The Joy of Tax Serfdom
Like a good peasant, I have already filed an extension, so I am at least temporarily compliant with the friendly people at the IRS. But since it is tax day, perhaps a slight bit of criticism of the tax code is warranted. I have already posted my video on the flat tax and warned about the risks of adding a value-added tax on top of the income tax in another video. I also posted a very successful video narrated by a former Cato intern about the harsh compliance costs of the internal revenue code. So it is time to reach into the archives and post this classic video produced by Caleb Brown and Austin Bragg of the Cato Institute.
P.S. Not that I would ever want to put my thumb on the scale of any contest, but I am defending the flat tax in an online debate for U.S. News & World Report with someone who favors the current system. You can cast a vote if you have an opinion on the matter.
P.P.S. Caleb has independently produced a video on the meaning of free enterprise. With politicians acting as if the business community is an ATM machine to finance a bigger welfare state, Caleb’s video puts a human face on what it means to be a risk-taking entrepreneur.
Bush Was a Statist, Not a Conservative
A former White House speechwriter, Mark Thiessen, has jumped to the defense of his former boss, writing for the Washington Post that George W. Bush “established a conservative record without parallel.” Even by the loose standards of Washington, that is a jaw-dropping assertion. I’ve been explaining for years that Bush was a big-government advocate, even writing a column back in 2007 for the Washington Examiner pointing out that Clinton had a much better economic record from a free-market perspective. I also groused to the Wall Street Journal the following year about Bush’s dismal performance.
“Bush doesn’t have a conservative legacy” on the economy, said Dan Mitchell, a senior fellow at the libertarian Cato Institute. “Tax-rate reductions are the only positive achievement, and those are temporary … Everything else that has happened has been permanent, and a step toward more statism.” He cited big increases in the federal budget, along with continuing subsidies in agriculture and transportation, new Medicare drug benefits, and increased federal intervention in education and housing.
Let’s review the economic claims in Mr. Thiessen’s column. He writes:
Washington Prospers While America Suffers
Unemployment in the heartland may be high and incomes may be stagnating in most of the nation, but Washington, DC, continues to be an oasis of prosperity as more of the nation’s resources get consumed by government. The latest evidence comes from the Washington Post, which reports on the federal government’s insatiable demand for more real estate.
Evidence of the federal government’s growing influence on Washington area commercial real estate is illustrated in big deals it is working on both sides of the table: auctioning a 127,000-square-foot Bethesda building previously occupied by the National Institutes of Health and moving to snatch up vast spaces in buildings on the private market that have been vacant for months. The General Services Administration is seeking to unload the 10-story building that the NIH vacated in 2002 when it consolidated offices into other buildings in Bethesda. The recommended opening bid for the online auction, which runs from April 30 to July 2, is $14 million. At the same time, federal leasing activity is expanding, according to Jones Lang LaSalle, the real estate firm representing the government. The government signed deals for 750,000 square feet of space in the District in the first quarter of 2010, compared with 670,000 square feet in the city for all of 2009.
It’s hard to pick out the most depressing part of the article. Signing leases for more space in the first quarter of 2010 than in all of 2009 might be at the top of the list. That is presumably a good (and discouraging) measure of the growth of government. But for those who enjoy reading about incompetence and inefficiency, the government’s eight-year (and counting) project to sell one office building may be at the top of the pile.
The GSA decided to sell the 46-year-old former NIH building at 7550 Wisconsin Ave. in Bethesda eight years ago. “We have a process we have to go through before we sell a building. We have to offer it to homeless housing, to local government,” said Bob Peck, commissioner for the GSA’s Public Buildings Service.
More discouraging factoids include a six-figure increase in the number of bureaucrats (just in the DC area), and the fact that the government is going to squander huge amounts of money on green renovations, which will require taxpayers to cough up lots of money for the contractors doing the work and for five-year leases (which probably means ten, knowing the sloth-like pace of government work) so the bureaucrats can be housed elsewhere during the work.
