Based on new 10-year fiscal estimates from the Congressional Budget Office, I wrote yesterday that balancing the budget actually is very simple with a modest bit of spending restraint.
If lawmakers simply limit annual spending increases to 1 percent annually, the budget is balanced by 2022. If spending is allowed to grow by 2 percent annually, the budget is balanced by 2025. And if the goal is balancing the budget by the end of the 10-year window, that simply requires that spending grow no more than 2.63 percent annually.
I also pointed out that this wouldn’t require unprecedented fiscal discipline. After all, we had a de facto spending freeze (zero percent spending growth) from 2009-2014.
And in another previous column, I shared many other examples of nations that achieved excellent fiscal results with multi-year periods of spending restraint (as defined by outlays growing by an average of less than 2 percent).
Today, we’re going to add tax cuts to our fiscal equation.
Some people seem to think it’s impossible to balance the budget if lawmakers are also reducing the amount of tax revenue that goes to Washington each year.
After all, if politicians tried to simultaneously enact a big tax cut and balance the budget, it would require deep and harsh spending cuts that would decimate the federal budget, right?
Nope. Not at all.
They just need to comply with my Golden Rule.
Let’s examine the fiscal implications of a $3 trillion tax cut. If you look at CBO’s baseline revenue forecast for the next 10 years, the federal government is projected to collect more than $43 trillion during that decade. If you reduce that baseline by an average of $300 billion each year, receipts will still grow. Indeed, they’ll rise from $3.4 trillion this year to $4.8 trillion in 2027.
And since CBO is forecasting that the federal government this year will spend more than $3.9 trillion, we simply have to figure out the amount of spending restraint necessary so that outlays in 2027 don’t exceed $4.8 trillion.
That’s not a difficult calculation. It turns out that the American people can get a substantial $3 trillion tax and a balanced budget if politicians simply exercise a modest amount of fiscal discipline and limit annual spending increases to 1.96 percent annually.
In other words, if the crowd in Washington does nothing more than simply have government grow just a tiny bit less than the projected rate of inflation, lots of good things can be achieved.
P.S. I can’t resist pointing out yet again that we shouldn’t fixate on balancing the budget. The real goal should be to shrink the burden of federal spending so more resources are allocated by the productive sector of the economy. That being said, if lawmakers address the underlying disease of excessive spending, that automatically solves the symptom of red ink.
P.P.S. Higher taxes, by contrast, generally lead to higher deficits and debt.
The Congressional Budget Office, as part of The Budget and Economic Outlook: 2017 to 2027, has just released fiscal projections for the next 10 years.
Let’s repeat that process. Here’s what you need to know from CBO’s new report.
But what happens if there is a modest bit of spending restraint? What if politicians decide to comply with my Golden Rule and limit how fast the budget grows every year?
This shouldn’t be too difficult. After all, even with Obama in the White House, there was a de facto spending freeze between 2009-2014. In other words, all the fights over debt limits, sequesters, and shutdowns actually yielded good results.
So if the Republicans who now control Washington are serious about protecting the interests of taxpayers, it should be relatively simple for them to adopt good fiscal policy.
And if GOPers actually decide to do the right thing, the grim numbers in the CBO’s new report quickly turn positive.
To put all these numbers in context, inflation is supposed to average about 2 percent annually over the next decade.
Here’s a chart showing the overall fiscal impact of modest spending restraint.
By the way, it’s worth pointing out that the primary objective of good fiscal policy should be reducing the burden of government spending, not balancing the budget. However, if you address the disease of excessive spending, you automatically eliminate the symptom of red ink.
For more background information, here’s a video I narrated on this topic. It was released in 2010, so the numbers have changed, but the analysis is still spot on.
P.S. Achieving good fiscal policy obviously becomes much more difficult if Republicans in Washington decide to embark on a foolish crusade to expand the federal government’s role in infrastructure.
P.P.S. Achieving good fiscal policy obviously becomes much more difficult if Republicans in Washington decide to leave entitlement programs on autopilot.
This article originally appeared on The Daily Caller on January 25, 2017.
President Trump has made clear that he wants Congress to quickly move to advance his agenda. In addition to the big ticket items like Obamacare repeal and tax reform, Congress should also waste no time in sending the Email Privacy Act (H.R. 387) to the president’s desk for his signature.
Reps. Kevin Yoder and Jared Polis recently reintroduced the Email Privacy Act in order to finally bring the 1986 Electronic Communications Privacy Act (ECPA) into the 21st Century. Without reform, the inadequate protections offered by ECPA leave Americans’ privacy rights vulnerable to bureaucratic overreach.
ECPA’s biggest flaw is that it protects emails from warrantless searches only so long as they are less than 180 days old. Any emails held by a third-party beyond 180 days are treated as abandoned and require only a simple subpoena for law enforcement to obtain access. This threshold might have made sense with the technology and behaviors of 1986, but it is laughably outdated in the age of cloud computing.
Last year, the House passed the Email Privacy Act with an overwhelming 419-0 vote only to see it languish in the Senate. They should try again to close this egregious loophole.
Exemplifying the need for adding clarification and certainty to the nexus between law enforcement and digital privacy is a lengthy legal battle between Microsoft and the Department of Justice.
In 2014 Microsoft was held in contempt of court for refusing to hand over the data of an Irish citizen that was being stored on a server in Dublin. The government argued that a U.S. warrant was sufficient because the Irish company is a subsidiary of the U.S.-based Microsoft.
In a landmark ruling in July 2016, the Second Circuit ruled in Microsoft’s favor and slapped down the government’s attempted overreach. Obama’s Justice Department then filed for the full court to rehear the case, only to see its appeal rejected earlier this week.
If the court had accepted the government’s assertion of global jurisdiction, it would have placed both U.S.-based multinationals and the privacy of American citizens in jeopardy. The former would have faced the impossible task of complying with aggressive U.S. law enforcement demands while also respecting the privacy laws of foreign jurisdictions, while the latter could have been caught in the crossfire as other nations followed suit with their own aggressive demands.
The Justice Department would no doubt like to continue the case all the way to the Supreme Court. Further litigation is not the answer, however.
A better approach would be for the Justice Department to work with Congress on passing clarifying legislation that balances legitimate law enforcement needs with respect for privacy and jurisdictional limits.
The International Communications Privacy Act (ICPA), introduced last Congress by Sens. Orrin Hatch Chris Coons, and Dean Heller, would allow for law enforcement to obtain data on U.S. citizens from service providers regardless of where the data is held, with a proper warrant of course. They could also pursue data of foreign nationals where appropriate cooperation agreements are in place. In addition, ICPA would reform the mutual legal assistance treaty process to make international cooperation less cumbersome, giving law enforcement no excuse for further seeking to circumvent legal protections.
Refocusing the Justice Department away from aggressive litigation that will do nothing to solve the underlying problems with the ancient Electronic Communications Privacy Act should be the first task of Sen. Jeff Sessions if and when he is confirmed by the Senate as the new attorney general. Reversing the Obama administration’s attempted invasions of privacy and the damage it is doing to American businesses would be a productive way to promote Trump’s “America First” agenda.
A Justice Department that is willing to be reasonable and not demand unlimited power for law enforcement could be the final push needed for either of the already popular and bipartisan Email Privacy Act or International Privacy Communications Act to become law.
Having lived in the Washington area for more than three decades, I have many friends who work for the federal government. Most of them will privately admit that they are very lucky since federal salaries and benefits are considerably higher than what they could earn in the private sector. And they’ll also admit that there’s lots of featherbedding, inefficiency, and waste where they work.
While I like my buddies, I don’t think it’s fair that taxpayers around the nation (particularly those with modest incomes) are sending so much money to Washington to subsidize overly generous compensation packages for a bloated federal bureaucracy.
So I’m pleased that President Trump announced a hiring freeze yesterday.
President Trump on Monday ordered an across-the-board employment freeze for the federal government, halting hiring for all new and existing positions except those in national security, public safety and the military. In the two-page order, Mr. Trump said the directive was a stopgap way to control the growth of government until his budget director recommends a long-term plan to significantly reduce the federal work force through attrition.
But keep in mind this is just a tiny step in the right direction.
First, it only addresses part of the problem.
For instance, most bureaucrats are at the state and local level, often carrying out mandates, regulations, and spending of the federal government.
The Wall Street Journal put together a good summary of the situation back in 2014.
When you include state and local governments, it’s clear where the public civilian workforce has been growing in recent decades. Local governments, in particular, have boomed from 4 million employees in the 1950s to over 14 million today. In the mid-1950s, state governments employed half as many people as the federal government. Today, state governments employ nearly twice as many.
Here’s the accompanying chart.
Moreover, federal employment numbers don’t include the gigantic “shadow bureaucracy” of government contractors.
And exactly how many people are technically private employees but actually get their pay from federal taxpayers? Well, because the federal government is so big and bloated, we don’t have an exact number.
Indeed, as reported by Government Executive, there’s not even an official inexact number.
