Archive for the ‘Government and Politics’ Category
Everything You Need to Know About Public School Spending in Less Than 2½ Minutes
Neal McCluskey gutted the President’s new “Save the Teachers” American Jobs Act sales pitch a good while back, as did Andrew Coulson here. Thankfully, it seems a lot of senators agree it’s a bad idea.
Last week, a $35 Billion piece of the president’s new “stimulus” plan, which included $30 Billion to bail out government schools—again—went down in the Senate:
Our public education problem is huge; we’re spending far too much and getting way too little. But most people don’t know the basic details. They still think we need to spend more on education.
So, for all of you who want to get the details but don’t have much time, or have family and friends who need to be introduced to reality, I present to you . . . Everything you need to know about public school spending in less than 2½ minutes.
Watch it, “like” it, post it on Facebook, email it around, comment, and generally get the word out . . . because we really do need to get the word out.
The Euro Crisis in Prose and Poetry
The European debt crisis is inspiring public radio to literary analysis. Last week NPR’s Planet Money put the French-German relationship into a “threepenny opera”:
All
Everyone is counting on you
You’ve got the money
We’ve got the debt (Oh yes, we’ve got a lot of debt!)
And do we need a bailout—you betGermany
Zat’s it, I’ve had enough
Looks like it’s time now for me to leave…France
Oh?
Germany
Vhy is ze door locked? You must let me out.
France
Dear when the times are tough
It’s better to give zan to receive
Then Monday Marketplace Radio turned to classics professor Emily Allen Hornblower and economist Bill Lastrapes to discuss Greek debt as classical tragedy—Oedipus? The ant and the grasshopper?
Loyal Cato readers will recognize Bill Lastrapes as the coauthor of the much-discussed Cato Working Paper “Has the Fed Been a Failure?”
And then, if you prefer prose and sober analysis to literary analogies, let me recommend Holman Jenkins’s perceptive column on why Europe hasn’t solved its crisis yet, which unfortunately appeared in the less-read Saturday edition of the Wall Street Journal. (OK, not less read than Cato-at-Liberty, but probably less read than the weekday Journal.)
Neither leader has an incentive to sacrifice what have become vital and divergent interests to produce a credible bailout plan for Europe. To simplify, German voters don’t want to bail out French banks, and the French government can’t afford to bail out French banks, when and if the long-awaited Greek default is allowed to happen….
There is another savior in the wings, of course, the European Central Bank. But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat. Yet all know this is the outcome politicians are stalling for. This is the outcome markets are relying on, and why they haven’t crashed.
All are waiting for some market ruction hairy enough that the central bank will cast aside every political and legal restraint in order to save the euro….
And then the crisis will be over? Not by a long shot.
All these “solvent” countries and their banks will be dependent on the ECB to keep them “solvent,” a reality that can only lead to entrenched inflation across the European economy. That is, unless these governments undertake heroic reforms quickly to restore themselves to the good graces of the global bond market so they can stand up again without the ECB’s visible help.
It’s just conceivable that this might happen—that countries on the ECB life-support might put their nose to the grindstone to make good on their debts, held by ECB and others. Or they might just resume the game of chicken with German taxpayers, albeit in a new form, implicitly demanding that Germany bail out the ECB before the bank is forced thoroughly to debauch the continent’s common currency, the euro.
Grading Perry’s Flat Tax: Some Missing Homework, but a Solid B+
Governor Rick Perry of Texas has announced a plan, which he outlines in the Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s review his proposal, using the principles of good tax policy as a benchmark.
1. Does the plan have a low, flat rate to minimize penalties on productive behavior?
Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.
2. Does the plan eliminate double taxation so there is no longer a tax bias against saving and investment?
The Perry flat tax gets rid of the death tax, the capital gains tax, and the double tax on dividends. This would significantly reduce the discriminatory and punitive treatment of income that is saved and invested (see this chart to understand why this is a serious problem in the current tax code). Since all economic theories – even socialism and Marxism – agree that capital formation is key for long-run growth and higher living standards, addressing the tax bias against saving and investment is one of the best features of Perry’s plan.