Expansion of the government’s role in the nation’s financial markets, increased defense spending and the new health-care law are driving its demand for more space. The government is expected to increase its Washington area payroll by as many as 100,000, according to Partnership for Public Service, a nonprofit group that helps the federal government find workers. “The government spent 2009 planning for the growth. We’re going to see the growth materialize in 2010,” said Scott Homa, research manager for Jones Lang LaSalle. The government also is overhauling many of its buildings, making them energy efficient. As a result, several agencies will need to lease space in the commercial market for five years or so during renovations.
The Flat Tax: Good for America, Bad for Washington
America’s biggest fiscal challenge is excessive government spending. The public sector is far too large today and it is projected to get much bigger in coming decades. But the corrupt and punitive internal revenue code is second on the list of fiscal problems. This new video, narrated by yours truly, explains how a flat tax would work and why it would promote growth and fairness. Something to keep in mind with tax day in just a couple of weeks.
There are two big hurdles that must be overcome to achieve tax reform. The first obstacle is that the class-warfare crowd wants the tax code to penalize success with high tax rates. That issue is addressed in the video in a couple of ways. I explain that fairness should be defined as treating all people equally, and I also point out that upper-income taxpayers are far more likely to benefit from all the deductions, credits, exemptions, preferences, and other loopholes in the tax code. The second obstacle, which is more of an inside-the-beltway issue, is that the current tax system is very rewarding for the iron triangle of lobbyists, politicians, and bureaucrats (or maybe iron rectangle if we include the tax preparation industry). There are tens of thousands of people who make very generous salaries precisely because the tax code is a playground for corrupt deal making. A flat tax for these folks would be like kryptonite for Superman. But more than two dozen nations around the world have implemented a flat tax, so hope springs eternal.
Why Is Obama Trying to Make America More Like Sweden when Swedes Are Trying to Be Less Like Sweden?
In this new video from the Center for Freedom and Prosperity, a Swedish economics student makes three important points.
- Sweden became a rich nation in the late 1800s and first half of the 1900s by relying a free markets and small government.
- Growth deteriorated beginning in the 1970s after the imposition of high tax rates and a big increase in the burden of government spending.
- For the last 20 years, Swedish lawmakers have been trying to restore prosperity by lowering tax rates and adopting pro-market policies.
So if Swedes have learned from their mistakes and are now trying to reduce the size and scope of government, why are American politicians determined to repeat those mistakes? This is something to keep in mind with a looming vote on a giant expansion of the welfare state.
Senator Bunning Exposes Washington’s Fiscal Frauds
President Obama and many other politicians in Washington are big fans of pay-as-you-go budgeting, which means they want any new spending or tax relief offset (or “paid for”) with tax increases or spending cuts from other parts of the budget. Or at least that’s what they claim. But when Senator Bunning took them at their word and blocked a $10 billion spending bill because his colleagues were unwilling to make some tiny changes elsewhere, he was treated like a leper. Even his Republicans colleagues largely disapproved of his actions (so much for having learned any lessons from the drubbings they took at the polls in 2006 and 2008). Attacked from all sides, Bunning eventually relented in exchange for an offset vote (which was defeated, of course). What makes this episode interesting is not the specific policies that were being considered. As I posted earlier this week, Bunning was not even trying to shrink the size of government. Indeed, his “offset” was actually a tax increase (getting rid of a special tax break for paper manufacturing).
But this incident does expose the gross hypocrisy of the supposed deficit hawks in Washington. President Obama and the Democrats (and many Republicans) pretend they care about deficits, but their concerns magically disappear whenever there is a chance to buy votes by spending other people’s money. When tax cuts or tax increases are being debated, however, many of these same politicians piously declare their unwavering opposition to red ink (unless, of course, it’s a special tax break for a contributor). But perhaps it’s no surprise to discover that politicians think higher taxes are the solution to the over-spending problem in Washington.
