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The Best Trump Budget Cuts, Part I: Shutting Down the National Endowment for the Arts

Fri, 03/17/2017 - 12:10pm

President Trump has released his budget blueprint. From a big picture perspective, the size of government won’t change. He’s kicking the can down the road on entitlements, which is obviously disappointing for people who can add and subtract. He does cut some domestic programs, but taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.

But I’m going to be optimistic today (the glass isn’t 9/10ths empty, it’s 1/10th full). Let’s look at the good parts of his budget.

First, some background. Redistribution is bad public policy since it simultaneously encourages inactivity and dependency among recipients and discourages activity and initiative by taxpayers.

That’s the standard argument against conventional handouts such as welfare, food stamps, Medicaid, EITC, and housing subsidies. The plethora of such programs in Washington is bad news for both taxpayers and poor people.

But there’s another type of redistribution that’s far worse, and that’s when politicians use the coercive power of government to take money from lower-income people in order to provide goodies for upper-income people.

This is why I am so unrelentingly hostile to programs like the Export-Import Bank, agriculture subsidies, so-called disaster relief, green-energy scams like Solyndra, and Fannie Mae/Freddie Mac subsidies.

Indeed, I even developed a “Bleeding Heart Rule” back in 2012 to describe how such giveaways are morally reprehensible.

Now let’s add another program to the list.

The National Endowment of the Arts is a federal program that subsidizes art, with upper-income people reaping the vast majority of the benefits.

That’s the bad news. The good news is that President Trump is proposing to defund this elitist bureaucracy.

Before explaining why the program should be abolished, let’s look at the case for federal involvement. This is how the NEA describes its mission.

The National Endowment for the Arts is an independent federal agency that funds, promotes, and strengthens the creative capacity of our communities by providing all Americans with diverse opportunities for arts participation.

That sounds noble. But are we really supposed to believe that our communities won’t have any creative capacity without some handouts from the federal government to museums and other politically connected organizations that primarily serve rich people?

And for those of us who have this old-fashioned notion that the federal government should be constrained by the Constitution, it’s also worth noting that art subsidies are not one of the enumerated powers in Article 1, Section 8.

Here is the pro-NEA argument from a column in the New York Times.

Sadly, it has become clear that the N.E.A. is, once again, under threat of being abolished… The N.E.A.’s budget is comparatively minuscule — $148 million last year, or 0.004 percent of the total federal budget — while the arts sector it supports employs millions of Americans and generates billions each year in revenue and tax dollars. …the N.E.A., founded in 1965, serves three critical functions: It promotes the arts; it distributes and stimulates funding; and it administers a program that minimizes the costs of insuring arts exhibitions through indemnity agreements backed by the government. …The grants, of course, receive the most attention, if not as much as they deserve. Thousands are distributed in all 50 states, reaching every congressional district, urban and rural, rich and poor. …They support live theater for schools; music, dance and jazz festivals; poetry and literary events; arts programs for war veterans; and, of course, museum exhibitions.

This actually makes my point. The NEA spends $148 million per year, which is just a tiny fraction of what is spent by the private sector.

In other words, we had museums, plays, music festivals, and art programs before the NEA was created and all of those activities will exist if the NEA is abolished.

All that will change is that politicians and bureaucrats won’t be doling out special grants to select institutions and insiders that have figured out how the manipulate the system.

The column also has some absurd hyperbole.

I fear that this current call to abolish the N.E.A. is the beginning of a new assault on artistic activity. Arts and cultural programming challenges, provokes and entertains; it enhances our lives. Eliminating the N.E.A. would in essence eliminate investment by the American government in the curiosity and intelligence of its citizens.

The author actually wants readers to conclude that a failure to subsidize is somehow akin to an assault on artistic creativity. Oh, and don’t forget that our curiosity and intelligence somehow will suffer.

Here’s a story about an interest group that wants to keep the gravy train on the tracks.

The heads of five Boston arts museums are pushing back against feared Trump administration cuts to the National Endowment for the Arts and the National Endowment for the Humanities. The museums’ directors say in an open letter that the agencies…help foster knowledge of the arts, create cultural exchanges, generate jobs and tourism, and educate young people. They say NEA and NEH funding has been instrumental at each of the Boston museums.

My immediate reaction is that there are lots of rich people and well-heeled companies in Boston. Surely NEA handouts can be replaced if these museum directors are remotely competent.

I’ll also take a wild guess that the directors of these five museums earn an average of more than $500,000 per year. Perhaps it’s not right for them to be using tax dollars to be part of the top 1 percent. Heck, trimming their own salaries might be an easy place for them to get some cost savings.

But enough from me. Let’s look at what some others have written about the NEA.  Let’s start with George Will’s assessment.

