Archive for July, 2010
How Big Were the Bush Tax Cuts?
The debate on extending the Bush tax cuts has begun. Those opposed to extension argue that the cuts would greatly increase the federal deficit.
The first thing to note is that extending all the 2001 and 2003 tax cuts would lose the government about $216 billion a year in 2012 and rising amounts after that (see page 16). By contrast, federal spending in 2011 will be almost $2 trillion higher than in 2001 when the first Bush tax cuts were passed. Thus, in a rough sense, spending increases have had a nine times greater impact on our changed budget situation since 2001 than have tax cuts.
How big were the Bush tax cuts compared to previous tax legislation? One way to compare different tax bills is to look at the initial projections of the effects when they were passed. I assembled the figure below based on official scores of past tax legislation, as reported by the CBO at the time. The revenue effects of each tax bill are measured over the first five years as a share of GDP.
The figure shows that the Bush tax cuts were small compared to the Reagan tax cuts of 1981. The Revenue Act of 1978 was also a big tax cut. Note that the Tax Reform Act of 1986 was scored as being revenue neutral, and thus isn’t shown.
The figure also shows that the combined effect of tax cuts from 1997 forward were not large enough to offset the tax hikes under Reagan and the first Bush between 1982 and 1993.
I have a detailed discussion of federal tax policy between 1994 and 2004, here.
Controversy? Or Confidence Game?
While Washington, D.C. and the newstalk-osphere are gripped by the story of forced-out USDA bureaucrat Shirley Sherrod, six appropriations subcommittees have advanced FY 2011 spending bills that will collectively spend over $4,000 per U.S. family. (They’ll get to the big ones later.)
Are you paying attention? What are you paying attention to?
There are important social and political kernels within the Sherrod story (and “Journolist”), but in the context of Washington policymaking, they might just be distraction.
The White House Has Declared Class War on the Rich, but the Poor and Middle Class Will Suffer Collateral Damage
The 2001 and 2003 tax cuts are scheduled to expire at the end of this year, which means a big tax increase in 2011. Tax rates for all brackets will increase, the double tax on dividends will skyrocket from 15 percent to 39.6 percent, the child credit will shrink, the death tax will be reinstated (at 55 percent!), the marriage penalty will get worse, and the capital gains tax rate will jump to 20 percent. All of these provisions will be unwelcome news for taxpayers, but it’s important to look at direct and indirect costs. A smaller paycheck is an example of direct costs, but in some cases the indirect costs — such as slower economic growth — are even more important. This is why higher tax rates on entrepreneurs and investors are so misguided. For every dollar the government collects from policies targeting these people (such as higher capital gains and dividend taxes, a renewed death tax, and increases in the top tax rates), it’s likely that there will be significant collateral economic damage.
Unfortunately, the Obama Administration’s approach is to look at tax policy only through the prism of class warfare. This means that some tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. The folks at the White House apparently don’t understand, however, that higher direct costs on the “rich” will translate into higher indirect costs on the rest of us. Higher tax rates on work, saving, investment, and entrepreneurship will slow economic growth. And, because of compounding, even small changes in the long-run growth rate can have a significant impact on living standards within one or two decades. This is one of the reasons why high-tax European welfare states have lost ground in recent decades compared to the United States.
When the economy slows down, that’s not good news for upper-income taxpayers. But it’s also bad news for the rest of us — and it can create genuine hardship for those on the lower rungs of the economic ladder. The White House may be playing smart politics. As this blurb from the Washington Post indicates, the President seems to think that he can get away with blaming the recession on tax cuts that took place five years before the downturn began. But for those of us who care about prosperity more than politics, what really matters is that the economy is soon going to be hit with higher tax rates on productive behavior. It’s unclear whether that’s good for the President’s poll numbers, but it’s definitely bad for America.
Treasury Secretary Timothy F. Geithner took the lead Sunday in continuing the Obama administration’s push for extending middle-class tax cuts while allowing similar cuts for the nation’s wealthiest individuals to expire in January. …The tax cuts, put in place between 2001 and 2003, have become an intensely political topic ahead of the congressional elections this fall. Republicans have argued that extending the full spectrum of tax cuts is essential to strengthening the sluggish economic recovery. Geithner rejected that notion, telling ABC’s “This Week” that letting tax cuts for the wealthiest expire would not hurt growth. …On Saturday, the president used part of his weekly address to chide House Minority Leader John A. Boehner (Ohio) and other Republicans who oppose the administration’s approach, saying the GOP was pushing “the same policies that led us into this recession.”
