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Archive for September, 2011

Only the federal government could be this stupid.

We have two very big problems in our nation.

o First, we have a giant, bloated federal government that is spending too much money, putting us at serious risk of a Greek-style fiscal crisis at some point in the future.

o Second, the social capital of our society is eroding because dependency and sloth are slowly but surely replacing independence, self-reliance, and the work ethic.

So what do the morons in Washington do to address these problems?

They find a policy that simultaneously makes both problems worse. More specifically, they implement a policy that gives states more tax dollars as a reward for luring more people into the food stamp program – even though that policy will exacerbate the fiscal crisis and further weaken the nation’s social capital.

This is one of those this-can’t-possibly-be-true moments. But this is not a joke. Here’s an excerpt from a news release from Oregon’s Department of Human Services.

Oregon’s Supplemental Nutrition Assistance Program (SNAP) has again ranked among the best in the nation, the United States Department of Agriculture (USDA) announced this week. The state earned one award for ensuring that people eligible for food benefits receive them and a second recognition for its swift processing of applications. The two awards combined bring a $5 million performance bonus to Oregon.

I actually wrote about something similar early last year, and groused that, “there apparently is a program that gives states ‘bonuses’ for putting more people on the dole.”

Much to my dismay (but not to my surprise), my fears were warranted.

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Running for the U.S. Senate in Massachusetts, Harvard professor and former Obama appointee Elizabeth Warren got her fellow leftists excited when she said, “There is nobody in this country who got rich on his own. Nobody” and added that “…part of the underlying social contract is you take a hunk of that and pay it forward for the next kid who comes along.”

She specifically pointed out that successful people depend on government-provided “public goods” such as roads, police, and education.

Given that the government is doing a terrible job with education, spending huge amounts of money for rather mediocre results, that was probably a foolish addition to her list. Regardless, she’s basically making a point that public goods benefit everybody. And she would like us to think that the “rich” benefit more than the rest of us, so they should pay more.

I had a couple of reactions when this story broke.

1. The rich already do pay a lot more, with the top 10 percent shouldering about 70 percent of the income tax burden. At what point would Ms. Warren be satisfied?

2. If you want a system where people pay proportionately more for public goods, isn’t that an argument for a simple and fair flat tax?

3. People get rich by providing value to the rest of us. Is it wise to subject those people to disproportionate tax penalties when that may discourage them from utilizing their talents?

4. If some people get rich illegitimately because of special handouts and subsidies from politicians, isn’t the solution to get rid of the bad programs rather than indiscriminately penalize all high-income households?

But I didn’t do a blog post, at least back when the story broke, because it seemed those points were rather obvious.

But Professor Russ Roberts of George Mason University wrote a column for yesterday’s Wall Street Journal that is so excellent that it must be shared. Here are some key passages from his WSJ column.

There’s much truth in Ms. Warren’s statement. But if government stuck to what it does fairly well—roads, police, fire and the courts; enforcing contracts that help businesses interact with their customers and other businesses—the federal government wouldn’t need to spend over $3.5 trillion a year, as it now does. And of course it’s state and local governments—and not Washington—that primarily fund police, fire and education, so it’s a bit strange to ask the rich to pay their fair share of federal income taxes because they enjoy police protection.

I especially like how Russ identified the federalism angle, noting that core public goods largely are provided by state and local governments, which makes Ms. Warren’s demand for higher tax rates from Washington even more absurd.

Unfortunately, as Russ notes, most federal spending goes for other purposes.

Much government spending supports activities that are ineffective or even harmful to the economy, often helping the politically powerful at the expense of the rest of us. Wouldn’t it be great for the federal government to stop federal export subsidies, propping up financial institutions, meddling in the education system, and trying to engineer the entire health system from the top down?

And a big part of the problem is that big chunks of the federal budget actually are handouts that benefit the rich.

If the feds stopped all that, Ms. Warren would have a stronger point. We could all feel some gratitude for government’s role in helping us live better lives. All of us, rich and poor, would look at government differently. …Ms. Warren is certainly correct that some rich people aren’t carrying their weight—those who live off the rest of us by twisting the rules of the game in their direction: the sugar farmers who benefit from sugar quotas, the corn farmers who benefit from ethanol subsidies and those sugar quotas, and especially the Wall Street executives who have managed to convince both parties that the survival of their firms, even when they make disastrous loans to each other, benefits the rest of us. …The symbiotic relationship between politicians and the super-rich is destructive of democracy and our economy. Let’s not make it worse. To close our deficit, let’s spend less rather than tax anyone more.

What a good idea: “…spend less rather than tax anyone more.” That’s what this fight is really all about.

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I’ve previously explained that the federal government should have no role in housing and that the Department of Housing and Urban Development should be abolished.

If I haven’t convinced you, then you should watch this powerful video from the folks at Reason TV.

What an outrage.

Politicians create a program, claiming that they will help the less fortunate. But as is so often the case, it’s a scam that winds up hurting poor people and instead lines the pockets of politically connected rich people.

Using the coercive power of government to redistribute from rich to poor is economically misguided. Using the coercive power of government to redistribute from poor to rich is far worse – a combination of bad economic policy and complete moral depravity.

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One almost feels sorry for Treasury Secretary Tim Geithner.

He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).

Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.

And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.”I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”

…at birth?

Separated…

This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.

But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.

The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which – as shown in this chart – are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.

Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense – much as American politicians were lying (or bamboozled) when they supported TARP.

It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.

But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.

Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

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Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).

What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.

So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?

The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.

Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.

Both Senators from Texas also have announced their opposition, and the entire Florida congressional delegation came out against the IRS’s regulatory overreach.

And now we have two more important voices against the IRS’s rogue regulation.

The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.

If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital.  I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose.  Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad.  …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements.  These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages.  Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.

But criticism is not limited to Capitol Hill. The Center for Freedom and Prosperity has spearheaded opposition from think tanks, taxpayer organizations, and public policy groups.

And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.

Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.

This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.

Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.

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During his 1976 campaign for the GOP presidential nomination, Ronald Reagan popularized the notion of “welfare queens” who bilked redistribution programs for thousands of dollars.

It has since become non-PC to use such a term, but that’s never stopped me. Here’s a report of a wretched welfare queen who is mooching off taxpayers and should be deeply ashamed of her behavior.

The Queen was paid more than £224,000 in EU subsidies for her Windsor farm estate last year, according to figures obtained by The Mail on Sunday. …The subsidy for the 500-acre dairy and cereal farm, which was founded by Queen Victoria’s husband Prince Albert, has increased by almost £40,000 since 2009.  Similar amounts are thought to have been paid to the Monarch to support her estates in Sandringham and Balmoral, but the Government refused to release this information. …A Palace spokesman said the rise was due to an increase in EU subsidy rates.

Keep in mind 224,000 British pounds is about $350,000 – and that’s not even counting the handouts and subsidies that the royal family may be receiving from other estates.

That’s downright disgusting, and should be Example A in the argument to get rid of Europe’s corrupt Common Agricultural Policy – much as the United States Department of Agriculture should be abolished as quickly as possible.

But there’s another point worth making. Government-coerced redistribution is never a good idea, particularly when done by a central government. But there are degrees of wrong. Taking from rich people to give to poor people is wrong. But as I’ve noted before, taking from poor people to line the pockets of rich people is utterly reprehensible.

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Having grown up during the Cold War, I never though I would write a sentence like the title of this blog post, but there have been lots of firsts during the reign of Obama.

