Friday, April 30, 2010

Anybody Know If This Is True?

I'm sure it could be true, so it's worth sharing even if it is an urban legend.

More Regulation Will Increase Systemic Risk

One bonus of speaking at the Global Financial Services Centres Conference in Dublin earlier this week is that I got to listen to Paul Atkins, a former Commissioner at the Securities and Exchange Commission. Unlike many others who have served in that role, Paul understands economics and recognizes the limited value of government regulation. Here's and excerpt of what he had to say in the Wall Street Journal a few days ago about the so-called reform legislation being pushed by the White House and Hill Democrats:

The centerpiece of this legislation includes creating a group of officials to regulate "systemic risk." Unfortunately, instead of advancing transparency and empowering investors, it will do very little to address systemic risk, while adversely affecting many of America's most successful non-financial businesses. In fact, combined with other provisions of the bill, government officials will be in a position to substitute their judgment for that of investors. ...The fundamentally wrong conclusion..., now seized upon by the Administration and politicians on both sides of the aisle, is that another, cleverly designed government institution is the prescription for our present ills. Given that most of the "bailed out" institutions were the most tightly regulated, even in terms of capital standards specifically designed to prevent the kind of bank run we witnessed, the "safety and soundness" approach to bank regulation itself needs to be reexamined. The end result of this traditional regulatory approach is that government bureaucrats tightly control the information that investors can learn about a financial institution, limiting proper analysis. ...The bill proposed by Senator Christopher Dodd, along with the Treasury and House versions, simply doubles down on this same approach. The proposals seek to extend bank-style regulation to any American company that is deemed to be systemically significant – a "threat" to the financial system. The powers extend to companies and, ultimately, financial products. The new regulatory body is to be both omniscient and omnipotent – supposedly able to predict future market excesses and use sweeping powers to stop them. If the bill becomes law, two outcomes are likely: the systemic risk regulator will prove as incapable of predicting the future as everyone else in history, and the regulator will prove so overly cautious that it prevents financial market innovation and stifles economic growth.

Thursday, April 29, 2010

Excellent Primer on the Financial Crisis

Russ Roberts of George Mason University has written a very good article for the Mercatus Center explaining - for economists and non-economists - how government intervention created distortions in the housing and finance sectors. He also blames Wall Street, paticularly for lobbying for the policies that caused the distortions and led to the financial crisis. Here's an excerpt from the executive summary:

Some blame capitalism for being inherently unstable. Some blame Wall Street for its greed, hubris, and stupidity. But greed, hubris, and stupidity are always with us. What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system? ...public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess. In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

Greek Chutzpah

There's an old joke that if you owe a bank $10,000, you have a problem, but if you owe a bank $10,000,000, the bank has a problem. The Greek government certainly seems to have that attitude. Short-sighted and corrupt politicians in Athens have spent their nation into a fiscal ditch and they now want to mooch from both the IMF and other European nations (especially Germany). The German Prime Minister (if only for political reasons) is talking tough, saying that Greece should do more to reduce subsidies and handouts. Why should Germans work until age 67, after all, so Greeks can enjoy overpaid government jobs and retire at age 61? So what is the response from the Greeks? Amazingly, one of the politicians had the gall to say his nation "cannot accept" further wage cuts. Here's an excerpt from the Daily Telegraph:

It is far from clear whether Athens will agree to further austerity as strikes hit the country day after day. Andreas Loverdos, Greece’s labour minister, said the EU-IMF team wants further wages cuts. “We cannot accept that.” Greece knows it can opt for default at any time, setting off an EMU-wide crisis and bringing down Europe’s banks. It also knows that key figures in the Bundestag favour debt restructuring. “Those who chased high yield by purchasing Greek debt must share the costs,“ said Volker Wissing, chair of Bundestag’s finance committee. Leo Dautzenberg from the Christian Democrats said banks should prepare for a `haircut’ of up to 50pc. The ECB, Brussels, and the IMF have been fighting feverishly to head off such a move, fearing a financial chain-reaction.
If the Germans have any brains and pride, they will tell the Greeks to go jump in a lake (other phrases come to mind, but this is a family-oriented blog). And if this means that German banks take a loss on their holdings of Greek government debt, there's a silver lining to that dark cloud since it is time for financial institutions to realize that they should not be lending so much money to corrupt and wasteful governments.

Greetings from Spain

I arrived in Madrid yesterday for a speech to the annual Convention of Independent Financial Advisors, and it is somehow fitting that Spain was downgraded by Standard and Poor's as I entered the country. I'm not a fan of the bond-rating agencies, and the fact that it has taken so long for Spain to be downgraded simply reinforces my skepticism about their value. So let's focus instead on identifying the sources of Spain's fiscal crisis. If you look at the OECD's fiscal database, you will see that Spain's short-run problem is solely the result of a growth in the burden of government spending. Over the past seven years, the budget in Spain has skyrocketed from 38.4 percent of GDP to 47.2 percent of GDP. And since tax revenues have stayed the same as a share of national economic output, it is difficult to see how anyone can conclude that the fiscal crisis is the result of inadequate revenue. In the long run, the problem also is excessive government spending, largely because demographic factors such as an aging population will push up outlays for pensions and health care.

In other words, Spain is in trouble for the same reason that Greece is in trouble. Government is too big and politicians are unwilling to take the modest steps that are needed to rein in dependency. This, of course, is exactly why there should not be a bailout. Subsidizing Greek politicians and Spanish politicians - regardless of whether the bailout comes from German taxpayers and/or the IMF - will send a signal to other European nations that there is an easy way out. But the "easy way out" simply postpones the day of reckoning and makes the eventual adjustment much more challenging. Here's an excerpt from the Washington Post report:

European and International Monetary Fund officials on Wednesday were considering a dramatically increased $158 billion bailout package for Greece as the country's debt crisis continued to ripple across Europe, with Standard & Poor's downgrading the credit rating on Spain, the continent's fourth-largest economy. ...In Europe, the most intense focus remains on Greece, but fears were intensifying elsewhere, especially in Portugal and Spain. Though analysts noted that both countries are in better shape than Greece -- with lower ratios of debt -- they both shared large fiscal deficits and poor long-term economic prospects. On Wednesday, the government in Portugal announced that it would move up a program of painful spending cuts to shrink its budget deficit and shore up confidence amid signs that fearful depositors were moving capital out of Lisbon banks. After lowering Greek debt to junk bond status on Tuesday, Standard & Poor's kept Spain at investment grade status, but lowered its rating one notch, to AA.

A Flat Tax-Sales Tax Debate from the Archives

I only vaguely remember this debate that took place at Furman University, and I never saw this recording until it arrived in my inbox today. I invite fans of both the flat tax and FairTax to watch this debate and let me know your thoughts.

Many of my arguments, by the way, also apply to the debate on the value-added tax. Simply stated, I don't trust politicians when they claim a VAT won't be used to increase the overall burden of government.

Wednesday, April 28, 2010

Government Is a Racket to Enrich Bureaucrats and Rip Off the Rest of Us

Every experience I've had with speed cameras has been negative. That's hardly a surprise, but the other common experience is that they always are set up in places where the speed limit is absurdly low (a 45-mph limit on a stretch of interstate highway in DC is a good example). As one might suspect, there is considerable evidence that greedy and corrupt governments use cameras as a revenue generator. But cameras are not a necessary component of speed traps. Here's a story from Michigan about how local governments are ignoring state requirements to set reasonable speed limits solely because the bureaucrats want to rip off motorists:

Metro Detroit motorists who exceed posted speed limits may not be breaking the law, because in many cases the limits themselves are unlawful, according to one of the state's top traffic cops. Four years after the passage of Public Act 85, which requires municipalities in Michigan to conduct studies to set proper speed limits, most cities, villages and townships have not complied, according to Lt. Gary Megge, head of the Michigan State Police Traffic Services Section. One likely reason, said Megge, whose section advises communities on how to set proper speed limits, is that communities want speeding ticket revenue, and failing to conduct the required speed studies allows them to keep enforcing their speed limits that Megge calls "artificially low." ...Ferndale Police Chief Michael Kitchen admitted revenue was the reason behind his recent decision to step up traffic enforcement. "We have to write more tickets in order to avoid layoffs," Kitchen said. ...Kitchen admitted that the 35-mph speed limit on the most heavily-driven roadway in Ferndale -- Woodward Avenue near Nine Mile -- is likely too low. "That speed limit would probably be 45 mph if they ever did a speed study," said Kitchen, adding that Woodward falls under MDOT's jurisdiction.