What about the organizations that supposedly exist to fight deficits, such as the Concord Coalition and the Committee for a Responsible Federal Budget (they should be fighting spending instead, but let’s set that issue aside). Folks from these groups often ask politicians to be courageous and make “tough choices.” So I went to the Concord Coalition’s homepage and was shocked, shocked to find nothing about Bunning’s effort. I checked the blog and the press releases and found lots of tough rhetoric, but not one word of praise (or one word of any sort) for a Senator who tried to put the Concord Coalition’s words into action. And what about the Committee for a Responsible Federal Budget? Same song, second verse. Not a mention of Bunning on the homepage, blog, or in the press releases. (See update below)
Anybody care to make any predictions whether these groups will be similarly silent when President Obama’s “Fiscal Responsibility Commission” unveils a big tax hike?
Mea Culpa: On another matter, I have to confess an error. I did an interview for NBC affiliate stations on the financial mess at the Postal Service. I haven’t spent any time on that issue, so I quickly scanned some material from my Cato colleagues Chris Edwards and Tad DeHaven and saw that Congress had given an indirect bailout to the Postal Service by suspending $4 billion of required pre-funding for retiree health benefits. I then went on the air and said that this was a taxpayer subsidy for the Postal Service’s lavish pay and benefits. The Postal Service does have lavish pay and benefits, and the indirect bailout may lead to a direct infusion of taxpayer money at some point in the near future, but what I said I was wrong because no taxpayer money is currently being allocated (and I would have avoided the mistake if I paid closer attention to what Chris and Tad wrote). So, please, postal workers, don’t go…um…postal on me.
Mea Culpa, Part II: I am getting sloppy in my old age. Maya MacGuineas of the Committee for a Responsible Federal Budget nailed me fair and square. CFRB did say something nice about Bunning on its blog back on February 26. I should have scrolled down farther. I did just check the Concord Coalition blog, all the way back to the beginning of the year, and was relieved (from a personal perspective, not on policy grounds) to find no mention of Bunning’s effort.
The Fiscal Equivalent of Defining Deviancy Down
Senator Jim Bunning of Kentucky may be the most unpopular man in Washington right now. And, as you may surmise, this means he is doing something admirable (envision Jimmy Stewart in Mr. Smith Goes to Washington and you’ll have the right context).
Republicans and Democrats want to rush through a bill to spend more money on everything from highways to healthcare to joblessness. Senator Bunning is simply saying that the new spending should be financed by reallocating some of the unspent money from the so-called stimulus. For this modest proposal, Bunning is being treated like a porcupine at a nudist camp, with both Republicans and Democrats expressing irritation that he is making it harder for them to buy votes with other people’s money.
I am delighted that Senator Bunning is putting some roadblocks in the path of bigger government, but this episode also illustrates how our hopes and expectations have been eroded. For all intents and purposes, Sen. Bunning is saying that if we want to waste money on A, B, and C, then we should not waste as much money on X, Y, and Z.
Even in the unlikely event that he succeeds, all Bunning will have accomplished to keep a bloated federal government at its current size, which is about twice as big as it was when Bill Clinton left office about nine years ago.
Whatever happened to getting rid of the Department of Education and Department of Energy? Who has a proposal to get rid of the Department of Housing and Urban Development? Are any politicians even talking about getting rid of the Department of Transportation? Or Department of Commerce? I could go on, but I’m already getting suicidally depressed.
Three cheers for Senator Bunning, but it says a lot about the era of Bush-Obama profligacy that his very modest proposal is seen as a radical idea.
