Archive for June, 2011
The “Tax Expenditure” Con Job
For both political and policy reasons, the left is desperately trying to maneuver Republicans into going along with a tax increase. And they are smart to make this their top goal. After all, it will be very difficult – if not impossible – to increase the burden of government spending without more revenue coming to Washington.
But how to make this happen? President Obama is mostly arguing in favor of class-warfare tax increases, but that’s a non-serious gambit driven by 2012 political considerations. Moreover, there’s presumably zero chance that Republicans would surrender to higher tax rates on work, saving, and investment.
The real threat is back-door hikes resulting from the elimination and/or reduction of so-called tax breaks. The big spenders on the left are being very clever about this effort, appealing to anti-spending and pro-tax reform sentiments by arguing that it is important to get rid of “tax expenditures” and “spending in the tax code.”
I recently warned, however, that GOPers shouldn’t fall for this sophistry, noting that “If legislation is enacted that results in more money coming into Washington, that is a tax increase.” I also explained that tax breaks are not spending, stating that “When politicians tax (or borrow) money from one person and give it to another, that’s government spending. But if politicians allow a person keep more of their own money, that’s a tax cut.”
To be sure, the tax code is riddled with inefficient and corrupt loopholes. But those provisions should be eliminated as part of fundamental tax reform, such as a flat tax. More specifically, every penny of revenue generated by shutting down tax preferences should be used to lower tax rates. This is a win-win situation that would make America more prosperous and competitive.
It’s also important to understand what’s a loophole and what isn’t. Ideally, you determine special tax breaks by first deciding on the right benchmark and then measuring how the current tax system deviates from that ideal. That presumably means all income should be taxed, but only one time.
So what can we say about the internal revenue code using this neutral benchmark? Well, there are lots of genuine loopholes. The government completely exempts compensation in the form of employer-provided health insurance, for instance, and everyone agrees that’s a special tax break. There’s also the standard deduction and personal exemptions, but most people think it’s appropriate to protect poor people from the income tax (though perhaps we’ve gone too far in that direction since only 49 percent of households now pay income tax).
That’s Not Healthy: the GAO on Medicaid’s Lousy Access to Care
ObamaCare expands coverage mostly by cramming tens of millions of Americans into Medicaid, about which the Government Accountability Office just released these data:
Click here for the full Government Accountability Office report.
That’s Not Healthy: KFF Poll Results Not Kind to ObamaCare
From the June 2011 Kaiser Family Foundation tracking poll (by “health reform” they mean ObamaCare):
Filed under: Cato Publications; General; Government and Politics; Health Care
The Federal Government and Financial Literacy
Almost 600 pages into the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is a provision directing the Government Accountability Office to assess the feasibility of the federal government certifying organizations that provide financial literacy. The GAO released its report this week and concluded that “While a federal process for certifying financial literacy providers appears to be feasible, doing so would pose challenges.”
The challenges cited by the GAO are generally of the bureaucratic variety: What agency or agencies would be in charge? What criteria would be used? How would oversight be conducted? And most importantly, how much would it cost [taxpayers] to implement and operate a federal process for certifying financial literacy providers?
Fortunately, the GAO says that the majority of the representatives of private sector financial literacy organizations, federal agencies, and academic experts that it interviewed said that the disadvantages outweighed the advantages. Numerous concerns were cited, but one in particular stands out: Financial literacy certification may not be an appropriate role for the federal government.
Well, Hallelujah. I’ve read my share of GAO reports – almost all of which have dealt with activities that are not a proper role of the federal government – and I don’t recall that concern being mentioned.
Not only is individual financial literacy not an appropriate concern of the federal government, the federal government itself is a monument to financial illiteracy. It isn’t just that GAO report after GAO report continues to document financial mismanagement across the entire government complex. No, it’s the fact that Washington’s financial mismanagement has left us with a bloated government that’s mired in debt and crippled by massive “entitlement” programs that operate like Ponzi schemes.
The additional irony is the Dodd-Frank regulatory overhaul was passed in the wake of an economic meltdown perpetrated in large part by government failure. Alas, there might not be a lot of shame in Washington, but the hypocrisy is seemingly without limit.
Rafael Correa’s Flat in Belgium
It is traditional for a Latin American nationalist to criticize people who take their money out of their country and invest it somewhere else. President Rafael Correa has done it several times. In 2009 he forced private banks to repatriate part of their assets.
What is unusual is finding evidence that he who preaches does not necessarily practice what he preaches. Last week, Ecuadorians were surprised to hear the news—with our tax authority (Servicio de Rentas Internas–SRI) and then the presidency as a source—that Correa had transferred $330,000 to his bank account in Germany. The President then clarified (“…don’t be stupid, the money was sent to Belgium not Germany”) [in Spanish] that the money was transferred to pay for an apartment for his family in Belgium, given that his children may pursue studies in that country.