…attempting to abolish the NEA is a fight worth having, never mind the certain futility of the fight. …Government breeds advocacy groups that lobby it to do what it wants to do anyway — expand what it is doing. The myriad entities with financial interests in preserving the NEA cloyingly call themselves the “arts community,” a clever branding that other grasping factions should emulate… The “arts community” has its pitter-patter down pat. The rhetorical cotton candy — sugary, jargon-clotted arts gush — asserts that the arts nurture “civically valuable dispositions” and a sense of “community and connectedness.” And, of course, “diversity” and “self-esteem.” Americans supposedly suffer from a scarcity of both. …the NEA’s effects are regressive, funding programs that are…“generally enjoyed by people of higher income levels, making them a wealth transfer from poorer to wealthier.” …Americans’ voluntary contributions to arts organizations (“arts/culture/humanities” institutions reaped $17 billion in 2015) dwarf the NEA’s subventions, which would be replaced if those who actually use the organizations — many of them supported by state- and local-government arts councils — are as enthusiastic about them as they claim to be. The idea that the arts will wither away if the NEA goes away is risible.

Now let’s hear from members of the “arts community” who understand that art doesn’t require handouts.

We’ll start with Patrick Courrielche, who wrote in the Wall Street Journal about the need to free the arts from federal dependence.

The NEA, created in 1965, has become politically tainted and ill-equipped to handle today’s challenges. Mr. Trump and Congress should ax it as soon as possible. …For the American arts to flourish—and for art to reach all Americans—artists must be able to make a living from their efforts.

And a theater director from Brooklyn explains in the Federalist why the art world will be better off without the NEA.

…as Trump prepares to spike the ball and end the game by axing the NEA, there is reason to be optimistic that this decision will be very good for the arts in America. …Arts institutions, which receive the bulwark of NEA funding, are failing badly at reaching new audiences, and losing ground. This is a direct result of the perverse market incentives our nonprofit arts system creates… As the artistic director of an unsubsidized theater company in New York City for more than a decade, I had to compete in a closed marketplace, where wealthy gatekeepers and the government rather than ticket sales pay the bills. …The industry receives more free money than it did a decade ago, and has fewer attendees. That is a broken system by any estimation. …Taking away free government money for the arts won’t make art disappear. After all, art is older than government. It will force artists and arts organizations to finally come to terms with their market realities. Audiences are better than experts at deciding what art is good or important. If a piece of art is so good that nobody to wants to pay for it, maybe it isn’t all that good. …In the American tradition, vaudeville, jazz, standup comedy, and many other art forms were created and grew within the free market, free from government assistance. Under this system there was a tremendous appetite for high art among Americans… President Trump is wise to get the government out of the art game, and all of us will be better off for his decision.

Here’s another artist, writing for PJ Media, about the benefits of ending federal handouts.

For over a decade as a theatre artist, my salary was made possible by taxpayers funding the arts. …In hindsight, and after much reflection and a better understanding of economics, I am truly sorry, and ask the taxpayer to forgive my thievery. However, spilled milk can’t be put back into the bottle. That doesn’t mean that we have to keep spilling the milk, though. It’s way past time to defund and shutter the National Endowment for the Arts. … The NEA and their supporters will trot out research about how many dollars are added to local economies due to things like theatres, symphonies, and museums. Of course, as almost every person with at least half a semester of Economics under their belt is screaming, the NEA’s argument embraces the broken window fallacy. The economic stimulus felt and supposedly generated by the arts community comes at the expense of other markets. …The National Endowment for the Arts model artificially props up mostly unwanted markets by using tax dollars that get funneled through inefficient and wasteful bureaucracies. …What it does to the arts is create a marketplace that supports bad art. …Don’t misunderstand, I love art. Like, a lot. And I’m willing to pay for it, as are many other patrons of the arts. If the National Endowment for the Arts were to be defunded and shuttered, it would help clear the deck of bad art that people aren’t willing to pay the real cost for. …art does enhance life, but having your life enhanced at the expense of others is not a right. People don’t have a right to other people’s money just so they can watch a play or visit a museum. …It’s time for the National Endowment for the Art to be defunded and shuttered.

Amen.

Since I started today’s column with optimism, I’ll be balanced and end with pessimism. I very much doubt that Congress will defund the NEA bureaucracy.

In part, this is a classic example of “public choice.” The recipients of the handouts have strong incentives to mobilize and lobby to keep their goodies. Taxpayers, by contrast, mostly will be disengaged because their share of the cost is trivial.

But it gets worse. The NEA also is very clever. A Senator once told me that it was difficult to vote against the bureaucracy because the “arts community” cleverly placed the wives of major donors on local arts councils. That made it difficult to vote against the NEA, though this Senator did say that making this tough vote would be worthwhile. Yes, there would be some short-term grousing by interest groups (and donor wives) if the agency actually was shut down, but that would quickly dissipate as people saw the arts were able to survive and thrive without sucking at the federal teat.

For the sake of the nation, let’s hope most lawmakers think this way.

Based on His Leaked 2005 Tax Data, Donald Trump Should Move to Italy (or the Isle of Man)

Thu, 03/16/2017 - 6:24pm

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected – including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the ghouls at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

Keep the IRS out of Tax Preparation

Thu, 03/16/2017 - 12:19am

Originally published by Washington Examiner on March 2, 2017.