How many contractor employees does the federal government rely on, at what cost per person, and how does that compare with the cost of assigning the same task to a full-time hire? When asked by Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee, the Congressional Budget Office took a shot but left the $64,000 question unresolved. “Regrettably, CBO is unaware of any comprehensive information about the size of the federal government’s contracted workforce,” the nonpartisan analysts wrote in response. “However, using a database of federal contracts, CBO determined that federal agencies spent over $500 billion for contracted products and services in 2012.”
But we do know that it’s a very big number. An outside expert crunched the data and concluded that there are 5-1/2 contractors for every federal bureaucrat.
Second, the real issue is that the federal government has accumulated far too much power and is involved in many areas that either belong in the private sector (Department of Agriculture, Department of Energy, Department of Housing and Urban Development, etc) or should be handled by state and local governments (Department of Transportation, Department of Education, etc).
In other words, as I explain at the end of this video, the correct pay for many federal bureaucrats is zero, for the simple reason that their jobs shouldn’t exist.
This is why I explained a few days ago that the real goal for the Trump Administration should be program terminations. The new hiring freeze is good, to be sure, but it’s largely a symbolic gesture.
And that’s not going to solve our very big problem.
P.S. Though the problem is even bigger in Europe.
And the problem gets worse every year.
If I had to pick the worst example of foolish regulation, there would be lots of absurd examples from the federal government, and the crazy bureaucrats at the Equal Employment Opportunity Commission probably would be at the top of the list.
But the worst regulations, at least if measured by the harm to lower-income Americans, probably are imposed by state governments. Yes, I’m talking about the scourge of occupational licensing.
A report published by The American Interest elaborates on this problem.
…it’s important that policymakers don’t lose sight of more subtle ways the government has distorted the economy to favor the politically connected. One example: Onerous occupational licensing laws that force people to undergo thousands of hours of often redundant and gratuitous training to perform jobs like auctioneering, tree trimming, and hair styling. …licensing laws are the result of higher-skilled professionals seeking to protect their market share at the consumers’ expense. …This not just a minor concern for a few key industries; it is a weight dragging down the entire economy, raising prices while blocking access to less-skilled trades. The Obama administration has already recommended that states look at ways to loosen these requirements.
Yes, you read correctly. This is an issue where the Obama Administration was basically on the right side.
I’m not joking. Here are excerpts from a White House statement last year.
Today nearly one-quarter of all U.S. workers need a government license to do their jobs. The prevalence of occupational licensing has risen from less than 5 percent in the early 1950s with the majority of the growth coming from an increase in the number of professions that require a license rather than composition in the workforce. …the current system often requires unnecessary training, lengthy delays, or high fees. This can in turn artificially create higher costs for consumers and prohibit skilled American workers like florists or hairdressers from entering jobs in which they could otherwise excel.
Senator Mike Lee of Utah is a strong advocate of curtailing these protectionist regulations and allowing capitalism to flourish. Using teeth-whitening services as an example, he explained the downside of government-enforced cartels in an article for Forbes.
Should only dentists be allowed to whiten people’s teeth? …This may sound like a silly question… Keep in mind that the Food and Drug Administration already regulates teeth-whitening products for safety and that virtually no one has ever been injured by someone administering these products. But in a number of states throughout the country, dentists began losing teeth-whitening customers to non-dentists who had set up kiosks in shopping malls and were charging less money for the same teeth-whitening services. These upset dentists then went to their state dental-licensing boards and urged those boards to add teeth whitening to the definition of “the practice of dentistry.” These state boards complied… The results were unemployed teeth whiteners, more expensive teeth whitening, and higher profits for the dentists. …An organized cartel (the dentists)…used the threat of government punishment to enforce their monopoly.
Unfortunately, Senator Lee explains, this is a problem that goes way beyond teeth whitening.
…when the deeper question of occupational licensing is applied to the broader economy, it turns out that there are millions of jobs and hundreds of billions of dollars at stake. …dentists are not the only professionals using government power to harm consumers and line their pockets. A 2013 study found that 25% of today’s workforce is in an occupation licensed by a state entity, up from just 5% in 1950. And the number of licensed professionals is not growing because everyone is suddenly becoming a doctor or a lawyer. Instead, it is the number of professions requiring licenses that is growing. Security guards, florists, barbers, massage therapists, interior decorators, manicurists, hair stylists, personal trainers, tree trimmers and auctioneers work in just some of the many, many professions that state legislatures have seen fit to cartelize.
But do consumers get some sort of benefit as a result of all this red tape?
According to a study by University of Minnesota Professor Morris Kleiner, “Occupational licensing has either no impact or even a negative impact on the quality of services provided to customers by members of the regulated occupation.” Occupational licensing has grown not because consumers demanded it, but because lobbyists recognized a business opportunity where they could use government power to get rich at the public’s expense. …Consumers end up paying $200 billion in higher costs annually, prospective professionals lose an estimated three million jobs, and millions more Americans find it harder to live where they want due to licensing requirements.
By the way, the barriers to mobility are a major problem. A professor at Yale Law School crunched the numbers and found that occupational licensing has undermined the great America tradition of moving where the jobs are.
Here are some details from the abstract of the study.
Rates of inter-state mobility, by most estimates, have been falling for decades. Even research that does not find a general decline finds that inter-state mobility rates are low among disadvantaged groups and are not increasing despite a growing connection between moving and economic opportunity. …governments, mostly at the state and local levels, have created a huge number of legal barriers to inter-state mobility. Land-use laws and occupational licensing regimes limit entry into local and state labor markets.
In an article for Reason, Ronald Bailey highlights some of the key findings from the scholarly study.
From the end of World War II through the 1980s, the Census Bureau reports, about 20 percent of Americans changed their residences annually, with more than 3 percent moving to a different state each year. Now more are staying home. In November, the Census Bureau reported that Americans were moving at historically low rates: Only 11.2 percent moved in 2015, and just 1.5 percent moved to a different state. …Yale law professor David Schleicher blames bad public policy. …Schleicher identifies and analyzes the policies that limit people’s ability to enter job-rich markets and exit job-poor ones. …Why? First, lots of job-rich areas have erected barriers that keep job-seekers from other regions out. The two biggest barriers are land use and occupational licensing restrictions. …Schleicher notes that more than 1,100 occupations require licensing in at least one state, but fewer than 60 are regulated in all states. A 2015 White House report on occupational licensing found that “interstate migration rates for workers in the most licensed occupations are lower by an amount equal to nearly 15 percent of the average migration rate compared to those in the least licensed occupations.”
Let’s close by putting this in practical terms.
Imagine you don’t have a lot of education. And you definitely don’t have out-of-state licenses that are necessary for dozens of professions.
Are you going to move where there are more jobs?
Several decades ago, the answer likely was yes. Now, the incentive for mobility has been curtailed thanks to licensing laws that are really nothing more than regulatory protectionism.
Such laws should be repealed, or struck down by the courts as illegal restraints on trade.
P.S. Here’s some dark libertarian humor on this topic.
When trying to educate people about the superiority of free enterprise over statism, I generally show them long-run data comparing market-oriented jurisdictions with those that have state-driven economies. Here are some of my favorite examples.
It’s my hope that when readers look at these comparisons, they will recognize the value of economic freedom because it is very obvious that ordinary people become far more prosperous when government is small.
But there’s also another way of determining which approach is superior. Just look and see what happens when people are allowed to vote with their feet. Or, just as important, look at places where people are not allowed to vote with their feet.
The Berlin Wall and the Iron Curtain, for instance, existed to prevent people from escaping the horror of Soviet communism. Likewise, people in North Korea and Cuba don’t have the freedom to emigrate.
Totalitarian governments realize that their citizens would escape en masse if they had the chance.
In free countries, by contrast, there’s no need to imprison people.
And that’s why this image is not only funny, but also a good summary of population shifts around the world.
I’ll definitely have to add this to my collection of libertarian humor.
To be sure, not everybody who moves from a statist hellhole to a prosperous capitalist society is motivated by an appreciation for liberty. They may simply want a better life and have no idea that national prosperity is a function of economic liberty.
And they may not even want to earn a better life. They may simply want to get on the gravy train of government handouts (which is why I’m not a fan of America’s dependency-inducing refugee program).
But I’m digressing. The simple moral of today’s story is that decent societies don’t have to imprison their citizens. That only happens in place where government is not only big, but also evil.
P.S. Unlike some libertarians, I like borders.
P.P.S. People also vote with their feet inside nations, and the lesson to be learned is that smaller governments attract more people.
I was sitting directly under a television in a Caribbean airport when Trump got inaugurated, so I inadvertently heard his speech.
The bad news is that Trump didn’t say much about liberty or the Constitution. And, unlike Reagan, he certainly didn’t have much to say about shrinking the size and scope of Washington.
On the other hand, he excoriated Washington insiders for lining their pockets at the expense of the overall nation. And if he’s serious about curtailing sleaze in DC, the only solution is smaller government.
But is that what Trump really believes? Does he intend to move policy in the right direction?
Well, as I’ve already confessed, I don’t know what to expect. The biggest wild card, at least for fiscal policy, is whether he’ll be serious about the problem of government spending. Especially entitlements.
I’ve been advising the Trump people that he needs some genuine spending restraint (or even some semi-serious spending restraint) if he actually wants to enact his big tax cut and have it be durable. And I’ve also been reminding them that Reagan’s 1984 landslide was in part a reward for having implemented policies that triggered strong growth.