3. Does the plan get rid of deductions, preferences, exemptions, preferences, deductions, loopholes, credits, shelters, and other provisions that distort economic behavior?
A pure flat tax does not include any preferences or penalties. The goal is to leave people alone so they make decisions based on what makes economic sense rather than what reduces their tax liability. Unfortunately, this is one area where the Perry flat tax falls a bit short. His plan gets rid of lots of special favors in the tax code, but it would retain deductions (for those earning less than $500,000 yearly) for charitable contributions, home mortgage interest, and state and local taxes.
As a long-time advocate of a pure flat tax, I’m not happy that Perry has deviated from the ideal approach. But the perfect should not be the enemy of the very good. If implemented, his plan would dramatically boost economic performance and improve competitiveness.
That being said, there are some questions that need to be answered before giving a final grade to the plan. Based on Perry’s Wall Street Journal column and material from the campaign, here are some unknowns.
1. Is the double tax on interest eliminated?
A flat tax should get rid of all forms of double taxation. For all intents and purposes, a pure flat tax includes an unlimited and unrestricted IRA. You pay tax when you first earn your income, but the IRS shouldn’t get another bite of the apple simply because you save and invest your after-tax income. It’s not clear, though, whether the Perry plan eliminates the double tax on interest. Also, the Perry plan eliminates the double taxation of “qualified dividends,” but it’s not clear what that means.
2. Is the special tax preference for fringe benefits eliminated?
One of the best features of the flat tax is that it gets rid of the business deduction for fringe benefits such as health insurance. This special tax break has helped create a very inefficient healthcare system and a third-party payer crisis. It is unclear, though, whether this pernicious tax distortion is eliminated with the Perry flat tax.
3. How will the optional flat tax operate?
The Perry plan copies the Hong Kong system in that it allows people to choose whether to participate in the flat tax. This is attractive since it ensures that nobody can be disadvantaged, but how will it work? Can people switch back and forth every year? Is the optional system also available to all the small businesses that use the 1040 individual tax system to file their returns?
4. Will businesses be allowed to “expense” investment expenditures?
The current tax code penalizes new business investment by forcing companies to pretend that a substantial share of current-year investment outlays take place in the future. The government imposes this perverse policy in order to get more short-run revenue since companies are forced to artificially overstate current-year profits. A pure flat tax allows a business to “expense” the cost of business investments (just as they “expense” workers wages) for the simple reason that taxable income should be defined as total revenue minus total costs.
Depending on the answers to these questions, the grade for Perry’s flat tax could be as high as A- or as low as B. Regardless, it will be a radical improvement compared to the current tax system, which gets a D- (and that’s a very kind grade).
Here’s a brief video for those who want more information about the flat tax.
Last but not least, I’ve already received several requests to comment on how Perry’s flat tax compares to Cain’s 9-9-9 plan.
At a conceptual level, the plans are quite similar. They both replace the discriminatory rate structure of the current system with a low rate. They both get rid of double taxation. And they both dramatically reduce corrupt loopholes and distortions when compared to the current tax code.
All things considered, though, I prefer the flat tax. The 9-9-9 plan combines a 9 percent flat tax with a 9 percent VAT and a 9 percent national sales tax, and I don’t trust that politicians will keep the rates at 9 percent.
The worst thing that can happen with a flat tax is that we degenerate back to the current system. The worst thing that happens with the 9-9-9 plan, as I explain in this video, is that politicians pull a bait-and-switch and America becomes Greece or France.
The Downside of Federal Infrastructure Spending
My Washington Post op-ed on federal infrastructure yesterday elicited a large and vigorous response. The comments on the WaPo site and emails to my inbox were about 80 percent in opposition to my views.
Here are some critiques of my article and my responses:
Critique: My view of devolving infrastructure funding to the states is unrealistic because only the federal government has enough “resources” to do big projects.
