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Another Reason to Reject the Border-Adjustable Tax: Value-Added Taxes Undermine National Competitiveness

Tue, 04/18/2017 - 12:20pm

My crusade against the border-adjustable tax (BAT) continues.

In a column co-authored with Veronique de Rugy of Mercatus, I explain in the Wall Street Journal why Republicans should drop this prospective source of new tax revenue.

…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.

Here’s what supporters claim.

Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds persuasive, at least until you look at both sides of the equation.

When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.

 

Now let’s consider the flip side.

What if an American company sells to a customer in Germany? The U.S. government imposes the corporate income tax and the German government imposes a VAT. But guess what? The German competitor selling domestically is hit by the German corporate income tax and the German VAT. That’s another level playing field. This explains why economists, on the right and left, repeatedly have debunked the idea that countries use VATs to boost their exports.

Here’s the German version of the map. Once again, I note that it’s possible – depending on the structure of the US company – for American products to get hit by the German corporate income tax. But the key point of the map is to show that American-produced goods and services and German-produced goods and services are subject to the VAT.

 

By the way, it’s entirely possible that an American company in Germany or a German company in America may pay higher or lower taxes depending on whether there are special penalties or preferences. Those companies may also pay more or less depending on the cleverness of their tax lawyers and tax accountants.

But one thing can be said with total certainty: The absence of an American VAT does not result in a “Made-in-America” tax on American companies. Even Paul Krugman agrees that VATs don’t distort trade.

Moreover, Veronique and I point out that the lack of a VAT creates a big advantage for the United States.

One big plus for Americans is that Washington does not impose a VAT, which would enable government to grow. This is a major reason that the U.S. economy is more vibrant than Europe’s. In Germany, the VAT raises so much tax revenue that the government consumes 44% of gross domestic product—compared with 38% in America.

And to the extent that there is a disadvantage, it’s not because of some sneaky maneuver by foreign governments. It’s because of a self-inflicted wound.

America’s top corporate income tax of 35% is the highest in the developed world. If state corporate income taxes are added, the figure hits nearly 40%, according to the Congressional Budget Office. That compares very unfavorably with other nations. Europe’s average top corporate rate is less than 19%, and the global average is less than 23%… That’s the real “Made in America Tax,” and it’s our own fault.

The column does acknowledge that BAT supporters have their hearts in the right place. They are proposing that new source of revenue to help finance a lower corporate tax rate, as well as expensing.

But there’s a much better way to enable those pro-growth reforms.

If Congress simply limits the growth of outlays to about 2% a year, that would create enough fiscal space to balance the budget over 10 years and adopt a $3 trillion tax cut. If Republicans want a win-win, dropping the border-adjustment tax is the way to get one.

And what if Republicans aren’t willing to restrain spending? Then maybe the sensible approach is to simply cut the corporate tax rate and declare victory.

The Shadow Bureaucracy and the Burden of Federal Spending

Mon, 04/17/2017 - 12:51pm

As Ronald Reagan pointed out many years ago, Washington is a company town. But rather than being home to a firm or industry that earns money by providing value to willing consumers, the “company” is a federal government that uses a coercive tax system to provide unearned wealth to various interest groups.

And the beneficiaries of that redistribution zealously guard their privileges and pay very close attention to any developments that might threaten their access to the public trough.

Federal bureaucrats are particularly concerned whenever there is talk about spending restraint. They get lavishly compensated compared to folks in the private sector, so they definitely fret whenever something might happen to derail their gravy train.

A recent segment on a local station in Washington, DC, focused on their angst, and I provided a contrary point of view.

Needless to say, my friends who work for the federal government generally don’t agree with my assessment.

Some of them have even told me that I’m off base because the federal workforce is remarkably efficient. Indeed, several of them even sent me an article from the Washington Post that claims the number of bureaucrats hasn’t changed since the late 1960s.

They claim this is evidence that the bureaucracy has become more efficient.

But they’re wrong. The official federal workforce may not have changed, but research from the Brooking Institution reveals that this statistic is illusory because of a giant shadow bureaucracy.

George Will’s latest column is about this metastasizing hidden bureaucracy.

…government has prudently become stealthy about how it becomes ever bigger. In a new Brookings paper, …government expands by indirection, using three kinds of “administrative proxies” — state and local government, for-profit businesses, and nonprofit organizations. Since 1960, the number of state and local government employees has tripled to more than 18 million, a growth driven by federal money: Between the early 1960s and early 2010s, the inflation-adjusted value of federal grants for the states increased more than tenfold. …“By conservative estimates,” DiIulio writes, “there are about 3 million state and local government workers” — about 50 percent more than the number of federal workers — “funded via federal grants and contracts.” Then there are for-profit contractors, used, DiIulio says, “by every federal department, bureau and agency.” For almost a decade, the Defense Department’s full-time equivalent of 700,000 to 800,000 civilian workers have been supplemented by the full-time equivalent of 620,000 to 770,000 for-profit contract employees. …the government spends more (about $350 billion) on defense contractors than on all official federal bureaucrats ($250 billion). Finally, “employment in the tax-exempt or independent sector more than doubled between 1977 and 2012 to more than 11 million.” Approximately a third of the revenues to nonprofits (e.g., Planned Parenthood) flow in one way or another from government.

When you add it all together, the numbers are shocking.

“If,” DiIulio calculates, “only one-fifth of the 11 million nonprofit sector employees owe their jobs to federal or intergovernmental grant, contract or fee funding, that’s 2.2 million workers” — slightly more than the official federal workforce. To which add the estimated 7.5 million for-profit contractors. Plus the conservative estimate of 3 million federally funded employees of state and local governments. To this total of more than 12 million add the approximately 2 million federal employees. This 14 million is about 10 million more than the estimated 4 million federal employees and contractors during the Eisenhower administration.

In other words, the federal budget has expanded and so have the number of people with taxpayer-financed jobs.

By the way, there’s nothing theoretically wrong with a government bureaucracy using non-profits or contractors. Assuming, of course, that both the agency and the person are doing something productive.

And that was the point I tried to make it the interview. I don’t care whether the Department of Agriculture or Department of Education is filled with official bureaucrats or shadow bureaucrats. What I do care about, however, is that they are part of an agency that should not exist.

And the same is true for the Department of Energy, Department of Labor, Department of Transportation, Department of Veterans Affairs, and Department of Housing and Urban Development.

Sound Tax Advice from the International Monetary Fund

Sun, 04/16/2017 - 12:14pm

Since I’ve written that the International Monetary Fund is “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy,” I don’t think anyone could call me a fan of that international bureaucracy.

But I’ve also noted that the real problem with organizations like the IMF is that they have bad leadership. The professional economists at international bureaucracies often produce good theoretical and empirical work. That sensible research doesn’t make much difference, though, since the actual real-world policy decisions are made by political hacks with a statist orientation.

For instance, the economists at the IMF have produced research on the benefits of smaller government and spending caps. But the political leadership at the IMF routinely ignores that sensible research and instead has a dismal track record of pushing for tax increases.

Hope springs eternal, though, so I’m going to share some new IMF research on tax policy that is very sound. It’s from the second chapter of the bureaucracy’s newest Fiscal Monitor. Here are some excerpts, starting with an explanation of why the efficient allocation of resources is so important for prosperity.

A top challenge facing policymakers today is how to raise productivity, the key driver of living standards over the long term. …The IMF’s policy agenda has therefore emphasized the need to employ all policy levers, and in particular to promote growth-friendly fiscal policies that will boost productivity and potential output. Total factor productivity (TFP) at the country level reflects the productivity of individual firms…aggregate TFP depends on firms’ individual TFP and also on how available resources (labor and capital) are allocated across firms. Indeed, the poor use of existing resources within countries—referred to here as resource misallocation—has been found to be an important source of differences in TFP levels across countries and over time. …What is resource misallocation? Simply put, it is the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor.

The chapter notes that creative destruction plays a vital role in growth.

Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to the reallocation of factors across plants and to firm entry and exit. Similarly, Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007.

And a better tax system would enable some of that growth by creating a level playing field.

Simply stated, you want people in the private sector to make decisions based on what makes economic sense rather than because they’re taking advantage of some bizarre quirk in the tax code.

Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. …Upgrading the design of their tax systems can help countries chip away at resource misallocation by ensuring that firms’ decisions are made for business and not tax reasons. Governments can eliminate distortions that they themselves have created. …For instance, the current debt bias feature of some tax systems not only distorts financing decisions but hampers productivity as well, especially in the case of advanced economies. …Empirical evidence shows that greater tax disparity across capital asset types is associated with higher misallocation.

One of the main problems identified by the IMF experts is the tax bias for debt.

And since I wrote about this problem recently, I’m glad to see that there is widespread agreement on the economic harm that is created.