However, I gave that same advice to Bush’s people last decade and they didn’t listen, so I’m not overflowing with optimism that I’ll have more luck this time around.
But hope springs eternal, so I’m starting the Trump era with my fingers crossed that we’ll get some good reform and good results. I talk about these issues in this interview with Dana Loesch.
If I can elaborate on a couple of points from the interview, I am especially interested to see whether Republicans can actually deliver a big reduction in the corporate tax rate. Trump wants 15 percent, which would be great. House Republicans have proposed 20 percent, which also would be a big shift in the right direction.
But there are a lot of details to be addressed before a big fiscal package can be approved, including whether Trump will do something to control spending and also how he will deal with the controversial provision on border adjustability in the House plan.
Regarding employment, I mentioned that we have the good news of a lower unemployment rate combined with the bad news of too many people out of the labor force.
I shared my views on this issue for a story in USA Today.
The share of Americans working or looking for jobs is near historic lows. About 10 million prime-age men aren’t in the labor force — a lingering casualty of the Great Recession. Wage increases were stagnant at about 2% for most of the 7 ½-year-old recovery. “Several million people are not earning income, not producing,” says Dan Mitchell, senior fellow at the conservative Cato Institute. “I don’t think it’s good for the economy and it’s not good for those people.” Mitchell at least partly blames the substantial increase in the disability and food stamp rolls during and after the recession, which he says encouraged some Americans to remain idle. “We’ve expanded the welfare state,” he says.
At the risk of stating the obvious, fewer people work when you increase the benefits of not working.
Last but not least, I will confess a sin of omission. Dana mentioned the uptick in consumer spending over the holidays. That’s an important economic indicator, to be sure, but I should have taken the opportunity to explain that consumer spending and consumer sentiments are symptoms of an improving economy rather than causes of an improving economy. The focus of policy should be on how to produce higher incomes, not on how existing income is allocated.
P.S. Speaking of sins of omission, I missed an important point earlier this month in my column on Obama’s legacy. Fortunately, Ramesh Ponnuru of National Review picked up the ball with the very important point that Obama utterly failed in his desire to be a Reagan-type transformational President.
Obama…wanted to be the liberal Reagan, or rather the liberal anti-Reagan: the person who pulled American politics back to the left a generation after Reagan pulled it to the right. …the Obama project has failed. He did manage to pull his own party to the left. …On criminal justice, on entitlements, on immigration, on abortion, on religious liberty, Democrats staked out positions and adopted rhetoric that were much less moderate than they had previously been. …The Democratic strategy of the Obama years has left the party locked out of power in the White House, the Senate, and the House… At no point in Obama’s presidency did his political success make Republicans consider assimilating some of his views into their philosophy, as Bill Clinton had done with Reaganism. Republicans are even less likely to make such an adjustment now. …it is clear enough already that Obama is no Reagan.
Which gives me another opportunity to call attention to the best poll of the past eight years.
But if recent headlines are true, I may develop a man crush.
Here’s a story from The Hill.
Donald Trump is ready to take an ax to government spending. Staffers for the Trump transition team have been meeting with career staff at the White House ahead of Friday’s presidential inauguration to outline their plans for shrinking the federal bureaucracy, The Hill has learned. The changes they propose are dramatic. The departments of Commerce and Energy would see major reductions in funding, with programs under their jurisdiction either being eliminated or transferred to other agencies. The departments of Transportation, Justice and State would see significant cuts and program eliminations. The Corporation for Public Broadcasting would be privatized, while the National Endowment for the Arts and National Endowment for the Humanities would be eliminated entirely. Overall, the blueprint being used by Trump’s team would reduce federal spending by $10.5 trillion over 10 years. …At the Department of Justice, the blueprint calls for eliminating the Office of Community Oriented Policing Services, Violence Against Women Grants and the Legal Services Corporation and for reducing funding for its Civil Rights and its Environment and Natural Resources divisions. At the Department of Energy, it would…eliminate the Office of Electricity, eliminate the Office of Energy Efficiency and Renewable Energy and scrap the Office of Fossil Energy, which focuses on technologies to reduce carbon dioxide emissions. Under the State Department’s jurisdiction, funding for the Overseas Private Investment Corporation, the Paris Climate Change Agreement and the United Nations’ Intergovernmental Panel on Climate Change are candidates for elimination.
This warms my heart. It might even send a thrill up my leg, to borrow a phrase from Chris Matthews.
But that’s not all.
The Washington Examiner also has a report that has me salivating.
Making good on a promise to slash government, President-elect Trump has asked his incoming team to pursue spending and staffing cuts. Insiders said that the spending reductions in some departments could go as high as 10 percent and staff cuts to 20 percent, numbers that would rock Washington if he follows through. At least two so-called “landing teams” in Cabinet agencies have relayed the call for cuts as part of their marching orders to shrink the flab in government. …The teams also are looking at staffing cuts over four years through attrition, a hiring freeze and reorganization. The plan is winning cheers in conservative, anti-tax and anti-spending corners in Washington that have long sought massive cuts in the bureaucracy. …Trump is likely to face a wall of opposition from Democrats and federal unions who consider much of the federal workforce on their side.
Sounds great, right?
But before getting too excited, keep in mind that these articles simply refer to options that Trump’s team is preparing. It’s still an open question whether Trump actually embraces these policies.
So my man crush is on hold until I see whether Trump actually decides to do what’s right for the nation.
But if he does, I have some very helpful three-part advice for successful fiscal policy.
In other words, don’t cut programs by 10 percent, 20 percent, or even 50 percent. If you do that, it’s like cutting off a weed at ground level. If the root system is still there, it’s just a matter of time before it regrows and begins to suffocate the good plants (i.e., the private sector).
Instead, shut them down. Eliminate them. Raze the buildings. And pour a foot of salt on the ground so nothing can regrow.
Simply stated, it’s very easy to restore a budget cut at some point in the future. But if a part of government is totally wiped out, then special interests have to go through all the effort of recreating that function. And that’s not overly easy given the separation-of-powers system that the Founding Fathers wisely created.
Another advantage of killing off programs and agencies is that voters will see that they were never needed in the first place.
Get rid of the National Endowment for the Arts and people will quickly see that the hysterical claims of its supporters were nonsense.
Shut down the Department of Commerce and, other than cronyists, folks won’t even notice that it’s gone.
Cut off all funding for the Organization for Economic Cooperation and Development and the only losers will be the bureaucrats who no longer get to enjoy business-class junkets to Paris.
I’ve already identified several cabinet departments that should be terminated.
John Stossel also has a bunch of suggestions for Trump’s first week.
…there’s a lot of good Trump and Pence could do their first day, or, let’s be generous, their first week. …Monday: Abolish the Department of Commerce. …Commerce just happens; it doesn’t need a department. Today the Department of Commerce spends $9 billion a year subsidizing companies with political connections, gathering economic data, setting industry standards and doing a bunch of things companies ought to do for themselves. Get rid of it. Tuesday: Abolish the Department of Labor. The Department inserts itself into almost every protracted argument between workers and management. Why should we let government referee every argument? Let workers, bosses, unions and their lawyers fight it out. …The Labor Department also spends about $9 billion gathering information on workers. Top labor-union bosses make six-figure salaries. I’m sure their organizations could spend a little on statistics and workplace studies. Leave the poor, oppressed taxpayer out of it.
For the rest of the week, he suggests wiping out the Small Business Administration, the Department of Education, and the Department of Energy, so you can see we’re on the same wavelength.
The bottom line is that President Trump (I didn’t think I’d ever write those words) is in a position to…um, well…make America great again.
But that means pursuing a fiscal policy consistent with America’s founding principles.
I’m not expecting miracles, but it would be nice to see some semi-serious spending restraint when the dust settles. And any good results will be much more durable if they’re based on program terminations instead of haircuts.
Time for a boring and wonky discussion about taxes, capital formation, and growth.
We’ll start with the uncontroversial proposition that saving and investment is a key driver of long-run growth. Simply stated, employees can produce more (and therefore earn more) when they work with better machines, equipment, and technology (i.e., the stock of capital).
But if we want to enjoy the higher incomes that are made possible by a larger and more productive capital stock, somebody has to save and invest. And that means they have to sacrifice current consumption. The good news is that some people are willing to forego current consumption if they think that saving and investment will enable them to have higher levels of future consumption. In other words, if they make wise investments, it’s a win-win situation since society is better off and they are better off.
And these investment decisions help drive financial markets.
Now let’s focus specifically on long-run investments. If you have some serious money to invest, one of your main goals is to find professionals who hopefully can identify profitable opportunities. You want these people, sometimes called “fund managers,” to wisely allocate your money so that it will grow in value. And in some cases, you try to encourage good long-run investments by telling fund managers that if your investments increase in value (i.e., earn a capital gain), they get to keep a share of that added wealth.
In the world of “private equity” and “venture capital,” that share of the added wealth that goes to fund managers is known as “carried interest.” And as a Bloomberg article notes, it has played a big role in some of America’s great business success stories.
