 years old, Marie Louise Sikorski has lived in her house on Webber Street in Sarasota for most of her life… The city found several code violations at her home. Since then, she’s racked up massive fines, which she says add up to about 150,000 dollars. As a widow receiving only 1,000 dollars a month…, she says there’s little she can do. …That’s when 30-year-old Miles came into her life. …As her neighbor, Miles heard about her situation and began to help with repairs around the home, sometimes putting in 16 hour days, all free of charge.

This sounds like a happy ending, right? A greedy local government hits a senior citizen who is too old to maintain her house with massive fines, but a wonderful neighbor steps in to save the day.

You’re probably thinking the local government then waived the absurd fines.

…the City is still not satisfied, and she says she’s still being charged 500 dollars a day. …Sarasota requires much of the work to be done by a “licensed” contractor, something Miles is not.

In other words, we get a sad end to the story because of a mix of two ugly things, routine government greed and oligopolistic government licensing restrictions. Reminds me of the disgusting actions of the local government in Montgomery, Alabama.

Last but not least, let’s close with a classic story of wasteful spending.

A local politician in Portland, Oregon, squandered tax money taking her staff to a luxury spa in Arizona for supposed diversity training.

Commissioner Amanda Fritz says she will close her office next week to take her six staff members to a retreat in Arizona to learn about diversity at a cost of roughly $40,000. Fritz and her staff, about half of whom are people of color, plan to spend at least 3 1/2 days in Tubac, Arizona, near the Mexican border, participating in a diversity workshop put on by a Portland-based company, White Men as Full Diversity Partners. …The program charges $4,750 per person for tuition, lodging, meals and site fees. Fritz’s office will also have to pay for the staffers’ flights to Arizona.

Though, to be fair, Commissioner Fritz is not the only Portland politician to rip off taxpayers for this type of scam.

Former Mayor Charlie Hales drew criticism for spending $56,000 to send 16 white, male city employees to a resort on Mt. Hood in 2014 for another workshop put on by the same organization. The City of Portland has spent more than $126,000 on programs and consulting from White Men as Full Diversity Partners since August 2014, according to city invoice records.

As you might expect, there are some sketchy connections between the city bureaucracy and the contractor.

Office of Neighborhood Involvement Director Amalia Alarcon Morris worked as a paid associate for the diversity organization more than a decade ago… The diversity company still lists Alarcon Morris as a consultant on its website.

By the way, I fully expect that a search of campaign finance records would reveal that the owners and managers of White Men as Full Diversity Partners have recycled some of the loot they’ve received into the campaigns of Portland politicians.

The politicians win with campaign contributions. The bureaucrats win with a free vacation. The contractor wins by getting a big check.

The only losers are…you guessed it…the taxpayers!

The moral of the story, as explained by Veronique de Rugy in a column for Reason, is that governments at all levels are venal and incompetent.

What do home Bible study classes, transgender bathrooms, lemonade stands, cat litter, and marijuana have in common? To the blind eye, not much—but in fact, they’re all things state and local governments are actively working to regulate. …it turns out local governments are frequently the worst offenders of all when it comes to petty tyranny. …Dozens of places, including Austin, Texas; Sacramento, California; and Thurston County, Washington, have banned supermarkets, convenience stores, and pharmacies from providing customers with free plastic bags. “Many cities restrict the economic freedom of their residents and potential migrants through minimum wage laws, business licensing, rent control, and zoning restrictions,” Mercatus Center state and local policy expert Adam Millsap explains. And many of these regulations, particularly zoning and occupational licensing laws, place a disproportionate burden on poor people and minorities.

And she points out that decentralization, while theoretically very desirable, won’t generate many benefits if misguided federal policies are replaced by bad local policies.

Many on the political right believe that the devolution of power to lower levels of government can help overcome problems created by centralized authority….In a 2014 paper, George Mason University economist Richard Wagner explored whether federalism really supports liberty. He found that devolving power to lower levels can be good for individual freedom under the right conditions—but it’s far from guaranteed.

P.S. Don’t forget to vote for Veronique in the “most influential libertarian” contest. And you don’t even need to make it a write-in vote. She’s been added to the list by popular demand.

P.P.S. I suspect most people won’t care about what’s happening with my local government, but local politicians and bureaucrats are whining about belt-tightening even though spending has climbed much faster than inflation.

Laffer Curve Lessons for Leftists, Part VI

Tue, 02/28/2017 - 11:00am

I shared yesterday an example of how a big tax increase on expensive homes led to fewer sales. Indeed, the drop was so pronounced that the government didn’t just collect less money than projected, which is a very common consequence when fiscal burdens increase, but it actually collected less money than before the tax hike was enacted.

That’s the Laffer Curve on steroids.

The purpose of that column was to share with my leftist friends an example of a tax increase that achieved something they desired (i.e., putting a damper on sales of expensive houses) in hopes of getting them to understand that higher taxes on other types of economic activity also will have similar effects.

And some of those “other types of economic activity” will be things that they presumably like, such as job creation, entrepreneurship, and upward mobility.

I now have another example to share. The New York Times is reporting that a Mexican tax on soda is causing a big drop in soda consumption.

In the first year of a big soda tax in Mexico, sales of sugary drinks fell. In the second year, they fell again, according to new research. The finding represents the best evidence to date of how sizable taxes on sugary drinks, increasingly favored by large American cities, may influence consumer behavior.

This is an amazing admission. Those first three sentences of the article are an acknowledgment of the central premise of supply-side economics: The more you tax of something, the less you get of it.

In other words, taxes do alter behavior. In the wonky world of economics, this is simply the common-sense observation that demand curves are downward-sloping. When the price of something goes up (in this case, because of taxes), the quantity that is demanded falls and there is less output.

And here’s another remarkable admission in the story. The effect of taxes on behavior can be so significant that revenues are impacted.

The results…matter for policy makers who hope to use the money raised by such taxes to fund other projects. …some public officials may be dismayed… Philadelphia passed a large soda tax last year and earmarked most of its proceeds to pay for a major expansion to prekindergarten. City budget officials had assumed that the tax would provide a stable source of revenue for education. If results there mirror those of Mexico, city councilors may eventually have to find the education money elsewhere.

Wow, not just an admission of supply-side economics, but also an acknowledgment of the Laffer Curve.

Now if we can get the New York Times to admit that these principles also apply to taxes on work, saving, investment, and entrepreneurship, that will be a remarkable achievement.

P.S. Leftists are capable of amazing hypocrisy, so I won’t be holding my breath awaiting the consistent application of the NYT‘s newfound knowledge.

P.P.S. Just because some folks on the left are correct about the economic impact of soda taxes, that doesn’t mean they are right on policy. As a libertarian, I don’t think it’s the government’s job to dictate (or even influence) what we eat and drink.

Laffer Curve Lessons for Leftists, Part V

Mon, 02/27/2017 - 12:00pm

In my never-ending strategy to educate policy makers about the Laffer Curve, I generally rely on both microeconomic theory (i.e., people respond to incentives) and real-world examples.

