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Four Options in the Fight over Parental Leave

Mon, 03/25/2019 - 12:51pm

I have this quaint notion that the Constitution guarantees economic liberty by limiting the power of Washington. Needless to say, parental leave is not one of the enumerated powers in Article 1, Section 8.

Sadly, many people (include the Chief Justice of the Supreme Court) don’t share my view.

So let’s set aside that objection and focus on the policy implications of a new entitlement program.

I’ve already explained why the federal government shouldn’t have a policy on parental leave, but the topic isn’t going away so let’s look at the issue again.

The first thing to realize is that the fight over “parental leave” involves several competing options.

Here are the four alternatives.

  1. A “conservative” plan to allow new parents to finance time off by tapping into the bankrupt Social Security system.
  2. A plan from the left to make parental leave an entitlement financed by payroll taxes.
  3. A plan from the left to mandate that employers provide paid leave.
  4. The libertarian notion that it’s none of the government’s business.

Let’s address Option #1.

Writing for National Review, Alexandra DeSanctis argues for an expansion of government’s role.

Joni Ernst of Iowa and Mike Lee of Utah recently introduced the Child Rearing and Development Leave Empowerment (CRADLE) Act, the latest conservative effort to develop a paid-leave policy that enables parents to stay home with their newborns. …It would amend the Social Security Act to allow parents to take up to three months off from work by drawing on their retirement benefits early in exchange for delaying their benefits after retiring.

You can read my concerns about this approach in this column from last March, so I don’t want to reinvent the wheel.

But Ms. DeSanctis makes some new arguments that cry out for rebuttal.

Starting with the notion that we should be ashamed that we’re not copying Europe’s decrepit welfare states.

The United States is the only country in the Organization for Economic Cooperation and Development (OECD) — an intergovernmental economic alliance of 36 member countries — that doesn’t have a national paid-leave program.

Wow, I never expected to see this type of argument in National Review. William F. Buckley must be spinning in his grave.

Heck, I made that argument a punchline in my recent collection of anti-Bernie Sanders satire.

She also wants to water down the definition of conservatism so that it means whatever is convenient for certain politicians.

The conservative argument against the proposal is intriguing as a matter of principle, but it is worth noting that the Republican politicians offering these paid-family-leave bills in recent years are also some of the most conservative policymakers in the Senate. …This new proposal is an effort not to expand the government but to protect and cultivate family life, which ought to be the chief goal of any country that cares about its future. …as the Right grapples with populist arguments for greater government prioritization of the needs of working-class Americans negatively affected by globalization, conservatives should embrace efforts to incentivize family growth and offer parents more flexibility in caring for their newborns.

I’m also less than impressed by her argument that Congress should “cultivate family life.”

Indeed, it’s precisely because strong families are good that Washington shouldn’t be involved.

Which is why I prefer what Rachel Greszler wrote for the Heritage Foundation. Here are some excerpts.

…a new national entitlement…could expand as other federal entitlements have, potentially costing hundreds of billions of dollars per year. …the role for the federal government is to remain neutral with regard to parents’ decisions to stay home or work outside the home. The government can, however, make it easier and less costly for workers to take family leave by reducing marginal tax rates so that workers have larger paychecks, supporting, instead of impeding, flexible work arrangements between employees and employers, and cutting costly regulations so that businesses can afford to provide paid leave.

And I definitely like articles that make the principled case against more government.

For instance, here are excerpts from a column by Veronique de Rugy.

Even if we pretend that it doesn’t change the size of government because the increased spending in the beginning will perfectly offset a few decades later with delayed benefit payments and increases in revenue (i.e., parents delay retirement and hence continue to send taxes to Uncle Sam), the plan increases the scope of the government immediately. You can’t wish away the fact that it drags the government into an area where it played no role before.

And George Leef, writing for Forbes, has similar concerns.

The notion that the government should help cover the costs of having a child springs naturally from the “progressive” mindset that government should be there to provide in case anyone needs (or merely prefers) assistance. It also dovetails with the liberal political mentality that many votes are to be won by giving people stuff. …But the big problem with this idea is not the dollars and cents one. Rather, it is the way it perpetuates and spreads the idea that the purpose of the federal government is to provide for our needs. …Kindly old Uncle Sam will be there to help when you need it. …This is the sort of thing Thomas Jefferson had in mind when he warned against ‘wasting the labors of the people under the pretense of taking care of them.’

What about other ways to address the issue?

Regarding Option #2 (an entitlement funded by payroll taxes), Vanessa Brown Calder’s article in National Review is must-reading on the issue.

…government-supported paid leave is costly. Paid-leave proposals such as the FAMILY Act would result in new payroll taxes on all current workers, whether or not they intend to use benefits. …realistic assumptions based on the national use of the federal unpaid FMLA program…suggest the FAMILY Act would result in costs of around $450 per year in taxes for the average worker. …the program is likely to expand, as similar programs have in other OECD countries. For example, the average length of paid maternity, parental, and home-care leave available to mothers in OECD-30 countries in 1970 was 17.2 weeks. In 2016 that number had tripled, to an average of 52.5 weeks, or over a year in benefits. Large expansions of programs are accompanied by large expansions in program costs. For example, Norway expanded leave from 18 to 35 weeks between 1987 and 1992, which nearly doubled the cost to taxpayers from $12,354 to $24,022 per eligible birth.

Imposing taxes to finance that much new spending isn’t very popular, even in left-wing states.

For instance, the New York Times reports that politicians in California want to impose a paid-leave mandate, but they are having a hard time figuring out how to make the numbers work.

The United States has long been the only industrialized country not to offer paid leave to new parents. Instead of waiting for the federal government, the incoming governor of California intends to change that… What’s unclear is how California would pay for it. The proposal, which the governor-elect, Gavin Newsom, is expected to include with his budget after he is sworn in on Monday, would be the most generous state policy in the nation, at a time when federal paid leave proposals have stalled. Yet it does not include a plan to finance it… California’s existing paid leave program is financed by a 1 percent payroll tax. Increasing that tax would require the approval of two-thirds of the Legislature, not assured despite Democratic control.

Interestingly, folks on the left are making the same argument that Ms. DeSanctis used in National Review.

“…we’re falling behind our economic competitors,” said Heather Boushey, the executive director of the Washington Center for Equitable Growth, who advised Hillary Clinton on economic issues during her 2016 presidential campaign.

I’ll merely add that “we’re falling behind” only in the race to impose more government.

We’re way ahead in the race for more prosperity.

I also found this passage to be laughable.

California has a history of fervent opposition to taxes. Democrats now have supermajorities in both the Senate and the House, but many of them have embraced fiscally conservative policies.

You almost have to assume that the reporter who wrote this piece never visited the state.

California has the nation’s most onerous state income tax. And it ranks very low in measures of fiscal policy.

Yes, there is a supermajority requirement to raise taxes, but politicians in Sacramento have been very successful in overcoming that barrier.

Let’s shift to Option #3 (mandating the employers provide leave).

Vanessa Brown Calder authored a comprehensive study on parental leave last year. She included a section on how this approach would harm female workers.

Economist Lawrence Summers studied the effects of mandating government benefits and concluded that women’s wages would be reduced to reflect the cost. Summers states that “if wages could freely adjust, these differences in expected costs would be offset by differences in wages.” If not, “there will be efficiency consequences as employers seek to hire workers with lower benefit costs.” …Economist Jonathan Gruber studied maternity-benefit mandates in Illinois, New York, and New Jersey, and his findings “consistently suggest” women’s wages were reduced to reflect the cost of benefits. The estimated reduction in wages was around 100 percent of the cost of benefits. Government-mandated leave has similar effects internationally. A study of 16 European countries over a period of around 20 years found that “parental leave is associated … with reductions in [women’s] relative wages at extended durations.” Other researchers have noted that “work-family policies … have also contributed to … lower wage-levels for women relative to men.”

This data is especially noteworthy since there is additional evidence that women get hurt when government intervenes on their behalf.

To conclude, let’s look at how her research supports Option #4 (no interference from Washington).

Here are her main findings.

…ample data show that the private market provides paid leave at rates about 30 to 50 percentage points higher than proponents claim. Private paid leave provision has grown three- or fourfold over 50 years and continues to grow. This trend indicates industry is responsive to employee demands. …Government intervention is also unlikely to correct gender or labor-market inequality in ways proponents desire. For example, families may respond to the policy by increasing women’s household work contributions relative to men’s. Redistributive effects of government intervention are likely to harm workers.

This chart shows how markets are naturally responsive when government doesn’t intervene.

And this chart from her study shows that women do better in the United States than in other nations.

In other words, benign neglect is the policy that produces the best outcomes.

Sadly, this is one of the many issues where the Trump Administration is on the wrong side.

The bottom line is that Option #4 is the only choice that is good for freedom, good for women, and good for the economy.

Option #1 is not as bad as Options #2 and #3, but it is still a step in the wrong direction (as I noted last year, supporters “are proposing to do the wrong thing in the best possible way”).

Battle of Economic Logic: Restaurant Workers 1 – Hollywood Celebrities 0

Sun, 03/24/2019 - 12:38pm

Time for a confession.

I don’t particularly enjoy writing columns about the minimum wage because it’s such a slam-dunk issue. Simply stated, it is cruel and illogical when politicians mandate wage levels that are higher than the productivity of low-skilled workers.

Yet, at the risk of being repetitive, I periodically share evidence showing that higher minimum wages lead to more unemployment (see hereherehereherehereherehereherehere, and here).

The issue also is disturbing because I’ve had several friends on the left privately admit that they understand that jobs are lost when the minimum wage goes up, but they think that’s okay because it’s a good political issue for their side.

How utterly immoral. And racist, at least in outcome if not intent.

Today, though, I’m actually excited to write about the topic because I have a new angle.

As reported by the New York Times, a bunch of millionaire celebrities are trying to convince the governor of New York to raise the minimum wage for restaurant staff.

…a group of Hollywood actresses waving the banner of the Time’s Up movement have been pressing Gov. Andrew M. Cuomo to apply New York’s minimum wage to workers who earn tips, arguing that it would make waitresses less vulnerable to sexual harassment. Among the celebrities weighing in are Sarah Jessica Parker, Michelle Williams, Amy Poehler and Amy Schumer. …advocates like Ms. Jayaraman and celebrity activists are focused on state-by-state battles. Last week, Hillary Clinton wrote to Mr. Cuomo and other leaders in Albany, calling on them to eliminate the lower wage for tipped workers. …a letter sent to Mr. Cuomo by Hollywood celebrities including Ms. Poehler, Reese Witherspoon and Natalie Portman…urged the governor to eliminate the lower minimum wage for servers.

Do the workers appreciate this display of “solidarity” from the Hollywood crowd?

Not exactly.

Waitresses and other servers are resisting the proposal, saying they can make more money from tips and do not need celebrities to help protect them from harassment. …In New York City, many servers at busy restaurants and bars earn more than enough in tips to push their hourly wage well above the $15 minimum. …Raising wages for tipped workers, many waitresses say, could threaten an economic lifesaver if it forces restaurants to change tipping policies or, worse, puts them out of business.