When the head of a major multinational company says the American tax system is worse than the policy of a nation that is nominally still communist, that’s a remarkable – and worrisome – development.

Here’s an excerpt from a story in the UK-based Financial Times.

Coca-Cola now sees the US becoming a less friendly business environment than China, its chief executive has revealed, citing political gridlock and an antiquated tax structure as reasons its home market has become less competitive. Muhtar Kent, Coke’s chief executive, said “in many respects” it was easier doing business in China, which he likened to a well-managed company. “You have a one-stop shop in terms of the Chinese foreign investment agency and local governments are fighting for investment with each other,” he told the Financial Times. Mr Kent also pointed to Brazil as an example of an emerging economy that is making itself attractive to investment in ways that the US once did.

As much as I criticize the U.S. tax system and notwithstanding the passage you just read, I wouldn’t want anyone to conclude that China has better economic policy. The United States may have become more statist in the past decade, dropping from 3rd to 10th in the Economic Freedom of the World rankings, but 10th place is still a heck of a lot better than 92nd place, which is where China currently ranks.

And I also think it’s important to draw a distinction between a nation being “business friendly” and “market friendly.” I strongly prefer the latter. I want small government and laissez-faire markets, not policies that cater to big business. And some of China’s development is based on special deals for large companies.

This is not a big knock on China, which has improved. It used to rank as one of the 10th-worst nations, so gradual economic liberalization is boosting its economy and has lifted hundreds of millions out of absolute poverty (as compared to the relatively benign poverty found in the U.S.).

But even with those caveats, it’s not a good thing that America’s corporate tax system is so unfriendly. And it’s not a good thing that investors, entrepreneurs, CEOs, and others have a perception that it’s better to produce outside of America.

For more information, here are two of my videos. This one (my very first effort, so forgive the lack of polish) discusses the overall issue of corporate taxation.

And here’s a video that looks at the critical issue of international corporate taxation. You won’t be surprised to learn that America probably has the most unfriendly regime in the world.

One last thing worth mentioning is that most European governments have territorial tax systems and the average corporate tax rate in “socialist” Europe is down to 23 percent.

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I’ve commented on the corruption of the Solyndra scandal, but it’s important to understand this is not just a story of sleaze.

From an economic perspective, the real problem is that green-energy programs cause a misallocation of capital. Simply stated, government intervention diverts resources from more productive uses.

Here are a couple of examples, explained in videos put together by Senator Jim DeMint’s office.

The first video shows how a subsidiary of Coca-Cola used White House favoritism to subsidize its energy costs.

And the second video explains how a Spanish company, thanks to the Obama White House, benefited from industrial policy.

And what’s the economic impact of these forms of crony capitalism? I did a back-of-the-envelope calculation, estimating that there’s about $160,000 of investment for every real job in the private sector.

Click here to listen to the list of green-energy programs that create jobs more efficiently.

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Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory – including socialism and Marxism – agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand (click it for better resolution).

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

By the way, Hong Kong’s simple and fair flat tax eliminate all those extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate, but you also get rid of double taxation so that the IRS only gets one bit at the apple.

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This is getting surreal. We now have layers of bailouts around the world.

Different nations are doing their own bailouts. On top of that, the Europeans have set up something called the European Financial Stability Facility, which does bailouts across the continent. And then there’s the International Monetary Fund, doing bailouts on a global basis. (and we’re not even counting the indirect bailouts from the Federal Reserve and European Central Bank)

So how is this system working? Well, if you understand the principle of moral hazard, you won’t be surprised to learn that it’s a big flop. Giving bailouts is like trying to cure an alcoholic with more booze.

But the problems are much deeper than promoting bad behavior. Bailouts also undermine growth by misallocating capital. And, most ominously, they create even bigger problems down the road.

Which is now what’s happening. The queen bureaucracy of bailouts, the IMF, may run out of bailout money, and presumably will demand more handouts from member nations – with the United States on the hook for providing the biggest share. Here’s a blurb from the story in the Daily Telegraph.

The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”

At the risk of stating the obvious, the IMF should not get any more money. This is one of those moments for which the phrase “Hell No!” was invented.

The time has come to stop the cycle of bailouts. As Greece has demonstrated, bailouts simply give politicians some breathing room to postpone necessary reforms.

But it’s not just that bailouts encourage bad behavior in the public sector. They also promote moral hazard, leading financial institutions to make excessively risky loans because of an expectation that taxpayers will be coerced into making up any losses.

To understand why bailouts and moral hazard are so misguided, here’s a video narrated by Nicole Neily of the Independent Women’s Forum.

The video largely focuses on American policy issues such as Fannie, Freddie, and TARP, but the principles apply to all bailouts.

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I became a big admirer of Herman Cain back in the 1990s when he was a member of the National Commission on Economic Growth and Tax Reform (aka, the Kemp Commission).

I worked as a staffer for the Commission and was able to observe Mr. Cain in action over a period of several months. Suffice to say I like what I saw. Unlike many people in DC, he is not an empty suit.

That doesn’t means he’s perfect, as illustrated by his support for the TARP bailout, but he’s definitely on the right side of the dividing line between those who want freedom and those who want statism.

And his victory in the Florida straw poll is bringing lots of deserved attention to his campaign, leading several people to ask what I think about his economic agenda.

To get right to the point, it’s a very Reaganesque package of lower taxes and more freedom that can be divided into three parts.

1. His short-run plan, which he calls the “Immediate Boost,” is to slash personal and corporate tax rates to 25 percent and eliminate the capital gains tax.

2. His intermediate plan, which he calls the “Enhanced Plan,” eliminates the death tax and the payroll tax. But the most important part is the 9-9-9 plan, which is a 9 percent tax rate on personal income, a 9 percent tax rate on corporate income, and a 9 percent national sales tax.

3. His long-run agenda, which he calls the “Fair Tax,” is to eliminate all personal and corporate income taxes and adopt a national sales tax.

This all sounds great, but let me do a bit of nit-picking. I want to focus on part 2, particularly the 9-9-9 plan.

It’s fine in theory. Heck, it’s great in theory. It means low tax rates on productive behavior. It means no double taxation of saving and investment. And it means no corrupt and inefficient loopholes.

What’s not to love about a plan that achieves all these principles?

But here’s the problem. If you happen to be one of those people (such as me) who does not trust politicians, then we run a grave risk if we ever let the crowd in Washington impose any sort of national sales tax without first getting rid of all income taxes.

I have faith that Herman Cain’s heart is in the right place, but years of experience in Washington have taught me to always assume politicians will grab more power and more money at every possible opportunity.

This is why I made this video, explaining why a national sales tax is only acceptable if the Constitution is amended to permanently bar any form of income taxation.

Let me put it more bluntly. A national sales tax – such as a Fair Tax or a VAT – would be a less destructive way of raising revenue than the current tax system.

But any form of national sales tax, if imposed on top of the income tax, would be a disaster. The experience of Europe shows that national sales tax are a money machine for big government.

This is why a national sales tax can only be put on the table after the income tax is repealed. But since I don’t trust politicians, we need to also amend the Constitution to repeal the 16th Amendment that allowed income taxes.

But since many Supreme Court Justices seem oblivious to the Constitution, we would actually need to replace the 16th Amendment with a new amendment that is completely unambiguous about banning any tax on income in perpetuity.

In other words, the income tax needs to be sealed in a lead vault, buried under 10 feet of concrete, and then covered by a foot of salt so nothing can ever grow back to haunt the American people.