New York Times vs. the Constitution
Last Monday, the New York Times ran an editorial, “The Republicans and the Constitution,” lamenting how Elena Kagan’s nomination ”has become a flashpoint for a much larger debate about the fundamental role of American government.” (I, of course, was hoping that this was the direction the debate would go.) The Old Gray Lady was particularly aghast that Congress’s expansive use of the Commerce Clause was being maligned. Don’t those retrograde obstructionists know that as long as the government passes laws the progressive elite — especially the New York Times editorial board — deigns beneficial, no silly constitutional arguments can possibly be germane?
As you could expect, I found quite a bit to quibble with here, so I wrote a letter to the editor. My letter wasn’t published, but you can still read it here:
Your editorial stumbles onto an inconvenient truth: The debate over Elena Kagan’s nomination is indeed one about the “fundamental role of American government.” That’s a good thing! The opposition to Kagan is not based on petty partisanship or the politics of personal destruction but instead on principled concerns about whether the nominee sees any constitutional limits on federal power.
You rightly focus on the Commerce Clause aspect of this issue because so many federal excesses have been perpetrated in that provision’s name. But if Congress can, under the guise of regulating activities that “substantially affect interstate commerce,” tell farmers what to grow in their backyards—as the Supreme Court said in the 1942 Wickard v. Filburn case—is it really so “silly” for Senator Coburn to ask a judicial nominee whether, in the name of lowering healthcare costs, Congress can require that we all eat nutritious foods?
You’re also correct that the Court recently approved Congress’s ability to confine sex offenders—but it did so, narrowly, under the Necessary and Proper Clause, after Solicitor General Kagan abandoned the Commerce Clause argument that had been wholly rejected in the lower courts.
And so, as you say, a vote against Kagan is indeed about more than her or President Obama—but that doesn’t mean it’s a vote against various statutes that you like. There are good reasons for arguing that some of these laws weren’t good ideas, but that’s beside the point. The point is that there’s a difference between law and policy and that raising the issue of constitutionality is not an “ideological fuss” or “excuse” but goes to the core of this nation’s first principles.
The Constitution creates a government of delegated and enumerated—and therefore limited—powers, and so much of the discontent in the country is about the basic question of where the government gets the power to do whatever it wants. Let the debate continue!
Here are some related thoughts from Cato adjunct scholar Tim Sandefur, reacting to the same editorial.
Randy Barnett in the Wall Street Journal: “A Commandeering of the People”
Cato senior fellow Randy Barnett is the subject of the Wall Street Journal‘s nearly-full-page Weekend Interview. Randy talks about interpreting the Constitution with “a presumption of liberty,” the subtitle of his book Restoring the Lost Constitution; about the Supreme Court’s expansion of government power from Wickard v. Filburn to Gonzales v. Raich; and especially about the constitutionality of the new health care bill and its individual mandate. Randy wrote an amicus brief with Cato in support of the Virginia attorney general’s challenge to the health care mandate.
“What is the individual mandate?” Mr. Barnett says. “I’ll tell you what the individual mandate, in reality, is. It is a commandeering of the people. . . . Now, is there a rule of law preventing that? No. Why isn’t there a rule of law preventing that? Because it’s never been done before. What’s bothering people about the mandate? This fact. It’s intuitive to them. People don’t even know how to explain it, but there’s something different about this, because it’s a commandeering of the people as a whole. . . . We commandeer people to serve in the military, to serve on juries, and to file a return and pay their taxes. That’s all we commandeer the people to do. This is a new kind of commandeering, and it’s offensive to a lot of people.”
For the full legal argument, read the brief.
Making Transit More Cost-Effective
The Federal Transit Administration (FTA) has asked for public comment on Transportation Secretary Ray LaHood’s proposal to eliminate a rule that limits federal funding of particularly wasteful rail transit projects. The Cato Institute has submitted comments arguing that, instead of eliminating the rule, the FTA should strengthen it, but also give transit agencies more flexibility in defining the goals of new projects.
Since 1970, American cities have spent nearly $100 billion building new rail transit projects, and tens if not hundreds of billions more running them. While new rail lines appeal to the egos (and campaign coffers) of elected officials, they do little that could not be accomplished for a lot less money by simple improvements in bus service. Even Peter Rogoff, the Obama administration’s appointee in charge of the FTA, recently admitted that “paint is cheap, rail systems are very expensive,” meaning that painting buses a special color and running them on specific routes can accomplish just as much as spending billions on new rail construction.
DISCLOSE Again and Maybe for the Last Time
The DISCLOSE Act, slightly modified, is headed for a cloture vote on Tuesday afternoon. The alterations to the bill have changed few minds outside of Congress. It remains to be seen whether the modification in the bill — the sponsor removed a passage allowing labor unions to transfer funds among its affiliates — will be enough to attract enough support to achieve cloture.