More Much-Needed VAT Bashing

A former Governor of Delaware, Pete DuPont, explains that a value-added tax means bigger government and slower growth. This issue is very important since Obama clearly is trying to set the stage for imposing this European-style national sales tax in the United States:

The VAT has been in use in the European countries since the late 1960s, and has had a strong, negative economic influence. Before the European VATs were put into effect, the average EU tax burden was 28% of gross domestic product, compared with the 25% in the U.S. By 2006 with the VATs EU average tax burden was 40% compared with 28% in America. Average European government spending was about 30% of GDP when the VATs were instituted in the late 1960s. Fast forward to today, and we see European government spending has grown more than 50% and now hits 47% of GDP. And European government debt in 2005 was 50% of GDP, compared with under 40% in America. Perhaps most important, bigger government spending and higher taxes have radically reduced job growth in Europe. Between 1982 and 2007, Europe created fewer than 10 million new jobs, vs. 45 million in the U.S. Our economic growth was more then one-third faster. The European Union now requires all member nations to have a minimum VAT of 15%--more or less the equivalent of Congress telling each of our 50 states how high their taxes must be. So has the VAT replaced some of the income tax in Europe? Absolutely not, nor has it reduced the income tax rates. The average VAT rate there is just under 20%, and the EU's top income tax rates average about 46%. ...What the VAT really does, as we have seen in Europe, is to do away with government spending controls. So if enacted by the Congress, higher taxes, bigger government, lower economic growth and fewer jobs will be the result, and all of us will soon be living in a new and much less successful America.

Tuesday, April 27, 2010

Political Humor

In fairness, we were getting the same medicine during the Bush years. My only other thought it that Dr. Obama is soon going to prescribe suppositories for taxpayers.

Monday, April 26, 2010

Why Is Government so Bloody Incompetent?

I was going to have a policy-oriented post about the value-added tax or something like that, but I have to complain about government incompetence as it is affecting my life right now.

I'm en route to Ireland for a speech. I started my day in Florida and took a connecting flight to Chicago (where I am right now). The Palm Beach Airport experience was reasonably pleasant, featuring free Internet (yes, I'm willing to utilize services financed by Florida taxpayers).

Chicago is a different story. One of the worst things about being at an airport is going through security, so it is a sign of a terrible airport when you land for a connecting flight and can't get to your new gate without exiting the secure area and having to go through security again.

If that was the extent of my hassle, I wouldn't grouse too much, but the geniuses who designed the international terminal at O'Hare didn't put any restaurants inside security. So after going through security and finding no place to eat, I had to exit to the terminal again.

I'm a cheap bastard, but I paid $6.49 so I could get online and vent my spleen while munching on sub par airport food.

As long as I'm bitching about airport incompetence, I may as well take a shot at Dulles Airport in Washington. I'm vaguely sympathetic to administrators who are running airports that were designed before 9/11 and all the added security hassle. But Dulles recently completed a very expensive renovation, and the system for funneling people into security is even worse than the previous system. I would describe it if I could, but that's impossible. Suffice to say that people wind up layered next to each other in long lines for each X-ray belt.

In the private sector, people who make bone-headed mistakes suffer consequences. In the government, they get excessive salaries and lavish pensions.

The Right Way for Banks to Bail Themselves Out

The politicians are urging big taxes on banks, using rhetoric designed to trick people into thinking that this is a way to make the banks pay for their own bailouts. But a general tax on all banks simply means that well-run banks subsidize the reckless banks - a problem that may get worse over time because of the moral hazard problems that seem to get worse every time politicians get more power over the industry. Greg Mankiw of Harvard has a more appealing idea, which would require automatic conversion of bonds to equity when a bank gets in trouble. This means, for all intents and purposes, that a bank would only be in a position of bailing itself out, so there is no risky cross-subsidization. And since bondholders presumably would not want to be converted into shareholders, there would be greater incentive to monitor whether the bank is being operated in a prudent manner. I'm not an expert on the specifics of the banking system, so I won't pretend to know enough to give this my unqualified blessing, but I know it is a far better approach than the blank-check bailout/intervention authority in the legislation on Capitol Hill:

There has been much talk about restricting the use of financial derivatives. Unfortunately, writing good rules is not easy. Derivatives, like fire, can lead to disaster if not handled with care, but they can also be used to good effect. Whatever we do, let’s not be overoptimistic about how successful improved oversight will be. The financial system is diverse and vastly complicated. Government regulators will always be outnumbered and underpaid compared with those whose interest it is to circumvent the regulations. Legislators will often be distracted by other priorities. To believe that the government will ever become a reliable watchdog would be a tragic mistake. ...Much focus in Washington has been on expanding the government’s authority to step in when a financial institution is near bankruptcy, and to fix the problem before the institution creates a systemic risk. That makes some sense, but creates risks of its own. If federal authorities are responsible for troubled institutions, creditors may view those institutions as safer than they really are. When problems arise, regulators may find it hard to avoid using taxpayer money. The entire financial system might well become, in essence, a group of government-sponsored enterprises. ...My favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance. Bankers may balk at this proposal, because it would raise the cost of doing business. The buyers of these bonds would need to be compensated for providing this insurance. But this contingent debt would also give bankers an incentive to limit risk by, say, reducing leverage. The safer these financial institutions are, the less likely the contingency would be triggered and the less they would need to pay for this debt.

Sunday, April 25, 2010

The IMF Is Urging Governments to Adopt Regulatory and Tax Cartels to Benefit Politicians

Price fixing is illegal in the private sector, but unfortunately there are no rules against schemes by politicians to create oligopolies in order to prop up bad government policy. The latest example comes from the bureaucrats at the International Monetary Fund, who are conspiring with national governments to impose higher taxes and regulations on the banking sector. The pampered bureaucrats at the IMF (who get tax-free salaries while advocating higher taxes on the rest of us) say these policies are needed because of bailouts, yet such an approach would institutionalize moral hazard by exacerbating the government-created problem of "too big to fail." But what is particularly disturbing about the latest IMF scheme is that the international bureaucracy wants to coerce all nations into imposing high taxes and excessive regulation. The bureaucrats realize that if some nations are allowed to have free markets, jobs and investment would flow to those countries and expose the foolishness of the bad policy being advocated elsewhere by the IMF. Here's a brief excerpt from a report in the Wall Street Journal:

Mr. Strauss-Kahn said there was broad agreement on the need for consensus and coordination in the reform of the global financial sector. "Even if they don't follow exactly the same rule, they have to follow rules which will not be in conflict," he said. He said there were still major differences of opinion on how to proceed, saying that countries whose banking systems didn't need taxpayer bailouts weren't willing to impose extra taxation on their banks now, to create a cushion against further financial shocks. ...Mr. Strauss-Kahn said the overriding goal was to prevent "regulatory arbitrage"—the migration of banks to places where the burden of tax and regulation is lightest. He said countries with tighter regulation of banks might be able to justify not imposing new taxes.
I've been annoyingly repetitious on the importance of making governments compete with each other, largely because the evidence showing that jurisdictional rivalry is a very effective force for good policy around the world. I've done videos showing the benefits of tax competition, videos making the economic and moral case for tax havens, and videos exposing the myths and demagoguery of those who want to undermine tax competition. I've traveled around the world to fight the international bureaucracies, and even been threatened with arrest for helping low-tax nations resist being bullied by high-tax nations. Simply stated, we need jurisdictional competition so that politicians know that taxpayers can escape fiscal oppression. In the absence of external competition, politicians are like fiscal alcoholics who are unable to resist the temptation to over-tax and over-spend.

This is why the IMF's new scheme should be resisted. It is not the job of international bureaucracies to interfere with the sovereign right of nations to determine their own tax and regulatory policies. If France and Germany want to adopt statist policies, they should have that right. Heck, Obama wants America to make similar mistakes. But Hong Kong, Switzerland, the Cayman Islands, and other market-oriented jurisdictions should not be coerced into adopting the same misguided policies.

