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Archive for October, 2010

A good lesson for all children, though I tried to indoctrinate my kids throughout the year by explaining that we couldn’t buy certain things because the government stole too much of our money.

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A paper posted on the Social Science Research Network looks at nations that are prospering compared to those that are stagnating. Not surprisingly, limited government and free enterprise policies are associated with better economic performance. Here’s an excerpt from this new research.

What can we conclude about the effect of various policies on economic growth? What lessons can we learn from the growth miracles of recent years, and how can we avoid the sorry fate of the growth disasters? The countries that have been most successful at increasing their economic growth rates, and therefore at raising the living standards of their population, have all shared a commitment to increasing economic freedom, limiting the role of government, stamping out corruption, and strengthening the rule of law. They relied on free markets, rather than on central planning. They lowered their tax rates, and some even adopted a flat income tax. They made their labor laws more flexible, and allowed their firms to hire new workers more easily. They privatized their inefficient state-owned enterprises. They lowered tariffs, and opened up to trade and international competition. They courted foreign investors, and created a favorable business environment to lure them in. In other words, growth miracles have occurred in countries whose governments have adopted policies that reflect the classical liberal ideals of economic freedom, limited government and rule of law. Our brief survey of economic successes around the world shows that this lesson is universal: Countries as diverse as China, Estonia, Germany, India, Chile, South Korea and Slovakia have benefited from applying a similar set of market-oriented policies.

The paper also makes a key point about economic growth and living standards.

Over time, even modest increases in the economic growth rate can, furthermore, lead to vast improvements in the standard of living. If China sustains the eight percent annual GDP growth rate that it has achieved since its market-oriented reforms began in 1978, its inhabitants will double their living standards every nine years. By contrast, in the United States, which has grown at an average annual rate of about two percent, a doubling of living standards would require thirty-six years.

This is an under-appreciated observation. The author cites a rather dramatic example, but the key observation is that even modest differences in economic growth can have a big impact on relative prosperity with a couple of decades. Here’s a chart I include in many of my Powerpoint presentations. It shows how long it takes to double GDP based on different growth rates.

Let’s look at a real-world example. Hong Kong has been growing by more than 5 percent each year for decades, while France has been growing by less than 2 percent annually. Now let’s ask a couple of big-picture questions. Why have Bush and Obama been trying to make us more like France? Do they fail to understand that this means less future prosperity for the American people? Don’t they realize that this means a loss of relative competitiveness?

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The death tax is a punitive levy that discourages saving and investment and causes substantial economic inefficiency. But it’s also an immoral tax that seizes assets from grieving families solely because someone dies. The good news is that this odious tax no longer exists. It disappeared on January 1, 2010, thanks to the 2001 tax cut legislation. The bad news is that the death tax comes back with a vengeance on January 1, 2011, ready to confiscate as much as 55 percent of the assets of unfortunate families.

I’ve criticized the death tax on many occasions, including one column in USA Today explaining the economic damage caused by this perverse form of double taxation, and I highlighted a few of the nations around the world that have eliminated this odious tax in another column for the same paper.

Politicians don’t seem persuaded by these arguments, in part because they feel class warfare is a winning political formula. President Obama, House Ways & Means Committee Chairman Charlie Rangel, and Senate Finance Committee Chairman Max Baucus have been successful in thwarting efforts to permanently kill the death tax. But I wonder what they’ll say if their obstinate approach results in death?

Congresswoman Cynthia Lummis of Wyoming is getting a bit of attention (including a link on the Drudge Report) for her recent comments that some people may choose to die in the next two months in order to protect family assets from the death tax. For successful entrepreneurs, investors, and small business owners who might already be old (especially if they have a serious illness), there is a perverse incentive to die quickly. 

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. Lummis…said many ranchers and farmers in the state would rather pass along their businesses — “their life’s work” — to their children and grandchildren than see the federal government take a large chunk. “If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88 years old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision,” Lummis told reporters.

The class-warfare crowd doubtlessly will dismiss these concerns, but they should set aside their ideology and do some research. Four years ago, two Australian scholars published an article on this issue in Topics in Economic Analysis & Policy, which is published by the Berkeley Electronic Press. Entitled “Did the Death of Australian Inheritance Taxes Affect Deaths?”, their paper looked at the roles of tax, incentives, and death rates. The abstract has an excellent summary.

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. …our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

And here’s a graph from the article, which shows how many affected taxpayers managed to delay death until the tax went away.

Obama and other class-warfare politicians now want to run this experiment in reverse. I already noted in another blog post that there are Americans who are acutely aware of the hugely beneficial tax implications if they die in 2010. In other words, Congresswoman Lummis almost certainly is right.

I don’t actually think that Obama, Rangel, Baucus and the rest of the big-government crowd should be blamed for any premature deaths that occur. But I definitely think that they should be asked if they feel any sense of guilt, remorse, and/or indirect responsibility.

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The “good government” crowd tells us that voting is a “civic duty.” When I hear that type of nonsense, it makes me want to deliberately stay home.

But I did actually vote today, in part to avoid lines on Tuesday and in part because I leave that morning for a speech in Florida. But why did I bother? The odds of my vote making a difference in any race are so infinitesimally small that there’s no logical reason to vote. But that’s if you view voting as an “investment good” – i.e., you vote in hopes of influencing the outcome.

Voting only make sense as a “consumption good.” In other words, you do it just for the sheer joy of voting against someone (or, in very rare cases, because you actually want to vote for someone).

Some libertarians argue that voting is wrong, for any reason, because it legitimizes the current system. This is the sentiment that motivates this t-shirt, and it also is the title of P.J. O’Rourke’s new book. But that argument, while superficially appealing, doesn’t make sense. Does anyone actually think that the corrupt crowd in Washington will suddenly stop stealing our money and trying to control our lives if fewer people decide to vote? I don’t think it would have the slightest impact on their behavior.