The best part of the story is that the supposed beneficiaries clearly have a much better understanding of economics than the virtue-signaling celebrities.

…“The resounding message from servers in New York to these actresses in Hollywood is to just leave us alone,” said Maggie Raczynski, a bartender at an Outback Steakhouse in upstate New York. “These celebrities have literally no idea. I feel like they need to butt out.” …D. Sweeney, a former actor who said he made a “very comfortable living” as a bartender in New York, was adamant about his opposition to the proposed change. …Raising restaurant labor costs any further, he said, could trigger several changes in the business model that would hurt workers more than they would help. “Immigrant support staff will be the first to be fired,” he said. …The servers fired back in a letter to the actresses, saying, “Thank you for your concern. But we don’t need your help and we’re not asking to be saved.” In an interview this week, Ms. Raczynski said her employer had already trimmed staff to offset the steady rise in wages that Mr. Cuomo championed a few years ago.

This is a heartwarming story.

The fact that restaurant owners are opposed to intervention is not surprising, but it’s great to see that restaurant workers are savvy enough to realize that they’ll get hurt if politicians increase the minimum wage.

Reminds me of the great story from Seattle when employers and workers both protested against additional tax hikes on companies.

To paraphrase an evil man, “workers and capitalists of the world unite!”

Let’s close by recycling this video tutorial on the minimum wage.

P.S. Switzerland doesn’t have a minimum wage, and Swiss voters very much prefer that outcome.

P.P.S. You can enjoy additional cartoons on the minimum wage by clicking here and here.

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Image credit: LuckyLife11 | Pixabay License.

Senators Introduce Awful Opioid Bill

Sat, 03/23/2019 - 12:07pm

Bipartisanship is no indication of legislative quality, as indicated by the opioid bill introduced by Senators Kirsten Gillibrand (D) and Cory Gardner (R). The “John S. McCain Opioid Addiction and Prevention Act” limits opioid prescription for acute pain to 7 days. It’s an awful idea that will do nothing to solve opioid overdoses, but will harm many patients.

As many pointed out when Gillibrand announced the bill on Twitter, “acute pain” covers a variety of maladies, many requiring much more than a week’s worth of medication, and not just events similar to a “wisdom tooth extraction” she cited. Forcing patients already suffering from pain to return to a doctor every week for medication is an unnecessary hardship.

There was a strong and immediate negative  reaction to the bill from health professionals and patients already suffering from other misguided government policies. In response to the backlash, Gillibrand says she is open ” open to improving the bill.” Unfortunately, she also says ” the intent was to address what experts believe is one of the root causes of the opioid epidemic: the over-prescription of opioids for acute pain.”

In other words, she doesn’t get it. There may be some situations where opioids are overprescribed, but it is a myth that overprescription is a root cause of the “opioid crisis.” As I wrote recently:

We often hear the problem called an “opioid crisis,” but on closer inspection this moniker appears misleading. Opioids are a potent pain medication that many need and use responsibly. There’s little risk of overdose from the proper medical use of prescription opioids. Most opioid overdoses instead occur from use of powerful synthetics like fentanyl.  Even in the roughly 30 percent of fatal overdose cases involving prescription opioids, fentanyl or heroin are also often involved.

Pretty much all of the increase in opioid deaths in recent years are due to the spike in fentanyl related deaths, which is why “opioid-related deaths keep rising as pain pill prescriptions fall.” Our Taxpayers Against Illicit Opioids project exists to further draw attention to this unfortunate misconception.

Moreover, the medical community is better situated than politicians to determine where prescriptions are out of whack and to devise solutions, if necessary. What Gillibrand and Gardner are proposing is just another round in the war on pain pills that would exacerbate the fear already compelling doctors to drastically cut back on prescriptions for chronic pain sufferers.

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Image credit: U.S. Air Force photo illustration/Tech. Sgt. Mark R. W. Orders-Woempner | Public Domain.

A Simple Reform to Avert a Future Greek-Style Fiscal Crisis in America

Fri, 03/22/2019 - 12:10pm

In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.

But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.

The discussion was triggered by comments from the Chairman of the Federal Reserve.

Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.

As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.

The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).

To be more specific, politicians are violating my Golden Rule.

Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.

Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.

That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.

But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.

Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.

So how can America avoid a Greek-style fiscal nightmare?

Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.

The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.

P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

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Image credit: 401kcalculator.org | CC BY-SA 2.0.

New York Vs. Florida, Round #2

Thu, 03/21/2019 - 12:38pm

I used to think Texas vs. California was the most interesting and revealing rivalry among states. It was even the source of some clever jokes and cartoons.

But the growing battle between Florida vs. New York may now be even more newsworthy.

wrote last month about how many entrepreneurs, investors and business owners are escaping bad tax policy by moving from the Empire State to the Sunshine State.

Not that we should be surprised.

Florida ranks #1 for economic freedom while New York languishes in last place.

A big reason for the difference is that Florida has no state income tax, which compares very favorably to the punitive system in New York.

And because the federal tax code no longer provides an unlimited deduction for state and local taxes, I expect the exodus from New York to Florida to accelerate.

What’s especially amusing is that Alexandria Ocasio-Cortez’s mother is one of the tax refugees.

Here are some excerpts from a report in the New York Post.

The mother of soak-the-rich Congresswoman Alexandria Ocasio-Cortez said she was forced to flee the Big Apple and move to Florida because the property taxes were so high. “I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year in Florida. It’s stress-free down here,” Blanca Ocasio-Cortez told the Daily Mail… Her daughter raised eyebrows with her pitch to hike the top marginal tax rate on income earned above $10 million to 70 percent. She has also gotten behind the so-called Green New Deal, which would see a massive and costly government effort.

The former Governor of Florida (and new Senator from the state) obviously is enjoying the fact that New York politicians are upset.

Here’s some of what Rick Scott wrote in today’s Wall Street Journal.

America is a marketplace where states are competing with each other, and New York is losing. Their loss is Florida’s gain… I would like to tell New Yorkers on behalf of the rest of America that our hearts go out to you for your sagging luxury real-estate market. But you did this to yourself, and you can fix it yourself. If you cut taxes and make state and local government efficient, maybe you can compete… I made more than 20 trips to high-tax states like California, Connecticut, Illinois, New York and Pennsylvania to lure businesses to Florida. The tax-happy leaders of those states were furious, which made the visits all the more enjoyable for me. They called me every name in the book. But they were the ones who raised taxes, and bad decisions have consequences. The elites in New York and Washington should commission a study of Florida to see what happens when conservative ideas are put into practice. …Florida’s economy is thriving, expanding at a record pace. …There’s a reason Rep. Alexandria Ocasio-Cortez’s mom left New York for Florida. And there’s a reason companies are fleeing high-tax states, bringing jobs with them to Florida.

I mentioned above that having no state income tax gives Florida a big advantage over New York.

Courtesy of Mark Perry, here a comprehensive comparison of the two states.

Wow. If this was a tennis tournament, the announcers would be saying “game, set, and match.” And if it was a boxing contest, it would be a knock-out.

The bottom line is that we should expect more rich people to escape New York and move to Florida because they’ll get to keep more of their money.

And we should expect more lower-income and middle-class people to also make the same move because Florida’s better policy means more jobs and more opportunity (sadly, Rep. Ocasio-Cortez has learned nothing from her mother’s move).

P.S. New York actually doesn’t do terribly in nationwide rankings for pension debt, though it is still below Florida.

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Image credit: DonkeyHotey | CC BY 2.0.

New Academic Study: Payroll Tax Burdens Stifle Entrepreneurship

Wed, 03/20/2019 - 12:04pm

When I write about Social Security, I normally focus on two serious deficiencies.

  1. The program was never properly designed to deal with demographic change, which means there’s a gargantuan long-run budgetary shortfall of $44 trillion.
  2. The program is a very bad deal for workers (especially minorities), offering a paltry retirement benefit compared to what could be obtained with private savings.

I’ve neglected to explain, though, that there’s also an economic cost. All government spending is a burden since resources get diverted from the productive sector of the economy. Moreover, the associated payroll taxes have an adverse impact on incentives for employment.

Those taxes also have a negative effect on entrepreneurship, according to new research from three economists. Here are some excerpts from their study, which has been published by the National Bureau of Economic Research. We’ll start with a look at the methodology.

Entrepreneurship plays a central role in modern economies. In the US, for example, new businesses account for 20% of total gross job creation. While entrepreneurs can be very successful…, entrepreneurship remains one of the most economically risky lines of activity and can result in large wealth losses. …the marginal value of resources for entrepreneurs can be substantial, given how cash-constrained they often are. Therefore, mandating social insurance, while reducing risks,could significantly affect entrepreneurial activity. …In this paper, we…exploit quasi-experimental variation in the amount of social insurance contributions and…administrative data on the full population of Finnish entrepreneurs to address this question. …We use a standard differences-in-differences strategy and exploit a reform in 2011 that changed the ownership share rule from 50% to 30% to assess how relaxing the social insurance mandate affects entrepreneurial activity. …Overall, we find that social insurance contributions are reduced by an aver-age of 19% for the treatment group, which has more discretion over insurance contributions after the reform. This reduction represents a large cash windfall, equivalent to, on average, a 5 percentage-point reduction in corporate taxes.

Here are the key results, which show that payroll taxes have a decidedly negative effect on new firms.

…we observe a larger than average decrease in social insurance contributions by the owners of younger firms. The cash saved from the lower contributions is channeled into their firms, as we observe an increase in both employee compensations and other input costs, and an increase in turnover after the reform. …entrepreneurs in younger firms are more liquidity-constrained and have access to better growth opportunities than more mature firms. …Figure 2 shows the effect of the 2011 reform on business activity for young firms that are equal to or younger than five years old. …we estimate a 9.9% increase in turnover and a 6% increase in employee wage costs. Overall, these results imply that firms use the saved cash to pay for additional intermediate inputs and labor in order to increase turnover, and suggests that these firms might be facing liquidity constraints.

Here’s the aforementioned Figure 2, showing the both sales and wages are higher when social insurance taxes are lower.

The bottom line is clear.

…our findings imply that the social insurance mandate…crowds out business activity for young firms… the social insurance mandate for entrepreneurs has heterogeneous efficiency costs. Efficiency gains could be achieved by…lower social insurance contributions.

What is meant by efficiency gains?

That’s simply economic jargon for faster growth and higher living standards. And those results occur because entrepreneurs play a key role in driving innovation.

P.S. This issue is timely and important since politicians such as Bernie Sanders and Alexandria Ocasio-Cortez are pushing “Medicare for All” and other schemes that would require huge increases in payroll taxes.

P.P.S. Other Democrats, such as Barack Obama and Hillary Clinton, have urged higher payroll taxes that would deliberately target entrepreneurs, investors and business owners.

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Image credit: geralt | Pixabay License.