Once these things happen, then we can adopt a national sales tax. See, I can be open-minded and reasonable.

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Have you ever wondered why the tax code is a Byzantine mess that requires 72,000 pages of law and regulation?

Hopefully you don’t ponder such dark and dreary thoughts, but the answer is that politicians and lobbyists have spent nearly 100 years creating all sorts of loopholes, shelters, deductions, preferences, exemptions, credits, and shelters.

Beginning on that dark day in 1913 when the income tax began to plague America.

Politicians love this process since they get to control our behavior and (even better) raise campaign cash from interest groups that benefit from industrial policy in the tax code.

The Washington Post has put together a revealing chart showing the steady growth of tax breaks – just in the past 37 years. If you click on the website, it has some interactive features, but this pictures of ever-rising distortions is all you really need to know.

But you should have two warning signs blaring in your head as you peruse this material.

1. You can’t properly define a loophole unless you first properly define an ideal tax system. This sounds like wonky talk for tax geeks, but it’s critically important. There’s a big debate featuring (mostly) tax lawyers on one side who think the right “tax base” includes pervasive double taxation of saving and investment. And the other side is comprised of (mostly) tax economists who think that a proper “tax base” has no double taxation.

Not surprisingly, the Washington Post, like much of the Washington crowd, accepts the wrong definition of a loophole. I explained this issue more thoroughly in this post, for those who want to get in the weeds. But here’s one example. If you put money in an IRA, that means you only get taxed on that income one time. The tax lawyers think that’s a loophole and they want you to be taxed at least two times, once when you first earn the money and again when you take the money out of the account. The tax economists point out that the government should only get one bite at the apple, meaning that the income can be taxed before it goes into the account (a Roth-style IRA) or when it comes out of the account (a traditional IRA). But not both.

2. Assuming we have the proper definition of a loophole, we presumably agree that these distortions are both corrupt and inefficient. And we’d like to clean up the tax code by eliminating these provisions. But getting rid of loopholes – assuming that’s all that happens – gives the government more money. That’s what’s motivating folks on the left. Going after loopholes (including things that aren’t loopholes, as explained above) is largely a tax-raising exercise.

That’s why, as I explained in an earlier post, any loophole-closing should be accompanied by an equal amount of tax-rate cutting. More specifically, every dollar generated by reducing tax breaks should be used to finance lower tax rates. That’s the underlying principle of tax reform. And if you get rid of all loopholes, eliminate all double taxation, and lower tax rates as much as possible, you wind up with a simple and fair flat tax.

This video explains how the system works.

But don’t hold your breath waiting for this to happen. Politicians react to the flat tax like vampires react to holy water.

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School choice doesn’t automatically mean every child will be an educational success, but evidence from other nations certainly suggests it means better overall performance. Sweden, Chile, and the Netherlands are just some of the countries that have seen good results after breaking up state-run education monopolies.

The same is true in the United States. When parents have some ability to select schools, this generates competitive pressure for better results. This is true even in sub-optimal instances where the choice is merely among different government-run schools. as illustrated by the abstract of a new study from the National Bureau of Economic Research.

We study the impact of a public school choice lottery in Charlotte-Mecklenburg (CMS) on postsecondary attainment. We match CMS administrative records to the National Student Clearinghouse (NSC), a nationwide database of college enrollment. Among applicants with low-quality neighborhood schools, lottery winners are more likely than lottery losers to graduate from high school, attend a four-year college, and earn a bachelor’s degree. They are twice as likely to earn a degree from an elite university. The results suggest that school choice can improve students’ longer-term life chances when they gain access to schools that are better on observed dimensions of quality.

But real competition should involve private schools. Here’s the video from last year about why comprehensive school choice is good news for education.

School choice is one of the few issues where I’m optimistic. If we’re beginning to make progress even in places such as California and New Orleans, we’re obviously winning. No wonder the teacher unions are sounding so shrill.

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The fiscal turmoil in Greece is not about fiscal balance. It’s a fight between looters and moochers such as Olga Stefou, who think taxpayers should endlessly subsidize everything, and the shrinking group of productive people who are pulling the wagon and keeping Greece’s economy from total collapse.

Not surprisingly, the Greek government has tried to prop up its uncompetitive welfare state by pillaging that group of productive people. But it appears that the kleptocrats may have gone too far and triggered a Tea Party-type revolt.

Here are some excerpts from a remarkable story about a Greek tax revolt from Der Spiegel in Germany.

Belitsakos is…the physical and spiritual leader of a movement of businesspeople in Greece that is recruiting new members with growing speed. While Greece’s government is desperately trying to combat its ballooning budget deficit by raising taxes and imposing new fees, people like Belitsakos are putting their faith in passive resistance. The group’s slogan is as simple as it is stoic: “We Won’t Pay.” This business owners’ absolute refusal to pay any taxes resembles an uprising of the ownership class, rather than the working class, a rebellion of the self-employed business owners who have long been the backbone of Greek society. These are not the people who weaseled their way into Greece’s oversized civil service; these are people who put their money in the private sector, working 12-hour days, seven days a week. …”The state will kill us,” he says. “We’re acting in self-defense.”

In other words, these are the good guys. And look what they have to deal with.

Then he starts to do the math. Over the last two years, his sales have massively shrunk as 60 of the tavernas and restaurants he used to make deliveries to have terminated their contracts with him. At the same time, the government has raised the value-added tax (VAT) twice while imposing a never-ending series of new fees. He mentions the €300 ($406) one-time fee for the self-employed, a two-percentage-point boost in the VAT, a €180 solidarity levy for the unemployed and a property tax that is “easily a few hundred euros every year.” …Belitsakos calls them “charatzi,” a word from Ottoman times that can perhaps best be translated as “loot” or “compulsory levy.” The term is meant to indicate taxes levied arbitrarily and without justification, such as the tithe once paid to feudal lords.

This doesn’t mean that anyone who refuses to pay tax is automatically a hero. Some of the moochers and looters that have destroyed Greece think they should rape and pillage others and not pay taxes themselves.

These days, even communists, unionists and leftists are raising a public outcry against the new taxes. This week, Aleka Papariga, the general secretary of the Communist Party of Greece, said that the only way to stop the complete bankrupting of the people was for them to not pay the “charatzi.”

The UK-based Financial Times, in a story on the likelihood of a Greek default, also finds anger among the nation’s productive class.

The frustration is evident even among those who have jobs. George, a 49-year-old real estate agent, said despite a pledge to cut 30,000 public service jobs, the austerity policies of the government still appeared intent on protecting the interests of civil servants and state employees in general at the expense of the private sector. “Everything from water to electricity and telephony charges has gone up because of the increase in VAT [value added tax],” he said. And a new special property tax meant he would be hit yet again. In an increasing sign more and more people are getting upset with the political system and taxes, Andreas P, a 54-year-old clerk at a big Greek supermarket chain, is vowing to refuse to pay the new special property tax in protest at what he sees as an explosion of public service workers. “My father had a [café] in our village near Lamia [central Greece] back in 1980 and knew that just four out of the 400 inhabitants were state employees,” he says. “When I visited my village in August, I tried to count by curiosity how many were employed in some form in the public sector. I found out that more than 200 were working there. Is it ever possible for a country to prosper with so many state employees who do not produce? Can you give me a good reason to pay the extra taxes?”

These two stories underscore the message that I’ve been repeating for years. Greece’s problem is not deficits and debt. Red ink and imminent default are bad, but they are symptoms of the real problem of a bloated public sector and the dependency culture created by too much government.

