New at Cato, Tax Day Edition
Here are a couple of dishes Cato Institute scholars cooked up for Tax Day:
- Writing for National Review Online, Chris Edwards warns against the dangers of rapidly increasing government spending:
When filling out your tax forms, you might want to think for a second about where all that money is going. After federal spending roughly doubled in the Bush years, it is growing by leaps and bounds under President Obama. What’s more, the federal government is increasing the scope of its activities — it is intervening in many areas that used to be left to state and local governments, businesses, charities, and individuals.
There are now a staggering 1,804 subsidy programs in the federal budget. Hundreds of programs were added this decade, and the recent stimulus bill added even more. The result is that we are in the midst of the largest federal gold rush at taxpayer expense since the 1960s.
- At Townhall, Dan Mitchell rails against the current tax code:
Beginning as a simple two-page form in 1913, the internal revenue code has morphed into a complex nightmare that simultaneously hinders compliance by honest people and rewards cheating by Washington insiders and other dishonest people.
But that is just the tip of the iceberg. The tax code also penalizes economic growth, distorts taxpayer behavior, undermines American competitiveness, invites corruption and promotes inefficiency.
- At CNSNews.com, Edwards argues that policymakers should give Americans the low and simple tax code that they deserve.
- Also, don’t miss the new Cato video that reveals how troubling the American tax system really is.
Obama Tax Policies and Beyond
I was a panelist for a Tax Notes forum on April 3 regarding Obama’s tax policies. The other panelists were Len Burman of the Urban Institute and Gene Steuerle of the Peterson Foundation. It was an expert and ideologically diverse panel, but nobody was fond of Obama’s fiscal policy direction. (In the photo, that’s former CBO director Rudy Penner to my left. Photo credit to Derek Squires)
Tax Notes summarized the discussion: “A diverse panel of economists and tax specialists largely agreed … that President Obama’s tax and budget plans at best would fail to forestall long-term fiscal ruin and could even hasten its arrival.” One point of agreement was that the tax code is too complex and it doesn’t need the complicated new tax credits that Obama has proposed.
Where we differed was on the need for added federal revenue, and herein lies the big tax policy battle ahead. Len thought that some form of new value-added tax (VAT) was inevitable in order that the government could raise more money. I am increasingly hearing that argument from top fiscal scholars, and I fear that the drumbeat for a VAT will get louder.
Dan Mitchell and I are dead-set against a VAT because it will be a tool to fund even larger government, as we discuss in Global Tax Revolution. But supporters of limited government need to start watching this issue and making preparations to ward off a Euro-style money machine.
Here’s A “Toxic Asset” for You…
The Obama administration seems obsessed with making American taxpayers eat toxic assets. And I’m not talking about bad paper, derivatives, or any other inscrutable financial stinkers. I’m talking about good ol’ American public schooling.
Truth be told, after listening to the president’s presser last night, even I started to think that the key to American economic success is “investing” in education. After all, once you’ve heard something for about the twentieth time, you start to believe it. I mean, that’s how propaganda works, right? But somehow my mind refused to give in, and it forced me to remember:
We’ve been “investing” in government schools for decades, and have been reaping nothing but AIG-like results!
I actually laid out the startlingly awful returns we’ve gotten for our education dollars in several blog entries last month, but thought I’d revisit the basic, revolting facts one more time. I want it to be absolutely clear that lavishing more money on education isn’t change, nor, given what we get for the money, could it possibly be the key to long-term economic success.
So what have we invested? Let’s start with total outlays for elementary through post-secondary education, taken from table 26 of the latest Digest of Education Statistics. In 1969 we spent a total of $347 billion in inflation-adjusted dollars. In 2007, we spent $981 billion, a 183 percent increase.
How about public k-12 spending on a per-pupil basis? Again using Digest data (table 181) – which understates total expenditures by excluding such things as “state administration expenditures” – we can see that we’ve been spending increasingly sizable amounts. After adjusting for inflation, in 1969 we spent $5,161 per child. By 2005, that number had more than doubled, hitting $11,643. And what has that “investment” yielded?
Other than massive bloat, bupkus! Looking at National Assessment of Educational Progress long-term trend scores for 17-year-olds – essentially, our schools’ final products – we see almost complete academic stagnation. In mathematics, the average scale score was 304 (out of 500) in 1973, and only a measly 3 points higher in 2004! That’s a one percent increase in math outcomes for a roughly 100 percent increase in funding! And that actually beats the “return” in reading, where 17-year-olds were at 285 in 1971 and, yup, 285 in 2004!
How about higher education? Here we don’t have very good outcome measures and it is difficult to break down overall per-pupil expenditures. What we do have, however, suggests another bad investment.
To get a feel for expenditures, we can examine the State Higher Education Executive Officers report (figure A) showing that total revenue collected per full-time-equivalent student at public institutions, adjusted for inflation, grew from $8,463 in 1983 to $11,037 in 2008, a 30 percent increase. We can also look at aid per student, most of which came through government. According to data from the College Board (table 3), in 1983 the average full-time-equivalent student received $3,769 in inflation-adjusted aid. In 2007 she got $10,392, a 176 percent increase.