The Case Against Socialism

Tue, 03/19/2019 - 12:57pm

I relentlessly mock socialism, in part because it’s such a target-rich environment. But I’m also hoping that humor is a way of debunking this wretched ideology. I’m worried, after all, that socialism may triumph thanks to a combination of “public choice” and diminishing societal capital.

Today, lets review the case against socialism. We’ll start with this short clip from a recent interview, where I recycled my argument that greater levels of socialism produce greater levels of economic misery.

I now have some new evidence on my side, thanks to the just-released Economic Report of the President.

Here are some excerpts from the socialism chapter (begins on page 381), including some analysis about how to define the term.

…economists generally agree about how to define socialism, and they have devoted enormous time and resources to studying its costs and benefits. …we review the evidence from the highly socialist countries showing that they experienced sharp declines in output, especially in the industries that were taken over by the state. We review the experiences of economies with less extreme socialism and show that they also generate less output, although the shortfall is not as drastic as with the highly socialist countries. …Whether a country or industry is socialist is a question of the degree to which (1) the means of production, distribution, and exchange are owned or regulated by the state; and (2) the state uses its control to distribute the country’s economic output without regard for final consumers’ willingness to pay or exchange (i.e., giving resources away “for free”). …we find that socialist public policies, though ostensibly well-intentioned, have clear opportunity costs that are directly related to the degree to which they tax and regulate.

The chapter looks at totalitarian forms of socialism.

…looking closely at the most extreme socialist cases, which are Maoist China, the USSR under Lenin and Stalin, Castro’s Cuba… Food production plummeted, and tens of mil-lions of people died from starvation in the USSR, China, and other agricultural economies where the state took command. Planning the nonagricultural parts of those economies also proved impossible. …Venezuela is a modern industrialized country that elected Hugo Chávez as its leader to implement socialist policies, and the result was less output in oil and other industries that were nationalized. In other words, the lessons from socialized agriculture carry over to government takeovers of oil, health insurance, and other modern industries: They produce less rather than more. …A broad body of academic literature…finds a strong association between greater economic freedom and better economic performance, suggesting that replacing U.S. policies with highly socialist policies, such as Venezuela’s, would reduce real GDP more than 40 percent in the long run, or about $24,000 a year for the average person.

For what it’s worth, the International Monetary Fund published some terrible research that said dramatically reduced living standards would be good if Americans were equally poor.

So I guess it makes sense that Crazy Bernie endorsed Venezuelan economic policy.

But I’m digressing. Let’s get back to the contents of the chapter, including this table that shows the collapse of agricultural output in Cuba following nationalization.

The chapter also looks at what is sometimes referred to as “democratic socialism” in the Nordic nations.

These countries don’t actually practice socialism since there is no government ownership of the means of production, no central planning, and no government-dictated prices.

But they do have bigger government, and the report echoes what I said in the interview about this leading to adverse consequences.

…the Nordic countries’ policies now differ significantly from policies that economists view as characteristic of socialism. …Nordic taxation overall is greater… Living standards in the Nordic countries, as measured by per capita GDP and consumption, are at least 15 percent lower than those in the United States. …a monopoly government health insurer to provide healthcare for “free” (i.e., without cost sharing) and to centrally set all prices paid to suppliers, such as doctors and hospitals. We find that if this policy were financed through higher taxes, GDP would fall by 9 percent, or about $7,000 per person in 2022.

The report notes that Nordic nations have cost sharing, so the economic losses in that excerpt would apply more to the British system, or to the “Medicare for All” scheme being pushed by some Democrats.

But Nordic-style fiscal policy is still very expensive.

It means higher taxes and lower living standards

I’ve previously shared AIC data, so regular readers already know this data.

And regular readers also won’t be surprised at this next chart since I wrote about Nima Sanandaji’s work back in 2015.

Here’s the bottom line from the report.

Highly socialist countries experienced sharp declines in output, especially in the industries that were taken over by the state. Economies with less extreme forms of socialism also generate less output, although the shortfall is not as drastic as with the highly socialist countries.

In other words, lots of socialism is really bad while some socialism is somewhat bad.

Let’s close by citing some other recent publications, starting with this editorial from the Wall Street Journal.

Democrats are embracing policies that include government control of ever-larger chunks of the private American economy. Merriam-Webster defines socialism as “any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.”…consider the Democratic agenda that is emerging from Congress and the party’s presidential contenders. …Bernie Sanders’ plan, which has been endorsed by 16 other Senators, would replace all private health insurance in the U.S. with a federally administered single-payer health-care program. Government would decide what care to deliver, which drugs to pay for, and how much to pay doctors and hospitals. Private insurance would be banned. …The Green New Deal…, endorsed by 40 House Democrats and several Democratic presidential candidates, would require that the U.S. be carbon neutral within 10 years. …this would mean a complete remake of American electric power, transportation and manufacturing. …as imagined by Rep. Alexandria Ocasio-Cortez, all of this would be planned by a Select Committee For a Green New Deal. Soviet five-year plans were more modest.

The column also mentions government-guaranteed jobs, Washington imposing controls on businesses, and confiscatory tax rates, all of which are terrible policies.

Whether this is technically socialist can be debated.

What can’t be debated is that this agenda would make the U.S. – at best – akin to Greece in terms of economic liberty.

Here’s a look at some excerpts from a column in the Weekly Standard.

…more and more people, particularly young people, tell pollsters they’re open to the idea of voting for a socialist. In a poll this summer, Democrats by a 10-point margin said they prefer socialism to capitalism. …The tide has certainly shifted against free enterprise, an economic system that has lifted countless masses out of abject poverty, and toward socialism,whose track record is far worse, to put it charitably. …The younger generation also seems curiously unwilling to credit capitalism with the creation of modern conveniences they hold so dear. There’s a reason text messaging and Netflix didn’t emerge from Cuba or North Korea. Socialism is traditionally defined as the government owning the means of production, and it just as traditionally leads to authoritarianism. …With a body count in the millions, you’d think “socialism” would be hard to rebrand. But thanks to Bernie, being a socialist is in vogue. …The Sandernistas say that “democratic socialism” is a more benign variant, akin to what is practiced in Scandinavia. Yes, Sweden, Norway, and Denmark are clean, prosperous, and beautiful countries…and not particularly socialist. Their tax rates may be high, but they have thriving private sectors and no minimum wage laws. Their economies rank as “mostly free,” the same category as the United States

Most interesting, we also have a column by Cass Sunstein, a former Obama appointee.

President Donald Trump was entirely right to reject “new calls to adopt socialism in our country.” He was right to add that “America was founded on liberty and independence — not government coercion,” and to “renew our resolve that America will never be a socialist country.” …socialism calls for government ownership or control of the means of production. By contrast, capitalism calls for private ownership and control — for a robust system of property rights. In capitalist systems, companies and firms, both large and small, are generally in private hands. In socialist systems, the state controls them. …Socialist systems give public officials a great deal of authority over prices, levels of production and wages. …Whether we are speaking of laptops or sneakers, coffee or candy bars, umbrellas or blankets, markets establish prices, levels of production and wages on the basis of the desires, the beliefs and the values of countless people. No planner can possibly do that. …Those who now favor large-scale change should avoid a term, and a set of practices, that have so often endangered both liberty and prosperity.

Last but not least, here’s a video about socialism.

Narrated by Gloria Alvarez, it looks at the grim evidence from Cuba and Venezuela.

And she also points out that Nordic nations are not socialist.

Indeed, most of them would be closer to the United States than to France on this statism spectrum.

In other words, the real lesson is not that socialism is bad (that should be obvious), but rather that there’s a strong relationship between national prosperity and economic liberty.

Simply stated, the goal of policy makers should be to reject all forms of collectivism (including communism and fascism) and instead strive to minimize the footprint of government.

Understanding the Trade Deficit

Mon, 03/18/2019 - 1:32am

In January, I shared a short video about protectionism, which expanded on some analysis from a one-minute video from last year.

Today, here’s a short video explaining the trade deficit, which also expands on a one-minute video from last year.

Simply stated, trade deficits are largely irrelevant.

And since trade balances don’t matter, then it makes no sense to fight trade wars. Especially when protectionist-minded politicians inflict lots of casualties on their own people.

Given all the dramatic rhetoric in Washington about trade deficits – especially from President Trump, it’s worth pointing out that there’s nothing radical or unconventional about my analysis.

Kevin Williamson, for instance, made similar points when he explained the economics of trade deficits for National Review.

A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger. …trade deficits…are not really driven by consumer behavior… It’s true that many Americans prefer German cars and French wines — and cheap electronics and T-shirts made in China — but trade deficits mostly are the result of several other causes: macroeconomic factors such as tax policies and savings rates, the strength of a country’s currency, and, most important, its attractiveness to investors. …Far from being victimized by such trade, Americans are enriched by it.

Indeed, while more trade is associated with more prosperity, Kevin notes that there’s no link with trade balances.

Trade deficits are not a sign of economic trouble, and trade surpluses are not necessarily a sign of economic health. The last time the U.S. ran a trade surplus with the world was 1975, when our economy was in a shambles. Britain ran a trade deficit from Waterloo to the Great War, a century marking the height of its power, and it grew vastly wealthy.

Neil Irwin, writing for the New York Times, points out that a trade deficit is the same as a capital surplus.

A core idea that Donald J. Trump has embraced throughout his time in public life has been that the United States is losing in trade with the rest of the world, and that persistent trade deficits are evidence of this fact. …The vast majority of economists view it differently. In this mainstream view, trade deficits are not inherently good or bad. …When a country runs a trade deficit, there is a countervailing force. …the flow of capital is the reverse of the flow of goods. And the trade deficit will be shaped not just by the mechanics of what products people in the two countries buy, but also by unrelated investment and savings decisions. The cause and effect goes both directions. …the flow of capital into the country — the inverse of the trade deficit — creates benefits that can be good for jobs, by encouraging more domestic investment.

Amen. I wrote back in 2017 about why it’s good when foreigners invest and create jobs in America.

Irwin also explains that the U.S. gets significant benefits because the dollar is the world’s reserve currency.

…the dollar isn’t used just in trade between the United States and other countries. The dollar is a global reserve currency, meaning that it is used around the world in transactions that have nothing to do with the United States. When a Malaysian company does business with a German company, in many cases it will do business in dollars; when wealthy people in Dubai or Singapore’s government investment fund want to sock away money, they do so in large part in dollar assets. That creates upward pressure on the dollar for reasons unrelated to trade flows between the United States and its partners. That, in turn, makes the dollar stronger…maintaining the global reserve currency creates…a lot of advantages. Lower interest rates and higher stock prices are among them.

For what it’s worth, politicians should ignore the trade deficit and focus instead on preserving the dollar’s special status as a reserve currency.

Let’s also review some commentary from Jeff Jacoby in the Boston Globe.