This video explains why the burden of government spending is the critical fiscal policy variable.

And it goes without saying that America faces the same challenge. The only difference is that we have a few years to solve the problem before we have our own Greek-style fiscal crisis.

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Have you ever tried to run in waist-high water? It’s not easy, but it’s a useful exercise if you want to experience what it’s like to comply with government rules, regulation, paperwork, and red tape. Especially if you want to understand why it’s getting harder for American companies to compete against firms from other nations.

The Wall Street Journal reports on some new numbers released by the White House Office of Management and Budget.

The effort needed to comply with federal bureaucracy now has a number. According to new government estimates released this week, Americans spent 8.8 billion hours filling out government forms in fiscal 2010. …In all, the paperwork burden has increased by around 19% over the past decade, up from 7.4 billion hours in fiscal 2000, the White House Office of Management and Budget said.

The article explains that there is plenty of blame to go around, showing that politicians of both parties seem perfectly happy to bury Americans under a mountain of red tape.

Between 2002 and 2005, federal agencies reported significant increases in paperwork demands. Republicans controlled Congress and the White House for almost all that period. In 2005, laws including the Bush administration’s Medicare prescription-drug overhaul, created what is now estimated to be an extra 250 million paperwork hours. At the same time, the biggest single-year jump in the past decade came in 2010, when individuals and businesses spent an extra 352 million hours responding to paperwork requests from agencies prompted by new statutory requirements.

Some of the example will help you understand why the economy is having trouble creating jobs.

Last year, employers needed almost 70 million additional hours to claim a new credit for hiring more workers, and restaurants spent 14.5 million hours to display calorie counts for their menus, according to figures submitted to OMB by the departments of the Treasury and Health and Human Services. In fact, the Treasury was the source of most of the paperwork burden in 2010, hitting 6.4 billion hours, or 73%. …The winner of the largest year-on-year increase was the Securities and Exchange Commission, which decided it actually took twice as long to complete its forms than it previously thought, upping its estimates to 361 million hours from 168 million. A spokesman declined to comment.

The real cost of all this regulation is measured in lost economic output, jobs not created, and mandated inefficiency. According to the Small Business Administration, that amounts to a whopping $1.75 trillion per year.

But if you just want to measure the cost of the man-hours required, the Administration has an estimate.

The OMB said it hadn’t attempted to put a financial cost on the paperwork requests, but noted in its report that “it is clear that the monetary equivalent would be very high. For example, if each hour is valued at $20, the monetary equivalent would be $176 billion.”

Considering much of the compliance burden falls on the business community, the $20 per-hour figure is obviously way too low.

But whatever the actual total, remember that the man-hours are just one small slice of the burden.

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When asked to pick my most frustrating issue, I could list things from my policy field such as class warfare or income redistribution.

But based on all the speeches and media interviews I do, which  periodically venture into other areas, I suspect protectionism vs. free trade is the biggest challenge.

So I want to ask the protectionists (though anybody is free to provide feedback) how they would answer these simple questions.

1. Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?

As Walter Williams has explained, this is a simple matter of freedom and liberty. If you want to give the political elite the authority to tell you whether you can buy foreign-produced goods, you have opened the door to endless mischief.

2. If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?

This is a very straightforward challenge. If protectionism is good, then it shouldn’t be limited to national borders.

3. Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?

Little green pieces of paper have little value to foreign companies. They only accept those dollars in exchange for products because they intend to use them, either to buy American products or to invest in the U.S. economy. Indeed, a “capital surplus” is the flip side of a “trade deficit.” This generally is a positive sign for the American economy (though I freely admit this argument is weakened if foreigners use dollars to “invest” in federal government debt).

4. Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?

There are thousands of hard-working Americans that have lost jobs because of foreign competition. At some level, this is natural in a dynamic economy, much as candle makers lost jobs when the light bulb was invented. But oftentimes American producers can’t meet the challenge of foreign competition because of bad policy from Washington. When I think of ordinary Americans that have lost jobs, I direct my anger at the politicians in DC, not a foreign company or foreign workers.

5. Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?

If we travel down the path of protectionism, politicians will use that as an excuse not to implement pro-growth reforms. This condemns America to a toxic combination of two bad policies – big government and trade distortions. This will destroy far more jobs and opportunity that foreign competition.

6. Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?

Most protectionism in America is the result of organized interest groups and powerful unions trying to prop up inefficient practices. And they only achieve their goals by getting in bed with the Washington crowd in a process that is good for the corrupt nexus of interest groups-lobbyists-politicians-bureaucrats.

7. If you don’t like taxes, why would you like taxes on imports?

A tariff is nothing but a tax that politicians impose on selected products. This presumably makes protectionism inconsistent with the principles of low taxes and limited government.

8. Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?

Some people will be tempted to say that the United States was a successful economy in the 1800s when tariffs financed a significant share of the federal government. That’s largely true, but the nation’s rising prosperity surely was due to the fact that we had no income tax, a tiny federal government, and very little regulation. And I can’t resist pointing out that the 1930 Smoot-Hawley tariff didn’t exactly lead to good results.

We also had internal free trade, as explained in this excellent short video on the benefits of free trade, narrated by Don Boudreaux of George Mason University and produced by the Institute for Humane Studies.

My closing argument is that people who generally favor economic freedom should ask themselves whether it’s legitimate or logical to make an exception in the case of foreign trade.

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I’m still at the Liberty Camp in Slovenia, doing my best to teach young Europeans about the importance of individual liberty, free markets, and small government. (also doing a bit of sightseeing, as you can see from the pictures below)

This morning, one of the other presenters showed a short video taken from the first-rate “Commanding Heights” program. It told the brief story of how one man, Ludwig Erhard, single-handedly put Germany on the road to post-war recovery by doing away with price controls.

This video is a lesson in character – and an example of doing what’s right.

Erhard did not have authority to change the price controls, but, with a certain degree of cleverness that would make Bill Clinton proud, he decided that this didn’t preclude him from simply abolishing them.

In doing this, he showed personal courage. He did something bold. And he went against so-called expert opinion.

And he helped millions of people enjoy a better life by reducing the burden of government.

We need more people with this integrity. In America and everywhere else.

People who will go against the grain to promote freedom.

People who will take risks to advance liberty.

People who will do the right thing, even if it doesn’t advance their career.

Not that I’m asking for selfless gestures. As Erhard’s episode demonstrates, sometimes doing the right thing at least means people say nice things about you.

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Welcome Instapundit readers: If you want a longer-term perspective on the Fed’s misdeeds, this George Selgin analysis is highly recommended.

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In a move that some are calling QE3, the Federal Reserve announced yesterday that it will engage in a policy called “the twist” – selling short-term bonds and buying long-term bonds in hopes of artificially reducing long-term interest rates. If successful, this policy (we are told) will incentivize more borrowing and stimulate growth.

I’ve freely admitted before that it is difficult to identify the right monetary policy, but it certainly seems like this policy is – at best – an ineffective gesture. This is why the Fed’s various efforts to goose the economy with easy money have been described as “pushing on a string.”

Here are two related questions that need to be answered.

1. Is the economy’s performance being undermined by high long-term rates?

Considering that interest rates are at very low levels already, it seems rather odd to claim that the economy will suddenly rebound if they get pushed down a bit further. Japan has had very low interest rates (both short-run and long-run) for a couple of decades, yet the economy has remained stagnant.