Corporate debt bias occurs when firms are allowed to deduct interest expenses, but not returns to equity, in calculating corporate tax liability. …Several options are available to eliminate the distortions arising from corporate debt bias and from tax disparities across capital asset types, including the allowance for corporate equity system and a cash flow tax. …In the simplest sense, a CFT is a tax levied on the money entering the business less the money leaving the business. A CFT entails immediate expensing of all investment expenditures (that is, 100 percent first-year depreciation allowances) and no deductibility of either interest payments or dividends. Therefore, if it is well designed and implemented, a CFT does not affect the decision to invest or the scale of investment, and it does not discriminate across sources of financing.

By the way, regular readers may notice that the IMF economists favor a cash-flow tax, which is basically how the business side of the flat tax operates. There is full expensing in that kind of system, and interest and dividends are treated equally.

This is also the approach in the House Better Way tax plan, so the consensus for cash-flow taxation is very broad (though the House wants a destination-based approach, which is misguided for several reasons).

But let’s not digress. There’s one other aspect of the IMF chapter that is worthy of attention. There’s explicit discussion of how high tax rates undermine tax compliance, which is music to my ears.

Several studies have shown that tax policy and tax administration affect the prevalence of informality and thus productivity. Colombia provides an interesting case study on the effect of taxation on informality. A 2012 tax reform that reduced payroll taxes was found to incentivize a shift of Colombian workers out of informal into formal employment. Leal Ordóñez (2014) finds that taxes and regulations play an important role in explaining informality in Mexico. For Brazil, Fajnzylber, Maloney, and Montes-Rojas (2011) show that tax reductions and simplification led to a significant increase in formal firms with higher levels of revenue and profits. While a higher tax burden contributes to the prevalence of informality… For 130 developing countries, a higher corporate tax rate is found to increase the prevalence of cheats among small manufacturing firms, lowering the share of sales reported for tax purposes.

In closing, I should point out that the IMF chapter is not perfect.

For instance, even though it cites research about how high tax rates reduce compliance, the chapter doesn’t push for lower rates. Instead, it endorses more power for national tax authorities. Makes me wonder if the political folks at the IMF imposed that recommendation on the folks who wrote the chapter?

Regardless, the overall analysis of the chapter is quite sound. It’s based on a proper understanding that growth is generated by the efficient allocation of labor and capital, and it recognizes that bad tax policy undermines that process by distorting incentives for productive behavior.

The next step is to convince Ms. Lagarde and the rest of the IMF’s leadership to read the chapter. They get tax-free salaries, so is it too much to ask that they stop pushing for higher taxes on the rest of us?

What We Can Learn From Maryland’s Work on Opioid Abuse

Sat, 04/15/2017 - 12:46pm

Originally published by the Herald-Mail, and was coauthored by Brian Garst.

Lawmakers at the state and national levels are scrambling to find answers to the growing problem of opioid abuse. Overdose deaths involving opioids increased by 200 percent between 2000 and 2014, and opioids are now a factor in almost two-thirds of all fatal drug overdoses. With overdoses now surpassing deaths from car accidents, firearms and suicides, opioid abuse is a serious public health problem.

President Donald Trump recently signed an executive order to tackle opioid addiction and abuse—creating the President’s Commission on Combating Drug Addiction and the Opioid Crisis. The Commission is charged with identifying existing programs to combat drug addiction and evaluating their effectiveness, assessing the availability of drug addiction treatment services and reporting on best practices for addiction prevention, among other things. It has 90 days to report its interim recommendations.

Many states are already working to solve the problem in their communities. Their work should inform the President’s Commission. In “Evaluating Public Policy Responses to Opioid Abuse and Maryland’s Proposed and Existing Initiatives,” a new policy study from the Maryland Public Policy Institute, we looked at Maryland’s current and proposed responses to opioid abuse and whether they can or should be adopted elsewhere.

Like the President, Maryland Governor Larry Hogan moved quickly after his election to establish a task force to tackle opioid abuse. More recently, he declared a state of emergency and promised to commit $50 million over five years to enforcement. prevention and treatment. He has also pushed several pieces of legislation as part of the 2017 Heroin and Opioid Prevention, Treatment, and Enforcement Initiative.

Overall, we find that Maryland’s approach is likely to produce mixed results.

We find that efforts to limit access to opioids can have negative unintended consequences. Since some patients who become addicted to opioids are first exposed while undergoing treatment for painful conditions, it may be tempting to seek to restrict access to much-needed medications. Yet doing so just makes it harder for those with medical needs to get treatment, while ultimately failing to have a major impact on abuse.

Abusers will simply turn to the black market for access while law-abiding patients suffer. Unfortunately, as part of his initiative, Governor Hogan proposed the Prescriber Limits Act, which would prevent more than seven days’ worth of opioid painkillers from being prescribed during a patient’s first visit.

Another proposed bill, the Distribution of Opioids Resulting in Death Act, would enact new felony charges for selling opioids that result in the death of a user. Yet responsibility is often difficult to determine given the high percentage of overdoses that involve a mix of drugs. The history of our nation’s war on drugs further demonstrates that this bill would do a great job at filling prisons—with all the economic and social costs that entails—while ultimately doing little to reduce drug abuse or illegal sales.

To really fix the problem, addiction itself must be tackled. On that front, Maryland has demonstrated a better record, as the state has sought to expand the number of physicians qualified to prescribe buprenorphine, which is used to treat addiction, and has directed considerable financial resources toward addiction treatment.

We also find that solutions may reside in policy areas where lawmakers might not always think to look. For instance, Maryland’s Pharmacy and Therapy Committee replaced Suboxone Film, a form of buprenorphine that has proven easy to smuggle in prisons and highly susceptible to abuse, with the more efficient Zubsolv tablets on the Medicaid preferred drug list.

In just six months after the change, the Department of Public Safety and Correctional Services reported significant declines in Suboxone Film contraband, which it identified as “by far the most prevalent form of contraband found in Maryland State Correctional Facilities.” Zubsolv’s greater efficiency makes it less attractive to abusers since it uses less of the active ingredient to achieve the same results.

This simple change has quickly started paying dividends in Maryland, and would be easy to replicate in other jurisdictions. At the same time, lawmakers should recognize that addiction is a powerful motivator and that those who suffer from it will not easily be deterred from finding a fix. Placing costly, heavy-handed controls on access to needed painkillers will only hurt those who need relief from chronic or severe pain.

Economic Liberty and the Rise and Fall of Nations

Sat, 04/15/2017 - 12:00pm

I wrote yesterday about the most recent OECD numbers on “Average Individual Consumption” in member nations.

There was a very clear lesson in that data about the dangers of excessive government. The United States was at the top in this measure of household living standards, not because American policies are great, but rather because huge welfare states in Europe have undermined economic vitality on the other side of the Atlantic.

Indeed, the only countries even remotely close to the United States were oil-rich Norway and the two tax havens of Switzerland and Luxembourg.

Those AIC numbers gave us an interesting snapshot of relative living standards in 2014.

But what would we discover if we looked at how that data has changed over time?

It appears that the OECD began assembling that data back in 2002. Here’s a table showing how nations rose or fell, relative to other OECD nations, since then. Based on convergence theory, one would expect to see that poorer nations enjoyed the biggest relative gains, while richer nations fell in the rankings. And that is what generally happened, but with some notable exceptions.

Here are the countries that did not conform, for either good reasons or bad reasons, to convergence theory.

We’ll start with the nations that have bragging rights.

  • Chile started at the very bottom compared to the rich nations of the western world, so anything other than a large increase would have been a disappointment. But the magnitude of Chile’s increase is nonetheless quite impressive and presumably a testament to pro-market reforms.
  • Finland was almost 7 points below the OECD average in 2002 and now is more than 2 points above the average, which is a significant jump for a nation near the middle of the pack. Maybe having sensible leaders is a good idea.
  • Oil-rich Norway was above average at the start of the period and even farther above average at the end of the period.
  • The United States was very high in 2002 and remained very high in 2014. Since that outcome violates convergence theory, that’s a non-trivial accomplishment and another piece of evidence that big governments in Europe are imposing a harsh economic cost.
  • Switzerland also started high and remained high. That’s presumably a reflection of good policies such as federalism and spending restraint.

Now for the nations that did not fare well.

  • Luxembourg suffered a large drop, some of which is understandable since the tiny tax haven was in first place back in 2002. But the magnitude of the decline – particularly compared to the United States and Switzerland – is not an encouraging sign. This may be a sign that anti-tax competition efforts by the OECD have hit the nation hard.
  • Greece, Spain, Ireland, and Italy all tumbled in the rankings even though – at best – they started in the middle of the pack. It will be interesting to see how these nations perform as they recover (or don’t recover, as I expect in the cases of Italy and Greece) from the European fiscal crisis.
  • Slovenia also went from bad to worse, which perhaps is not a big surprise since it is one of the least reform-oriented countries to emerge from the Soviet Bloc.
  • The United Kingdom suffered a rather large decline, almost all of which happened under the profligate Blair and Brown Labour governments. This will be another nation that will be interesting to watch in coming years, particularly because of Brexit.
  • France and the Netherlands also suffered, starting well above average in 2002 but falling to the mean in 2014.

If you like this kind of data on whether nations are trending in the right direction or wrong direction, I’ve also tinkered with the data from Economic Freedom of the World.

