Archive for April, 2011
Senator Rubio, Representative Posey, and other Lawmakers Fighting to Stop Rogue IRS Proposal that Would Drive Investment from U.S. Economy
There hasn’t been much good economic news in recent years, but one bright spot for the economy is that the United States is a haven for foreign investors and this has helped attract more than $10 trillion to American capital markets according to Commerce Department data.
These funds are hugely important for the health of the U.S. financial sector and are a critical source of funds for new job creation and other forms of investment.
This is a credit to the competitiveness of American banks and other financial institutions, but we also should give credit to politicians. For more than 90 years, Congress has approved and maintained laws to attract investment from overseas. As a general rule, foreigners are not taxed on interest they earn in America. Moreover, by not requiring it to be reported to the IRS, lawmakers on Capitol Hill have effectively blocked foreign governments from taxing this U.S.-source income.
This is why it is so disappointing and frustrating that the Internal Revenue Service is creating grave risks for the American economy by pushing a regulation that would drive a significant slice of this foreign capital to other nations. More specifically, the IRS wants banks to report how much interest they pay foreign depositors so that this information can be forwarded to overseas tax authorities.
Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law.
Not surprisingly, many members of Congress are rather upset by this rogue behavior.
Senator Rubio, for instance, just sent a letter to President Obama, slamming the IRS and urging the withdrawal of the regulation.
At a time when unemployment remains high and economic growth is lagging, forcing banks to report interest paid to nonresident aliens would encourage the flight of capital overseas to jurisdictions without onerous reporting requirements, place unnecessary burdens on the American economy, put our financial system at a fundamental competitive disadvantage, and would restrict access to capital when our economy can least afford it. …I respectfully ask that Regulation 146097-09 be permanently withdrawn from consideration. This regulation would have a highly detrimental effect on our economy at a time when pro-growth measures are sorely needed.
And here’s what the entire Florida House delegation (including all Democrats) had to say in a separate letter organized by Congressman Posey.
America’s financial institutions benefit greatly from deposits of foreigners in U.S. banks. These deposits help finance jobs and generate economic growth… For more than 90 years, the United States has recognized the importance of foreign deposits and has refrained from taxing the interest earned by them or requiring their reporting. Unfortunately, a rule proposed by the Internal Revenue Service would overturn this practice and likely result in the flight of hundreds of billions of dollars from U.S. financial institutions. …According to the Commerce Department, foreigners have $10.6 trillion passively invested in the U.S. economy, including nearly “$3.6 trillion reported by U.S. banks and securities brokers.” In addition, a 2004 study from the Mercatus Center at George Mason University estimated that “a scaled back version of the rule would drive $88 billion from American financial institutions,” and this version of the regulation will be far more damaging.
Both Texas Senators also have registered their opposition. Senators Hutchison and Cornyn wrote to the Obama Administration earlier this month.
We are very concerned that this proposed regulation will bring serious harm to the Texas economy, should it go into effect. …Forgoing the taxation of deposit interest paid to certain global investors is a long-standing tax policy that helps attract capital investment to the United States. For generations, these investors have placed their funds in institutions in Texas and across the United States because of the safety of our banks. Another reason that many of these investors deposit funds in American institutions is the instability in their home countries. …With less capital, community banks will be able to extend less credit to working families and small businesses. Ultimately, working families and small businesses will bear the brunt of this ill-advised rule. Given the ongoing fragility of our nation’s economy, we must not pursue policies that will send away job-creating capital.We ask you to withdraw the IRS’s proposed REG-14609-09. The United States should continue to encourage deposits from global investors, as our nation and our economy are best served by this policy.
Their dismay shouldn’t be too surprising since their state would be especially disadvantaged. Here are key passages from a story in the Houston Chronicle.