My policy analysis of DISCLOSE applies to the altered bill.
The Center for Competitive Politics provides an analysis of the altered bill here.
The American Civil Liberties Union is sending around a letter of opposition that states “we believe this legislation would fail to improve the integrity of our campaigns in any substantial way while significantly harming the speech and associational rights of Americans.”
The ACLU has four objections to the altered bill:
- The DISCLOSE Act fails to preserve the anonymity of small donors, thereby especially chilling the expression rights of those who support controversial causes.
- The DISCLOSE Act would chill not only express advocacy on political candidates, but also issue advocacy.
- The DISCLOSE Act imposes impractical requirements on those who wish to communicate using broadcast messages.
- The DISCLOSE Act imposes unjust restrictions on contractors, TARP participants and corporations with minimal foreign participation.
Taxes Are for the Little People, not John Kerry
In the future, dictionary publishers should get rid of their existing definitions for “hypocrisy” and replace them with a photo of Massachusetts Sen.ator John Kerry. He’s just been caught committing the horrible sin of saving his family more than $500,000 by domiciling his new yacht in Rhode Island (which is a tax haven for such luxuries) rather than his home state. Or at least Senator Kerry says that tax planning is a horrible sin when conducted by “Benedict Arnold” companies and facilitated by those wicked tax havens. But I guess that it’s not such a bad thing when Senator Kerry is protecting his wealth. For the rest of us peasants, it’s our job to meekly get in line and submit to whatever taxes Senator Kerry graciously decides to impose.
The Boston Herald reports:
Sen. John Kerry, who has repeatedly voted to raise taxes while in Congress, dodged a whopping six-figure state tax bill on his new multimillion-dollar yacht by mooring her in Newport, R.I. Isabel — Kerry’s luxe, 76-foot New Zealand-built Friendship sloop with an Edwardian-style, glossy varnished teak interior, two VIP main cabins and a pilothouse fitted with a wet bar and cold wine storage — was designed by Rhode Island boat designer Ted Fontaine. But instead of berthing the vessel in Nantucket, where the senator summers with the missus, Teresa Heinz, Isabel’s hailing port is listed as “Newport” on her stern. Could the reason be that the Ocean State repealed its Boat Sales and Use Tax back in 1993, making the tiny state to the south a haven — like the Cayman Islands, Bermuda and Nassau — for tax-skirting luxury yacht owners? Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say Isabel sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000. …[S]tate Department of Revenue spokesguy Bob Bliss confirmed the senator “is under no obligation to pay the commonwealth sales tax.”
Liberty Requires Risk
That’s the message of my recent op-ed in the Daily Caller. New York City Mayor Michael Bloomberg’s initial reaction to the McDonald v. City of Chicago decision was to say that McDonald would have no impact on government’s ability to keep guns “out of the hands of criminals and terrorists.” This was a reference to legislation that Bloomberg supports that would allow the federal government to bar anyone the Attorney General thinks is a terrorist from purchasing a firearm. Not convicted of a crime in support of terrorism — that would make them a felon and already unable to purchase or own a firearm. No, being suspected of activity in support of or preparation for terrorism means you get the same treatment as if you were a convicted felon or had been involuntarily committed to a mental institution. So much for due process.
While D.C. v. Heller is the relevant decision (the AG’s double secret probation list is a federal, not state action), the premise of this legislation needs to be refuted. The proposition that guns and gun ownership are uniquely dangerous such that the right to keep and bear arms must be treated as a second-class provision of the Bill of Rights is willfully blind of the other instances where society accepts risk by safeguarding liberty in the face of foreseeable hazards. Justice Stephen Breyer embraced this misguided concept –– that the right to keep and bear arms is an enumerated, but non-fundamental, right that deserves a lesser degree of protection than the rest of the provisions of the Bill of Rights — in his McDonald dissent.
I counter that notion in this podcast:
Related thoughts from Ilya Somin here.
This Week in Government Failure
Over at Downsizing Government, we focused on the following issues this week:
- The Obama economic strategy is reminiscent of Kevin Costner’s character in the movie Field of Dreams: “Subsidize it and they will come.”
- In the past decade, federal spending per household has gone through the roof.
- Former Senate majority leader Trent Lott says that the Republican leadership should “co-opt” new senators who want to cut government spending. This is the same guy who, prior to the 2006 elections, privately advised Republican senators to scare voters into keeping them in the majority.
- Greece’s Hellenic Railways and our Amtrak have a lot in common. That’s not a good thing.