Venture capitalists…helped transform novel business ideas into some of the world’s most valuable companies, including Apple, Alphabet Inc., Amazon.com Inc., Facebook Inc., and Microsoft Corp. According to a 2015 study by Stanford University, 43 percent of public U.S. companies founded since 1979 had raised venture cash.
An article from the National Center for Policy Analysis has some additional data on the key role of investors who are willing to take long-run risks.
…up to 25 percent of pre-initial public offering (preIPO) startup funding comes from private equity or venture capital backers. Increasing the tax burden on these entities would damage a valuable access-to-capital pipeline for some startups — particularly in the energy, technology and biotech sectors where large up-front investments could be required.
The obvious conclusion is that we should be happy that there are people willing to put their money in long-run investments and that we should not be envious if they make good choices and therefore earn capital gains. And most people (other than the hard-core left) presumably will agree that people who take big risks should be able to earn big rewards.
That consensus breaks down, however, when you add taxes to the equation.
There’s the big-picture debate about whether there should be “double taxation” of income that is saved and invested. There are two schools of thought.
In the United States, we’ve historically dealt with that debate by cutting the baby in half. We have double taxation of capital gains and dividends, but usually at modest rates. We have double taxation of interest, but we allow some protection of savings if people put money in IRAs and 401(k)s.
But the debate never ends. And one manifestation of that ongoing fight is the battle over how to tax carried interest.
Folks on the left want to treat carried interest as “ordinary income,” which simply means that they want regular tax rates to apply so that there’s full double taxation rather than partial double taxation.
So who supports such an idea? To quote Claude Rains in Casablanca, it’s the usual suspects. Strident leftists in Congress and their ideological allies are pushing this version of a capital gains tax hike.
Rep. Sander Levin (D-Mich.), Sen. Tammy Baldwin (D-Wis.) and a group of millionaires made a push on Wednesday for consideration of legislation to close the carried-interest tax “loophole.” “We have to eliminate this loophole to make that sure everyone is paying their fair share and especially so that we can invest in an economy that creates jobs and lifts working American wages,” Baldwin said during a news conference on Capitol Hill. …The carried interest tax break is “the most egregious example of tax unfairness,” said Morris Pearl, chair of the Patriotic Millionaires — a group of 200 Americans with annual incomes of at least $1 million and/or assets of at least $5 million.
Folks on the right, by contrast, don’t think there should be any double taxation. And that means they obviously don’t favor an increase in the double taxation on certain types of capital gains. And that included carried interest, which they point out is not some sort of “loophole.” As Cliff Asness has explained, the treatment of carried interest is “consistent with the way employee-incentive stock options and professional partnerships are taxed.
But this isn’t just a left-right issue. Some so-called populists want higher capital gains taxes on carried interest, including the President-Elect of the United States. Kevin Williamson of National Review is not impressed.
Trump doesn’t understand how our economy works. …The big, ugly, stupid tax hike he’s planning is on Silicon Valley and its imitators around the country, the economic ecosystem of startup companies and the venture capitalists who put up the cash to turn their big ideas into viable products, dopey computer games, social-media annoyances, and companies that employ hundreds of thousands of people at very high wages. Which is to say, he wants to punish the part of the U.S. economy that works, for the crime of working. The so-called carried-interest loophole, which isn’t a loophole, drives progressives batty.
Kevin points out how carried interest works in the real world.
If you’re the cash-strapped startup, you go to venture capitalists; if you’re the established business, you go to a private-equity group. In both cases, the deal looks pretty similar: You get cash to do what you need to do, and the investor, rather than lending you money at a high interest rate, takes a piece of your company as recompense (for distressed companies being reorganized by private-equity firms, that’s usually 100 percent of the firm) on the theory that this will be worth more — preferably much more – than the money they put into your business. Eventually, the investor sells its stake in the company and pays the capital-gains tax on its capital gain.
And he doesn’t hold Trump in high regard.
Donald Trump does not understand this, because he isn’t a real businessman — he’s a Potemkin businessman, a New York City real-estate heir with his name on a lot of buildings he doesn’t own and didn’t build and whose real business is peddling celebrity and its by-products. He’s a lot more like Paris Hilton than he is like Henry Ford or Steve Jobs. Miss Hilton sells perfumes and the promise of glamour, Trump sells ugly neckties and the promise of glamour.
In her syndicated column, Veronique de Rugy explains why Republicans shouldn’t make common cause with the class-warfare crowd.
Trump…has seemingly swallowed a key assumption of the left. During the campaign, Trump and Hillary Clinton both pledged to raise taxes on carried interest. …sensing an opening, Senate Minority Leader Chuck Schumer recently indicated that he’d be willing to work with Trump on the issue. Of course he would. Democrats have been trying for years to raise taxes on capital. In fact, they see the reduced rate on all capital gains as a loophole. Their goal is to treat all capital gains as ordinary income because they want higher tax burdens overall. …Republicans need to remember that the left’s goal is not fairness but higher taxes. Treating carried interest as ordinary income for tax purposes would simply be the first step toward higher taxes on capital in general. That would be bad for economic growth and for our wallets.
Chuck Devore of the Texas Public Policy Foundation also has a sensible take on the economics of this issue.
…If the investment professional sees his marginal tax rate on capital gains from carried interest almost double, from 23.8 percent to 43.4 percent, he’ll change his behavior and charge more for his services. Pension funds and colleges will get less… Increasing taxes on investment success would mean less investment and consequently, fewer jobs, less innovation, and less prosperity. According to the Tax Foundation, the U.S. already levies the 6th-highest capital gains taxes among the 34 developed nations of the Organization for Economic Co-operation and Development… Generating capital gains means that money was used efficiently, benefiting not just the professional investment manager, but savers and the world. Losing money, on the other hand, is nothing to celebrate.
The carried interest right is really a proxy for the bigger issue of whether there should be increased double taxation of capital gains. Which would be the exact opposite of what should happen if we want America to be more competitive and prosperous.
For more background on the issue of carried interest, this video from the Center for Freedom and Prosperity is very succinct and informative.
And if you want more info on the overall issue of capital gains taxation, I’m quite partial to my video on the topic.
While my colleagues are stuck in the cold of Washington for inauguration week, I’m enjoying a few days in the Caribbean. More specifically, I’m sharing my views today on Trump and the global economy at the annual Business Outlook Conference in the British Virgin Islands.
But it’s fortuitous that I’m here for reasons other than the weather. This is a good opportunity to expose Oxfam. Many people have a vague impression that this group is a well-meaning charity that seeks to help lift up poor people.
If you take a close look at the organization’s activities, however, you’ll see that it’s become a left-wing pressure group.
Consider, for example, Oxfam’s recent report on “Tax Battles,” which discusses the supposed “dangerous global race to the bottom on corporate tax.”
Based on Oxfam’s ideologically driven agenda, Bermuda and the Cayman Islands are the worst of the worst, followed by the Netherlands, Switzerland, and Singapore. The British Virgin Islands, meanwhile, is number 15 on Oxfam’s list.
And what awful sins did BVI and the other jurisdictions commit to get on the list?
Well, the report suggests that their guilty of helping taxpayers minimize their tax burdens.
To create the list, Oxfam researchers assessed countries against a set of criteria that measured the extent to which countries used three types of harmful tax policies: corporate tax rates, the tax incentives offered, and lack of cooperation with international efforts against tax avoidance.
In other words, places with good business tax policy are ostensibly bad because politicians have less money to waste.
The world’s most important jurisdiction for corporate tax planning is Delaware and it didn’t even appear on the list. Why? I have no idea.
But I can tell you that there is a single building in Delaware that is home to 285,000 companies according to a report in the New York Times.
1209 North Orange Street… It’s a humdrum office building, a low-slung affair with a faded awning and a view of a parking garage. Hardly worth a second glance. If a first one. But behind its doors is one of the most remarkable corporate collections in the world: 1209 North Orange, you see, is the legal address of no fewer than 285,000 separate businesses. Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 North Orange, they simply have a dropbox. …Big corporations, small-time businesses, rogues, scoundrels and worse — all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. …It’s easy to set up shell companies here, no questions asked.
Most leftists get upset about Delaware, just like they get upset about BVI and the Cayman Islands.
But Oxfam’s people are either spectacularly clueless or they made some sort of bizarre political calculation to give America a free pass.
For purposes of today’s discussion, however, what matters most is that Oxfam is ideologically hostile to jurisdictions with good policy. The fact that they’re also hypocritical is just icing on the cake.
By the way, putting out shoddy reports is a pattern for the organization.
It recently got a lot of press attention because of a report on “An Economy for the 99 Percent” with the dramatic claim that the world’s 8-richest people have the same wealth as the world’s bottom-50 percent.
My colleague Johan Norberg has waged a one-man campaign to debunk Oxfam’s shoddy methodology and dishonest implications.
Here are two very clever tweets on the topic.
8 people are richer than 3.6 bn, says Oxfam. So? My daughter, who has $20, is richer than 2 bn. So the problem is poverty, not inequality.
— Johan Norberg (@johanknorberg) January 16, 2017
Amen. Ethical people want to reduce poverty. Envious people want to punish the successful. And here’s a tweet noting that the classical liberal policies opposed by Oxfam have led to a much better world.
