Lower Tax Rates vs. Targeted Tax Credits, Part III

Last year, I wrote a column for the Wall Street Journal making the case that families would benefit more from lower tax rates rather than targeted tax credits.

My argument was simple and straightforward.

Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income.

I then had a follow-up piece that expanded the discussion, responding to critics but also noting that advocates of lower rates and supporters of targeted credits at least agree on the importance of reducing double taxation and also want to address non-fiscal impediments to growth.

Now it’s time for a third installment in the series.

The Wall Street Journal opined today against tax credits, citing the challenges that have arisen on the other side of the ocean.

Parliament blocked David Cameron’s plan to reform family tax credits. There’s a warning here for conservatives…about the dangers of social engineering through taxation. At issue is a convoluted tax benefit developed by Tony Blair in 2003 that was supposed to reward low-income work and childbearing. …This policy hasn’t worked.

The editorial points out that welfare reforms deserve credit for a somewhat improved job market.

Moreover, there’s scant evidence of desirable effects on birthrates (an important issue because of the collapsing welfare state, as discussed yesterday).

To the degree there are more births, it is because of the U.K.’s large immigrant population. Tax policy has no significant impact.

A 2013 Office for National Statistics study noted that the combination of economic climate and tax policy “does not have a clear impact in a particular direction.”

But there definitely is a measurable impact in other ways. People now expect to get checks from the government based on the size of their families.

…the tax credits have become a new entitlement for the child-rearing middle class. …eliminating the credits has proved to be politically difficult. The tax-credit system is so entrenched that it’s as hard to reform as any other entitlement… That’s a lesson for Americans as a debate about tax reform gathers momentum.

And the WSJ expands the lesson.

…the most pro-family tax policies are those that do the most to boost broad-based growth and raise incomes, which means a flatter tax code with lower rates and fewer distorting credits and exemptions. As Britain shows, the danger of using the tax code for pro-natalist social planning is that you end up with an expensive new entitlement that is merely another mechanism for income redistribution and can’t be reformed.

And if you want evidence, just look at how the so-called earned income tax credit has become the federal government’s fastest-growing entitlement program.

So why expand the problems of the EITC by creating new and bigger credits?

Especially since the tax code already is a convoluted and corrupt mess.

Writing for Investor’s Business Daily, Amity Shlaes and Gregory Thornbury make the case for a low-rate flat tax instead of expanded credits.

The fixation on family tax benefits abides, even though the tax code already features dozens of credits and deductions installed in the name of children. …The assumption that such credits are the best gift for the religious family dates back 100 child credits ago… But that doesn’t mean that the policy truly benefits families.

They explain that growth is more important.

And you’re more likely to get a better-performing economy when marginal tax rates are reasonable.

…a better policy for families, then and today, is a tax code that does more to realize their aspirations than any political lobby. Such a plan has no child credits but would be simpler and flatter, with a top rate of, say, 20%, 18%, 15% or even, as Carson would have it, 10%. The reasons why this is so have to do with standard tax parameters such as marginal rates and standard tax concepts such as the incentive.

Keep in mind, by the way, that there are tradeoffs. If politicians want big credits, they will want to make up for the foregone revenue by raising tax burdens elsewhere.

Costly tax breaks like the child credit are one reason why top rates are so high in the first place. To compensate for the revenue that such a break forgoes, lawmakers raise rates at the top of the tax schedule or lower the point at which the top rate kicks in.

Last but not least, there’s a moral component to this debate.

There are taxes in the Bible. But nowhere does the Bible say that a great share of the rich man’s money has to go to a secular government. And it never crosses the minds of today’s politicians that they encourage their constituents to violate the 10th Commandment when they stoke resentment and envy. …Our code does feel like a maze because progressivity represents behavioral engineering par excellence. It treats humans like rats who struggle through, avoiding trap doors and hunting for chunks of cheddar cheese without ever gaining much idea of where they are. It’s time for a tax code that treats humans with dignity.

And that tax code, needless to say, is a simple and fair flat tax.

Which, for what it’s worth, includes a generous exemption based on family size. So the goal is to provide some tax relief to families, but to keep it reasonable so that other objectives (such as growth) can be realized.

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The Fiscal Nightmare of Changing Demographics Combined with Poorly Designed Entitlement Programs

In my speeches, I routinely argue that an aging population is one of the reasons why we need genuine entitlement reform.

A modest-sized welfare state may be feasible if a country has a “population pyramid,” I explain, but it’s a recipe for fiscal chaos when changing demographics result in fewer and fewer people pulling the wagon and more and more people riding in the wagon.

And if you somehow doubt that’s what is happening in America, check out this very sobering image showing that America’s population pyramid is turning into a population cylinder.

The bottom line is that demographics and entitlements will mean a Greek fiscal future for America and other nations.

To bolster my case (particularly for folks who might be skeptical of a libertarian message), I frequently cite pessimistic long-run fiscal data from international bureaucracies such as the IMF, BIS, and OECD.

I’m not a big fan of these organizations because they routinely endorse statist policies, but I figure skeptics will be more likely to listen to me if I point out that even left-leaning international bureaucracies agree the public sector is getting too large.

And now I have more evidence to cite. A new report from the International Monetary Fund explores “The Fiscal Consequences of Shrinking Populations.” Here’s what you need to know.

Declining fertility and increasing longevity will lead to a slower-growing, older world population. …For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. …These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire…large tax increases that could stymie economic growth.

Let’s now look at a couple of charts from the study.

The one of the left shows that one-third of developed nations already have negative population growth, and that number will jump to about 60 percent by 2050. And because that means fewer workers to support more old people, the chart on the right shows how the dependency ratio will worsen over time.

So what do these demographic changes mean for fiscal policy?

Well, if you live in a sensible jurisdiction such as Hong Kong or Singapore, there’s not much impact, even though birthrates are very low, because government is small and people basically are responsible for setting aside income for their retirement years.

And if live in a semi-sensible jurisdiction such as Australia or Chile, the impact is modest because personal retirement accounts preclude Social Security-type fiscal challenges.

But if you live just about anywhere else, in places where government somehow is supposed to provide pensions and health care, the situation is very grim.

Here’s another chart from the new IMF report. If you look at developed nations, you can see a big increase in the projected burden of government spending, mostly because of rising expenditures for health care.

At this stage, I can’t resist pointing out that this is one reason why the enactment of Obamacare was a spectacularly irresponsible decision.

But let’s not get sidetracked.

Returning to the IMF report, the authors contemplate possible policy responses.

They look at increased migration, but at best that’s a beggar-thy-neighbor approach. They look at increased labor force participation, which would be a very good development, but it’s hard to see that happening when nations have redistribution policies that discourage people from being in the workforce.

And the report is very skeptical about the prospects of government-induced increases in birthrates.

Boosting birth rates could slow down population aging and gradually reduce fiscal pressures. …However, a “birth rate” solution to aging is unlikely to work for most countries. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births.

So that means the problem will need to be addressed through fiscal policy.

The IMF’s proposed solutions include some misguided policies, but I was surprisingly pleased by the recognition that steps were needed to limit the growth of government.

Regarding pensions, the IMF suggested higher retirement ages, which is a second-best option, while also suggesting private retirement savings, which is the ideal solution.

Reforming public pension systems can help offset the effects of aging. Raising retirement ages is an especially attractive option… For example, raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries. …increasing the role of private retirement saving schemes could be helpful in offsetting the potential decline in lifetime retirement income.

But if you recall from above, the biggest problem is rising health care costs.

And kudos to the IMF for supporting market-driven competition. Even more important, though, the international bureaucracy recognizes that the key is to limit the government’s health care spending to the growth of the private economy (sort of a a healthcare version of Mitchell’s Golden Rule).

…health care reform can be effective in containing the growth of public health spending. …There is past success in improving health outcomes without raising costs through promoting some degree of competition among insurers and service providers. …Containing the growing costs of health care would help reduce long-term fiscal risks. On average, health care costs are projected to increase faster than economic growth. …Assuming policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. Under this scenario, public health care spending pressures would be greatly subdued: by 2100, health spending would be reduced by 4½ percentage points of GDP in the more developed countries.

Interestingly, of all the options examined by the IMF, capping the growth of health care spending had the biggest positive impact on long-run government spending.

So what lessons can we learn?

Most important, the IMF study underscores the importance of the Medicaid reform and Medicare reform proposals that have been included in recent budgets on Capitol Hill.

In addition to making necessary structural changes, both of these reforms cap the annual growth of health care spending, which is precisely what the IMF report says will generate the largest savings.

So we’re actually in a very unusual situation. Some lawmakers want to do the right thing for the right reason at the right time.

But not all of them. Some politicians, either because of malice or ignorance, think we should do nothing, even though that will mean a very unpleasant future.

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The Ted Cruz Tax Plan: A Pro-Growth Restructuring of the Internal Revenue Code, but with One Worrisome Feature

The tax-reform landscape is getting crowded.

Adding to the proposals put forth by other candidates (I’ve previously reviewed the plans offered by Rand Paul, Marco Rubio, Jeb Bush, Bobby Jindal, and Donald Trump), we now have a reform blueprint from Ted Cruz.

Writing for the Wall Street Journal, the Texas Senator unveiled his rewrite of the tax code.

…tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again. That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

Here are the core features of his proposal.

…my Simple Flat Tax plan features the following: • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income. • Above that level, a 10% flat tax on all individual income from wages and investment. • No death tax, alternative minimum tax or ObamaCare taxes. • Elimination of the payroll tax and the corporate income tax… • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

From an economic perspective, there’s a lot to like. Thanks to the low tax rate, the government no longer would be imposing harsh penalties on productive behavior. Major forms of double taxation such as the death tax would be abolished, creating a much better environment for wage-boosting capital formation.

And I’m glad to see that the notion of a universal savings account, popularized by my colleague Chris Edwards, is catching on.

Moreover, the reforms Cruz is pushing would clean up some of the most complex and burdensome sections of the tax code.

But Cruz’s plan is not a pure flat tax. There would be a small amount of double taxation of income that is saved and invested, though the adverse economic impact would be trivial because of the low tax rate.

And the Senator would retain some preferences in the tax code, which is somewhat unfortunate, and expand the earned income credit, which is more unfortunate.

It maintains the current child tax credit and expands and modernizes the earned-income tax credit… The Simple Flat Tax also keeps the current deduction for all charitable giving, and includes a deduction for home-mortgage interest on the first $500,000 in principal.

But here’s the part of Cruz’s plan that raises a red flag. He says he wants a “business flat tax,” but what he’s really proposing is a value-added tax.

…a 16% Business Flat Tax. This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. …My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods.

His proposal is a VAT because wages are nondeductible. And that basically means a 16 percent withholding tax on the wages and salaries of all American workers (for tax geeks, this part of Cruz’s plan is technically a subtraction-method VAT).

Normally, I start foaming at the mouth when politicians talking about value-added taxes. But Senator Cruz obviously isn’t proposing a VAT for the purpose of financing a bigger welfare state.

Instead, he’s doing a swap, imposing a VAT while also getting rid of the corporate income tax and the payroll tax.

And that’s theoretically a good deal because the corporate income tax is so senselessly destructive (swapping the payroll tax for the VAT, as I explained a few days ago in another context, is basically a wash).

But it’s still a red flag because I worry about what might happen in the future. If the Cruz plan is adopted, we’ll still have the structure of an income tax (albeit a far-less-destructive income tax). And we’ll also have a VAT.

So what happens 10 years from now or 25 years from now if statists control both ends of Pennsylvania Avenue and they decide to reinstate the bad features of the income tax while retaining the VAT? They now have a relatively simple way of getting more revenue to finance European-style big government.

And also don’t forget that it would be relatively simple to reinstate the bad features of the corporate income tax by tweaking Cruz’s business flat tax/VAT.

By the way, I have the same specific concern about Senator Rand Paul’s tax reform plan.

My advice to both of them is to ditch the VAT and keep the payroll tax. Not only would that address my concern about enabling the spending proclivities of statists in the future, but I also think Social Security reform is more feasible when the system is financed by the payroll tax.

Notwithstanding my concern about the VAT, Senator Cruz has put forth a plan that would be enormously beneficial to the American economy.

Instead of being a vehicle for punitive class warfare and corrupt cronyism, the tax code would simply be the method by which revenue was collected to fund government.

Which gives me an opportunity to raise an issue that applies to every candidate. Simply stated, no good tax reform plan will be feasible unless it’s accompanied by a serious plan to restrain government spending.

