Archive for December, 2010
Senator Reid’s Gamble
My colleague Dan Mitchell has already written about the tax deal reached between President Obama and congressional Republicans. But there might be something in the package for people wishing to play poker freely online.
Sen. Harry Reid (D., Nev.) is apparently circulating draft legislation to overturn the Unlawful Internet Gambling Enforcement Act of 2006, which blocked financial institutions from processing transactions with online gambling companies. I would characterize that as a good move overall, apart from three quibbles. First, the draft legislation would — you guessed it –place a tax on the wagers (you didn’t think you’d get your freedom back without conditions, did you?). Second, the bill applies only to poker, and continues to prohibit “Internet gambling” more broadly. And third, the fine-print sounds problematic from a trade policy (and trade law) point of view:
…Mr. Reid’s office is considering language that would allow only existing casinos, horse tracks and slot-machine makers to operate online poker websites for the first two years after the bill passes, which could limit the ability of other companies to enter the market.
Carving out this fast-growing market for established gambling service providers sets off my protectionist alert. The cosy little cartel wouldn’t just exclude domestic potential competitors; I wrote a short paper a few years ago on how the UIGEA got the United States into hot water with the World Trade Organization, and the same arguments apply today. The United States still — despite vague, and so far empty, talk about changing its commitments with WTO members — has an obligation under the General Agreement on Trade in Services to open its market to online gaming operators abroad.
Politico has more about the groups supporting this move, suggesting (as are many Republicans opposed to internet gambling) that Reid has seen religion on online poker in direct response to the campaign contributions he received from gambling interests. I’m not so much interested in that angle –politicians responding to special interests is hardly news — as I am in the substance of what the legislation is proposing. And if the following reporting from Politico is accurate, the substance is troubling enough :
The National Indian Gaming Association is opposing Reid’s effort to insert the online poker language in any tax cut bill, said an official with the group, Jason Giles. He asserted it gives an advantage to Las Vegas-based gambling operators while discriminating against tribal operators.
“It is drafted to create an initial regulatory monopoly for Nevada and New Jersey for the first several years of the bill, which gives Las Vegas operators time to capture the market,” he said.
A gambling industry insider familiar with Reid’s efforts said Republican-leaning Vegas casino moguls Steve Wynn and Sheldon Adelson, while generally supportive of Reid’s legislation, take issue with provisions that could allow companies that previously operated in violation of online gambling laws to cash in.
The UIGEA is/was a nightmare for online operators to work around, partly because it never really defined “unlawful internet gambling.” Therefore, I am not sure how one would determine unambiguously whether a company “operated in violation of online gambling laws”. The UIGEA referred to transactions processors rather than gambling companies. And in any case, a few European operators (PartyGaming most famously) withdrew from the U.S. market at the time the UIGEA passed, just to be safe, and yet have continued to face prosecution. The European firms are at the cutting edge of online gaming services. Of course Messrs. Wynn and Adelson would want them out of the picture, but legislators should resist their attempts.
While Reid’s proposal may be an improvement on the status quo, it falls far short of restoring the full freedom of consenting adults to use their money, time, and online access in a manner of their choosing. It also is a long way from allowing a competitive, open market in gaming services to thrive. We should see this as a step in the right direction, but not the end game.
On Federal Education, Think Progress Should Think Harder
Over on the Think Progress blog, Ian Millhiser accuses Sen. Tom Coburn (R-Okla.) of never having read the Constitution. His grounds for the accusation? Coburn, citing Jefferson, doesn’t think that the Constitution gives the federal government authority to provide such things as Pell Grants and student loans.
Writes Millhiser:
Sen. Coburn might want to try actually read the Constitution before he pretends to know what it allows. Article I provides that “[t]he Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States,” a grant of power that unambiguously empowers Congress to raise funds and spend them on programs that are broadly beneficial to American welfare — such as education.
Moreover, while Coburn’s reference to Thomas Jefferson is true in the narrowest sense of the term, it also betrays Coburn’s ignorance of constitutional history. During the Washington Administration, Jefferson and James Madison led a minority coalition which believed that Congress’ constitutional power to spend money was too narrow to support spending programs such as the First Bank of the United States. President Washington, however, rejected their arguments. Moreover, while Coburn is correct that President Jefferson briefly referenced his narrow view of the Constitution in his 1806 State of the Union, Jefferson was an extreme outlier by this point in American history. Even Madison parted ways with Jefferson by the time Madison became president in 1809.