But the story did not end there. Earlier this week, the director of the SRI, Carlos Marx Carrasco, announced [in Spanish] that he will publish a list of all citizens that have taken money out of the country with the amount they have paid in taxes for doing so (currently there is a 2% tax on all transactions that imply taking money out of Ecuador). Marx Carrasco said that this has to be done “so that the citizens can see (the behavior) of those who represent El Universo, Diario Hoy, El Comercio and all media, who with human misery have allowed themselves to question (what the president has done)”.
This is how, those who concentrate political power in Ecuador, use information collected for the purpose of charging taxes to take reprisals.
Rise of the Transfer State
Perhaps this is best thought of as the chart of the day, as I will not attempt to discuss its many implications or drivers. The following chart tracks the percentage of federal spending that is simply a direct transfer of income. Now we could debate whether all government spending is little more than a transfer of wealth, but let’s save that for another day. The chart shows a dramatic increase in the share of government that does not go to buying or producing anything, but simply takes the form of a check, increasing from around a third of federal spending to about two-thirds today.
There is one aspect of this trend which merits study in our current economic environment. While there is a wide range of estimates* for how much government spending adds (or subtracts from) overall economic activity – the so called “fiscal multiplier” - that multiplier is likely to differ for transfer payments versus the government purchase of goods and services. If government simply takes from A and gives to B, then the magnitude and sign (- or +) will depend on A’s marginal propensity to consume relatives to B’s, minus any resources A spends to avoid said transfer. This suggests to me that the multiplier for transfers is likely to be about zero, if not negative. Some of that transfer will be saved by the receiving party, while consumption will likely decline by the losing party.With direct government purchases of good and services, little, if any, of the initial spending will be saved. Hence it seems reasonable to believe that the multilpier for direct spending is higher than than for transfer payments, although it still may be less than one.
The point of all this is that the shift of federal spending towards transfer spending has likely reduced the fiscal multiplier, all else equal. As this is an empirical question, I would certainly be interested in knowing if anyone has tried to measure it.
* for an overview of current Keynesian thinking on the fiscal multiplier see Michael Woodford’s recent piece in the AEA Journal Macroeconomics.
Gay Marriage in New York
In the Wall Street Journal today, Cato senior fellow Walter Olson praises the New York legislature both for passing a marriage equality bill and for including guarantees of religious freedom in the bill:
For those of us who support same-sex marriage and also consider ourselves to be right of center, there were special reasons to take satisfaction in last Friday’s vote in Albany. New York expanded its marriage law not under court order but after deliberation by elected lawmakers with the signature of an elected governor. Of the key group of affluent New Yorkers said to have pushed the campaign for the bill, many self-identify as conservative or libertarian. A GOP-run state Senate gave the measure its approval….
To their credit, New York lawmakers devoted much attention to the drafting of exemptions to protect churches and religious organizations from being charged with bias for declining to assist in same-sex marriages. Exemptions of this sort are sometimes dismissed as a mere sop to placate opponents. But in fact they’re worth supporting in their own right—and an important recognition that pluralism and liberty can and should advance together as allies….
Critics have charged that same-sex marriage will constrict the free workings of religious institutions and violate the conscience of individuals who act on religious scruples. Many of the examples they give are by now familiar….
Observe, however, that it isn’t the legal status of same-sex marriage that keeps generating these troublesome cases; it’s plain old discrimination law. Thus New York’s highest court ordered Yeshiva University, an Orthodox Jewish institution, to let same-sex couples into its married-student housing. But that ruling happened a decade ago and had nothing to do with last week’s vote in Albany. In the case of the wedding photographer ordered not to act on her scruples, New Mexico didn’t then and doesn’t now recognize same-sex marriage. While some of these rulings are to be deplored as infringements on individual liberty, they’re not consequences of the state of marriage law itself.
Also: Cato’s forum on the legal challenge to California’s Proposition 8, featuring Ted Olson, David Boies, John Podesta, and Robert Levy. And an earlier forum on gays and conservatism featuring Andrew Sullivan, Maggie Gallagher, and British Cabinet minister Nick Herbert.
School Choice Murder-Suicide in Pennsylvania
A huge school choice opportunity has been lost for the moment in Pennsylvania. But that lost opportunity is not the voucher program that has drawn so much attention.
The political conflagration touched off by the push for a targeted, failing-schools voucher program incinerated along with it a massive expansion of an existing, popular, successful, bipartisan-supported, and better program; the Educational Improvement Tax Credit (EITC). The House passed this expansion of credit program by a massive margin. And when I say “massive,” I mean 96 percent in favor to 4 percent opposed. Unfortunately, a stand-alone credit bill was not considered in the Senate, and the expansion fell by the wayside as the voucher battle raged.
In the next session, it would be good policy and politics to consider vouchers and credits separately. They are substantively different means of fostering choice, and the public deserves a clear debate and vote on both policies in separate bills.
The Educational Improvement Tax Credit program is vastly superior to all of the voucher bills. Vouchers are open to credible legal challenges, afford no accountability directly to taxpayers, and government money brings stifling government regulations. Furthermore, giving vouchers only to kids in or around “failing schools” won’t produce a dynamic market because there is an ambiguous, limited, and potentially shifting customer base. A failing-schools voucher program is a terrible policy design.