Immigration Law Enforcement and False Arrests
Cato hosted a forum the other day about immigration policy and the controversial Arizona law that will be going into effect on July 29. Dan Griswold made the case for comprehensive immigration reform while I offered a critique of the Arizona law. Mark Krikorian from the Center for Immigration Studies was invited to offer a contrary perspective, which is the type of event we like to host — where a civil exchange of views can take place.
Mr. Krikorian is continuing the debate now on his blog. Since his blog post takes a shot at my remarks, I’ll offer a rejoinder here.
By way of background, there are at least four problems with Arizona’s move to involve local police in immigration law enforcement. First, crime victims will be more reluctant to call on the police about violent crimes because they will fear deportation. Second, police resources are scarce. Priorities must be set. Why divert personnel who are trying to respond to (or investigating) violent crimes so that they can arrest, book, and process men and women who pose no danger to the community? The police chief in Phoenix, Jack Harris, among many others, says the Arizona law will make things worse, not better. Third, the Arizona law criminalizes honest work. It is now a crime for an “unauthorized alien” to pick fruit in a field, wash cars, or clean homes or offices. The worry used to be that people were crossing the border to take advantage of welfare benefits. Now policymakers are making work a crime! My fourth point was that involving local police in immigration enforcement will lead to scores of false arrests and that Hispanic Americans and Hispanic legal residents will be the ones enduring these false arrests.
The first thing to note about Mr. Krikorian’s post is that he did not respond to any of those points. What he does say is that I showed a video clip of an obnoxious and boorish guy who refused to answer questions from the police. He says that I believe the guy is a “hero” and that libertarians are “utopian” and favor “anarchism.” Hmmm. These are fanciful statements and I will leave it to fair-minded readers to judge the merits of those claims for themselves. (To follow this exchange further, one should check out the film clip here, though I only showed about a 4 minute excerpt at the Cato forum due to our time constraints.)
In order to examine the scope of government power regarding detentions and questioning, one must necessarily find that line between a lawful detention and an illegal false arrest. These encounters are very rarely captured on film so I thought the film clip might prove useful. In a contest of manners, Mr. Krikorian may be right, that the activist in the car gets indignant very quickly as the police refuse to answer his question, “Am I being detained or am I free to leave?” Let’s concede that right here. On the law, however, the police are wrong. And that was my point.
Let me explain. This incident did not occur at a border crossing where passports must be shown. This was not a traffic stop where license and registration must be presented by the driver. This was some “checkpoint” where the police were trying to question all comers without a warrant, probable cause, or reasonable suspicion. The police did their best to use a “show of authority” to pressure drivers to answer questions that they were under no legal obligation to answer. It was a false arrest. Was it a really awful false arrest? No — it was a false arrest that lasted about ten minutes.
One problem in this area is that 99 out of 100 people will cave in under the illegal pressure by the cops (“you are not free to go until you answer our questions”). Now I know that many are quite happy to answer the questions — that is their choice. Others may get upset when they discover that their right to decline to answer questions was violated — but how many will go to the trouble of hiring a lawyer to bring a lawsuit to check this kind of government overreaching? Virtually none, which means the law offers little practical protection for persons against false arrests, which means there might be quite a lot of them.
Mr. Krikorian may believe that illegal immigration is so serious a problem that it requires more soldiers, more highway checkpoints, stiffer employer sanctions, the criminalization of work, and more ID checks for pedestrians inland, but it is just silly to say that those who disagree with him are “utopian.”
Investors: Fear the Process That Gave Us ObamaCare, Not Efforts to Repeal It
Ezra Klein writes:
So long as the political system is working reasonably well, we can get out from even quite a lot of debt. But the more it breaks down — the more the market sees things like the deficit commission rejected by its Republican sponsors in Congress, the more it hears threats to repeal the deficit reduction in health-care reform, the more it seems likely that Democrats will become just as unreasonably obstructionist when they become the minority — the more it has reason to worry.
I doubt that investors worry more when they hear threats to repeal ObamaCare or its Medicare cuts, which few took seriously in the first place. Given that the non-partisan Congressional Budget Office, the non-partisan chief actuary of the Medicare program, and even the International Monetary Fund have all expressed skepticism that those cuts will take effect, I expect investors have already discounted claims that ObamaCare will reduce the deficit.
More generally, the problem is not that the political system is breaking down. That system is working pretty much the same way it always has and always will: it promotes irresponsibility. Republicans and Democrats are merely responding to the incentives created by the system in which they operate. (If they didn’t respond to those incentives, the political system would throw them out and replace them with people who do.) If investors don’t already understand that, the sooner the better.
This is why responsible people want to take responsibility for our health care, etc., out of the hands of politicians.
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