This might be a classic pot-kettle situation. At the very least, it is utterly impossible to say that the general welfare clause “unambiguously” empowers Congress to raise funds and spend them — with massive strings attached, of course — on education. Indeed, that the general welfare clause does anything other than introduce the specific, enumerated powers that follow it was expressly rejected by Madison in Federalist no. 41, in which he wrote:
For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural nor common than first to use a general phrase, and then to explain and qualify it by a recital of particulars.
The general welfare clause, quite simply, confers no power — it just explains why the specific powers that follow it were given.
But didn’t Alexander Hamilton — who had Washington’s ear — reject that notion? Well yes, in his 1791 Report on Manufactures he suggested that the federal government could do almost anything as long as it was done in the interest of the entire nation. But his report was not only shelved by Congress at the time, Hamilton’s argument was quite different from what he wrote in the Federalist Papers. Though speaking specifically of the taxation and ”necessary and proper” clauses, in Federalist no. 33 Hamilton wrote that seemingly broad powers were given to Congress only to execute “specified powers:”
[I]t may be affirmed with perfect confidence that the constitutional operation of the intended government would be precisely the same, if the clauses were entirely obliterated, as if they were repeated in every article. They are only declaratory of a truth which would have resulted by necessary and unavoidable implication from the very act of constituting a federal government, and vesting it with certain specified powers [italics added]. This is so clear a proposition, that moderation itself can scarcely listen to the railings which have been so copiously vented against this part of the plan, without emotions that disturb its equanimity.
How about the argument that Jefferson’s quaint small-government beliefs were way out of date by 1806? Well, they sure weren’t on education.
For one thing, it is notable that President Washington probably had a more expansive view of the federal government’s role in education than one might expect. He wanted a national university, after all. But he didn’t get it — that notion was well out of sync with the limited federal government most Americans wanted.
Next, Coburn was actually quoting Jefferson from Jefferson’s call for federal involvement in education, an idea that went nowhere because it would have constituted more federal intrusion — not less — than most Americans wanted. Indeed, Jefferson was generally on the big-government fringe of his time when it came to education. He only got the University of Virginia after four decades of trying, and never got the rudimentary public schooling system he wanted for Virginia. Most people at the time simply didn’t think government’s role — especially the federal government’s — was to run education.
One last bit of information demonstrates just how truly mistaken Millhiser is in his attack on education ”tenthers.” In 1943 – when Franklin Delano Roosevelt was president — the United States Constitution Sesquicentennial Commission, under the direction of the president, the vice president, and the Speaker of the House, published The History of the Formation of the Union under the Constitution. It noted in a section titled “Questions and Answers Pertaining to the Constitution:”
Q. Where, in the Constitution, is there mention of education?
A. There is none; education is a matter reserved for the states.
Even FDR’s people, apparently, didn’t find that the Constitution ”unambiguously” gave Washington authority to involve itself in education — quite the opposite!
In light of all this, it is clearly not Mr. Coburn who can reasonably be accused of having never read the Constitution. Indeed, not only has he almost certainly read it, it seems he has even taken the time to understand it.
It Turns Out You Can Indeed Criticize the Government
As I wrote almost exactly a year ago, my friend Mark Sigmon filed a case on behalf of the ACLU seeking to prohibit a town in North Carolina from enforcing its sign ordinance against a man who painted “Screwed by the Town of Cary” on the side of his house. Well, yesterday, the federal district court granted the plaintiff David Bowden summary judgment and entered a permanent injunction against the town.
The court concluded that the sign ordinance was content-based under the First Amendment because it required more than a perfunctory inquiry into the content of signs in order to determine whether the ordinance would apply. For example, the ordinance required the town to determine whether something was a “work of art,” a “holiday message,” etc. The court then concluded that the town’s asserted interests in aesthetics and traffic safety were not compelling, and that even if they were, the ordinance was not narrowly tailored because it would allow, for example, a huge flashing holiday sign.