Class Warfare, Tax Rates, and the Laffer Curve

Obama imposed higher tax rates on the so-called rich as part of his government-run healthcare scheme, and he wants to punish success with additional tax rate increases at the end of this year. This excerpt from a New York Post column comments on how many people are getting a free ride from the tax system, but then goes on to explain why a spiteful policy based on class warfare will backfire:

Nearly half of American tax filers didn't have to pay any federal income tax last year. But Americans -- especially New Yorkers -- shouldn't enjoy the free ride. Soon enough, everybody will pay for the higher spending that Washington's "generosity" encourages. And thanks to Washington, we'll be paying for higher state and local spending at the same time, too. Just a decade ago, two-thirds of American tax filers still paid into the tax system. ...everyone should have to pay something -- and anyone who earns enough to have cable TV can pay something toward their own national defense, too. A big majority of people, in fact, should pay enough to be annoyed on April 15 rather than excited. Otherwise, the politicians will figure they can just keep spending without angering a critical mass of voters. ...seems certain to let the Bush tax cuts for upper-income Americans expire -- so in January the top rate will jump back to 39.6 from 35 percent. Two years later, a new 3.8 percent tax kicks in on investment income earned by families who make $250,000 and up (part of the health-care bill). Thing is, the rich already do pay. And when it comes time to pay for all of the spending we're doing now, the rich may not be able or willing to pay even more. Taxpayers earning over $200,000 paid more than 54 percent of federal income taxes in 2007, way more than the 32 percent of the nation's income they earned. ...there's a limit to how much the government can get. Last year, New York hiked income taxes on people who earn more than $200,000. But, as E.J. McMahon of the Empire Center for New York State Policy noted last month, the expected take from that tax hike seems likely to come in half a billion below estimates. There's good reason to think Obama's tax hikes on the rich will fall short, too. No, federal taxpayers can't leave the country as easily as a handful of Bloomberg's Upper East Side neighbors can leave New York -- but they can park more money in tax-free investments or simply decline to earn it in the first place. Such tax-avoidance is perfectly legal -- but it means less economic growth, and thus less income earned by everyone else.

More on Obama and Socialism

I got some interesting feedback about my pseudo-defense of Obama against the accusation that he is a socialist. It was a faux defense because my goal was simply to point out that Obama is guilty of a different form of statism. For those interested in more information, Jonah Goldberg's Liberal Fascism book is first rate (and he has a discontinued blog on the topic for those too impatient to wait for a book), and Steve Horowitz does a great job addressing this topic for the Freeman:

Talking the talk of “free markets” but proposing policies that mostly amount to collaborations between well-placed private-sector interests and the State is the hallmark of “corporatism,” or “state capitalism,” or even economic fascism. From the bailouts of the banking system to “green jobs” to health insurance “reform” to various pieces of the “stimulus,” the real winners from the Obama administration’s policies (and Bush’s before him) have been those in corporate world lucky enough to be in the favored industries and to have sufficient political connections to benefit from the changes. Rather than take over various industries, Obama seems to believe he can work with industry leaders and labor to negotiate and manage them collectively in the national interest. This is the essence of the “third way” of Italian Fascism. It is not socialism, as private ownership is nominally maintained, but it is not capitalism, since private owners are not fully allowed to make independent decisions based on perceived profitability. Those decisions must take a back seat to predetermined national priorities. Again, consider the health insurance package. It’s not a single-payer system, which would arguably be more truly socialist. Instead, we will have a system of nominally private insurance companies heavily regulated and controlled so that they serve political goals, such as trying to guarantee that everyone has insurance regardless of income or medical history.
Keep in mind, though, my point about it being foolish to call Obama a fascist since the term is now inextricably linked to racism and militarism. Far better to point out that he is a statist or a corporatist.

Would You Exercise for a Free Meal?

I suspect this is a marketing gimmick, but this story I saw linked on Marginal Revolution will be a good test of incentives. A hotel is offering meal vouchers for people who "produce at least 10 watt hours of electricity" by riding an exercise bicycle. There is a 99 percent chance that I would cycle for 15 minutes in exchange for free meal, but mostly because I'm cheap rather than susceptible to faux environmentalism (indeed, I'm sometimes tempted to throw towels on the floor because I get nauseated by hotels trying to mask cost-saving strategies in environmentally-sensitive rhetoric).

The Crowne Plaza Hotel in Copenhagen says the idea is to get people fit and reduce their carbon footprint. Guests will have to produce at least 10 watt hours of electricity - roughly 15 minutes of cycling for someone of average fitness. The hotel already produces renewable energy with solar panels on its facade. Guests staying at Plaza Hotel will be given meal vouchers worth $36 (26 euros; £23) once they have produced 10 watt hours of electricity, hotel spokeswoman Frederikke Toemmergaard told the BBC News website. "Many of our visitors are business people who enjoy going to the gym. There might be the odd person who will cycle just to get a free meal, but I don't think people will exploit the initiative overall," she added.

Saturday, April 24, 2010

Boycott General Motors

Any company that steals money from taxpayers is despicable, but General Motors is especially reprehensible for dishonesty. Taking money from the left pockets of taxpayers and putting it in our right pockets is not a repayment, as explained by Shikha Dalmia in a column for Forbes.com. Her most important observation, after churning through the numbers, is that "GM is using government money to pay back government money to get more government money." Even politicians would be reluctant to tell the kind of bold-faced lie that GM's CEO is peddling to the nation. The only appropriate response from every moral person is to boycott this sleazy and corrupt company. Fortunately, some members of Congress are aware of GM's scam, as reported by Foxnews.com:

A top Senate Republican on Thursday accused the Obama administration of misleading taxpayers about General Motors' loan repayment, saying the struggling auto giant was only able to repay its bailout money by dipping into a separate pot of bailout money. Sen. Chuck Grassley's charge was backed up by the inspector general for the bailout -- also known as the Trouble Asset Relief Program, or TARP. Watchdog Neil Barofsky told Fox News, as well as the Senate Finance Committee, that General Motors used bailout money to pay back the federal government. ...Vice President Biden on Wednesday called the GM repayment a "huge accomplishment." But Barofsky told Fox News that while it's "somewhat good news," there's a big catch. "I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. ... It's actually from another pool of TARP money that they've already received," he said Wednesday. "I don't think we should exaggerate it too much. Remember that the source of this money is just other TARP money."

The Greek Bailout

I get a lot of email asking me about Greece, especially since I don't give the issue much attention on the blog. I am paying close attention to what's happening, especially since Greece is a canary in the coal mine. But I generally try to avoid being repetitious, and anything I say now would replicate what I said in my initial blog post in February. Simply stated, if you subsidize bad behavior, you get more bad behavrior. But now that a bailout request is official, I suppose some additional commentary is appropriate. The editorial page of today's Wall Street Journal has some solid analysis on how rewarding Greece will exacerbate rather than solve Europe's fiscal problems:

...a bailout would, of course, end nothing. What it would do instead is open a wide new world of moral hazard—for Greece, for the countries providing aid, and for the future of the entire euro-zone. The Greek government has played the victim for all it's worth over the past several months, insisting that the same credit markets that finance its extravagant spending were charging too much in interest. But on Thursday, following another upward revision to its budget deficit, bond yields soared and forced Mr. Papandreou's capitulation. ... a bailout comes with baleful consequences for the entire euro-zone. Further austerity demanded as a quid pro quo might take some domestic political heat off Mr. Papandreou, but the IMF's policy history does not bode well for future economic growth. The EU countries expected to shell out €30 billion for Greece have their own debt challenges. If Greece is bailed out, the markets will rightly conclude that a line has been crossed, and that Portugal and even Spain will be rescued too. Even the Germans don't have that much money. ...Mr. Schäuble is so worried about Berlin's finances that he opposes tax cuts for Germans, but he nonetheless wants to bail out a spendthrift Greece. ...Greece represents only 2% of euro-zone GDP. While European banks would take losses on any Greek debt restructuring, those losses would not by themselves be catastrophic. But that wouldn't be true if the sovereign debt panic spreads to Portugal and Spain. Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and demonstrate to markets that there won't be a rolling series of bailouts. To adapt Mr. Schäuble's Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman Brothers.