And here’s one of his “Dead Wrong” videos on the topic of inequality and poverty.
And since we’re looking at videos, here’s my video on Obama’s anti-tax haven demagoguery.
You’ll notice that 1209 North Orange Street makes a cameo appearance.
And Oxfam should end the pretense of being a charity. It’s a left-wing hack organization.
In the world of tax policy, there’s an intense debate about the “border-adjustable” provision that is part of the tax plan put forth by House Republicans, which basically would tax imports and exempt revenues generated by exports.
It’s a bit wonky, but the simplest explanation is that GOPers want to replace the current corporate income tax with a “destination-based cash flow tax” (DBCFT) that would – for all intents and purposes – tax what is consumed in the United States rather than what is produced in the United States.
I’m very sympathetic to what Republicans are trying to accomplish, particularly their desire to eliminate the tax bias against income that is saved and invested. But I greatly prefer the version of consumption-base taxation found in the flat tax.
My previous columns on the plan have highlighted the following concerns.
Here’s what I said about the proposal in a recent interview for CNBC.
This provision is not in Trump’s plan, but I’ve been acting on the assumption that the soon-to-be President eventually would embrace the Better Way Plan simply because it presumably would appeal to his protectionist sentiments.
So I’m quite surprised that he’s just poured cold water on the plan. Here are some excerpts from a report in the Wall Street Journal.
President-elect Donald Trump criticized a cornerstone of House Republicans’ corporate-tax plan… The measure, known as border adjustment, would tax imports and exempt exports as part of a broader plan to encourage companies to locate jobs and production in the U.S. But Mr. Trump, in his first comments on the subject, called it “too complicated.” “Anytime I hear border adjustment, I don’t love it,” Mr. Trump said in an interview with The Wall Street Journal on Friday. …Retailers and oil refiners have lined up against the measure, warning it would drive up their tax bills and force them to raise prices because they rely so heavily on imported goods.
If we read between the lines, it appears that Trump may be more knowledgeable about policy than people think.
Proponents of the Better Way Plan sometimes use protectionist-sounding rhetoric to sell the plan (e.g., taxing imports, exempting exports), but they argue that it’s not really protectionist because the dollar will become more valuable.
But Trump apparently understands this nuance and doesn’t like that outcome.
Independent analyses of the Republican tax plan say it would lead the dollar to appreciate further—which would lower the cost of imported goods, offsetting the effects of the tax on retailers and others. In his interview with the Journal on Friday, Mr. Trump said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
I don’t agree with Trump about trade deficits (which, after all, are mostly the result of foreigners wanting to invest in the American economy), but that’s a separate issue.
When I talk to policymakers and journalists about this issue, one of the most common questions is why the DBCFT would cause the dollar to rise.
In a column for the Wall Street Journal, Martin Feldstein addresses that topic.
…as every student of economics learns, a country’s trade deficit depends only on the difference between total investment in the country and the saving done by its households, businesses and government. This textbook rule that “imports minus exports equals investment minus savings” is not a theory or a statistical regularity but a basic national income accounting identity that holds for every country in every year. That holds because a rise in a country’s investment without an equal rise in saving means that it must import more or export less. Since a border tax adjustment wouldn’t change U.S. national saving or investment, it cannot change the size of the trade deficit. To preserve that original trade balance, the exchange rate of the dollar must adjust to bring the prices of U.S. imports and exports back to the values that would prevail without the border tax adjustment. With a 20% corporate tax rate, that means that the value of the dollar must rise by 25%.
This is a reasonable description, though keep in mind that there are lots of factors that drive exchange rates, so I understand why importers are very nervous about the proposal.
By the way, Feldstein makes one point that rubs me the wrong way.
The tax plan developed by the House Republicans is similar in many ways to President-elect Trump’s plan but has one additional favorable feature—a border tax adjustment that exempts exports and taxes imports. This would give the U.S. the benefit that other countries obtain from a value-added tax (VAT) but without imposing that extra levy on domestic transactions.
The first sentence of the excerpt is correct, but not the second one. A value-added tax does not give nations any sort of trade benefit. Yes, that kind of tax generally is “border adjustable” under WTO rules, but as I’ve previously noted, that doesn’t give foreign production an advantage over American production.
Here’s some of what I wrote about this issue last year.
For mercantilists worried about trade deficits, “border adjustability” is seen as a positive feature. But not only are they wrong on trade, they do not understand how a VAT works. …Under current law, American goods sold in America do not pay a VAT, but neither do German-produced goods that are sold in America. Likewise, any American-produced goods sold in Germany are hit be a VAT, but so are German-produced goods. In other words, there is a level playing field. The only difference is that German politicians seize a greater share of people’s income. So what happens if America adopts a VAT? The German government continues to tax American-produced goods in Germany, just as it taxes German-produced goods sold in Germany. …In the United States, there is a similar story. There is now a tax on imports, including imports from Germany. But there is an identical tax on domestically-produced goods. And since the playing field remains level, protectionists will be disappointed. The only winners will be politicians since they have more money to spend.
If you want more information, I also discuss the trade impact of a VAT in this video.
For what it’s worth, even Paul Krugman agrees with me on this point.
P.S. It is a good idea to have a “consumption-base” tax (which is a public finance term for a system that doesn’t disproportionately penalize income that is saved and invested). But it’s important to understand that border adjustability is not necessary to achieve that goal. The flat tax is the gold standard of tax reform and it also is a consumption-based tax. The difference is that the flat tax is an “origin-based” tax and the House plan is a “destination-based” tax.
P.P.S. Speaking of which, proponents of the so-called Marketplace Fairness Act are using a destination-based scheme in hopes of creating a nationwide sales tax cartel so that states with high rates can make it much harder for consumers to buy goods and services where tax rates are lower.
Mancur Olson (1932-1998) was a great economist who came up with a very useful analogy to help explain the behavior of many governments. He pointed out that a “roving bandit” has an incentive to maximize short-run plunder by stealing everything from victims (i.e. a 100 percent tax rate), whereas a “stationary bandit” has an incentive to maximize long-run plunder by stealing just a portion of what victims produce every year (i.e., the revenue-maximizing tax rate).
Tyler Cowen of George Mason University elaborates on this theory in this very helpful video.
As you can see, Olson’s theory mostly is used to analyze and explain the behavior of autocratic governments. Now let’s apply these lessons to political behavior in modern democracies.
I wrote last year about a field of economic theory called “public choice” to help explain how and why the democratic process often generates bad results. Simply stated, politicians and special interests have powerful incentives to use government coercion to enrich themselves while ordinary taxpayers and consumers have a much smaller incentive to fight against that kind of plunder.
But what’s the best way to think about these politicians and interest groups? Are they roving bandits or stationary bandits?
The answer is both. To the extent that they think their power is temporary, they’ll behave like roving bandits, extracting as much money from taxpayers and consumers as possible.
Though if you think of democracies as duopolies, with two parties and rotating control of government, then each party will also behave like a stationary bandit, understanding that it’s not a good idea to strangle the goose that lays the golden eggs.
And this is one of the reasons why I’m a big fan of “tax competition.” Simply stated, politicians and special interests constrain their greed when they know that potential victims have the ability to escape.
Here’s a report from the Wall Street Journal that is a perfect example of my argument.
Germany could reduce its corporate tax rate in the wake of similar moves in the U.K. and the U.S., German Finance Minister Wolfgang Schäuble said. Europe’s largest economy should simplify its complex tax system for companies in order to…remain competitive internationally, Mr. Schäuble told The Wall Street Journal in an interview. He also said that while Germany opposed beggar-thy-neighbor tax competition between mature industrial nations, Berlin would also consider cutting tax rates if necessary.
And such steps may be necessary. In other words, Germany may reduce tax rates, not because politicians want to do the right thing, but rather because they fear they’ll lose jobs and investment (i.e., sources of tax revenue) to other jurisdictions.
U.S. President-elect Donald Trump has said he would like to cut the corporate tax rate from 35% to 15% as part of a broader tax overhaul. In November, U.K. Prime Minister Theresa May said the main corporate rate there should fall from 20% to 17% by 2020. These followed announcements about corporate tax-rate cuts by Japan, Canada, Italy and France.
Let’s look at another example.
I made the economic case for Brexit in large part because the European Union is controlled by anti-tax competition bureaucrats and politicians in Brussels.
Philip Hammond warned yesterday that the Government will come out fighting with tax cuts if the EU tries to wound Britain by refusing a trade deal. …Yesterday, Mr Hammond was asked by a German newspaper if the UK could become a tax haven by further lowering corporation tax in order to attract businesses if Brussels denies a deal. In his strongest language yet on Brexit, the Chancellor said he was optimistic a reciprocal deal on market access could be struck… But he added: …‘In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do. …We will change our model, and we will come back, and we will be competitively engaged.’ …Earlier this year Mrs May committed Britain to having the lowest corporation tax of the world’s 20 biggest economies. The intention is a rate of 17 per cent by 2020.
In other words, yet another case of politicians doing the right thing because of tax competition.
