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Archive for January, 2012

I’m not overly excited about the 2012 presidential race, especially since the major choices at this point are three candidates who don’t seem to have much commitment to economic freedom and individual liberty.

  1. Obama (Tweedledee)
  2. Romney (Tweedledum)
  3. Gingrich (hmmm…how about Tweedledoh?)

So when someone sent me this cartoon, I immediately decided it had to be my next blog post.

Too bad we can’t turn the clock back 11 years. I’m not joking when I say I would gladly go back to Bill Clinton. No, he wasn’t a libertarian, but economic freedom increased during his tenure. And I care about results.

Clinton’s track record on spending was especially good. Indeed, I even admitted on TV that I would accept Clinton-era tax rates if we could unravel all the new spending and intervention of the Bush-Obama years.

But what I’d really like is a candidate who could sincerely give these remarks. Or, perhaps even better, make this statement.

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Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates, balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about 2 percent each year. In other words, make sure the budget doesn’t grow faster than inflation.

Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?

At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.

But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.

This creates a “baseline” and if they enact a budget that increases spending be less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.

Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.

There are two important caveats about these calculations.

1. We should be dramatically downsizing the federal government, not just restraining its growth. Even if he’s not your preferred presidential candidate, Ron Paul’s proposal for an immediate $1 trillion reduction in the burden of federal spending is a very good idea. Merely limiting the growth of spending is a tiny and timid step in the right direction.

2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.

Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.

Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message – that there is no good argument for tax increases – also is equally relevant today.

P.S. Some people will argue that it’s impossible to restrain spending because of entitlement programs, but this set of videos shows how to reform Social Security, Medicare, and Medicaid.

P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.

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Back during the 1990s, President Clinton cleverly began to refer to his spending initiatives as “investments.” He obviously hoped that voters could somehow be tricked into supporting bigger government by playing a bait-and-switch game with words.

Since the burden of federal spending fell significantly during the Clinton years, I’m not sure he was successful in his efforts.

But he did win reelection in 1996, and that may be why President Obama has adopted the same tactic, using some derivation of “invest” about ten times in his big speech last week.

If that sounds like overkill, the good news is that he didn’t use the term as much as he did in 2011. He was so repetitive that year that Chuck Asay produced this cartoon. Needless to say, it is equally funny when applied to this year’s speech.

I’ve stated before that Chuck Asay is a great cartoonist. If you want to see more of his work, click here, here and here.

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Leftists want higher tax rates and they want greater tax compliance. But they have a hard time understanding that those goals are inconsistent.

Simply stated, people respond to incentives. When tax rates are punitive, folks earn and report less taxable income, and vice-versa.

In a previous post, I quoted an article from the International Monetary Fund, which unambiguously concluded that high tax burdens are the main reason people don’t fully comply with tax regimes.

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.

Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.

Now there’s a new study confirming these findings. Authored by two economists, one from the University of Wisconsin and the other from Jacksonville University, the new research cites the impact of tax burdens as well as other key variables.

Here are some key findings from the study.

According to the results provided in Table 2, the coefficient on the average effective federal income tax variable (AET) is positive in all three estimates and statistically significant for the overall study periods (1960-2008) at beyond the five percent level and statistically significant at the one percent level for the two sub-periods (1970-2007 and 1980-2008). Thus, as expected, the higher the average effective federal income tax rate, the greater the expected benefits of tax evasion may be and hence the greater the extent of that income tax evasion. This finding is consistent with most previous studies of income tax evasion using official data… In all three estimates, [the audit variable] exhibits the expected negative sign; however, in all three estimates it fails to be statistically significant at the five percent level. Indeed, these three coefficients are statistically significant at barely the 10 percent level. Thus it appears the audit rate (AUDIT) variable, of an in itself, may not be viewed as a strong deterrent to federal personal income taxation [evasion].

Translating from economic jargon, the study concludes that higher tax burdens lead to more evasion. Statists usually claim that this can be addressed by giving the IRS more power, but the researchers found that audit rates have a very weak effect.

The obvious conclusion, as I’ve noted before, is that lower tax rates and tax reform are the best way to improve tax compliance – not more power for the IRS.

Incidentally, this new study also finds that evasion increases when the unemployment rate increases. Given his proposals for higher tax rates and his poor track record on jobs, it almost makes one think Obama is trying to set a record for tax evasion.

The study also finds that dissatisfaction with government is correlated with tax evasion. And since Obama’s White House has been wasting money on corrupt green energy programs and a failed stimulus, that also suggests that the Administration wants more tax evasion.

Indeed, this last finding is consistent with some research from the Bank of Italy that I cited in 2010.

…the coefficient of public spending inefficiency remains negative and highly significant. …We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues.

And I imagine that “tax morale” in the United States is further undermined by an internal revenue code that has metastasized into a 72,000-page monstrosity of corruption and sleaze.