Last year, I highlighted countries that have made significant moves in the EFW rankings, including oft-overlooked success stories such as Israel and New Zealand.

I also looked specifically at changes in Europe this century and did not find any reason for optimism.

The bottom line is that there’s no substitute for free markets and limited government. If nations want faster growth and more prosperity, they need to mimic jurisdictions such as Hong Kong and Singapore.

Unfortunately, there’s very little reason to be optimistic about that happening in Europe.

Another Reminder that the United States Should Not Become a European-Style Welfare State

Fri, 04/14/2017 - 12:47pm

One of the more surreal aspects of the 2016 campaign was watching Bernie Sanders argue that the United States should become more like a European welfare state.

Was he not aware that Europe had major problems such as high unemployment and a fiscal crisis?

Didn’t he know that America’s economy was growing faster (which is a damning indictment since growth in the U.S. was relatively anemic during the Obama years)?

Perhaps more important, didn’t he know that Americans enjoy much higher living standards than their European counterparts? Was he not aware that European nations, if they were part of America, would be considered poor states?

If you don’t believe me, here’s a chart I prepared using the “average individual consumption” data from the Organization for Economic Cooperation and Development. These are the numbers that measure the material well-being of households. As you can see, the United States is far ahead of other nations. Indeed, the only three countries that are even close are two admirable tax havens and oil-rich Norway.

 

What about Denmark and Sweden, the two nations that Bernie Sanders said were role models? Well, the United States could copy them, but only if we wanted our living standards to drop by more than 30 percent.

By the way, since the OECD is a left-leaning bureaucracy that is guilty of periodically rigging numbers against the United States, you can be confident that this AIC data isn’t structured to favor America.

So why does the United States have such a big advantage?

In a new study from the National Bureau of Economic Research, Professor Martin Feldstein addresses why Europe is lagging the United States.

Although the official statistics imply that the rate of growth of real GDP in the United States has declined in recent years, it has still been substantially higher than the real growth rates in Europe and the other industrial countries. The sustained higher rate of real GDP growth in the United States over a longer period of time has resulted in a substantially higher level of real GDP per capita in the United States than in other major industrial countries.

He lists 10 reasons for the growth gap. Here are the ones that are related to public policy, followed by my brief observations.

(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. In the private sector, less than seven percent of the labor force is unionized. There are virtually no state-owned enterprises. While labor laws and regulations affect working conditions and hiring rules, they are much less onerous than in Europe.

Given America’s high ranking in the World Bank’s Doing Business, this makes sense.

(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany.

The U.S. subsidizes leisure, but not nearly as bad as Europe (think of Lazy Robert).

(7) A supply of energy that makes North America energy independent. The private ownership of land and mineral rights has facilitated a rapid development of fracking to expand the supply of oil and gas.

Apparently, the United States is one of the few nations where you own minerals under your land. Good for us.

(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.

Given the data from Economic Freedom of the World, I’m not sure I believe this.

(9) A smaller size of government than in other industrial countries. According to the OECD, outlays of the U.S. government at the federal, state and local levels totaled 38 percent of GDP while the corresponding figure was 44 percent in Germany, 51 percent in Italy and 57 percent in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. In the United States, …There is no value added tax. State income taxes vary but are generally about five percent… So Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.

A smaller burden of government spending may be America’s biggest advantage. And that’s connected with our other big advantage, which is not being burdened by a government-fueling value-added tax.

(10) The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. The United States political system assigns many legal rules and taxing power to the fifty individual states. The states then compete for businesses and for individual residents by their legal rules and tax regimes. Some states have no income taxes and have labor laws that limit unionization.

We still have some federalism, and that helps.

Overall, Feldstein’s list is impressive, though it fails to note that there are areas where Europe has better policy, such as lower corporate tax rates, lower death taxes, private postal services, and private infrastructure. There are even European nations with school choice and private retirement accounts.

Notwithstanding these attractive features, Feldstein is right about more economic liberty in the United States. And that helps to explain higher living standards in America.

What makes this especially noteworthy is that convergence theory says that poorer nations should automatically catch up to richer nations. Yet Europe’s catch-up period came to halt in the 1980s and the continent has since been losing ground.

And for fans of apples-to-apples comparisons, it’s very illuminating that Americans of Scandinavian descent earn about 40 percent more than those who didn’t emigrate and still live in Scandinavia.

Laughing at Socialism, both in Theory and Practice

Thu, 04/13/2017 - 12:32pm

I’m tempted to say that statism is sort of like a cult. Proponents of socialism and other big-government ideologies have a dogmatic zeal that blinds them to reality.

For instance, no nation has ever become rich with big government. But that doesn’t stop leftists from advocating in favor of higher taxes and more coercive redistribution.

They are equally capable of rationalizing that economic misery in places such as Greece and Venezuela has nothing to do with bad policy, and you can even find a few zealots willing to defend basket cases such as Cuba and North Korea.

So long as they don’t burn me at the stake for my heretical views, I guess I won’t get too agitated by their bizarre fetish for statism.

But I will periodically mock them. And that’s the purpose of today’s column. We’ll start with this nice comparison between a capitalist grocery store and a socialist grocery store. I have no idea, by the way, if the lower image actually is a supermarket in a socialist country, but let’s not forget that a real-world version of this comparison is one of the reasons there’s no longer an Evil Empire.

 

But the bad news about socialism is not limited to economic deprivation for the masses.

The system also leads in many cases to totalitarianism (see this article by Marian Tupy, for example).

Venezuela is a particularly poignant example. Once the richest nation in Latin America, it now is an economic laggard and also is a cesspool of oppression.

Which makes this set of images from Reddit‘s libertarian page both funny and sad.

 

As you might expect, Milton Friedman had some very pointed observations on this topic.

The really good part starts shortly before 2:00. He explains very clearly that socialism is based on force and coercion.

I’ve saved the best for last.

The PotL sent me this collections of risky temptations and it perfectly captures the attitude of many statists. No matter how many times socialism has failed, they never learn the appropriate lesson. It just hasn’t been tried by right people, they tell us. Or been imposed in the right circumstances.

So they want us to give it one more try, just like a person with no willpower will eat one more bite of chocolate.

 

Which is the same message you find here, here, and here.

Incidentally, this analysis not only applies to socialism, as technically defined, but it also applies to redistributionism. Which is definitely more benign, but nonetheless produces bad results.

The bottom line is that statism is a recipe for stagnation and free markets are a route to prosperity.

Clever Video Mocking Privatization, but the Free Market Got the Last Laugh

Wed, 04/12/2017 - 12:35pm

My favorite anti-libertarian video is the one based on the notion that Somalia is a libertarian paradise. Since no libertarian has ever pointed to that country as a role model, the underlying premise is a bit silly (I’ve written something semi-favorable about Somaliland, but that’s a different place). However, that doesn’t change the fact that the video is well produced and rather amusing.

It’s now time to share another amusing video with a bad message. It’s not targeting libertarians directly, but it’s mocking an idea that’s being promoted by libertarians such as my colleague Chris Edwards. The video shows a pair of English comedians doing a mock interview back in the 1990s on privatizing the U.K.’s air traffic control system.

Putting millions of passengers at the mercy of a for-profit company? Seems laughably absurd, right?

Except it actually happened. Not only in the United Kingdom, but also in Canada. So advocates of privatization actually got the last laugh.

And we may see similar progress in the United States. Remarkably, even the Washington Post is supporting this reform.

The United States can and should learn from the experience of other Western democracies… Take the prosaic but crucial function of air traffic control. In the United States, that is still a job for big government: specifically, the Federal Aviation Administration. Overseas, however, countries are turning away from this statist model. Canada spun off its system, Nav Canada, in 1996, to a private entity funded by user fees. Britain privatized in 2000. Australia and New Zealand are also part of the movement; ditto Germany and Switzerland… In all of these countries, safety and innovation have stayed the same or improved, which is not surprising.

The editorial urges something similar for America.

A new corporation, funded by charges on the system’s various users, would manage flights and implement the long-stalled modernization. The FAA would still ensure safety, a regulatory job it already does remarkably well and might do even better if it were free to focus on that exclusively. Major players in the industry would share governance of the new entity, working out their differences within its boardroom rather than through the costlier and more conflictual method of lobbying Congress, as they do now.

Wow, the Washington Post is pointing out that a leaner government with fewer responsibilities would be more effective. I hope in the future they apply that lesson on a consistent basis.

Let’s close with a reference to another bit of anti-libertarian humor. Last year, I shared an image showing a satirical box of libertarian cereal, which I freely admitted was very amusing. But I then made the obvious point that private companies have zero incentive to harm or kill their customers.

Moreover, there’s even a system of mutually reinforcing private regulation that further discourages bad or sloppy behavior by companies.

Sot the bottom line is that there are greater incentives for safety with for-profit firms than there are with governments, where it’s just about impossible to fire someone for doing a bad job.