Friday, April 23, 2010

Robert Samuelson Punctures Obama's VAT Trial Balloon

His article doesn't completely slam the door on a value-added tax, but Robert Samuelson's piece in the Washington Post does highlight some of the very serious problems with a VAT - including more government spending, burdens on families, additional complexity, and more corruption:

Almost every pro-VAT argument is exaggerated, misleading, incomplete or wrong. The VAT is being merchandised as an almost-painless way to avoid deep spending cuts. The implicit, though often unstated, message is that a VAT could raise so much money it could eliminate future deficits by itself. This reasoning, if embraced, would create staggering tax burdens and exempt us from a debate we desperately need. ...From 1970 to 2009, federal spending averaged 20.7 percent of the economy (gross domestic product). By 2020, it could reach 25.2 percent of GDP and would still be expanding, reckons the Congressional Budget Office's estimate of President Obama's budgets. In 2020, the deficit (assuming a healthy economy with 5 percent unemployment) would be 5.6 percent of GDP. To cover that, taxes would have to rise almost 30 percent. A VAT could not painlessly fill this void. Applied to all consumption spending -- about 70 percent of GDP -- the required VAT rate would equal about 8 percent. But the actual increase might be closer to 16 percent because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. Together, they account for nearly half of $10 trillion of consumer spending. There would also be other upward (and more technical) pressures on the VAT rate. Does anyone believe that Americans wouldn't notice 16 percent price increases for cars, televisions, airfares, gasoline -- and much more -- even if phased in? As for a VAT's claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment. That's unlikely because it would require implausibly steep VAT rates. Chances are we'd pay both the income tax and the VAT, making the overall tax system more complicated. Europe's widespread VATs aren't models of simplicity. Among the European Union's 27 members, the basic rate varies from 15 percent (Cyprus, Luxembourg) to 25 percent (Denmark, Hungary and Sweden). But there are many preferential rates and exemptions. In Ireland, food is taxed at three rates (zero, 4.8 percent and 13.5 percent). In the Netherlands, hotels are taxed at 6 percent. An American VAT would stimulate ferocious lobbying for favorable treatment. ...what's wrong with the simplistic VAT advocacy is that it deemphasizes spending cuts. The consequences would be unnecessarily high taxes that would weaken the economy and discriminate against the young. It would become harder for families to raise children.

Obama Is Not a Socialist

Newt Gingrich writes in the Washington Post today to defend his assertion that Obama is a socialist. He cites several examples of the President's big-government agenda, which are excerpted below. These are all examples of bad policy, to be sure, but other than the student loan takeover, these are all examples of fascism rather than socialism. Socialism, technically speaking, is government ownership of the means of production. Fascism, by contrast, involves government control and direction of resources, but cloaked by a system of nominal private ownership.

Calling Obama a fascist, however, is counterproductive. Other than a few economists and historians, people don't understand that fascism developed (with Mussolini perhaps being the best example) as a social/economic system. Instead, most people associate it with Hitler's lunatic ideas on matters such as race and militarism. That's why I prefer to call Obama a statist or a corporatist. Those words accurately describe his governing philosophy without creating the distractions caused by calling him a socialist or fascist.

Creating czar positions to micromanage industry reflects the type of hubris of centralized government that Friedrich von Hayek and George Orwell warned against. How can a White House "executive compensation czar" know enough to set salaries in multiple companies for many different people? Having a pay dictatorship for one part of the country sets the pattern for government to claim the right to set pay for everyone. If that isn't socialism, what word would describe it?

Violating 200 years of bankruptcy precedent to take money from bondholders and investors in the auto industry to pay off union allies is rather an anti-market intervention.

Proposing that the government (through the Environmental Protection Agency or some sort of carbon-trading scheme) micromanage carbon output is proposing that the government be able to control the entire U.S. economy. Look at the proposals for government micromanagement in the 1,428-page Waxman-Markey energy tax bill. (I stopped reading when I got to the section regulating Jacuzzis on Page 442.) If government regulates every aspect of our use of power, it has regulated every aspect of our lives. What is that if not socialism?

Nationalizing student loans so that they are a bureaucratic monopoly. This will surely lead to fraud on the scale we see in Medicare and Medicaid, from which more than $70 billion per year is stolen.

Expanding government mortgage intervention to 90 percent of the housing market.

The Ronald Reagan of New Jersey?

He's only been Governor for a couple of months, and we have seen other elected officials start strong and then get captured by the special interests, but it certainly appears that Governor Christie of New Jersey genuinely intends to rescue his state from becoming the Greece of America. Here's an excerpt of what George Will just wrote, which included some spot-on analysis of the role of tax competition as a tool for constraining greedy politicians:

At the Pennsylvania end of the bridge, cigarette shops cluster: New Jersey's per-pack tax is double Pennsylvania's. In late afternoon, Gov. Chris Christie says, the bridge is congested with New Jersey government employees heading home to Pennsylvania, where the income tax rate is 3 percent, compared with New Jersey's top rate of 9 percent. There are 700,000 more Democrats than Republicans in New Jersey, but in November Christie flattened the Democratic incumbent, Jon Corzine. Christie is built like a burly baseball catcher, and since his inauguration just 13 weeks ago, he has earned the name of the local minor-league team -- the Trenton Thunder. He inheritaged a $2.2 billion deficit, and next year's projected deficit of $10.7 billion is, relative to the state's $29.3 billion budget, the nation's worst. Democrats, with the verbal tic -- "Tax the rich!" -- that passes for progressive thinking, demanded that he reinstate the "millionaire's tax," which hit "millionaires" earning $400,000 until it expired Dec. 31. Instead, Christie noted that between 2004 and 2008 there was a net outflow of $70 billion in wealth as "the rich," including small businesses, fled. And he said previous administrations had "raised taxes 115 times in the last eight years alone." ...New Jersey's governors are the nation's strongest -- American Caesars, really -- who can veto line items and even rewrite legislative language. Christie is using his power to remind New Jersey that wealth goes where it is welcome and stays where it is well-treated. Prosperous states are practicing, at the expense of slow learners like New Jersey, "entrepreneurial federalism" ...competing to have the most enticing business climate.
Meanwhile, a column from the Wall Street Journal makes some of the same points, noting that productive people will move across borders when they reach a tipping point. This underscores the value of tax competition - which is made possible by federalism:

Mr. Christie has started spreading the news that the Garden State aims to compete once again for businesses, jobs and residents. He notes that for years the state offered a better tax environment than New York, which encouraged city dwellers to discover New Jersey's beautiful suburbs. Mr. Christie says that he recently bumped into former New York Gov. George Pataki, who noted that he'd been shocked to learn that New Jersey now has an even higher burden than its tax-crazy neighbor. "See what happens when you're not looking?" he said to Mr. Pataki. "Snuck right up on ya." The governor aims to move tax rates back to the glory days before 2004, when politicians lifted the top income tax rate to its current level of almost 9% from roughly 6%. Piled on top of the country's highest property taxes, as well as sales and business income taxes, the increase brought the state to a tipping point where the affluent started to flee in droves. A Boston College study recently noted the outflow of wealthy people from the state in the period 2004-2008. The state has lately been in a vicious spiral of new taxes and fees to make up for the lost revenue, which in turn causes more high-income residents to leave, further reducing tax revenues.

Thursday, April 22, 2010

The Moochers Fight Back

The Chicago Tribune reports that a bunch of government bureaucrats went to the capital of Illinois and protested in favor of higher taxes. But it's not exactly news that looters want more looting. The amazing thing to note is that the Democrats have complete control of Illinois government yet they are afraid to raise tax rates because they know voters are sick and tired of corrupt and inefficient government:

Thousands of teachers and other union workers descended on the state Capitol on Wednesday and chanted "raise my taxes" to try to pressure politicians to avoid major budget cuts. The vibe was the exact opposite of what you'd find at a tea party rally. But the loud chants barely resonated inside the Capitol, where lawmakers are trying to exit Springfield in a couple of weeks without voting for a tax increase that could jeopardize their re-election chances in little more than six months. ...Gov. Pat Quinn is out front pushing his 33 percent increase in the income tax rate, but he's getting lonely. Many lawmakers don't want to take more money out of people's wallets as unemployment remains high in Illinois, yet groups that receive tax money said Quinn's proposed tax hike isn't big enough to help bridge a deficit that's expected to reach $13 billion if nothing is done. Complicating the matter is that Quinn faces Republican state Sen. Bill Brady of Bloomington in this fall's race for governor, and Brady is taking the position that no tax increase is needed. ...Last year, the Senate Democrats, led by President John Cullerton of Chicago, passed a tax increase that would increase the personal rate to 5 percent from 3 percent, along with a slight bump for corporate taxes. But the tax increase is stalled in the House, where last year, the Democrats in control did not muster enough votes for a smaller, temporary income tax increase.