I’m not saying people should vote, but don’t delude yourself into thinking that you can escape the predations of the political class if you opt out. Pericles, way back around 430 B.C., supposedly said that, “Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.”

I’m not sure if that’s a real quote, but it sure is accurate.

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At least this form of stimulus might work.

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HEAVEN OR HELL

While walking down the street one day a Corrupt Senator was tragically hit by a car and died.

His soul arrives in heaven and is met by St. Peter at the entrance.

“Welcome to heaven,” says St. Peter. “Before you settle in, it seems there is a problem. We seldom see a high official around these parts, you see, so we’re not sure what to do with you.”

“No problem, just let me in,” says the Senator.

“Well, I’d like to, but I have orders from the higher ups. What we’ll do is have you spend one day in hell and one in heaven. Then you can choose where to spend eternity.”

“Really?, I’ve made up my mind. I want to be in heaven,” says the Senator.

“I’m sorry, but we have our rules.”

And with that, St. Peter escorts him to the elevator and he goes down, down, down to hell.

The doors open and he finds himself in the middle of a green golf course. In the distance is a clubhouse and standing in front of it are all his friends and other politicians who had worked with him.

Everyone is very happy and in evening dress. They run to greet him, shake his hand, and reminisce about the good times they had while getting rich at the expense of the people.

They played a friendly game of golf and then dined on lobster, caviar and the finest champagne.

Also present is the devil, who is a very friendly guy time dancing and telling jokes.

They are all having such a good time that before the Senator realizes it, it is time to go.

Everyone gives him a hearty farewell and waves while the elevator rises.

The elevator goes up, up, up and the door reopens in heaven where St. Peter is waiting for him, “Now it’s time to visit heaven.”

So, 24 hours passed with the Senator joining a group of contented souls moving from cloud to cloud, playing the harp and singing. They have an okay time and, before he realizes it, the 24 hours have gone by and St. Peter returns.

“Well, then, you’ve spent a day in hell and another in heaven. Now choose your eternity.”

The Senator reflects for a minute, then he answers: “Well, I would never have said it before, I mean, heaven has been delightful, but I think I would be better off in hell.”

So St. Peter escorts him to the elevator and he goes down, down, down to hell.

Now the doors of the elevator open and he’s in the middle of a barren land covered with waste and garbage. He sees all his friends, dressed in rags, picking up the trash and putting it in black bags as more trash falls from above.

The devil comes over to him and puts his arm around his shoulders.

“I don’t understand,” stammers the Senator. “Yesterday I was here and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there’s just a wasteland full of garbage and my friends look miserable. What happened?”

The devil smiles at him and says, “Yesterday we were campaigning.  Now that you voted, it’s time for reality.” 

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In the past 15 years, I’ve debated in favor of a national sales tax, testified before Congress on the merits of a national sales tax, gone on TV to advocate for the national sales tax, and spoken with dozens of reporters to explain why the national sales tax is a good idea. Even though I prefer the flat tax, I’ve been an ardent defender of sales tax proposals such as the FAIR tax because it would be a great idea to replace the current system with any low-rate system that gets rid of the tax bias against saving and investment. I even narrated this video explaining that a national sales tax and flat tax are different sides of the same coin – and therefore either tax reform proposal would significantly improve prosperity and competitiveness.

I will continue to defend the FAIR tax and other national sales tax proposals that replace the income tax, but I wonder whether this is a losing battle. Every election cycle, candidates that endorse (or even say nice things about) the FAIR tax wind up getting attacked and put on the defensive. Their opponents are being dishonest, and their TV ads are grossly misleading, but they are using this approach because the anti-FAIR tax message is politically effective. Many pro-tax reform candidates have lost elections in favorable states and districts, largely because their opponents were able to successfully demagogue against a national sales tax.

The Wall Street Journal reaches the same conclusion, opining this morning about the false – but effective – campaign against candidates who support a national sales tax.

In 16 House and three Senate races so far, Democrats have blasted GOP candidates for at one point or another voicing an interest in the FAIR tax. …FAIR tax proponents are right to say these Democratic attacks are unfair and don’t mention the tax-cutting side of the proposal, but the attacks do seem to work. Mr. Paul’s lead in Kentucky fell after the assault, and the issue has hurt GOP candidate Ken Buck in a close Colorado Senate race. In a special House election earlier this year in Pennsylvania, Democrat Mark Critz used the FAIR tax cudgel on Republican opponent Tim Burns. In a district that John McCain carried in 2008, Mr. Critz beat the Republican by eight points and is using the issue again in their rematch. This is a political reality that FAIR taxers need to face. …in theory a consumption tax like the FAIR tax is preferable to an income tax because it doesn’t punish the savings and investment that drive economic growth. If we were designing a tax code from scratch, the FAIR tax would be one consumption tax option worth debating. But…voters rightly suspect that any new sales tax scheme will merely be piled on the current code.

We won’t know until next Tuesday what is going to happen in Kentucky and Colorado, and we won’t know until then what will happen in the other campaigns where the FAIR tax is an issue. But if there are two tax reform plans that achieve the same objective, why pick the approach that faces greater political obstacles?

FAIR tax proponents presumably could defuse some of the attacks by refocusing their efforts so that repealing the income tax is the top priority. This would not require any heavy lifting since all honest proponents of a national sales tax want to get rid of the 16th Amendment and replace it with something that unambiguously prohibits any direct tax on income. So why not lead with that initiative, and have the national sales tax as a secondary proposal? This is what I propose in the video, and I think it would be much harder for demagogues to imply that a FAIR tax would mean a new tax on top of the corrupt system that already exists.