P.S. Since I’m a fiscal wonk, I’ll confess that I also want to privatize air traffic control because I’m still irked that the FAA tried to deliberately and unnecessarily inconvenience travelers during the 2013 sequester. Sort of like the jerks at the National Park Service, who did something similar that year during the partial government shutdown (though at least we got some good humor out of that).

New Video Shows the Simple Recipe for Poor Nations to Become Rich Nations – in Spite of Bad Advice from International Bureaucracies

Tue, 04/11/2017 - 12:31pm

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, the Fraser Institute’s Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s a main message in this new CF&P video.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when the government was very small.

And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity’s video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.

Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.

But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).

The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.

And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.

The United States Should Stay Out of Syria

Mon, 04/10/2017 - 12:05pm

You would think the never-ending mess in Afghanistan would have taught us lessons.

Or maybe we might have learned lessons from the never-ending mess in Iraq.

Notwithstanding those unpleasant experiences, President Trump is expanding America’s intervention in Syria with missile strikes.

This rubs me the wrong way, but let’s look at what others are writing on this issue.

One of my colleagues at the Cato Institute, Gene Healy, isn’t impressed by Trump’s intervention.

Thus far, the administration has said nothing about the legal authority for the strikes. There’s not much that can be said: they’re plainly illegal. He had neither statutory nor constitutional authority to order them. …Without statutory cover, all that’s left is an appeal to presidential power under Article II of the Constitution. But that document vests the bulk of the military powers it grants in Congress, with the aim of “clogging, rather than facilitating war,” as George Mason put it. In that framework, the president retains the power to “repel sudden attacks” against the US; but he does not have the power to launch them. …

Kevin Williamson of National Review is equally unhappy with Trump’s unilateral intervention.

As Daniel Pipes and others have persuasively argued, the United States does not have an ally in Syria. The United States does not have any national interest in the success of the ISIS-aligned coalition fighting to depose Assad. The United States does not have any interest in strengthening the position of the Assad regime and the position of his Russian and Iranian patrons. …Of course the Assad regime is murderous. It is murderous in an awfully familiar way: a Baathist despot in cahoots with jihadists using chemical weapons against a civilian population. …The Trump administration has no authorization to engage in war on Syria. Congress has not declared war or authorized the use of military force; there is no emergency to justify the president’s acting unilaterally in his role as commander in chief; there is no imminent threat to American lives or American interests — indeed, there is no real American interest at all. President Donald Trump is acting illegally, and Congress has a positive moral obligation to stop him. …All decent people feel for the Syrians. We also feel for the Ukrainians, the North Koreans, the men and women languishing in Chinese laogai, Russian gulags, and Cuban prisons. We do not go to war for the sake of sentiment. We go to war for the sake of pressing national interests that cannot be otherwise secured. There is no casus belli for knocking over the Assad government, odious as it is.

And Sean Davis of the Federalist asks 14 questions. Here are the ones that caught my attention.

…proponents of military action to depose Assad have not explained is what our clear national security interest is there, what political victory looks like, what our main risks are, and what costs we will be required to pay in order to achieve that victory. …If our nation is going to wage war, and if we are going to pay a price in dollars and in American lives as a result of that decision, we are owed answers to questions that were never adequately answered before we went into Iraq.

1) What national security interest, rather than pure humanitarian interest, is served by the use of American military power to depose Assad’s regime?

2) How will deposing Assad make America safer?

3) What does final political victory in Syria look like (be specific), and how long will it take for that political victory to be achieved? Do you consider victory to be destabilization of Assad, the removal of Assad, the creation of a stable government that can protect itself and its people without additional assistance from the United States, etc.?

6) What costs, in terms of lives (both military and civilian), dollars, and forgone options elsewhere as a result of resource deployment in Syria, will be required to achieve political victory?

8) Should explicit congressional authorization for the use of military force in Syria be required, or should the president take action without congressional approval?

10) If U.S. intervention in Syria does spark a larger war with Russia, what does political victory in that scenario look like, and what costs will it entail?

14) What lessons did you learn from America’s failure to achieve and maintain political victory following the removal of governments in Iraq and Libya, and how will you apply those lessons to a potential war in Syria?

I try to avoid commenting on foreign policy, but all of the excerpts I just shared make total sense. Nobody is claiming that America’s national interests are being threatened. Instead, the case for intervention is that Assad is a bad dictator who is doing bad things.

But if that’s the criteria for intervention, why aren’t we bombing China, Venezuela, North Korea, Saudi Arabia, and the Central African Republic?

Heck, here’s a map from Freedom House. The purple nations are “not free,” which means systematic repression of political rights and civil liberties. Syria is on the list, of course, but if having an oppressive government is what triggers U.S. intervention, there will be perpetual war.

Finally, I can’t help but call attention to a story in the New York Times that looked at many of the Republicans and Democrats who have flipped and flopped when commenting on Obama’s 2013 intervention and Trump’s 2017 intervention.

But there are some notable exceptions, particularly two of the more libertarian-leaning Republicans who actually put principle over partisanship.

And even though I admit I’m not a foreign policy expert, I sometimes play one on TV. And if you look at this interview from 2013, you’ll see that my views also have been consistent.

New “Economics 101” Video from CF&P Explains How Poor Nations Become Rich

Mon, 04/10/2017 - 10:11am

Center for Freedom and Prosperity Foundation

For Immediate Release
Monday, April 10, 2017
202-285-0244

www.freedomandprosperity.org

New “Economics 101” Video from CF&P Explains How Poor Nations Become Rich

(Washington, D.C., Monday, April 10, 2017) The Center for Freedom and Prosperity Foundation (CF&P) released today an “Economics 101” that explains the role of economic freedom in enabling developing nations to become prosperous.

Narrated by Abir Doumit from Lebanon, the mini-documentary highlights how growth is enabled by good rule of law, limited government, property rights, sound money, freedom to trade, and modest regulatory burdens. The video includes numerous real-world examples of success stories, such as the Asian tigers of Hong Kong and Singapore, as well as Chile, Ireland, Estonia, and Botswana. The video also highlights how international organizations like the IMF, the OECD, and the UN work to promote fiscal policies that are bad for growth.

Link to the video: https://youtu.be/aK3lyNR_vV8

“The evidence overwhelming supports the adoption of classical liberal policies as the key to economic growth,” said CF&P Foundation President Andrew Quinlan. He added, “It’s alarming to see that US taxpayer dollars are going to international organizations that push policies which help keep billions from enjoying prosperity.”

“The video is a great tutorial on the policies that produce growth,” said Dan Mitchell of the Cato Institute, who also noted that “it exposes the pernicious role of international bureaucracies, which use their leverage and influence to push for high tax burdens and excessive levels of government.”

Executive Summary

This mini-documentary from the Center for Freedom and Prosperity Foundation outlines the public policy framework that is necessary for a poor nation to become a rich nation and includes several real-world examples. It also highlights how international bureaucracies hinder development by advocating onerous destructive fiscal policies, which is especially disturbing since today’s rich nations all made their big jumps to prosperity when government was very small and taxes were very low.

This new video is part of CF&P’s Economics 101 video series, which is designed to explain free market concepts, with particular emphasis on reaching students and young people. This is the twenty-fifth video in the series, which have combined for over 787,000 views.

Small Government Is the Recipe for Creating Rich Nations

Mon, 04/10/2017 - 10:05am

Center for Freedom & Prosperity Foundation’s
Economics 101 Series:
Small Government Is the Recipe for Creating Rich Nations
April 2017

Connecticut’s Metamorphosis from the Nutmeg State to the Taxnut State

Sun, 04/09/2017 - 12:56pm

To pick the state with the best tax policy, the first step is to identify the ones with no income tax and then look at other variables to determine which one deserves the top ranking.

For what it’s worth, I put South Dakota at the top.

Picking the state with the worst tax policy is more difficult. There are lots of reasons to pick California, in part because it has the highest income tax rate of any state. But there are also strong arguments that New York, Illinois, and New Jersey deserve the worst rating.

And let’s not forget my home state of Connecticut, which invariably ranks near the bottom based on research from the Tax Foundation, the Mercatus Center, the Cato Institute, the Fraser Institute, and WalletHub.

The Wall Street Journal opined yesterday about Connecticut’s metamorphosis from a zero-income-tax state to a high-tax swamp.

Hard to believe, but a mere 25 years ago—a lifetime for millennials—Connecticut was a low-tax haven for Northeasterners. The state enacted an income tax in 1991 that was initially a flat 4.5% but was later made steeply progressive. In 2009 former Republican Governor Jodi Rell raised the top rate on individuals earning $500,000 or more to 6.5%, which Democratic Gov. Dannel Malloy has lifted to 6.99% (as if paying 0.01% less than 7% is a government discount). Connecticut’s top tax rate is now higher than the 5.1% flat rate in the state formerly known as Taxachusetts.

This big shift in the tax burden has led to predictably bad results.