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No Matter How You Slice the Data, Senator Sanders and other Leftists Are Wrong to Think Nations like Sweden and Denmark Are More Prosperous than America

I periodically make comparisons of the United States and Europe that are not very flattering for our cousins across the Atlantic.

Though this isn’t because of any animus toward Europe. Indeed, I always enjoy my visits. And some of America’s best (albeit eroding) features, such as rule of law and dignity of the individual, are a cultural inheritance from that continent.

Nor am I trying to overstate America’s competitiveness, which actually has eroded considerably during this century.

Instead, I’m simply trying to make the narrow point that too much government is already causing serious problems in Europe, and I’m worried those problems are spreading to the United States.

Yet some of our statist friends, most notably Senator Bernie Sanders, think America should deliberately choose to be more like Europe.

They have this halcyon vision that the average European is more prosperous and they exclaim that this is proof that a big welfare state is benign. Or perhaps even beneficial.

So it was with great interest that I read a new article by Ryan McMaken of the Mises Institute. He takes a data-driven look at the America-v-Europe economic debate.

The battle over the assumed success of European socialism continues. Many European countries like Sweden have gained a reputation as being very wealthy in spite of their highly regulated and taxed economies. From there, many assume that the rest of Europe is more or less similar, even if slightly poorer. But if we look more closely at the data, a very different picture emerges.

Actually, I have a minor disagreement with the above passage.

Countries like Sweden and Denmark are highly taxed, but it’s not true that they’re highly regulated.

Or, to be more accurate, there almost surely is too much regulation in those nations, but since we’re discussing the relative economic performance of the United States and Europe, the relevant point is that there’s less government intervention in certain European countries (particularly Nordic nations) than there is in the United States.

The only reason that they generally lag behind the United States in the overall rankings is that they have very bad fiscal policy and that more than offsets the advantage they generally have over America in other categories.

But I’m digressing.

Let’s focus on the main point of the article, which is an effort to produce a neutral comparison of living standards in European nations and American states.

…if one is going to draw broad conclusions about poverty among various countries, GDP numbers are arguably not the best metric. For one, GDP per capita can be skewed upward by a small number of ultra-rich persons.  …I thought it might be helpful to use data that relies on median income data instead, so as to better account for inequalities in income and to get a better picture of what the median resident’s purchasing power.

McMaken uses OECD data to calculate relative levels of median income.

The nationwide median income for the US is in red. To the left of the red column are other OECD countries, and to the right of the red bar are individual US states. These national-level comparisons take into account taxes, and include social benefits (e.g., “welfare” and state-subsidized health care) as income. Purchasing power is adjusted to take differences in the cost of living in different countries into account. Since Sweden is held up as a sort of promised land by American socialists, let’s compare it first. We find that, if it were to join the US as a state, Sweden would be poorer than all but 12 states, with a median income of $27,167.

And here’s the chart he described (click to enlarge). Remember, this is a look at the income of the median (rather than mean) household, so the numbers are not distorted by the presence of people like Bill Gates.

Here’s some additional analysis based on his number-crunching.

With the exception of Luxembourg ($38,502), Norway ($35,528), and Switzerland ($35,083), all countries shown would fail to rank as high-income states were they to become part of the United States. In fact, most would fare worse than Mississippi, the poorest state. For example, Mississippi has a higher median income ($23,017) than 18 countries measured here. The Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Japan, Korea, Poland, Portugal, Slovenia, Spain, and the United Kingdom all have median income levels below $23,000 and are thus below every single US state. …Germany, Europe’s economic powerhouse, has a median income ($25,528) level below all but 9 US states.

We could stop at this point and declare that the United States was more economically prosperous than all European nations other that oil-rich Norway and the twin financial centers of Switzerland and Luxembourg.

This doesn’t bode well for Bernie Sanders’ claim that America should be more like Sweden and Denmark.

But McMaken expands upon his analysis and explains that the above numbers actually are too generous to Europeans.

We’ve already accounted for cost of living at the national level (using PPP data), but the US is so much larger than all  other countries compared here, we really need to consider the regional cost of living in the United States. Were we to calculate real incomes based on the cost of living in each state, we’d find that real purchasing power is even higher in many of the lower-income states than we see above. Using the BEA’s regional price parity index, we can take now account for the different cost of living in different states.

And he produces a new graph, once again featuring the United States average in red, with other developed nations to the left and numbers for various states to the right.

McMaken gives some added context to these new adjusted-for-cost-of-living numbers.

…there’s less variation in the median income levels among the US states. That makes sense because many states with low median incomes also have a very low cost of living. …This has had the effect of giving us a more realistic view of the purchasing power of the median household in US states. It is also more helpful in comparing individual states to OECD members, many of which have much higher costs of living than places like the American south and midwest.  Now that we recognize how inexpensive it is to live in places like Tennessee, Florida, and Kentucky, we find that residents in those states now have higher median incomes than Sweden (a place that’s 30% more expensive than the US) and most other OECD countries measured.

And here’s the most powerful data from his article.

Once purchasing power among the US states is taken into account, we find that Sweden’s median income ($27,167) is higher than only six states… We find something similar when we look at Germany, but in Germany’s case, every single US state shows a higher median income than Germany. …None of this analysis should really surprise us.

In other words, even when we limit the comparison to Europe’s more successful welfare states, the United States does better.

Not because America is a hyper-free market jurisdiction like Hong Kong or Singapore. Instead, the U.S. does better simply because European nations deviate even further from the right recipe for prosperity.

I commented on some of these issues in this interview with Dana Loesch of Blaze TV, specifically noting that living standards in Denmark and Sweden are below American levels.

I also recycled my assertion that Bernie Sanders isn’t even a real socialist, at least if we’re relying on the technical economic definition of having the government own the means of production.

P.S. In typically blunt yet analytically rigorous fashion, Thomas Sowell identifies where Obama belongs on the economic spectrum.

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Summarizing the New Budget Deal: Spend More Now and Promise to Spend Less in the Future

During the 1980 presidential campaign, Ronald Reagan famously said “there you go again” when responding to one of Jimmy Carter’s attacks.

Well, the Gipper’s ghost is probably looking down from Heaven at the new budget deal between congressional leaders and the Obama Administration and saying “there they go again.”

That’s because we basically have a repeat of the distasteful 2013 budget deal.

The new agreement, like the 2013 deal, busts the budget caps. In this case, the politicians in DC have approved $50 billion of additional spending for the 2016 fiscal year (which started on October 1) and $30 billion of additional spending in the 2017 fiscal year (starting October 1, 2016).

Which means that the President gets to further undo his biggest fiscal defeat.

And what do Republicans get in exchange?

Many of them want higher defense spending, of course, and some of them doubtlessly are happy to have more domestic spending as well. Those politicians are presumably happy, at least behind closed doors.

So let’s rephrase the question: What do advocates of fiscal restraint get in exchange?

Well, if you peruse the agreement, it’s apparent they don’t get anything. Sure, there are some promises of future restraint. But if the 2013 deal and the current agreement are any indication, those promises don’t mean much.

The deal has a handful of back-door revenue increases, including an assumption that the IRS will be more aggressive in squeezing money out of taxpayers. And there are some budget gimmicks, along with some tinkering with entitlement programs, especially the fraud-riddled disability program, that ostensibly will lead to some modest savings.

The net result is that we have a pact that leads to guaranteed spending increases over the nest few years, combined with some nickel-and-dime proposals that will probably offset each other in the future.

So the bad news – assuming the goal is enforceable spending restraint – is that policy has moved in the wrong direction.

In other words, I was right to worry that Republicans would fumble away a guaranteed victory.

And this deal probably sets the stage for another bad deal two years in the future since more spending in 2016 and 2017 will make it harder to meet the spending caps for 2018 and beyond.

Now for the good news…

…

…

…

…

Ooops, there isn’t any good news.

About the only positive thing to say is that this new agreement is not a huge defeat. There will still be budget caps, which is better than no spending caps.

And the new spending, while wasteful and counterproductive, is relatively small in the context of an $18 trillion economy.

Moreover, the deal only partially unwinds the fiscal discipline that already has been achieved thanks to the spending caps.

Last but not least, nothing in this deal precludes a better and more comprehensive spending cap, perhaps modeled after Switzerland’s very successful debt brake, once Obama is out of the White House.

P.S. This new deal also increases the debt limit. Some view this as a defeat, but it more properly should be viewed as a missed opportunity to get some much-needed reforms.

That being said, I can’t resist commenting on the deliberately dishonest scare tactics from our statist friends. They routinely claim that the United States government would have to default on its debt and cause a global crisis unless there is approval for more borrowing.

For instance, exuding an air of faux hysteria, one writer for the Washington Post asserted that, “Failure to raise the debt ceiling would unleash hell on the U.S. economy.” Another Washington Post columnist fanned the flames of fake despair, writing, “The chaos…is about to have some very serious effects on the entire country.” And a third Washington Post reporter falsely fretted that not raising the debt limit by November 3rd, “could plunge the United States into default, an outcome that…could lead to economic catastrophe.”

Oh, please, we’ve heard this song and dance before. But it’s utter nonsense.

Here’s some of what I said as part of my testimony to the Joint Economic Committee in 2013.

…there is zero chance of default. Why? Because…annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion. …there’s no risk of default – unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

But some folks may wonder whether my analysis is accurate. After all, maybe I’m some sort of nihilistic libertarian who fantasizes about laying waste to Washington.

And other than the nihilistic part, that’s actually a good description of my long-run goals.

But that doesn’t mean I’m wrong. So for backup, let’s look at some identical analysis from an ultra-establishment source, as reported in The Hill.

Moody’s Investors Service announced Monday that, despite dire warnings from the Treasury Department, the government would find a way to pay money owed on its debt, regardless of whether lawmakers agree to raise the $18.1 trillion borrowing cap. …”Even if the debt limit is not raised, …the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations,” says Moody’s Senior Vice President Steven Hess.

Gee, maybe all the mouth-breathing partisans at the Washington Post are the ones who are wrong. Along with the partisan and status-quo voices from the political establishment.

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Italy vs. America: Battle of the Bureaucrats

Since the Bureaucrat Hall of Fame is getting crowded, I’ve decided we need a system to limit new entrants.

So today we’re doing an experiment. We’ll look at two separate stories about lazy and overpaid bureaucrats, and the comments section will determine which one actually is most deserving of joining the Hall of Fame.

Let’s start in Italy, where Alberto Muraglia stakes his claim to membership. Here are some excerpts from a story in the UK-based Times.

Video footage of a policeman clocking in for work in his underpants before allegedly heading back to his bed has become the symbol of an embarrassing absenteeism scandal among council employees in San Remo, on the Italian Riviera. Alberto Muraglia, a pot-bellied, 53-year-old officer, was secretly filmed as he clocked on at council offices. He lives in the same building, a converted hotel, where he occupies a caretaker flat — allowing him to register his presence at work, and then go back to bed, it is alleged.

To be fair, our Italian contestant has an excuse for his truancy.

Though it’s about as plausible as the Groucho Marx quote, “Who are you going to believe, me or your own eyes?”

Mr Muraglia’s wife, Adriana, said the family had an alibi for every instance in which her husband was suspected of clocking in at 5.30am, opening the gates to the council building, and then returning to bed. “Some mornings, if he was a few minutes late pulling on his trousers, he would clock in in that manner and then get fully dressed immediately after and go off to work,” Mrs Muraglia told La Stampanewspaper. “Some mornings he may have forgotten, and he telephoned me to clock in on his behalf.”

In any event, Signor Muraglia is not the only bureaucrat scamming the system.

More than a hundred employees — 75 per cent of the council workforce — are under investigation for allegedly skiving off in the resort town…investigators…filmed employees swiping their time cards, and sometimes those of multiple colleagues, before turning tail and heading off to pursue other interests. One employee, filmed paddling a kayak on the Mediterranean, is alleged to have spent at least 400 hours away from his desk in the planning office, a dereliction of duty estimated to have cost San Remo council more than €5,600.

Though I have to say 400 hours away from his desk is chicken feed compared to the Italian doctor who worked only 15 days in a nine-year period.

And I like how the bureaucrats awarded themselves bonuses for their…um…hard work.

Eight of the suspected skivers shared a €10,000 productivity bonus last year.

Just like the IRS bureaucrats and VA bureaucrats who got bonuses for improper behavior.

I guess there must be an unwritten rule in government: The worse your performance, the higher your compensation.

Now let’s see how Alberto compares to our American contestant. As reported by the Contra Costa Times, former City Manager Joe Tanner is scamming taxpayers for a lavish pension, yet he’s asking for more on the basis of a shady deal he made with the City Council.