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It was only a few decades ago that there was no such thing as money-laundering laws. Instead, the focus of law enforcement was on the underlying criminal behavior (such as robbery) that generated ill-gotten gains. In recent decades, however, politicians around the world have passed hundreds of laws, created hundreds of agencies, and spawned several international bureaucracies and treaties. The theory is that crime could be discouraged by making it more difficult for bad guys to make use of any resulting loot.

In reality, though, money-laundering laws have been a huge failure. From a cost-benefit perspective, there is an overwhelming case that these laws should be radically revised if not totally repealed.

The current approach has significantly increased the expense of providing financial services, which is particularly burdensome for the poor and others at risk of not being able to utilize the financial system. These laws also have dramatically eroded privacy, forcing financial service providers and professional advisers to spy on customers and clients. To get a sense of what this means, here’s a blurb from a recent article in the U.K.’s Law Society Gazette.

…an official from the World Bank’s Financial Market Integrity Unit…described his research on the kind of large-scale money laundering that takes place globally. At the end of his presentation, which he admitted touched only tangentially on the role of lawyers, he said that his research showed that the overwhelming majority of lawyer participation in money laundering took place by deliberate action of the lawyer, and not through unwitting manipulation by the criminal. Then I intervened. If that was the case, if money laundering overwhelmingly involves crooked lawyers and not unwitting ones, then why do we have the gigantic and unwieldy money laundering legislation in place for lawyers, with its duty to report suspicious transactions without tipping off the client, which turns the lawyer into a police officer? Obviously, if a lawyer is deliberately involved in the laundering, there are existing laws and professional rules to deal with it. But why must the balance of the rule of law, which depends on a client being able to confide information to a lawyer, be upset for a problem that does not exist? That is when the audience applauded. …I think it is time to use more of our resources to push for exposure of the lie on which the money laundering legislation is based. There is no evidence that unwitting lawyers’ reports are making any difference. Give us the evidence or repeal the legislation.

From a utilitarian standpoint, these costs might be justifiable if they resulted in a substantial reduction in crimes against people and property. Unfortunately, there is no evidence that money-laundering laws have reduced criminal behavior (heck, they don’t even do a good job of intercepting criminal funds).

Yet politicians and bureaucrats every year seek more laws and more powers in hopes of somehow turning a sow’s ear into a silk purse. The latest example is from the Financial Action Task Force, a Paris-based bureaucracy filled with people who make very good salaries thanks to the existing plethora of laws and regulations. These bureaucrats now want to make tax matters a predicate offense for money laundering. And they want such laws to apply across borders, so a bank in New York could be held accountable if a French worker or investor didn’t fully comply with France’s oppressive tax laws. Or a bank in Miami could be guilty of an offense if it helps a Venezuelan family protect its assets from Hugo Chavez’s thugocracy.

So many costs, so few benefits. This video elaborates.

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While flipping through the radio on my way to pick my son up from school yesterday afternoon, I was dumbfounded to hear Congressman John Boehner talk about repealing Obama’s Medicare cuts on Sean Hannity’s show.

I wasn’t shocked that Boehner was referring to non-existent cuts (Medicare spending is projected to jump from $519 billion in 2010 to $677 billion in 2015 according to the Congressional Budget Office). I’ve been dealing with Washington’s dishonest definition of “spending cuts” for decades, so I’m hardly fazed by that type of routine inaccuracy.

But I was amazed that the presumptive future Speaker of the House went on a supposedly conservative talk radio show and said that increasing Medicare spending would be on the agenda of a GOP-controlled Congress. (I wondered if I somehow misinterpreted what was being said, but David Frum heard the same thing)

To be fair, Boehner also said that he wanted to repeal Obamacare, so it would be unfair to claim that the interview was all Bush-style, big-government conservatism. But it is not a positive sign that Boehner is talking about more spending before he’s even had a chance to pick out the drapes for his new office.

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I commented on the Obama Administration’s TARP dishonesty yesterday, which made me feel better, but it was even more cathartic to vent on national TV about the corruption, dishonesty, and economic damage associated with the Wall Street bailout.

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While everyone is focused on whether Republicans will win control of the House and/or Senate, there are several issues that voters will directly decide that deserve close attention. Here are the nine initiatives that have caught my attention. I’m probably missing some important ones, so feel free to add suggestions in the comment section.

1. Imposing an income tax in the state of Washington - This is the one I’ll be following very closely. I have a hard time thinking that voters would be dumb enough to impose an income tax, but the Pacific Northwest is a bit crazy on these issues. Oregon voters, for instance, approved higher tax rates earlier this year.

2. Stopping eminent domain abuse in Nevada - This initiative is very simple. It stops the state from seizing private property if the intent is to transfer it to a private party (thus shutting the door that was opened by the Supreme Court’s reprehensible Kelo decision).

3. Marijuana legalization in California - Proponents of a more sensible approach to victimless crimes will closely watch this initiative to see whether Golden State voters will say yes to pot legalization, subject to local regulation.

4. Strengthen rights of gun owners in Kansas - If approved, this initiative would remove any ambiguity about whether individuals have the right to keep and bear arms.

5. Protecting health care freedom in Arizona - For all intents and purposes, this is a referendum on Obamacare. I’m hoping that it will pass overwhelmingly, thus giving a boost to the repeal campaign. There’s apparently a similar initiative in Oklahoma, but it hasn’t gotten as much attention.

6. Reducing benefits for bureaucrats in San Francisco - If one of the craziest, left-wing cities in America decides to require bureaucrats to make meaningful contributions to support their bloated pension and health benefits, that’s a sign that the gravy train may be in jeopardy for bureaucrats all across the nation.