And my favorite real-world example is what happened in the 1980s when Reagan cut the top tax rate from 70 percent to 28 percent. Critics said Reagan’s reforms would deprive the Treasury of revenue and result in rich people paying a lot less tax. So I share IRS data on annual tax revenues from those making more than $200,000 per year to show that there was actually a big increase in revenue from upper-income taxpayers.

It has slowly dawned on me, though, that this may not be the best example to share if I’m trying to convince skeptical statists. After all, they presumably don’t like Reagan and they may viscerally reject my underlying point about the Laffer Curve since I’m linking it to the success of Reaganomics.

So I have a new strategy for getting my leftist friends to accept the Laffer Curve. I’m instead going to link the Laffer Curve to “successful” examples of left-wing policy. To be more specific, statists like to use the power of government to control our behavior, often by imposing mandates and regulations. But sometimes they impose taxes on things they don’t like.

And if I can use those example to teach them the basic lesson of supply-side economics (if you tax something, you get less of it), hopefully they’ll apply that lesson when contemplating higher taxes on things they presumably do like (such as jobs, growth, competitiveness, etc).

Here’s a list of “successful” leftist tax hikes that have come to my attention.

Now I’m going to augment this list with an example from the United Kingdom.

By way of background, there’s been a heated housing market in England, with strong demand leading to higher prices. The pro-market response is to allow more home-building, but the anti-developer crowd doesn’t like that approach, so instead a big tax on high-value homes was imposed.

And as the Daily Mail reports, this statist approach has been so “successful” that the tax hike has resulted in lower tax revenues.

George Osborne’s controversial tax raid on Britain’s most expensive homes has triggered a dramatic slump in stamp duty revenues. Sales of properties worth more than £1.5million fell by almost 40 per cent last year, according to analysis of Land Registry figures… This has caused the total amount of stamp duty collected by the Treasury to fall by around £440million, from £1.079billion to a possible £635.7million. The figures cover the period between April and November last year compared to the same period in 2015.

Our leftist friends, who sometimes openly admit that they want higher taxes on the rich even if the government doesn’t actually collect any extra revenue, should be especially happy because the tax has made life more difficult for people with more wealth and higher incomes.

Those buying a £1.5 million house faced an extra £18,750 in stamp duty. …Tory MP Jacob Rees-Mogg…described Mr Osborne’s ‘punitive’ stamp duty hikes as the ‘politics of envy’, adding that they have also failed because they have raised less money for the Treasury.

By the way, the fact that the rich paid less tax last year isn’t really the point. Instead, the lesson to be learned is that a tax increase caused there to be less economic activity.

So I won’t care if the tax on expensive homes brings in more money next year, but I will look to see if fewer homes are being sold compared to when this tax didn’t exist.

And if my leftist friends say they don’t care if fewer expensive homes are being sold, I’ll accept they have achieved some sort of victory. But I’ll ask them to be intellectually consistent and admit that they are implementing a version of supply-side economics and that they are embracing the notion that tax rates change behavior.

Once that happens, it’s hopefully just a matter of time before they recognize that it’s not a good idea to impose high tax rates on things that are unambiguously good for an economy, such as work, saving, investment, and entrepreneurship.

Yes, hope springs eternal.

P.S. In addition to theory and real-world examples, my other favorite way of convincing people about the Laffer Curve is to share the poll showing that only 15 percent of certified public accountants agree with the leftist view that taxes have no impact have taxable income. I figure that CPAs are a very credible source since they actually do tax returns and have an inside view of how behavior changes in response to tax policy.

Two Utterly Depressing Medicaid Graphs

Sun, 02/26/2017 - 12:07pm

The United States is going to become another Greece, and it’s largely because of poorly designed entitlement programs. As the old saying goes, demography is destiny.

Let’s look at just one piece of that puzzle. James Capretta of the American Enterprise Institute has a very sobering summary of how Medicaid has metastasized into one of the largest and fastest-growing entitlement programs.

You should read the entire article, but if you’re pressed for time, I’m going to share two grim charts that tell you what you need to know.

First, we have a look at how the burden of Medicaid spending, measured as a share of national output, has increased over time.

What makes this chart particularly depressing is that Medicaid was never supposed to become a massive entitlement program.

It was basically created so the crowd in Washington could buy a few votes. Yet the moment politicians decided that it was the federal government had a role in subsidizing health care for the indigent, it was just a matter of time before the program was expanded to new groups of potential voters.

And every time the program was expanded, that increased the burden of spending and further undermined market forces in the health sector.

This is why entitlement programs are so injurious to a nation.

But Medicaid isn’t just a problem because of its adverse fiscal and economic impact.

The program also is exacerbating the redistribution culture in the United States as more and more people get trapped in the web of dependency.

Which brings us to our second chart from Capretta’s article. Here’s a look at the share of the population being subsidized by Medicaid.

As a fiscal wonk, I realize I should care more about the budget numbers, but I actually find this second graph more depressing. In my lifetime, we’ve gone from a nation where the federal government had no role in the provision of low-income healthcare, and now nearly one out of every five Americans is on the federal teat.

Even though we’re far richer than we were in the mid-1960s when the program was created, which presumably should have meant less supposed need for federal subsidies.

For further background on the issue, here’s a video I narrated for the Center for Freedom and Prosperity.

I urge you to pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending. This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs. But it also happens because the federal match gives states big incentives to manipulate the system to get more transfers.

P.S. All of which explains why I think Medicaid reform should be the first priority when looking at how to fix the entitlements mess, even before Medicare reform and Social Security reform.

P.P.S. I’m not overflowing with optimism that Trump will tackle the issue, but there is a feasible scenario for him fixing the program.

P.P.P.S. Regardless, one would hope all politicians would agree that it’s time to tackle rampant Medicaid fraud.

Business Taxation and Connecting the Dots on Tax Rates, Tax Base, and Tax Revenue

Sat, 02/25/2017 - 11:00am

For more than 30 years, I’ve been trying to educate my leftist friends about supply-side economics and the Laffer Curve.

Why is it so hard for them to recognize, I endlessly wonder, that when you tax something, you get less of it? And why don’t they realize that when you tax something at high rates, the effect is even larger?

And if the tax is high and the affected economic activity is sufficiently discouraged, why won’t they admit that this will have an impact on tax revenue?

Don’t they understand the basic economics of supply and demand?

But I’m not giving up, which means I’m either a fool or an optimist.

In this Skype interview with the Blaze’s Dana Loesch, I pontificate about the economy and tax policy.


I made my standard points about the benefits a lower corporate rate and “expensing,” while also warning about the dangers of the the “border-adjustable tax” being pushed by some House Republicans.

But for today, I want to focus on the part of the interview where I suggested that a lower corporate tax rate might generate more revenue in the long run.

That wasn’t a throwaway line or an empty assertion. America’s 35 percent corporate tax rate (39 percent if you include the average of state corporate taxes) is destructively high compared to business tax systems in other nations.