Perhaps the problem is bad policy in other areas. After all, who wants to borrow money, expand business, create jobs, and boost output if Washington is pursuing a toxic combination of excessive spending and regulation, augmented by the threat of higher taxes.

2. Is the economy hampered by lack of credit?

Low interest rates, some argue, may not help the economy if banks don’t have any money to lend. Yet I’ve already pointed out that banks have more than $1 trillion of excess reserves deposited at the Fed.

Perhaps the problem is that banks don’t want to lend money because they don’t see profitable opportunities. After all, it’s better to sit on money than to lend it to people who won’t pay it back because of an economy weakened by too much government.

The Wall Street Journal makes all the relevant points in its editorial.

The Fed announced that through June 2012 it will buy $400 billion in Treasury bonds at the long end of the market—with six- to 30-year maturities—and sell an equal amount of securities of three years’ duration or less. The point, said the FOMC statement, is to put further “downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” It’s hard to see how this will make much difference to economic growth. Long rates are already at historic lows, and even a move of 10 or 20 basis points isn’t likely to affect many investment decisions at the margin. The Fed isn’t acting in a vacuum, and any move in bond prices could well be swamped by other economic news. Europe’s woes are accelerating, and every CEO in America these days is worried more about what the National Labor Relations Board is doing to Boeing than he is about the 30-year bond rate. The Fed will also reinvest the principal payments it receives on its asset holdings into mortgage-backed securities, rather than in U.S. Treasurys. The goal here is to further reduce mortgage costs and thus help the housing market. But home borrowing costs are also at historic lows, and the housing market suffers far more from the foreclosure overhang and uncertainty encouraged by government policy than it does from the price of money. The Fed’s announcement thus had the feel of an attempt to show it is doing something to help the economy, even if it can’t do much. …the economy’s problems aren’t rooted in the supply and price of money. They result from the damage done to business confidence and investment by fiscal and regulatory policy, and that’s where the solutions must come. Investors on Wall Street and politicians in Washington want to believe that the Fed can make up for years of policy mistakes. The sooner they realize it can’t, the sooner they’ll have no choice but to correct the mistakes.

Let’s also take this issue to the next level. Some people are explicitly arguing in favor of more “quantitative easing” because they want some inflation. They argue that “moderate” inflation will help the economy by indirectly wiping out some existing debt.

This is a very dangerous gambit. Letting the inflation genie out of the bottle could trigger 1970s-style stagflation. Paul Volcker fires a warning shot against this risky approach in a New York Times column. Here are the key passages.

…we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes. The siren song is both alluring and predictable. …After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? …all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth. …What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate. …At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.

Last but not least, here is my video on the origin of central banking, which starts with an explanation of how currency evolved in the private sector, then describes how governments then seized that role by creating monopoly central banks, and closes with a list of options to promote good monetary policy.

And I can’t resist including a link to the famous “Ben Bernank” QE2 video that was a viral smash.

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I haven’t paid too much attention to the Solyndra scandal, except to note that waste, corruption and job losses are the inevitable consequences of big government and crony capitalism.

But if you want a withering indictment of the sleaziness of the whole enterprise, a trip to Chicago is very illuminating.

Here’s some of what John Kass of the Chicago Tribune wrote about the “Chicago smell” of this issue.

The Solyndra scandal cost at least a half-billion public dollars. It is plaguing PresidentBarack Obama. And it’s being billed as a Washington story. But back in Obama’s political hometown, those of us familiar with the Chicago Way can see something else in Solyndra — something that the Washington crowd calls “optics.” In fact, it’s not just a Washington saga — it has all the elements of a Chicago City Hall story, except with more zeros. …did you really believe it when the White House mouthpieces — who are also Chicago City Hall mouthpieces — promised they were bringing a new kind of politics to Washington? This is not a new kind of politics. It’s the old kind. The Chicago kind. And now the Tribune Washington Bureau has reported that the U.S. Department of Energyemployee who helped monitor the Solyndra loan guarantee was one of Obama’s top fundraisers. Fundraising? Contracts? Imagine that. …it’s the same old politics, the same kind practiced in Washington and Chicago and anywhere else where appetites are satisfied by politicians. When the government picks winners and losers, who’s the loser? Just look in the mirror, hold that thought, and tell me later.

Kass does a great job of describing how these legal forms of corruption take place.

In Solyndra, like any proper City Hall political scandal, there are similar archetypes. There are the guys who count. The guys who bring the cash. They count because they do the counting. They have leverage. They’re always there at the fundraisers. And so they’re the ones who are allowed to gorge at the public trough. The bureaucrats are the fulcrum so the guys with the leverage can lift great weight without too much effort. And while they might whine privately among themselves, they don’t hold news conferences to blow the whistle. They keep their mouths shut until the deal is done. If anyone gets caught and the problem becomes public, at least they’ve got email to cover their behinds. And they’re doing a good job covering. But there’s one group that doesn’t get their behinds covered. Instead, their behinds are right out there, suspended foolishly, and waiting to get kicked. We’re the taxpayers — in Illinois we call ourselves chumbolones because we’re the ones who stupidly end up covering all the losses. As in the Solyndra mess.

His last point is most important. Taxpayers always wind up with the short end of the stick. Meanwhile, all the politicians, bureaucrats, lobbyists, and interest groups simply shrug their shoulders and move on to the next scam.

That’s why the only solution to this sleaze is smaller government.

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I don’t mean jokes about the Slovenian political system, though I’m sure it would be a target-rich environment since politicians all over the world are easy to mock.

Instead, I happen to be in Slovenia and it’s time to share the best political jokes from America’s late-night talk shows (something I do periodically, as you can see here, here, and here).

Jay Leno

  • Astronomers have discovered a planet that has two suns. That solar company Solyndra went bankrupt on that planet too.
  • President Obama says his new jobs bill will create over 1.9 million jobs — and up to 50 of them will be right here in America.
  • I had a horrible nightmare. My cat was sick and the only vet in town was Ron Paul, and I didn’t have my pet insurance card.
  • President Obama is more popular overseas than here. Then again, he’s created more jobs over there than here.
  • Congress is investigating why the Obama administration invested over $500 million in a solar panel company called Solyndra, which filed for bankruptcy. Only the White House could pick a solar panel company that goes broke in California in the summer.
  • The Democrats lost a seat they’ve held in New York since the 1920s. The White House said, “At least President Obama created one new job.”
  • Dick Cheney was grilled by the women of “The View.” So apparently he’s willing to undergo torture himself to prove a point.
  • After saying the jobs bill is paid for, President Obama now says that it will be paid for by raising taxes over 10 years. I can’t figure out if he’s the kind of guy who makes infomercials, or the kind of guy who falls for infomercials.
  • Threatening messages were posted on the White House Facebook page. Secret Service takes this very seriously and they’re warning that whoever is responsible runs the risk of being unfriended.
  • According to the latest poll, a record 73 percent of Americans think the country is headed in the wrong direction. But the good news: Gas is so expensive that we’ll never get there.
  • President Obama’s uncle has been arrested on suspicion of drunk driving. Remember when the most embarrassing person in the president’s life was Joe Biden?
  • How sad is it for the uncle? He got thrown in jail and the only relative he could call for bail money is $14 trillion in debt.
  • Hurricane Irene wasn’t that bad. In fact, it was downgraded to a tropical storm. Even our hurricanes are getting downgraded.