7. Making it easier to increase government spending in California - The big spenders want to get rid of the two-thirds requirement in the state legislature to approve a budget. This would pave the way for even bigger government in a state that already is close to bankruptcy.

8. Reducing the sales tax in Massachusetts - The entire political establishment is fighting this proposal to roll back the sales tax from 6.25 percent to 3 percent, and pro-spending lobbies are pouring big money into a campaign against the initiative, so you know it must be a good idea.

9. Controlling benefits for bureaucrats in Louisiana - The initiative would require a two-thirds vote to approve any expansion of taxpayer-financed benefits for government employees.

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I’m an economist, so I should probably be most agitated about the economic consequences of TARP, such as moral hazard and capital malinvestment. But when I read stories about how political insiders (both in government and on Wall Street) manipulate the system for personal advantage, I want to go postal.

Yes, TARP was economically misguided. But the bailout also was fundamentally corrupt (as are so many things when government gets too big). And it was a form of corruption that lined the pockets of the ruling class. I don’t like it when lower-income people use the political system to take money from upper-income people, but I get completely nauseated/angry/disgusted when upper-income people use the coercive power of government to steal money from lower-income people.

Now, to add insult to injury, we’re being fed an unsavory gruel of lies and deception as the political class tries to cover up its sleazy behavior. Here’s a story from Bloomberg about the Treasury Department’s refusal to obey the law and comply with a FOIA request. A Bloomberg reporter wanted to know about an insider deal to put taxpayers on the line to guarantee a bunch of Citigroup-held securities, but the government thinks that people don’t have a right to know how their money is being funneled to politically-powerful and well-connected insiders.

The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used. More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails — none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!” None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees.

Here’s another reprehensible example of sleazy behavior. The Treasury Department, for all intents and purposes, lied when it recently claimed that the AIG bailout would cost “only” $5 billion. This has triggered some pushback from Capitol Hill GOPers, as reported by the New York Times, but it is highly unlikely that anyone will suffer any consequences for this deception. To paraphrase Glenn Reynolds, “laws, honesty, and integrity, like taxes, are for the little people.”

The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program. …“The American people have a right for full and complete disclosure about their investment in A.I.G.,” Mr. Barofsky said, “and the U.S. government has an obligation, when they’re describing potential losses, to give complete information.” …“If a private company filed information with the government that was just as misleading and disingenuous as what Treasury has done here, you’d better believe there would be calls for an investigation from the S.E.C. and others,” said Representative Darrell Issa, the senior Republican on the House Committee on Oversight and Government Reform. He called the Treasury’s October report on A.I.G. “blatant manipulation.” Senator Charles E. Grassley of Iowa, the senior Republican on the Finance Committee, said he thought “administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers.” He said it reminded him of “misleading” claims that General Motors had paid back its rescue loans with interest ahead of schedule.

 P.S. Allow me to preempt some emails from people who will argue that TARP was a necessary evil. Even for those who think the financial system had to be recapitalized, there was no need to bail out specific companies. The government could have taken the approach used during the S&L bailout about 20 years ago, which was to shut down the insolvent institutions. Depositors were bailed out, often by using taxpayer money to bribe a solvent institution to take over the failed savings & loan, but management and shareholders were wiped out, thus  preventing at least one form of moral hazard.

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This entry was submitted by email. While several of the posted comments made me chuckle, this one earned a laugh. And the person (who wishes to remain anonymous) clearly put in a bit of effort.

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I’m not sure what to make of the Stewart/Colbert rally this weekend, but one of the sideshow events that definitely cries out for some verbal abuse is the “Government Doesn’t Suck” march that has been organized by overpaid federal bureaucrats. I wonder what signs they’ll carry? Perhaps “Lazy People Have Rights!”? Or how about, “We Deserve Twice the Income of People Who Actually Produce”? I wouldn’t be surprised, however, if this event fizzles out because the bureaucrats are all on break.

Here’s a blurb from the Washington Post about the planned march. The last sentence is really disgusting. These needless parasites actually seem to believe that they’re the ones “keeping the country running.”

Amid growing dissatisfaction with federal employees, a group of younger, web-savvy feds are planning to march on Saturday in defense of their coworkers… Organizers of the “Government Doesn’t Suck March” (their choice of words, not ours) were inspired in part by last week’s Washington Post poll that revealed widespread negative perceptions of federal workers. “We hear it day in and day out: the government sucks, federal employees are lazy and their positions are redundant,” said march organizer Steve Ressler, founder of GovLoop, a social networking Web site for public servants. “It’s time to turn the tables and remind the world that government employees just happen to be people — people that don’t suck,” Ressler said in a message sent to The Federal Eye on Sunday announcing the march. Government workers “are a lot of cool cats” who work hard, listen to good music and watch Stewart’s “The Daily Show,” “but that’s all after they’ve spent a whole day keeping the country running,” he said.

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Two CNBC stories are linked on the Drudge Report this morning, and they both highlight the growing risk of the Fed’s easy-money policy. The first story discusses whether the dollar will continue to depreciate. Since the “optimist” argument is based on global instability, this is hardly encouraging regardless of what you think will happen to the dollar.

The dollar’s slump could get far worse if the dollar index takes out last year’s low, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC Monday. …”The dollar is being trashed, we’ve actually had effectively devaluation of about 14 percent in the last two months,” Griffiths said. His view is contrary to that of HSBC foreign exchange strategist David Bloom, who told CNBC that a continuation of the currencies war after the G20 might put pressure on risky assets, causing a flight to safety into the dollar.

The Germans certainly are not happy about U.S. monetary policy. The other story reveals that Bernanke’s easy-money policy met with criticism from other nations at the recent G-20 meeting in South Korea.