Texas bankers fear Mexican nationals will yank their deposits if the institutions are required to report to the Internal Revenue Service the interest income non-U.S. residents earn. …such a requirement would drive billions of dollars in deposits to other countries from banks in Texas and other parts the country, hindering the economic recovery, bankers argue. About a trillion dollars in deposits from foreign nationals are in U.S. bank accounts, according to some estimates. …The issue is of particular concern to some banks in South Texas, where many Mexican nationals have moved deposits because they don’t feel their money is safe in institutions in Mexico. …”This proposal has caused a wave of panic in Mexico,” said Lindsay Martin, an estate-planning lawyer with Oppenheimer Blend Harrison + Tate in San Antonio. He has received in recent weeks more than a dozen calls from Mexican nationals and U.S.-based financial planners with questions on the rule. …Jabier Rodriguez, chief executive of Pharr-based Lone Star National Bank, said not one Mexican national he has spoken to backs the rule. “Several of them have said if it were to happen, then there’s no reason for us to have our money here anymore,” he said. Many Mexican nationals worry that the data could end up in the wrong hands, jeopardizing their safety. If people in Mexico and some South American nations find out they have a million dollars in an FDIC-insured account in the United States, “their families could be kidnapped,” added Alex Sanchez, president of the Florida Bankers Association.
For those who want more information about this critical issue, here’s a video explaining why the IRS’s unlawful regulation is very bad for the American economy.
Whistleblowing Scandal at UCLA
Lately I seem to have been blogging — and filing briefs – a fair bit on campus First Amendment issues, regarding both students and professors. The threats to free speech and academic freedom stretch far beyond the halls of Widener Universty and concern more than just the rules of political correctness.
This month, UCLA’s James Enstrom (34 years a professor) is fighting his dismissal from UCLA for submitting a paper to a regulatory board that denied that diesel particulates cause 2,000 premature deaths in California per year. The scientific literature published subsequent to his initial findings support his thesis and the conclusions his work refuted turned out to be written by a fraud who received his Ph.D. from a diploma mill. In short, he was fired for telling the truth.
Reason.tv produced an excellent (and infuriating) video detailing the story. The story exposes a corrupt political process, bogus credentials, cronyism, and trumped-up charges against a man guilty only of scientific rigor:
Thankfully, our friends at the Foundation for Individual Rights in Education have taken Professor Enstrom’s case. You can read more about the sorry tale here. I wish the best of luck to FIRE and Prof. Enstrom in their fight.
You Look Mahvelous
“Bijan Pakzad, an extravagant fashion designer and boutique owner who happily and unabashedly made wealthy men look rich, feel rich and smell rich,” has died, reports the Washington Post. Mr. Pakzad explained that he catered to customers who “normally aren’t concerned about inflation.”
His slogan — “the costliest men’s wear in the world” — helped his opulent clothing store become known as the West Coast’s one-stop Savile Row.
While drinking champagne presented by white-gloved butlers, customers could shop for $2,500 silk pajamas, $1,500 cologne, a $24,000 mink-lined topcoat, a $19,000 ostrich vest, $55,000 crocodile luggage or even a $120,000 Mongolian chinchilla bedspread lined with silk.
Who could afford such clothes? Warren Buffett and Bill Gates? Yes, but they don’t look like they spend so much money on clothes. The Post names a few customers:
From the moment in 1976 when Mr. Pakzad first opened Bijan, his Rodeo Drive emporium, three words bedecked the entrance: “By appointment only.”
The locked-door policy made clear that Mr. Pakzad exclusively catered to men who had money, power or fame — and usually all three. His clients included President Obama, Frank Sinatra, Cary Grant, Stevie Wonder, Arnold Schwarzenegger and Michael Jordan.
Wait, President Obama? That’s not the same Barack Obama who told college graduates not to “take your diploma, walk off this stage, and chase only after the big house and the nice suits and all the other things that our money culture says you should buy,” is it?
More on AEP v. Connecticut: Sue the Butterflies or Regulate Them?
During Tuesday’s oral arguments in American Electric Power v. Connecticut—the global warming lawsuit that Walter Olson recently discussed here and Ilya Shapiro here, and in which Cato filed amicus briefs at both the certiorari stage and the merits stage—the justices concentrated their inquiries on a few technical legal doctrines in order to answer one question: should states even be allowed to sue power companies for the damage that global warming has allegedly done to their lands and citizens?
There are multiple ways this question could be answered, and how it is answered in the final opinion could have important ramifications for future environmental litigation.
Connecticut and five other states, plus New York City and three land trusts, brought the suit against five power companies. Their claim is based on the age-old tort of nuisance, the same ground that lets you sue your neighbor if his contaminated water seeps onto your land. Essentially, the states argued that if courts can solve that kind of dispute, then a dispute over global warming is only slightly different—bigger in scope, certainly, but not different in kind.