With President Trump in office and Republicans in full control of Congress, the prospects for major reforms to the tax code are the highest they’ve been since the Reagan era. Reform might not only mean lower tax burdens on individuals and businesses, but it could also lead to changes in how taxes are filed and collected. One idea Republicans should absolutely avoid is expanding IRS power to prepare tax returns on behalf of taxpayers.

Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., have said the IRS should engage in its own tax preparation services, similar to those offered by private companies, though the IRS would make it available for free. This may sound like a reasonable idea, but it is rife with problems. Chief among them is the huge conflict of interest it would create for the IRS.

The IRS exists to collect tax revenue for the government. It answers to the president and Congress, both of whom are primarily concerned with raising money to fund government programs. In contrast, tax preparers answer to their customers, who are interested in paying as little tax as legally possible.

These two objectives are clearly at odds.

Preparation work done by the IRS is likely to reflect their organizational agenda, not that of taxpayers. This will lead to higher than necessary tax payments on average, making this proposal a de facto tax increase. That’s the opposite of what Congressional Republicans should hope to achieve with this year’s reform effort.

There is also reason to question the ability of the IRS to competently accomplish the task of preparing tax returns. For decades, studies have found that IRS help centers provide an unacceptably high rate of false information when responding to taxpayer questions. The agency also has a history of overcharging interest and other fees.

Private tax preparation companies obviously make mistakes, too. After all, the tax code is extremely complex. But competition for customers gives them strong incentive to invest in getting it right. A preparation program run by the IRS, however, would have no such incentive and would make it harder for private solutions not subsidized by the government to fairly compete.

Finally, it’s vitally important to maintain our system of voluntary tax compliance. Voluntary in this case doesn’t mean that compliance is optional, but rather that the IRS does not directly assess taxes against each individual nor audit every single return. The key benefit of this system is that taxpayers are exposed to the cost of the tax code as they fill out their forms each year. Though there is room for improvement to make the full costs of the tax system more transparent, taxpayers generally see first hand how much taxes are impacting them, which is useful information when entering the voting booth.

While announcing her proposal, Warren suggested that it should be made easier for Americans to file their taxes. On that point, she is entirely correct. However, simplifying the tax code is the best way to do that, not to grant the IRS even more control over individual tax returns. The standing separation between tax collection and compliance services needs to be maintained.

Two Cheers for the Fiscal Changes in the GOP’s Obamacare Repeal-and-Replace Legislation

Wed, 03/15/2017 - 10:30am

As I wrote yesterday (and have pontificated about on many occasions), the main problem with America’s healthcare system is that various government interventions (Medicare, Medicaid, Obamacare, tax code’s healthcare exclusion, etc) have created a system where people – for all intents and purposes – buy healthcare with other people’s money.

And as Milton Friedman wisely observed, that approach (known as “third-party payer”) undermines normal market incentives for lower costs. Indeed, it’s a green light for ever-higher costs, which is exactly what we see in the parts of the healthcare system where government programs or insurance companies pick up most of the tab.

For what it’s worth, I’m not overflowing with confidence that the new Obamacare-replacement proposal from Republicans will have much impact on the third-party payer crisis. And it probably doesn’t solve some of the Obamacare-specific warts in the system. If you want to get depressed about those issues, read what Michael Cannon, Philip Klein, and Christopher Jacobs have written about the new GOP plan.

But healthcare in America is also a fiscal issue. And if we’re just looking at the impact of the American Health Care Act on the burden of government spending and taxes, I’m a bit more cheerful.

The Congressional Budget Office released its official score on the impact of the legislation. Here’s the excerpt that warmed my heart.

Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion. The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance. … parts of the legislation would repeal or delay many of the changes the ACA made to the Internal Revenue Code… Those with the largest budgetary effects include: • Repealing the surtax on certain high-income taxpayers’ net investment income; • Repealing the increase in the Hospital Insurance payroll tax rate for certain high-income taxpayers; • Repealing the annual fee on health insurance providers; and • Delaying when the excise tax imposed on some health insurance plans with high premiums would go into effect.

And fellow wonks will be interested in this table.

By the way, the “two cheers” in the title may be a bit too generous. After all, there should be full reform of Medicare and Medicaid. Though I suppose some of that can happen (at least Medicaid, hopefully) as part of the regular budget process.

It’s also unfortunate that Republicans are creating a new refundable tax credit (and when you see the term “refundable tax credit,” that generally is a sneaky euphemism for more government spending that is laundered through the tax code, sort of like the EITC) to replace some of the Obamacare subsidies that are being repealed.

So it’s far from ideal.

For those who want to see the glass as being half-full rather than half-empty, however, Ryan Ellis has a very upbeat assessment in a column for Forbes.

It’s a net spending cut of over $1.2 trillion and a net tax cut of nearly $900 billion over the next decade. …the score shows that the AHCA would be a large and permanent tax cut for families and employers….This should lower the tax revenue baseline considerably, perhaps even by half a percentage point of the economy.