Response: The federal government has no magical source of money. All “federal dollars” ultimately come from taxpayers who live in the 50 states. It is true that the federal government can run larger deficits that state governments, but that’s a reason not to give the Feds responsibility for spending activities because they tend to go hog wild.
Critique: Maybe the federal government screws up, but so do state governments and private companies.
Response: Of course. But as the op-ed noted, when the Feds screw-up they botch it for the entire country, often for many decades. The federal government is a monopoly, and monopolies breed inefficiency. By contrast, the states compete with each other and learn from each other to an extent. And when private companies screw up repeatedly, they go belly up.
Critique: Maybe the federal government screws up, but we should just try to make it work better.
Response: The histories of the Corps and Reclamation illustrate patterns of failure for more than a century. And we’ve explored similar patterns with other federal agencies at www.downsizinggovernment.org. Federal problems are often deep-rooted and systematic, and they defy the many well-meaning efforts at reform, such as Al Gore’s “reinventing government” initiative in the 1990s. So it’s time to try something different—like exploring privatization.
Critique: We need the federal government for things like the Interstate Highway System because infrastructure crosses state lines.
Response: Numerous people made this point regarding my op-ed, but I’m afraid they didn’t put their thinking caps on. Private energy pipelines cross state and international borders, and so do the huge systems of the private freight railroads, such as Union Pacific.
Critique: Federal agencies, such as the Corps, often contract-out work to private companies that do the actual construction, so failures like Hurricane Katrina are private failures.
Response: Hurricane Katrina represented a failure of government on many levels, as I’ll address in an upcoming essay on the Corps. The American Society of Civil Engineers concluded that “a large portion of the destruction from Hurricane Katrina was caused by …engineering and engineering-related policy failures.” So that’s the fault of the Corps, not private contractors.
Anyway, the volume of negative, snarky, and knee-jerk responses to my suggesting that the federal government doesn’t work very well is rather depressing. I criticized Rachel Maddow for “thinking big” about federal spending. But the nation is going to have to “think big” about government reforms to avert the looming federal fiscal disaster. Devolution and privatization offer part of the solution both to reduce debt and to revive U.S. economic growth in coming years.
Should You Need a License to Hang Curtains?
The latest example of liberty-reducing occupational licensing schemes comes to us from Florida, where a law restricts the practice of interior design to people the state has licensed. Those wishing to pursue this occupation must first undergo an onerous process ostensibly in the name of “public safety.”
In reality, the law serves as an anti-competition measure that protects Florida’s current cohort of interior designers. Our friends at the Institute for Justice have pursued a lawsuit against the law but lost their appeal in the Eleventh Circuit.
Cato has now joined the Pacific Legal Foundation on an amicus brief asking the Supreme Court to review that ruling. The lower court got it wrong not just with respect to the right to earn a living, however, but also on First Amendment grounds.
That is, interior design, as a form of artistic expression, is historically protected by the First Amendment. Indeed, interior designers are measured primarily on the value of their aesthetic expression, not for any technical knowledge or expertise. This type of artistry is a matter of taste, and the designer and client usually arrive at the end result through collaboration and according to personal preferences. Thus, the designer-client relationship has little in common with traditionally regulated professions such as medicine, law and finance, where bad advice can have real and far-reaching consequences—but even then, the Supreme Court has emphasized the First Amendment implications of placing “prior restraints” on expression through burdensome licensing schemes.
Instead of following that precedent, however, the circuit court carved out a constitutionally unprotected exception for “direct personalized speech with clients.” Florida’s “public safety” justification is similarly weak, given that the state has presented no evidence of any bona fide concerns that substantiate a burdensome licensing scheme that includes six years of higher education and a painstaking exam—instead relying on cursory allegations that, for example, licensed designers are more adept at ensuring that fixture placements do not violate building codes.