For centuries, economists have pointed out the destructive folly of tariffs and other trade barriers. Tirelessly they explain that a trade deficit is not a defeat, just as a shopper’s “deficit” with a department store is not a defeat. They implore policymakers to see that trade restrictions always impose more costs on a country’s economy than any benefits they generate. …Nations don’t trade with each other. We speak as if they do out of habit and convenience, but it’s not true. The United States and Canada are not competing firms. America doesn’t buy steel from China, and China doesn’t buy soybeans from America. Rather, hundreds of individual American companies choose to buy steel from Chinese mills and fabricators, and hundreds of Chinese-owned firms make deals to buy soybeans from far-flung American growers.

He explains that trade is peaceful and productive cooperation.

…international trade occurs among countless sellers and buyers, all acting independently in their own best interest. …To those individuals, national trade deficits and surpluses are irrelevant. They aren’t competing — they’re cooperating. Buyers and sellers aren’t in conflict with each other, let alone with each other’s countries. On the contrary: By doing business together, traders create wealth and connections, knitting the world together in mutual interest, making the planet more harmonious.

Reminds me of Bastiat’s observation about trade and war.

But that’s a separate issue. The focus today is on the meaning (or lack thereof) of trade deficits.

Let’s close with a chart from the video (which I first shared exactly one year ago), which clearly shows that a trade deficit is simply the flip side of an investment surplus.

P.S. I’m still waiting for an anti-trade person to answer these questions I asked back in 2011.

P.P.S. And I also challenge anyone to defend Trump on this issue when compared to Reagan.

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Image credit: distel2610 | Pixabay License.

Economic Liberty and the Constitution

Sun, 03/17/2019 - 12:05pm

Two days ago, I wrote about how the Constitution was designed, in large part, to protect Americans from majoritarianism.

The Supreme Court is doing a reasonably good job of protecting some of our liberties (or, in the Heller case, restoring our liberties), but I point out in this clip from a recent interview that the Justices have failed to protect our property rights.

But since I’m now a lawyer, let’s focus instead on what legal scholars have written on this issue.

The late Professor Bernard Siegan authored a great book, Economic Liberties and the Constitution. If you care about these issues, you should buy it.

In the meantime, here are some excerpts from an article he wrote for Chapman Law Review.

The original Constitution of 1787 granted limited powers to each of the three branches of government… The federal government was limited in power so that it could not deprive citizens of their privileges and immunities… The Constitution was passed by delegates who had lived under and were steeped in the common law. Most terms and provisions of the Constitution are of common law origin and cannot fully be understood without reference to the common law. Thus, although there were no specific protections for the right of property or economic activity or press and speech, the United States government was given no power in the Constitution to deprive people of these common law rights.

Siegan explains some of the thinking that motivated James Madison.

The most influential Framer of both the United States Constitution and the Bill of Rights was James Madison, a delegate to the Constitutional Convention from Virginia… He spent considerable time preparing for the Convention by studying the writings of leading authorities on government, particularly the Scottish philosopher and historian David Hume, who advocated freedom for commerce as essential to the viability and progress of a nation. As a result of his…extensive review of literature on the subject of government, Madison concluded that for a nation to be politically and economically successful considerable limitation of government powers was required, enabling the productive, inventive, and competitive talents of the people to flourish. He believed that the welfare of a nation mandated the creation of a commercial republic that would depend on freedom of the markets and not on the authority of the state.

There’s also an excellent book, The Dirty Dozen, written by Robert Levy and William Mellor, which outlines twelve terrible Supreme Court decisions that expanded the power of government (including Wickard v. Filburn and Kelo v City of New London).

Here are some excerpts from remarks by Levy.

The Tenth Amendment says quite clearly that the federal government is authorized to exercise only certain enumerated powers, the ones that are listed there and that are specifically delegated to the national government. The Tenth Amendment goes on to say, if the power is not listed there, if it’s not enumerated and delegated to the national government, then it is reserved to the states or, depending on the provisions of state constitutions and state laws, to the people. …No matter how worthwhile the goal, no matter how much Congress thinks that it has identified a really important problem, and no matter how sure Congress is that it knows how to fix the problem, if there’s no constitutional authority to pursue it, then the federal government has to step aside and leave the matter to the states or private parties.

In other words, the Founders weren’t joking when they listed the enumerated powers.

They even included an amendment as part of the Bill of Rights to reinforce those limitations on the power of government.

Speaking of amendments, advocates of bigger government could have used that approach to expand the power of Washington. But, as Levy points out, they didn’t need to follow the rules because the Supreme Court decided to no longer protect economic liberty.

…the Supreme Court has accomplished through the back door what the states and the Congress could not have accomplished through the prescribed amendment process. Regrettably, I think, the modern court has lost its compass… Much of the court’s enduring mischief…started during the New Deal and continues today.

Last but not least, Professor Richard Epstein (my former debating partner) has a great book entitled The Classical Liberal Constitution. It also belongs in your library (and will help underscore the differences between classical liberalism and today’s statist version of liberalism).

Until then, here are excerpts from one of his articles.

…the Constitution…does offer broad and specific protections to private property through the Takings Clause (“nor shall private property be taken for public use without just compensation”4×4. U.S. Const. amend. V. ) and through the Due Processes Clauses of the Fifth and the Fourteenth Amendments (providing that neither the federal government nor the states may deprive any person of “life, liberty or property, without due process of law”5×5. Id.; id. amend. XIV. ). …a unified conceptual framework should apply to what are called economic and personal liberties, even if it were possible to articulate some hard-edged separation between them. The analytical origin of this position is that voluntary contracting, whether for the transfer of goods and services or the formation of long-term associations, works as well in the one domain as in the other.

Epstein points out that there was a spirited debate when the Constitution was drafted and adopted, but both sides in that debate would oppose the expansion of government power that largely began in the 1930s.

…there were many differences between the Federalists and Antifederalists, but anyone would be hard pressed to find a single point of contention that could be cashed out to support the hallmark legislation of the New Deal. …the Contracts Clause imposes limitations on how the state could regulate ot only existing contracts, but also those contracts that had not yet been made. And whatever doubts that existed were largely removed by the adoption of the Fourteenth Amendment, where the correct reading of the Privileges or Immunities, Due Process, and Equal Protection Clauses all place powerful limitation on the scope of state power to regulate economic and noneconomic matters alike. …neither the Federalists nor the Antifederalists in the ratification debates supported such massive federal schemes as the National Labor Relations Act.

Let’s close with this clever image someone posted on Facebook.

P.S. Here’s some satire about Obama and the Bill of Rights.

P.P.S. And here’s what Professor Epstein said about his interactions with Obama at the University of Chicago.

P.P.P.S. I image Levy/Mellor book would be re-titled The Dirty Thirteen if it was updated to include the horrific Obamacare decision.

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Image credit: Mark Fischer | CC BY-SA 2.0.

Majoritarianism and Democracy vs. Liberty and the Constitution

Sat, 03/16/2019 - 12:42pm

While she’s mostly known for radical proposals such as confiscatory tax rates and the Green New Deal, Alexandria Ocasio-Cortez also made waves with recent comments about imposing “democracy” on the economy.

In a discussion last year at Ponoma College in California, I explained why majoritarianism is misguided.

For all intents and purposes, unchecked democracy gives 51 percent of the people a right to rape and pillage 49 percent of the people.

Thankfully, America’s Founders realized that approach was incompatible with individual liberty.

They drafted a Constitution that explicitly limited the power of politicians (and thus also limited the power of people who vote for politicians).

Why? Because they understood history.

Professor Victor Davis Hanson explains how they recognized the dangers of majoritarianism.

The half-millennia success of the stable Roman republican system inspired later French and British Enlightenment thinkers. Their abstract tripartite system of constitutional government stirred the Founding Fathers to concrete action. Americans originally were terrified of what 51 percent of the people in an unchecked democracy might do on any given day—and knew that ancient democracies had always become more not less radical and thus more unstable. For all the squabbles between Adams, Jefferson, Hamilton, and Madison, they agreed that a republic, not a direct democracy, was a far safer and stable choice of governance. …We often think that a Bill of Rights was designed to protect Americans from monarchs and dictators. It certainly was. But the Founders were just as terrified of what that the majority of elected representatives without restraint might legally do on any given day to an individual citizen. …All consensual governments are prone to scary wild swings of mob-like emotion—and to demagogues who can almost rein in or goad the dêmos. But the Founders sought to make American government immune to Athenian-style craziness through a system of checks and balances that vented popular frenzies without a great deal of damage.

In a column for the Foundation for Economic Education, Professor Gary Galles explains the difference between liberty and democracy.

…far too little attention seems to be given to the differences between democracy—the process by which we select members of government—and liberty—the key to good government. …our Constitution and Bill of Rights…put some things beyond majority determination… Unfortunately, democracy…is entirely consistent with choices that destroy liberty…the growing reach of government makes our exercise of democracy an increasing threat to liberty, defending that liberty requires understanding the limits of democratic determination.

George Will, citing the work of Professor Randy Barnett, explains that the fight is – or should be – between statist majoritarians and libertarian constitutionalists.

Regarding jurisprudence, Democrats are merely results-oriented, interested in…expanding government’s power… Republicans…have grown lazily comfortable with rhetorical boilerplate in praise of “judicial restraint.” …all progressives are Hobbesians in that they say America is dedicated to a process — majoritarian decision-making that legitimates the government power it endorses. Not all Lockeans are libertarians, but all libertarians are Lockeans in that they say America is dedicated to a condition — liberty. …Lockeans favor rigorous judicial protection of certain individual rights — especially private property and freedom of contract — that define and protect the zone of sovereignty within which people are free to act as they please. Hobbesians say the American principle is the right of the majority to have its way. …Lockeans say the Constitution, properly construed and enforced by the judiciary, circumscribes the majoritarian principle by protecting all rights that are crucial to individual sovereignty. …Barnett says, yes, the Constitution — “the law that governs those who govern us” — is libertarian. And a Lockean president would nominate justices who would capaciously define and vigorously defend, against abuses by majoritarian government.

You don’t have to be a Randian to heartily endorse and embrace this sentiment (h/t: Libertarian Reddit).

The most cogent warning about majoritarianism comes from the great Thomas Sowell.

“In the modern welfare state, a vote becomes a license to take what others create — and these others include generations yet unborn.”

— Thomas Sowell (@ThomasSowell) April 19, 2017

To emphasize the dangers of majoritarianism, I’ll close by simply citing Brazil in the past and Venezuela today.

P.S. Though I must admit that the Swiss are an example of how majoritarianism can lead to good outcomes.

P.P.S. I strongly encourage you to read what Walter Williams wrote on this topic.

The Macro Damage of Trade Taxes

Fri, 03/15/2019 - 12:19pm

In a video I shared two months ago included a wide range of academic studies showing that government-imposed trade barriers undermine economic prosperity.

Not that those results were a surprise. Theory teaches us that government intervention is a recipe for economic harm. And we certainly have painful history showing the adverse consequences of protectionism.

When I debate the issue, I like to cite real-world examples, such as the fact that the nations with the lowest trade barriers tend to be very prosperous while protectionist nations are economic laggards.

No wonder there’s such a strong consensus among economists.

Today, we’re going to add to pro-trade consensus.

new study from the International Monetary Fund investigates the macroeconomic impact of trade taxes. Here’s the basic outline of the methodology.