…the tax hikes have been a disaster. A net 30,000 residents moved to other states last year. Since 2010 seven of Connecticut’s eight counties have lost population, and the hedge-fund haven of Fairfield County shrank for the first time last year. In the last five years, 27,400 Connecticut residents have moved to Florida. …More than 3,000 Connecticut residents have moved to zero income-tax New Hampshire in the last two years. While liberals wax apocalyptic about Kansas’s tax cuts, the Prairie State has welcomed 1,430 Connecticut refugees since 2011 and reversed the outflow between 2005 and 2009. Yet liberals deny that tax policies influence personal or business decisions.

The good news is that the state’s leftist politicians recognize that there’s a problem. The bad news is that they don’t want to undo the high tax rates that are causing the problems. Instead, they want to use some favoritism, cronyism, and social engineering.

Connecticut’s progressive tax experiment has hit a wall. Tens of thousands of residents are fleeing for lower tax climes, which has prompted Democrats to propose—get this—paying new college grads a thousand bucks to stick around. …proposing a tax credit averaging $1,200 for grads of Connecticut colleges who live in the state as well as those of out-of-state schools who move to the state within two years of earning their degree.

As the WSJ points out, special tax credits won’t be very effective if the job market stinks.

Yet the main reason young people are escaping is the lack of job opportunities. Since 2010 employment in Connecticut has grown at half the rate of Massachusetts and more slowly than in Rhode Island, New Jersey or Kansas.

By the way, this isn’t the first time that Connecticut’s politicians have resorted to special-interest kickbacks.

The Wall Street Journal also editorialized last year about the state’s one-off bribe to keep a hedge fund from fleeing to a state with better policy.

Last week the Governor presented Bridgewater with $5 million in grants and $17 million in low-interest, forgivable loans to renovate its headquarters in Westport along the state’s Gold Coast.

But the bit of cronyism won’t help ordinary people.

Connecticut has lost 105,000 residents to other states over the last five years while experiencing zero real economic growth. …So here is the new-old progressive governing model: Raise taxes relentlessly in the name of soaking the 1% to pay off government unions. When that drives people out of the state, subsidize the 0.1% to salvage at least some jobs and revenue. Ray Dalio gets at least some of his money back. The middle class gets you know what.

What’s particularly frustrating is that the state’s leftist governor understands the consequences of bad tax policy, even though he’s unwilling to enact the right solution.

Mr. Malloy said that other states including New York were trying to lure Bridgewater, and Connecticut couldn’t afford to lose the $150 billion fund or its 1,400 high-income employees. …The Governor’s office says Nutmeg State tax revenues could shrink by $4.9 billion over the next decade if all of Bridgewater’s employees departed. …“We see what happens in places like New Jersey when some of the wealthiest people move out of the state,” Mr. Malloy warned. This is the same Governor who has long echoed the progressive left’s claim that tax rates don’t matter. Maybe he was knocked off his horse by a vision on the road to Hartford.

This is remarkable.

Governor Malloy recognizes that tax-motivated migration is a powerful force.

He even admits that it causes big Laffer Curve effects, meaning governments actually lose revenue over time when tax rates are punitive.

Yet he won’t fix the underlying problem.

Maybe there’s some unwritten rule that Connecticut has to have bad governors?

Mr. Malloy’s Republican predecessor Jodi Rell raised the top marginal tax rate to 6.5% from 5% on individuals earning more than $500,000, and Mr. Malloy raised it again to 6.99%. Hilariously, Ms. Rell said last month that she’s also moving her residence to Florida because of the “downward spiral” in Connecticut that she helped to propel.

And lots of other people are moving as well.

The death tax plays a role, as explained in a column for the Hartford Courant.

Connecticut spends beyond its means and, therefore, taxes more than it should. …they’re driving the largest taxpayers away. We’ve passed the tipping point beyond which higher taxes beget lower revenues… The wealthy, in particular, have decided in swelling numbers they won’t be caught dead — literally — in our state. Evidence strongly suggests that estate and gift taxes are the final straw. To avoid Connecticut’s estate tax, wealthy families are moving to one of the 36 states without one.

And the loss of productive people means the loss of associated economic activity.

Including tax revenue.

Where wealthy families choose to establish residency has important ramifications for Connecticut’s economy and fiscal health. The earlier these golden geese flee, the greater the cumulative loss of golden eggs in the form of income taxes, sales taxes, jobs created by their companies, philanthropic support and future generations of precious taxpayers.

The data on tax-motivated migration is staggering.

Between 2010 and 2013, the number of federal tax returns with adjusted gross incomes of $1 million or more grew only 9.5 percent here vs. 22 percent in Massachusetts, 16 percent in New York and Rhode Island, and 30 percent in Florida. Slow economic growth and ever higher taxes are both cause and effect of out-migration. …In 2008, the state Department of Revenue Services asked accountants and tax lawyers whether clients moved out of state due to the estate tax, and 53 percent of respondents said it was the principal reason. …The outflow accelerated following 2011’s historic $2.5 billion tax increase. In the following two years, Connecticut suffered a net out-migration of more than 27,000 residents who took nearly $4 billion in annual adjusted gross income elsewhere, a stunning $500,000 per household. According to the Yankee Institute, the average adjusted gross income of each person leaving tripled in the past 10 years. At an average tax rate of 6.5 percent, this represents more than $250 million in lost income tax revenue annually, which is 50 percent more than the state collected in estate and gift taxes in 2014.

By the way, just in case some of you are skeptical and think that Connecticut’s deterioration is somehow unconnected to tax policy, I’ll close with this excerpt from some academic research that calculated the nationwide impact of state tax policy differences.

We consider the complete sample of all U.S. establishments from 1977-2011 belonging to firms with at least 100 employees and having operations in at least two states. On the extensive margin, we find that a one percentage point increase (decrease) in the state corporate tax rate leads to the closing (opening) of 0.03 establishments belonging to firms organized as C corporations in the state. This corresponds to an average change in the number of establishments per C corporation of 0.4%. A similar analysis shows that a one percentage point change in the state personal tax rate a§ects the number of establishments in the state per pass-through entity by 0.2-0.3%. These effects are robust to controls for local economic conditions and heterogeneous time trends. …This lends strong support to the view that tax competition across states is economically relevant.

To be sure, the numbers cited above may not sound large.

But keep in mind that small changes, if sustained over time, grow into very big results.

In the case of Connecticut, we have a state that has suffered dramatic negative consequences ever since the income tax was imposed back in 1991.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents are engaging in civil disobedience against the state’s anti-gun policies.

Don’t Fall For Air Travel Protectionism Appeals

Sun, 04/09/2017 - 12:29am

Originally published by The Daily Caller on March 23, 2017.

Days after Emirates Airlines launched a new route from Newark to Athens to Dubai, a coalition representing Delta Air Lines, United Airlines, and American Airlines called on the administration to freeze the route, and others from Etihad Airways and Qatar Airways, under the Open Skies agreements between the U.S. and Persian Gulf governments. They claim that there is not a “fair playing field” due to illegal subsidies to the state-owned airlines. Granting their request would harm American consumers and is not justified under the circumstances.

Adoption of the Open Skies agreements—the U.S. has them in place with over 100 jurisdictions—helped to deregulate the airline industry and eliminate government interference in the market. As a result, competition increased and consumers benefited through lower prices, more frequent flights, and better in-flight service. A Brookings Institution study estimated $4 billion in annual consumer benefits. American airlines have also been able to vastly expand their reach through access to new markets thanks to Open Skies agreements.

But several U.S. airlines—facing new competition for customers on certain routes—now cry foul. They claim that billions in subsidies are going to the Gulf carriers and use it as reason to call for revisiting the Open Skies agreements. The free markets that have long benefited consumers are no longer sufficient, they say, and “fairness” ought to now be ensured by the government.

This would represent a major step backward for an airline industry that suffered under stiff regulation for decades. “Market fairness,” after all, has long been a euphemism used by those who don’t trust freedom and favor instead government control over the economy. Its use, in this case, is pure corporate rent-seeking rather than motivated by ideological, but the desired result is the same: a government that picks winners and losers and thus ultimately makes losers of us all.

And just how unfair is the playing field, really?

Lest we forget, U.S. airlines also benefit significantly from subsidies. They received a quick bailout following 9/11, and continue to benefit from the Essential Air Service program and its subsidies for airlines serving many rural communities, and the Fly America Act, which requires federal agencies to favor U.S. air carriers regardless of cost or convenience. Then there are the significant tax dollars funneled into air travel infrastructure.

The companies in question also seem to be doing just fine despite claims of being unable to compete. Delta was proud to announce “a year of record-breaking performance in 2016,” for instance. United and American have also been showing hefty profits.

When foreign governments subsidize foreign companies, the biggest losers are foreign taxpayers. In addition, distortions of market activity ultimately lead to large inefficiencies and slower economic growth. That’s why such policies cannot last in the long run when set against the free market. American companies should look to history if they need more confidence on that point.

On the other hand, an intervention by the U.S. government could spark retaliation and the closing of some markets to American carriers. The result would be higher prices and fewer choices for international travelers, which would not only inconvenience American consumers but also depress tourism and its sundry benefits to the U.S. economy.