Finally, the Eleventh Circuit’s ruling disregarded the infinite array of auxiliary occupations the Florida law subjects to possible criminal sanctions: wedding planners, branding consultants, sellers of retail display racks, retail business consultants, corporate art consultants, and even theater-set designers could all get swept in. The state has already taken enforcement actions against a wide spectrum of people who are not interior designers, including office furniture dealers, restaurant equipment suppliers, flooring companies, wall covering companies, fabric vendors, builders, real estate developers, remodelers, accessories retailers, antique dealers, drafting services, lighting companies, kitchen designers, workrooms, carpet companies, art dealers, stagers, yacht designers, and even a florist. This dragnet effect also suggests that the law is too broad to survive constitutional scrutiny.
The Court will likely decide by the end of the year (or early 2012) whether to take this case of Locke v. Shore.
Living in the Past
A year after Kate Zernike wrote in the New York Times that Tea Partiers were “resurrect[ing] once-obscure texts by dead writers”—such as F. A. Hayek, who won the Nobel Prize in 1974 and died in 1992—the New Yorker‘s cover depicts Wall Streeters in top hats and bushy mustaches. That’s an image from, what, the 1930s? Or maybe the 1870s? Who’s “reach[ing] back to dusty bookshelves for long-dormant ideas” now?
Finally, Some Scrutiny of Romney’s Culpability for ObamaCare
Just days after the other Republican presidential candidates finally started holding Mitt Romney’s feet to the fire for the ObamaCare 1.0 health care law he signed while governor of Massachusetts, the Wall Street Journal slams his health care record in not one but two opinion pieces.
See also this pertinent Cato video:
GAO Throws Water on Postal Bailout
The Government Accountability Office has weighed in on the controversy over whether the federal government “owes” the U.S. Postal Service approximately $50-$75 billion in alleged pension “overpayments” made by the USPS to the government’s retirement system. In short, the GAO concluded that the USPS is not owed the money.
The controversy is interesting because it pits government agencies against each other. The USPS, the USPS inspector general, and the Postal Regulatory Commission say money is owed. The Office of Personnel Management, which administers the government’s retirement system, and the OPM inspector general say that money isn’t owed. The GAO is the most neutral party so its findings should carry more weight with members of Congress. Let’s hope as a transfer from the federal government to the USPS would amount to a taxpayer bailout.
The GAO explains:
Any assets that are transferred from the nonpostal to the postal subaccount of CSRS [Civil Service Retirement System] would increase the federal government’s nonpostal CSRS unfunded liability, which must then be paid by the federal government through tax revenue, borrowing, or both. For example, adoption of the recommendation in the PRC report would result in an asset transfer of about $50 billion to $55 billion, which would then need to be repaid by the federal government and taxpayers.
The GAO also notes that a bailout wouldn’t solve the USPS’s long-term problems:
Any change in the USPS’s share of responsibility for CSRS benefits would provide some temporary relief from the pressures USPS faces because of declining volume, revenue, and inflexible costs, but would not by itself address USPS’s long-term financial outlook. Such a transfer of CSRS funds would not be sufficient to repay all of USPS’s debt and address current and future operating deficits related to USPS’s inability to cut costs quickly enough to match declining mail volume and revenue.
See this Cato essay for more on the USPS’s problems and why it should ultimately be privatized.
Did Canada Steal Our Tenth Amendment?
Under the U.S. Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Those delegated powers are “few and defined,” noted James Madison.
But the Tenth Amendment has disappeared. No one has seen it in recent decades. But I’ve found some statistics that make me very suspicious that the Canadians stole the Tenth. Look at the pie charts below. The top pie shows that 71 percent of total government spending in the United States is federal, while 29 percent is state/local. (See BEA tables 3.1, 3.2, 3.3 for 2010 data).
Back when we still had the Tenth, that ratio was the other way around—like how the bottom chart looks for Canada today. In Canada, federal spending accounts for just 38 percent of total government spending, while provincial/local spending accounts for 62 percent. (See Canada Yearbook for 2010/11 data.)