Some economies have recently begun to use commercial policy, seemingly for macroeconomic objectives. So it seems an appropriate time to study what, if any, the macroeconomic consequences of tariffs have actually been in practice. Most of the predisposition of the economics profession against protectionism is based on evidence that is either a) theoretical, b) micro, or c) aggregate and dated. Accordingly, in this paper, we study empirically the macroeconomic effects of tariffs using recent aggregate data. …Our panel of annual data is long if unbalanced, covering 1963 through 2014; more recent data is of greater relevance, but older data contains more protectionism. Since little protectionism remains in rich countries, we use a broad span of 151 countries, including 34 advanced and 117 developing countries.

And here are the results.

Our results suggest that tariff increases have adverse domestic macroeconomic and distributional consequences. We find empirically that tariff increases lead to declines of output and productivity in the medium term, as well as increases in unemployment and inequality. … a one standard deviation (or 3.6 percentage point) tariff increase leads to a decrease in output of about .4% five years later. We consider this effect to be plausibly sized and economically significant… Why does output fall after a tariff increase? …a key channel is the statistically and economically significant decrease in labor productivity, which cumulates to about .9% after five years. …Protectionism also leads to a small (statistically marginal) increase in unemployment…we find that tariff increases lead to more inequality, as measured by the Gini index; the effect becomes statistically significant two years after the tariff change. To summarize: the aversion of the economics profession to the deadweight losses caused by protectionism seems warranted; higher tariffs seem to have lower output and productivity, while raising unemployment and inequality. … there are asymmetric effects of protectionism; tariff increases hurt the economy more than liberalizations help.

These graphs show the main results.

The simple way to think about this data is that protectionism forces an economy to operate with sand in the gears. Another analogy is that protectionism is like having to deal with permanent and needless road detours. You can still get where you want to go, but at greater cost.

The bottom line is that things simply don’t function smoothly once government intervenes.

Lower growth, reduced productivity, and higher unemployment are obvious and inevitable consequences, as shown in the IMF study.

And while I don’t worry about inequality when some people get richer faster than other people get richer in a genuine free market, it’s morally disgusting for politicians to support protectionist policies that are especially harmful to the poor.

P.S. Everything in the IMF study about the damage of trade taxes also applies to the economic analysis of other forms of taxation. Indeed, deadweight losses presumably are even higher when considering income taxes. So the IMF deserves to be castigated for putting politics above economics when it pimps for higher taxes.

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Image credit: AKrebs60 | Pixabay License.

SpaceX Gets a Well-Deserved Watchdog Inspection

Fri, 03/15/2019 - 12:04pm

Originally published by The Western Journal on March 14, 2019.

A lot was riding on the Crew Dragon’s safe return Friday after SpaceX became the first company to dock a commercial spacecraft at the International Space Station a week prior. While the docking was praised by NASA as “a historic achievement,” SpaceX was nonetheless in desperate need of a win in the form of the shuttle’s safe return from the test flight, to be followed later by a crewed mission. But while the news turned out good, the company and its owner, Elon Musk, can’t yet rest easy.

SpaceX has faced mounting adversity over the past few months by failing to secure big-ticket government contracts. Most recently, NASA passed over SpaceX and awarded a $150 million contract to the United Launch Alliance, Musk’s leading competitor in aerospace. But the real danger for the company comes in the form of the Pentagon’s Inspector General investigation into SpaceX’s launch certification, which for the sake of taxpayers needs to be thorough.

In early February, the Inspector General announced that it would be launching an investigation into SpaceX’s certification as a government launch provider. The Pentagon has not been entirely forthcoming about the investigation’s scope, but the inspector general’s office did say that the audit decision is part of a larger project of government oversight. Given the significant taxpayer and national security interests at stake, it’s a good sign that they’re taking such interest in the certification process.

Ever since SpaceX settled its lawsuit with the U.S. Air Force in 2015 and was awarded launch certification, the aerospace company has relied extensively on government contracts to turn a profit. Some say the company’s bottom line is extremely fragile even with help from the government. Moving forward, the Inspector General investigation could certainly hinder SpaceX’s ability to secure additional government contracts.

The question then becomes: why would the Inspector General want to do that? While there are plenty of possible motives behind the move to open the investigation, the most likely explanation is SpaceX’s questionable record of security and compliance and questions surrounding potential cronyism.

A prior Inspector General investigation in December 2017 showed that SpaceX has serious problems when it comes to quality control. The report found that, out of the 181 “deviations” in the quality of SpaceX’s products and processes, over a third were classified as “major nonconformities,” indicating a dangerous lack of quality assurance. A new Inspector General investigation of SpaceX means a chance to follow up on these prior concerns.

If the IG finds that SpaceX was improperly provided its credentials as a government contractor, the result would certainly be catastrophic for the company. Not only could SpaceX lose its primary source of income, but its reputation as a legitimate aerospace contractor would be severely damaged. To make matters worse, Musk is also under investigation for being filmed smoking marijuana on Joe Rogen’s podcast, which is against the rules for a security clearance holder.

In general, competition in the space industry is a good thing. But so, too, is the government being a responsible steward of taxpayer dollars and operating in a transparent and forthright manner.

Given the circumstances under which SpaceX received its Air Force certification — following a lawsuit challenging contracts awarded to a competitor — it’s only prudent to review the process and ensure that bureaucrats didn’t react purely out of fear, or that there were no shenanigans involved. The latter is a concern thanks to congressional attempts over multiple years to add language seemingly designed to favor SpaceX to the annual National Defense Authorization Agreements, with the most recent effort proving successful.

Given the degree to which other companies owned by Musk, such as Tesla and SolarCity, benefit from government largesse, taxpayers ought to take a bit of comfort in the fact that there are at least some government watchdogs out there taking their responsibilities seriously.

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Image credit: Dan Taylor / Heisenberg Media | CC BY 2.0.

New Illinois Governor Wants to Accelerate the State’s Fiscal Collapse with a “Progressive” Tax

Thu, 03/14/2019 - 12:54pm

I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report, starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like ConnecticutNew Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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Image credit: Jeff Sharp | CC BY 2.0.

Democrats Pass Sweeping Election Reform Bill That Undermines Democracy

Wed, 03/13/2019 - 12:15pm

On Friday, House Democrats voted along party lines to pass H.R. 1, a sweeping election reform bill called the  “For the People Act.” But instead of improving the electoral system as they claim, it unconstitutionally undermines key democratic institutions.

H.R. 1 is a large and complex piece of legislation with many troubling provisions. Among other things, it usurps the power of state and local governments by federalizing elections and imposing one-size-fits-all regulations, turns the FEC into a partisan agency, and erodes political speech and association rights.

Ilya Shapiro & Nathan Harvey explain how H.R. 1 opens the FEC up to political abuse:

After Watergate, Congress created the FEC as a six-member, politically independent body so that neither party could use its regulatory power to punish political opponents. H.R. 1 abandons this longstanding structure, refashioning the FEC into a five-member commission that allows a simple majority to investigate and prosecute. The bill does state that no more than two members can be from the same political party, but this wouldn’t stop obvious partisans like, say, Bernie Sanders (who’s technically an “independent”) from being appointed. Adopting these changes would subject the FEC — our election monitor — to partisan control.

The bill also not only federalizes many election rules and prevents states from setting their own voting qualification rules, but it puts federal employees, themselves a special interest group, to work as poll workers. Nor is that the only provision that opens up the possibility of political intimidation.

H.R. 1 requires sharing of the private information of certain donors with the government. While discussing the similar issue of Schedule B donor reporting requirements, I explained why such a demand is problematic:

A healthy democracy needs its citizens capable and willing to express their political preferences even, or especially, when they conflict with the views of those in power. Tellingly, robust protections for speech were listed first among the Bill of Rights and have long been a cornerstone of our republic. Supporting like-minded organizations working to inform and shape the public debate has proven to be a valuable means by which millions of Americans express their political preferences. Unfortunately, invasive donor reporting requirements instituted by the Internal Revenue Service threaten to chill this critical democratic tool.

…Like the secret ballot, respecting donor privacy and thus anonymous speech and association is essential to prevent majoritarian abuse and intimidation that subverts democracy. This was a lesson learned in the civil rights era after the shameful attacks on the NAACP and its supporters.

Although officials pledge to keep the collected information confidential, there’s good reason to question the ability of the government to protect sensitive taxpayer information given the history of inadvertent disclosures and information leaks at the IRS. For example, an IRS official wrongly included the Schedule B donor information provided by the National Organization for Marriage in response to an individual’s request for its Form 990. The information was subsequently shared with an adversarial organization that then made it public.

…Similarly, as part of the investigation into the targeting of conservative organizations by the IRS, Lois Lerner was found to have illegally shared confidential Form 990 taxpayer information with the Federal Election Commission. The classified information disclosed by Edward Snowden further demonstrated that data collected by one government agency is vulnerable to illegal access and exploitation by any other.

For minority viewpoints, public exposure can lead to intimidation or other private consequences. We saw this when Brendan Eich was forced out as Mozilla CEO after it was revealed he donated in support of California Prop 8.

Not long after that, an effort by then-California Attorney General Kamala Harris to collect donor information was found to be unconstitutional as applied to the Americans for Prosperity Foundation and the Thomas More Law Center, though a similar challenge by the Center for Competitive Politics failed. In ruling on the Thomas More Law Center challenge, the district court found that “in the context of a proven and substantial history of inadvertent disclosures,” the state’s government could not assure donor confidentiality.

The ACLU, otherwise supportive of most of the bill’s leftwing objectives, finds problems:

The upshot of the DISCLOSE Act, and the essence of why we oppose it, is that it would chill the speech of issue advocacy groups and non-profits such as the ACLU, Planned Parenthood, or the NRA that is essential to our public discourse and protected by the First Amendment. These groups need the freedom to name candidates when discussing issues like abortion, health care, criminal justice reform, tax reform, and immigration and to urge candidates to take positions on those issues or criticize them for failing to do so. The DISCLOSE Act interferes with that ability by impinging on the privacy of donors to these groups, forcing the groups to make a choice: their speech or their donors. Whichever they choose, the First Amendment loses.

Far from enhancing democracy, exposing private information of those who donate to nonprofit organizations as an exercise of political speech undermines core democratic values. Individuals should not have to worry that a rogue employee might share their info with political enemies, who in turn might engage in various forms of intimidation and harassment. There’s a reason the secret ballot is considered fundamental to free and fair elections.

Thankfully, Mitch McConnell shows no interest in taking up H.R. 1 in the Senate. However, Democrats have made clear that they are playing the long game and consider the recent vote as laying the groundwork should they later flip the Senate and White House. The preservation of liberty, as always, thus requires constant vigilance.

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Image credit: Shaw Girl | CC BY-NC-ND 2.0.

Cross-Border Investment Threatened by Extraterritorial Tax and Regulatory Policy

Tue, 03/12/2019 - 12:16pm

When I write about the benefits of trade, I periodically point out that America has a trade deficit because it has a foreign investment surplus.