The EITC should not be legislatively handcuffed to vouchers. Vouchers are an inferior policy and a proven political liability. For once the popular, politically smart, most principled, and most effective thing to do are all the same; drop the voucher drama and expand the education tax credit program.
California Wants Amazon to Tax Californians
The Los Angeles Times has a good article on California’s move to require Amazon and other out-of-state retailers to collect taxes for it. Good because it accurately portrays what’s happening. Many such stories will say that California is seeking to tax Amazon. In fact, says the headline, “California Tells Online Retailers to Start Collecting Sales Taxes From Customers.”
You see, Californians generally don’t pay their “use taxes“—the alternative to sales taxes, for things brought into the state from outside. If the tax authorities tried to collect use taxes, going door to door to tally up the goods that haven’t yet been taxed, there would be bedlam.
So they want out-of-state companies that sell into California to collect the taxes that the state’s residents would pay. But in 1992, the Supreme Court found in a decision called Quill v. North Dakota that states can’t require out-of-state retailers to collect taxes for them. Doing so would create too great a burden on interstate commerce.
If an Internet retailer has a significant presence in a state, then the state can require the retailer to collect and remit sales taxes. (It’s no longer interstate commerce—get it?) So Amazon and other retailers are doing the sensible thing: shedding ties to California, such as with their affiliate marketers. Reports the Times:
Amazon and online retailer Overstock.com Inc. told thousands of California Internet marketing affiliates that they will stop paying commissions for referrals of so-called click-through customers. … Both Amazon in Seattle and Overstock in Salt Lake City have told affiliates that they would have to move to another state if they wanted to continue earning commissions for referring customers.
The natural result of California doing yet more to make the state uninhabitable for business comes at the end of the story. Californians who earned and spent money in California as part of the Internet remote sales ecosystem plan to move elsewhere:
One affiliate, Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to move out of state. “Will it be Las Vegas or Scottsdale or Ensenada?” he said. “It’s a question of where, not if.”
In the Quill case, the Supreme Court invited Congress to change the rule that it laid down. If it saw fit, Congress could permit states to export their tax responsibilities to businesses in every other state. But this would cut off the healthy tax competition you see happening in the area of remote sales; both taxes and tax collection burdens would rise.
Profligate and tax hungry states like California are desperate to overturn Quill in the courts or through the Congress. Here’s hoping they fail.
$2 Trillion in Cuts in Perspective
Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.
Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.
The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:
Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.
The Sixth Circuit Got It Wrong
Today’s 2-1 Sixth Circuit Obamacare decision was an exercise in unwarranted judicial deference, not by the author of the majority opinion, Judge Boyce Martin, who regularly rubberstamps misuses of federal power, but by concurring Judge Jeffrey Sutton, who avoided the logical implications of this ruling and punted the main issue to the Supreme Court. Under a document establishing a government of enumerated and therefore limited powers, the burden is on that government to prove that it has the power to do something, not on the plaintiffs to disprove that power. Never has the Supreme Court ratified the federal power to force someone to buy a product in the marketplace under the guise of regulating commerce. Indeed, never, not even during the height of the New Deal, had Congress asserted such a power—until the health insurance mandate.
To allow such a power now is to read out of the Constitution any structural limitations on federal power, which, as Justice Kennedy reminded us for a unanimous Supreme Court two weeks ago in Bond v. United States, are the Constitution’s first and greatest protectors of liberty. While a progressive like Judge Martin could be expected to accept any exercise of federal power, it is shocking that an avowed constitutionalist like Judge Sutton requires Congress to show only a rational basis behind what it does—a “reasonable fit” between the means it chooses and the ends of regulating interstate commerce—to survive constitutional scrutiny. Under such logic, Congress can do anything it wants so far as it is essential to a larger regulatory scheme. That cannot be the law.
As Chief Justice Marshall wrote nearly two centuries ago, any legislation Congress enacts under its power to make laws that are necessary and proper for executing an enumerated power must “consist with the letter and spirit of the [C]onstitution.” A constitutional interpretation resulting in Congress being the judge of its own powers, that forces people to engage in commerce rather than regulating existing commerce, fails that test.
Judge Sutton does well to describe the Supreme Court’s inflation of federal authority over the last 75 years and is to be commended for demanding that the Court “either should stop saying that a meaningful limit on Congress’s commerce power exists or prove that it is so.” But he has it backwards in saying that it’s not the role of the lower courts to invalidate legislation that goes beyond even the modern warped doctrine; the decision on whether to expand existing Supreme Court precedent is precisely that ultimate court’s alone.
If the Court joins the Sixth Circuit and goes there, it would mean putting the final nail in federalism’s coffin. But I doubt that proposition will find five votes—and before then we may even see decisions to the contrary from one or more circuit courts.
Economic Freedom
Some smart folks have drawn strongly on the Fraser Institute’s Economic Freedom of the World Annual Report to put together a short video extolling the virtues of economic freedom. Enjoy!
The Fraser Institute report is published in the United States by the Cato Institute.
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