By working just two and a half more years, retired Vallejo City Manager Joseph Tanner boosted his starting annual pension from $131,500 to $216,000. He wants more, claiming he’s entitled to yearly retirement pay of $307,000. …he is now taking his six-year dispute to the state Court of Appeal. At issue is whether CalPERS must pay benefits on a contract Tanner and the Vallejo City Council concocted to boost his pension.

An extra $85,000 of pension for the rest of his life just for working 2-1/2 years?

Geesh, and I though the Philadelphia bureaucrat who is getting $50,000 of yearly loot for the rest of her life, after just three years of “work,” had a good deal. She must be feeling very envious of Mr. Tanner.

Yet Mr. Tanner isn’t satisfied.

Here’s the part that seems like it should be amusing, but it’s not actually funny when you realize that government employee pensions are driving states into fiscal chaos.

Ironically, Tanner was a critic of pension excesses. …Yet his personal spiking gambit was breathtaking. The case exemplifies how some top public officials try to manipulate their compensation to grossly inflate their retirement pay. …Tanner’s quest for another $90,000 a year, plus inflation adjustments, for the rest of his life is unreasonable.

Here’s how he schemed to pillage taxpayers.

His first contract with Vallejo called for $216,000 in base salary, plus a list of add-on items that would soon be converted to salary, bringing his compensation to $306,000. But when CalPERS advised that the amount of those add-ons would not count toward his pension, he insisted the contract be fixed. The result: His contract was amended. The add-ons were eliminated and his base salary was simply increased to $306,000, plus management incentive pay and other items that brought the total to about $349,000. If CalPERS used that number, his pension would have started at $307,000 a year. CalPERS says it was an obvious subterfuge. The amended contract was never put before the City Council at any public meeting. And there was never a truthful public explanation for it.

Of course there wasn’t a truthful explanation.

Whether bureaucrats are negotiating with other bureaucrats or whether they’re negotiating with politicians, a main goal is to hide details in order to maximize the amount of money being extracted from taxpayers.

By the way, the example of Mr. Tanner is odious, but it’s not nearly as disgusting as what happened in another California community.

Before inviting readers to vote, I want to make a serious point. Government employee pensions are a fiscal black hole because they are “defined benefits” (DB plans), which means annual payments to retirees are driven by formulas. And those formulas often include clauses that create precisely the perverse incentives exploited by Mr. Tanner.

The right approach is to reform the system so that bureaucrats instead are in a “defined contribution” system (DC plans), which basically operates like IRAs and 401(k)s. A bureaucrat’s retirement income is solely a function of how much is contributed to his or her account and how much it earns over time. By definition, there is no unfunded liability. There’s no fiscal nightmare for future taxpayers.

Now that I have that cry for fiscal prudence out of my system, I invite readers to vote. Does the shirking underwear-clad Italian bureaucrat deserve to join the Hall of Fame, or should that honor be bestowed on the scheming and hypocritical American bureaucrat?

P.S. While I think DC plans are inherently superior (and safer for taxpayers) than DB plans, I will acknowledge that some nations manage to run DB plans honestly.

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Rearranging the Deck Chairs Isn’t the Solution for Belgium’s Titanic Tax System

It’s time for a lesson in tax economics.

Though hopefully today’s topic won’t be as dry and boring as my missives on more technical issues like depreciation and worldwide taxation.

That’s because we’re going to talk about the taxation of workers, which is something closer to home for most of us.

And our lesson comes from Belgium, where the government wants a “new social contract” based on lower “direct” taxes on workers in exchange for higher “indirect” taxes on consumers.

Here are some excerpts from a Bloomberg column by Jean-Michel Paul.

Belgium’s one-year-old government announced measures, radical by that country’s standards, to move the burden of taxation to consumption from labor.  The measures are being hailed as the start of a new social contract in the heart of Europe.

But before discussing this new contract, let’s look at how Belgium’s system evolved. Monsieur Paul explains that his nation has a bloated welfare state, which has resulted in heavy taxes on workers (vigorous tax competition precludes onerous taxes on capital).

…In order to sustain large government expenses of more than 50 percent GDP on top of servicing its debt, Belgium became the OECD’s second most-taxed economy. …Belgium made a choice: It decided to heavily tax labor, which it figured, wrongly, was stuck. At the same time, it decided to provide attractive tax treatment to highly mobile capital. The gambit meant that Belgium attracted a large number of wealthy families from higher tax countries, particularly France and the Netherlands, eager to take advantage of the low rates of tax on capital. However, Belgian workers got hammered. In 2014 Belgian workers were the most taxed labor in the developed world, taking home only 46 percent of employers’ labor costs.

Here’s a chart from the article, showing that Belgian workers are the most mistreated in the developed world.

Keep in mind, by the way, that average rates only measure the overall burden of taxation.

Marginal tax rates, which are what matters most for incentives, are even higher.

According to Wikipedia, the personal income tax has a top rate of 50 percent, and that punitive rate hits a lot of ordinary workers (it’s imposed on income “in excess of €37750”). But there’s also a 13 percent payroll tax on workers and a concomitant payroll tax of more than 30 percent on employers (which, needless to say, is borne by workers).

So an ambitious Belgian worker who wants to earn more money will be confronted by the ugly reality that the government will get the lion’s share of any additional income. Geesh, no wonder Belgium gets a high score (which is not a good outcome) in the World Bank’s “tax effort report card.”

Not surprisingly, high tax rates on labor have led to some predictably bad consequences.

The entrepreneurial class is voting with its feet and regular workers are being taxed into the unemployment line.

This unusual policy mix has increasingly created problems. …Educated professionals and entrepreneurs, those most in demand in other countries, have voted with their feet in borderless Europe. As a result, productivity growth has been limited and Belgium’s economy remained low-growth. Its business start-up rate is the second lowest of the EU. …Whole segments of the country’s industrial tissue, such as the automobile sector, have gradually closed down… This has led to what the European Commission described as “a chronic underutilisation of labour” (read: unemployment) especially among the least qualified and the young. Youth unemployment stands at over 22 percent. …In its 2015 country report the Commission noted that this “reflects Belgium’s high social security charges on labour, which add to the large tax wedge”

Given these horrid numbers, it’s understandable that some policy makers in Belgium want to make changes.

But as Americans have learned (very painfully), “change” doesn’t necessarily mean better policy.

So let’s see what Belgian policy makers have in mind.

The new policy…is to reduce taxes on labor and increase indirect taxes to compensate. Social Security taxes on companies are being reduced to 25 percent from 33 percent over the next two years, bringing an increase in the net after-tax income of 100 euros ($113) per month for low and middle-wage earners. This is mainly financed by an increase in value added tax on electricity consumption. …Belgium is the first to implement what some call a “social VAT” (a tax on consumption to finance social security). …it rewards work and may well change the entitlement mind-set that has hampered innovation and job growth for decades. …a significant step in the right direction, correcting some of the worst distortions of Belgium’s social model.

In other words, politicians in Belgium want to rearrange the deck chairs on the Titanic.

Workers will be allowed to earn more of their income when they earn it, but the government will grab more of their income when they spend it.

Now for the economics lesson.

People work because they want to earn money. And they want to earn money so they can spend it. In other words, as Adam Smith observed way back in 1776, “Consumption is the sole end and purpose of all production.”

Now ask yourself whether the change in Belgian tax policy will boost employment when there’s no change in the tax wedge between pre-tax income (the income you generate) and post-tax consumption (the income you get to spend)?

The answer presumably is no.

This doesn’t mean that the proposed reform is completely useless. It appears that the VAT increase is achieved by ending a preferential tax rate on electricity consumption. And since I don’t like distorting tax preferences, I’m guessing the net effect of the overall package is slightly positive.

In other words, the lower payroll tax rate is unambiguously good and the increase in the VAT burden is only partially bad (I would be more critical if the proposal included an increase in the VAT rate rather than the elimination of a preference).

That being said, now let’s address Belgium’s real problem. Simply stated, it’s impossible to have a good tax system when government spending consumes more than 50 percent of economic output.

In no uncertain terms, an excessive burden of government spending is the problem that needs to be solved.

P.S. Interestingly, Belgium’s tax shift is somewhat similar to Rand Paul’s tax plan. In addition to all the other changes envisioned by the Kentucky Senator, he would get rid of the payroll tax and replace it with a value-added tax.

P.P.S. In addition to much smaller government, I suspect Belgium also needs to split into two different countries.

P.P.P.S. To get an idea of Belgium’s challenge, the politicians in Brussels actually criticize Germany for being too capitalistic.

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Great Moments in Federal Government Insanity

My first instinct, when arguing against higher taxes, is to pontificate about the negative impact of high marginal tax rates and punitive effect of double taxation on saving and investment.

Those are very legitimate concerns, and they’re the obvious things for an economist to highlight.

But I’m going to confess that my main motive for fighting tax increases is that I don’t think we should reward incompetent and feckless politicians by giving them more of our money.

I routinely cite horrifying cases of government waste and bureaucratic stupidity and it galls me to think that American families might have to sacrifice more of their income to the gaping maw of Washington.

And now I have more reasons to despise the political class. Check out these three additional examples of foolish waste.

The Washington Examiner reports that agents from the Drug Enforcement Administration got illegal bonuses after “partying” with prostitutes.

Drug Enforcement Agency officials linked to sex parties and prostitutes paid by drug cartels weren’t fired but rewarded with $95,000 in performance bonuses, according to a shocking new report from the Justice Department’s inspector general. What’s more, the bonuses weren’t allowed. …The report outraged House Oversight and Government Reform Committee Chairman Jason Chaffetz…”It is a disgrace that taxpayer dollars are being wasted on those who violate our trust and abuse their positions.”

I’m particularly impressed that they didn’t just hang out with normal prostitutes. These hookers were provided by the drug cartels!

I’m surprised they didn’t get free cocaine as well.

Our second story is from the Los Angeles Times, and it reveals that the Federal Air Marshall program is an ineffectual waste of money.

I realize “ineffectual waste of money” applies to most everything the government does, but this program must be uniquely wasteful.

…the federal air marshal program is mired in…allegations of misconduct and management turmoil, prompting some in Congress to question whether the multi-billion dollar experiment has outlived its usefulness. …At a price tag of $9 billion over the past 10 years, Duncan called the program “ineffective” and “irrelevant.”

I had no idea the government was squandering almost $1 billion per year on this empty gesture of security theater.

But I guess the costs add up with the Marshalls get to fly in first class while the taxpayers are stuck in coach.

Some air marshals have complained they feel they are merely “riding the bus” as they hopscotch around on domestic and international planes. …In addition, the agency, part of the Department of Homeland Security, has been hit recently with several scandals. In 2012 some agents were accused of setting up sexual liaisons to coincide with their work flights. …some Chicago-based marshals allegedly disguised themselves as pornography producers to hire prostitutes after some trips. …the program “has come to be a symbol of everything that’s wrong with the DHS, when 4,000 bored cops fly around the country First Class, committing more crimes than they stop.”

But not every Air Marshall was satisfied by first class travel and hookers.

“I hated every day of it,” said former air marshal Jay Lacson, who said he is suing after being fired for inappropriately releasing confidential job information. “I couldn’t stay awake. I got colds. You get complacent.” He added, “They don’t need the agency anymore.”

To complete a trifecta of brainless government waste, now let’s turn to the Equal Employment Opportunity Commission.

As recounted by my colleague Walter Olson, this bureaucracy sued a trucking company for failing to provide “reasonable accommodation” to Muslim truck drivers who didn’t want to deliver alcoholic beverages.

In 2013 the commission sued the Star Transport Co. in Illinois for failing to provide a reasonable accommodation to two Muslim truck drivers when it dismissed them for refusing to haul booze

Since the EEOC bureaucrats already have gone after a trucking company that wanted to weed out alcoholics (seemingly a prudent step), I briefly wondered whether these pinheads are trying to tilt the playing field in favor of air cargo and/or railroads.

But that assumes they know enough about investing to manipulate the market. But if they were that clever, they probably wouldn’t be languishing in the federal bureaucracy.

Instead, I think the EEOC simply wants to make sure it’s still recognized as America’s most clueless and malicious bureaucracy.

P.S. Since today’s topic is wasteful spending, I suppose it’s appropriate to share these excerpts from a report by the Daily Caller.

Entitlement spending accounts for most erroneous federal payments, and it’s only going to get worse, Comptroller General Gene Dodaro told Congress Thursday. “Improper” Medicaid, Medicare, and Earned Income Tax Credit disbursements made up 75 percent of all erroneous federal payments in fiscal year 2014, and were the main driver behind a nearly $19 billion increase in improper payments — from $105.8 billion in fiscal year 2013 to $124.7 billion in fiscal year 2014… Medicare incorrectly paid out one of every $10 the program spent last year, or $59.9 billion of its $603 billion budget.