German Economy Minister Rainer Bruederle on Saturday took issue with what he called a U.S. policy of increasing liquidity, saying it indirectly manipulated exchange rates. The U.S. Federal Reserve is widely expected to embark on a fresh round of asset purchases to prop up the economy. “There was criticism of the American policy of monetary easing, or creating more liquidity,” Bruederle said after a meeting in South Korea of finance officials from the Group of 20 economic powers. “I tried to make clear in my contribution to the discussion that I regard that as the wrong way to go,” he said.

But maybe this image captures the real meaning of what’s happening to the dollar. On a more serious note, the United States is not in danger of becoming another Zimbabwe or Argentina, but there are real reasons to be concerned that political manipulation of monetary policy will bring us back to 1970s-style inflation. At that point, the question becomes whether we get a leader like Reagan who is willing to make the tough choices needed to restore a sound currency.



The Wall Street Journal obviously isn’t happy about the Fed’s policy. Writing about what happened in South Korea, they opine this morning that:

…the clear implication is that the U.S. will continue to print dollars until China and other surplus nations with currencies pegged to the dollar cry uncle and revalue. As for Europe and those countries whose currencies float against the dollar, they’ll have to decide whether to join the Fed’s easing binge or accept rising currencies too. This is a recipe for more currency turmoil, not less. And it is likely to drive more capital, not less, to Asia and elsewhere other than the U.S.

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I have no idea if this is a faked photo, but let’s have some fun with it. Whoever comes up with the funniest/most clever caption wins a very valuable prize.*

*Okay, there’s no real prize, but you’ll at least have the satisfaction of being…um…funny and clever.

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Our AA 50+ softball team made it to the final day of the World Series tournament in Phoenix, but we lost 15-14 to a team from Alaska and missed out shot at the title.

We had the tying run on second and I was on deck when the game ended, so I missed my chance for glory (or embarrassment). But we played very well yesterday, knocking several teams out of the tournament.

And the Georgia Bulldogs beat Kentucky, their third straight win after a terrible 1-4 start, so the sports news this weekend was not all bad.

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I’m not serious , of course, but it is rather ironic that Raul Castro is cutting the tax burden on small business at the same time that Obama is pushing for higher tax rates on small business. Reuters reports on the latest in supply-side communism.

Cuba unveiled on Friday a new tax code it said was friendlier for small business, signaling authorities are serious about building a larger private sector within the state-dominated economy. The new system, outlined in the Communist Party daily Granma, greatly increases tax deductions… The tax redesign comes as the government has begun slashing 500,000 workers from state payrolls and preparing to issue 250,000 self-employment licenses to create new jobs in President Raul Castro’s biggest reform since taking office in 2008. …The new tax system enables the self-employed to deduct up to 40 percent from income for the cost of supplies, compared to just 10 percent under the old one. Formerly, small businesses simply paid a graduated income tax. Now they will also have to pay a 10 percent sales tax and 25 percent social security tax, but both are deductible at the end of the year.

Unfortunately, Obama seems to views tax issues through the prism of class warfare. This video explains why class warfare tax policy is misguided, and it includes the footage from the 2008 campaign where Obama basically said that he didn’t care whether his proposed tax increase on capital gains led to lower revenue.

The politics of hate-and-envy may be emotionally satisfying to some on the left, but there is strong evidence that high tax rates damage small business. And even though Obama apparently doesn’t think this means much, there is also lots of evidence that the so-called rich won’t wind up paying much additional tax because they can easily adjust their behavior. I guess the real question is why so many statists are consumed by disdain and resentment.

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I’m just making up the 1.94 percent number, but the International Herald Tribune reported last year that unfunded liabilities in France are nearly 550 percent of GDP. The news reports don’t include any estimates of what Sarkozy’s reform will mean, but I would be surprised if it had a big impact on France’s long-run fiscal nightmare. But, as the old saying goes, a journey of a thousand miles begins with a first step, and Sarkozy has pushed through the reforms notwithstanding protests and riots from left-wing unions and brain-dead students (who don’t seem to realize that they’ll pay even higher taxes if entitlements aren’t reformed).

Under pressure from the government, the French Senate voted Friday to raise the retirement age from 60 to 62, a victory for President Nicolas Sarkozy after days of street rage, acrimonious debate and strikes that dried up the supply of gasoline across the country. The vote all but sealed passage of the highly unpopular measure, but it was unlikely to end the increasingly radicalized protests. The coming days promised more work stoppages and demonstrations by those who feel changing the retirement age threatens a French birthright. …Leftist critics called the move a denial of democracy by an increasingly confrontational president. “No, you haven’t finished with retirement. You haven’t finished with the French,” said Socialist Sen. Jean-Pierre Bel, alluding to an apparently unflagging determination by unions, now joined by students, to keep protests alive — even through the upcoming week of school holidays.

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According to a new poll from Rasmussen, almost two-thirds of the American people want smaller government and lower taxes while only one-fourth want bigger government and higher taxes. Not surprisingly, the moochers and looters of the governing elite are wildly out of touch with the American people, with 70 percent of the political class favoring an increased burden of government while 78 percent of ordinary Americans want more freedom.

Most voters (65%) say they prefer a government with fewer services and lower taxes rather than one with more services and higher taxes. A new Rasmussen Reports telephone survey finds that only 25% of Likely U.S. Voters favor a government with more services and higher taxes instead. …As is often the case, there is a noticeable divide between the Political Class  and Mainstream voters: 70% of the Political Class supports more services and higher taxes, while 78% of Mainstream voters prefer fewer services and lower taxes.

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There’s been considerable attention to the news that the IRS has only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”

Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.

Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.