I like starving the beast, so I agree this is a good thing.

And I also agree with Ryan that the resulting lower tax burden on dividends and capital gains is very positive. After all, double taxation is probably the most pernicious feature of the internal revenue code.

The most pro-growth tax cut in the bill is the elimination of the so-called “NIIT” or “net investment income tax.” It adds on a 3.8 percentage point surtax on savers and investors. By eliminating NIIT, the bill cuts the capital gains and dividends tax from 23.8 percent in 2017 to 20 percent in 2018 and beyond. …The contribution limit to HSAs is doubled, from nearly $7000 for families today to $14,000 starting in 2018.

But I’ll close with some sad news. If the legislation is approved, that probably means no more Obamacare-related humor. If this makes you sad, you can easily spend about 30 minutes enjoying Obamacare  cartoons, videos, and jokes by clicking here, here, here, here, here, herehere, here, here, here, here, here, here, here, here, here, here, here, here, and here.

The World’s Most Inefficient Healthcare System, Part I: Created by Government, Financed by Government

Tue, 03/14/2017 - 12:32pm

I shared last year a matrix to illustrate Milton Friedman’s great insight about the superior results achieved by markets compared to government.

Incentives explain why markets work best. When you spend your own money on yourself (box 1), you try to maximize quality while minimizing cost. And that drives the businesses that are competing for your money to constantly seek more efficient ways of producing better products at better prices.

This system generates creative destruction, which sometimes can be painful, but the long-term result is that we are vastly richer.

Governments, by contrast, don’t worry about efficiency or cost (box 4).

Today, though, let’s  use Friedman’s matrix to understand the shortcomings of the US healthcare system. Way back in 2009, I opined that the most important chart in healthcare was the one showing that American consumers directly paid for less than 12 percent of health expenditures.

For all intents and purposes, instead of buying healthcare with their own money, they use other people’s money (box 2), a phenomenon known as third-party payer. And because most of their health expenses are financed by either government (thanks to Medicare, Medicaid, Obamacare, etc) or insurance companies (thanks to the tax code’s healthcare exclusion), consumers focus only on quality and don’t care much about cost.

That 2009 column was written before Obamacare’s enactment, so let’s see if anything has changed.

Well, we know healthcare has become more expensive. But do we know why?

The answer, at least in part, is that consumers are directly financing an even smaller percentage of their healthcare expenses. In other words, the distortions caused by third-party payer have become worse.

Here’s the most-recent data from the federal government’s Centers for Medicare and Medicaid Services (specifically the National Health Expenditures by type of service and source of funds, CY 1960-2015). Consumers are now paying only 10.5 percent of healthcare costs.

Now let’s consider the issue of efficiency.

Are we getting better healthcare for all the money that’s being spent?

That doesn’t seem to be the case. Here’s another chart from the archives. It compares per-capita health spending in various nations with average life expectancy.

As you can see, the United States is not getting more bang for the buck. And I very much doubt an updated version of those numbers would show anything different.

Heck, we even have more government spending on healthcare, per capita, than many nations with fully nationalized systems.

So if we’re not buying better health outcomes with all this money, what are we getting?

The blunt answer is bureaucracy and inefficiency. Here are some excerpts I shared years ago from a column by Robert Samuelson.

There are 9 times more clerical workers in health care than there are physicians, and twice as many clerical workers as registered nurses. This investment has not paid off in superior outcomes or better customer service, however. …Every analysis of medical care that has been done highlights the significant waste of resources in providing care. Consider a few examples: one study found that physicians spent on average of 142 hours annually interacting with health plans, at an estimated cost to practices of $68,274 per physician (Casalino et al., 2009). Another study found that 35 percent of nurses’ time in medical/surgical units of hospitals was spent on documentation (Hendrich et al., 2008).

Let’s close with a chart from a left-wing group that wants a single-payer system.

And this chart clearly makes a compelling case that the current approach in the United States is very wasteful.

For what it’s worth, I’m slightly skeptical about the veracity of the numbers. Why, for instance, would there be a sudden explosion of administrators starting about 1990?

But even if the data is overstated, I’m sure the numbers are still bad. We see the same thing in other areas of our economy where government-instigated third-party payer enables waste and featherbedding. Higher education is an especially shocking example.

The real issue is how to solve the problem. Our leftist friends think a single-payer healthcare system would solve the problem, but that would be akin to nationalizing grocery stores to deal with the inefficiencies created by food stamps and agriculture subsidies.

The real answer, as Julie Borowski explains in this video, is unraveling all the government interventions that caused the problem in the first place.

And if you want another video on the topic, here’s a Dutch expert making similar points. I also recommend this clever cartoon video that explains third-party payer. And this Reason video on how costs are lower when actual markets operate.

And if aren’t already numbed by lots of data, Mark Perry and Devon Herrick have more evidence of lower costs when third-party payer is reduced.

A 50-Day Economic Report Card on the Trump Presidency

Mon, 03/13/2017 - 12:15pm

We have passed the 50th full day of the Trump Presidency.

In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.

Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.