Something to keep in mind next time someone argues that we can stick our heads in the sand and not enact genuine entitlement reform.

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A Growing Consensus for Spending Caps and the MAP Act

Republicans are probably going to surrender on spending caps, thus allowing Obama to reverse his biggest-ever defeat.

Moreover, GOPers almost surely will get nothing in exchange for raising the debt limit, thus squandering an opportunity to limit profligacy in Washington.

So I should be feeling very glum. And, truth be told, I am routinely frustrated by what happens in DC.

But one thing I’ve learned over the past three decades is that it’s very hard to win battles without doing the hard work that helps to build a consensus for policy reform.

• The Reagan tax rate reductions and tax reform were only possible because of several years of work by supply-side heroes who focused on the disincentive effects of high tax rates.
• The 1996 welfare reform was only possible because of several years of work by think tank experts at places like the Heritage Foundation and Cato Institute.
• The spending restraint of the Clinton years occurred in large part because of people inside the beltway and outside the beltway who spent years explaining the dangers of bloated government.
• Likewise, the fiscal discipline that started in 2010 was the result of the Tea Party and other fiscal conservatives who spent years fighting bailouts and pork.
• Our possible victory over the Export-Import Bank is only possible because of Veronique de Rugy, Tim Carney, and other diligent fighters against corrupt cronyism.
• Likewise, genuine entitlement reform might be possible in a few years because lawmakers like Paul Ryan – as well as groups like Cato – have spent years educating people on the issue.

With this in mind, I’m going to express some optimism about the case for long-run spending restraint. This may seem counter intuitive given the probable defeats that will occur in the next month or two on the BCA spending caps and the debt limit.

But I’m thinking this may be Obama’s last hurrah and that things will change dramatically after the 2016 elections.

My medium-term hopefulness isn’t based on the election of any specific candidate. Instead, it’s a reflection of the growing consensus for good policy.

For instance, Congressman Kevin Brady of Texas, writing in National Review, says that the BCA spending caps need to be expanded.

Congress’s latest effort at fiscal restraint — the Budget Control Act of 2011 — targeted the one-third of federal spending that goes for discretionary programs. This act has helped to shrink Washington’s budget deficit by two-thirds and shave Washington’s spending by a significant three percentage points of GDP. …Unfortunately, the…Budget Control Act does not address entitlements. And without common-sense reforms, the massive uncontrolled growth in entitlements will leave America with a bleak fiscal future. …Congress must build on the success of the Budget Control Act. We need smarter, 21st-century budget guardrails… The upcoming fight over the federal debt limit gives Congress an opportunity to think smartly and act boldly by enacting a responsible spending cap that limits federal spending in relation to the size of our economy.

Congressman Brady has a specific plan to cap spending growth, and he explains that it is similar to Switzerland’s very effective approach.

The Maximizing America’s Prosperity Act of 2015 (MAP) would cap federal primary spending (which includes both discretionary and entitlement spending) as a percentage of potential GDP. Under MAP, primary spending would gradually decline from 19 percent of potential GDP in fiscal year 2016 to 16 percent of potential GDP over ten years. …MAP is a very prudent approach similar to the “debt brake” that has successfully capped the growth of government spending in Switzerland.

Since I’ve already written favorably about the Swiss Debt Brake and specifically noted that the MAP Act is the closest thing to that approach in the Untied States, it’s obvious that I like spending caps.

But what about other fiscal experts in Washington?

Well, there’s significant agreement on this issue.

Kevin Hassett of the American Enterprise Institute testified on the issue earlier this month.

…countries have increasingly begun to rely on specific expenditure targets… The adoption of such targets makes a great deal of sense. …Marking spending to potential GDP would be an effective way to enact budget legislation that is transparent and difficult to game. …I encourage Congress to consider adopting a budget rule that caps spending in the U.S. (other than interest payments) at some agreed upon fraction of GDP.

By the way, Kevin mentioned in his testimony that even the IMF has identified spending caps as the only effective fiscal rule.

Returning to the views of American fiscal experts, Romina Boccia of the Heritage Foundation shared favorable thoughts about spending caps in an article for The National Interest.

…how could Congress…make long-overdue spending reforms? One way is to enact spending caps in line with Congress’s budget to pave the way for concrete reforms with the threat of automatic cuts. Such a statutory spending cap would encourage lawmakers to prioritize federal spending, enable them to say “no” to special interests, and help to protect American taxpayers from wasteful spending burdens. Lawmakers should build on the success of the Budget Control Act and its spending caps enforced by sequestration to motivate entitlement reforms. Rep. Kevin Brady (R-TX) recently reintroduced the Maximizing America’s Prosperity Act (H.R. 2471), which would impose a statutory spending cap across all non-interest outlays, in line with the spending targets established in Congress’s budget resolution.

And here’s some of what Veronique de Rugy wrote for the Mercatus Center.

…the caps and accompanying sequestration enforcement mechanism have been successful in constraining the discretionary share of the federal budget. …One of the chief criticisms of the caps is that they are largely limited to the discretionary programs, which comprise an increasingly smaller share of the overall federal budget. That’s a fair criticism. …policymakers should lock in these gains for taxpayers and seek to expand limits on federal funding to include more of the mandatory side of the budget.

By the way, here’s a chart Veronique prepared showing how the BCA spending caps have saved taxpayers a lot of money.

From this chart, you can see why I think it’s so important to preserve the spending caps and not surrender to Obama’s veto threats.

But let’s not dwell on potential bad developments and instead focus on the best approach, which is expanding the caps to constrain a far greater share of the federal budget.

Here are some excerpts from an article in Reason by A. Barton Hinkle, who explains how spending caps produce fiscal progress.

How do we avoid the iceberg up ahead? …sequestration has helped slow the growth of the federal government. Before it took effect, federal spending was on track to consume one-fourth of America’s GDP. By last year, Washington sopped up only one-fifth of America’s wealth. …there’s a[n]…option that could put America in the black… Hold the growth of government spending to 2 percent per year. That’s it. If Washington did only that, the federal budget would be balanced within six years. …many other advanced democracies have held their spending in similar check. Sweden, Canada, the Netherlands, and Italy did so during the 1990s; Germany, Switzerland, Israel and Taiwan did so in the 2000s. And because their economies grew somewhat faster, their government debt burdens shrank.

Wow. If you have Cato, AEI, Heritage, Mercatus, and Reason all endorsing spending caps, that’s a noteworthy development.

And remember that this approach also has been lauded by the International Monetary Fund, which definitely is not part of the vast right wing conspiracy.

Here’s the bottom line, which presumably explains the growing support for spending caps.

We have lots of examples of countries that have successfully addressed fiscal problems with multi-year periods of spending restraint.

And we have further evidence that explicit spending caps are the only sure-fire way of ensuring long-run fiscal discipline.

So no wonder lots of people and institutions are joining forces in the campaign to create a successful enforcement mechanism for fiscal policy’s Golden Rule.

But I don’t want to get cocky. Building a coalition for good policy is a necessary but not sufficient condition for reform.

I’ll feel more confident about possible changes if some of the presidential candidates openly embrace spending caps and put forth plans to restrain the burden of government spending.

But if we get enough people in the parade for good policy, I suspect a few politicians will suddenly see the wisdom of getting to the front of the line.

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Brazilian Politicians Are Running Out of Other People’s Money

We should fondly remember the great, late Margaret Thatcher for several reasons, most notably because she saved the United Kingdom from economic collapse.

I’m especially a fan of her famous observation that socialism fails because, sooner or later, you run out of other people’s money.

Though apparently the real quote (as opposed to the versions that circulate on the Internet) is “they always run out of other people’s money.”

And that’s exactly what’s happening in Brazil. It’s even gotten to the point that the New York Times has noticed. Here are some excerpts from a very sobering story about the pension mess in that nation.

It starts with an anecdote about a bureaucrat who retired with a full pension when she was only 44 years old.

When Rosângela Araújo turned 44, she decided that she had worked long enough. So Ms. Araújo, a public school supervisor, did what millions of others in their 40s and 50s have done in this country: She retired, with a full pension. “I had to take advantage of the benefit that was available to me,” said Ms. Araújo, now 65.

But the problem is that Ms. Araújo is the rule rather than the exception.

Indeed, her pension is relatively small compared to the way some government workers bilk the system.

An exploding pension crisis here in Brazil, Latin America’s biggest country, is wreaking havoc on its public finances, intensifying a political struggle over the economy that already has the president fighting for survival. Brazilians retire at an average age of 54, and some public servants, military officials and politicians manage to collect multiple pensions totaling well over $100,000 year. Then, once they die, loopholes enable their spouses or daughters to go on collecting the pensions for the rest of their lives, too. …“Think Greece, but on a crazier, more colossal scale,” said Paulo Tafner, an economist and a leading authority on Brazil’s pension system. …The nation’s economy has soured badly.

Worse than Greece?!? Is that really true?

Depends on what’s being measured. Greece has a bigger and more bloated public sector (and it’s getting worse), but Brazil ranks below Greece for overall economic freedom. So I wouldn’t be surprised if Brazil’s pension system is even worse than the one in Greece.

For instance, I don’t think young Greek women have an incentive to marry old codgers just to get a lifelong pension. That’s apparently so prevalent in Greece that they call it the “Viagra effect.”

In any event, it’s adding up, setting the stage for a fiscal crisis. Particularly when you consider demographic changes.

…economists warn that the pension crisis will grow more acute…, ranking it among Brazil’s most vexing structural binds. Officials had expected a major shortfall in 2030, but they now say that could happen as soon as next year. …Brazil’s plummeting fertility rate — which recently dropped to 1.77 children per woman, below the rate needed for the population to replace itself — which will eventually put even more pressure on a pension system already under intense strain. …Brazil already spends more than 10 percent of its gross domestic product on public pensions, similar to what southern European countries with much older populations have recently spent…an even bigger shock is expected here, given that the population of people 60 or older is expected to reach about 14 percent of the overall population in just two decades, up from about 7 percent now.

You also won’t be surprised to learn that government bureaucrats have rigged the system so that they get the best deal.

…the system also perpetuates inequality by providing special benefits to hundreds of thousands of government employees and their families. …Brazil is estimated to spend about 3 percent of its gross domestic product on survivors’ pensions, about three times the level in many rich industrialized countries. Politicians have been especially skilled at securing big pensions at the state level. In the Amazonian state of Pará, former governors and first ladies were recently receiving lifelong pensions as high as $7,000 a month, even if they served only a few years in office. …“Public pensions in Brazil have long been a slow-motion disaster,” said Raul Velloso, a specialist on public finances.

Gee, I hope bureaucrats in New Jersey, California, and Illinois don’t read this article. They might get some additional ideas of how to pillage taxpayers.

By the way, the lesson from all this is that the only stable pension system – and the one that is impervious to demographic change – is personal retirement accounts.

P.S. As bad as things are in Brazil, the former socialist president of that nation has more wisdom than Obama.

P.P.S. Then again, the Brazilians have a very strange approach to “rights.”

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A Nordic Nightmare for Bernie Sanders

Whenever there’s a discussion of the Nordic nations, I feel conflicted.

I don’t like the punitively high tax rates and socially destructive levels of redistribution in nations such as Denmark, but I also admire the very laissez-faire policies those countries have when it comes to regulation, trade, and property rights.

Indeed, on those latter issues, it’s worth noting that Nordic nations are more free market-oriented than the United States according to the experts at the Fraser Institute who put together Economic Freedom of the World.

Take the example of Sweden. That country has robust school choice and a partially privatized social security system.

Moreover, Nordic nations in general have lower business tax burdens and investment tax burdens than the United States. And Denmark and Sweden have both taken some modest steps to restrain government spending, so even in the realm of fiscal policy you can find some admirable developments.

But these countries need more than “modest steps” since the burden of government spending is still enormous. And excessive social-welfare expenditures are a major problem since such outlays depress labor force participation and encourage dependency.

I mention all these good and bad features of Nordic nations because Senator Bernie Sanders has suggested, as part of his presidential campaign, that the United States should become more like Sweden and Denmark.

If I got to pick and choose which policies we copied, I would agree.

But since Senator Sanders almost surely wants us to copy their fiscal policies (and presumably has no idea that those countries are pro-free market in other areas), I feel compelled to explain that he’s wrong.

And the good news is that other people are producing the evidence, which makes my job easy. Nima Sanandaji is a Swedish economist who just wrote a very illuminating article on this topic for the Cayman Financial Review.