Great Moments in (Anti) Stimulus
There were many reasons to oppose last year’s so-called stimulus legislation. But perhaps one of the most compelling reasons is that politicians and bureaucrats inevitably do really stupid things because the federal budget is a racket designed to funnel the maximum amount of money to powerful interest groups. Here’s a great example from a story linked on Kausfiles.com. A city in New Hampshire wanted to stick its snout in the trough in order to subsidize a water treatment plant, but eventually decided to reject the money because the local government’s out-of-pocket costs would increase – primarily thanks to corrupt rules designed to line the pockets of union bosses, but also because of protectionist requirements and a mind-boggling $100,000 of paperwork expenses:
As stimulating as it might have sounded at the time, the city recently declined $2.5 million from the American Recovery and Reinvestment Act for its new water treatment plant because federal wage regulations would have forced the city to pay more for the project. …the low bidder — Penta Corporation — presented final cost of $21 million with the stimulus funds and $17.3 million without. So the city said thanks, but no thanks, to the stimulus funds. “It just didn’t make sense,” said Deputy Public Works Director David Allen. “It was going to cost us more money to take the money.” Stimulus funds mandate workers are paid using Davis-Bacon Wage Determination, which sets the pay scale for workers on federal projects and added $2.5 million to the bottom line. The “Buy American” provision would’ve added another $500,000 and Allen said there would have been significant administrative costs — upwards of $100,000 — for the city to track it the way the government requires over the course of the two-year project.
A Value-Added Tax Is Not the Answer…Unless the Question Is How to Finance Bigger Government
While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.
Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.
I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.
But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.
The Hayek Boom
Bruce Caldwell, editor of The Collected Works of F. A. Hayek and Director of the Center for the History of Political Economy at Duke University, writes in today’s Washington Post about the booming interest in Hayek:
Friedrich Hayek, Nobel-prize winning economist and well-known proponent of free markets, is having a big month. He was last seen rap-debating with John Maynard Keynes in the viral video above, (in which Hayek is portrayed as the sober voice of reason while Keynes overindulges at a party at the Fed). His 1944 book, “The Road to Serfdom,” provided the theme for John Stossel’s Fox Business News program on Valentine’s Day.
Hayek, who died in 1992, is also reemerging as a bestselling author. A new edition of Hayek’s seminal book, “The Road to Serfdom,” was published in March 2007 by the University of Chicago Press as part of a series called “The Collected Works of F. A. Hayek,” for which I serve as editor. For over a year-and-a-half, the book sold respectably, at a clip of about 600 copies a month.
But then, in November 2008, sales more than quadrupled, and they haven’t slowed down since. What’s more, the Kindle edition went on sale in late May 2009 and is now the best-selling book that the University of Chicago Press has offered in that format.
I reported on the rising sales of The Road to Serfdom last July. I argued that a Wall Street Journal op-ed by Dick Armey had sent sales jumping in February. Caldwell has a slightly different answer. After noting the general concern about President Obama’s big-government program and the talk about socialized medicine, he writes:
But perhaps the biggest stimulus to sales was, well, the stimulus package. The macroeconomic analyses of John Maynard Keynes had gone quickly out of vogue in the 1970s, when a decade of stagflation delivered a death blow to the notion of Keynesian fine-tuning of the economy. But in early 2009, people were talking about Keynes again, and indeed the fiscal stimulus package, to the extent that it had a theoretical underpinning, would find one in Keynesian economics….
Because Keynes and Hayek actually did have a great debate over their rival theoretical models of a monetary economy in the early 1930s, just as the Slump of 1930 was turning into the Great Depression, it seemed natural for opponents of these policies to turn to Hayek’s writings. (For those who are interested in this episode, I recommend a perusal of volume 9 of The Collected Works, Contra Keynes and Cambridge.)
Not only is “The Road to Serfdom” still relevant in our own time, it has something else going for it, too. It is actually readable. Anyone who has tried to master Keynes’s “General Theory,” or for that matter Hayek’s rival title “Prices and Production,” will find the going pretty tough.
Not so for “The Road to Serfdom,” a book that was condensed by Reader’s Digest in April 1945, just as the war in Europe was ending. Plus, “The Road to Serfdom” is, simply put, a great, evocative title. And with 10 percent unemployment, people certainly have more time to read it.
In the end, however, I think that the underlying reason for the sustained interest in Hayek’s book is that it taps into a profound dissatisfaction in the public mind with the machinations of its government. Both Presidents Bush and Obama have presided over huge growth in the size of the federal government and in the size of the federal deficit, with little obvious effect on unemployment. Things seem out of control.