Conan

  • President Obama has proposed a new tax increase called the “Buffett rule.” At first, Newt Gingrich was for it because he thought it was the “buffet rule.”
  • President Obama’s re-election campaign is doing a contest where contributors can win a chance to have dinner with the president. Or, if you come in 2nd place, a mid-afternoon Hot Pocket with Joe Biden.
  • President Obama described himself as an eternal optimist. He then explained that he’s the kind of person that sees the country as “half employed.”
  • A man wearing an Obama mask robbed a bank. Either that or Obama has an exciting new plan to reduce the deficit.
  • It’s being reported that Rick Perry met his wife when they were in elementary school. There was another boy that liked her too but Perry had him executed.
  • According to a report, the post office could go out of business this winter. On the bright side, the post office won’t receive the report in the mail for another two years.
  • Republican presidential candidate Jon Huntsman announced that he received the endorsement of Jeb Bush Jr., who is the son of the brother of the former president. Analysts say he’s sewn up the crucial “guy you didn’t know existed” vote.

Jimmy Kimmel

  • The University of Chicago is hosting an academic conference called “Jersey Shore Studies.” Meanwhile in Korea, students are learning something called “math.”
  • President Obama is determined to help the unemployed because it’s looking increasingly likely that in a year, he’ll be one of them.
  • President Obama’s approval rating is very low. But then again, his disapproval rating is very high, so there’s a silver lining.
  • This is the first debate Rick Perry has participated in since he announced his candidacy. Perry is a mix between George W. Bush and Yosemite W. Sam.

David Letterman

  • I love autumn in New York City: The yellows, the browns, and the rust — and that’s just the drinking water. (not political, but I thought it was funny enough to share)
  • Labor Day is the day that Americans take three days off from looking for work.

Jimmy Fallon

  • Last night in the Rose Garden, President Obama had a beer with a Medal of Honor winner. Not to be outdone, Joe Biden had a beer with a “World of Warcraft” winner.
  • According to a new poll, only 55 percent of Americans think President Obama is intelligent. Yeah, that may not sound impressive, but it’s up 55 percent over the last president.

Speaking of political humor, this cartoon is my most-viewed blog post of all time.

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Since this story is about an Italian porn star who because a politician, the title of this post could have more than one meaning, but we’re going to limit our conversation to whether it’s appropriate for politicians to receive extravagant pensions

And this is not just an Italian issue. Disgraced Congressman Anthony Weiner is eligible for more than $1 million of pension benefits according to the National Taxpayers Union, and top bigwigs from the European Union have become experts at fleecing taxpayers.

But what’s interesting about the Italian controversy is that taxpayers in that nation may have (finally) reached a boiling point. Who knows, maybe they’ll form a tea party. Here are some excerpts from the story in the UK-based Guardian.

She is famed for being the first woman to uncover her breasts live on Italian television, for recording a song entirely about the male organ, and for offering sex to Osama bin Laden (in return, she said, for giving up terrorism). But now Ilona Staller, better known as Cicciolina, is the unlikely centre of a bitter row over the cost to ordinary Italians of the perks enjoyed by their country’s tens of thousands of politicians. It emerged on Monday that the Hungarian, who starred in almost 40 hardcore pornographic movies, will soon be enjoying a €39,000-a-year (£34,000) pension, provided by the taxpayers of her adoptive homeland. The stipend, which is for life, is her reward for labouring as a member of parliament for all of five years, from 1987 to 1992. Staller was elected for the libertarian Radical party and sponsored a number of mainly sex-related bills, including one to set up “love parks and hotels”. …According to one recent estimate, Italy’s cohorts of politicians cost the taxpayers almost €1.3bn a year. With four levels of government – national, regional, provincial and municipal – the country has an inordinately large number of elected representatives. But that has not stopped them from giving themselves a distinctly comfortable lifestyle. According to the Italian parliament website, the gross salary of a member of the lower house is €140,000 a year plus an attendance allowance of up to €42,000 and a contribution towards expenses of up to €63,000. They are also entitled to free public transport, free air and sea travel within Italy and exemption from motorway tolls.

The right approach is that politicians should face exactly the same laws – for pensions and in all other regards – as regular people. That means they should be trapped in dismal Social Security systems and be subject to the market if they do private savings (heck, maybe that would encourage them to adopt pro-growth policy).

I can’t resist making two additional comments. Ms. Staller is identified as being a member of the “libertarian Radical party.” But the story also says that she introduced legislation to have the government finance “love parks and hotels.”

At the risk of speaking for all libertarians, that doesn’t sound like a legitimate function of government. Maybe the reporter should learn the difference between libertarian and libertine.

Last but not least, I wonder whether Ms. Staller’s parents were more embarrassed when they learned she was a porn actress…or when they learned she was a politician.

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The 2011 edition of Economic Freedom of the World, published by Canada’s Fraser Institute (with help from groups like Cato), has been released.

Covering data through 2009, the new report provides damning evidence of the negative impact of the Bush-Obama policies of bigger government and more intervention.

Here’s a relevant passage from the Executive Summary.

The world’s largest economy, the United States, has suffered one of the largest declines in economic freedom over the last 10 years, pushing it into tenth place. Much of this decline is a result of higher government spending and borrowing and lower scores for the legal structure and property rights components. Over the longer term, the summary chain-linked ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight-tenths of a point or more between 1990 and 2009, causing their rankings to slip.

This chart, taken directly from the book, shows how the United States has been of the world’s five-worst performers over the past decade, putting America in a very unfortunate category.

The previous chart shows the decline in America’s absolute ranking. And here’s a chart I created showing how the United States has declined relative to other nations. Simply stated, America is on the verge of falling out of the top 10, after being the 3rd-freest economy in the world at the end of the Clinton Administration.

Thanks George and Barack.

By the way, Hong Kong and Singapore are the top two nations, where they’ve ranked for quite some time. Here is the full top-10 list.

1. Hong Kong

2. Singapore

3. New Zealand

4. Switzerland

5. Australia

6. Canada

7. Chile

8. United Kingdom

9. Mauritius

10. United States

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It’s hard to keep track of all the tax hikes that President Obama is proposing, but it’s very simple to recognize his main target – the evil, nasty, awful people known as the rich.

Or, as Obama identifies them, the “millionaires and billionaires” who happen to have yearly incomes of more than $200,000.

Whether the President is talking about higher income tax rates, higher payroll tax rates, an expanded alternative minimum tax, a renewed death tax, a higher capital gains tax, more double taxation of dividends, or some other way of extracting money, the goal is to have these people foot the bill for a never-ending expansion of the welfare state.

This sounds like a pretty good scam, at least if you’re a vote-buying politician, but there is one little detail that sometimes gets forgotten. Raising the tax burden is not the same as raising revenue.

That may not matter if you’re trying to win an election by stoking resentment with the politics of hate and envy. But it is a problem if you actually want to collect more money to finance a growing welfare state.

Unfortunately (at least from the perspective of the class-warfare crowd), the rich are not some sort of helpless pinata that can be pilfered at will.

The most important thing to understand is that the rich are different from the rest of us (or at least they’re unlike me, but feel free to send me a check if you’re in that category).

Ordinary slobs like me get the overwhelming share of our income from wages and salaries. The means we are somewhat easy victims when the politicians feel like raping and plundering. If my tax rate goes up, I don’t really have much opportunity to protect myself by altering my income.

Sure, I can choose not to give a speech in the middle of nowhere for $500 because the after-tax benefit shrinks. Or I can decide not to write an article for some magazine because the $300 payment shrinks to less than $200 after tax. But my “supply-side” responses don’t have much of an effect.