The opinion in the case makes clear that governments should not be in the business of looking at the substance of speech, except in the most superficial manner — for example, to determine if something is commercial speech or not. Because the law is not entirely clear in this area, if the Town of Cary appeals, the resulting opinion should be instructive. Hopefully the Fourth Circuit would affirm the district court and take another step to ensure that core speech is relatively unmolested. Especially political speech that you write on your own house.
Kudos to Mark and to the First Amendment.
Policymakers Needn’t Fear Spending Cuts
A recent study by economists Alberto Alesina, Dorian Carloni, and Giampaolo Leece looked at 19 OECD countries from 1975 to 2008 and found no evidence that “governments which quickly reduce budget deficits are systematically voted out office.” Therefore, the authors conclude that governments can “decisively” reduce deficits and be returned to office by voters.
A particularly interesting finding is that only 20 percent of the governments that reduced deficits by cutting spending were subsequently voted out of office. In contrast, 56 percent of governments that reduced deficits by increased taxes were given the boot.
The findings are good news for the large group of incoming members of Congress who promised to cut spending during the campaign.
The authors ask, “If it is the case that certain types of fiscal adjustments are not necessarily costly in terms of lost output or lost votes, why are they often delayed and politicians reluctant to implement them?”
One possible reason they suggest makes the most sense:
Certain constituencies may be able to block adjustments to continue receiving rents from government spending because they have enough political energy (time, organization, money). This is sometimes referred to as an issue of diffuse benefits and concentrated costs. For example, in some cases strikes of public-sector employees may create serious disruptions. Pensioners lobbies may be able to persuade politicians not to touch their pension systems even when future generations will suffer the costs of delayed reforms. Lobbyists for certain protected sectors use campaign contributions for continued protection.
Policymakers in Washington are surrounded by doting staffers, political operatives, and persistent lobbyists representing countless special interests. The result is an endless stream of feedback telling policymakers to SPEND! Or, as is currently more likely the case, DON’T CUT! Many politicians learn to enjoy the warm feelings (and campaign support) that come with delivering the taxpayer goods to particular interests, while those who would actually like to cut spending don’t make any friends.
The media often doesn’t help matters.
Consider how many journalists tend to portray the subject of spending cuts. They describe proposed cuts as “draconian” and modest trims as “slashing” spending. Instead of considering the cost to taxpayers of a program or the possible alternatives to government programs, journalists just think of cuts as “painful.”
One way to puncture a hole in the Beltway spending echo-chamber would be for congressional committees to spend more time listening to witnesses who don’t want more government spending. In a Cato Policy Analysis, former Yale professor James Payne surveyed 14 congressional committee hearings. He found that “in those 14 hearings, 1,014 witnesses appeared to argue in favor of programs and only 7 spoke against them, an imbalance of 145 to 1.”
There’s a lot of talk coming from House Republicans about “changing the culture” in the appropriations committee and elsewhere. A good start would be for the committees to start hearing more from the “diffuse” taxpayers footing the bill, and less from the concentrated beneficiaries. Perhaps then more policymakers will come to realize that pushing spending cuts isn’t so scary after all.
Is Congress Above the Law?
The first item on this election campaign’s Contract with America was that, if elected (as they have been), the House Republicans would require that all laws that apply to the rest of the country also apply to Congress. We’ll see if that and the other promised reforms materialize, but it does raise yet another issue in the context of Obamacare.
As my colleague Michael Cannon pointed out to me, the new health care law kicks congressmen out of the Federal Employees Health Benefits Program. (The current FEHB is no different from the health coverage provided by any private employer -– federal employees choose from a series of private plan options (none of which is run by the government), and receive a subsidy from the federal government acting in its role as an employer.)
My first reaction to hearing this was: Good — if the rest of us lose our health care freedom, so should those who forced this new atrocity on us. But apparently this result was not intended, so the Obama administration has decided to ignore that part of the law.
No joke. Here is the Congressional Research Service report on the provisions that oust members of Congress from their health insurance. And here is the letter in which an Obama appointee announces that the administration will ignore the law. These two articles also provide important information.