Heck, Trump hasn’t even told us what he really thinks on some of these issues.

In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.

I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.

You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!

In this second interview, which occurred a couple of days later, I start the conversation by fretting about how the border-adjustable tax could kill the chances of getting good tax policy.

In the latter part of the interview, the discussion shifts to infrastructure and I make the rare point that we should copy Europe and get the private sector more involved (it’s generally a good idea to do the opposite of Europe, to be sure, but there are a small handful of other areas – including corporate tax rates, Social Security, and privatized postal services – where various European countries are ahead of us).

The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.

Obamacare and the Second Theorem of Government

Sun, 03/12/2017 - 12:56pm

A couple of years ago, filled with disgust at the sleazy corruption of the federal Leviathan, I put forth a simple explanation for what happens in Washington, DC.

I call it the “First Theorem of Government,” and I think it accurately reflects the real purpose and operation of government. Except I probably should have added lobbyists and contractors. And it goes without saying (though I probably should have said it anyhow) that politicians are the main beneficiaries of this odious racket.

I think this theorem has stood the test of time. It works just as well when Republicans are in charge as it does when Democrats are in charge.

But it doesn’t describe everything.

For instance, Republicans have won landslide elections in recent years by promising that they will repeal Obamacare the moment they’re in charge. Well, now they control both Congress and the White House and their muscular rhetoric has magically transformed into anemic legislation.

This is very disappointing and perhaps I’ll share some of Michael Cannon’s work in future columns about the policy details, but today I want to focus on why GOP toughness has turned into mush.

In part, this is simply a reflection of the fact the rhetoric of politicians is always bolder than their legislation (I didn’t agree with 98 percent of what was said by Mario Cuomo, the former Governor of New York, but he was correct that “You campaign in poetry. You govern in prose.”)

But that’s just a small part of the problem. The real issue is that it’s relatively easy for GOP politicians to battle against proposed handouts and it’s very difficult to battle against existing handouts. That’s because government goodies are like a drug. Recipients quickly get hooked and they will fight much harder to preserve handouts than they will to get them in the first place.

And that’s the basic insight of the “Second Theorem of Government.”

Here’s a recent interview on FBN. The topic is the Republican reluctance to fully repeal Obamacare. I only got two soundbites, and they both occur in the first half of the discussion, but you can see why I was motivated to put forth the new theorem.

Simply stated, I’m disappointed, but I’m more resigned than agitated because this development was so sadly predictable.

And here are a couple of follow-up observations. I guess we’ll call them corollaries to the theorem.

  1. You break it, you buy it – Government intervention had screwed up the system well before Obamacare was enacted, but people now blame the 2010 law (and the Democrats who voted for it) for everything that goes wrong with healthcare. Republicans fear that all the blame will shift to them if their “Repeal and Replace” legislation is adopted.
  2. Follow the money – What’s partly driving GOP timidity is their desire not to anger many of the interest groups – such as state governments, hospitals, doctors, insurance companies, etc – who benefit from various Obamacare handouts. That’s what is motivating criticism for politicians such as Ohio’s John Kasich and Alaska’s Lisa Murkowski.
  3. Don’t throw the baby out with the bathwater – The “Cadillac Tax” is the one part of Obamacare that’s worth preserving because it will slowly cut back on the distorting tax preferences that lead to over-insurance and third-party payer. For what it’s worth, the GOP plan retains that provision, albeit postponed until 2025.
  4. The switch in time that saved…Obamacare – I’m still upset that Chief Justice John Roberts (aka, the reincarnation of Justice Roberts) put politics above the Constitution by providing the decisive vote in the Supreme Court decision that upheld Obamacare. If the law had been blocked before the handouts began, we wouldn’t be in the current mess.

For these reasons (as well as other corollaries to my theorem), I’m not brimming with optimism that we’ll get real Obamacare repeal this year. Or even substantive Obamacare reform.

P.S. Now you know what I speculated many years ago that Obamacare would be a long-run victory for the left even though Democrats lost many elections because of it. I sometimes hate when I’m right.

Welfare, Taxes, the Nanny State, and Supply-Side Economics

Sat, 03/11/2017 - 11:02am

What’s the right way to define good tax policy? There are several possible answers to that question, including the all-important observation that the goal should be to only collect the amount of revenue needed to finance the legitimate functions of government, and not one penny above that amount.

But what if we want a more targeted definition? A simple principle to shape our understanding of tax policy?

I’m partial to what I wrote last year.

…the essential insight of supply-side economics…when you tax something, you get less of it.

I’m not claiming this is my idea, by the way. It’s been around for a long time.

Indeed, it’s rumored that Reagan shared a version of this wisdom.

I don’t know if the Gipper actually said those exact words, but his grasp of tax policy was very impressive. And the changes he made led to very good results, even if folks on the left still refuse to believe the IRS data showing that Reagan’s lower tax rates on the rich generated more revenue.