Actually, the real culprit for the missing Tenth is not the Canadians, but the U.S. Congress. In recent decades, Congress has undertaken many activities that were traditionally reserved to state and local governments. A primary method has been through “grants-in-aid.” These are federal subsidies combined with regulatory controls that micromanage state and local affairs. In United States, federal grants are about 4.1 percent of GDP (in fiscal 2011), while in Canada they are about 3.3 percent of GDP.
Even more striking: while we’ve got a complex mess of more than 1,000 state grant programs, Canada seems to have just a handful, and they are simple block grants. As I understand it, Canada’s federal grants to lower governments mainly just include:
- A health care block grant
- A social services block grant
- An “equalization” block grant to help the poor provinces.
There is a smattering of other aid, but that’s just about it. There are no federal subsidies for K-12 education in Canada, for example. There are a few large block grants and not much else.
On October 27, I’m on an Urban/Brookings panel looking at “What Can the United States Learn from Canada.” Perhaps we can learn how to get our decentralized federation back. While we’re at it, we could get some tips on how to cut government spending, as the Canadians did in the 1990s.
Herman Cain’s 9-9-9 Tax Plan: The Good, the Bad, and the Ugly
Actually, the title of this post should probably read, “The Good, Good, Good, Bad, and the Ugly.”
That’s because Herman Cain’s 9-9-9 tax plan has low tax rates, it eliminates double taxation, and it wipes out loopholes, and those are three very big and very good things.
The bad part, as I explain here, is that Cain would let politicians impose a national sales tax at the same time as an income tax.
And the ugly part is that he also would let them impose a value-added tax as well, as I discuss here.
I pontificate on all these issues in the latest Coffee and Markets podcast, which you can listen to by clicking here.
In closing, I will admit that it’s been very frustrating to deal with Cain’s plan. Supporters of Cain accuse me of being too critical and opponents of Cain accuse me of being too nice.
Normally, I don’t like being in the middle of the road, but that seems to be the only logical place to be since 9-9-9 has some really good features and some really bad features.
Whither Constitutional Authority Statements?
On its first day of business this past January, the Republican House majority adopted a new rule requiring every bill to include a so-called constitutional authority statement, listing the part(s) of the Constitution that give Congress the power to do what the bill says.
At the time, I analyzed the requirement, as did Cato’s chairman emeritus Bill Niskanen, and what effect it might have on congressional action. We noted that, while it was a good thing for people (and especially elected officials) to be paying attention to the Constitution, the practical effect may be negligible because legislators would overwhelmingly cite the General Welfare Clause, Commerce Clause, and Necessary and Proper Clause — all part of Article I, section 8. To minimize this result, Cato ran an ad in Politico and other publications explaining what these clauses could and could not justify. Here are the points we made:
- Contrary to modern readings, the General Welfare Clause does not grant Congress an independent power to tax and spend for the “general welfare.” If it did, there would be no need to enumerate any other powers. Rather, it authorizes Congress to enact the specified taxes for the specified purposes—headings more precisely defined by the 17 enumerated powers or ends that follow. And Congress’s power to tax for the “general welfare” precludes it from taxing to provide for special parties or interests.
- The Commerce Clause too does not authorize Congress to regulate anything and everything, which again would put an end to the idea of a government of enumerated and thus limited powers. Under the Articles of Confederation, states had erected tariffs and other protectionist measures that were impeding interstate commerce. To end that and ensure free interstate commerce, Congress was given the power to regulate, or “make regular,” such commerce—the main sense of “regulate” at the time. Were Congress thought to have the all but unbounded regulatory power it exercises today, the Constitution would never have been ratified.
- The Necessary and Proper grants Congress the means to execute its enumerated powers or ends and those of the other branches. It adds no new ends. And the means must be “necessary and proper.” That means they must respect the Constitution’s structure and spirit of limited government; they must respect federalism principles; and they must respect the rights retained by the people.