And since investment is a key driver of economic growth and rising wages, that’s a good outcome.

It basically means that foreigners who earn dollars by exporting to America are helping to finance America’s future prosperity by then plowing that money back into our financial markets (see this video for more details).

That’s the good news.

The bad news is that politicians are making cross-border investment more difficult.

They are using tax and regulatory policies to hinder the flow of money, just like they use protectionist policies to hinder the flow of goods and services.

new CF&P report, authored by Bruce Zagaris, explains this unfortunate development. He starts by explaining some of the bad policies imposed by Washington.

The ever-growing complexity and reach of the U.S. tax system impinges on the ability of U.S. taxpayers to live abroad, work abroad, open bank accounts abroad, or conduct business abroad. …These developments create a challenging environment, with taxpayers being subject to onerous – and sometimes conflicting – requirements. The complex array of obligations put taxpayers in legal jeopardy as governments threaten to impose sanctions on investors and businesses… The U.S. has even proactively prosecuted individuals and companies for cross-border tax activities that do not violate American laws. …The paperwork and reporting requirements for cross-border economic activity are extensive. …The icing on the cake of intrusiveness and costly compliance is the Foreign Account Tax Compliance Act.

FATCA is horrid legislation, perhaps the single worst part of the internal revenue code.

And bad policy from the U.S. has given other nations an excuse to adopt similar bad rules – aided and abetted by statist international bureaucracies such as the European Commission and Organization for Economic Cooperation and Development.

The difficulties caused by extraterritorial taxation are exacerbated by similar moves by other nations, often implemented as a response to aggressive policies by the United States. … the OECD has developed compliance and enforcement initiatives. …extraterritorial tax rules also are impinging on corporations. …The EU has taken a series of aggressive steps to impose tax on cross-border transactions. …Overly aggressive tax compliance and enforcement initiatives erode globalization, impede the ability of normal commerce and the movement of people, capital, and goods, and threaten privacy.

I especially like Bruce’s conclusion. All of the rules that stifle and hinder cross-border investment only exist because politicians have adopted bad tax laws.

Most of the policies reviewed above are only necessary because governments not only tax income, but also impose extra layers of tax on income that is saved an invested, exacerbated by decisions to impose such tax laws on income earned outside national borders. In a neutral, territorial tax system that taxes economic activity only one time, such as the Hall-Rabushka flat tax, almost all international tax conflicts disappear.

Amen. If we had a flat tax, there would be no case to be made for these bad policies.

Writing for the Washington Times, Richard Rahn of the Institute for Global Economic Growth cites this new study as he warns that an ever-expanding web of global tax rules is throwing sand in the gears of the global economy.

Global economic growth, particularly foreign investment, is slowing. One reason is likely the growing complexity of engaging in cross-border financial transactions. Major companies, banks and other financial institutions have been required to pay, in some cases, multi-billion-dollar fines to various governments for some alleged tax or other violation. The question is: Why is this occurring when virtually all of these institutions have compliance officers, tax lawyers, accountants, auditors, etc.? Much of the problem seems to stem from the ever-changing regulations and laws among countries, which are increasingly impossible to understand and comply with, even by the most sophisticated businesses. …The Center for Freedom and Prosperity Foundation has just published an important paper by the highly regarded international tax lawyer Bruce Zagaris, titled “Why the U.S. and the Worldwide Tax Systems Have Run Amok.” …Overly complex and even incomprehensible rules govern many international wealth and business transfers, as well as very onerous reporting requirements for people that have foreign interests. …In his paper, Mr. Zagaris details the problems caused by FATCA and a number of other international tax-related rules and regulations. Many of the rules and regulations would never meet basic cost-benefit analysis. They create much pain for little or no gain.

I would modify that last sentence.

The only “gain” from all these tax rules is a comparatively small amount of additional tax revenue for politicians (Obama originally promised $100 billion annually from FATCA and the actual law is projected to collect less than $1 billion per year).

Yet there is great pain imposed on the private sector.

Moreover, laws to hinder cross-border capital flows are especially disadvantageous for the United States, as illustrated by this chart from Bruce’s report.

Sadly, damage to the productive sector of the economy is not something that politicians lose sleep over.

After all, they wouldn’t be imposing risky extraterritorial policies if they actually cared about what’s best for the nation.

Is Socialism on the Winning Side of History?

Mon, 03/11/2019 - 12:54pm

Socialism is a joke. It doesn’t work. And it is so often a gateway to totalitarianism.

But that doesn’t mean it won’t happen. In this interview, I express my concern that the United States has passed a tipping point.

In the discussion, I included my usual caveat about the meaning of socialism.

I prefer the technical definition, which involves government ownership of the means of production, central planning, and government-dictated prices. But most people assume it simply means big government, in which case it’s hard to find nations that don’t qualify.

Regardless of the best definition, the reason for my pessimism is simple. It’s a combination of changing demographics and poorly designed entitlement programs.

For all intents and purposes, we’re on a trajectory (the “most predictable crisis in history“) to become another Greece.

The good news is that we probably have a couple of decades before the crisis occurs. The bad news is that our political class seems to have no interest in the reforms that would be necessary to avert the crisis.

Though maybe the crisis will occur sooner than we think. I wrote back in 2015 that the debate between Hillary Clinton and Bernie Sanders was merely a discussion over how fast we should drive in the wrong direction.

Well, Crazy Bernie didn’t get the nomination, but he seems to have won the war for the soul of the party. As I point out in this second clip, the radicals are now in the ascendancy on the left.

By the way, here’s the interview with Thomas Sowell that was used as a lead-in to my interview. He may be even more pessimistic than I am.

Though you’ll notice that Professor Sowell included a caveat, speculating that maybe there will be some unforeseeable development that saves the western world (or perhaps just the United States) from gradual decay.

Let’s close this column with some optimism on that point.

I’m old enough to remember the malaise of the 1970s, which wasn’t just based on the economic mess caused by Nixon-style and Carter-style statism. Many people also thought capitalism was no better than communism and that we needed to find some sort of middle ground (and some economists were horribly guilty of this sin).

Thankfully, Reagan had a different approach (including mockery rather than moral equivalence) and the western world won the Cold War.

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Image credit: Max Pixel | CC0 1.0.

Why the U.S. and the Worldwide Tax Systems Have Run Amok

Mon, 03/11/2019 - 12:13pm

[PDF Version]

Why the U.S. and the Worldwide Tax Systems Have Run Amok

By Bruce Zagaris*

The ever-growing complexity and reach of the U.S. tax system impinges on the ability of U.S. taxpayers to live abroad, work abroad, open bank accounts abroad, or conduct business abroad. The difficulties caused by extraterritorial taxation are exacerbated by similar moves by other nations, often implemented as a response to aggressive policies by the United States. These developments create a challenging environment, with taxpayers being subject to onerous – and sometimes conflicting – requirements. The complex array of obligations put taxpayers in legal jeopardy as governments threaten to impose sanctions on investors and businesses – or even on other governments. Meanwhile, many of the disputes in international tax matters emanate from the overbroad extraterritorial reach of tax authorities.

The United States

A unique aspect of the U.S. tax system is that it requires citizens, permanent residents, and tax residents to report and pay taxes on their worldwide income even if they live overseas and their income is earned in other nations. To enforce this approach, the U.S. has imposed a plethora of byzantine overlapping reporting requirements and has levied heavy penalties for persons who run afoul of the regime. Moreover, IRS resources are now more focused on dealing with the metastasizing complexity of domestic provisions of the tax code. As a result, the IRS has reduced its workforce dedicated to overseas issues, thereby depriving U.S. taxpayers overseas of their ability to obtain advice from the IRS. For the common taxpayer, speaking to the right tax official who can provide practical answers has become almost impossible at a time when the U.S. tax system becomes increasingly complex and inscrutable.

The U.S. has even proactively prosecuted individuals and companies for cross-border tax activities that do not violate American laws. In 2005, in the Pasquantino case the U.S.  Supreme Court affirmed the conviction of two individuals for helping violate the liquor excise tax in Canada.  The U.S. has prosecuted foreign banks, asset managers, lawyers, and other professionals for helping U.S. taxpayers violate U.S. tax law with respect to their foreign assets and income.

The paperwork and reporting requirements for cross-border economic activity are extensive.

  • Since 1970, pursuant to the Bank Secrecy Act, U.S. taxpayers must file Foreign Bank Account Reports (FBARs), now known as FinCEN 114 reports, if they have a financial interest in, or signature or other authority over, foreign financial accounts in which the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. A willful failure to file can incur a civil penalty of as much as 50% of the value of the foreign account, with no cap for each violation, per year.[1]S. taxpayers must file a report when they send or receive more than $10,000 in monetary instruments, including currency, into or out of the U.S.[2]
  • If a U.S. transferor of property to a foreign trust, or a U.S. recipient of a distribution of more than $100,000 from a Non-Resident Alien (NRA) or a foreign estate or from such a trust, fails timely to file a Form 3520 to report these transactions, the IRS may impose a penalty equal to 35% of the gross value of the property transferred to or received from the trust.
  • Certain U.S. citizens and residents who are officers, directors, or 10% shareholders in certain foreign corporations must file Form 5471 and its schedules to fulfill the reporting requirements of IRS, sections 6038 and 6046, and the related regulations. Additional reporting requirements require filings in connection with owning interests in foreign partnerships (Form 8865).
FATCA

The icing on the cake of intrusiveness and costly compliance is the Foreign Account Tax Compliance Act.

In March 2010, the U.S. Congress enacted FATCA, responding to U.S. tax non-compliance by providing enhanced transparency with respect to assets and investments held by U.S. persons outside the U.S. Its purpose is to guarantee that U.S. persons with financial assets outside the U.S. declare their income and assets. The law is very complex and important for financial institutions and other foreign businesses and individuals. The IRS has issued over 500 pages of technical guidance with over 100 technical terms that require an enormous investment of time to understand its concept and operation.

FATCA requires “foreign financial institutions” (FFIs) and other foreign entities receiving payments from U.S. sources to develop due diligence programs to identify U.S. account holders and report information with respect to their accounts annually to the IRS.  To facilitate compliance, FATCA requires U.S. Withholding Agents to withhold 30% on U.S. sourced payments and payments subject to Pass Through Withholding to foreign institutions/entities that do not comply.

Many countries have complained that complying with FATCA would violate their fundamental laws. To overcome this problem, the U.S. has concluded International Governmental Agreements (IGAs) with other countries. These IGAs are mini-tax information exchange agreements. However, the U.S. has not fully reciprocated with the IGAs, as U.S. law does not authorize the exchange of certain information that the U.S. nonetheless requires other countries and FFI to exchange.

A recent study by the European Parliament PETI Committee states that FATCA amounts to the unilateral exercise of extraterritorial legislative jurisdiction in most cases not based on reciprocity, triggering systemic conflicts with the General Data Protection Regulation (GDPR) and undermining the multilateral systems of automatic exchange of information to which the U.S., the EU, and the international community undertook at the time the U.S. government proposed the Intergovernmental Agreements (IGAs) with other countries. On May 15, 2018, Valere Moutarlier, the EU’s head of direct taxation, told a new European Parliament tax investigative committee that if the U.S. does not conform FATCA to the Common Reporting Standard by June 2019, the EU should put the U.S. on its tax blacklist.