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Peggy Noonan makes a compelling case in the Wall Street Journal that the Tea Party has rescued the GOP by allowing Republicans to escape the statist legacy of George W. Bush and forcing them to re-focus on the need to restrain big government. I’m not sure that she’s right. After all, the establishment wing of the GOP will try to co-opt and corrupt the new Representatives and Senators elected November 2. But there’s no doubt that the GOP is enjoying a revival (reprieve?) thanks to this spontaneous and organic grassroots movement.

…the tea party is not a “threat” to the Republican Party, the tea party saved the Republican Party. In a broad sense, the tea party rescued it from being the fat, unhappy, querulous creature it had become, a party that didn’t remember anymore why it existed, or what its historical purpose was. The tea party, with its energy and earnestness, restored the GOP to itself. …The tea party did something the Republican establishment was incapable of doing: It got the party out from under George W. Bush. The tea party rejected his administration’s spending, overreach and immigration proposals, among other items, and has become only too willing to say so. In doing this, the tea party allowed the Republican establishment itself to get out from under Mr. Bush… the tea party stiffened the GOP’s spine by forcing it to recognize what it had not actually noticed, that we are a nation in crisis. The tea party famously has no party chiefs and no conventions but it does have a theme—stop the spending, stop the sloth, incompetence and unneeded regulation—and has lent it to the GOP.

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Gallup just released a poll showing that 46 percent of Americans view the federal government as an immediate threat to the rights and freedoms of ordinary Americans. My first reaction was to wonder why the number was so low. After all, we have a political elite that wants to do everything from control our health care to monitor our financial transactions.

But a secondary set of numbers is even more remarkable. As seen in this chart, both Republicans and Democrats tend to view the federal government as a threat mostly when the White House is controlled by the other party.

This complacency is very unfortunate. Republicans presumably want to limit government control over the economy, yet it was the Bush Administration that put in place policies such as Sarbanes-Oxley, the banana-republic TARP bailout, the corrupt farm bills, and the pork-filled transportation bills. Democrats, meanwhile, presumably want to protect our civil liberties, yet the Obama Administration has left in place virtually all of the Bush policies that the left was upset about just two years ago. There has been no effort to undo the more troublesome provisions of the PATRIOT Act. And shouldn’t honest liberals be upset that the Obama Administration is going to such lengths to defend the military’s don’t-ask-don’t-tell policy?

The lesson to be learned is that there is an unfortunate tendency for politicians to misbehave when they get control of the machinery of government. Lord Acton warned that “Power corrupts and absolute power corrupts absolutely.” It’s almost as if Republicans and Democrats do their best every day to confirm this statement.

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This definitely belongs in the OMG category. Bureaucrats at the New Jersey Turnpike Authority are ripping off taxpayer is a spectacular fashion. Here are some stunning details.

Auditors say the New Jersey Turnpike Authority wasted $43 million on unneeded perks and bonuses.  In one case, an employee with a base salary of $73,469 earned $321,985 when all payouts and bonuses were included. The audit says that toll dollars From the New Jersey Turnpike and the Garden State Parkway were spent on items ranging from an employee bowling league to employee bonuses for working on birthdays and holidays. It took place as tolls were being increased. The biggest expense uncovered in the audit was $30 million in unjustified bonuses to employees and management in 2008 and 2009 without consideration of performance. One example was paying employees overtime for removing snow and working holidays and then giving additional “snow removal bonuses” and “holiday bonuses.” …Among the questionable legal expenses was a billing for $111,840 for a law firm’s weekly internal status meetings that were generally attended by 10 to 15 of the firm’s attorneys and two to three of its paralegals.

P.S. I’m getting rid of the “Part XLIII” part of the “Taxpayers vs Bureaucrats” series. In the beginning, I figured it was a good way of emphasizing the scope of the problem, but now it’s become a bit of a pain (especially since I started having to go online to figure out how to translate numbers into roman numerals).

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I want to believe. No, I’m not talking about the X-Files movie from 2008. I’m referring to the BBC’s report that the U.K. government will cut spending and eliminate 500,000 government positions. Unfortunately, I can’t accept this story at face value. As I’ve noted before, the United Kingdom has the same dishonest fiscal system we have in America, where politicians claim they are cutting spending when spending actually in increasing. They get away with this scam by comparing how much spending is growing to an imaginary baseline showing even faster growth. So while I hope this story is true, I won’t be surprised if the number of bureaucrats in 2015 is not substantially different than it is today.

Chancellor George Osborne has unveiled the biggest UK spending cuts since World War II, with welfare, councils and police budgets all hit. The pension age will rise sooner than expected, some incapacity benefits will be time limited and other money clawed back through changes to tax credits and housing benefit. A new bank levy will also be brought in – with full details due on Thursday. …shadow chancellor Alan Johnson, for Labour, called the review a “reckless gamble with people’s livelihoods” which risked “stifling the fragile recovery” – a message echoed by the SNP, despite smaller than expected cuts in Scotland. Mr Osborne ended his hour-long Commons statement by claiming the 19% average cuts to departmental budgets were less severe than expected… Up to 500,000 public sector jobs could go by 2014-15 as a result of the cuts programme, according to the Office for Budgetary Responsibility. …Labour would also have had to make major cuts if they had won the general election, but the party insists Mr Osborne’s plans were too aggressive and risked tipping the country into a “double dip” recession. During raucous Commons exchanges, shadow chancellor Alan Johnson accused Tory backbenchers of cheering “the deepest cuts to public spending in living memory”.

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Governor Mitch Daniels of Indiana has triggered a spat among policy wonks with his recent comments expressing sympathy for a value-added tax (VAT). Kevin Williamson of National Review is arguing that a VAT will probably be necessary because there is no hope of restraining spending. Ryan Ellis of Americans for Tax Reform jumped on Williamson for his “apostasy,” arguing that a VAT would be bad news for taxpayers. From a policy perspective, I’m very much against a VAT because it will finance bigger government, as explained in this video.