In any event, our friends on the nanny-state left actually understand this principle when it suits their purposes. They propose sugar taxes, soda taxes, carbon taxes, housing taxes, tanning taxes, tobacco taxes, and even “adult entertainment” taxes with the explicit goal of using the tax code to reduce the consumption of things they don’t like.

I don’t like the idea of government trying to dictate people do with their own money, but these so-called sin taxes generally are successful because supply-siders are right about taxes impacting incentives.

But that doesn’t mean it’s always popular when statist governments impose such policies. At least not in Belarus, according to a story from RFERL.

Protests over a new tax aimed at reducing social welfare spread beyond the Belarusian capital, as thousands took to the streets in Homel and other towns. Along with similar protests two days earlier in Minsk, the February 19 demonstrations were some of the largest in the country in years. In Homel, near the border with Russia, at least 1,000 people marched and chanted slogans against the measure, known as the “Law Against Social Parasites.”

But what are “social parasites” and what does the law do?

…the law…requires people who were employed fewer than 183 days in a calendar year to pay a tax of about $200. …The measure is aimed at combating what President Alyaksandr Lukashenka has called “social parasitism.”

For what it’s worth, the Washington Post reports that the government had to back down.

The protesters won. On Thursday, Lukashenko announced that he won’t enforce the measure this year, though he’s not scrapping it. “We will not collect this money for 2016 from those who were meant to pay it,” he told the state news agency Belta. Those who have already paid will get a rebate if they get a job this year. The law, signed into effect in 2015, is reminiscent of Soviet-era crackdowns against the jobless, who undermined the state’s portrayal of a “workers’ paradise.”

That’s good news.

If people can somehow survive without working (assuming they’re not mooching off taxpayers, which is something that should be discouraged), more power to them. It’s not the life I would want, but it’s not the role of government to tax them if they don’t work. Or if they simply choose to work 182 days per year.

Mr. Lukashenko should concentrate instead on taking the heavy foot of government off the neck of his people. According to the most-recent Index of Economic Freedom, Belarus is only ranked #104, with especially weak scores for “rule of law” and “open markets.”

If he turns his country into a Slavic version of Hong Kong, based on free markets and small government, people will be clamoring to work. But I’m not holding my breath expecting that to happen.

P.S. While government shouldn’t tax people for not working, it’s also a bad idea to subsidize them for not working. Indeed, there’s even a version of the Laffer Curve for poverty and redistribution.

P.P.S. Given the low freedom ranking for Belarus, I suspect the real parasites in that country (just like in the U.S.) are the various interest groups that are feeding from the government trough.

P.P.P.S. On an amusing note, here’s the satirical British video on killing the poor instead of taxing them.

Global Evidence Shows Lower Corporate Tax Rates Are a No-Lose Recipe for Growth and Competitiveness

Fri, 03/10/2017 - 6:02pm

The centerpiece of President Trump’s tax plan is a 15 percent corporate tax rate.

Republicans in Congress aren’t quite as aggressive. The House GOP plan envisions a 20 percent corporate tax rate, while Senate Republicans have yet to coalesce around a specific plan.

Notwithstanding the absence of a unified approach, you would think that the stage is set for a big reduction in America’s anti-competitive corporate tax rate, which is the highest in the developed world (if not the entire world) and creates big disadvantages for American workers and companies.

If only.

While I am hopeful something will happen, there are lots of potential pitfalls, including the “border-adjustable tax” in the House plan. This risky revenue-raiser has created needless opposition from major segments of the business community and could sabotage the entire process. And I also worry that momentum for tax cuts and tax reform will erode if Trump doesn’t get serious about spending restraint.

What makes this especially frustrating is that so many other nations have successfully slashed their corporate tax rates and the results are uniformly positive.

My colleague Chris Edwards recently shared the findings from an illuminating study published by the London-based Centre for Policy Studies. It examines what’s happened in the United Kingdom as the corporate tax rates has dropped from 35 percent to 20 percent over the past 30 years. Here’s some of what Chris wrote about this report.

New evidence comes from Britain… It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury. …the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.”

And keep in mind that GDP today is significantly greater in part because of a better corporate tax system.

Here’s the chart from the CPS study, showing the results over the past three decades.

The results from the most-recent round of corporate rate cuts are especially strong.

In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. …But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

None of this should be a surprise.

Big reductions in the Irish corporate tax rate also led to an uptick in corporate receipts as a share of economic output. And remember that the economy has boomed, so the Irish government is collecting a bigger slice of a much bigger pie.

And Canadian corporate tax cuts generated the same effect, with no drop in revenues even though (or perhaps because) the federal tax rate on business has plummeted to 15 percent.

Would we get similar results in the United States?

According to experts, the answer is yes. Scholars at the American Enterprise Institute estimate that the revenue-maximizing corporate tax rate for the United States is about 25 percent. And Tax Foundation experts calculate that the revenue-maximizing rate even lower, down around 15 percent.

I’d be satisfied (temporarily) if we split the difference between those two estimates and cut the rate to 20 percent.

Let’s close with some dare-to-hope speculation from Joseph Sternberg of the Wall Street Journal about what might happen in Europe if Trump significantly drops the U.S. corporate tax rate.