He starts by noting how statists embrace the Nordic Model.

Denmark, Finland, Norway and Sweden have high-tax social democratic systems that for long have been admired by the left. …The high regard comes as no surprise. Nordic societies are uniquely successful. Not only are they characterised by high living standards, but also by other attractive features such as low crime rates, long life expectations, high degrees of social cohesion and relatively even income distributions. …This is often seen as proof that a ”third way” policy between socialism and capitalism works well, and that other societies can reach the same favourable social outcomes simply by expanding the size of government.

But Nima explains that Nordic nations became rich when they had free markets and small government.

The best that can be said about the Nordic welfare state is that the damage is somewhat contained because of cultural norms.

If one studies Nordic history and society in depth, however, it quickly becomes evident that the simplistic analysis is flawed. …High levels of trust, strong work ethic, civic participation, social cohesion, individual responsibility and family values are long-standing features of Nordic society that pre-date the welfare state. These deeper social institutions explain why Sweden, Denmark and Norway could so quickly grow from impoverished nations to wealthy ones as industrialisation and the market economy were introduced in the late 19th century. …The same norms explain why large welfare systems could be implemented in the mid-20th century. Strong work ethics and high levels of trust made it possible to levy high taxes and offer generous benefits with limited risk of abuse and undesirable incentive effects. It is important to stress that the direction of causality seems to be from cultures with strong social capital towards welfare states that have not had serious adverse consequences, and not the other way around.

Dr. Sanandaji then hypothesizes that we can learn a lot by comparing Americans of Nordic descent with those that didn’t emigrate.

…the Nordic success culture is maintained when people from this region move abroad. …The American descendants of Nordic migrants live in a very different policy environment compared with the residents of the Nordic countries. The former live in an environment with less welfare, lower taxes and (in general) freer markets. Interestingly, the social and economic success of Nordic-Americans is on a par with or even better than their cousins in the Nordic countries. …Close to 12 million Americans have Nordic (Scandinavian) origins.

And he produces some dramatic data.

Simply said, people of Nordic descent do very well in America, where the fiscal burden is lower than it is back in Scandinavia.

According to the 2010 US Census, the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as “Scandinavian Americans” in the US Census. The median household income for this group is even higher at $66,219.

But here’s the most remarkable information from his article. Nordic-Americans are far more productive than their cousins back home.

Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 per cent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland. …there is prima facie evidence that the decedents of Nordic people who move to the U.S. are significantly better off than those who stay at home.

Here’s the infographic Nima sent with his article.

Wow, this is game, set, match, as far as I’m concerned.

Nima produced similar data a few years ago looking just as Swedes.

But this new data makes it clear that we’re not just looking at a one-nation phenomenon. The lesson is clear. Nordic people manage to be somewhat productive in high-tax, big-government nations.

But if they reside in a medium-tax country with a medium-sized government, they are highly productive (so just imagine what they could achieve in Hong Kong or Singapore!).

And Nima also points out that there is less poverty among Scandinavians in America than there is among Scandinavians in Scandinavia.

Nordic descendants in the U.S. today have half the poverty rate of the average of Americans – a consistent finding for decades. In other words, Nordic Americans have lower poverty rates than Nordic citizens.

So here’s the lesson that will be a nightmare for Bernie Sanders. It turns out that his role models actually teach us that big government makes people less prosperous.

…in the long run, the large welfare states have eroded incentives, and ultimately the social norms that bounded Nordic societies together. The U.S. system, with greater emphasis on personal responsibility, is more in line with the traditional Nordic system that allowed for the culture of success to develop in the first place. Thus, we should not be surprised that Nordic Americans have both higher living standard and lower poverty than their cousins in the Nordic welfare states.

To summarize, the recipe for prosperity is free markets (which you find in Scandinavia) and small government (which is absent in those countries).

But Senator Sanders wants to copy the bad parts of Nordic nations while ignoring the good parts. For those who care about real-world evidence, Dr. Sanandaji’s data suggests we should take the opposite approach.

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A Much-Needed Economics, Math, and Logic Lesson for the New York Times

More than two years ago, I cited some solid research from the Tax Foundation to debunk some misguided analysis from the New York Times about the taxation of multinational companies.

Well, it’s déjà vu all over again, as the late Yogi Berra might say. That’s because we once again find something in the New York Times that cries out for correction.

Here’s some of what Patricia Cohen recently wrote about ostensibly generating lots of tax revenue by pillaging America’s top-1 percent taxpayers.

…what could a tax-the-rich plan actually achieve? As it turns out, quite a lot…the government could raise large amounts of revenue exclusively from this small group, while still allowing them to take home a majority of their income.

Oh, how generous of her for deciding that the awful, evil rich people can keep perhaps keep 50.1 percent of what they earn. Sounds like she should join the other cranks advising Jeremy Corbyn in the United Kingdom.

But I’m getting distracted. Let’s focus on the more important topic, which is her claim that it’s easy to generate a lot of tax revenue by soaking the rich.

The top 1 percent on average already pay roughly a third of their incomes to the federal government, according to a Treasury Department analysis…how much more revenue could be generated by asking the rich to pay a larger share of their income in taxes?

Interestingly, Ms. Cohen shares some data showing that the rich already are paying far higher tax rates than the rest of us. Here’s the table that accompanied her article.

Normal people would look at those numbers, or at similar data produced by the IRS, and conclude that we’re already selectively over-penalizing upper-income taxpayers.

But statists see income in the private sector as belonging to the state, so there’s no such thing as too much money for government.

And Ms. Cohen seems to have this attitude. She engages in some simplistic calculations to estimate how much loot could be seized.

Raising their total tax burden to, say, 40 percent would generate about $157 billion in revenue the first year. Increasing it to 45 percent brings in a whopping $276 billion. …Move a rung down the ladder and expand the contribution of those in the 95th to 99th percentile — who earn on average $405,000. Raising their total tax rate to 30 percent from a quarter of their total yearly income would generate an additional $86 billion. …A 35 percent share produces $176 billion.

Gee, how easy, at least on paper. If the politicians can figure out how to raise average tax rates to 45 percent for the rich (and 35 percent for the upper-middle class), then they get about $450 billion of additional tax revenue every year.

And you can buy a lot of votes with that much of other people’s money.

But sometimes things that are simple on paper are not so simple in reality.

It turns out that raising someone’s average tax rate (total tax payments/total income) requires some very big (and very bad) decisions on marginal tax rates (tax paid on the last dollar of income/last dollar of income).

Scott Greenberg of the Tax Foundation does that heavy lifting and his analysis makes mincemeat out of Ms. Cohen’s argument.

…how exactly would Congress go about raising the effective tax rate of the 1% from 33.4 percent to 45 percent? The article is not specific about this point. In fact, the article acknowledges that it is “sidestepping… the messy question of just which taxes would be increased.” This is irresponsible policy analysis… When one examines exactly which taxes would have to be increased to raise the effective tax rate of the 1% from 33.4 percent to 45 percent, the endeavor begins to appear much more difficult than the New York Times portrays.

For instance.

…the top tax bracket on ordinary income is 39.6%. How high would Congress have to raise this rate, in order to raise the effective tax rate of the 1% to 45 percent? According to our estimates, Congress would have to raise the top rate on ordinary income to 74 percent, in order to raise the effective rate of the 1% from 33.4 percent to 45 percent. …What if Congress decided to increase, not only the top rate on ordinary income, but also the top rate on capital gains and dividends? …According to our estimates, Congress would have to raise the top rate on ordinary income, capital gains, and dividends to 56 percent, in order to increase the effective rate of the 1% to 45 percent.

In other words, if you target the rich with higher income tax rates, you’d have to have a rate higher than the confiscatory structure that existed before any of the Reagan tax cuts.

Or you could boost the top rate “only” to 56 percent, but only by also dramatically increasing the double taxation of dividends and capital gains.

And that might not be very smart, at least if you care about economic performance. Scott explains.

The high rates that would need to be in place to tax the 1% at a 45 percent effective rate would almost certainly have negative economic consequences. According to our Taxes and Growth model, raising the top rate on ordinary income to 74 percent would shrink the size of the U.S. economy by 3.5 percent in the long run, by discouraging labor and pass-through business. While this tax increase would raise $3.49 trillion over 10 years under conventional scoring, after taking its economic effects into account, it would only raise $2.37 trillion. This is a significantly smaller figure than that cited by the New York Times. Furthermore, raising the top rate on ordinary income, capital gains, and dividends to 56 percent would lead to an even larger decline in GDP, of 4.9 percent. This is because taxes on investment income are especially harmful to long-term economic growth. After taking economic effects into account, this proposal would only raise $1.96 trillion over 10 years.

So the politicians would still have some extra revenue, but they would destroy several dollars of private economic activity for every one dollar of revenue they would collect.

In what world would that be a good trade?

Oh, and by the way, those revenue estimates overstate how much money the politicians would collect. In the real world, higher tax rates also would increase tax avoidance and tax evasion.

…none of these figures take into account the effects of increased tax evasion and profit shifting by wealthy Americans that would surely occur in response to such high rates. After all, when taxes rise, taxpayers have more incentives to avoid them. And it is well-documented that, when rates on capital gains rise, shareholders simply defer their realizations, making it difficult to raise much revenue from tax increases on capital gains income.

So here’s the bottom line.

…the New York Times claims that the federal government could raise large amounts of revenue by taxing the rich just a little bit more. In fact, taxes on the rich would have to go up enormously in order to bring in the sorts of revenue figures cited by the article. The negative economic effects of these tax increases would then reduce these revenues considerably.

I’d like to think Scott’s analysis will change minds and cause statists to reassess their desire to impose high tax rates.

But I’m not overly hopeful. Let’s not forget that some of these people aren’t particularly interested in generating more revenue for politicians. Their real motive is hate and envy.

P.S. Let’s hope American statists never learn about Francois Hollande’s flat tax.

P.P.S. Speaking of which, here are some amusing cartoons about class-warfare tax policy.

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Pro and Con: George Will vs. Al Hunt on Impeaching a Corrupt IRS Commissioner

When someone says “IRS,” my Pavlovian response is “flat tax.”

That’s because I’m a policy wonk and I’d like to replace our punitive internal revenue code with something simple and fair that doesn’t do nearly as much damage to our economy.

And it’s a fringe benefit that real tax reform would substantially de-fang the IRS.

But I’m also a big believer in the rule of law and a big opponent of capricious government power, so I’m also interested in curtailing the power of the IRS even if we don’t get a chance to fix the tax code.

I’ve previously commented on the unseemly and corrupt behavior of the IRS, and there’s no question the bureaucracy’s actions have been despicable.

But is it so bad that the Commissioner of the IRS deserves to be impeached? Let’s look at pro and con arguments.

Here’s some of what Bloomberg’s Al Hunt wrote about the controversy. He’s obviously a defender of the current Commissioner.

The specifics of any supposed impeachable offenses are vague. Koskinen, 76, is a respected, successful business and government executive who, at the behest of the White House, took on the job of cleaning up the beleaguered tax agency in December 2013, after offenses had been committed. …The accusations stem from 2013, when the IRS’s tax-exempt division was found to have disproportionately targeted conservative groups for scrutiny. Although Koskinen was brought in after the damage had been done, …Some, rather recklessly, accuse him of lying. …The specific charges seem specious: There may have been miscommunication, but there is no evidence of wrongdoing by Koskinen. …The pre-Koskinen abuses by the IRS’s tax-exempt division have been the subject of three inquiries… All were critical of IRS mismanagement, but none found any evidence of illegal activities or political direction from on high.

George Will is not so sanguine about Koskinen’s role. Here are excerpts from his column in the Washington Post.

Federal officials can be impeached for dereliction of duty (as in Koskinen’s failure to disclose the disappearance of e-mails germane to a congressional investigation); for failure to comply (as in Koskinen’s noncompliance with a preservation order pertaining to an investigation); and for breach of trust (as in Koskinen’s refusal to testify accurately and keep promises made to Congress). …After Koskinen complained about the high cost in time and money involved in the search, employees at a West Virginia data center told a Treasury Department official that no one asked for backup tapes of Lerner’s e-mails. Subpoenaed documents, including 422 tapes potentially containing 24,000 Lerner e-mails, were destroyed. For four months, Koskinen kept from Congress information about Lerner’s elusive e-mails. He testified under oath that he had “confirmed” that none of the tapes could be recovered. …Koskinen’s obfuscating testimonies have impeded investigation of unsavory practices, including the IRS’s sharing, potentially in violation of tax privacy laws, up to 1.25 million pages of confidential tax documents. …Koskinen consistently mischaracterized the Government Accountability Office report on IRS practices pertaining to IRS audits of tax-exempt status to groups.