Gangster Government

I'm down in Miami for the Resource Bank and saw this video at the Heritage Foundation booth. They did an excellent job exposing how the federal government too often acts like a bunch of thugs. I am disgusted and ashamed that my government puts people like this in prison.

Share this blog post with your friends.

Wednesday, April 21, 2010

Paying for Pro-Bureaucrat Propoganda

The government is wasting so much money in so many ways that it takes something really odd to shock me, but this story from the Federal Times certainly meets that test. The Office of Personnel Management is actually squandering money on a marketing campaign to improve the image of bureaucrats. Call me old fashioned, but I think the image of bureaucrats will increase if they spend some time figuring out ways to save money rather than coming up with innovative ways to waste it:

The Office of Personnel Management is working on a new marketing campaign intended to boost the public's opinion of federal employees. OPM Director John Berry said his agency is surveying liberal and conservative citizens about their impressions of federal workers and issues most important to them. Once that survey is done, OPM will contract with a marketing firm to "come up with the right vocabulary, the right messaging and the right energy that we believe will re-polish the public servant's image," Berry said at the Excellence in Government conference in Washington this morning. Berry said that the government's outreach efforts should focus on employees' specific jobs to counter the perception of civil servants as bureaucrats. ...Berry's comments came a day after the Pew Research Center released a survey showing that the public's trust in the federal government has reached historic lows. Just 22 percent of Americans say they can trust the government almost always or most of the time, the survey found. That's down from 31 percent in January 2007, and down from 40 percent in February 2000. Surveys conducted by other organizations in late 2009 and early 2010 yielded similar numbers. The last time national polls consistently showed this level of mistrust was in the mid-1990s. Public discontent could hurt government agencies' ability to recruit and retain employees, said Tim McManus, vice president for education and outreach at the Partnership for Public Service.

Taxpayers vs. Bureaucrats, Part XXIII

The Manhattan Institute's City Journal has a very thorough article exposing how a bloated bureaucracy is crippling California. The excerpt below just scratches the surface. Read the entire article, though you'll probably be depressed and angry afterwards:

The unions’ political triumphs have molded a California in which government workers thrive at the expense of a struggling private sector. The state’s public school teachers are the highest-paid in the nation. Its prison guards can easily earn six-figure salaries. State workers routinely retire at 55 with pensions higher than their base pay for most of their working life. Meanwhile, what was once the most prosperous state now suffers from an unemployment rate far steeper than the nation’s and a flood of firms and jobs escaping high taxes and stifling regulations. This toxic combination—high public-sector employee costs and sagging economic fortunes—has produced recurring budget crises in Sacramento and in virtually every municipality in the state. ...The story starts half a century ago, when California public workers won bargaining rights and quickly learned how to elect their own bosses—that is, sympathetic politicians who would grant them outsize pay and benefits in exchange for their support. Over time, the unions have turned the state’s politics completely in their favor. The result: unaffordable benefits for civil servants; fiscal chaos in Sacramento and in cities and towns across the state; and angry taxpayers finally confronting the unionized masters of California’s unsustainable government. ...expanding population in turn led to rapid growth in government jobs—from a mere 874,000 in 1960 to 1.76 million by 1980 and nearly 2.1 million in 1990—and to exploding public-union membership. In the late 1970s, the California teachers’ union boasted about 170,000 members; that number jumped to about 225,000 in the early 1990s and stands at 340,000 today. ...three major blocs—teachers’ unions, public-safety unions, and the Service Employees International Union, which now represents 350,000 assorted government workers—began amassing colossal power in Sacramento. Over the last 30 years, they have become elite political givers and the state’s most powerful lobbying factions, replacing traditional interest groups and changing the balance of power. ...with union dues somewhere north of $1,000 per member and 340,000 members, the CTA can afford to be a player not just in local elections but in Sacramento, too (and in Washington, for that matter, where it’s the National Education Association’s most powerful affiliate). ...In a state that has embraced some of the toughest criminal laws in the country, police and prison guards’ unions own a precious currency: their political endorsements, which are highly sought after by candidates wanting to look tough on crime. But the qualification that the unions usually seek in candidates isn’t, in fact, toughness on crime; it’s willingness to back better pay and benefits for public-safety workers. The pattern was set in 1972, when State Assemblyman E. Richard Barnes—an archconservative former Navy chaplain who had fought pension and fringe-benefit enhancements sought by government workers, including police officers and firefighters—ran for reelection. Barnes had one of the toughest records on crime of any state legislator. Yet cops and firefighters walked his district, telling voters that he was soft on criminals. He narrowly lost. As the Orange County Register observed years later, the election sent a message to all legislators that resonates even today: “Your career is at risk if you dare fiddle with police and fire” pay and benefits. ...California taxpayers are realizing how stacked the system is against them, and the first stirrings of revolt are breaking out. Voters defeated a series of ballot initiatives last May that would have allowed politicians to solve the state budget crisis temporarily through a series of questionable gimmicks, including one to let the state borrow against future lottery receipts and another to let it plug budget holes with money diverted from a mental-health services fund. In a clear message from voters, the only proposition to gain approval last May banned pay raises for legislators during periods of budget deficit.

Painfully Funny

This would be much more enjoyable if it wasn't true.

Don't Give Up on the American People...at Least not Yet

Gloominess and despair are not uncommon traits among supporters of limited government - and with good reason. Government has grown rapidly in recent years and it is expected to get much bigger in the future. To make matters worse, it seems that the deck is stacked against reforms to restrain government. One problem is that 47 percent of Americans are exempt from paying income taxes, which presumably means they no longer have any incentive to resist big government. Mark Steyn recently wrote a very depressing column for National Review Online about this phenomenon, noting that, "By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury." Walter Williams, meanwhile, has a new column speculating on whether this cripple the battle for freedom:

According to the Tax Policy Center, a Washington, D.C., research organization, nearly half of U.S. households will pay no federal income taxes for 2009...because their incomes are too low or they have higher income but credits, deductions and exemptions that relieve them of tax liability. This lack of income tax liability stands in stark contrast to the top 10 percent of earners, those households earning an average of $366,400 in 2006, who paid about 73 percent of federal income taxes. ...Let's not dwell on the fairness of such an arrangement for financing the activities of the federal government. Instead, let's ask what kind of incentives and results such an arrangement produces and ask ourselves whether these results are good for our country. ...Having 121 million Americans completely outside the federal income tax system, it's like throwing chum to political sharks. These Americans become a natural spending constituency for big-spending politicians. After all, if you have no income tax liability, how much do you care about deficits, how much Congress spends and the level of taxation?
Steyn and Williams are right to worry, but the situation is not as grim as it seems for the simple reason that a good portion of the American people know the difference between right and wrong. Consider some of the recent polling data from Rasmussen, which found that "Sixty-six percent (66%) believe that America is overtaxed. Only 25% disagree. Lower income voters are more likely than others to believe the nation is overtaxed" and "75% of voters nationwide say the average American should pay no more than 20% of their income in taxes." These numbers contradict the hypothesis that 47 percent of Americans (those that don't pay income tax) are automatic supporters of class-warfare policy.

So why are the supposed free-riders not signing on to the Obama-Reid-Pelosi agenda? There are probably several reasons, including the fact that many Americans believe in upward mobility, so even if their incomes currently are too low to pay income tax, they aspire to earn more in the future and don't want higher tax rates on the rich to serve as a barrier. I'm not a polling expert, but I also suspect there's a moral component to these numbers. There's no way to prove this assertion, but I am quite sure that the vast majority of hard-working Americans with modest incomes would never even contemplate breaking into a rich neighbor's house and stealing the family jewelry. So it is perfectly logical that they wouldn't support using the IRS as a middleman to do the same thing.