But at oral argument, the justices did not seem persuaded. Arguing against the states, Acting Solicitor General Neal Katyal opened by pointing out that “[i]n the 222 years that this Court has been sitting, it has never heard a case with so many potential perpetrators and so many potential victims…[T]he very name of the alleged nuisance, ‘global warming,’ itself tells you much of what you need to know.” Chief Justice John Roberts later asked the states’ attorney, New York solicitor general Barbara Underwood, if she had any rebuttal to Katyal’s claim—if there was “any case where it has been as broad as it is here?” Her answer? “Well, of course it depends on what you call broad.”
Indeed.
But how much broader could it be? Taking the scientists at their word, we’d have to include at least every car owner, every coal power plant, every natural gas power plant, every cement producer, every forester, and the fabled effects of bovine flatulence. And not just every one of these in America, but every one in the world. The scope of this case and the numerous trade-offs involved make it utterly inappropriate for judicial resolution.
The supposed link between the power companies’ emissions and the alleged global warming harms resembles a Rube Goldberg device of conjectures that stretches back millions of years. In our brief we analogized this to the famous “butterfly effect”: a butterfly flaps its wings in Brazil and causes a tornado in Texas.
A few theories were offered as to why the case should not go any further. The most far reaching of these theories, the political question doctrine, is one we advanced in our amicus briefs. The political question doctrine directs courts to stay out of disputes that are better left to the other branches of government. A decision along those lines would go far in the future toward keeping such suits out of courts.
But many environmental lawyers are hoping, and predicting, that the states will “lose well”—that is, the suit will be dismissed because it has been “displaced” by the “regulatory cascade” underway at the EPA, not because it is a fundamentally impossible and illegitimate lawsuit. Dismissing the suit on these grounds would leave the door open for large-scale suits to be brought whenever an agency is thought to be shirking its regulatory duties. Such suits are already a problem for administrative agencies, particularly those brought by environmental advocacy groups trying to force agencies to live up to the groups’ idea of sound environmental policy. The NY Times, for example, reported recently on the “barrage [that] has paralyzed the listing process” for the Endangered Species Act.
Not wanting to totally foreclose the possibility of large-scale suits being brought in the future, at least three justices, Kagan, Breyer, and Ginsburg, seemed partial to the displacement theory. One hopes that the other five justices will rule, on either prudential standing or political question grounds, that no amount of regulatory action or inaction can make these suits justiciable. If regulation is called for here — a dubious proposition — it should be undertaken by the political branches, not the courts.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this week:
- Paul Ryan’s budget doesn’t really eliminate anything the federal government does.
- Just as they did back in 1995, Republicans are doing a lot of talking about cutting the size of the federal government. However, they aren’t doing much talking about reducing the scope of the federal government’s activities.
- The government’s air traffic controllers have been sleeping on the job, watching movies rather than guiding planes, and misdirecting the First Lady’s plane over Washington. The solution is privatization.
- Lobbyists are already hard at work trying to undo the minuscule spending cuts recently agreed to by Republicans and Democrats.
- If you could only choose one, which federal department or agency would you eliminate? Let us know on Downsizing’s Facebook page.
Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.
“Tax Credits Only or Die”?
Responding to a post yesterday by Cato’s Adam Schaeffer, Matt Ladner characterizes our education policy recommendations as: “Tax credits only or die!!!!!!!!”
But our recommendations are not of the form: You must do “x.” They are of the form: If you do “x,” “y” will happen.
Our goal is to identify the policies that produce the educational results people say they want: universal access to a good education, better academic outcomes, higher efficiency, greater responsiveness to the individual needs of each child and family, more harmonious relations among different ethnic/religious/ideological groups, less socially corrosive compulsion to consume or support types of instruction that violate their convictions.
So we do comparative policy research to find out what works and what doesn’t in pursuit of these ends and disseminate our findings. Adam’s post was a response to a commentary touting a type of government-funded school voucher program as “the future of school choice” in America. He pointed out that the evidence actually favors tax credits as the most effective means of achieving the goals of school choice supporters, and identified some shortcomings of vouchers in achieving those goals. In the process, he linked to some of our research on these issues so readers can judge for themselves.
We think this is the right mission and methodology for a public policy organization.
As for the specific points Matt raises, I have no opinion of the legal viability of Education “Savings” Account vouchers in Arizona, not having studied that particular issue. I think they are legally doomed in Florida, where I have studied the question, and that their inevitable defeat in the courts there could have negative repercussions for other school choice programs in that state.