For rich people, however, the world is vastly different. As the chart shows, people with more than $1 million of adjusted gross income get only 33 percent of their income from wages and salaries. And the same IRS data shows that the super-rich, those with income above $10 million, rely on wages and salaries for only 19 percent of their income.

This means that they – unlike me and (presumably) you – have tremendous ability to control the timing, level, and composition of their income.

Indeed, here are two completely legal and very easy things that rich people already do to minimize their taxes – but will do much more frequently if they are targeted for more punitive tax treatment.

1. They will shift their investments to stocks that are perceived to appreciate in value. This means they can reduce their exposure to the double tax on dividends and postpone indefinitely taxes on capital gains.  They get wealthier and the IRS collects less revenue.

2. They will shift their investments to municipal bonds, which are exempt from federal tax. They probably won’t risk their money on debt from basket-case states such as California and Illinois (the Greece and Portugal of America), but there are many well-run states that issue bonds. The rich will get steady income and, while the return won’t be very high, they don’t have to give one penny of their interest payments to the IRS.

For every simple idea I can envision, it goes without saying that clever lawyers, lobbyists, accountants, and financial planners can probably think of 100 ways to utilize deductions, credits, preferences, exemptions, shelters, exclusions, and loopholes. This is why class-warfare tax policy is so self-defeating.

And all of this analysis doesn’t even touch upon the other sure-fire way to escape high taxes – and that’s to simply decide to be less productive. Most high-income people are hard-charging types who are investing money, building businesses, and otherwise engaging in behavior that is very good for them – but also very good for the economy.

But you don’t have to be an Ayn Rand devotee to realize that many people, to varying degrees, choose to “go Galt” when they feel that the government has excessively undermined the critical link between effort and reward.

Indeed, if Obama really wants to “soak the rich,” he might want to abandon his current approach and endorse a simple and fair flat tax. As explained in this video, this pro-growth reform does lead to substantial “Laffer Curve” effects.

But you don’t have to believe the video. You can check out this data, straight from the IRS website, showing how those evil rich people paid much more to the IRS after Reagan cut their tax rate from 70 percent to 28 percent in the 1980s.

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Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It is such a nightmare of complexity that even Democrats routinely have supported “patches” and “band-aids” to protect millions of additional households from getting trapped in this surreal parallel tax universe – one that requires taxpayers to calculate their taxes two different ways, with the IRS getting the maximum amount of money from the two returns.

(Hong Kong, by contrast, give taxpayers the option of calculating their taxes two different ways, but they’re allowed to pay the smaller of the two amounts.)

Notwithstanding the AMT’s status as arguably the worst feature of the internal revenue code, President Obama apparently wants to double down on this horrific policy by creating a new version of this nightmarish provision.

Here are some excerpts from the Wall Street Journal’s coverage, including a key observation that Obama’s scheme is just another version of the AMT.

The administration’s principle resembles the Alternative Minimum Tax, which was first adopted in 1969 and was intended to hit the superwealthy. The AMT has been hitting an increasing number of the middle class because it wasn’t indexed for inflation, and Congress has continually wrestled with how to get rid of it.

The WSJ article also notes that a glaring inconsistency in the White House’s rhetoric. the plan is supposed to be a “very significant” tax hike, but doubling the tax burden on millionaires would only raise $19 billion per year. In other words, the Administration’s class-warfare rhetoric is probably just cover for a tax hike that actually will hit a lot of people with far more modest incomes.

The proposal also could apply to a broader selection of taxpayers—all households with incomes of more than $1 million. Those earners are expected to pay an average of $845,000 this year, according to the nonpartisan Tax Policy Center. Assuming the households in the group of 22,000 pay that amount, even doubling their tax burden would raise just $19 billion a year at a time when deficit reduction is being measured in trillions of dollars. That doesn’t take into effect any change in taxpayer behavior prompted by a new tax regime. A senior administration official said that depending on where the minimum rate is set, the plan could be a “very significant” revenue raiser. The official wouldn’t provide details. …Some conservative economists say such a proposal could put a drag on capital markets and ignores the fact that many companies have already paid tax on the income before it is distributed to owners as dividends or capital gains.

The New York Times, to its credit, provides a fair description of the issue (including a much-needed acknowledgement that Warren Buffett may not have been honest and/or accurate), and also suggests that Obama may be proposing to replace the existing AMT with this new version (though that presumably would negate its impact as a revenue-raiser).

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday. Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments. …The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class.

Actually, the AMT also hits lots of middle-class families since having kids is considered a “preference” for tax purposes.

But that’s just an insult layered on top of injury. What makes Obama’s new scheme so destructive is that it would (though the White House has not explained the details) somehow classify dividends and capital gains as “preference” items – even though everyone acknowledges that such income already is double taxed!

In other words, Obama claims to be concerned about jobs, but he is proposing a big tax hike on the saving and investment that is necessary to create jobs. Amazing.

Regular readers will recognize this video about Obama’s class-warfare tax policy. But if you haven’t seen it, five reasons are presented to explain why it will backfire.

But look at the bright side. At least accountants and tax lawyers (and don’t forget bankruptcy specialists) will get more business if Obama’s plan is implemented.

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I’ve shared many examples of IRS humor over the years, including a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, and (my favorite) a joke about a Rabbi and an IRS agent.

So you’ll understand why I can’t resist sharing this gem I saw on the TaxProf Blog.

If you want to move from humor to real-world tragedy, watch this video on IRS complexity.

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Treasury Secretary Tim Geithner may be most famous in the United States for cheating on his taxes (you can even buy a t-shirt to acknowledge his tax dodging), but he’s becoming a punch line in the rest of the world for different reasons.

I wrote two years ago about Chinese students erupting in laughter after Geithner claimed the Administration believed in a strong dollar.

Now he’s getting mocked by the Europeans.

After Friday’s post about the absurdity of Obama sending his Treasury Secretary to lecture the Europeans, you can imagine my great amusement today as I read that the Europeans basically told Geithner to go jump in a lake.

Here are some passages from the Reuters report.

Treasury Secretary Timothy Geithner’s high-profile trip to Europe left some European officials more dumbstruck than starstruck. …”We can always discuss with our American colleagues. I’d like to hear how the United States will reduce its deficits … and its debts,” Belgian Finance Minister Didier Reynders said somewhat tartly. Jean-Claude Juncker, the chairman of the Eurogroup, was even more to the point. “I don’t think it would be wise for me to report from an informal meeting that we have with the treasury secretary. We are not discussing the expansion or increase of the EFSF with a non-member of the euro area,” he said.

And here is a brief excerpt from the Financial Times.

…some eurozone finance ministers hit back at Mr Geithner’s comments, questioning the usefulness of his visit. “I found it peculiar that even though the Americans have significantly worse fundamental data than the eurozone, that they tell us what we should do and when we make a suggestion … that they say no straight away,” said Maria Fekter, Austria’s finance minister. Sweden’s Anders Borg said: “we need to make progress, but it’s quite clear the US has a big debt problem and the situation would be better if the US could show a sustainable way forward.”

When the dust settles, though, the fact that Secretary Geithner is getting laughed at and mocked by people in other countries is not that funny. Not because he doesn’t deserve abuse, but rather because the bad policies of the Obama Administration are resulting in genuine hardship and suffering.

And the fact that the Europeans are even further down the path that leads to fiscal crisis makes it all the more tragic. You would think American policy makers would learn what not to do.