Now, assuming that something constitutionally problematic is going on here, what can anyone do about it? To put it in legal terms, who has standing to sue for this apparent constitutional violation? It’s a tough row to hoe — taxpayers cannot bring suit based on generalized grievances — but off the top of my head, I can think of two possibilities: (1) members of Congress suing the president or the Department of Health and Human Services for essentially passing new law and therefore infringing on congressional prerogatives (thereby violating the separation of powers); or (2) an insurance broker or carrier who would otherwise be signing up new clients.
And there are two additional related questions:
1. Why did Congress expand Medicaid while refusing to participate in it themselves? Obamacare expanded Medicaid to an estimated 18 million new Americans, none of whom will have a choice of private plans, instead being dumped into Medicaid, a program notorious for access problems (and which in Arizona now doesn’t cover organ transplants). Yet all Senate Democrats voted against an amendment enrolling members of Congress in the new Medicaid program (all Republicans voted for it, except one who was absent).
2. Will members of Congress use their own salaries to pay any fines assessed because their employees have “unaffordable” health coverage? Obamacare includes a $2,000 per worker penalty for any employer that does not provide “affordable” coverage, beginning in 2014. Many junior staffers have incomes below 400 percent of the federal poverty level ($43,320 for a single person, or $88,200 for a family of four), and thus could be subject to the new statutory test of whether their health insurance options are “affordable.” While it’s unclear how this particular provision will be implemented for Hill staff – due to the “significant unintended consequences” of sloppy drafting — it’s entirely possible that member offices could be assessed a $2,000 penalty for every worker needing insurance subsidies because they have no “affordable” alternative. If that scenario happens, will the members of Congress who voted for the law pay the penalty out of their own salaries or will they rely on taxpayer funds to finance an obligation they imposed on themselves?
Rep. Jeff Flake to Appropriations
In-coming House Speaker John Boehner’s endorsement of Rep. Jeff Flake (R-AZ) for a seat on the chamber’s appropriations committee means that it’s probably a done deal. Flake is one of the few policymakers who actually lives up to the fiscal conservative label. Thus, Flake’s appointment to a committee that many members think only exists to increase spending on special interests would be welcome news.
Boehner also endorsed a suggestion from Rep. Jeff Kingston (R-GA), who has mounted a dark-horse campaign to chair the appropriations committee, to create a subcommittee focused on investigating federal programs. Flake would chair this subcommittee, and according to a release on his website, he has already lined up worthy targets like Head Start and farm subsidies.
How much success will Flake have within the committee?
The New York Times quotes Flake as boldly saying, “It has been a favor factory for years, and now it is going to become a slaughterhouse.” At the same time, Flake acknowledged to Politico that putting a few anti-spenders on appropriations isn’t going to be enough:
Flake said the conservatives that Boehner wants to get on the committee will be “marginalized” if they’re scattered throughout the panel.
“It’s not enough just to have a few going on the committee,” he said. “They could be dispersed among the subcommittees that are forgotten.”
I recently warned the House Republican leadership against serving tea party voters re-heated meatloaf by allowing old-school spenders to dominate the committees. Getting Jeff Flake on appropriations is a step in the right direction, but his appointment can’t be a token gesture. Anti-spenders like Flake will need support from their leadership to succeed because they sure won’t be making friends with the big-spending old bulls.
This Is Earmark Transparency
This morning, a database of FY 2011 earmark requests was released by Taxpayers Against Earmarks, Taxpayers for Common Sense, and my own WashingtonWatch.com. With House Republicans generally eschewing earmarks this year, members of Congress and senators still sought over 39,000 earmarks, valued at over $130 billion dollars. Learn more on the relevant pages at Taxpayers for Common Sense, Taxpayers Against Earmarks, and WashingtonWatch.com.
This is transparency. The production of organized, machine-readable data has allowed these differing groups—an advocacy organization, a spending analysis group, and a “Web 2.0″ transparency site—to expand the discussion about earmarks. The data is available to any group, to the press, and to political scientists and researchers.