What are the returns on these investments? Again, lots of bloat, but from what we can tell, relatively little of educational value. Graduation rates, for one thing, seem to be falling.
According to the Population Studies Center, within eight years of graduating high school, 51.1 percent of students in the high school class of 1972 had finished college degrees. In contrast, only 45.3 percent of 1992’s high school class had done the same. And grads seem to be getting less well educated; according to the National Assessment of Adult Literacy, between 1992 and 2003 literacy levels dropped for both Americans whose education maxed out at a bachelor’s degree and those with graduate degrees. Whether it was graduates’ ability to read prose, documents, or handle math, scores went down while costs went up.
So all told, what do we have to show for our education investment? Pretty much just empty bank accounts. And yet, some politicians just can’t seem to get enough of those toxic assets!
Week in Review: Bailout Bonuses, Marijuana and Eminent Domain Abuse
House Approves 90 Percent ‘Bonus Tax’
Sparked by outrage over the bonus checks paid out to AIG executives, the House approved a measure Thursday that would impose a 90 percent tax on employee bonuses for companies that receive more than $5 billion in federal bailout funds.
Chris Edwards, Cato’s director of tax policy studies, says the outrage over AIG is misplaced:
While Congress has been busy with this particular inquisition, the Federal Reserve is moving ahead with a new plan to shower the economy with a massive $1.2 trillion cash infusion — an amount 7,200 times greater than the $165 million of AIG retention bonuses.
So members of Congress should be grabbing their pitchforks and heading down to the Fed building, not lynching AIG financial managers, most of whom were not the ones behind the company’s failures.
Cato executive vice president David Boaz says this type of selective taxation is a form of tyranny:
The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers.
On a related note, Cato senior fellow Richard W. Rahn defended the use of tax havens in a recent Wall Street Journal op-ed, saying the practice will only become more prevalent as taxes increase in the United States:
U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world’s highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.
Obama to Stop Raids on State Marijuana Distributors
Attorney General Eric Holder announced this week that the president would end federal raids on medical marijuana dispensaries that were common under the Bush administration.
It’s about time, says Tim Lynch, director of Cato’s Project on Criminal Justice:
The Bush administration’s scorched-earth approach to the enforcement of federal marijuana laws was a grotesque misallocation of law enforcement resources. The U.S. government has a limited number of law enforcement personnel, and when a unit is assigned to conduct surveillance on a California hospice, that unit is necessarily neglecting leads in other cases that possibly involve more violent criminal elements.
The Cato Institute hosted a forum Tuesday in which panelists debated the politics and science of medical marijuana. In a Cato daily podcast, Dr. Donald Abrams explains the promise of marijuana as medicine.
Cato Links
• A new video tells the troubling story of Susette Kelo, whose legal battle with the city of New London, Conn., brought about one of the most controversial Supreme Court rulings in many years. The court ruled that Kelo’s home and the homes of her neighbors could be taken by the government and given over to a private developer based on the mere prospect that the new use for her property could generate more tax revenue or jobs. As it happens, the space where Kelo’s house and others once stood is still an empty dustbowl generating zero economic impact for the town.
• Daniel J. Ikenson, associate director of Cato’s Center for Trade Policy Studies, explains why the recent news about increasing protectionism will be short-lived.
• Writing in the Huffington Post, Cato foreign plicy analyst Malou Innocent says Americans should ignore Dick Cheney’s recent attempt to burnish the Bush administration’s tarnished legacy.
• Reserve your spot at Cato University 2009: “Economic Crisis, War, and the Rise of the State.”
Corruption Rewarded in Government
In Downsizing the Federal Government, I discussed some of the corruption surrounding former Senator Ted Stevens:
Another example of abuse engineered by Senator Stevens involves Alaska Native Corporations. Because of rule changes slipped in by Stevens, these shadowy businesses based in his state are allowed to circumvent normal federal procurement rules and win no-bid contracts. The result of such loopholes is that taxpayers do not get value for their money. For example, in 2002 a half billion dollar contract for scanning machines at U.S. border crossings was given to a native corporation with little experience in the technology, instead of established leaders in the field who were not allowed to bid.
The Washington Post did a good job of bringing the scandal of ANCs to light a few years ago. Did the spotlight on ANCs and connections to disgraced Senator Stevens convince Congress to move ahead with reforms? Hardly. From Government Executive today:
In fiscal 2008, companies owned by Alaskan regional and tribal corporations earned a record $5 billion in federal contracts, nearly 10 times the $506 million they earned in fiscal 2000 … ANCs earned two-thirds of the $24 billion they accumulated in prime contracts since fiscal 2000 through the Small Business Administration’s 8(a) Business Development program … Federal acquisition specialists said the data shows that the program, which was designed to help small and disadvantaged companies, has been undermined by a system that rewards companies that earn hundreds of millions in annual revenue.
In the story, Steven Schooner, of George Washington University, summed up the scam well: “The ANC program, as currently implemented, is a blunt instrument that distorts the procurement system, injects well-founded cynicism into the process, and reinforces the belief that government procurement is more about allocating political spoils than ensuring that the government receives value for taxpayer money.”
President Obama has promised procurement reform. He could start be eliminating ANCs and other forms of procurement favoritism.
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