Last decade, the experts at the American Enterprise Institute calculated that the revenue-maximizing corporate tax rate is about 25 percent.

More recently, the number crunchers at the Tax Foundation estimated the long-run revenue-maximizing rate is even lower, at about 15 percent.

You can (and should) read their studies, but all you really need to understand is that companies will have a greater incentive to both earn and report more income when the rate is reasonable.

But since the U.S. rate is very high (and we also have very punitive rules), companies are discouraged from investing and producing in America. Firms also have an incentive to seek out deductions, credits, exemptions, and other preferences when rates are high. And multinational companies understandably will seek to minimize the amount of income they report in the United States.

In other words, a big reduction in the corporate rate would be unambiguously positive for the American economy. And because there will be more investment and job creation, there also will be more taxable income. In other words, a bigger “tax base.”

Though I confess that I’m not overly fixated on whether that leads to more revenue. Remember, the goal of tax policy should be to finance the legitimate functions of government in the least destructive manner possible, not to maximize revenue for politicians.

P.S. Economists at the Australian Treasury calculated the effect of a lower corporate rate and found both substantial revenue feedback and significant benefits for workers. The same thing would happen in the United States.

Donald Trump, Transgender Kids, and the Separation of Bathroom and State

Fri, 02/24/2017 - 12:11pm

Because I’m worried about the future of the nation, I want a national discussion and debate about big issues such as the entitlement crisis and our insane tax code.

No such luck. The crowd in Washington and the media have been focusing on sideshow topics such as which side has the most fake news, the purported sloppiness of executive orders, and the Trump-Putin “bromance.”

And we now have a culture-war fight in DC thanks to Trump’s new policy on transgender bathroom usage.

The Justice and Education departments said Wednesday that public schools no longer need to abide by the Obama-era directive instructing them to allow transgender students to use bathrooms and locker rooms of their chosen gender. …The agencies said they withdrew the guidance to “in order to further and more completely consider the legal issues involved.” Anti-bullying safeguards for students will not be affected by the change, according to the letter. …There won’t be any immediate impact on schools, because the Obama guidance had been temporarily blocked since August by a federal judge in Texas, one of 13 states that sued over the directive.

Though, to be fair, Trump didn’t start this culture war. He’s simply responding to a battle that Obama triggered.

Moreover, even though I prefer that we focus attention on big-picture fiscal and economic issues, I’m not asserting that this issue should be swept under the rug.

That being said, I think the issue would largely disappear if we simply recognized boundaries. Not everything should be decided in Washington. Yes, it’s the federal government’s job to guarantee and protect universally applicable constitutional rights, but some decisions belong at the state and local level. And most decisions should take place in the private sector and civil society.

Here’s some of what I wrote in late 2015.

One of the great things about being a libertarian is that you have no desire for government sanctions against peaceful people who are different than you are, and that should be a very popular stance. You can be a libertarian who is also a serious fundamentalist, yet you have no desire to use the coercive power of government to oppress or harass people who are (in your view) pervasive sinners. For instance, you may think gay sex is sinful sodomy, but you don’t want it to be illegal. Likewise, you can be a libertarian with a very libertine lifestyle, yet you have no desire to use the coercive power of government to oppress and harass religious people. It’s wrong (in your view) to not cater a gay wedding, but you don’t want the government to bully bakers and florists. In other words, very different people can choose to be libertarian, yet we’re all united is support of the principle that politicians shouldn’t pester people so long as those folks aren’t trying to violate the life, liberty, or property of others. …And when you’re motivated by these peaceful principles, which imply a very small public sector and a very big private sector and civil society, it’s amazing how many controversies have easy solutions.

Let’s look at some more recent sensible commentary on this topic.

Roy Cordato wrote about the controversy in his state of North Carolina.

…lost in all the rhetoric surrounding this issue is the truth about both the original Charlotte law and the state’s response to it. …the Charlotte, North Carolina, city council passed an “antidiscrimination” law… The centerpiece of this law was a provision that prohibits businesses providing bathrooms, locker rooms, and showers from segregating usage of those facilities by gender, biologically defined. Biological males or females must be allowed to use the facilities of the opposite sex if they claim that that is the sex they identify with psychologically. …This ordinance was an assault on the rights of private property owners and economic freedom, regardless of one’s religious beliefs. …In a free society based on property rights and free markets, as all free societies must be, a privately owned business would have the right to decide whether or not it wants separate bathrooms strictly for men and women biologically defined, bathrooms for men and women subjectively or psychologically defined, completely gender neutral bathrooms with no labels on the doors, or no bathrooms at all.

And Roy says that the state law (which overturned the Charlotte ordinance) was reasonable in that regard.

The law in North Carolina that so many progressives are up in arms about does not prohibit businesses from having bathrooms, locker rooms, showers, etc., that allow use by people of all genders defined biologically, psychologically, or whatever. …the state of North Carolina codified a basic libertarian principle: the separation of bathroom and state.

Tim Carney of the Washington Examiner has a similar perspective.

Government needs to get out of culture war issues as much as possible, the question of transgendered people in bathrooms included. …In North Carolina, Charlotte’s City Council made the first mistake. …the city passed a non-discrimination ordinance…that…basically legislated bathroom admission. …Charlotte passed this law, exposing private business owners to lawsuits and legal punishments. …The ordinance also stirred up fears of predators — men getting into a ladies’ room thanks to this law, and then assaulting or leering at vulnerable women. Nobody showed that this was a real threat, but the same mindset behind the Charlotte law — we need a law to ban a possible bad thing — drove the state legislature to pass HB 2. HB 2 blocked Charlotte and other cities from implementing their antidiscrimination laws. …both the liberal legislation and the conservative reaction were out of place. Charlotte shouldn’t have stuck itself into private restrooms, and the state shouldn’t have stuck itself into the city’s sticking itself into restrooms.

By the way, Tim’s column also makes the key point that people should be decent human beings. A bit of civilized consideration and politeness goes a long way when dealing with potentially uncomfortable situations.

Writing for Reason, Scott Shackford opines on the topic, beginning with an appropriate defense of transgender people.

Transgender citizens have the same right as everybody else to live their lives as they please without unnecessary government interference. …As a legal and ethical matter, …it generally shouldn’t matter why somebody identifies as transgender. It’s their right. In the event that somebody decides to pose as transgender in order to engage in some sort of fraud or criminal behavior, there are already laws to punish such actions. …so it would be appropriate that in any situation where the government treats a transgender person on the basis of his or her identity it respects their form of gender expression. That means the government should allow for any official documentation—such as a driver’s license—that requires the listing of a person’s sex to match the identity by which a person lives, as much as it’s feasibly possible. …Transgender citizens are seeing some big inroads both culturally and legally, and we should all see these generally as positive developments. …Transgender citizens have the right to demand the government treat them fairly and with dignity.

But Scott correctly observes that the government should not have the power to use coercion to mandate specific choices by private individuals or private businesses.