More on Libya and Constitutional War Powers
So it turns out that, per CBO’s numbers, the “epic” budget showdown didn’t even produce enough cuts to pay for a week of bombing Libya.
On that subject, as I noted last week, the Obama administration’s Office of Legal Counsel recently released its memo arguing that our Libyan adventure is constitutional. And that memo is one sorry piece of work.
Over at the Washington Examiner’s “Beltway Confidential” blog, I’ve been commenting on various aspects of the OLC memo, and I thought I’d link to some of that discussion here.
Recently, I addressed two of the OLC’s arguments: (1) that what we’re doing in Libya isn’t “war”; and (2) that the 1973 War Powers Resolution gives the president a 60-to-90-day “free pass” to wage war without congressional authorization. Neither argument comes close to showing that the president’s actions in Libya are legal.
Make no mistake, what we’re doing in Libya amounts to war. Defense Secretary Gates admitted as much recently, albeit reluctantly:
It’s fairly common to hear supporters of unrestrained presidential war power argue that whatever “war” is, it’s far too ambiguous a concept for us to insist that the president be restrained by constitutional niceties like prior congressional approval.
But this is a silly argument.
Taxing the Rich Is the Cure for Everything!
Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.
For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.
It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the program’s giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.
For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine:
Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year.
…Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners.
…[M]ost of the increase could be paid by the middle class or modestly affluent — i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.
Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.
After the jump is a video from the Center for Freedom and Prosperity, narrated by yours truly, that elaborates on why this is the wrong approach.
CEOs to Governors: Raise Production Goals and Quality Standards
A group of CEOs called on the nation’s governors this week to raise U.S. business standards. Speaking at the National Press Club in Washington, DC, the CEOs declared that state governments have been misleading consumers about the quality of the goods they’re buying. One retired Fortune-500 CEO declared that:
America’s standing as the most innovative and prosperous nation on earth depends on our ability to boost business’ productivity. As business leaders, we are pledging to stand with governors who commit to high production and product quality standards in scientific and technological fields.
Even today, most readers probably recognize the preceding paragraphs as satirical (I hope!). The idea that it would be helpful to have bureaucrats set production volume and quality standards for high-tech industries is ludicrous on its face. How tragic it is, then, that this event actually took place… with one small twist: the CEOs were calling for more central planning in science and technology education.
Having spent nearly 20 years studying the relative productivity of different types of school systems, it is hard for me to understand how such brilliant business leaders could have arrived at such a profoundly mistaken conclusion. If they care at all about the goals they have set out to achieve, they would be well advised to stop listening to those who are currently advising them, and to look at the evidence on what actually does raise educational productivity. I’ve summarized that evidence in a short piece for the Washington Post, in a journal paper reviewing the past 25 years of worldwide research, and in a book surveying 20 centuries of school systems.
Distilling the findings of that work into a single sentence: it is the freest and most market-like education systems that, throughout history, have done the best and most efficient job of serving both our individual needs and our shared ideals.
Teachers, it turns out, are people. And like other people, they respond to the freedoms and incentives of their workplaces. As a result, the same structures and conditions that optimize the operation of other industries also optimize the operation of school systems. Xerox makes good copiers and Intel makes good chips because they have competitors who will eat their lunch if they don’t; because they have the freedom to explore new and better ways of serving their customers; and because they are rewarded very handsomely for innovations that successfully serve those customers.
Want education standards to rise? Give educators those same freedoms and incentives — and stand back.
Libertarians and the Arab Spring
The astonishing changes sweeping the Arab world hold great promise for liberty and peace, but those goals are much less likely to be realized without the active input of libertarians. Arab libertarians are organized in a number of networks, one of which held a series of programs recently in Cairo on building the institutions of liberty and development in a post-revolutionary society. The director of the Arabic “Forum of Liberty” (Minbaralhurriyya.org), Dr. Nouh El Harmouzi (also a university professor of economics in Morocco) spoke at the massive rally on Tahrir Square April 8 with a clear message for Egyptians (in Arabic, with English subtitles):
Also speaking at the rally (on democracy and the rule of law) and in other programs in Cairo was Gurcharan Das, the former CEO of Procter and Gamble India, author of the best-selling books India Unbound and The Difficulty of Being Good, and chairman of India’s Centre for Civil Society.