The stationary bandits described by Olson are being forced to adopt better tax policy.
So it’s very appropriate to close with some wise counsel from a Wall Street Journaleditorial.
The EU needs more tax competition from government vying to stimulate business investment. …The real tax-policy scandal is that so few European governments understand there’s a cause-and-effect relationship between oppressive tax rates and low economic growth.
P.S. Since we’re looking at tax competition, Europe, and bandits, keep in mind there’s considerable academic work showing that Europe became a rich continent precisely because there were many small nations that competed with each other. Those jurisdictions felt pressure to adopt good policy because the various leaders wanted lots of economic activity to tax. All of which helps to explain why modern statists are so hostile to decentralization and federalism.
When politicians create programs and announce projects, they routinely lie about the real costs. Their primary goal is to get initial approval for various boondoggles and they figure it will be too late to reverse path once it becomes apparent that something will cost for more than the initial low-ball estimates. Obamacare is a classic (and discouraging) example.
These “cost overruns” are very bad news for taxpayers, of course, but the system works very well for insiders. Bureaucrats get more money. Interest groups get more money. Government contractors get more money. Government consultants get more money. And some of that money gets funneled back to politicians in the form of campaign contributions, so they get more money as well.
This scam is particularly prevalent whenever politicians decide to build infrastructure. And there are lots of local examples in the Washington area.
But it’s definitely not limited to Washington. There are ridiculous examples of cost overruns elsewhere in the world.
And it goes without saying that places controlled by statists often produce the most absurd examples of wasteful boondoggles. Indeed, is there anyone in the world surprised to see this headline from a story in the Los Angeles Times?
Here are some of the details from the report.
A confidential Federal Railroad Administration risk analysis, obtained by The Times, projects that building bridges, viaducts, trenches and track from Merced to Shafter, just north of Bakersfield, could cost $9.5 billion to $10 billion, compared with the original budget of $6.4 billion. …The California High-Speed Rail Authority originally anticipated completing the Central Valley track by this year, but the federal risk analysis estimates that that won’t happen until 2024, placing the project seven years behind schedule.
Over budget and overdue? Gee, who could have predicted that would happen with a government infrastructure project (other than every single person with an IQ above room temperature).
What happens next is unclear. The federal bureaucracy that disburses grants presumably wants to keep the gravy train on the tracks (pun intended), though hopefully Congress will tell California there won’t be any more federal handouts.
The Federal Railroad Administration is tracking the project because it has extended $3.5 billion in two grants to help build the Central Valley segment. …Rep. Jeff Denham (R-Turlock), chairman of the House rail subcommittee, said Friday… “Despite past issues with funding this boondoggle, we were repeatedly assured in an August field hearing that construction costs were under control,” he said in a statement. “They continue to reaffirm my belief that this is a huge waste of taxpayer dollars.” …About 80% of all bullet train systems incur massive overruns in their construction, according to Bent Flyvbjerg, an infrastructure risk expert at the University of Oxford who has studied such rail projects all over the world.
Unsurprisingly, the various interest groups that are feasting on this boondoggle want it to continue, whether the money comes from federal taxpayers or state taxpayers.
The California system is being built by an independent authority that has never built anything and depends on a large network of consultants and contractors for advice. …Proponents of the project, including many veteran transportation experts, have said that California’s massive economy can handle higher costs for the project — even more than $100 billion — by increasing sales taxes.
For what it’s worth, I don’t particularly care if California voters want to squander their own money and hasten the state’s economic decline.
But I’m very much against the idea that my income should be forcibly redistributed to support this foolish bit of pork. And this is why I’m very nervous about Donald Trump’s infatuation with infrastructure. Though since he hasn’t provided many details, so we don’t know whether he wants a business-as-usual expansion of pork or a much-needed expansion of private-sector involvement. But I’m not optimistic.
Which state gets the biggest share of its budget from the federal government?
Nope, not even close. As a matter of fact, those two jurisdictions are among the 10-least dependent states.
Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!
So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?
That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.
State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.
In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps. So if you compared this map with a map of poverty rates, there would be a noticeable overlap.
Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.
Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.
This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).
P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.
P.P.S. And it’s definitely worth noting that the federal government deserves the overwhelming share of the blame for rising levels of dependency in the United States.
I don’t like tax increases, but I like having additional evidence that higher tax rates change behavior. So when my leftist friends “win” by imposing tax hikes, I try to make lemonade out of lemons by pointing out “supply-side” effects.
I’m hoping that if leftists see how tax hikes are “successful” in discouraging things that they think are bad (such as consumers buying sugary soda or foreigners buying property), then maybe they’ll realize it’s not such a good idea to tax – and therefore discourage – things that everyone presumably agrees are desirable (such as work, saving, investment, and entrepreneurship).
Though I sometimes worry that they actually do understand that taxes impact pro-growth behavior and simply don’t care.
But one thing that clearly is true is that they get very worried if tax increases threaten their political viability.
This is why Becket Adams, in a column for the Washington Examiner, is rather amused that Mayor Kenney of Philadelphia has been caught with his hand in the tax cookie jar.
Philadelphia Mayor Jim Kenney fought hard to pass a new tax on soda and other sugary drinks. He won, and the 1.5-cents-per-ounce tax is now in place, affecting both merchants and consumers, because that’s how taxes work. Businesses pay the levies, and they offset the cost by charging higher prices. That is as basic as it gets. The only person who doesn’t seem to understand this is Kenney, who is now accusing business owners of extortion. “They’re gouging their own customers,” the mayor said.
Yes, consumers are being extorted and gouged, but the Mayor isn’t actually upset about that.
He’s irked because people are learning that it’s his fault.
Philadelphians are obviously outraged by the skyrocketing cost of things as simple as a soda, which has prompted some businesses to post signs explaining why the drinks are now do damned expensive. Kenney said that this effort by businesses to explain the rising cost is “wrong” and “misleading.” The mayor apparently thought the city council could impose a major new tax on businesses, and that customers somehow wouldn’t be affected.
In other words, it’s probably safe to say that Mayor Kenney has no regrets about the soda tax. He’s just not pleased that he can’t blame merchants for the price increase.
The International Monetary Fund, by contrast, may actually have learned a real lesson that higher taxes aren’t always a good idea. That bureaucracy is infamous for blindly supporting tax increases, but if we can believe this story from the Wall Street Journal, even those bureaucrats don’t think additional tax hikes in Greece would be a good idea.
IMF officials have said Greece’s economy is already overtaxed. New taxes that came into affect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay.
Here are some stories to illustrate the onerous tax system in Greece, starting with a retired couple that will probably lose their house because of a new property tax.
…the 87-year-old former economist and his 81-year-old wife are unable to repay the property tax imposed on their 70-year old house, a family inheritance. The annual tax is around €33,000, but Mr. Kokkalis’s pension—already cut by half—is €28,000 a year. The couple borrowed money when the tax was imposed, initially as a temporary austerity measure in 2011. But they are already behind on nearly €200,000 of tax payments and can’t borrow more. Mr. Kokkalis says the state is calculating tax based on outdated property prices that have since collapsed, and that if he tried to sell the house now, nobody would be interested. “They impose taxes on an imaginary value,” Mr. Kokkalis says. “This is confiscation.”
The bad news is that the tax in Greece is far too onerous.
And I’ve also noted that small businesses are being wiped out in Greece as well. The WSJ has a new example.
Tax increases under previous rounds of austerity have put a middle-class lifestyle beyond reach for many. “Our only goal now is survival,” says arts teacher Mimi Bonanou. Until recent years she also made a living as a practicing artist, selling her works in Greece and abroad. But increasingly heavy taxes that self-employed Greeks must pay at the start of each year, based on the state’s often-ambitious forecast of their incomes, have forced her to rely on teaching alone.
And if a left-leaning bureaucracy is now willing to admit that excessive taxation can lead to less revenue, maybe eventually the Republicans on Capitol Hill will install people at the Joint Committee on Taxation who also understand this elementary insight.
This article originally appeared on WisOpinion.com on January 10, 2017.
It is said that the states are laboratories of democracy. While the federal government dithers in gridlock, states can act to solve problems and learn from the experiences of their neighbors. Wisconsin today has just such an opportunity to put an end to a vicious cycle of taxpayer waste, and improve public health to boot.
Wisconsin Attorney General Brad Schimel took the lead earlier this year in a 36-state lawsuit against the makers of Suboxone, a drug used to treat opioid addiction. Wisconsin DHS Secretary Linda Seemeyer calls opioid addiction a “public health crisis that is destroying lives and families across the state.” Suboxone, and the anti-competitive practices of its manufacturer, is at the center of this costly public policy issue.
The main active ingredient of Suboxone, buprenorphine, is endorsed by the American Society of Addiction Medicine as an appropriate bridge to help break addicts of opioid dependence. Itself a weak opioid, buprenorphine helps addicts beat their addictions by reducing the harmful side-effects of withdrawal, but it also poses its own risks.
Those risks have been amplified by the questionable practices of Suboxone’s manufacturer. Rather than accept the expiration of their patent in 2009 and the competition from cheaper generics that would follow, the company engaged in “product hopping” to secure a new patent by slightly tweaking their product without making any real improvements, according to the anti-trust suit.