In the private sector, it’s all a matter of cultural negotiation and voluntary agreements. The law should not be used to mandate private recognition of transgender needs, whether it’s requiring insurance companies cover gender reassignment surgeries or requiring private businesses to accommodate their bathroom choices. The reverse is also true: It would be inappropriate for the government to forbid insurance coverage or to require private businesses to police their own bathrooms to keep transgender folks out.

Last but not least, my colleague Neal McCluskey explains that federalism is part of the solution.

Much of this debate has been framed as conservatives versus liberals, or traditionalists versus social change. But the root problem is not differing views. It is government — especially federal — imposition. …Single-sex bathrooms and locker rooms have long been the norm, and privacy about our bodies — especially from the opposite sex — has long been coveted. …Of course, transgendered students should — must — be treated equally by public institutions, and their desire to use the facilities in which they feel comfortable is utterly understandable. By fair reckoning, we do not have a competition between good and evil, but what should be equally protected values and rights. How do we resolve this? …not with a federal mandate. …So how, in public schools, do we treat people equally who have mutually exclusive values and desires? We cannot. Open the bathrooms to all, and those who want single-sex facilities lose. Keep them closed, and transgender students lose. The immediate ramification of this is that decisions should be made at state, and preferably local, levels. At least let differing communities have their own rules.

But the real answer, Neal explains, is school choice.

…the long-term — and only true — solution is school choice. Attach money to students, give educators freedom to establish schools with their own rules and values, and let like-minded people freely associate. Impose on no one.  …We live in a pluralist society, and for that we should be eternally grateful. To keep that, and also be a free and equal society, people of different genders, values, etc., must be allowed to live as they see fit as long as they do not impose themselves on others. That is impossible if government imposes uniformity on all.

But I’ll admit that these libertarian principles don’t solve every problem. States will need to have some sort of policy. Not because of private businesses, which should get to choose their own policies. And not because of schools, which will be privately operated in my libertarian fantasy world and therefore also able to set their own policies.

But how should states handle bathrooms in public buildings? Even if there are less of them in a libertarian society, the issue will exist. And what about prisons in a libertarian world?

I don’t pretend to know exactly how these issues should be resolved. Conservatives argue that you should be defined by the gender on your birth certificate and leftists say you should be to choose your identify.

My gut instinct is to cut the baby in half (I’m such a moderate). Maybe the rule for prisons is not how you identify or what’s on your birth certificate, but what sort of…um…equipment you have. If you were born a man but had surgery (which is your right so long as you’re not asking me to pay for it), then you’re eligible for a women’s prison. Likewise, if you were born a woman and surgery gave you male genitalia (I confess I don’t know if that’s even possible), then you get assigned to a men’s prison.

Government bathrooms are an easier problem. From a practical perspective, I’m guessing the net result of this fight – at least for schools and public buildings – will be a shift to single-use bathrooms. In other words, multi-person facilities for men and women will be replaced by a bunch of private bathrooms.

This will be bad news for taxpayers, because it is more expensive to build and operate such bathrooms.

And it will be bad news for women because that means they will be forced to use bathrooms that are less pleasant because men…um…tend to be less fastidious about…um…personal habits such as lifting toilet seats before…well…you know.

Men only have to deal with the messes made by other men when we have to sit down in a bathroom. And even then, the problem is minimized since other men generally will use urinals when they…um…don’t need to sit down.

But if we have a world of one-person-at-a-time bathrooms, women’s lives will be less pleasant.

Italy’s Continuing Downward Spiral

Thu, 02/23/2017 - 12:47pm

Early last month, in a column on my hopes and fears for 2017, I fretted about fiscal chaos in Italy leading to default and bailouts.

Simply stated, I fear that Italy, along with certain other “Club Med” nations, has passed the point of no return in terms of big government, demographic decline, and societal dependency.

And this means that, sooner or later, the proverbial wheels are going to fall off the bus.

And it might be sooner. I don’t always agree with his policy recommendations, but I regularly read Desmond Lachman of the American Enterprise Institute because he is one of the best-informed people in Washington on the fiscal and economic mess in Europe.

And Italy, to be blunt, is in a mess.

Here’s what Desmond just wrote about the country’s economy.

…while the euro could very well survive a Greek exit, it certainly could not survive in anything like its present form were Italy to have a full-blown economic and financial crisis that forced it to default on its public debt mountain. …Among the reasons that there should be greater concern about an Italian, rather than a Greek, economic crisis is that Italy has a very much larger economy than Greece. Being the third-largest economy in the eurozone, Italy’s economy is around 10 times the size of that of Greece. Equally troubling is the fact that Italy has the world’s third-largest sovereign bond market with public debt of more than $2.5 trillion. Much of this debt is held by Europe’s shaky banking system, which heightens the risk that an Italian sovereign debt default could shake the global financial system to its core. …the country’s economic performance since 2008 has been abysmal. Indeed, Italian living standards today are around 10 percent below where they were 10 years ago. Meanwhile, Italy’s banking system has become highly troubled and its public sector debt as a share of gross domestic product (GDP) is now the second highest in the eurozone.

And here’s some of what he wrote late last year.

…today there would seem to be as many reasons for worrying about the Italian economy as there were for worrying about the Greek economy back in 2009. Like Greece then, Italy today checks all too many of the boxes for the making of a full-blown economic and financial crisis within the next year or two. …the Italian economy today is barely above its level in 1999 when the country adopted the Euro as its currency. Worse still, since the Great Global Economic Recession in 2008-2009, the Italian economy has experienced a triple-dip recession that has left its economy today some 7 percent below its pre-2008 crisis peak level and its unemployment rate stuck at over 11 percent. …deficiencies of its ossified labor market that contributes so importantly to the country’s very poor productivity performance. As a result, since adopting the Euro in 1999, Italy’s unit labor costs have increased by around 15 percentage points more than have those in Germany. …Italian banks now have around EUR 360 billion in non-performing loans, which amounts to a staggering 18 percent of their loan portfolio. If that were not bad enough, the Italian banks also hold unhealthily large amounts of Italian government debt, which now total more than 10 percent of their overall assets. …the country’s public debt level has risen from 100 percent of GDP in 2008 to 133 percent of GDP at present.

The numbers shared by Lachman are downright miserable.

And he’s not the only one pointing out that Italy’s economy is in the toilet.

I shared numbers last year showing the pervasive stagnation in the country.

So what’s the Italian government doing to solve these problems? Is it slashing tax rates? Reducing the burden of government? Cutting back on red tape?

Of course not. The politicians are either making things worse or engaging in pointless distractions.

Speaking of which, I’m tempted to laugh at the Italian government’s campaign to boost birthrates. Here’s some of what’s been reported by the New York Times.