A few final tax observations:

The hostility to taxation also represents opposition to big government (at least in theory). Rasumssen also recently found that, "Just 23% of U.S. voters say they prefer a more active government with more services and higher taxes over one with fewer services and lower taxes. ...Two-thirds (66%) of voters prefer a government with fewer services and lower taxes."

There is a giant divide between the political elite and ordinary Americans. Rasmussen's polling revealed that, "Eighty-one percent (81%) of Mainstream American voters believe the nation is overtaxed, while 74% of those in the Political Class disagree."

Voters do not want a value-added tax or any other form of national sales tax. They are not against the idea as a theoretical concept, but they wisely recognize the politicians are greedy and untrustworthy. Rasumussen found that "just 26% of all voters think that it is even somewhat likely the government would cut income taxes after implementing a sales tax. Sixty-six percent (66%) believe it’s unlikely to happen."

Fiscal restraint is a necessary precondition for any pro-growth tax reform. If given a choice between a flat tax, national sales tax, value-added tax, or the current system, many Americans want reform, but it is very difficult to have a good tax system if the burden of government spending is rising. Likewise, it would be very easy to have a good tax system if we had a federal government that was limited to the duties outlined in Article I, Section VIII, of the Constitution.

Republicans should never acquiesce to higher taxes. All these good numbers and optimistic findings are dependent on voters facing a clear choice between higher taxes and bigger government vs lower taxes and limited government. If Republicans inside the beltway get seduced into a "budget summit" where taxes are "on the table," that creates a very unhealthy dynamic where voters instinctively try to protect themselves by supporting taxes on somebody else - and the rich are the easiest target.

Last but not least, I can't resist pointing out that I am part of a debate for U.S. News & World Report on the flat tax vs. the current system. For those of you who have an opinion on this matter, don't hesitate to cast a vote.

Tuesday, April 20, 2010

Current System, Flat Tax, Fair Tax, or Value-Added Tax?

Here are four very short videos produced from an in-office interview I did at the Heartland Institute last week. Which tax system do you prefer?

I talk about the current internal revenue code…



...and the flat tax...



...and the national sales tax (Fair Tax)...



...and the value-added tax (VAT).

The Feminist Equal-Pay Scam

Christina Hoff Summers of the American Enterprise Institute does a masterful job debunking the feminist notion that discrimination is responsible for wage differences between male and female workers. I'll just add one observation, which is that genuine discrimination is very costly. If an employer wanted to discriminate against women (or any other group), that would mean deliberately making inefficient choices. This, in turn, would reduce the competitiveness of firms with discriminatory hiring practices. In other words, the market penalizes people who do the wrong thing. This doesn't mean there is no discrimination. It does suggest, however, that market forces are the right solution, not coercive intervention by government:

Today is Equal Pay Day. Feminist groups and political leaders have set aside this day to protest the fact that women’s wages are, on average, 78 percent of men’s wages. ...The American Association of University Women (AAUW) has enlisted supporters to wear red “to represent the way the pay gap puts women ‘in the red.’” There will be rallies, speak outs, mass mailings of equity e-cards, and even bake sales featuring cookies with a “bite” taken out to represent women’s losses to men. ...this holiday has no basis in reality. Even feminist economists acknowledge that today’s pay disparities are almost entirely the result of women's different life choices—what they study in school, where they work, and how they balance home and career. ...In January 2009, the Labor Department posted a study prepared by the CONSAD Research Corporation, "An Analysis of the Reasons for the Disparity in Wages Between Men and Women." It analyzed more than 50 peer-reviewed papers. Labor Department official Charles E. James Sr. summed up the results in his foreword: "This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers." ...Women are not as ready to sacrifice their deep interests in, say, history, psychology, or public policy—“all in order to fix, sell, or distribute widgets” or “to spend the best years of [their lives] planning air conditioning ductwork for luxury condos.” Men also work longer hours and are more willing than women to take dangerous but well-paid jobs as truck drivers, loggers, coal miners, or oil riggers. ...And of course women are much more involved with babies than men. According to a 2009 Pew Survey, “A strong majority of all working mothers (62%) say they would prefer to work part time . . . An overwhelming majority [of working fathers] (79%) say they prefer full-time work. ...American women are among the freest, best educated, and most self-determining people in the world. It seems unsisterly for NOW or the AAUW to suggest that they are being hoodwinked into college majors, professions, or part-time work so they can spend more time with their children.

Some More Political Humor

On a more serious level, this isn't funny, but definitely a well-done cartoon. When I do a post on the article that accompanied this cartoon, there definitely won't be anything to laugh about.

Monday, April 19, 2010

Defending the Honor of Drunken Sailors

Very funny, though it is also tragic if you really think about it. I recall Reagan using a line like this in his speeches, though perhaps that is just my aging memory playing tricks on me.

Great Moments in International Bureaucracy

Much of Europe is dealing with a fiscal crisis caused by too much spending and economic stagnation caused by excessive taxation. But for the bureaucratic elite in Brussels, the important business of wasting other people's money never goes on holiday. So it is quite appropriate that the latest hare-brained scheme from the continent is subsidized vacations. This is not a joke. Or, if it is, many newspapers have fallen for the story. The UK-based Times reports on this vital new addition to the list of human rights financed by other people's money:

An overseas holiday used to be thought of as a reward for a year’s hard work. Now Brussels has declared that tourism is a human right and pensioners, youths and those too poor to afford it should have their travel subsidised by the taxpayer. Under the scheme, British pensioners could be given cut-price trips to Spain, while Greek teenagers could be taken around disused mills in Manchester to experience the cultural diversity of Europe. The idea for the subsidised tours is the brainchild of Antonio Tajani, the European Union commissioner for enterprise and industry, who was appointed by Silvio Berlusconi, the Italian prime minister. The scheme, which could cost hundreds of millions of pounds a year, is intended to promote a sense of pride in European culture, bridge the north-south divide in the continent and prop up resorts in their off-season. ...The European Union has experience of subsidised holidays. In February the European parliament paid contributions of up to 52% towards an eight-day skiing trip in the Italian Alps for 80 children of Eurocrats. Tajani’s programme will be piloted until 2013 and then put into full operation. It will be open to pensioners and anyone over 65, young people between 18 and 25, families facing “difficult social, financial or personal” circumstances and disabled people.

The Best Poster I've Ever Seen on Gun Control, Without Rival

This image really captures the essence of the issue. Not the best quality image, so if anyone has a crisper-looking version, please send it to me. Regardless, though, share this with your statist friends and maybe they'll begin to understand.

Sunday, April 18, 2010

Clinton Was Much Better than Bush

Some of my posts spark debate between Bush supporters and Clinton fans, particularly on my Facebook page. I hate to burst anyone's bubble, but Clinton wins that contest hands down. I'm only talking about economic issues, to be sure, so I'm not looking to trigger any discussions about foreign policy or abortion.

Regarding economic issues, perhaps the key thing to understand is that there are many factors which determine economic freedom (which, of course, is related to growth and prosperity). Some people look at a high-profile issue such as taxes, and are tempted to rank Bush higher because he cut taxes in 2001 and 2003, whereas Clinton increased taxes in 1993 (he also cut taxes in 1997, but not as much as he raised them four years earlier).

But while Bush had a better record on taxes, he had a much worse record on spending. And as I wrote in the Washington Examiner a couple of years ago, Bush's record in other areas was more statist than Clinton's (and I was writing before the bailouts).

Perhaps the best way of showing the difference between Bush and Clinton is to examine the Economic Freedom of the World annual rankings. Not all the years are available, but the image below clearly shows that economic freedom rose during the Clinton years and fell during the Bush years.

I'm no great fan of Bill Clinton, and I'll be the first to admit that many of the good things that happened under Clinton were the result of a GOP Congress (in the good old days before they were corrupted by compassionate conservatism). But also keep in mind that Clinton signed into law almost all of the good policies that were enacted during his reign. Likewise, Bush signed into law almost all of the bad policies that were enacted during his reign. If I'm choosing between the economic policies that were implemented by the previous two Presidents, the answer is obvious.