Earmarking is a questionable practice, and, anticipating public scrutiny, House and Senate Republicans have determined to eschew earmarks for the time being. But the earmark requests in this database are still very much “live.” They could be approved in whatever spending legislation Congress passes for the 2011 fiscal year. They also tell us how our representatives acted before they got careful about earmarks.
Earmarks are a small corner of the federal policy process, of course, but when all legislation, budgeting, spending, and regulation has become more transparent—truly transparent, Senator Durbin—the public’s oversight of Congress will be much, much better. As I noted at our December 2008 conference, “Just Give Us the Data,” progressives believe that it would validate government programs and root out corruption. (That’s fine—corruption and ongoing failure in federal programs are not preferable.) I believe that demand for government will drop. The average American family pays about $100 per day for the operation of the federal government currently. That’s a lot.
Again, you can see how this data is in use, and you can use it yourself, by visiting Taxpayers for Common Sense, Taxpayers Against Earmarks, and WashingtonWatch.com. On the latter site, you can see a map of earmarks in your state and lists of earmarks by member of Congress and representative, then vote and comment on individual earmarks.
At considerable expense and effort, these sites have done what President Obama asked Congress to do in January. If earmarking is to continue, Congress could produce earmark data as a matter of course itself: The appropriations committees could take earmark requests online and immediately publish them, rather than using the opaque exchange of letters, phone calls, and—who knows—homing pigeons.
Congress should modernize and make itself more transparent. We’re showing the way.
Overcriminalization Incentives
In my post on Brian Aitken’s plight, I discussed New Jersey’s draconian gun laws and how a law-abiding citizen can become a victim of overbroad laws. New Jersey gun laws weren’t always so bad, but overcriminalization warped them into their current unconstitutional state.
This trend is a staple of modern legislative activity. Every time a politician says that we must pass a new law to “get tough on crime” and that their pet legislation ought to be passed “for the children,” it’s a sure indicator that the rule of law is about to take another body blow. Take, for instance, the crusade against sexting that threatens to make foolish teenagers into sex offenders. Or the proposed federal cyberbullying act, which aims to turn teens into federal felons, in spite of the fact that there is no federal juvenile justice system. New Jersey gun laws jumped the shark a long time ago and haven’t looked back.
The same is true with federal “honest services” fraud. In the words of one former lawmaker who fed the overcriminalization beast only to see it turn on him:
When I served in Congress, I vigorously opposed any expansion of federal agency authority. All too often, however, I exempted the Justice Department from my efforts because I wanted to give law enforcement the power it needed to keep our country safe from dangerous individuals. After enduring a years-long investigation into crimes my wife and I did not commit, and after watching the outrageous prosecution of Kevin Ring, I have serious doubts about whether I was wise to faithfully support the Justice Department. I strongly encourage the new Congress to examine the guidance and leeway the Department gives to federal prosecutors, and to refrain from passing any new vague criminal laws which seem to invite the worst prosecutorial abuse.
This is just the tip of the iceberg. For more on overcriminalization, take a look at Tim Lynch’s book, In the Name of Justice, or Harvey Silverglate’s Three Felonies a Day.
The Private Sector Lacks What?!?
So there I was, checking e-mail this morning on my JooJoo when I came across this editorial about how the private sector lacks accountability unless the government provides it through regulation! This naturally caused me to expectorate New Coke all over over myself and my Apple III, forcing me to toss my Levi’s Type 1 jeans in the wash and hop back in the shower. (You know, that Touch of Yogurt shampoo by Clairol is really… uh… something).
Twenty minutes later I was still so preoccupied about responding to the editorial that I backed over my neighbor’s Segway as I pulled the Edsel out of the garage. Oops. Sorry Dean.
Anyway, once I got into the office I popped a couple of Ben Gay Aspirin to ease my now ferocious headache, but realized as I did so that I’d left my Colgate Kitchen Entree frozen dinner at home. Argh!
You get the idea, yes?
The fact that consumers have demands, and that they can go elsewhere if you fail to meet them, makes producers accountable. We see this in every sector of the economy. Provide a product or service that people don’t want, take away one that they do want, or charge more than they are willing to pay, and they will kick you right in the bottom line.
The result is the same in education as in other fields: the least regulated, most market-like education systems consistently outperform highly regulated state-run school systems such as we have in this country—across every measure people care about.