…a government effort to promote “Fertility Day” on Sept. 22, a campaign intended to encourage Italians to have more babies. …Italy has one of the lowest birthrates in the world… Italian families have been shrinking for decades. In 2015, 488,000 babies were born in Italy, the fewest since the country first unified in 1861. It has one of the lowest birthrates in Europe, with 1.37 children per woman, compared with a European average of 1.6, according to Eurostat figures.

By the way, I actually commend the government for recognizing that falling birth rates are a problem.

Not because women should feel obliged to have kids if that’s not what they want. But rather because Italy has a massive tax-and-transfer welfare state that is predicated on an ever-expending population of workers (i.e., taxpayers) to finance benefits to retirees.

But old people are living longer and low birthrates mean that there won’t be enough taxpayers to prop up the Ponzi Scheme of big government.

But while the government deserves kudos for acknowledging a problem, it deserves mockery for thinking empty slogans will make a difference.

Moreover, there’s also a problem in that Italian voters have been so conditioned to expect handouts that they think the answer to the problem is even more government!

The problem is not a lack of desire to have children, critics of the campaign say, but rather the lack of meaningful support provided by the government and many employers. …”I still feel very offended,” said Vittoria Iacovella, 37, a journalist and mother of two girls, ages 10 and 8. “The government encourages us to have babies, and then the main welfare system in Italy is still the grandparents.” …Italy’s government has tried to help families with a so-called baby bonus of 80 to 160 euros, or about $90 to $180, for low- and middle-income households, and it has approved labor laws giving more flexibility on parental leave.

Ms. Iacovella is crazy for thinking that more taxes, more spending, more regulation, and more mandates will make things better.

Heck, even leftists are now admitting such laws undermine employment and specifically hurt women by making them less attractive to employers.

Meanwhile, the Italian government is taking lots of other dumb steps. Including, as reported by the Telegraph, creating a new entitlement for teenagers.

Italian school leavers may face the dismal prospect of 40 per cent youth unemployment, but at least they have one thing to look forward to – a €500 “culture bonus”, courtesy of the government. From next month, every 18-year-old will be entitled to claim the money and spend it on culturally enriching pursuits such as going to theatres, concerts and museums, visiting archaeological sites, and buying books. The scheme, which starts on Sept 15, will benefit 575,000 teenagers, at a cost to the government of €290 million (£250 million).

By the way, is anyone shocked to learn that Italian teenagers look forward to these handouts?

…it has been welcomed by 18-year-olds, who face a difficult economic landscape when they leave school – high unemployment, a lack of secure, long-term contracts and an economy that has performed dismally for a decade. “Of course we’re happy…,” said Angelica Magazzino, a teenager from the southern region of Puglia who turns 18 in November.

If you read the entire story, you’ll learn that the government justifies this new entitlement by saying it will fight terrorism. I don’t know if that’s more or less crazy than the American leftists who blame terrorism on climate change or inequality.

Last but not least, CNN is reporting that the government is also enabling other forms of Italian “culture.”

Italy’s highest court has ruled that masturbation in public is not a crime, as long as it is not conducted in the presence of minors.

No, this is not a joke.

The decision came down from the Italian Supreme Court…in the case of a 69-year-old man…The man was convicted in May 2015 after he performed the act in front of students on the University of Catania campus, according to documents filed with Supreme Court. The man was sentenced to three months in prison and ordered to pay a fine of €3,200 (around $3,600). However, the defendant’s lawyer appealed the case to the country’s highest court, which ruled on the side of the accused in June but only just made its decision public. Judges ruled that public masturbation out of the presence of minors is no longer deemed criminal conduct due to a change in the law last year, which decriminalized the act.

Great. I’m looking forward to my next trip to Italy. Though I guess it’s nice to see Italian seniors are staying active in their communities.

More seriously, this is why I’m sympathetic to Italians that are either privately dodging or publicly revolting when you have a government this profligate and senseless.

P.S. Amazingly, some leftists think the United States should have a bigger government and be more like Italy.

Vote for the Most Influential Libertarians

Wed, 02/22/2017 - 12:28pm

I’ve shared several surveys that people can take to determine whether they are libertarian.

Now the good folks from FreedomFest are taking this to the next level by conducting a survey to determine the “50 Most Influential Libertarians.”

I invite everyone to participate by clicking here, especially since filling out the survey gives you a $100 discount when registering for this year’s FreedomFest (to be held in mid-July).

Having worked in libertarian circles for many decades, I’m going to look at each of the categories and take a guess on who will get the most votes and also give my two cents on which of the people are the most under-appreciated.

We’ll start with libertarian authors.

I’m guessing P.J. O’Rourke will get first place in this category, though Robert Higgs and Charles Murray also are possibilities.

The most under-appreciated choice is James Bovard. I’ve known Jim for decades and his writing is both principled and entertaining. I’ve shared several of his columns if you want to get a taste.

Now let’s move the business and finance category.

I actually know only about half of the people on this list, so take my views here with a grain of salt. For my guess on who will win, I’m torn between listing David Koch and Charles Koch, who have done so much to build libertarian institutions, and Steve Forbes, who has done so much to popularize free markets.

For the most under-appreciated libertarian, I’m going with John Aglialoro. How can you not applaud a guy who finally delivered a movie version of Atlas Shrugged?

Now let’s look at libertarian celebrities.

I have no idea who will win this category. I’m wondering if voters will pick the biggest celebrity, meaning perhaps Clint Eastwood.

It’s also hard to pick the most under-appreciated libertarian in this category. But I’ll go with Penn Gillette. I’ve seen his Las Vegas show (Penn and Teller) two times and I imagine hundreds of thousands, if not millions, of Americans have been both entertained and enlightened by the experience.

By the way, I wonder why Howard Stern wasn’t listed.

Time now for the top libertarian in freedom organizations.

This is another hard-to-guess category. If I’m basing my choice on (deserved) celebrity status, I would have to pick between Mark Skousen, who has made FreedomFest a must-attend event, Jeffrey Tucker, the guy who is dramatically expanding FEE’s outreach, and Johan Norberg, who is famous for his short videos on freedom.

For under-appreciated libertarians, Tom Palmer deserves praise as one of the most determined and effective libertarians ever to traverse the globe (literally and figuratively). And Barbara Kolm deserves some sort of prize for her yeomanlike (yeowomanlike?) efforts to save Europe with her annual Free Market Road Show.

Let’s shift to the media category.

I would be stunned if John Stossel didn’t win this category, though Judge Napolitano and the guys from Reason may give him a tough race.

My choice for under-appreciated libertarian would be Neal Boortz or Julie Borowski.

The big oversight is that Glenn Reynolds of Instapundit isn’t listed.

Here are the choices for politics.

I assume there’s not much suspense on who will win. If Ron Paul doesn’t come in first place, I’ll eat my hat. Actually, I retract that offer. Based on my less-than-impressive election predictions, I no longer feel confident about my ability to prognosticate. But I still think Ron Paul wins, perhaps followed by his son.

For under-appreciated libertarians, I’m going with Justin Amash and Thomas Massie. It is very helpful to have a couple of solid libertarians in the House of Reprehensibles. They probably should have included Congressman Brat as well.