These charges don’t seem (as Hunt asserted) to be “specious.”

That doesn’t mean, by the way, that there aren’t good (or at least adequate) responses to these accusations.

And perhaps Koskinen didn’t technically commit perjury. Maybe he simply engaged in some Clintonian parsing and misdirection.

So I’ll be the first to admit that it’s unclear whether Koskinen deserves to be impeached.

But I’ll also be the first to argue that the IRS is a rogue bureaucracy that needs to slapped down. That’s why it deserves budget cuts rather than the increases favored by the White House.

And Lois Lerner almost certainly should be in jail. Beyond that, I’m open to ideas on how to discourage the tax collectors from engaging in rampant misbehavior.

Just in case you think I’m exaggerating, here’s a list.

• The IRS goes beyond the law to make the system worse, as we saw when it imposed a regulation that forced U.S. banks to put foreign tax law above American tax law.
• Bureaucrats at the IRS then decided to ignore the text of the FATCA legislation and make up a different enforcement mechanism in order to salvage an unworkable and destructive law.
• Moreover, the IRS disregarded legislative text and arbitrarily rewrote the Obamacare legislation to enable additional subsidies.
• This is the bureaucracy that – in an odious display of bias – interfered with the electoral process by targeting the President’s opponents. And then awarded bonuses to itself after this corrupt behavior!
• The IRS also is one of the worst offenders in the government’s asset-forfeiture racket, which arbitrarily steals money from law-abiding citizens.
• The tax-collection bureaucracy has violated its own rules as part of a discriminatory and arbitrary persecution of Microsoft.
• While the IRS slaps harsh penalties and interest payments on taxpayers who make inadvertent errors, the agency is seemingly incapable of preventing massive fraud against taxpayers, routinely sending checks to crooks and con artists milking the system for EITC payments and false refunds.
• And the IRS (with help from negligent courts) routinely violates legal protections and civil liberties of American citizens.

These horror stories provide plenty of evidence that the internal revenue service should have its wings clipped.

P.S. Since we’re criticizing the IRS, I can’t resist sharing some oldies but goodies.

• It has thieving employees.
• It has incompetent employees.
• It has thuggish employees.
• It has brainless employees.
• It has protectionist employees.
• It has wasteful employees.
• And it has victimizing employees.

P.P.P.S. And since I’m digging through my archives, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, 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, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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What Lessons Can America Learn from Europe?

Some issues never seem to get resolved. One would think, for instance, that leftists would be more cautious about pushing for a bigger welfare state given the fiscal crisis in Europe.

But we have folks like Bernie Sanders openly arguing we should be more like nations such as Denmark and Sweden.

To give some credit to the Vermont Senator, he’s at least smart enough to pick Scandinavian nations that compensate for the damaging impact of high taxes and excessive spending by being very market-oriented in all other respects.

Though I suspect he’d be horrified to know that he’s basically endorsing a laissez-faire approach to policies such as trade and regulation.

But let’s set aside the quirky candidacy of Bernie Sanders and focus on whether the United States, as a general rule, should be more like Europe.

To be sure, this is a very imprecise way to look at the issue since “Europe” includes very market-oriented countries such as Switzerland and the United Kingdom (both of which rank above the United States for overall economic freedom) as well as very statist nations such as Italy, France, and Greece.

But if you take the average of European nations, there’s no question that the continent would be further to the left than America on the statism spectrum.

So we should be able to learn some lessons by making general comparisons.

Let’s go to the other side of the world to get some insight on this issue. Oliver Hartwich is an economist with the New Zealand Initiative, and he looks at the negative consequences of the welfare state in his new publication, Why Europe Failed. He starts by sharing the grim data on how the burden of government spending has increased.

Government spending as a percentage of GDP increased dramatically across Europe all through the 20th century (Table 1). …Since the immediate post-World War II and reconstruction era, government spending has increased to unprecedented levels. The most extreme case is France where the state now accounts for well over half of the economy. …These spending rises have not been driven by the core areas of government spending of law and order, defence and certain public goods. …these European countries spent almost 30% of GDP on welfare alone, which is more than the total of government spending before World War II.

And here’s the Table he referenced.

Very similar to the data I shared back in 2013 for the simple reason that we’re both citing the superb work of Vito Tanzi.

Oliver adds some analysis, noting that Europe’s voters have sold themselves into dependency.

Bread and circuses – or panem et circenses in the Latin original – were the means of bribing the masses in ancient Rome. Modern Europe is witnessing a similar phenomenon. …Unfortunately, it is often overlooked that government can only bribe the people with their own money. …Buying European citizens’ loyalty for their mixed economy welfare states has effectively enslaved them.

He then shares lessons for New Zealand, but they’re also lessons for the United States.

…we have to make sure we do not repeat Europe’s mistakes. …be watchful of the rise of the welfare state. In Europe, the welfare state was a means of buying political power. Of course, the bribed electorate always paid for its own bribes. However, the arrangement worked for as long as new spending commitments could be financed through higher taxes, more debt, or indeed a combination of both. As government spending has now reached around 50% of GDP, and as the debt load stands at worrying levels, the European welfare state model has reached its limits. … we have the luxury of being three or four decades behind Europe’s demography curve. But this does not have to mean that we will be experiencing Europe’s problems 30 or 40 years later. It should mean that we have 30 or 40 years of finding ways to prevent a European replay by finding different answers to the challenges facing Europe today.

Here’s a short video of Hartwich discussing his work and its implications.

Now let’s look at another source of information. And we’ll actually deal with an argument being peddled by Bernie Sanders.

In an article for the Mises Institute, Ryan McMaken looks at the assertion that the United States has the highest poverty rate in the developed world.

Bernie Sanders claimed that the United States has the highest rate of childhood poverty. …UNICEF…is probably the source of Sanders’s factoid… Sanders probably doesn’t even know what he means by “major country”.

Though maybe the OECD is the source of Senator Sanders’ data. After all, as Ryan explains, some organizations are completely dishonest in that their supposed poverty data actually measures income distribution rather than poverty.

We get much more insight, though, once we have a look at what UNICEF means by “poverty rate.” In this case, UNICEF (and many other organizations) measure the poverty rate as a percentage of the national median household income. …The problem here, of course, is that…the median income in the US is much higher than the median income in much of Europe. So, even someone who earns under 60% of the median income in the US will, in many cases, have higher income than someone who earns the median income in, say, Portugal.

McMaken then crunches the data to see what actually happens if you compare the poverty level of income in the United States to overall income in other industrialized nations.

So what’s the bottom line from this data?

The answer is that it’s better to be a “poor” person in the United States than an average person in many European nations.

…a person at 60% of median  income in the US still has a larger income than the median household in Chile, Czech Rep., Greece, Hungary, Portugal, and several others. And the poverty income in the US is very close to matching the median income in Italy, Japan, Spain, and the UK.

In other words, Bernie Sanders is wrong, UNICEF is wrong, and the OECD is wrong.

Poverty in the United States is not high.

Indeed, experts who have looked at actual measures of deprivation have concluded that the real poverty rate in the United States is relatively low. Even when compared with the more market-oriented countries in Northern Europe.

Last but not least, let’s look at one more Europe-America comparison, just in case the aforementioned data wasn’t sufficiently compelling. Check out this map showing how many young adults still live with their parents (h/t: Paul Kirby).

As pointed out above, Europe is not monolithic. The Northern European economies lean more toward free markets than the Southern European economies, so this map presumably captures some of that difference (though I imagine culture plays a role as well).

But for purposes of today’s analysis, our message is more basic. Simply stated, the United States should not be more like Europe. Instead, we should seek to be more like Hong Kong and Singapore.

Assuming, of course, that the goal is to have policies that promote prosperity.

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Get the Federal Government Out of Our Stomachs

Back in 2010, I joked that the Libertarian Party should give Barack Obama a Man-of-the-Year Award because his failed policies rejuvenated interest in limits of federal power.

Though, in retrospect, perhaps the GOP should have given Obama the Award since Republicans reaped the short-term benefits.

In any event, let’s not get distracted by electoral politics. That’s because we have another tongue-in-cheek award. It’s time for the Libertarian Party to give its Woman-of-the-Year Award to Michelle Obama.

Why? Because the First Lady has single-handedly managed to discredit the federal government’s program to subsidize school lunches.

In short, there are now all sorts of federal regulations and mandates that have simultaneously made the program most costly for schools and resulted in food that is less appealing to students.

In other words, she’s helping to teach the next generation that big government makes your life less pleasant. That’s usually a lesson young people don’t learn until they get their first paycheck.

Let’s look at the results of Ms. Obama’s handiwork.

Citing a report from the Government Accountability Office, the Wall Street Journal opines on how Washington has made the school lunch program become far less appealing.

America’s youth are voting with their forks: …participation has plunged for the second year in a row by 1.4 million children, or 4.5%, as they flee inedible government-designed cuisine. …In the name of better eating habits, the USDA has published 141 memos with mandates reaching down to quotas across “vegetable subgroups” and bans on salt and sandwiches. …this cookbook…runs to some 4,700 pages and counting… GAO auditors toured 14 schools in eight states for an on-site look at how kids and cafeterias are responding, and they report that the regulatory deluge is “overwhelming.”

Though I’m glad to see that some local governments and students are engaging in civil disobedience.

“…two had nevertheless been serving pasta that was not in compliance with the whole grain-rich requirement.” …The auditors found students in two schools who carried contraband salt shakers.

Gasp! Non-compliant pasta and contraband salt?!?

Surely it’s time to sic the IRS on these scofflaws.

Or maybe we should learn a different lesson, which the WSJ succinctly identifies.

This exercise has been an epic waste of food and taxpayer money.

Some statist readers doubtlessly are saying that the higher cost is worthwhile because students (even if they don’t like it) are being forced to eat healthier.

Um…not exactly.

Amazingly, the federal government managed to decrease consumption of fruits and vegetables (FV) even though that’s one of the main goals of the new rules. Here’s an excerpt from a scholarly study.

Since 2012, the USDA’s requirement that children select FVs at lunch as part of the reimbursable school meal has been met with concern and evidence of food waste. We compared elementary schoolchildren’s FV selection, consumption, and waste before (10 school visits, 498 tray observations) and after (11 school visits, 944 tray observations) implementation of this requirement using validated dietary assessment measures. More children selected FVs in higher amounts when FVs were required compared with when they were optional (0.69 cups vs. 0.89 cups, p,0.001); however, consumption decreased slightly (0.51 cups vs. 0.45 cups, p50.01) and waste increased (0.25 cups vs. 0.39 cups, p,0.001) when FVs were required compared with when they were optional.

As reported by the Washington Examiner, even the School Nutrition Association is not exactly happy with the federal government’s nanny-state approach to school lunches.

Schools nationwide are being forced to raid their education budgets to cover the costs of federally-mandated school lunches, rejected by students because they taste bad, according to a group the represents school nutrition professionals. Once a profit center for schools, cafeterias have become a financial black hole… And the deficits are being made up by cafeteria worker firings and budget shifting, according to the School Nutrition Association.

The Washington Examiner story represents an interesting development since it’s a sign of a schism between two interest groups – government workers and nanny staters – that normally are part of the same coalition.

So further kudos to Ms. Obama for causing discord on the left.

Though when push comes to shove, the nanny staters lose.

Here’s a real-world example of how the federal government has botched the program. A Montana school board has decided it makes more sense to reject handouts from Uncle Sam.

Bozeman school board members voted 5-3 to pull the high school out of the National School Lunch Program because federal regulations on calories, fat, sugar, sodium, whole grains and other nutritional elements championed by the first lady were driving students off campus for lunch… School officials realized it was financially advantageous to forgo $117,000 in federal food subsidies tied to the National School Lunch Program to draw students back into the cafeteria, and it seems they were correct. …Across the district, the food service program is $1,441 in the black so far for the 2015-16 school year. The food service budget ended last school year $16,000 in the red… And school food service workers told board members students are now getting high quality food from local sources, rather than pre-packaged meals promoted by the government.

Let’s now shift gears and look at other ways the federal government screws up when it gets involved with what goes in our stomachs.

For years, bureaucrats in Washington have tried to tell all of us, not just students, what we should eat and drink.

Well, it turns out that they were giving us bum advice. Here are a few excerpts from some analysis in the Washington Post.

U.S. dietary guidelines have long recommended that people steer clear of whole milk… Whole milk sales shrunk. It was banned from school lunch programs. Purchases of low-fat dairy climbed. “Replace whole milk and full-fat milk products with fat-free or low-fat choices,” says the Dietary Guidelines for Americans, the federal government’s influential advice book, citing the role of dairy fat in heart disease.