Donald Trump says many things that alarm Europeans, but one of the bigger fright lines may have come in last week’s address to Congress: “Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.” What’s scary here to European ears is…the idea that tax policy is now fair game when it comes to global competitiveness. …One of the biggest political gifts Barack Obama gave European leaders was support for their notion that low tax rates are unfair and that taxpayers who benefit from them are somehow crooked. Europeans pushed that line among themselves for years, complaining about low Irish corporate rates, for instance. The taboo on tax competition is central to the political economy of Europe’s welfare states… Mr. Obama…backed global efforts against “base erosion and profit shifting,” meaning legal and efficient corporate tax planning. The goal was to obstruct competition among governments… The question now is how much longer Europe could resist widespread tax reform if Mr. Trump brings in a 20% corporate rate alongside rapid deregulation—or what the consequences will be in terms of social-spending trade-offs to a new round of tax cutting. Dare to dream that Mr. Trump manages to trigger a new debate about competitiveness in Europe.

Amen. I’m a huge fan of tax competition because it pressures politicians to do the right thing even though they would prefer bad policy. And I also like the dig at the OECD’s anti-growth “BEPS” initiative.

P.S. I want the government to collect less revenue and spend less money, so the fact that a lower corporate tax rate might boost revenue is not a selling point. Instead, it simply tells us that the rate should be further reduced. Remember, it’s a bad idea to be at the revenue-maximizing point on the Laffer Curve (though that’s better than being on the downward-sloping side of the Curve, which is insanely self-destructive).

More Funding for Government Schools: Throwing Good Money after Bad

Thu, 03/09/2017 - 12:30pm

The story of the private sector is that competition generates ever-more output in ways that bring ever-higher living standards to ever-greater numbers of people.

By contrast, the story of the government is inefficiency and waste as interest groups figure out how to grab ever-larger amounts of unmerited goodies, often while doing less and less.

In some cases, where government is doing bad things (stealing property, subsidizing big corporations, fleecing poor people, etc), I actually favor inefficiency.

Sadly, the government seems to be most inefficient in areas where we all hope for good results. Education is a powerful (and sad) example.

A story in the LA Weekly is a perfect illustration of this phenomenon.

A little more than a decade ago, something unexpected happened. The district’s enrollment, which peaked in 2004 at just under 750,000, began to drop. …Today, LAUSD’s enrollment is around 514,000, a number that the district estimates will fall below half a million by 2018.

Anyone want to guess whether this means less spending?

Of course not.

L.A. Unified’s costs have not gone down. They’ve gone up. This year’s $7.59 billion budget is half a billion dollars more than last year’s. …Today, the district has more than 60,000 employees, fewer than half of whom are teachers. …LAUSD’s administrative staff had grown 22 percent over the previous five years. Over that same period of time, the number of teachers had dropped by 9 percent.

If these trends continue, maybe we’ll get an example of “peak bureaucracy,” with a giant workforce that does absolutely nothing!

Based on his famous chart, the late Andrew Coulson probably wouldn’t be too surprised by that outcome.

There’s also lots of waste and inefficiency when Uncle Sam gets involved. With great fanfare, President Obama spent buckets of money to supposedly boost government schools. The results were predictably bad.

It was such a failure than even a story in the Washington Post admitted the money was wasted (in other words, there wasn’t enough lipstick to make the pig look attractive).

One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis. Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not. …The School Improvement Grants program…received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015… Arne Duncan, Obama’s education secretary from 2009 to 2016, said his aim was to turn around 1,000 schools every year for five years. ..The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”

It was a “bet,” but he used our money. And he lost. Or, to be more accurate, taxpayers lost. And children lost.

Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash. …Smarick said he had never seen such a huge investment produce zero results. …Results from the School Improvement Grants have shored up previous research showing that pouring money into dysfunctional schools and systems does not work.

Indeed, I’ve seen this movie before. Many times. Bush’s no-bureaucrat-left-behind initiative flopped. Obama’s latest initiative flopped. Common Core also failed. Various schemes at the state level to dump more money into government schools also lead to failure. Local initiative to spend more don’t lead to good results, either.

Gee, it’s almost as if a social scientist (or anybody with a greater-than-room-temperature IQ) could draw a logical conclusion from these repeated failures.

And, to be fair, some folks on the left have begun to wake up. Consider this recent study by Jonathan Rothwell, published by Brookings, which has some very sobering findings.

…the productivity of the education sector depends on the relationship between how much it generates in value—learning, in this case—relative to its costs. Unfortunately, productivity is way down. …This weak performance is even more disturbing given that the U.S. spends more on education, on a per student basis, than almost any other country. So what’s going wrong? …In primary and secondary public education, where price increases have been less dramatic, there has been a decline in bureaucratic efficiency. The number of students for every district-level administrator fell from 519 in 1980 to 365 in 2012. Principals and assistant principals managed 382 students in 1980 but only 294 in 2012.

The conclusion is stark.