Regulations are an attempt, crude and usually unsuccessful, to imitate the accountability inherent in competitive markets. So as long as you allow market forces to work in education, and you allow people to allocate their own money rather than taxing it and spending it through the state, regulations are not only unnecessary they are generally counterproductive. (Milton and Rose Friedman had a good chapter on this in Free to Choose.)
Note that this is true under both personal use education tax credits (for parents’ own education costs) and scholarship donation tax credits (in which taxpayers donate to non-profit organizations that subsidize education for the poor). If a scholarship organization becomes corrupt or inefficient, taxpayers can easily redirect their donations to better-run competing organizations. The accountability is built into the system’s design. No other private school choice program has this feature, and certainly public schools do not.
There is no evidence that layering government regulations on top of this market accountability system improves outcomes, and ample evidence that heavily regulated school systems perform badly. Unless those facts change, there is good reason to fight off attempts to regulate private schools under education tax credit programs.
President Touts Historic Education Failure… Again
He did it on the campaign trail in 2008, he did it in his first year in office, and how he’s done it again: speaking at the Forsyth Technical Community College in North Carolina yesterday, President Obama praised post-Sputnik federal education initiatives aimed at improving achievement in math and science. The trouble is, those investments—the National Defense Education Act—failed.
Having already demonstrated the decline in achievement that followed the passage of the NDEA two years ago, I won’t re-hash it here. I’m left to wonder though, what the next two years are going to be like. If the president is still recycling campaign speeches about programs that never worked in the first place, is this what we can expect for the next two years?
Perhaps, faced by the latest international test scores showing that the United States continues to languish in educational mediocrity, this administration is simply out of ideas. Perhaps it’s unable to accept that 40 years (and $1.8 trillion) of federal education intervention have failed, and unable to accept that educational freedom is the solution.
If so, that’s yet another reason for Congress to return the reins of educational power to the states and the people, where the United States Constitution so wisely left them.
No Recession in Washington
Forbes looks at new data on household income in different metro areas:
Median family incomes across the country decreased dramatically from 2008 to 2009, and no region was left untouched by the recession. But despite shrinking paychecks nearly across the board, some cities still stand out for their bigger-than-average salaries.
To find the places where Americans earn the most, we looked at median family income data for 2009, as reported by the U.S. Census Bureau. In September, as part of its annual American Community Survey, the Census released updated data for several hundred Metropolitan Statistical Areas — geographic entities defined by the U.S. government that roughly correspond to major cities.
The place with the highest median family income is the Washington, D.C., metro area, which includes the nation’s capital, as well as wealthy suburbs in Virginia and Maryland. In 2009 families in this region earned a median income of $102,340, a 0.7 percent increase from 2008. D.C. also boasts a better than average unemployment rate of 5.9 percent, far below the September’s 9.2 percent national average.
As we’ve reported here before, these trends began even before the Obama administration started concentrating job creation on the federal sector. In the middle of the Bush bubble, the Washington Post reported:
The three most prosperous large counties in the United States are in the Washington suburbs, according to census figures released yesterday, which show that the region has the second-highest income and the least poverty of any major metropolitan area in the country.
Rapidly growing Loudoun County has emerged as the wealthiest jurisdiction in the nation, with its households last year having a median income of more than $98,000. It is followed by Fairfax and Howard counties, with Montgomery County not far behind.
This of course reflects partly the high level of federal pay, as Chris Edwards and Tad DeHaven have been detailing. And it also reflects the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.
To slightly amend a ditty I posted a few years ago,
Mamas, don’t let your babies grow up to be cowboys,
Don’t let ‘em make software and sell people trucks,
Make ‘em be bureaucrats and lobbyists and such.
The Good, the Bad, and the Ugly of the Tax Deal
Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.
Compared to what I expected to happen, the deal announced last night is pretty good.
In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.
With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.
The Good
The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath — do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years — including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.
On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact. A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.
Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to ”expense” new investment rather than have it taxed, which perversely happens to some degree under current law.
The Bad
The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.
But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.
The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.
The Ugly
As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politically powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.
Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.
To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.
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