On the other hand, tax evasion apparently is correlated with real per-capita gross domestic product. And since the economy has suffered from anemic performance over the past three years, that blows a hole in the conspiratorial theory that Obama wants more evasion.

All joking aside, I’m sure the President wants more tax compliance and more prosperity. And since I’m a nice guy, I’m going to help him out. Mr. President, this video outlines a plan that would achieve both of those goals.

Given his class-warfare rhetoric, I’m not holding my breath in anticipation that he will follow my sage advice.

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I’ve written before about the sleazy and corrupting impact of earmarks.

And I’ve debunked the lobbyist arguments in favor of earmarks.

Heck, I’ve even done NPR interviews about this unseemly Washington practice.

So I like to think I’m reasonably knowledgeable about the system. But even I’m shocked to learn how a former Massachusetts Congressman has taken graft to the next level.

And I’m slightly happy that he’s been caught with his hand in the cookie jar and feels compelled to give up his share of the loot.

Here are some excerpts from a report in the New York Times.

A former congressman who became a lobbyist has abandoned his plans to collect $90,000 from working on an energy project that he helped finance through Congress. …An apologetic Mr. Delahunt told town officials he wanted to eliminate the “black mark” created by questions of a possible financial conflict, Patrick Cannon, chairman of the Hull Light Board, said on Saturday. …Mr. Delahunt, a Democrat who retired from Congress last year, had faced criticism for the last week from legal and ethics specialists over the unusual lobbying arrangement he had struck with the town, which is seeking federal help to build an offshore wind energy plant at a cost of more than $60 million. While in Congress, Mr. Delahunt earmarked $1.7 million for the same project, and he was to be paid 80 percent of his monthly consulting fees out of that same pot of money. …Mr. Delahunt and executives at his firm did not respond to e-mails Saturday seeking further comment on the decision.

Wow. For all intents and purposes, Congressman Delahunt directly pilfered the Treasury for personal gain.

This is amazing. But what’s remarkable isn’t that he stole money. After all, the federal budget is largely a big scam enabling various groups of people to obtain unearned loot.

The noteworthy thing about this story is that he didn’t launder the money.

In most cases, politicians do earmarks as part of a corrupt quid pro quo. They direct money to a certain group of beneficiaries and, in exchange, get campaign contributions from both the lobbyists who facilitated the deal and the interest groups that receive the taxpayer funds.

But Delahunt cut out one of the middlemen. He created an earmark, and then became one of the lobbyists pocketing the cash.

So it is poetic justice that this unsavory deal has become public knowledge and the former Congressman has been shamed into giving up his fees.

But don’t be deluded into thinking this is a victory.

The earmark is still there. Money is still being wasted. Delahunt is still a lobbyist. Government is still too big. And corruption is still rampant.

And if you think the former Congressman is genuinely apologetic….well, please get in touch with me. I’m selling a bridge in Brooklyn and need a gullible buyer – i.e., the kind of person who doesn’t think there’s anything wrong with this unseemly example of sleaze.

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Even when the results coincide with my views, I have a jaundiced view of polling data. In large part, this is because the answers often depend on how a question is framed.

That being said, I periodically link to polling data about economic policy if I think we can glean some insight from the data.

I assume, for instance, that trends can be accurately detected if the same question is asked year after year, regardless of whether the question is fair or slanted.

This is why I posted this poll showing that Americans are increasingly hostile to the federal government.

Similarly, I showed this data on how a growing number of Americans see the federal government as a threat to freedom and liberty.

I also like multi-country polls. Whether the questions are straightforward or tilted, you can at least learn something about differences in national attitudes.

One of my favorite polls, for instance, compared the degree to which Americans and Europeans think it’s okay to mooch off government.

I’m not sure, though, how to react to this latest survey data. Published in the New York Times, it shows widespread global support for more regulation. Here are the results (click the image to enlarge).

These results obviously are not good news for supporters of deregulation – especially since the burden of red tape already is so onerous.

The only bit of good news, at least for American chauvinists, is that people in the United States are more likely than others to think there is “too much” regulation.

But if you look at the data from a different perspective, people in Singapore and Sweden are least likely to say there’s “not enough” regulation.

The most puzzling bit of data is that people in Hong Kong appear to be the most sympathetic to regulation. Considering that Hong Kong is the most economically free jurisdiction in the world, this doesn’t make much sense.

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People keep emailing and complaining that I must be an Obama supporter since I periodically post critical information about Romney and Gingrich.

In response, I say that it’s my role to simply tell the truth and dispassionately analyze public policy.

But being disappointed in the leading Republicans doesn’t mean I’m deluded about Obama and his agenda. This cartoon nicely captures my view of the President’s track record.

And if you want something more substantive, this data from the Minneapolis Federal Reserve shows how Obamanomics is grossly inferior to Reaganomics.

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