So, nine months later, what happened? The Republican Study Committee – essentially the GOP House Caucus’s conservative sub-caucus — has come up with the following analysis (analyzing 3042 bills through September 16, some of them counted more than once in the below statistics):
- 3 bills cite only the Preamble to the Constitution.
- 84 bills cite only Article 1, which creates the Legislative Branch.
- 58 bills cite only Article 1, Section 1, which grants all legislative powers to Congress.
- 470 bills cite only Article 1, Section 8, which is the list of specific powers of Congress, without citing any specific clause.
- 539 bills cite [the General Welfare Clause].
- 567 bills cite [the Commerce Clause].
- 247 bills cite [the Necessary and Proper Clause], without citing a “foregoing power” as required by [Article I, section 8,] clause 18.
- 309 bills cite two or more of the “general welfare” clause, commerce clause, or the “necessary and proper” clause.
- 87 bills cite Article 1, Section 9, Clause 7, which provides that no money shall be drawn from the Treasury, but in consequence of appropriations made by law.
- 210 bills cite Article 4, Section 3, which provides that Congress shall have the power to make rules and regulations respecting the territory or property of the United States.
- 252 bills cite an amendment to the Constitution. For example, 54 cite the 10th Amendment (powers not delegated to the federal government), 30 cite the 14th Amendment (“equal protection, etc.”), and 64 cite the 16th Amendment (income tax).
Pretty thin gruel and, as I noted above, not unexpected. Then again, if the constitutional authority statement requirement has caused even one House member to waver over what he has the power to propose — let alone to refrain from offering a bill — this minor legislative rule will have been an improvement on the status quo ante.
Race-Based Tax Exemptions Are Unconstitutional
Hawaii continues to think that it’s not quite part of the United States and thus not fully subject to U.S. law.
In the 2000 case of Rice v. Cayetano, the Supreme Court struck down race-based voting requirements for certain Hawaii state officers because government schemes that distinguish between “native Hawaiian” and “Hawaiian” are racial classifications that must pass “strict scrutiny” to be deemed constitutional; they must be narrowly tailored to achieve a truly “compelling” purpose (a standard nearly impossible to meet). Yet that exact same category of “native Hawaiian” — whose frighteningly archaic definition is “any descendant of not less than one-half part of the blood of the races inhabiting the Hawaiian Islands previous to 1778” — was used in the Hawaii Homes Commission Act to distinguish those who can hold certain leases that are subject to little or no property tax.
A group of Hawaiians who do not meet the state’s definition of “native Hawaiian” and therefore suffer under the explicitly race-based law decided to challenge these property-tax exemptions. After paying their taxes, these plaintiffs sought refunds on the grounds that the classification scheme violates the Fourteenth Amendment’s Equal Protection Clause.
The Supreme Court of Hawaii, however, ruled that they didn’t have standing — a legal doctrine that determines who can bring a claim — to challenge the taxes on the ground that they had not yet asked for the leases (for which they were indisputably ineligible due to not having enough “blood of the races” flowing through their veins). A lower state court had even ruled that the classification was not race-based—that it merely distinguishes leaseholders and non-leaseholders, even though Hawaiians without the sufficient “blood quantum” cannot be leaseholders!
The group of taxpayers now seek review in the U.S. Supreme Court. Cato, joined by the Pacific Legal Foundation, the Grassroot Institute of Hawaii, the Goldwater Institute, and Professor Paul M. Sullivan, filed a brief urging the Court to take the case and rectify Hawaii’s explicitly unconstitutional taxation scheme. We argue that, after Hawaii’s state judiciary refused to address the issue of racial discrimination head-on, only the U.S. Supreme Court is in a position to guarantee the constitutional protections that Hawaiians have lived under for over a century (since Hawaii became a territory). Only by taking this case and overturning the racially charged definition can the Court continue to ensure that Hawaii is a state that “neither knows nor tolerates classes among citizens.”
The Supreme Court will likely decide by the end of the year (or in early 2012) whether to hear this case, Corboy v. Louie.
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