Those who wish to contribute to the spread of liberty in the Middle East and North Africa can find more information here.
Education ‘Savings’ Accounts Have Same Problems as Regular Vouchers
I really hate to disagree with people that I both like and have tremendous respect for, but a new voucher program that passed recently in Arizona has been getting a lot of attention, and a few points need to be addressed.
The program is referred to as an Education “Savings” Account, although the accounts are not filled with personal savings but with government funds collected from state taxpayers.
Unfortunately, as Andrew Coulson has noted before, these ESAs retain the most important problems of regular voucher programs and add new ones as well:
- This is still a third-party-payer system that uses government funds. These ESAs are not like HSAs. HSAs and education savings programs like Coverdell accounts are filled by the person who earned the money in the first place. This is a government education account filled with public funds, accessible to eligible families.
- If the ultimate goal for ESA proponents is to have broad-based choice, why not let families who can afford it pay for education out of their earnings? Tax credits can accomplish this. ESAs make all families dependent on government funds sitting in accounts that the government controls.
- Because these are still government funds, the legal threats to vouchers will not be significantly mitigated. Each ruling striking down vouchers, including in Arizona, has relied on the fact that government funds carry restrictions on their use in education – even if there is an intervening choice on the part of parents. The Arizona program is unlikely to survive another challenge.
- Because these are still government funds, they are more likely than credits to bring serious new regulatory burdens. Andrew Coulson’s historical evidence and recent statistical analysis of existing credit and voucher programs demonstrates what common-sense tells us: government money brings regulations. Citizens and politicians think that all institutions taking government funds should be accountable to the government, not just parents. Education tax credits provide for direct accountability to both parents and the taxpayers who earned the funds being expended. Educational freedom is more easily retained within a fully civil society system which doesn’t require government action or legislation to address every problem.
- Only tax credits respect the values and preferences of the taxpayers who earned the money being spent on education. ESAs still compel all taxpayers to support, in some small measure, the educational choices of all families. This compelled support increases the pressure to regulate and restrict choices. Interest groups and citizens attempt to ensure that their tax dollars are spent according to their values and preferences, using the only means possible in the public sphere: rules and regulations. Credits confer on each taxpayer the means to affirmatively support the kinds of education with which they are comfortable.
- Long-term complications and problems are likely to arise with the use of third-party ESAs. Because unused funds revert at some point to the state (as they are not personal savings), individuals will not manage the accounts as they would HSAs and actual education savings accounts. Many families will likely spend out each year rather than shopping for value as promoters of HSAs suggest will occur. Alternatively, if some families do save excess funds from early years, they will likely over-consume in late high school or college because the money will otherwise revert to the state. It is not difficult to imagine all manner of problems this scenario could produce, from simple waste to various kickback schemes through which a person can cash out their government education accounts. Management of fraud and abuse will be extremely difficult in a large-scale, fully developed ESA system that relies on government, third-party funding.
How Russia Makes Universal Coverage Work
As everybody with a brain knows, Article 41 of Chapter 2 of the Constitution of the Russian Federation protects the universal right of every Russian citizen to health care:
Everyone shall have the right to health protection and medical aid. Medical aid in state and municipal health establishments shall be rendered to individuals gratis….
Free health protection for everyone is an impressive feat, considering Russia spends less than 4 percent of its meager GDP on health care. The Washington Post reveals how Russia makes it work:
Nationally, statistics show, almost half of Russia’s hospitals lack heat or running water.
There’s also the fact that Russians of all ages and sexes face probabilities of dying rivaled only by HIV-plagued sub-Saharan African nations. Thank God for universal coverage.
A doctor named Leonid Roshal has decided he’s mad as hell and he’s not going to take it any more. And he told Prime Minister Vladmir Putin to his face:
Russian medical care is hobbled by corruption, meager salaries, ill-conceived laws, a shortage of medical workers and an overbearing government bureaucracy, one of Russia’s most prominent doctors told a recent medical conference here. He addressed his remarks directly to Prime Minister Vladimir Putin, who was sitting just a few feet away….
In his remarks, he said too much money is being budgeted for equipment, much of it useless, because it is easy for bureaucrats to “saw off” a kickback for themselves.
Actually, that happens in the U.S. Medicare program too, though I believe we confine those rents to the private sector.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