Was this advice helpful?

Not so much. At least if the goal is better health.

…research published in recent years indicates that the opposite might be true: millions might have been better off had they stuck with whole milk. Scientists who tallied diet and health records for several thousand patients over ten years found, for example, that contrary to the government advice, people who consumed more milk fat had lower incidence of heart disease.

By the way, it’s not just whole milk. One of my Cato colleagues, Walter Olson, points out that the government has a long track record of botching recommendations.

Previous advice from Washington about the supposed hazards of eggs and other cholesterol-laden foods, the advantages of replacing butter and other animal fats with trans fats, and the gains to be made from switching from regular to diet soda, have all had to be re-evaluated and sometimes reversed in later years.

So what lessons should we learn?

Let’s turn to David Boaz, another colleague from the Cato Institute. He succinctly explains that government shouldn’t be involved in our diets.

It’s understandable that some scientific studies turn out to be wrong. Science is a process of trial and error, hypothesis and testing. Some studies are bad, some turn out to have missed complicating factors, some just point in the wrong direction. I have no criticism of scientists’ efforts to find evidence about good nutrition and to report what they (think they) have learned. My concern is that we not use government coercion to tip the scales either in research or in actual bans and mandates and Official Science. Let scientists conduct research, let other scientists examine it, let journalists report it, let doctors give us advice. But let’s keep nutrition – and much else – in the realm of persuasion, not force. First, because it’s wrong to use force against peaceful people, and second, because we might be wrong. This last point reflects the humility that is an essential part of the libertarian worldview.

Very well said.

Let’s close with one final example to demonstrate the bad things that happen when the federal government gets involved with food.

Writing for the Foundation for Economic Education, my old buddy Jim Bovard explains how biased bureaucrats are deliberately exaggerating hunger in America.

The Agriculture Department announced this morning that 48 million Americans live in “food insecure” households. Soon you’ll hear we’re suffering an epidemic of hunger. While the federal government is already feeding more than 100 million Americans, we’ll be told that it just isn’t enough. But it isn’t true. “Food insecurity” is a statistic designed to mislead. USDA defines food insecurity as being “uncertain of having, or unable to acquire, enough food to meet the needs of all their members because they had insufficient money or other resources for food.”

But this doesn’t mean anyone is going without food, as Jim notes.

The definition of “food insecure” includes anyone who frets about not being able to purchase food at any point. If someone states that they feared running out of food for a single day (but didn’t run out), that is an indicator of being “food insecure” for the entire year — regardless of whether they ever missed a single meal. If someone wants organic kale but can afford only conventional kale, that is another “food insecure” indicator.

Needless to say, statists predictably use the federal government’s biased stats to push for…you guessed it…more government!

After the 2009 USDA food security report was released, President Obama announced that “hunger rose significantly last year. … My administration is committed to reversing the trend of rising hunger.” …USDA food security reports, by creating the illusion of a national hunger epidemic, have helped propel a vast increase in federal food aid in recent years. …The insecurity = hunger switcheroo is also fueling campaigns to compel schools to give free breakfasts to all kids after school starts each day. …USDA has never attempted to create an accurate gauge to measure actual hunger. Instead, citizens are supposed to be satisfied with federal reports that are little more than a subsidy for political grandstanding.

I know what lesson I hope people learn from the deceit, waste, and foolishness discussed today.

We should end any role for the federal government in food. That means ending all the misguided programs discussed above.

It also means abolishing the food stamp program and letting states decide whether such subsidies are desirable.

And it means shutting down the entire Department of Agriculture.

Like all sensible libertarians, I don’t like the idea of having the federal government in my wallet or my bedroom. Perhaps we also need to say we don’t want Washington in our stomachs either.

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The EITC: Washington’s Fastest-Growing Form of Income Redistribution

Federal government redistribution programs don’t work.

We’ve ignored the lessons of history about the dangers of government intervention, so is it any mystery that we now have millions of people mired in dependency.

Yet some people in Washington want to double down on failure.

Chris Edwards of the Cato Institute, joined by Veronique de Rugy of the Mercatus Center, are understandably distressed that so many politicians – on both sides of the aisle – want to expand the amount of money being redistributed by the federal government. In a new Tax and Budget Bulletin, they make a very compelling case that the so-called earned income tax credit should be abolished rather than expanded.

Here’s the big picture.

…the earned income tax credit (EITC)…is a huge program. In 2015 it will provide an estimated $69 billion in benefits to 28 million recipients. The EITC is the largest federal cash transfer program for low-income households. …While the EITC is administered through the tax code, it is primarily a spending program. The EITC is “refundable,” meaning that individuals who pay no income taxes are nonetheless eligible to receive a payment from the U.S. Treasury. Of the $69 billion in benefits this year, about 88 percent, or $60 billion, is spending.

Now let’s look at some of the details. As is so often the case with government programs, the EITC started small but then quickly expanded.

In the early 1970s, policymakers considered ways to combat the anti-work effects of the growing welfare state. But rather than reining in the welfare state, they decided to expand it in 1975 by enacting the EITC. The credit was aimed at reviving work incentives… Initially, it was a 10- percent wage credit with a maximum value of $400… The EITC is a much larger program today than in 1975. It has credit rates up to 45 percent and a maximum credit of $6,242 in 2015. … expansions in 1986, 1990, 1993, and 2009 greatly increased the costs. …The EITC has increasingly become a spending program over time. The refundable portion of benefits has risen from 70 percent in 1990 to about 88 percent today.

Here’s a chart from their study showing both the growing number of dependents and the growing burden on taxpayers.

I have to imagine that this makes the EITC the fastest-growing redistribution program in Washington.

Chris and Veronique then list some of the reasons why the EITC is a harmful form of income redistribution.

First, it drives down wages, which hurts low-skilled workers who can’t get EITC payments while also providing undeserved subsidies for employers.

One side effect of the EITC is that, to the extent it works by pushing down market wages, it ends up hurting low earners who receive no EITC or a small EITC— mainly childless workers. The labor-supply effect of the EITC also means that the program acts partly as a subsidy to businesses that hire lower-skilled workers because they are able to pay reduced market wages.

Second, while supporters correctly argue that the EITC encourages poor people to enter the labor force (the handouts are tied to earning money), they conveniently overlook the fact that the program penalizes people who want to work more hours and climb the economic ladder.

…people have an incentive to reduce hours worked in both the flat and phase-out ranges of the credit. As it turns out, about three-quarters of people taking the EITC are in those two ranges where the work incentives are negative. …Consider a single parent with two children, as in Figure 2. She would have a disincentive to increase her work effort in the large income range from $13,870 all the way to $44,454.

Here’s a table from the report. The last column shows the “phase-out rate,” which is akin to a marginal tax rate on workers as they seek to earn more income. Keep in mind that these workers, depending on their incomes, will also be paying the payroll tax and the income tax.

So it’s easy to see why poor people face very high marginal tax rates that discourage them from additional productive effort.

Third, the EITC is riddled with fraud.

The EITC error rate has been more than 20 percent since at least the 1980s. The Internal Revenue Service reports that the EITC error and fraud rate in 2014 was 27 percent, which amounted to $18 billion in overpayments.

Though I guess we shouldn’t be surprised. There’s lots of Medicare fraud, Medicaid fraud, Food Stamps fraud,  and disability fraud, so this just seems to be an inevitable additional cost when governments spend money.

Fourth, the EITC is absurdly complex (like other parts of the tax code).

The EITC is a particularly complex credit. Benefits change as income rises, with four phase-in rates and three phase-out rates. It is adjusted by filing status and number of children. The rules regarding child eligibility are complex due to issues such as separation and divorce. There are rules and calculations regarding earned income, investment income, and adjusted gross income. …For individuals, the IRS guidebook for the EITC (Publication 596) is 37 pages long. But the rules are so complicated that more than two-thirds of all tax returns claiming the EITC are done by paid preparers.

Fifth, like all other forms of government spending, it’s important to calculate the economic burden that is imposed when resources are taken from the productive sector of the economy and transferred to government.

The process of extracting taxes damages the economy because it causes people to reduce their productive activities, such as working and investing. The harm from the behavioral responses to higher taxes is called “deadweight losses.” For the federal income tax, studies have found, on average, that the deadweight loss of raising taxes by a dollar is roughly 30 to 50 cents. … expanding the EITC—or any other federal spending program—would ultimately mean higher taxes, and thus more tax distortions and higher deadweight losses.

So what’s the bottom line?

Well, since great minds think alike, you won’t be surprised to see that Chris and Veronique also want to get the federal government out of the redistribution racket.

The EITC should not be expanded. Indeed, the best long-term solution would be to end the EITC, while also cutting other welfare programs… The credit creates a modest increase in workforce participation by single mothers, but that benefit is outweighed by the work disincentives during the phase-out range, billions of dollars of errors and fraud, substantial paperwork costs, and the damage caused by the higher taxes needed to fund the program.

Amen.

As I’ve repeatedly explained, redistribution programs are bad news for both poor people and taxpayers.

Yet our statist friends want to make the current system worse, with proposals for a government-guaranteed income. And they’re willing to lie to advance their agenda.

P.S. Click here for a video that explains why free markets are better than redistribution if you really want to help the less fortunate.

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Profound Thoughts from the Left: Up Is Down, Night Is Day, and Capitalism Is Coercion

A couple of days ago, I (sort of) applauded Senator Bernie Sanders. Not for his views, which are based on primitive redistributionism, but because he challenged Republicans to state whether they support capitalism.

And I think it would be very revealing to see which GOPers were willing to openly embrace free markets, hopefully for both moral and economic reasons.

But not let’s look at this issue from another perspective. Why do some folks on the left oppose capitalism?

I suppose there are several answers. Old-fashioned communists and socialists actually thought capitalism was inferior and they wanted the government to directly plan the economy, run the factories, and allocate resources.

Most leftists today admit that central planning doesn’t work and you need a market-based price system, so their arguments against capitalism usually are based on two other factors.

1. The rich somehow exploit the poor and wind up with too big a slice of the economic pie. The solution is high tax rates and redistribution.
2. Capitalism is inherently unstable, causing painful recessions. The solution is to have lots of regulations to somehow prevent bad things.

I think both those arguments are misguided since the first is based on the inaccurate presumption that the economy is a fixed pie and the second overlooks the fact that government intervention almost always deserves the blame for downturns and panics.

Today, though, I want to focus on a new argument against capitalism. Some guy named Matt Bruenig recently argued in the Washington Post that capitalism is coercive.

I’m not joking. This wasn’t parody. He really is serious that a system based on voluntary exchange is anti-freedom.

Here are some excerpts from his column.

Capitalism is a coercive economic system that creates persistent patterns of economic deprivation. …it is well established that capitalism is fundamentally built upon threats of force. …When the physical resources necessary for production are privately held in the hands of very few, as in the United States, the majority of the population is forced to submit itself to well-financed employers in order to live.

And how does he propose to deal with the supposedly coercive nature of capitalism?

Simple, the government should give everybody money so they don’t have to work

To secure freedom and prosperity for all, it may ultimately be necessary to supplement the welfare state with a universal basic income — a program that would provide all citizens with a basic level of financial support, regardless of whether they’re employed. …no amount of labor regulation can ever undo the fact that workers are confronted daily with the choice between obeying a supervisor or losing all their income. The only way to break the coercion at the core of the employment relationship is to give people the genuine ability to say no to their employers. And the only way to make that feasible is to guarantee that working-age adults, at least, have some way to support themselves whether they work or not.

Wow.

I don’t suppose Mr. Bruenig has thought through what happens if too many people decide to stop working so they can live off the “universal basic income.”

Call me crazy, but I suspect the number of people riding in the wagon would exponentially expand while an ever-growing share people pulling the wagon would decide to “go Galt.”

Of course, some leftists are smart enough to realize that somebody has to produce before the government can redistribute.

But anybody capable of writing these sentences obviously isn’t moored to reality.

True freedom requires freedom from destitution and freedom from the demands of the employer. Capitalism ensures neither, but a universal basic income, if successful, could provide both.

While he’s at it, why doesn’t he wave his magic wand so every little boy can play major league baseball and every little girl can have a pet unicorn?

I’ve previously expressed skepticism about the notion of a government-guaranteed income. The fact that Mr. Bruenig thinks it’s a good idea is confirmation that this idea should be rejected.