International Evidence Shows Spending Restraint Is Best Way to Address Red Ink

Tyler Cowen's recent New York Times column explains how nations as diverse as Ireland, Sweden, and Canada have successfully solved fiscal problems by limiting the growth of government spending:

America's long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, ...we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. ...Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. ...Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. ...The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. ...The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed. Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997.

Yes, High Tax Rates Change Behavior and Discourage Income

I've read several places that Ronald Reagan instinctively understood supply-side economics because Hollywood stars sooner or later learned that making more than a couple of movies per year was pointless when marginal tax rates were 90 percent. The same thing happens in sports. I've already posted about soccer stars turning down contracts in places where tax rates are high. Now we have a fascinating little story about taxes and the boxing profession:

For a very long time, boxing was the only really big-money sport for athletes. ...At a time when Babe Ruth was being razzed for his $80,000 salary (more than the President of the United States, it was pointed out, to which Babe supposedly replied in 1930, "Well, I had a better year than he [President Hoover] did"), heavyweight champion Jack Dempsey made about nine times as much—over $700,000, for his unsuccessful title defense against Gene Tunney in 1926. ...The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966.

Saturday, April 17, 2010

George Will Says No VAT Unless 16th Amendment Is Repealed

As usual, some very sound thoughts - on both the value-added tax and the income tax - from George Will:

When liberals advocate a value-added tax, conservatives should respond: Taxing consumption has merits, so we will consider it — after the 16th Amendment is repealed. A VAT will be rationalized as necessary to restore fiscal equilibrium. But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government. ...Because the income tax is not broadly based, it radiates moral hazard: Its incentives are for perverse behavior. The top 1% of earners provide 40% of that tax's receipts; the top 5% provide 61%; the bottom 50% provide 3%. So the tax makes a substantial majority complacent about government's growth. Increasingly, the income tax is codified envy. A VAT is the political class's recourse when the resources of the minority that is targeted by the envious are insufficient to finance ravenous government.

Government Corruption Watch, Part IV

Since the United States is the biggest funder of that bevy of kleptocrats and moochers known as the United Nations, it is especially painful to read stories about the rampant corruption that characterizes that international bureaucracy and its various divisions. Here's a typical story about waste and fraud from The American:

How pervasive are the problems at the World Food Program, the largest hunger relief agency in the world and the United Nations agency responsible for food aid? It’s a $2.9 billion question—the amount of direct aid disbursed by the WFP. A significant part of its budget comes from U.S. contributors, and USAID coordinates some of its work through the WFP. It’s been a month since the leaking of a scathing evaluation of WFP’s Somalian relief program written by the UN Monitoring Group on Somalia. The body, created by the UN Security Council, alleges that three Somali businessmen who held about $160 million in WFP transport contracts were involved in arms trading while diverting the agency’s food aid away from the hungry. A New York Times report also claimed food was being siphoned off by radical Islamic militants and local UN workers. ...Somalia is not the WFP’s only controversy, only its most recent and most public. Its operation in Ethiopia, which is one of the largest recipients of food aid in the word, is reportedly in disarray, with the transport companies controlled by the country’s authoritarian government at the center of the controversy. According to the U.S. State Department, in 2008 only 12 percent of food aid (most of it overseen by the WFP) made it to its intended recipients in the poverty-stricken eastern region. The trucking situation is little better in Afghanistan, where reports suggest that WFP is paying two to three times more than commercial rates, taking large chunks out of the $1.2 billion, three-year relief effort. The WFP has admitted that it inflated its shipping costs in North Korea by funneling business through dictator Kim Jong Il's government. In each case the WFP has denied the magnitude of the problem. But the responses miss the point. Why hasn’t the WFP, which portrays itself as a model of transparency, opened its books so the international community can exercise appropriate accountability and oversight? ...U.S. citizens concerned about the use of their tax dollars abroad may find it equally hard to discover how NGOs awarded grants by USAID are spending their money. I filed a Freedom of Information Act request with USAID in May 2009, requesting copies of all NGO project budgets financed with American taxpayers’ money during the second half of 2008. Almost a year later, USAID has still not released these documents.

Awful Tax System Causing a Growing Number of Americans to "Go Galt"

Being an American citizen is an honor in many ways, but it is a huge millstone around the neck for highly successful investors and entrepreneurs because of an oppressive and complex tax system. This is particularly true for those based in and/or competing in global markets. Indeed, because the tax system (and regulatory system) is so onerous and because it is expected to get far worse in the future, a growing number of Americans are actually giving up citizenship and "voting with their feet." The politicians view these people as "tax traitors" and are trying to erect higher barriers to hinder economic migration, particularly in the form of confiscatory "exit taxes" that are disturbingly reminiscent of the totalitarian practices of some of the world's most unsavory regimes. The Wall Street Journal recently reported on this issue:

The number of American citizens and green-card holders severing their ties with the U.S. soared in the latter part of 2009, amid looming U.S. tax increases and a more aggressive posture by the Internal Revenue Service toward Americans living overseas. According to public records, just over 500 people world-wide renounced U.S. citizenship or permanent residency in the fourth quarter of 2009, the most recent period for which data are available. That is more people than have cut ties with the U.S. during all of 2007, and more than double the total expatriations in 2008. An Ohio-born entrepreneur, now based in Switzerland, told Dow Jones he is considering turning in his U.S. passport. Mounting U.S. tax and reporting requirements are making potential business partners hesitate to do business with him, he said. "I still do dearly love the U.S., and renouncing my citizenship is not something I take lightly. But more and more it is seeming like being part of a dysfunctional family," said the businessman, who asked that his name not be used for fear of retribution. "The tax itself is only a small part of the issue," the Swiss-based entrepreneur said. "It's the overall regulatory environment." ..."Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example," said Timothy Burns, a tax lawyer at Withers law firm in Hong Kong. "Now we're seeing just the opposite." Last month, the Treasury Department announced more rigorous requirements for Americans living abroad to report information on foreign bank accounts. The reporting requirement has been in place for years, but only in the most recent couple of years has the IRS gotten tough about enforcing penalties. ...Others are giving up their U.S. nationality to avoid tax increases in the U.S., as the government struggles under huge budget deficits. The top marginal tax rate is set to rise to 39.6% from 35% at the end of this year. A proposal to tax fund manager pay at ordinary income rates, instead of the 15% capital gains rate, is gaining currency in Congress. "Everybody sees the tax rates are going up. At a certain point, it gets beyond people's pain threshold," said Anthony Tong, a tax partner at accounting firm PricewaterhouseCoopers in Hong Kong. Unlike most jurisdictions, the U.S. taxes the income of citizens and green-card holders no matter where in the world it is earned.

Friday, April 16, 2010

A Sordid Combination of Tax Greed and Odious Protectionism

Tax-news.com reports that the French and Italian governments want Europe to impose a tax on imports from nations that don't adopt misguided climate-change/global-warming rules. This is awful policy, but the good news is that such a policy presumably won't happen unless all 27 European Union nations agree:

France and Italy have demanded that the European Union (EU) consider the introduction of a carbon tax on imports from outside the EU, where countries do not comply with EU standards on environmental issues. In a joint letter to Jose Manuel Barroso, the head of the European Commission, President Sarkozy of France and Prime Minister Silvio Berlusconi of Italy stressed that: “It would be unacceptable if the ambitious efforts already agreed by the EU to reduce greenhouse gas emissions… were compromised by carbon leaking due to... insufficient action by certain third countries.” The letter went on to say that the tax could be used to pressurize third world countries to adopt measures to reduce their carbon emissions. ...The irony is that the French government recently abandoned a plan to introduce a carbon tax in the country following a ruling that it was unconstitutional. The French government’s view is that any new carbon tax would only be viable if it was adopted by all 27 EU member states.