Here’s another very difficult category, the top libertarian professors.

It’s impossible to make good selections since there are so many good choices. If you put a gun to my head, I wouldn’t be surprised to see Walter Williams or Thomas Sowell emerge in first place because they’ve both done such a great job over the decades with their books and columns.

It’s also difficult to pick the most under-appreciated libertarian. The crowd from George Mason University is superb, Richard Epstein and Randy Barnett are amazing legal minds, and the Schoollands do great work.

But I suppose I’ll go with either James Gwartney, since his work on Economic Freedom of the World is so valuable, or Deirdre McCloskey, who deserves praise for her books and other works.

By the way, it’s a terrible oversight that Robert Murphy and Ed Stringham are not on the list.

Last but not least, we have the think tank crowd.

It goes without saying that the Cato Institute (America’s most principled and effective think tank) should win this category. And you have lots of Cato people from which to choose, so pretend you’re a dead person in Chicago and vote early and vote often.

For the most under-appreciated libertarian, I’m going to pick someone who isn’t even on the list. Veronique de Rugy of the Mercatus Center deserves lots of write-in votes. Not only did she escape France, but she’s been one of the most effective and determined policy economists in Washington. If you need any extra convincing, just watch this video.

Once again, here’s the link for those who want to take the survey.

P.S. On another issue, Paul Krugman once again has attacked me for my comments about California. For those  interested, here is my response.

Time for Republicans to Pull the Plug on Border-Adjustable Tax Scheme

Tue, 02/21/2017 - 6:53pm

As part of an otherwise very good tax reform plan, House Republicans have proposed to modify the corporate income tax so that it becomes a “destination-based cash-flow tax.”

For those not familiar with wonky inside-the-beltway tax terminology, there are three main things to understand about this proposal.

  • First, the tax rate on business would drop from 35 percent to 20 percent. This is unambiguously positive.
  • Second, it would replace depreciation with expensing, which is a very desirable change that would eliminate a very counter-productive tax on new investment outlays. This is basically what makes the plan a “cash-flow” tax.
  • Third, any income generated by exports would be exempt from tax but the 20-percent tax would be imposed on all imports. These “border-adjustable” provisions are what makes the plan a “destination-based” tax.

I’m a big fan of the first two provisions, but I’m very hostile to the third item.

I don’t like it because I worry it sets the stage for a value-added tax. I don’t like it because it is designed to undermine tax competition. I don’t like it because it has a protectionist stench and presumably violates America’s trade commitments. I don’t like it because that part of the plan only exists because politicians aren’t willing to engage in more spending restraint. And I don’t like it because politicians should try to reinvent the wheel when we already know the right way to do tax reform.

Heck, I feel like the Dr. Seuss character who lists all the ways he would not like green eggs and ham. Except I can state with complete certainty I wouldn’t change my mind if I was suddenly forced to take a bite of this new tax.

Today, I’m going to augment my economic arguments by noting that the plan also is turning into a political liability. Here are some excerpts from a news report in the Wall Street Journal about opposition in the business community.

A linchpin of the House Republicans’ tax plan, an approach called “border adjustment,” has split Republicans and fractured the business world into competing coalitions before a bill has even been drafted. …There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.

And The Hill reports that grassroots organizations also are up in arms.

Americans for Prosperity is stepping up its efforts to advocate against a proposal from House Republicans to tax imports and exempt exports, as lawmakers are increasingly raising concerns about the proposal. …AFP has hundreds of volunteers and staff who are making phone calls about the proposal. The group has about 100 meetings set up with Congress members and their staff for next week, while Congress is in recess.

Meanwhile, the Economist reports that the plan is causing uncertainty around the world.

To offset a border-adjusted tax of 20%—the rate favoured by House Republicans—the greenback would need to rise fully 25%, enough to destabilise emerging markets burdened with dollar-denominated debts. If the dollar stayed put and wages and prices rose 25% instead, the Federal Reserve would have to decide how to respond to an unprecedented surge in inflation. Why tolerate such disruption?

Holman Jenkins of the Wall Street Journal has a devastating take on the issue.

Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane. And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow. The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports.

Last but not least, John Tamny outlines some of the political downsides at Real Clear Markets.

…the House of Representatives…is aggressively promoting a…tax on imports. …When we get up and go to work each day, our work is what we exchange for what we don’t have, including voluminous goods and services produced for us around the world.  …Party members are proudly seeking a tax on our work. …Only the “stupid” Party could come up with something so injurious to every American, to the American economy, and to its growth-focused brand.  But that’s where we are at the moment.  The Party that attained majorities with its tax cutting reputation is aggressively seeking to shed its growth brand through the introduction of tax hikes meant to give politicians even more of what we the people produce.  If so, the majority Party can kiss its majority goodbye.  It will have earned its minority status.

For what it’s worth, I think John overstates the case against the plan. The additional revenue from border-adjustable tax provision would be used to cut taxes elsewhere. Heck, the plan is actually a significant net tax cut.

But John is right when you look at the issue through a political lens. If the DBCFT actually began to move through the legislative process, opponents would start running commercials about the “GOP scheme to impose new consumption tax on Americans.” Journalists (most of whom dislike Republicans) would have a field day publicizing reports about the “GOP plan to raise average family tax bill by hundreds of dollars.”

Such charges would be ignoring the other side of the equation, of course, but that’s how politics works.

All of which brings me back to one of my original points. We already know that the flat tax is the gold standard of tax reform. And we already know the various ways of moving the tax code in that direction.

My advice is that Republicans abandon the border-adjustable provision and focus on lowering tax rates, reducing double taxation, and cutting back on loopholes. Such ideas are economically sounder and politically safer.

Mirror, Mirror, on the Wall, Which Nation Punishes Productive People Worst of All?

Mon, 02/20/2017 - 6:55pm

Back in 2014, I shared some data from the Tax Foundation that measured the degree to which various developed nations punished high-income earners.

This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.

But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?

To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.

They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.

Here’s what Englund and Lundberg wrote.

The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.

They then explain why they include payroll taxes in their calculations.

The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.

Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.

They then explain why they include a measure of consumption taxation.

One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.

Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.

And when you begin to add everything together, you get the most accurate measure of government greed.

Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.

Here’s their data for various developed nation.

Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.

And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.

Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.

For what it’s worth, the United States does fairly well when compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.

By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.

Though none of this satisfies the statists. They actually would like us to think that letting well-to-do taxpayers keep any of their money is akin to a handout.

Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.

In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.

Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.

P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.

P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.

Everything You Need to Know about Socialism in Three Pictures

Sun, 02/19/2017 - 3:31pm

All forms of statism are despicable because they’re morally and practically evil.

They’re morally evil since they’re based on coercion. And they’re practically evil since they deliver such awful results for ordinary people.

The good news is that some forms of statism are widely discredited. Outside of universities, you don’t find many people who defend and advocate communism. And other than a few lonely cranks, you don’t find many people who defend and advocate national socialism and other forms of fascism.