That being said, Kevin Williamson makes a good point when he says that some supply-siders have neglected the spending side of the fiscal ledger. And it certainly is true that Republicans don’t seem very interested in curtailing the growth of government. But does this mean, as Williamson argues, but that our choices are limited to 1) a 36 percent spending cut, 2) catastrophic deficits and debt, or 3) a European-style value-added tax.

I actually think it would be a great idea to reduce the budget by 36 percent. That would bring the burden of federal spending back down to where it was in 2003. Notwithstanding the screams from various interest groups that this would generate, nobody was starving in the streets when the budget was $2.3 trillion rather than today’s $3.5 trillion. But Kevin is unfortunately correct in noting that this type of fiscal reform won’t happen.

Kevin is wrong, however, in saying that we therefore have to choose between either Greek-style deficits or a VAT. According to the Congressional Budget Office, tax revenues over the next 10 years will increase by an average of about 7.3 percent each year – and that’s assuming the tax cuts are made permanent and the AMT is adjusted for inflation. Reducing red ink simply requires that politicians exercise a tiny bit of restraint so that spending grows by a lesser amount. This video walks through the numbers and shows how quickly the budget could be balanced with varying levels of spending discipline.

By the way, it’s worth pointing out that the VAT has not prevented gigantic deficits in nations such as Greece, Japan, Ireland, Spain, England, etc, etc. Politicians in those nations implemented VATs, usually with promises that the money would be used to reduce other taxes and/or lower red ink, but all that happened was more spending and bigger government (this cartoon makes the point in a rather amusing fashion). In other words, Milton Friedman was right when he wrote that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

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Senator John Kerry is enriched by tax havens. Former Democratic Senator (and professional slug) John Edwards got to use tax havens. Former President Bill Clinton got to benefit from tax havens. Connecticut’s Attorney General (and Senate candidate), Richard Blumenthal, saves money with tax havens.

Now we find out that a major Democratic donor and significant other to a Democratic Congresswoman from Maine, Donald Sussman, appears to be guilty of the horrible crime of…gasp…trying to lower his tax burden by using a tax haven. What makes this story interesting in part is the hypocrisy angle. Why is it leftists want all of us to pay more, but they get to utilize havens – or, in the case of folks like Geithner, Daschle, and Rangel, engage in outright evasion?

I’ve argued many times that tax havens are very beneficial for the world economy, so I certainly have no objection to what these Democrats are doing. I just wish they would let the rest of us in on some of the action.

But the other juicy part of the story is that there appears to be a legal catch-22 for Sussman and Congresswoman Pingree. In order for Sussman to be eligible for the big tax savings in the Virgin Islands, he needs to be a legal resident. But in order for Congresswoman Pingree to legally take rides on Sussman’s corporate jet, he needs to be living with her in Maine (technically, riding on his jet is only supposed to be legal if he’s a family member, but I guess shacking up counts in today’s society). Here’s are some amusing excerpts from the Weekly Standard.

As far as liberal financiers go, you don’t get much more powerful than S. Donald Sussman. Since 1989, the hedge-fund billionaire has pumped millions into the coffers of Democratic politicians and their political pet projects. …he’s been one of the top contributors to left-leaning 527 organizations during the 2010 election cycle. But while Sussman has long kept a behind-the-scenes profile, a recent ethics controversy in Maine has flung him into the center of a complicated dispute over state residency, tax dodging and congressional ethics – the implications of which extend all the way from the rocky coast of southern Maine to the offshore tax haven of the U.S. Virgin Islands. According to Sussman’s fiancée, Rep Chellie Pingree (D-ME), the philanthropist lives with her and has been a resident of Maine since 2009. But financial records and other documents indicate that Sussman has claimed full-time residency and extensive tax breaks in the U.S. Virgin Islands for years – and may be continuing to claim them. …Confusion over Sussman’s residency status has been dogging his fiancée’s congressional reelection bid for weeks. As the former president of an ethics watchdog group, Pingree caught flack in late September after she was found to be traveling on Sussman’s private jet – an activity prohibited by election rules, unless the aircraft owner is a family member. In response to Republican criticism over the incident, the congresswoman said that Sussman lives with her in Maine, which may qualify him as family. The House Ethics committee has since cleared her of any charges. …But this seems to conflict with records that suggest a company owned by Sussman is currently receiving financial benefits in the U.S. Virgin Islands. A decade ago, Sussman founded Trust Asset Management, LLP., in St. Thomas, and began paying himself income from his Connecticut-based hedge-fund firm through it. As recently as September, Trust Asset Management LLP., was listed as an active beneficiary of the Virgin Island’s tax breaks, known as the Economic Development Commission (EDC) benefits. U.S. Virgin Island tax attorneys said that in order to receive these benefits through the EDC, a company owner must be a “bona fide” resident of the territory – meaning that the individual needs to live in the area for more than six months out of the year. …Other information has added to the confusion over Sussman’s residency status. During an interview with the Virgin Islands Daily News in July, the hedge-fund owner reportedly told the paper that he has resided full-time in the territory since 2000. …Sussman’s Securities and Exchange Commission filings from September also list his address as the Virgin Islands, as do political contributions he made in 2009. The website for the Great Cruz Bay Homeowners Association in St. John names Sussman as the organization’s president. Over the past few years, the U.S. Virgin Islands have come under scrutiny for being a magnet for criminal tax evaders; individuals who want to take advantage of the territory’s 90 percent tax savings, but don’t want to make it their primary home.

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Time for some much-needed positive news. Ordinary taxpayers are slowly but surely figuring out that federal workers are overpaid and underworked. Here are some of the details from the story in the Washington Post.