They are also accused of a baseless fear campaign against tablet forms of Suboxone in order to justify the “invention” of their new filmstrip product. It’s the same drug in a different shape, but due to their deceptions, the lawsuit claims, it was enough to get a new patent and extend their monopoly.
Unfortunately, the filmstrips are also susceptible to abuse on the black market. They are convenient for smuggling into prisons and easy to cut for recreational use. So because it wanted to avoid competition, Suboxone’s manufacturer is contributing to the very opioid epidemic their drug is supposed to help solve, all the while charging sky-high prices and making a mint from the extra need for treatment they helped create. And taxpayers are on the hook not just for the cost of Suboxone through programs like Medicaid, but also for the enforcement problems created by the new filmstrips.
Ultimately, the FDA rejected the claim–which the AG’s suit alleges was a fraudulent conspiracy–that the same pill bottles Suboxone’s makers made billions off of were suddenly a health risk to children once their patent expired, and the agency approved a tablet alternative. This form uses 30 percent less buprenorphine to provide the same effect as Suboxone, which means less chance of it being abused and contributing to, rather than helping to solve, the opioid addiction crisis.
It is now up to Wisconsin and other states to begin undoing the damage caused by the regulatory abuses of Suboxone’s manufacturers by making alternatives more accessible to the public and relieving taxpayers of the burden of paying monopoly prices through Medicaid.
Wisconsin should follow the lead of Maryland and Kentucky and update the state’s Medicaid formulary to no longer favor Suboxone over newer, more effective, and cheaper alternatives. Maryland has already seen a 41 percent decrease in Suboxone contraband recovered at its correctional facilities in just the six months since the change, while a Kentucky Managed Medicaid program reduced its costs by almost half within two years of switching from Suboxone, savings millions each year. Why shouldn’t Wisconsin do the same?
Since I can’t even keep track of schools of thought on the right (libertarians, traditional conservatives, neocons, reform conservatives, compassionate conservatives, Trump-style populists, etc), I’m not going to pretend to know what’s happening on the left.
But it does appear that something significant – and bad – is happening in the statist community.
Traditionally, folks on the left favored a conventional welfare state, which revolved around two components.
But now the left has expanded its goals to policies that are far more radical. Instead of a well-meaning (albeit misguided) desire to protect people from risk, they now want coerced equality.
And this agenda also has two components.
Taking a closer look at the idea of basic income, there actually is a reasonable argument that the current welfare state is so dysfunctional that it would be better to simply give everyone a check instead.
But as I’ve argued before, this approach would also create an incentive for people to simply live off taxpayers. Especially if the basic income is super-generous, as was proposed (but fortunately rejected by an overwhelming margin) in Switzerland.
I discuss the pros and cons in this interview.
By the way, one thing that I don’t mention in the interview is my fear that politicians would create a basic income but then not fully repeal the existing welfare state (very similar to my concern that politicians would like to have a national sales tax or value-added tax without fully eliminating the IRS and all taxes on income).
Now let’s shift to the left’s class-warfare fixation about penalizing those with high incomes.
This isn’t a new phenomenon, of course. We’ve had ideologues such as Bernie Sanders, Thomas Piketty, and Matt Yglesias arguing in recent years for confiscatory tax rates. It appears some modern leftists actually think the economy is a fixed pie and that high incomes for some people necessitate lower incomes for the rest of us.
And because of their fetish for coerced equality, some of them even want to explicitly cap incomes for very valuable people.
The nutcase leader of the U.K. Labour Party, for instance, recently floated that notion. Here are some excerpts from a report in the Guardian.
Jeremy Corbyn has called for a maximum wage for the highest earners… The Labour leader would not give specific figures, but said radical action was needed to address inequality. “I would like there to be some kind of high earnings cap, quite honestly,” he told BBC Radio 4’s Today programme on Tuesday. When asked at what level the cap should be set, he replied: “I can’t put a figure on it… It is getting worse. And corporate taxation is a part of it. If we want to live in a more egalitarian society, and fund our public services, we cannot go on creating worse levels of inequality.” Corbyn, who earns about £138,000 a year, later told Sky News he anticipated any maximum wage would be “somewhat higher than that”. “I think the salaries paid to some footballers are simply ridiculous, some salaries to very high earning top executives are utterly ridiculous. Why would someone need to earn more than £50m a year?”
This is so radical that even other members of the Labour Party have rejected the idea.
Danny Blanchflower, a former member of Corbyn’s economic advisory committee, said he would have advised the Labour leader against the scheme. In a tweet, the former member of the Bank of England’s monetary policy committee said it was a “totally idiotic, unworkable idea”. …Labour MPs expressed reservations… Reynolds also expressed some uncertainty. “I’m not sure that I would support that,” she told BBC News. “I would like to see the detail. I think there are other ways that you can go about tackling income inequality… Instinctively, I don’t think [a cap] probably the best way to go.”
The good news, relatively speaking, is that Crazy Corbyn has been forced to backtrack.
Not because he’s changed his mind, I’m sure, but simply for political reasons. Here’s some of what the U.K.-based Times wrote.
Jeremy Corbyn’s attempt to relaunch his Labour leadership descended into disarray yesterday as he backtracked on a wage cap… The climbdown came after members of the shadow cabinet refused to back the idea of a maximum income while former economic advisers to Mr Corbyn criticised it as absurd.
There don’t seem to be many leftists in the United States who have directly embraced this approach, though it is worth noting that Bill Clinton’s 1993 tax hike included a provision disallowing deductibility for corporate pay over $1 million.
And that policy was justified using the same ideology that politicians should have the right to decide whether some people are paid too much.
In closing, I can’t help but wonder whether my statist friends have thought about the implications of their policies. They want the government to give everyone a guaranteed basic income, yet they want to wipe out high-income taxpayers who finance the lion’s share of redistribution.
President Obama gave his farewell speech two nights ago, orating for more than 50 minutes. As noted by the Washington Examiner, his remarks were “longer than the good-bye speeches of Ronald Reagan, Bill Clinton and George W. Bush combined.”
But this wasn’t because he had a lengthy list of accomplishments.
Unless, of course, you count the bad things that happened. And there are three things on my list, if you want to know Obama’s legacy for domestic policy.
And those three things, combined with his other policies, produced dismal results.
In other words, Obama’s legacy will be failed statism.
Writing for the Orange County Register, Joel Kotkin is not impressed by Obama’s overall record.
Like a child star who reached his peak at age 15, Barack Obama could never fulfill the inflated expectations that accompanied his election. …The greatest accomplishment of the Obama presidency turned out to be his election as the first African American president. This should always be seen as a great step forward. Yet, the Obama presidency failed to accomplish the great things promised by his election: racial healing, a stronger economy, greater global influence and, perhaps most critically, the fundamental progressive “transformation” of American politics. …Eight years after his election, more Americans now consider race relations to be getting worse, and we are more ethnically divided than in any time in recent history. …if there was indeed a recovery, it was a modest one, marked by falling productivity and low levels of labor participation. We continue to see the decline of the middle class.
And Seth Lipsky writes in the New York Post that Obama’s economic legacy leaves a lot to be desired.
Obama’s is the only modern presidency that failed to show a single year of growth above 3 percent… Plus, the Obama economy failed to prosper even though the Federal Reserve had its pedal to the metal. Its quantitative easing, $2 trillion balance-sheet expansion and zero-interest-rate policy all produced zilch. …The recent declines in the unemployment rate are due less to the uptick in employed persons than to an increasing number of persons leaving the labor force.
All these accusations are very relevant, and I would add another charge to the indictment. Median household income has been stagnant during the Obama years. And the data for Obamanomics is especially grim when you compare recent years to what happened under Reagan.
By the way, the bad news isn’t limited to economic policy.
Here’s what Tim Carney of the Washington Examiner wrote about Obama’s cavalier treatment of the Bill of Rights.
The Bill of Rights is a barricade protecting Americans from their government. Part of President Obama’s legacy will be that he inflicted damage on that barricade, eroding freedom of speech, free exercise of religion, the right to bear arms and the right to due process. Through his political arguments, executive actions and political leadership, Obama has taken some of the holes punched by previous presidents and made them broader or more permanent. This means that after Obama leaves office, people will be more easily silenced, killed or disarmed by their own government.
Tim extensively documents all these transgressions in his article. The entire thing is worth reading.
To be sure, there are people who defend Obama’s legacy.
From the left, Dylan Matthews wants readers of Vox to believe that Obama has been a memorable President. And he means that in a positive sense.
Barack Obama is one of the most consequential presidents in American history — and that he will be a particularly towering figure in the history of American progressivism. He got surprisingly tough reforms to Wall Street passed as well, not to mention a stimulus package that both blunted the recession and transformed education and energy policy.
A “towering figure”? That might be an accurate description of Woodrow Wilson, the despicable person who gave us both the income tax and the federal reserve. Or Franklin Roosevelt, who doubled the size of the federal government and wanted radical collectivism. Or Lyndon Johnson, the big spender who gave us Medicare and Medicaid.
All of those presidents changed America in very substantial (and very bad) ways.