But for some inexplicable reason, you still find some folks who harbor positive feelings about socialism.

To be sure, that opens up a bunch of questions, such as whether they even understand that socialism – at least in theory – involves government ownership and operation of the means of production. Such as the United Kingdom in the post-WWII era.

For what it’s worth, the fans of Bernie Sanders probably don’t understand anything about economics (goes without saying, right?) and they probably think that socialism is simply a system with lots of redistribution. Such as modern Denmark (even though that nation is just as market-oriented as the United States).

I’m not sure how we educate these people, and I doubt these three photos will have much impact on them, but I chuckled when this showed up in my inbox.

I guess the top photo might be Detroit. The second photo could be Cuba. And the last photo might be where Al Gore lives.

If that’s the case, the first is actually an image showing the destructive impact of the welfare state and the third is actually an image the benefits of insider cronyism, but let’s not get hung up on details. The real point is that corrupt insiders are the only real beneficiaries of big government.

P.S. And even though self-proclaimed socialists pontificate about sharing and compassion, their ideology actually promotes a bad kind of selfishness.

Trump, Big Government, the Export-Import Bank, and the Washington Swamp

Sat, 02/18/2017 - 10:00am

I’ve written many times that Washington is both a corrupt city and a corrupting city. My point is that decent people go into government and all too often wind up losing their ethical values as they learn to “play the game.”

I often joke that these are people who start out thinking Washington is a cesspool but eventually decide it’s a hot tub.

During the presidential campaign, Trump said he wanted to “drain the swamp,” which is similar to my cesspool example. My concern is that El Presidente may not understand (or perhaps not even care) that shrinking the size and scope of government is the only effective way to reduce Washington corruption.

In any event, we’re soon going to get a very strong sign about whether Trump was serious. With Republicans on Capitol Hill divided on how to deal with this cronyist institution, Trump basically has the tie-breaking vote on the issue.

In other words, he has the power to shut down this geyser of corporate welfare. But will he?

According to Susan Ferrechio of the Washington Examiner, Trump may choose to wallow in the swamp rather than drain it.

President Trump now may be in favor of the Export-Import Bank, according to Republican lawmakers who met with him privately Thursday, even though Trump once condemned the bank as corporate welfare.

Veronique de Rugy of the Mercatus Center is one on the Ex-Im Bank’s most tenacious opponents, and she’s very worried.

…if the reports are true that Trump has decided to support the restoration of the crony Export-Import Bank’s full lending authority, it would be akin to the president deciding to instead happily bathe in the swamp and gargle the muck. …If true, the news is only “great” for Boeing, GE, and the other major recipients of Ex-Im’s corporate welfare. It is also at odds with his campaign promises since much of the way the program works is that it gives cheap loans — backed by Americans all over the country — to foreign companies in China, Russia, Saudi Arabia, and the UAE. Restoring Ex-Im’s full lending-authority powers is renewing the policy to give cheap loans backed by workers in the Rust Belt to companies like Ryanair ($4 billion in guarantee loans over ten years) and Emirates Airlines ($3.9 billion over ten years) so they can have a large competitive advantage over U.S. domestic airlines like Delta and United. It continued to subsidize the large and prosperous state-owned Mexican oil company PEMEX ($9.7 billion over ten years). Seriously? That’s president Trump’s vision of draining the swamp?

Ugh. It will be very disappointing if Trump chooses corporate welfare over taxpayers.

What presumably matters most, though, is whether a bad decision on the Ex-Im Bank is a deviation or a harbinger of four years of cronyism.

In other words, when the dust settles, will the net effect of Trump’s policies be a bigger swamp or smaller swamp?

The New York Times opined that Trump is basically replacing one set of insiders with another set of insiders, which implies a bigger swamp.

Mr. Trump may be out to challenge one establishment — the liberal elite — but he is installing one of his own, filled with tycoons, Wall Street heavyweights, cronies and a new rank of shadowy wealthy “advisers” unaccountable to anyone but him. …Take first the Goldman Sachs crowd. The Trump campaign lambasted global financiers, led by Goldman, as having “robbed our working class,” but here come two of the alleged miscreants: Gary Cohn, Goldman’s president, named to lead the National Economic Council, and Steven Mnuchin, named as Treasury secretary. …Standing in the rain during Mr. Trump’s inaugural speech, farmers and factory workers, truckers, nurses and housekeepers greeted his anti-establishment words by cheering “Drain the Swamp!” even as the new president was standing knee-deep in a swamp of his own.

I’m skeptical of Trump, and I’m waiting to see whether Gary Cohn and Steven Mnuchin will be friends for taxpayers, so I’m far from a cheerleader for the current administration.

But I also think the New York Times is jumping the gun.

Maybe Trump will be a swamp-wallowing cronyist, but we don’t yet have enough evidence (though a bad decision on Ex-Im certainly would be a very bad omen).

Here’s another potential indicator of what may happen to the swamp under Trump’s reign.

Bloomberg reports that two former Trump campaign officials, Corey Lewandowski and Barry Bennett have cashed in by setting up a lobbying firm to take advantage of their connections.

The arrival of a new president typically means a gold rush for Washington lobbyists as companies, foreign governments, and interest groups scramble for access and influence in the administration. Trump’s arrival promises to be different—at least according to Trump. Throughout the campaign, he lambasted the capital as a den of insider corruption and repeatedly vowed to “drain the swamp,” a phrase second only in the Trump lexicon to “make America great again.” …Trump’s well-advertised disdain for lobbying might seem to augur poorly for a firm seeking to peddle influence. …“Business,” Lewandowski says, “has been very, very good.”

This rubs me the wrong way. I don’t want lobbyists to get rich.

But, to be fair, not all lobbying is bad. Many industries hire “representation” because they want to protect themselves from taxes and regulation. And they have a constitutional right to “petition” the government and contribute money, so I definitely don’t want to criminalize lobbying.

But as I’ve said over and over again, I’d like a much smaller government so that interest groups don’t have an incentive to do either the right kind of lobbying (self-protection) or the wrong kind of lobbying (seeking to obtain unearned wealth via the coercive power of government).

Here’s one final story about the oleaginous nature of Washington.

Wells Fargo is giving a big payout to Elaine Chao, the new Secretary of Transportation.

Chao, who joined Wells Fargo as a board member in 2011, has collected deferred stock options —  a compensation perk generally designed as a long-term retention strategy — that she would not be able to cash out if she left the firm to work for a competitor. Her financial disclosure notes that she will receive a “cash payout for my deferred stock compensation” upon confirmation as Secretary of Transportation. The document discloses that the payments will continue throughout her time in government, if she is confirmed. The payouts will begin in July 2017 and continue yearly through 2021. But Wells Fargo, like several banks and defense contractors, provides a special clause in its standard executive employment contract that offers flexibility for awarding compensation if executives leave the bank to enter “government service.” Such clauses, critics say, are structured to incentivize the so-called “reverse revolving door” of private sector officials burrowing into government. …Golden parachutes for executives leaving firms to enter government dogged several Obama administration officials. Jack Lew, upon leaving Citigroup to join the Obama administration in 2009, was given a cash payout as part of his incentive and retention awards that wouldn’t have been paid if he had left the firm to join a competitor or under ordinary circumstances. But Lew’s Citigroup contract stipulated that there was an exception for leaving to work in a “full time high level position with the U.S. government or regulatory body.” Goldman Sachs, Morgan Stanley, and Northrop Grumman are among the other firms that have offered special financial rewards to executives who leave to enter government.