FATCA has amended IRC, §6038D(d) and requires certain U.S. taxpayers holding “specified foreign financial assets” (SFFAs) to report those assets on IRS Form 8938 and file the form with the taxpayer’s annual return if the aggregate value of interest in SFFAs exceeds applicable thresholds ($50,000). Failure to file Form 8938 will suspend the statute of limitations for the taxpayer’s entire return. Civil penalties for failure to report this information are $10,000. Additional $10,000 penalties apply to a maximum of $50,000 after the IRS gives notice. The filing of FinCEN 114 and IRS 8938 are overlapping and confuse taxpayers.

An important U.S. tax policy issue is that many states in the U.S. impose tax on and/or require reporting on a worldwide basis. On the one hand, many of them confer tax, secrecy, and other incentives to attract diverse financial services, such as asset protection and other trusts, captive insurance, and bank accounts. On the other hand, they issue tax haven blacklists and impose countermeasures on entities doing business in so-called tax havens. When foreign governments have complained to the U.S. Treasury about the illegality of state tax haven countermeasures, the U.S. Treasury has responded that the states are sovereign in their ability to take tax decisions.

Organization for Economic Cooperation and Development

Extraterritorial tax enforcement by the United States has encouraged similar behavior by other nations.

As a result of FATCA, the Organization for Economic Cooperation and Development has issued in July 2014 the Common Reporting Standard (CRS), which is a multilateral version of FATCA. It comes with over 500 pages of its own technical regulations. While it uses concepts similar to FATCA, the CRS has different substantive (it is based on the residence rather than citizenship of the taxpayer) and procedural features, requiring financial institutions and professionals to master these technical terms and impose still another framework on their clients.

In connection with the CRS, the OECD has developed compliance and enforcement initiatives.  The OECD has issued mandatory disclosure rules to combat CRS avoidance and offshore structures.  They bring a new layer of reporting that increase the burdens on intermediaries. Criticisms are that the rules are vague insofar as they require intermediaries to “reasonably be expected to know of a CRS Avoidance Arrangement or an Offshore Structure” and can be interpreted differently in different jurisdictions.

The consultation was released right before the Christmas holiday and gave only thirty days for comment. An industry criticism concerns the undesirability of imposing on citizens a legally enforceable duty to inform on one another. The new rules apply retrospectively, thereby challenging the rule of law.  The consultation endangers the entitlement of citizens to obtain confidential independent professional advance rulings about the application of law to their particular circumstances. In addition, the OECD has issued consultation documents on preventing abuse of residence by investment schemes to circumvent the CRS. The OECD is considering imposing additional requirements on all stakeholders involved, including the jurisdictions offering these schemes, the tax administrations of jurisdictions participating in the CRS, financial institutions subject to CRS reporting, the intermediaries promoting the schemes, and taxpayers.

BEPS

Many of the above laws and regulations target investors, entrepreneurs, and small businesses. But extraterritorial tax rules also are impinging on corporations. In response to the G-20 identification in 2012 of so-called base erosion and profit shifting by multinational enterprises as a major threat to fiscal stability, the OECD produced a “BEPS Action Plan” in a specially created working group. In 2013, the G-20 endorsed that action plan and mandated that the OECD act on the 15 issues identified in the Action Plan.

The OECD claims that its 15 Action Plans, produced in a compressed period of two years, strengthens the coherence of international corporate income tax law, mainly by combating “double non-taxation”; in part insisting that a deduction in one country of a transnational, intra-company transaction should equal a taxable inclusion on the other side. The Plans also realign taxation and “substance” by requiring that MNCs recognize income in the territories where value is created; and providing improved transparency and a more stable compliance environment for all stakeholders.

Many commentators characterize the BEPS Action Plan as an ad hoc response to a laundry list of issues that were raised by various sovereigns but left unaddressed by the OECD over the last few decades.

The OECD is attempting to implement the Action Plans through peer reviews. Until now, the peer reviews have been effective mainly against small countries. Their use against large countries or international organizations, such as the EU, which continues to apply its own rules, such as through the state aid mechanisms, remains to be seen.

Meanwhile, many tax authorities are using the BEPS process to proactively impose new tax rules against MNCs. The United Kingdom’s and Australia’s Diverted Profits tax (DPT) laws impose a penalty tax (40 per cent) in circumstances such as in Australia where the amount of Australian tax paid is reduced by diverting profits offshore through related-party arrangements. The DPT is extremely broad (for example, both financing and non-financing arrangements are in scope), and will apply to a significant number of multinational groups and will create uncertainty to affected entities. The DPT is likely to trigger a proliferation of disputes and litigation.

In addition, The Multinational Anti-Avoidance Law (MAAL) amended Australia’s anti-avoidance rules by introducing a targeted anti-avoidance law that applies to multinationals that supply goods or services to Australian customers and record the revenue from those sales overseas.  The law will apply where an Australian related entity of the foreign seller performs activities connected with the sales (such as marketing services), and it would be concluded that the arrangement was entered into with a principal purpose of avoiding tax in Australia or reducing their foreign tax liability. Where the MAAL applies, the foreign entity will be taxed as if it had made the sales through a deemed Australian permanent establishment (PE) and will be subject to Australian income tax on the notional profits attributable to the deemed PE. More withholding taxes may be imposed. Penalties will apply on top of these taxes, generally at a rate of 100 per cent.

The European Union

The EU has taken a series of aggressive steps to impose tax on cross-border transactions.  Since June 2013, the EU has started investigations of individual tax rulings and challenged other tax arrangements of Member States under EU state aid rules. In particular, the EU found that Luxembourg, the Netherlands, and Ireland had granted selective tax advantages to a number of multinationals. In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinational groups under Belgium’s “excess profit” tax scheme were illegal under EU state aid rules.

State aid rules arguably are not suited to deal with the use of mismatches by multinational entities between national tax laws to lower their tax burdens. State aid is a mechanism to address cases where a member state has made an exception to its own rules and given a specific company an advantage. To know whether that is the case, one has to understand how corporate taxation works.

International corporate tax principles require that companies pay taxes where value is created. In the modern world, companies create value through design, marketing and intellectual creativity. The situs of those activities is where the profits really originate. Hence, companies should pay tax where they undertake research and development and produce intellectual property and not primarily where the products are made or sold.

The tax laws of different countries permit multinational corporations to allocate much of their income in low-tax or no-tax jurisdictions, and many of their expenses in high-tax jurisdictions, thereby significantly reducing their tax liabilities.

EU member states have a sovereign right to determine their own tax laws. State aid cannot be used to rewrite those rules. However, the state aid investigations into national tax rulings constitute a radical new approach to so-called transfer-pricing rules that determine where profits shall be allocated.

On December 5, 2017, the EU issued its conclusions on the EU list of non-cooperative jurisdictions for tax purposes. The conclusions also set forth the criteria and proposed sanctions for the countries blacklisted.

The purpose of the program and list of non-cooperative jurisdictions for tax purposes is to combat tax evasion and avoidance and enable the EU to more robustly combat external threats to EU Members’ tax bases and third countries that “consistently refuse to play fair on tax matters.” Until now, a patchwork approach has had limited impact.

During the debate, MEPs deplored the lack of transparency surrounding the compilation of the list and especially the lack of information about the criteria for removal of a country from the blacklist.

During a February 29 hearing of the European Parliament, outside experts and EP members criticized the weak and opaque criteria in the process. One of the important criteria is “fair tax competition:  the country should not have harmful tax regimes, which violate the principles of the EU’s Code of Conduct or OECD’s Forum on Harmful Tax Practices.” The ones that choose to have no or zero-rate corporate taxation should ensure that this does not encourage artificial structures without real economic activity. Some of the jurisdictions on the grey list for lack of real economic activity are now in the process of holding discussions with the OECD.

In February 2018, the European Parliament decided to review the extent to which the EU and its member states have implemented the recommendations of the previous special committees on LuxLeaks and the Committee of Inquiry on the Panama Papers. Parliament will investigate tax privileges for new residents or foreign income such as citizenship programs or non-dom regimes. Such distorting privileges are offered by Portugal, Italy, Malta, the United Kingdom and Cyprus. In the context of Brexit, the committee will give particular attention to “the British Crown Dependencies and Overseas Territories.” However, the EU member states are not subject to the investigation, reflecting a discriminatory conception and application of the recommendations.

Conclusion

Overly aggressive tax compliance and enforcement initiatives erode globalization, impede the ability of normal commerce and the movement of people, capital, and goods, and threaten privacy.  The proliferation of overlapping taxes and reporting requirements mean that individuals are faced with aggressive reports from sometimes three levels of government (e.g., federal, state, and local).  Governments, meanwhile, spend inordinate amounts of time preparing for evaluations from multilateral organizations. In turn, governments impose more reporting requirements and penalties on intermediaries and taxpayers. The confidential affairs of taxpayers are increasingly exposed and increasingly find their way onto WikiLeaks or the media.

These legal concerns are augmented by economic worries. Most of the policies reviewed above are only necessary because governments not only tax income, but also impose extra layers of tax on income that is saved an invested, exacerbated by decisions to impose such tax laws on income earned outside national borders. In a neutral, territorial tax system that taxes economic activity only one time, such as the Hall-Rabushka flat tax, almost all international tax conflicts disappear.

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*  Berliner Corcoran & Rowe LLP, Washington, D.C.

The Center for Freedom and Prosperity Foundation is a public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported and receives no funds from any government at any level, nor does it perform any government or other contract work. Nothing written here is to be construed as necessarily reflecting the views of the Center for Freedom and Prosperity Foundation or as an attempt to aid or hinder the passage of any bill before Congress.

_______________________________________________

Endnotes

[1]    31 U.S.C. § 5321.

[2]    31 U.S. C. § 5316 requires filing FinCEN Form 105: A Report of International Transportation of Currency or Monetary Instruments (CMIR).

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Image credit: NikolayFrolochkin | Pixabay License.

Democrats’ Green Energy Crusades Are Always Catastrophic

Sun, 03/10/2019 - 12:26pm

Originally published by The Western Journal on March 9, 2019.

As the march toward the 2020 presidential election begins to pick up steam, Democratic candidates are stumbling over themselves to embrace the next “fresh” and “exciting” big-ticket item on the progressive agenda. Today, that means renewable energy subsidies and a whole lot of them. Sen. Kamala Harris became the latest candidate to proclaim her love for government-mandated renewable energy production. She did so by courageously falling in line with fellow Democratic hopefuls Sen. Elizabeth Warren and Sen. Kirsten Gillibrand in their support of the Green New Deal.