Obama, by contrast, wanted to “fundamentally transform” America but instead turned out to be an incremental statist. Sort of like Bush.
And I can’t help but laugh at the assertion that Obama got “tough reforms to Wall Street.” Dodd-Frank was supported by Goldman-Sachs and the other big players!
Let’s get back to the Matthews’ article. His strongest praise is reserved for Obamacare.
He signed into law a comprehensive national health insurance bill, a goal that had eluded progressive presidents for a century. …it established, for the first time in history, that it was the responsibility of the United States government to provide health insurance to nearly all Americans, and it expanded Medicaid and offered hundreds of billions of dollars in insurance subsidies to fulfill that responsibility.
I’ll agree that this is Obama’s biggest left-wing accomplishment. I’ve even noted that it may be a long-term victory for the left even though Republicans now control the House and Senate in large part because of that law (and it may not even be that if GOPers get their act together and actually repeal the law).
But I hardly think it was a game-changing reform, even if it isn’t repealed. Government was already deeply enmeshed in the healthcare sector before Obama took office. Obamacare simply moved the needle a bit further in the wrong direction.
Again, that was a victory for the left, just as Bush’s Medicare expansion was a victory for the left. But it didn’t “fundamentally transform” anything.
And here’s his conclusion.
You can generally divide American presidents into two camps: the mildly good or bad but ultimately forgettable (Clinton, Carter, Taft, Harrison), and the hugely consequential for good or ill (FDR, Lincoln, Nixon, Andrew Johnson). Whether you love or hate his record, there’s no question Obama’s domestic and foreign achievements place him firmly in the latter camp.
I strongly suspect that Obama will wind up in the former camp. He was bad, but largely forgettable. At least if the metric is policy.
Let’s close with a couple of observations on the political side.
I’m amused, for instance, that Obama’s bitter that he couldn’t rally the nation behind has anti-gun ideology.
President Obama said his biggest policy disappointment as president was not passing gun control laws, according to an interview CNN aired… Obama was unable to convince Congress to pass legislation that would change those policies, including enhancing background checks and not selling firearms at gun shows and other venues.
And I’m also amused that he believes the American people would have reelected him if he was on the ballot.
Arguing that Americans still subscribe to his vision of progressive change, President Barack Obama asserted in an interview recently he could have succeeded in this year’s election if he was eligible to run.
To be sure, he may be right. He definitely has better political skills than Hillary Clinton, and I’ll be the first to acknowledge that he was better at campaigning rather than governing.
But his victories in 2008 and 2012 were against very weak Republican candidates. And it’s interesting that a hypothetical poll showed him and Trump in a statistical dead heat. Given Trump’s low approval rating, that doesn’t exactly translate into a vote of confidence for Obama.
More important, I shared some hypothetical polling data back in 2013 which showed that Reagan would have defeated Obama in a landslide.
And I imagine Reagan would have an even bigger lead if there was a new version of the poll.
For what it’s worth, I think the most insightful analysis of Obama’s legacy comes from Philip Klein. He notes that Obama wanted Americans to believe in big government. But he failed. Miserably.
President Obama entered office in 2009 with the twin goals of expanding the role that government plays in the lives of individuals and businesses and proving to Americans that the government could be trusted to achieve big things. He was only half successful. …the gulf between his promises and the reality of what was implemented dramatically hardened public skepticism about government. …As the Obama epoch wanes, trust in government has reached historic lows. A Pew poll last fall found that just 19 percent of Americans said they could trust the government to do the right thing most of the time — a lower percentage than during Watergate, Vietnam or the Iraq War. …Obama saw himself as the liberal answer to Reagan who could succeed where Clinton failed, putting an optimistic face on government expansion, passing historic legislation and getting Americans believing in government again. …Obama’s failure to repair the image of the federal government as a bungling institution — think of the DMV, just on a much bigger scale — will create enormous challenges for any Democratic successors trying to sell the public on the next wave of ambitious government programs.
This is spot on. I joked several years ago that the Libertarian Party should have named Obama “Man of the Year.”
But given how his bad policies have made people even more hostile to big government, he might deserve “Man of the Century.”
I don’t often use the literary tactic of referring to something as the “best-ever.” Indeed, the only time that phrase appeared in the title of a column was back in 2014 when I smugly wrote about the collapse of government-run single-payer healthcare in Vermont. Recalling what Justice Brandeis wrote about states being the “laboratories of democracy,” I asserted that the disaster in the Green Mountain State taught the entire nation a valuable lesson about the dangers of bad policy and that this was the “best-ever argument for federalism.”
Well, it’s time to once again use this superlative because consumers in California get the “best-ever receipt” when they make purchases at Firearms Unknown. Here’s the example that’s gone viral, and I’ve highlighted the relevant portion that gives an amusing description of California’s onerous sales tax.
By the way, not everything you see on the Internet is true (yes, shocking news). And since the folks at Independent Journal Review didn’t want to make the mistake of sharing without checking (like I did when trying to mock Justin Trudeau), they actually did some due diligence.
Many times, viral photos are too good to be true. So we contacted Firearms Unknown in National City, CA, to find out if this was one of those times. Sure enough, a representative with Firearms Unknown confirmed the receipt’s authenticity to Independent Journal Review. Then, he let out a chuckle. I guess if you’re going to operate a gun shop in a far-left state like California, you better have a good sense of humor. Bravo, Firearms Unknown.
Yes, kudos to the store, but I also want to take this opportunity to make a serious point about tax visibility.
One of the many reasons to oppose a value-added tax is that the tax almost always is hidden from consumers. When taxpayers make purchases in Europe, they don’t know that VATs are responsible, on average, for about 21 percent of the purchase price.
So it’s good that consumers in America know there’s a sales tax, both because it’s visible on their receipts and also because they can see the difference between the price on the shelf and the price at the cash register.
Though this system isn’t perfect. How many Americans, after all, know how much sales tax they paid last year?
The visibility issue also exists with the income tax. In theory, we all know what we paid the previous year based on our annual tax returns. But because of withholding, most Americans don’t really pay attention to that very important number and instead focus on whether they’re getting a refund. They actually think a big refund is a great outcome, even though it simply means that they gave the government an interest-free loan by over-paying their taxes during the year!
This is one of the reasons why I’m such a big fan of Hong Kong, in part because of the flat tax. Not only is there a low rate and no double taxation, but there’s also no withholding. Instead, taxpayers write checks to the government twice annually. So they are fully aware of the cost of government, which may explain why the fiscal burden of government is relatively low (it also helps that there is a constitutional spending cap).
In the United States, the only levies that are visible (at least some of the time) are property taxes. Taxpayers usually have to make annual or semiannual payments on cars and houses (though property taxes on homes are sometimes built into mortgage payments).
And when you have to write a lump-sum check to the government, that’s a wonderful opportunity for people to ponder whether they’re actually getting good value for their money.
And since the answer almost always is no, it’s easy to understand why politicians are big fans of policies (such as VATs and withholding) that disguise the burden of taxation.
All things considered, I like small businesses more than big businesses.
Not because I’m against large companies, per se, but rather because big businesses often use their political influence to seek unearned and undeserved wealth. If you don’t believe me, just look at the big corporations lobbying for bad policies such as the Export-Import Bank, Dodd-Frank, Obamacare, bailouts, and the green-energy scam.
By contrast, the only bad policy associated with modest-sized firms is the Small Business Administration. And I suspect the majority of little firms wouldn’t even notice or care if that silly bit of intervention was shut down.
Rather than seeking handouts, small businesses generally are more focused on fighting back against excessive government.
That’s because taxes and red tape can be a death sentence for a mom-and-pop firm. Literally, not just figuratively.
The Daily News reports on the sad closing of a popular restaurant in New York City.
For 25 years, China Fun was renowned…the restaurant’s sudden Jan. 3 closing, blamed by management on suffocating government demands. …“The state and municipal governments, with their punishing rules and regulations, seems to believe that we should be their cash machine to pay for all that ails us in society.” …Albert Wu, whose parents Dorothea and Felix owned the eatery, said the endless paperwork and constant regulation that forced the shutdown accumulated over the years. …Wu cited one regulation where the restaurant was required to provide an on-site break room for workers despite its limited space. And he blamed the amount of paperwork now required — an increasingly difficult task for a non-chain businesses. “In a one-restaurant operation like ours, you’re spending more time on paperwork than you are trying to run your business,” he griped. Increases in the minimum wage, health insurance and insurance added to a list of 10 issues provided by Wu. “And I haven’t even gone into the Health Department rules and regulations,” he added. …“For smaller businesses like China Fun, each little thing that occurs makes it harder,” said Malpass. “Each regulation, each tax — you put it all together and it’s just a hostile business environment.”
This is rather unfortunate, but perhaps it is a “teachable moment.”
There are two things that came to mind as I read this story.
The moral of the story is that we should have smaller government. Not just lower taxes (and simpler taxes), but also less regulation and red tape.
Not just because such policies are good for overall economic performance, but also because small businesses shouldn’t be disadvantaged.
P.S. Since we’re on the topic of how government tilts the playing field in favor of big companies (at least the corrupt big companies), let’s enjoy some humor on that topic.