Declining education productivity disproportionately harms the poor. …unlike their affluent peers, low-income parents lack the resources to overcome weak quality by home-schooling their children or hiring private tutors. Over the last 30 to 40 years, the United States has invested heavily in education, with little to show for it. The result is a society with more inequality and less economic growth; a high price.

Incidentally, even private money is largely wasted when it goes into government schools. Facebook’s founder famously donated $100 million to Newark’s schools back in 2010.

So how did that work out? As a Washington Post columnist explained, the funds that went to government schools was basically money down the toilet.

It is a story of the earnest young billionaire whose conviction that the key to fixing schools is paying the best teachers well collided with the reality of seniority protections not only written into teacher contracts but also embedded in state law.

But there is a bit of good news. Some of the money helped enable charter schools.

there is a more optimistic way to interpret the Newark experience, much of which has to do with the success of the city’s fast-growing charter schools. …The reasons are obvious. Unencumbered by bureaucracy and legacy labor costs, charters can devote far more resources to students, providing the kind of wraparound services that students like Beyah need. An analysis by Advocates for Children of New Jersey noted “a substantial and persistent achievement gap” between students at charter and traditional public schools: “For example, while 71 percent of charter school students in Newark passed third-grade language arts tests in 2013-14 — higher than the state average of 66 percent — only 41 percent of students in Newark traditional public schools passed those tests.”

The Wall Street Journal also opined about this topic.

‘What happened with the $100 million that Newark’s schools got from Facebook’s Mark Zuckerberg?” asks a recent headline. “Not much” is the short answer. …The Facebook founder negotiated his gift with New Jersey Gov. Chris Christie and then-Mayor Cory Booker in 2010, and it flowed into Newark’s public-school system shortly thereafter. The bulk of the funds supported consultants and the salaries and pensions of teachers and administrators, so the donation only reinforced the bureaucratic and political ills that have long plagued public education in the Garden State.

The editorial explains that this isn’t the first time a wealthy philanthropist squandered money on government schools.

In 1993, philanthropist Walter Annenberg sought to improve education by awarding $500 million to America’s public schools. …But the $1.1 billion in spending that resulted, thanks to matching grants, accomplished little. An assessment by the Consortium on Chicago School Research on the schools that received funds reached a dismal conclusion: “Findings from large-scale survey analyses, longitudinal field research, and student achievement test score analyses reveal that . . . there is little evidence of an overall Annenberg school improvement effect.” The report did not explain why the campaign failed, but the reason is fairly obvious: The funds wound up in the hands of the unions, administrators and political figures who created the problems in the first place.

Fortunately, not all rich people believe in wasting money. Some of them actually want to help kids succeed.

In 1998, John Walton and Ted Forstmann each gave $50 million to fund scholarships for low-income children to attend private schools. More than 140,000 students have attended schools with graduation and college matriculation rates that exceed 90% instead of going to the failing schools in their neighborhoods. Earlier this summer, hedge-fund manager John Paulson pledged $8.5 million to the Success Academy charter-school network, where 93% of students are proficient in math, compared with 35% of their traditional public-school peers. His gift will allow more such schools to open. The financier Stephen Schwarzman and his wife, Christine, a former attorney, donated $40 million to help endow the Inner-City Scholarship Fund, which provides financial aid to needy children attending Catholic schools in the Archdiocese of New York.

Which is a good segue into the real lesson for today about the type of reforms that actually could boost education.

I’ve shared in the past very strong evidence about how school choice delivers better education results.

Which is what everyone should expect since competition is superior to monopoly.

Well, as explained in another Wall street Journal editorial, it also generates superior results at lower cost. Especially when you factor in the long-run benefits.

…a study shows that Milwaukee’s landmark voucher program will save taxpayers hundreds of millions of dollars. …the Wisconsin Institute for Law and Liberty, a nonprofit that advocates for limited government and education reform, decided to look at the relative cost and benefits of choice schools. And, what do you know, it found that students participating in Milwaukee’s voucher program will provide the city, state and students nearly $500 million in economic benefits through 2035 thanks to higher graduation and lower crime rates. …More education translates into higher incomes, more tax revenue and a lower likelihood of reliance on government welfare or other payments. Meanwhile, greater economic opportunity also prevents young adults from turning to crime.

Wow. It’s not just that it costs less to educate children in private schools. There’s also a big long-run payoff from having more productive (and law-abiding) citizens.

That’s a real multiplier effect, unlike the nonsense we get from Keynesian stimulus schemes.

P.S. School choice doesn’t automatically mean every child will be an educational success, but evidence from SwedenChile, and the Netherlands shows good results after breaking up state-run education monopolies.

And there’s growing evidence that it also works in the limited cases where it exists in the United States.

P.P.S. Or we can just stick with the status quo, which involves spending more money, per student, than any other nation while getting dismal results.

P.P.P.S. This is a depressing post, so let’s close with a bit of humor showing the evolution of math lessons in government schools.

P.P.P.P.S. If you want some unintentional humor, the New York Times thinks that education spending has been reduced.

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