The problems with this plan are threefold: it’s neither green, nor new, nor a deal. Indeed, the left’s hot take on renewable energy is really anything but. Their proposal to spend countless tax dollars to prop up solar, wind and other renewable energy companies is a tried and true method for failure. Whenever liberals attempt to use green energy subsidies in their crusade to save the world from itself, the results have been unfavorable at best, catastrophic at worst. And while it is unsurprising that Democrats have a short memory — they’re embracing socialism outright — it’s clear they need a refresher in the myriad failures of green energy subsidies.

In reality, the left’s fresh take on environmental policy is over 40 years stale. In 1978, in the wake of the nation’s energy crisis, the Carter administration signed the Public Utility Regulatory Policies Act into law. The purpose of this old regulation has quite a familiar ring: to promote conservation efforts and the production of renewable energy. It attempted to accomplish this goal through government mandates. The law forced utility companies to purchase power from renewable sources and offer that energy to consumers at “equitable retail rates,” similar to how government subsidies operate.

The last four decades have shown just how dangerous tampering with the free market can be. PURPA, once an obscure law regulating American utilities, has grown far beyond its original purpose. The regulation has become a significant driver pushing the development of solar projects within the energy sector, but for all the wrong reasons.

Essentially, PURPA hasn’t kept up with market progress. It still forces companies to engage in long-term, fixed-price contracts at costs well above market rates, even though renewable energy is much more plentiful than it was in 1978. As a result, utilities end up purchasing the PURPA-mandated power at a markedly higher price than other clean alternatives. This raises the cost for consumers while disincentivizing the proper use of renewable energy. In effect, the regulation accomplishes the opposite of what it set out to do.

Liberals had to swallow another dose of economic reality in 2010 when the Obama administration created the infamous Solyndra debacle. That year, President Barack Obama heralded the solar energy company Solyndra as “leading the way toward a brighter and more prosperous future.” The company became the president’s exemplar of success in his initiative to expand renewable energy production and green jobs.

The company received over half a billion dollars in subsidies from the federal government in taxpayer-guaranteed loans. Using that money, Solyndra managed to create a meager 585 jobs at a cost to the American taxpayer of nearly one million dollars per head. It worked to develop solar panels for which there was no substantial demand. And just one year later, the company declared bankruptcy, shut down its plant and laid off those workers the government paid so much to hire.

The PURPA and Solyndra embarrassments are certainly a tragic waste of resources. Nevertheless, the failed experiment belies the flawed assumption in the left’s ongoing push for green energy subsidies. They mistakenly believe that the government can select winners and losers more efficiently than the free market can. Green energy subsidies are merely an expression of the belief that throwing government money at renewable energy companies will propel them toward success.

The Green New Deal is merely another iteration in this pattern of failure. Piggybacking off the same misconceptions that plagued both PURPA and Solyndra, the Green New Deal is on the fast track toward catastrophe. Liberals may argue that this most recent plan is different, special and fresh, but history disagrees. And Democrats would be wise to heed its warning.

 

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Image credit: Pedro Xing | CC0 1.0.

Government-Directed Industrial Policy Will Hinder China’s Growth

Sat, 03/09/2019 - 12:52pm

During my early years in public policy, back in the late 1980s, I repeatedly crossed swords with people who argued that Washington should have more power over the economy so that the United States could compete with Japan, which supposedly was an economic juggernaut because of “industrial policy” directed by wise and far-sighted bureaucrats at the Ministry of International Trade and Industry.

Given Japan’s subsequent multi-decade slump, it certainly seems like I was right to warn against giving American politicians the power to pick winners and losers.

But not everybody learned from that experience. In the words of Yogi Berra, “It’s deja vu all over again,” only this time we’re supposed to be terrified because the Chinese government wants to subsidize and promote certain industries as part of “Made in China 2025”.

At the risk of understatement, I’m not scared.

Yes, China has enjoyed some impressive growth since it partially liberalized its economy in the late 1900s, but it will remain far behind the United States unless – as I recently explained on CNBC – there is a new wave of free-market reforms.

Needless to say, a government initiative to favor certain industries is hardly a step in that direction.

Some Chinese policy makers even realize that it’s counterproductive to give that kind of power to politicians and bureaucrats.

Here are some excerpts from a report in the South China Morning Post.

“Made in China 2025” has been a waste of taxpayers’ money, China’s former finance minister Lou Jiwei has said…“[Made in China] 2025 has been a lot of talking but very little was done,” Lou, chairman of the National Council for Social Security Fund, said on Wednesday… “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.” …“The negative effect of [the plan] is to have wasted taxpayers’ money.” He suggested the market should have played a greater role in developing the industries that MIC2025 was designed to push. “The [resources] should have been allocated by the market; the government should give the market a decisive role,” Lou said. “Why has the government pushed so hard on this strategy? [Hi-tech industry prospects] can all change in a few years, it is too unforeseeable.”

Sounds like Mr. Lou learned from Obama’s Solyndra fiasco that cronyism doesn’t work.

But some of his colleagues still need to be educated.

Made in China 2025 (MIC2025) strategy, Beijing’s blueprint for tech supremacy. …Since the plan’s launch in 2015, the government has poured money into MIC2025 to try to turn a number of domestic industries – including artificial intelligence, pharmaceuticals and electric vehicles – into global leaders by 2025. …Lou said: “It [the strategy] should not have been done that way anyway. I was against it from the start, I did not agree very much with it.

I hope senior government officials change their minds about this harmful exercise in central planning.

Not because I’m afraid it will work, but rather because I like China and I want the country to prosper. The partial reforms from last century produced great results for China, including huge reductions in poverty.

Additional reforms could lead to mass prosperity. But that won’t happen if the Chinese government tries to control the allocation of resources.

Let’s close with a big-picture look at central planning and industrial policy, starting with the common-sense observation that there are degrees of intervention.

Here’s my back-of-the-envelope perspective. We have examples of nations, such as the Soviet Union, where the government had near-total control over the allocation of labor and capital. And I suppose Hong Kong would be the closest example of a laissez-faire jurisdiction. And then there’s everything in between.

I’ve already shared two great videos on government planning versus the market. I strongly recommend this Prager University video, narrated by Professor Burton Folsom, on the failure of government-dictated investment. And also this video narrated by Professor Russ Roberts, which shows how a decentralized market efficiently provides a bounty to consumers.

Here’s a third, which celebrates the work of the late Don Lavoie, one of my professors when I studied at George Mason University.

By the way, there is a terrible flaw in the video. The photo that appears at 1:38 shows select faculty and students in 1987. Why is that a flaw? For the simple reason that I was part of the photo but got cropped out in the video.

P.S. Some people worry that China’s industrial policy will have a negative spillover effect on the United States because American companies will lose market share to the subsidized Chinese companies. That’s a legitimate concern and American officials should use the World Trade Organization to counter mercantilist policies.

P.P.S. To my dismay, some people don’t want China to become a rich nation. I assume those people are hoping China follows the advice of the OECD and IMF.

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Image credit: wuwow | Pixabay License.

Individualism and Society

Fri, 03/08/2019 - 12:48pm

When talking with people who dislike free enterprise, it’s quite common that they will admit (at least once I share some of the evidence) that markets produce more prosperity than statism.

But that generally doesn’t convince them. In part, this is because they believe it is wrong to have significant income disparities. Especially if they’ve been snookered into thinking that the rich are getting richer at the expense of the poor.

To be fair, they generally don’t favor rabid redistribution. And I rarely find anyone who agrees with the twisted IMF prescription to hurt the poor so long as the rich suffer even more. But it bothers them that some people are poor and others are rich.

They’re also skeptical about capitalism because they think it implies the stereotype of a Randian world of ultra individualism where people are so fixated on making money that family and community are afterthoughts.

It is true that individualism-based societies generate much more prosperity than collectivism-based societies, at least according to research from scholars at the University of California at Berkeley.

But does that additional growth come at a cost? Are individualism-based societies cold, harsh, and disconnected?

We have the answer, thanks to a study authored by academics at the University of Tartu in Estonia. They investigated this very issue.

Many social scientists have predicted that one inevitable consequence of modernization is the unlimited growth of individualism, which poses serious threats to the organic unity of society. Others have argued that autonomy and independence are necessary conditions for the development of interpersonal cooperation and social solidarity. We reanalyzed available data on the relationship between individualism-collectivism and social capital within one country (the United States) and across 42 countries.

They considered the hypothesis that individualism corrodes community.

…many theorists have seen the unlimited growth of individualism as a threat to the organic unity between individuals and society. Particularly in France, the concept of individualism has historically carried a negative meaning, denoting individual isolation and social dissolution… For many critics, individualism mainly fosters social atomization, which, in its turn, leads to the disappearance of social solidarity and to the dominance of egoism and distrust. …Thus, in the opinion of communitarians, society should exert a balancing force to excessive individualism, which endangers both individual rights and civic order.

And they also considered the opposite hypothesis, which says that individualism builds social capital.

…individualism does not necessarily jeopardize organic unity and social solidarity. On the contrary, the growth of individuality, autonomy, and self-sufficiency may be perceived as necessary conditions for the development of interpersonal cooperation, mutual dependence, and social solidarity. …normative or ethical individualism even elevates social welfare by promoting trust as well as by encouraging people to work creatively, from which others can benefit…individualism (as it is conceptualized in psychology) is also associated with higher self-esteem and optimism…individualistic cultures are higher on subjective wellbeing…and they report higher levels of quality-of-life… People in individualistic cultures tend to have more acquaintances and friends…they are more extraverted and open to new experience…and they are more trusting and tolerant toward people of different races.

The authors crunched numbers for states and nations.

Here’s what they found in American states.

…states with higher levels of social capital tend to be more individualistic. According to Figure 1, high levels of both community-based social capital and individualism prevail in the states that belong to the Plains region: Montana, North Dakota, South Dakota, and Nebraska. Low social capital and collectivistic tendencies, on the other hand, can be found in the area of the former Confederacy, in the states of South Carolina, Louisiana, Mississippi, Georgia, and so on.

As you can see, there’s a clear correlation showing that more individualism is associated with higher levels of social capital.

And the same is true for countries.

Figure 2 shows that the countries with the highest levels of interpersonal trust are the countries most characterized by high levels of individualism: Finland, Norway, Sweden, Denmark, the Netherlands, Canada, and the United States.

As you can see from the chart, interpersonal trust and individualism are correlated.

As is so often the case, it’s interesting to look at the outliers.

The authors note that Utah and Nevada are outlier states. I’m assuming those results may have something to do with Mormonism and gambling, respectively. But maybe there are other explanations.

Looking at nations with high levels of interpersonal trust, China is a big outlier at one end and the Nordic nations are outliers at another end. For what it’s worth, the authors admit that the Chinese results are counterintuitive.

Now let’s circle back and consider policy implications.

I’ve argued that big government undermines charity, it undermines civil society, and that it undermines societal capital as well.

In a free society, by contrast, people have the ability to strive and prosper in order to have the time and resources to enjoy the things – such as family, neighborhood, friendship and community – that are the sources of happiness and contentment.

Though I confess I’m not sure how to best explain this to skeptics.

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Image credit: National Park Service | .

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