More than half of Americans say they think that federal workers are overpaid for the work they do…according to a Washington Post poll. Half also say the men and women who keep the government running do not work as hard as employees at private companies. …In the new Post survey, 52 percent of Americans think that federal civil servants are paid too much, a view held by nearly two in three Republicans and about seven in 10 conservatives. Far fewer Democrats, independents, liberals and moderates hold this opinion. …Three-quarters of those surveyed say they think federal workers are paid more and get better benefits than their counterparts outside government, an increase of seven percentage points from a Post-ABC poll conducted in 1982.

And if you want to know why a bloated and overpaid government workforce is bad for the economy, this part of the story says it all.

…nearly half of Republicans would recommend a government job to a relative or close friend just graduating, compared with 70 percent of Democrats. “Why not?” asked Nirmal Sandhu, 56, the father of two college students, who emigrated from India to Long Island in 1987. “Working in the federal government is a good job. For my kids, I think it would be great.” …African Americans are far more sympathetic to civil servants than are whites, with three-quarters saying they would like to see a young person close to them pursue a career in government.

When people think that mooching off taxpayers and pushing paper for a bureaucracy is a worthy ambition, that is a sign that the nation’s social capital is eroding. And when people actually wind up in the bureaucracy, that is a sign that the nation’s labor force is being misallocated. In either case, long-term growth suffers.

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Tim Carney of the Washington Examiner is an expert on corruption and sleaze inside the beltway, and his column this morning is a perfect example. He shows how corrupt insiders in Alaska use something known as the “Rent-an-Eskimo” scam to pull in hundreds of millions of tax dollars from no-bid federal contracts. These insiders, meanwhile, steers big bucks to Washington lobbyists (almost all of whom worked for politicians like Lisa Murkowski), who then provide campaign cash to the corrupt officials who pass the laws that enable the circle of graft to continue. Here are some key passages from Tim’s column.

Sen. Lisa Murkowski’s write-in candidacy is being funded by $100,000 contributions from a handful of Alaska corporations that have been handsomely subsidized by the federal government. These six-figure donors have pulled in billions of taxpayer dollars thanks to special legislative favors from Murkowski and her mentors — the late Sen. Ted Stevens (R), and Lisa’s father, former senator and governor, Frank Murkowski (R). …In late September AST took in $800,000 from nine Alaska Native Corporations — unique, privileged, and politically connected for-profit entities created in the 1970s by legislation written by Stevens.  While the companies are technically owned by the natives, the taxpayer-funded spoils from these contracts accrue to the well-connected nonnative lobbyists, subcontractors, and executives in the “Alaska mafia” made up of aides, friends and donors of Stevens, the Murkowskis, and Rep. Don Young (R). Meanwhile the 130,000 Alaska Natives, who are shareholders in the ANCs, have received $720 million over the last nine years, which comes to $615 per native annually. In effect, the natives are unwitting frontmen for this racket. Critics on Capitol Hill say this is worse than Jack Abramoff’s exploitation of Indian tribes, and, in a dark joke, dub the ANCs with the politically incorrect name “rent-an-Eskimo. …These multimillion-dollar (in some cases billion-dollar) corporations are exempt from competition requirements that cover most federal contracts because they are automatically treated as small businesses from socially and economically disadvantaged populations — although their success in pulling in federal contracts would suggest otherwise. …These overpriced no-bid contracts aren’t welfare for poor natives as much as they are patronage for politically connected lobbyists and executives, most of whom are not natives. …The ANCs highlight the truly corrupt aspect of pork-barrel spending, especially in Alaska. “Bringing home the bacon” is not simply about transferring wealth north from the Lower 48 — it’s often about using taxpayer money to line the pockets of the politically connected, who return the favor in the form of campaign contributions. Much of the pork doesn’t make it all the way to Alaska — it stays right here on K Street.

This is just one example of how big government creates a breeding ground for corruption. The circle of graft is Washington’s version of recycling. Money gets taken from taxpayers and then winds up getting passed back and forth among special interests, lobbyists, and politicians. This video provides more of the sordid details.

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 I’m finally back in Washington after a week in Australia for the Mont Pelerin Society general meeting. Aussies are great people, but their government is just as misguided as the one we’re burdened with here in America. A friend took this pic of me on a visit to Manly Beach. You may notice a similarity to this other photo (though the Australian sign has not been changed to reflect truth-in-advertising).

Moreover, it also appears that the Australian Tax Office is just as odious as our internal revenue service. One of the Aussies at the Mont Pelerin meeting told me that his nation’s tax police were going to investigate a bunch of people because…drum roll, please…they purchased hail-damaged cars at an auction.

Yes, you read right. Being a frugal shopper and looking for bargains apparently is seen as behavior that cries out for harassment by the tax man. I expressed some skepticism when told this story, but the Aussie sent me a link to a story that ran in the West Australian. Here’s an excerpt.

Tens of thousands of Perth residents who bought a new car after the March hailstorm face a new danger – a close examination of their tax details. The Australian Taxation Office revealed yesterday it was expanding its data matching program to take in cars worth more than $10,000 that were sold, transferred or newly registered between July 1 last year and June 30 this year. Tax commissioner Michael D’Ascenzo said…”In the past our motor vehicle data matches focused on luxury cars, but the net is now being cast much wider,” he said. “We’re looking to identify businesses that sell vehicles and fail to report or under-report those sales. “We’re also looking at whether a person’s income was not sufficient to support the purchase of the vehicle. …Car sales in Perth went through the roof after the March 22 storm when many hail-damaged vehicles were written off by insurance companies. WA car sales hit an all time high of almost 12,000 in April, a jump of 29 per cent on March, as drivers rushed to buy a replacement vehicle. Almost every one of those purchases will fall under the ATO’s watch.

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