In an ideal world, governments wouldn’t be subsidizing any companies. Things are obviously not yet ideal, but Open Skies agreements have moved us closer in that direction.

If U.S. air carriers want to offer up all current and future benefits that they receive in exchange for the elimination of subsidies overseas, that’s a discussion worth having. Taxpayers the world over would certainly rejoice. But let’s not make the mistake of compounding one bad policy with another by re-regulating the air travel industry.

Tax and Development: What the U.N. Gets Wrong and What the U.N. Doesn’t Get Right

Sat, 04/08/2017 - 12:14pm

I’ve been at the United Nations this week for both the 14th Session of the Committee of Experts on International Cooperation in Tax Matters as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.

As you might suspect, it would be an understatement to say this puts me in the belly of the beast (for the second time!). Sort of a modern-day version of Daniel in the Lion’s Den.

These meetings are comprised of tax collectors from various nations, along with U.N. officials who – like their tax-free counterparts at other international bureaucracies – don’t have to comply with the tax laws of those countries.

In other words, there’s nobody on the side of taxpayers and the private sector (I’m merely an observer representing “civil society”).

I could share with you the details of the discussion, but 99 percent of the discussion was boring and arcane. So instead I’ll touch on two big-picture observations.

What the United Nations gets wrong: The bureaucracy assumes that higher taxes are a recipe for economic growth and development.

I’m not joking. I wrote last year about how many of the international bureaucracies are blindly asserting that higher taxes are pro-growth because government supposedly will productively “invest” any additional revenue. And this reflexive agitation for higher fiscal burdens has been very prevalent this week in New York City. It’s unclear whether participants actually believe their own rhetoric. I’ve shared with some of the folks the empirical data showing the western world became rich in the 1800s when fiscal burdens were very modest. But I’m not expecting any miraculous breakthroughs in economic understanding.

What the United Nations fails to get right: The bureaucracy does not appreciate that low rates are the best way of boosting tax compliance.

Most of the discussions focused on how tax laws, tax treaties, and tax agreements can and should be altered to extract more money from the business community. Participants occasionally groused about tax evasion, but the real focus was on ways to curtail tax avoidance. This is noteworthy because it confirms my point that the anti-tax competition work of international bureaucracies is guided by a desire to collect more revenue rather than to improve enforcement of existing law. But I raise this issue because of a sin of omission. At no point did any of the participants acknowledge that there’s a wealth of empirical evidence showing that low tax rates are the most effective way of encouraging tax compliance.

I realize that these observations are probably not a big shock. So in hopes of saying something worthwhile, I’ll close with a few additional observations

  • I had no idea that people could spend so much time discussing the technicalities of taxes on international shipping. I resisted the temptation to puncture my eardrums with an ice pick.
  • From the moment it was announced, I warned that the OECD’s project on base erosion and profit shifting (BEPS) was designed to extract more money from the business community. The meeting convinced me that my original fears were – if possible – understated.
  • A not-so-subtle undercurrent in the meeting is that governments of rich nations, when there are squabbles over who gets to pillage taxpayers, are perfectly happy to stiff-arm governments from poor nations.
  • The representative from the U.S. government never expressed any pro-taxpayer or pro-growth sentiments, but he did express some opposition to the notion that profits of multinationals could be divvied up based on the level of GDP in various nations. I hope that meant opposition to “formula apportionment.”
  • Much of the discussion revolved around the taxation of multinational companies, but I was still nonetheless surprised that there was no discussion of the U.S. position as a very attractive tax haven.
  • The left’s goal (at least for statists from the developing world) is for the United Nations to have greater power over national tax policies, which does put the UN in conflict with the OECD, which wants to turn a multilateral convention into a pseudo-International Tax Organization.

P.S. The good news is that the folks at the United Nations have not threatened to toss me in jail. That means the bureaucrats in New York City are more tolerant of dissent than the folks at the OECD.

Will Republicans Drain the Regulatory Swamp?

Fri, 04/07/2017 - 12:07pm

On major economic issues, it does not appear that Republican control of Washington makes much of a difference.

  • Efforts to repeal Obamacare have bogged down because GOPers are willing to deal with the fiscal wreckage of that law, but don’t seem very comfortable about undoing the interventions and regulations that have caused premiums to skyrocket.
  • Efforts to cut taxes and reform the tax code don’t look very promising because House Republicans have proposed a misguided border-adjustment tax and the White House seems hopelessly divided on how to proceed.
  • Efforts to restrain government spending haven’t gotten off the ground. A full budget is due next month, but it’s not overly encouraging that Trump’s proposed domestic cuts would be used to expand the Pentagon’s budget.

Let’s see whether we get a different story when we examine regulatory issues.

We’ll start with some good news? Well, sort of. It seems the United States has the largest and 4th-largest GDPs in the world.

You may think that makes no sense, but this is where we have to share some bad news on the regulatory burden from the Mercatus Center.

Economic growth has been reduced by an average of 0.8 percent per year from 1980 to 2012 due to regulatory accumulation. Regulations force companies to invest less in activities that enhance productivity and growth, such as research and development, as companies must divert resources into regulatory compliance and similar activities. …Compared to a scenario where regulations are held constant at levels observed in 1980, the study finds that the difference between the economy we are in and a hypothetical economy where regulatory accumulation halted in 1980 is approximately $4 trillion. …The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.

By the way, this data from Mercatus gives me an opportunity to re-emphasize the importance of even small variations in economic growth. It may not make that much difference if the economy grows 0.8 percent faster or slower in one year.

But, as just noted, a loss of 0.8 percent annual growth over 32 years has been enormously expensive to the U.S. economy.

The Competitive Enterprise Institute has a depressing array of data on America’s regulatory burden. Here’s the chart that grabbed my attention.

And here’s a video on the burden of red tape from the folks at CEI.

Who deserves the blame for this nightmare of red tape?

The previous president definitely added to the regulatory morass. The Hill reported last year on a study by the American Action Forum.

The Obama administration issues an average of 81 major rules, those with an economic impact of at least $100 million, on a yearly basis, the study found. That’s about one major rule every four to five days, or, as the American Action Forum puts it, one rule for every three days that the federal government is open. “It is a $2,294 regulatory imposition on every person in the United States,” wrote Sam Batkins, director of regulatory policy at the American Action Forum, who conducted the study.

And there was a big effort to add more red tape in Obama’s final days, as noted by Kimberly Strassel of the Wall Street Journal.

Since the election Mr. Obama has broken with all precedent by issuing rules that would be astonishing at any moment and are downright obnoxious at this point. This past week we learned of several sweeping new rules from the Interior Department and the Environmental Protection Agency, including regs on methane on public lands (cost: $2.4 billion); a new anti-coal rule related to streams ($1.2 billion) and renewable fuel standards ($1.5 billion).

As you might expect, the net cost of Obama’s regulatory excess is significant. Here’s some of what the Washington Examiner wrote during the waning days of Obama’s tenure.

According to new information from the White House, finally released after a two year wait, the total burden of federal government paperwork is more than 11.5 billion man-hours a year. That’s almost 500 million man-days, or 1.3 million man-years. More importantly, it’s 35 hours every person in the country (on average) has to spend doing federal paperwork every year, on average. …Time is money, and paperwork time alone costs the country almost $2 trillion a year, or about 11 percent of GDP.

But it’s not solely Obama’s fault. Not even close.

Both parties can be blamed for this mess, as reported by the Economist.

The call to cut red tape is now an emotive rallying cry for Republicans—more so, in the hearts of many congressmen, than slashing deficits. Deregulation will, they argue, unleash a “confident America” in which businesses thrive and wages soar, leaving economists, with their excuses for the “new normal” of low growth, red-faced. Are they right?

They may be right, but they never seem to take action when they’re in charge.

Between 1970 and 2008 the number of prescriptive words like “shall” or “must” in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year… The unyielding growth of rules, then, has persisted through Republican and Democratic administrations… The endless pile-up of regulation enrages businessmen. One in five small firms say it is their biggest problem, according to the National Federation of Independent Business.

Though I would point out that President Reagan was the exception to this dismal rule.

That being said, who cares about finger pointing? What matters is that the economy is being stymied by excessive red tape.

So what can be done about this? President Trump has promised a 2-for-1 deal, saying that his Administration will wipe out two existing regulations for every new rule that gets imposed.

Susan Dudley opines on this proposal, noting that Trump hasn’t put any meat on the bones.

Like pebbles tossed in a stream, each individual regulation may do little economic harm, but eventually the pebbles accumulate and like a dam, may block economic growth and innovation. A policy of removing two regulations for every new one would provide agencies incentives to evaluate the costs and effectiveness of those accumulated regulations and determine which have outlived their usefulness. Mr. Trump’s statement doesn’t provide details on how this new policy would work.

Ms. Dudley points out, however, that other nations have achieved some success with similar-sounding approaches.