This rubs me the wrong way, just as it rubbed me the wrong way when one of Obama’s cabinet appointees got a similar payout.

But the more I think about it, the real question isn’t whether government officials get to keep stock options and other forms of deferred compensation when they jump to the government.

What bothers me much more is why companies feel that it’s in their interest to hire people closely connected to government. What value did Jacob Lew bring to Citigroup? What value did Chao bring to Wells Fargo?

I suspect that the answer has a lot to do with financial institutions wanting people who can pick up the phone and extract favors and information from senior officials in government.

For what it’s worth, I’m not a fan of Lew because he pushed for statism while at Treasury. By contrast, I am a fan of Chao because she was one of the few bright spots during the generally statist Bush years.

But I don’t want a system where private companies feel like they should hire either one of them simply because they have connections in Washington.

I hope that Trump will change this perverse set of incentives by “draining the swamp.” But unless he reduces the size and scope of government, the problem will get worse rather than better.

Why Not Just Abolish the Out of Control CFPB?

Fri, 02/17/2017 - 12:20pm

The Hill reports that the Consumer Financial Protection Bureau (CFPB), Elizabeth Warren’s brainchild, is “under siege by all three branches of the government.” Congressional Republicans have long opposed the agency that was created when Democrats were in control, arguing that it has too much power and too little accountability. President Trump has likewise expressed his displeasure with Dodd-Frank–the massive financial reform legislation that created the CFPB–throughout the campaign and again after taking office.

CFPB receives independent funding from the Federal Reserve, which weakens Congressional oversight. Unlike other federal agencies, its director also cannot be removed at-will be the president. There must first be a finding of “inefficiency, neglect of duty, or malfeasance in office.”

An appeals court ruled this structure to be unconstitutional last October, but the ruling was recently vacated pending rehearing before the full D.C. Circuit Court of Appeals. Instead of waiting for the case to be heard on May 24, however, Congress should probably just scrap the failed experiment altogether, as companion bills from Sen. Ted Cruz and his Texas counterpart Rep. John Ratcliffe would do.

The extremely overpaid bureaucrats at the CFPB have been wreaking havoc since the agency was created. They worked with other agencies, in what is known as Operation Choke Point, to target lawful businesses in industries disliked by the previous administration. They’ve  tried to wipe out the small-dollar loan industry and leave the poor and the unbanked without access to credit in the name of protecting them. It has attempted to undermine consumers with an anti-arbitration rule that would only benefit class action lawyers, and now it evens wants to weaken attorney-client privilege.

There are other legislative approaches out there that would reform, rather than abolish, the CFPB. To be sure, these could be big steps in the right direction as well. But the burden should be on the CFPB to first demonstrate how it has benefited consumers, and not just bureaucrats and special interests. If they can do so then maybe there’s something worthwhile to salvage with a major organizational overhaul. Otherwise, the CFPB should be thrown out with the rest of the last administration’s garbage.

New “Tax Oppression Index” Shows Grim Toll of OECD’s Statist Agenda

Thu, 02/16/2017 - 12:23pm

Back in 2009, I shared the results of a very helpful study by Pierre Bessard of Switzerland’s Liberal Institute (by the way, “liberal” in Europe means pro-market or “classical liberal“).

Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.

Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.

Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.

The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).

Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.

I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.

But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!

Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.

But I’m digressing. Let’s look at Pierre’s new rankings.

As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.

At the very bottom, with the most oppressive tax systems, are Greece and Mexico (gee, what a surprise), followed by Israel and Turkey.

The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.

So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.

But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.

As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.

P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).

P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.

The False Promises Of A Republican Carbon Tax

Wed, 02/15/2017 - 7:19pm

This article appeared on the Daily Caller on February 14, 2017.

Republicans control the White House and both chambers of Congress for the first time in a decade. That might not be true for long, however, if they give into the voices within the party and other special interests now calling for a carbon tax. Americans elected Republicans to cut taxes, not to raise them.

If you’re confused as to why Republicans would ever consider raising Americans’ energy bills, you’re not alone. However, the pitch recently made by some veteran beltway Republicans calling themselves the Climate Leadership Council (CLC)  is just seductive enough to be dangerous.

The CLC, which includes former Secretary of State James Baker, is trying to convince the Trump administration to trade repeal of Obama’s Clean Power Plan and other costly EPA regulations supposedly aimed at reducing carbon emissions in exchange for a new carbon tax. But what kind of trade is it really, when the Clean Power Plan is already floundering and the administration can remove overly burdensome regulations all on its own?

A $300 billion annual tax on carbon, which is what they are asking for, would mean an immediate 36 cent per gallon increase in the cost of gasoline. That would also be just the beginning, as they want the tax to increase over time.

We’re supposed to take comfort in the promise that the revenues raised by the tax would be rebated to taxpayers—in theory reducing fossil fuel consumption without hitting our pocketbooks—but such assurances simply cannot be counted upon.

There would obviously be administrative costs to shuffling all this money around, for one thing, and future politicians would inevitably redirect the funds toward pet political projects and vote-buying schemes.

Even worse, once Democrats return to power much of the regulatory relief “traded” for the tax will likely be undone. We’ll be right back where we started with overly burdensome environmental regulations and a new tax on consumers to go with them.

That’s why it makes zero sense for Republicans to do the heavy lifting on their behalf by being the ones to impose this new tax on the American people and suffer the electoral consequences.

Those pushing for a carbon tax argue that something must be done to stop “climate change,” and that this is the most market-friendly option available.

But it’s rather telling that the environmental groups themselves often don’t act as if they truly believe it is necessary. When the state of Washington was considering a ballot initiative in November to impose a tax on carbon emissions, many environmental groups opposed it because other taxes would have been lowered to offset the levy. They were more concerned about growing government than the environment.

That’s no great surprise, as even the EPA’s own models show that entirely eliminating all carbon emissions in the United States—an impractical and undesirable goal—would reduce warming by little more than a tenth of a degree by the end of the century.

It’s easy to understand why someone like Elon Musk—who is also whispering about the tax to President Trump—wants to impose new taxes on Americans. His electric car company, Tesla, would benefit by making traditional gas vehicles more expensive. But the rest of Americans who aren’t billionaires and can’t count on crony handouts from government would lose big, which is why it’s very puzzling that Republicans would be seriously considering the political and economic loser that is a carbon tax.

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