Whether it was the financial crisis, the stimulus package, Dick Armey’s endorsement, or general fears about the growth of government, I’m glad to see people rediscovering F. A. Hayek. His ideas are a good foundation for a coherent and consistent response to the collectivist resurgence that now seems to be on the defensive.
The Federal Government Is Bribing States to Create More Welfare Dependency?!?
If you want to get depressed or angry, the New York Times has an article celebrating the effort by politicians at all levels of government to lure more people into the food stamp program. New York City is running ads in foreign languagues asking people to stick their snouts in the public trough. The City is even signing up prisoners when they get out of jail. The state of New York, meanwhile, actually set up quotas for enrolling new recipients. And on the federal level, there apparently is a program that gives states “bonuses” for putting more people on the dole. No wonder one out of every eight Americans is receiving food stamps. By the way, this is not just the fault of Democrats. The ranking Republican on the Agriculture Committee is a big defender of the program, in part because of the sordid pact among urban and rural politicians to support each other’s handouts. And President George W. Bush’s food stamp administrator actually had the gall to assert “food stamps is not welfare.” No wonder the burden of federal spending skyrocketed during the reign of so-called compassionate conservatism. The correct policy, of course, is to get the federal government out of the welfare business. If Mayor Bloomberg thinks it is a “civic duty” to expand food stamps, he should see whether New York City voters agree with him – and want to foot the bill.
A decade ago, New York City officials were so reluctant to give out food stamps, they made people register one day and return the next just to get an application. The welfare commissioner said the program caused dependency and the poor were “better off” without it. Now the city urges the needy to seek aid (in languages from Albanian to Yiddish). Neighborhood groups recruit clients at churches and grocery stores, with materials that all but proclaim a civic duty to apply — to “help New York farmers, grocers, and businesses.” There is even a program on Rikers Island to enroll inmates leaving the jail. “Applying for food stamps is easier than ever,” city posters say. …These changes, combined with soaring unemployment, have pushed enrollment to record highs, with one in eight Americans now getting aid. “I’ve seen a remarkable shift,” said Senator Richard G. Lugar, an Indiana Republican and prominent food stamp supporter. “People now see that it’s necessary to have a strong food stamp program.” …The program has commercial allies, in farmers and grocery stores, and it got an unexpected boost from President George W. Bush, whose food stamp administrator, Eric Bost, proved an ardent supporter. “I assure you, food stamps is not welfare,” Mr. Bost said in a recent interview. Still, some critics see it as welfare in disguise and advocate more restraints. …The federal government now gives bonuses to states that enroll the most eligible people. …In 2008, the program got an upbeat new name: the Supplemental Nutrition Assistance Program — SNAP. …Since Mayor Michael R. Bloomberg took office eight years ago, the rolls have doubled, to 1.6 million people… Albany made a parallel push to enroll the working poor, setting an explicit goal for caseload growth. “This is all federal money — it drives dollars to local economies,” said Russell Sykes, a senior program official. But Mr. Turner, now a consultant in Milwaukee, warns that the aid encourages the poor to work less and therefore remain in need. “It’s going to be very difficult with large swaths of the lower middle class tasting the fruits of dependency to be weaned from this,” he said.
There Is Some Budget Good News, but It Is Actually Really Bad News
The Office of Management and Budget has released the President’s FY2011 budget and the Congressional Budget Office has released its semi-annual Budget and Economic Outlook. Much of the coverage of these documents has focused on deficit numbers. This is not a trivial concern, particularly since the Bush-Obama policies of bigger government have dramatically boosted red ink.
But the most important numbers in the budget documents are the estimates of what is happening to government spending. The good news is that burden of government spending is projected to decline over the next few years from about 25 percent of GDP to less than 23 percent of GDP.
That’s the good news. The bad news is that federal government outlays only consumed 18.2 percent of economic output when Bush took office. In other words, notwithstanding the good news cited above, the size and scope of government has increased dramatically since 2001. The worse news is that the long-run spending forecasts show a cataclysmic expansion in the burden of government. The “optimistic” estimate is that the federal government will consume more than 30 percent of GDP by 2050 and 40 percent of GDP by 2080.
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