…his team could look to experiences in other countries for insights. The Netherlands, Canada, Australia and the United Kingdom have all adopted similar requirements to offset the costs of new regulations by removing or modifying existing rules of comparable or greater effect. …The Netherlands program established a net quantitative burden reduction target that reduced regulatory burdens by 20% between 2003 and 2007. It is currently on track to save €2.5 billion in regulatory burden between 2012 and 2017 by tying the introduction of new regulations “to the revision or scrapping of existing rules.” Under Canada’s “One-for-One Rule,” launched in 2012, new regulatory changes that increase administrative burdens must be offset with equal burden reductions elsewhere. Further, for each new regulation that imposes administrative burden costs, cabinet ministers must remove at least one regulation. Similarly, Australia’s policy is that “the cost burden of new regulation must be fully offset by reductions in existing regulatory burden.” The British began with a “One-in, One-out” policy, requiring any increases in the cost of regulation to be offset by deregulatory measures of at least an equivalent value. In 2013, it moved to “One-in, Two-out” (OITO) and more recently to a “One-in, Three-out” policy in an effort to cut red tape by £10 billion.

The bottom line is that progress will depend on Trump appointing good people. And on that issue, the jury is still out.

The legislative branch also could get involved.

In a column for Reason, Senator Rand Paul explained that the REINS Act could make a big difference.

…13 of the 15 longest registers in American history have been authored by the past two presidential administrations (Barack Obama owns seven of the top eight, with George W. Bush filling in most of the rest)…federal lawmakers should pass something called the REINS Act—the “Regulations from the Executive in Need of Scrutiny Act. The REINS Act would require every new regulation that costs more than $100 million to be approved by Congress. As it is now, agencies can pass those rules unilaterally. Such major rules only account for about 3 percent of annual regulations, but they are the ones that cause the most headaches for individuals and businesses. …the REINS Act did pass the House on four occasions during the Obama administration. Lack of support in the Senate and the threat of a presidential veto kept it from ever reaching Obama’s desk.

But would it make a difference if Congress had to affirm major new rules?

Given how agencies will lie about regulatory burdens, it wouldn’t be a silver bullet.

But based on the hysterical opposition from the left, I’m betting the REINS Act would be very helpful.

REINS would fundamentally alter the federal government in ways that could hobble federal agencies during periods when the same party controls Congress and the White House — and absolutely cripple those agencies during periods of divided government. Many federal laws delegate authority to agencies to work out the details of how to achieve relatively broad objectives set by the law itself. …REINS, however, effectively strips agencies of much of this authority.

That sounds like good news to me. If the crazies at Think Progress are this upset about the REINS Act, it must be a step in the right direction.

Let’s close with a bit of evidence that maybe, just maybe, Republicans will move the ball in the right direction. Here are some excerpts from a Bloomberg story.

The White House estimates it will save $10 billion over 20 years by having rescinded 11 Obama-era regulations under a relatively obscure 1996 law that lets Congress fast-track repeal legislation with a simple majority. …In all, the law has been used to repeal 11 rules, with two more awaiting the president’s signature… About two dozen measures with CRA’s targeting them remain, but because the law can only be used on rules issued in the final six months of the previous administration, Congress only has only a few more weeks to use the procedure.

Before getting too excited, remember that the annual cost of regulation is about $2 trillion and the White House is bragging about actions that will reduce red tape by $10 billion over two decades. Which means annual savings of only $500 million.

Which, if my math is right, addresses 0.025 percent of the problem.

I’ll take it, but it should be viewed as just a tiny first step on a very long journey.

P.S. The Congressional Review Act was signed into law by Bill Clinton. Yet another bit of evidence that he was a surprisingly pro-market President.

The Transition from Communism in the Soviet Bloc and Lessons for Cuba, North Korea, and Venezuela

Thu, 04/06/2017 - 12:54pm

It appears that Venezuela is on the brink of collapse as it enters the fourth circle of statist hell.

And the death of Cuba’s long-time dictator gives hope that the people of that island nation may soon escape communist tyranny.

Moreover, one certainly hopes that the lunatic leadership of North Korea’s brutal regime won’t last forever.

Let’s cross our fingers that these evil governments will soon lose power. But that’s only the first step. We also need to think about the policies that would enable these nations to undo the damage of pervasive socialism.

We can learn some lessons by looking at the experience of post-communist nations in Eastern Europe, which is a topic I addressed in the latest edition of The Conservative, which is the quarterly magazine published by the Alliance of Conservatives and Reformers in Europe.

I started the article with some broad observations about grim political and economic impact of communism.

Communism was an awful system for people trapped behind the Iron Curtain. The political cost was enormous. Personal rights and individual liberties were sacrificed to protect the power of the state. Human rights were abused, dissidents were imprisoned, and some were even killed. Communism also imposed huge economic costs. Collectivized agriculture, central planning, price controls, and government-run industries were among the policies that resulted in a debilitating misallocation of resources. And because labor and capital were poorly utilized, living standards lagged far behind western nations.

That was the bad news.

The good news is that the Soviet Empire collapsed, the Berlin Wall was dismantled, and democratic forms of government are now the norm in Eastern Europe.

But good news isn’t perfect news. Nations that emerged from the Soviet Bloc are still economic laggards. And if you dig into the latest version of Economic Freedom of the World, a big problem is that post-communist nations have not been very successful in defending property rights and implementing the rule of law.

Establishing genuine capitalism, though, has been a bigger challenge. Part of the problem is policy. And to be more specific, data from the Fraser’s Institute’s Economic Freedom of the World shows that the major difference today between Western Europe and Eastern Europe (nations that were part of the Soviet Bloc) is that the former get much better scores for “Legal System and Property Rights.” Indeed, the average ranking of Western European nations is 20.6 (with 1 being the best) while the average ranking of Eastern European countries is 67.1 (Economic Freedom of the World ranks 159 jurisdictions).

Here’s a graph comparing Western European nations with Eastern European nations.

As you can see, this is an area where Western Europe leads the world. Nordic nations tend to be at the very top of the rankings (thus helping to offset bad fiscal policy in those countries), and other countries in the region also are highly ranked (though a few countries in the region, such as Italy and Greece, don’t get good scores).

Eastern European countries, by contrast, don’t do well. There’s a significant gap when looking at average scores. Indeed, only Estonia ranks in the top 25.

And bad scores in this category are akin to putting a house on a foundation of sand. Other policies may create a house that looks very nice, but it probably won’t last very long on the unstable foundation.

And speaking of other policies, post-communist nations have better fiscal policy than the countries from Western Europe. Or, to be more accurate, they have less-worse fiscal policy.

If you examine the overall ratings for “Size of Government,” Eastern European nations actually are ranked significantly better, with an average ranking of 89.2 compared to 129.2 for Western European countries. This is because tax rates tend to be lower (many former Soviet Bloc nations have flat tax regimes, for instance) and welfare states aren’t as burdensome.

As I already hinted, doing “significantly better” on fiscal policy than Western Europe does not mean Eastern Europe has good fiscal policy.

Indeed, an average ranking of 89 means that most Eastern European nations are in the bottom half of the world.

So while it’s good that some Eastern European nations have flat taxes, that’s not an economic elixir if there are very high payroll taxes, stifling value-added taxes, and onerous energy taxes.

And since the burden of government spending is extremely onerous in Western Europe, it’s hardly an impressive achievement that Eastern Europe ranks slightly higher.

Though there’s one aspect of fiscal policy where the post-communist countries are lagging their neighbors to the west.

…if you dig into the details and examine the various components that determine “Size of Government,” there’s one area where Eastern Europe lags. The numbers for “Government Enterprises and Investment” are better in Western Europe. …In other words, politicians play too large a role in the allocation of capital in former communist nations.

To put that message in blunter terms, there’s too much cronyism in Eastern Europe.

So long as politicians can directly (state-owned enterprises) or indirectly (handouts, subsidies, and bailouts) provide favors and tilt the playing field, the enriching forces of private markets will be stunted.

Which is why I shared this conclusion in my article.

The bottom line is that post-communist nations need to choose genuine capitalism if they want a brighter future for their citizens.

If you want to close with some good news, I did point out in the article that there are some bright spots in the region, especially Estonia, though Poland also has made big progress.

Statement from CF&P President on Mark Meadows, Rand Paul Letter Calling for Administrative Action to Nullify FATCA

Wed, 04/05/2017 - 2:59pm

Center for Freedom and Prosperity

For Immediate Release
Wednesday, April 5, 2017
202-285-0244

www.freedomandprosperity.org

Statement from CF&P President on Meadows-Paul Letter Calling for Administrative Action
to Nullify FATCA

(Washington, D.C., Wednesday, April 5, 2017) Upon news that Senator Rand Paul and Congressman Mark Meadows authored a letter to the Trump administration calling for the reversal of Obama-era executive overreach implementing the Foreign Account Tax Compliance Act (FATCA), Center for Freedom and Prosperity President Andrew Quinlan offered the following statement:

“There’s no doubt that FATCA has been a disaster. Its extraterritorial demands on financial institutions not only cost the private sector much more than the limited revenue it collects, but millions of innocent Americans have suffered as a result. FATCA repeal is an essential component of tax reform. In the meantime, the Trump administration should heed the letter’s advice and roll back the unlawful enforcement actions of the Obama administration.