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Thomas Sowell just completed a three-part “Back to the Future” series, looking at a couple of fiscal policy issues. His unifying theme is how the political class fails (perhaps deliberately) to learn from mistakes.

In Part I, he decimates President Obama’s new stimulus scheme.

Once we get past the glowing rhetoric, what is the president proposing? More spending! Only the words have changed — from “stimulus” to “jobs” and from “shovel-ready projects” to “jobs for construction workers.” If government spending were the answer, we would by now have a booming economy with plenty of jobs, after all the record trillions of dollars that have been poured down a bottomless pit. Are we to keep on doing the same things, just because those things have been repackaged in different words? …When it comes to specific proposals, President Obama repeats the same kinds of things that have marked his past policies — more government spending for the benefit of his political allies, the construction unions and the teachers’ unions, and “thousands of transportation projects.” The fundamental fallacy in all of this is the notion that politicians can “grow the economy” by taking money out of the private sector and spending it wherever it is politically expedient to spend it — so long as they call spending “investment.”

In Part II, he exposes the historical illiteracy of folks who think government intervention ended the Great Depression.

The grand myth that has been taught to whole generations is that the government is “forced” to intervene in the economy when there is a downturn that leaves millions of people suffering. The classic example is the Great Depression of the 1930s. What most people are unaware of is that there was no Great Depression until AFTER politicians started intervening in the economy. There was a stock market crash in October 1929 and unemployment shot up to 9 percent — for one month. Then unemployment started drifting back down until it was 6.3 percent in June 1930, when the first major federal intervention took place. That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact. But then, as now, politicians decided that they had to “do something.” Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt that the answer was to do something more. Both President Hoover and President Roosevelt did more — and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

And in Part III, he explains how tax changes in the 1920s provide great evidence for the Laffer Curve.

Those who believe in high taxes on “the rich” got their way. The tax rate on people in the top income bracket was 73 percent in 1921. On the other hand, the rich also got their way: They didn’t actually pay those taxes. The number of people with taxable incomes of $300,000 a year and up — equivalent to far more than a million dollars in today’s money — declined from more than a thousand people in 1916 to less than three hundred in 1921. …More than four-fifths of the total taxable income earned by people making $300,000 a year and up vanished into thin air. So did the tax revenues that the government hoped to collect with high tax rates on the top incomes. …Mellon eventually got his way, getting Congress to bring the top tax rate down from 73 percent to 24 percent. Vast sums of money that had seemingly vanished into thin air suddenly reappeared in the economy, creating far more jobs and far more tax revenue for the government.

We could shorten all three of Sowell’s columns into one simple statement: Obama’s agenda of bigger government and class-warfare taxation will undermine America’s economy.

But that would be short-changing ourselves. Sowell’s writing is a model of clarity and logic – characteristics sorely lacking in Washington.

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If you want to know why Washington is a cesspool of corruption and graft, you should read this story from the Washington Post about how Capitol Hill staffers use their positions as stepping stones to jobs in the lobbying community.

Nearly 5,400 former congressional staffers have left Capitol Hill to become federal lobbyists in the past 10 years, according to a new study that documents the extent of the revolving door between Congress and K Street. The data published by the online disclosure site LegiStorm found close to 400 former U.S. lawmakers also have made the jump to lobbying. The report…underscores the symbiotic relationship: Thousands of lobbyists are able to exploit experience and connections gleaned from working inside the legislative process, and lawmakers find in lobbyists a ready pool of experienced talent. …The study also documents the reverse movement, finding 605 former lobbyists who have taken jobs working for lawmakers in the past decade. …About 14,000 people work on the Hill, and about 11,700 people are registered to lobby this year, according to the Center for Responsive Politics.

If this sounds like sleaze, that’s because it is. It’s a story about how the political class has created a system that loots the American public and enables the well-connected to skim a good share of the booty.

I explained in a previous post that some of the most despicable people in Washington are Republicans, but this story gives me an opportunity to elaborate.

What happens is that idealistic people come to Washington to work for Congress (also, because they get elected to Congress). They earn good salaries, considerably above the average for the U.S. economy.

But if they want to make big money – and if they have weak morals and an absence of character, they are drawn to the lobbying community.

I have known dozens of good people over the years who have been corrupted by this process. They came to Washington to do good, and they wound up doing well instead.

They began their careers thinking Washington is a cesspool, and they eventually decided it’s a hot tub.

The only solution to this problem is to shrink the size and scope of government, as I explain in this video.

And if we shrink the burden of government, we can return to the good ol’ days when each member of Congress could do their job with 2 or 3 staffers rather than 20 or 30.

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This is either frightening or hilarious. The people in Washington who are trying to make America more like Europe are advising the Europeans to double-down on the awful policies that have pushed the continent’s welfare states to insolvency.

Here are some of the surreal details from a CNBC report.

Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend. Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy. “In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy,” the news agency EFE quoted him as saying. Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund and consider boosting its size, an EU source said. …Obama’s comments suggested that Washington is trying to nudge European governments toward closer fiscal union or a bigger bailout fund to recapitalize teetering banks but European politics, especially in Germany, make that difficult.

Your eyes are not deceiving you. Obama and Geithner want more bailouts, which will simply encourage more profligacy. And the President even endorsed more harmonization of economic policy, which will exacerbate the problems in Europe by leading to higher taxes, more spending, and additional regulation.

But you have to give Obama and Geithner credit. They support the same bad policies on both sides of the Atlantic Ocean.

Obama, however, is not fully consistent in his beliefs. During a visit to Africa, he said, “No business wants to invest in a place where government skims 20 percent off the top.” But I guess bigger government is okay in Europe, where the burden of government is already 50 percent of economic output.

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The Center for Budget and Policy Priorities is a left-wing group in Washington that advocates for bigger government and higher taxes. In an effort to promote more redistribution, they recently put together a map showing how welfare benefits varied by state.

We’re supposed to look at the map and conclude that welfare benefits are too low, but I draw the opposite conclusion. I’m stunned that some states are providing welfare checks greater than 30 percent of the poverty level. And some are even sending out checks greater than 40 percent of the poverty level.

The folks at CBPP conveniently neglect to mention two critical pieces of information.

1. The poverty line is set considerably above a level that would indicate material deprivation. According to Census Bureau data, for instance, a single person with income of $11,139 is considered in poverty and a family of four with income of $22,113. That’s far above the average level of income in most nations of the world.

2. Welfare checks are just one of many forms of redistribution, and the data used to create the map do not count food stamps, Medicaid, housing subsidies and a plethora of other means-tested programs. As Robert Rector of the Heritage Foundation has documented, poor people experience surprisingly high levels of consumption.

This is not to say that life is easy for people living off the government. But it also true that the left is being disingenuous when they try to convince people that more redistribution is necessary to keep people from third world-style suffering.

The real tragedy of the welfare state, however, goes well beyond the fiscal burden. The human toll is far worse, as redistribution subsidizes dysfunctional behavior and traps people in dependency.

The problem could be partially fixed by getting the federal government out of the business of income redistribution. Welfare reform in the 1990s moved the ball in the right direction, and that success could be replicated by block-granting Medicaid and adopting other policies that put state and local governments back in charge.

But federalism is only part of the answer. The best way of dealing with poverty is economic growth, which is the point I make in this online video debate for PBS.

But welfare bureaucracies don’t have much incentive to actually reduce poverty. After all, as Walter Williams has explained, the so-called War on Poverty is a great gig for the tens of thousands of bureaucrats who get to oversee the programs.

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