U.S. Senate Overwhelmingly Rejects VAT

Here's a bit of good news. The Senate is now on record - overwhelmingly - against the value-added tax. To be sure, this doesn't guarantee that the 85 Senators who voted the right way will continue to vote the right way if they have a real opportunity to take more money from taxpayers (after all, Obama didn't hesitate to break his promise about no tax hikes on middle-class people), but this symbolic vote does put them on record against the VAT and it would be politically painful to reverse themselves anytime in the near future. The Washington Times reports:

Senators voted overwhelming Thursday to say they don't want to create a new value-added tax, or VAT, in a vote designed to take the wind out of an idea that had been circulating among policymakers for the last several weeks. The 85-13 vote against a VAT was nonbinding, but it did put one chamber of Congress on record in opposition to adding the new tax just weeks before the first meeting of President Obama's debt commission, which is supposed to report back this year on how to bring the country's finances under control. Six senators are part of that commission, and all six voted against a VAT, a type of consumption tax that's been adopted in Europe. ...The VAT vote was spurred by recent comments by Paul Volcker, a former chairman of the Federal Reserve who is now a top economic adviser to Mr. Obama. He said imposing a VAT "was not as toxic an idea" as it once was. Mr. Volcker was answering a question from the audience at an event in New York. ...Of the 13 senators who voted to support the possibility of a VAT, 12 were Democrats and one, Sen George V. Voinovich of Ohio, was a Republican.

Thursday, April 15, 2010

The Hidden Tax of Regulation

Even though today is tax day, let us not forget that taxation is just one of several ways that government dimishes propserity. Government spending financed by borrowing also is destructive, as is most regulation since it imposes substantially inefficiences and generally fails a cost-benefit test.

The folks at the Competitive Enterprise Institute have just released their annual estimate of the regulatory burden. The publication, entitled Ten Thousand Commandments, includes the following depressing factoids:
• A very rough extrapolation from an evaluation of the federal regulatory enterprise by economist Mark Crain estimates that annual regulatory compliance costs hit $1.187 trillion in 2009.
• Given 2009’s actual government spending of $3.518 trillion, the regulatory “hidden tax” stood at 34 percent of the level of federal spending itself. (Because of the recent federal spending surge, this proportion is lower than the near–40 percent level of recent years.)
• The dramatic reality that regulations and deficits now each exceed $1 trillion a year is an unsettling new development for America. In 2008, regulatory costs were more than double that year’s $459 billion budget deficit. Now, the 2009 deficit spending surge has catapulted the deficit well above the costs of regulation ($1.414 trillion compared to $1.187 trillion, respectively).
• The game has changed, with respect to government spending versus government regulation. Although the spending and deficit levels eclipse federal regulatory costs now, unchecked government spending can translate, in later years, into greater regulation as well...
• Regulatory costs dwarf corporate income taxes of $147 billion.
• Regulatory costs exceed estimated 2009 individual income taxes of $953 billion by 25 percent.
• Regulatory costs of $1.187 trillion absorb 8.3 percent of the U.S. gross domestic product (GDP), estimated at $14.253 trillion in 2009.
• Combining regulatory costs with federal FY 2009 outlays of $3.518 trillion implies
that the federal government’s share of the economy now reaches 33 percent.

A VAT Means Tax Day Is Every Day.

Caroline Baum of Bloomberg has a good column against the value-added tax, in part because she quotes me, but more so because she effectively explains that a national sales tax like the VAT would be an add-on tax that would finance much bigger government:
As Americans awake to the 2009 tax-filing deadline today, they can look forward to working longer and harder for the government in the future -- at least the dwindling share that pays individual income taxes. Enter the VAT, or value-added tax, a whole new source of revenue for the government. The VAT, a fixture in Europe for decades, is a broad-based consumption tax levied at each stage of production on the “value added,” as the name implies. Because government starts with a wish-list of new spending and entitlements and works backward to find a way to pay for them (when it’s trying to look responsible), raising more revenue without sinking the economy is an issue right now. “There is no way to finance all this new spending without an additional broad-based tax,” says Dan Mitchell, senior fellow at the Libertarian Cato Institute in Washington. Which is exactly why a VAT should be avoided, he says. “It’s akin to giving the keys to the liquor store to a bunch of alcoholics.” ...Somehow I doubt the Obama administration or Congress would propose substituting a VAT for the income tax or lowering individual or corporate tax rates as an offset. The VAT would be an add-on. ...Before you conclude that a VAT is the answer to all our fiscal problems, consider some facts. “Greece collapsed in spite of a 19 percent VAT adopted in 2005,” says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia. The additional revenue from the VAT did nothing to address Greece’s indebtedness. Does anyone think an out-of-control U.S. Congress would devote increased tax revenue to deficit reduction? (If you raised your hand, go back and reread this column from the beginning.)
P.S. Apologies for being out of touch. My laptop has crashed due to some form of virus attack. I am finally able to post again thanks to the kind people at the Montreal Economic Institute.

Wednesday, April 14, 2010

Debunking Obama's Cap and Trade

I'm sitting in the offices of the Heartland Institute in Chicago, so it is appropriate that I share one of their videos criticizing the radical cap-and-trade plan being pushed on Capitol Hill.

Helping New York...In Spite of the State's Awful Politicians

I have a column in the New York Post this morning explaining that big government is a losing deal for taxpayers in the Empire State. I'm tempted to say they deserve to be over-taxed and over-regulated because they keep electing collectivists like Chuck Schumer, but I grew up in the area and still follow the Yankees, so I hope the people of New York wake up and begin fighting big government. Here's an excerpt:

Federal spending has approximately doubled during the Bush-Obama years -- great news for special-interest groups, but bad news for New Yorkers, who pay a disproportionate share of federal taxes because of higher-than-average incomes. Needless to say, the IRS code allows no compensation for New Yorkers' higher-than-average living expenses. New Yorkers also lose on the spending side of the ledger. According to the Tax Foundation, the state gets back only about 80 cents for every $1 it sends to Washington. But the harm is actually greater -- because Washington takes that dollar from the job-creating private sector and returns the 80 cents in the form of handouts, subsidies and pork of very dubious economic benefit. And things are going to get worse before they get better. President Obama wants higher tax rates on income, higher tax rates on capital gains and increased double taxation of dividends. That will tilt the overall tax burden even further against New York. The taxes on investment, in particular, will hurt Wall Street -- on which the city's economy depends.

Tuesday, April 13, 2010

The Meaning of Free Enterprise

The politicians in Washington act as if businesses are ATM machines that can be fleeced every time there's a new boondoggle to finance. That is a deeply flawed assumption even in the case of big corporations, but it is utterly absurd when considering the challenges of creating a small business. Here's a video produced by my Cato colleague Caleb Brown that gives a personal perspective on what it means to be an entrepreneur. And since Caleb has submitted this video for a contest being sponsored by the Chamber of Commerce, do me a favor and share it widely so he gets more views.

Is California the Greece of America?

This video from the folks at Reason TV shows how excessive government - especially a bloated government workforce - is debilitating California's economy. The comparisons with Texas are a powerful example of why good policies are important.

What If We Could Cheat the Government, Sort of Like the Government Cheats Us?

I have a column in the Washington Times speculating on ways we could lower our tax bills if we could use the same creative accounting that the Congressional Budget Office and Joint Committee on Taxation used to help impose Obamacare on the nation:

If you're still struggling over your tax return, wondering why you pay so much to finance a dysfunctional and wasteful government, maybe it's time you adopted the same rules used by government number crunchers. The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) helped push the health bill across the finish line by forecasting that (don't laugh) a giant new entitlement program for government-run health care would reduce long-run budget deficits. A closer look at what they did suggests that as we approach April 15, taxpayers could save a bundle of money if they used the same creative accounting as CBO and JCT. For example: When CBO and JCT concoct their official scores about increases or decreases in government spending or revenue, they use "base-line" math. So when CBO said Medicare spending would be cut by several hundred billion dollars over the next 10 years, the first thing you need to understand is that Medicare spending actually will be increasing during that time period from $528 billion this year to about $1 trillion in 2020. But CBO says Medicare spending will be "cut" because it is not increasing even faster. Imagine if you got to do the same thing with your tax return. Not many of us received raises last year because of an economy weakened by bad government policy. But let's say you were one of the lucky ones (a government employee, perhaps?) and you got a $5,000 raise. Unfortunately, Uncle Sam is going to want a big chunk of that additional money. Here's where CBO accounting would be a big help. Why don't you assume that you were going to get a raise of $10,000. Because your pay "only" went up by $5,000, you can claim your pay was reduced. The IRS will come down on you like a ton of bricks, but you can tell the agents as they cart you away that you were following official government methodology. (Maybe they'll go easy on you when you tell them that an identical approach helped push the IRS budget up to $12 billion.)