Congressman Meadows and Senator Paul are committed defenders of American taxpayers at home and abroad. We applaud their leadership in the fight to undo the devastation caused by FATCA.”

Both Meadows and Paul introduced legislation to repeal FATCA in the previous Congress and plan to reintroduce them soon. Their letter urges the Trump administration to take one or more of their recommended steps to reverse what they call “the previous administration’s inclination for abusing its Executive Power”.

CF&P has opposed FATCA since day one. It recently co-authored a coalition letter of 23 free-market think-tanks and taxpayer advocacy organizations calling on Congress to include FATCA repeal as a part of tax reform.

The Center for Freedom & Prosperity is a Washington, DC-based think-tank dedicated to the promotion of tax competition, financial privacy, and fiscal sovereignty.

For additional comments:
Andrew Quinlan can be reached at 202-285-0244, [email protected]

###

Minimum Wage Laws, Jobs, and the Sobering Impact of Decentralization

Wed, 04/05/2017 - 12:41pm

The real world is like a cold shower for our friends on the left. Everywhere they look, there is evidence that jurisdictions with free markets and small government outperform places with big welfare states and lots of intervention.

That’s true when comparing nations. And it’s also true when comparing states. That must be a source of endless frustration and disappointment for statists.

Speaking of disappointed statists, the real world has led to more bad news. The left-wing Mayor of Baltimore campaigned in favor of a $15 minimum wage but then decided to veto legislation to impose that mandate. The Wall Street Journal opines on this development.

Mayor Catherine Pugh, a Democrat, has rejected a bill that would raise the city’s minimum wage to $15 an hour by 2022. She did so even though she had campaigned in favor of raising the minimum wage, which shows that economic reality can be a powerful educator. She explained her change of heart by noting that raising the rate above the $8.75 an hour minimum that prevails in the rest of Maryland would send jobs and tax revenue out of Baltimore to surrounding counties. The increase would also have raised the city’s payroll costs by $116 million over the next four years when she’s already coping with a deficit of $130 million in the education budget.

The key thing to notice is that the Mayor recognized that the real-world impact of bad legislation is that economic activity would shrink in the city and expand outside the city.

Writing for Reason, Eric Boehm also points out that the Mayor was constrained by the fact neighboring jurisdictions weren’t making the same mistake.

Pugh said the bill would not be in the best interest of Baltimore’s 76,000 unemployed workers and would drive businesses out of the city to the surrounding counties. …Indeed. Raising the minimum wage would not solve Baltimore’s economic troubles, and would likely only add to them. While support for a $15 minimum wage has become something of a litmus test for progressive politicians, the true test of any politician should be whether he or she is willing to set aside campaign trail rhetoric that flies in the face of economic reality. Signing the bill would have made progressive pols and activists happy—one Baltimore city councilman called Pugh’s decision “beyond disappointing” and a minimum wage activist group said it would remind voters of Pugh’s “broken promise”—but there’s no honor in following through on a promise to do more damage to an already struggling city’s economy. Pugh’s decision to veto a $15 minimum wage bill isn’t disappointing in the least. More politicians should learn from her example of valuing economic reality over populist rhetoric.

The Mayor’s veto is good news, though it remains to be seen whether city legislators will muster enough votes for an override.

Regardless of what happens, notice that the Mayor didn’t do the right thing because she believed in economic liberty and freedom of contract. She also didn’t do the right thing because she recognized that higher minimum wage mandates would lead to more joblessness.

Instead, she felt compelled to do the right thing because of jurisdictional competition. She was forced to acknowledge that bad policy in her city would explicitly backfire since economic activity is mobile. She had to admit that there are no magic boats.

And this underscores why federalism and decentralization are vital features of a good system. Governments are more likely to do bad things when the costs can be imposed on an entire nation (or, even better from their perspective, the entire world). But when bad policy is localized, it becomes very hard to disguise the costs of bad policy.

And, as today’s column illustrates, decentralization stopped the Mayor of Baltimore from a bad policy that would hurt poorly skilled workers. Just as federalism stopped Vermont politicians from imposing a destructive single-payer health system.

Let’s close by circling back to the minimum wage.

Writing in today’s Wall Street Journal, Andy Puzder makes a very timely point about automation.

Entry-level jobs matter—and you don’t have to take my word for it. In a speech last week on workforce development in low-income communities, Federal Reserve Chair Janet Yellen said that “it is crucial for younger workers to establish a solid connection to employment early in their work lives.” Unfortunately, government policies are destroying entry-level jobs by giving businesses an incentive to automate at an accelerated pace. In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017. Nearly a quarter of them, 24%, said rising minimum wages. …The trend toward automation is particularly pronounced in areas where the local minimum wage is high.

Need more evidence?

By the way, even the normally left-leaning World Bank has research on the damaging impact of minimum wage mandates.

This paper uses a search-and-matching model to examine the effects of labor regulations that influence the cost of formal labor (notably minimum wages and payroll taxes) on labor market outcomes… The results indicate that these regulations, especially minimum wage policy, contribute to higher unemployment rates and constraint formalization…, especially for youth and women.

The research was about the labor market in Morocco, but the laws of supply and demand are universal.

As I’ve repeatedly stated, when you mandate that workers get paid more than what they’re worth, that’s a recipe for unemployment. And as the World Bank points out, it’s the more vulnerable members of society who pay the highest price.

In an ideal world, there should be no minimum wage mandates. But since that’s not an immediately practical goal, the best way of protecting low-skilled workers is to make sure Washington does not impose a nationwide increase. That won’t stop every state and local government from imposing destructive policies that cause unemployment, but the pressure of jurisdictional competition will

And when those bad policies do occur, that will simply give us more evidence against intervention. Which brings us back to where we started. The real world is a laboratory that shows statism is a bad idea.

Can Corporate Rate Reduction Save the Tax Agenda?

Tue, 04/04/2017 - 12:05pm

The good news is that the House put together an Obamacare-repeal bill that reduced the fiscal burden of government. The bad news is that the legislation didn’t address the regulations and interventions that produce rising costs and sectoral inefficiency because of the third-party payer problem.

Whether the bill was a net plus is now moot since it didn’t have enough votes for approval. And the withdrawal of the legislation has generated a bunch of stories on whether Trump and congressional Republicans are incapable of governing.

In particular since it appears that GOPers also seem incapable of coming to agreement on how to reduce the tax burden. I commented on the dysfunctional state of affairs in this interview with Neil Cavuto.

The bottom line is that there are big divisions. There is (thankfully) a lot of opposition to the border-adjustable tax, and there’s also no agreement on whether the tax plan should be a pure tax cut or whether it should be a revenue-neutral package that finances lower tax rates by eliminating or curtailing undesirable preferences.

Jason Furman, who was the Chairman of Obama’s Council of Economic Advisers, suggest that Republican divisions won’t matter if tax reform becomes a bipartisan issue. But I’m not overly impressed by the five conditions he outlines in a column in today’s Wall Street Journal.

  • “Commit to revenue neutrality and distributional neutrality, as in the 1986 tax reform” – This is a poison pill, mostly because “distributional neutrality” means lawmakers would be constrained by class warfare concerns instead of focusing on how to produce growth. Indeed, this is why the plan put forth by the previous Chairman of the Ways & Means Committee was such a dud.
  • “Focus on business taxes only” – As I mentioned in the interview, I actually think this suggestion makes sense.
  • “For overseas business income, adopt something like a ‘minimum tax.’” – This is another poison pill. It’s designed to preserve worldwide taxation. Moreover, I explained last year that such schemes discriminate against nations with better tax policy.
  • “For domestic business income, adopt something along the lines of the House Republican proposal” – There’s not a lot of detail in the WSJ column, so it’s unclear if Furman is endorsing the notorious BAT from the House plan. He does explicitly endorse expensing over depreciation and he wants to put debt and equity on a level playing field. If that’s all he means, I agree with him.
  • “Incorporate into the bill a real plan for public infrastructure spending” – Since the federal government should not have any role in transportation, I’m obviously not enthusiastic about this proposal. Though if a bit of pork was the price to get an otherwise good bill through the process, I wouldn’t object too strenuously.

It’s unclear if Furman considers the five conditions a package deal. If so, there is zero chance of bipartisanship because Republicans presumably will not agree if they are bound by distributional neutrality.

But if a “business taxes only” agenda can get some Democrats on board, then there may be hope. Especially since that may make a virtue out of necessity, as I suggested in the interview.

And for those who question whether lowering the corporate tax rate is important, here’s an argument-ending chart from a recent Tax Foundation publication. Keep in mind that the U.S. corporate rate (including state levies) is 39 percent.

 

It’s particularly noteworthy that average corporate tax rates in Europe and Asia are about 20 percent, far lower than the tax burden imposed on companies in the United States.

No wonder many American companies have redomiciled to other nations.

The ultimate answer is to junk the entire tax code and adopt a simple and fair flat tax. The best-possible answer we may get out of dysfunctional Washington is probably a lower corporate rate.

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