P.S. I have a Moocher Hall of Fame to celebrate disreputable deadbeats and a Bureaucrat Hall of Fame to highlight overpaid and underworked civil servants. Maybe it’s time to have some sort of Hall of Fame for statists who say make really bizarre arguments. Mr. Bruenig could join Mr. Murphy, Ms. vanden Heuvel, and Mr. Yglesias as charter members.

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Why Is the Obama Administration Allowing an International Bureaucracy to Push Tax Policies that Will Make America Companies Less Competitive?

Most normal Americans have never heard of the “Base Erosion and Profit Shifting” project being pushed by the tax-loving bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

But in the world of tax policy, BEPS is suddenly attracting a lot of attention, mostly because the business community has figured out it’s a scheme that would require them to pay more money to greedy governments.

I’m happy that BEPS is finally getting some hostile attention, but I wonder why it took so long. I started criticizing the project from the moment it was announced. Given the OECD’s dismal track record of promoting statist policy, there was zero chance that this project would result in good policy proposals.

Though I will say that the Wall Street Journal quickly recognized that the BEPS scheme was a ruse for tax increases on the business community.

And the editors of the paper have continued their criticisms as BEPS has morphed from bad concept to specific policy. Here are some passages from an editorial earlier this week.

…the Organization for Economic Cooperation and Development this week released its final proposals for combatting “base erosion and profit shifting,” or BEPS. …The OECD claims governments lose anywhere between $100 billion and $240 billion in revenue each year to such legal strategies, and it has spent two years concocting complex rules and new compliance burdens to stop it. Perhaps the worst of the OECD’s ideas is…country-by-country reports to every jurisdiction in which a company operates would detail operations in that area, and where it has paid tax on any relevant profits.

The WSJ is particularly concerned about proposals to require sharing of information with irresponsible and corrupt governments.

Ostensibly this…data would be kept confidential. Fat chance about that, especially if a high-taxing government thinks it has spotted an opportunity to grab more revenue or indulge some political grandstanding. A related proposal would require companies to hand over their so-called master files to governments. Those files, which detail global operations and intra-company transfers, are essentially guides to proprietary business strategies. Passing them to the authorities, and especially governments that run state-owned enterprises competing with multinational firms, is an invitation to mischief.

The OECD’s proposals also will mean higher compliance costs.

Companies could also be forced to spend years in courts and arbitration challenging potential new instances of the double taxation the current global tax system was developed to avoid. …Underlying all of this is the belief that the fiscal problems of the world result from insufficient tax collection, when the real culprit is anemic growth.

The final point in the above passage deserves special attention. Economic growth in many industrialized nations is relatively anemic because of bad government policy. And since people are earning less income and businesses are earning fewer profits, this means less revenue for government.

But rather than fix the policies that are causing sub-par growth, the politicians want to impose higher tax rates.

Needless to say, this will simply lead to less taxable income, making it even harder to collect revenue (this is the core insight of the Laffer Curve).

It’s also worth citing what the Wall Street Journal wrote over the summer on the BEPS issue. The editors started with an important observation about companies being able to invest in high-tax nations because they can protect some of their profits.

The global war on low tax rates entered a new stage… Hang onto your wallets—and your proprietary corporate data. …Governments have noticed that companies try to protect themselves from rapacious tax policies. …This is all legal for now, and a good thing too. Shielding profits from growth-killing taxes helps make investment and job creation in high-tax jurisdictions more economical.

And the editorial also warns about the dangers of giving dodgy governments access to more information, particularly when some of them will be incapable of protecting data from hackers.

The compliance burden these rules would impose counts as a new tax in itself. Despite some attempts to allow companies to file only one global disclosure in the jurisdiction of the corporate headquarters, in practice firms are likely to have to submit multiple, overlapping documents around the world. Sensitive corporate financial information would then be shared among global tax collectors. If you believe the OECD’s claim that all this will be kept confidential, have a chat with any of the millions of federal employees whose personnel files Uncle Sam allowed China to hack.

By the way, I don’t doubt for one second that companies push the envelope as they try to protect their shareholders’ money from government.

But less money for government is a good outcome. Particularly when politicians are imposing taxes – like the corporate income tax – that hurt workers by impeding capital investment.

The main thing to understand, at least from an American perspective, is that businesses have a big incentive to shift money out of the United States because politicians have saddled our economy with the world’s highest corporate tax rate, combined with the globe’s most punitive worldwide tax system.

Dealing with those problems is the right approach, not some money grab from an international bureaucracy. I shared these ideas in this brief presentation I made to an audience on Capitol Hill.

For what it’s worth, the chart I shared is all the evidence you could ever want that governments aren’t suffering from a lack of corporate tax revenue.

Moreover, while I don’t like OECD schemes to enable higher tax burdens, the BEPS project won’t equally affect all businesses.

Let’s look at how the project specifically disadvantages American companies (above and beyond the self-imposed damage from Washington).

Aparna Mathur of the American Enterprise Institute explains how BEPS will make a bad system even worse for US-based multinationals.

The U.S. has much to lose from a shift to this system. …the U.S. today has the highest corporate tax rate in the OECD. Under BEPS, this would affect the real decisions of firms to locate jobs and capital investment in the U.S.. In a recent report Michael Mandel points out that the BEPS principles will give multinationals a strong incentive to move high-paying creative and research jobs out of the U.S. since that is the easiest way to take advantage of low tax rates. …The current U.S. system of corporate taxation has many flaws. …the changes envisaged under the OECD’s BEPS project would make matters even worse.

This doesn’t sound good.

Some people have complained about corporate inversions, but it doesn’t hurt America when a company technically redomiciles in a nation with better tax law. After all, the jobs, factories, and headquarters generally remain in the United States.

But the way BEPS is structured, companies will have to move economic activity out of America.

Last but not least, Veronique de Rugy of the Mercatus Center identifies some major systematic flaws in the BEPS project. She starts by pointing out what the OECD wants.

Europe’s largest welfare states…are leading the charge through the Organisation for Economic Co-operation and Development to raise corporate tax rates globally. …The underlying assumption behind the base erosion and profit shifting, or BEPS, project is that governments aren’t seizing enough revenue from multinational companies. …Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations.

And then she explains what will be the inevitable result of higher tax burdens.

Far from filling government coffers in order to continue funding massive redistributive welfare regimes, BEPS will strangle global economic output and erode tax bases even further. …Corporations provide an easy political target for tax-hungry politicians, but the burden of corporate taxes falls on ordinary citizens. Employees, shareholders, and investors will bear the brunt of the OECD’s corporate tax grab, all because European politicians refuse to accept responsibility for building bigger governments than their economies can sustain.

So what is the Obama White House doing to protect American companies from this global tax grab?

The good news is that some folks from the Treasury Department have complained that the project is targeting U.S. multinationals.

The bad news is that the minor grousing from the United States hasn’t had an impact. Not that we should be surprised. Because of a shared belief in statism, the Obama Administration has worked to expand the OECD’s power to push bad tax policy around the world.

P.S. Since today’s topic is arcane yet important international tax issues, allow me to share an update on the horribly misguided FATCA law. As is so often the case, the op-ed page of the Wall Street Journal is the source of great wisdom.

Or, in this case, maybe it would be best to write “the source of great sadness and frustration.”

America is the only country that taxes citizens on their global earnings, and in 2010 Washington exacerbated that by passing the Foreign Account Tax Compliance Act, or Fatca. As this law comes into force, it is doing immense harm to…the 8.7 million U.S. citizens living abroad, who have essentially been declared guilty of financial crimes unless they can prove otherwise. …American leadership overseas, from volunteer organizations to the business world, has diminished. No one wants an American involved when their citizenship attracts a maze of rules, regulations, potential fines and criminal penalties. …It’s painful to witness the anguish of patriotic Americans as they contemplate giving up their U.S. citizenship, as record numbers have been doing. In 2014, 3,417 renounced their citizenship, a 266% increase over 2012, before Fatca came fully into effect.

Interestingly, the way to solve the FATCA problem is the same way to deal with the corporate inversion issue.

Simply shift to a territorial system.

The best solution is for the U.S. to join the rest of the world in taxing based on residency rather than citizenship. …Doing so would advance American fairness, mobility and economic competitiveness.

Sadly, only a handful of lawmakers, most notably Senator Rand Paul, are making noise on this issue.

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A Challenge to the GOP from Bernie Sanders: Put Up or Shut Up on Capitalism

While his policy ideas are horrifying, Bernie Sanders’ campaign is the source of some amusement.

He claims to represent a different vision, but his voting record according to the National Taxpayers Union is virtually identical to the ratings received by Barack Obama and Hillary Clinton when they were in the Senate.

He’s not even a real socialist, at least if we use the technical definition of this poisonous ideology, which is based on government ownership of the means of production. That being said, Democratic operatives such as Congresswoman Debbie Wasserman Schultz sound like fools on TV because they don’t even know the difference between genuine socialism and big-government redistributionism.

But I will give Sanders credit for his recent challenge to Republicans. He was being badgered about his supposed socialist orientation on a political news show and he turned the question on its head and asked whether Republicans would be willing to identify as being pro-capitalist.

Here’s an excerpt from a report in The Hill.

Sen. Bernie Sanders (I-Vt.) says he’s tired of questions about whether he’s a socialist, asking why more people don’t want Republicans to defend themselves as capitalists. “Look, when one of your Republican colleagues gets on the show, do you say, ‘Are you a capitalist?’” the Democratic presidential candidate said on NBC’s “Meet the Press” on Sunday. “Have you ever referred to them as capitalists?”

I think this is a good idea.

I’d like every single GOP candidate to be asked some version of Sanders’ question.

And if any of them displayed the slightest hesitation before offering a loud and unapologetic “yes” in support of capitalism, that would be a very good indication that they shouldn’t be trusted anywhere close to the Oval Office.

After all, how could anyone support big government over markets after watching these videos narrated by Don Boudreaux, Walter Williams, and Deirdre McCloskey?

Or how could anyone pick socialism (or any other form of coercive statism) after reviewing how market-based economies out-perform big-government economies?

Heck, I repeatedly ask my left-wing friends to identify just one big-government success story. I don’t ask for 10 nations that prospered with large governments. I don’t ask for five countries that might be considered successful examples of statist prosperity.

I just plead with them to give me one case study. And the only response is chirping crickets. Why? Because no nation has ever become rich during an era of big government.

So if any Republican candidate showed the slightest hesitation before extolling the glories of free markets, that person should be booed off the stage.

By the way, I can’t resist commenting on one other part of the story in The Hill about Sanders. The Vermont Senator apparently was asked to identify nations that are role models.

Did he list North Korea and Cuba, countries that actually still have genuine socialism?

Nope.

Did he list Venezuela or China, countries that have partial government ownership of the means of production?

Nope.

Instead he picked Denmark and Sweden.

The senator said he admires the social programs in nations like Denmark and Sweden, and he thinks “we can look to those countries” for guidance.

Since both those countries still have large welfare states with high tax rates and lots of redistribution, his answer is somewhat understandable.

But what about government ownership of the means of production and control over the allocation of resources? In addition to having big governments, is there a lot of intervention in markets?

Hardly. Indeed, if you take the data from Economic Freedom of the World and remove the fiscal policy variable (and thus measure the degree to which markets are allowed to operate), then Denmark and Sweden are both among the world’s top-10 nations for free markets.

And both rank above the United States!

So we have two nations that are more free market than America while also having bigger government than America. I’m not sure how to characterize this so-called Nordic Model, but it’s definitely not socialism.

The bottom line, though, is that you get the most growth when you have both free markets and small government. In other words, genuine capitalism.

That’s obviously not the agenda of Bernie Sanders, though I hope Republicans will be forced to answer his question and tell us whether they favor capitalism.

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Faux Outrage, Ben Carson, and the Right (and Obligation) of Self Defense

Like most Americans, I’m impressed by Dr. Ben Carson’s personal story and achievements.

But since I’m a policy wonk, I have to admit that I’m equally impressed by his instinctive understanding that a flat tax is both fair and good for growth.

Moreover, it’s also worth noting that one of my buddies from grad school is now his chief economic adviser.

So I’ve been observing his presidential campaign with interest and I view his steady climb in the polls as an indication that voters like the idea of a principled outsider.

But his political success means that he’s also a target. Anything he says is fair game for his opponents, particularly the folks in the establishment media who are reflexively hostile to what Dr. Carson represents.

And since he’s not a practiced politician with years of training in how to artfully discuss certain topics, he has given his opponents some material. His comments about whether he would vote for a Muslim created a kerfuffle about whether he favored a religious requirement for high office. And his comments on homosexuality being a lifestyle choice definitely rubbed people the wrong way.

That being said, the latest flareup regarding Dr. Carson’s comments about self defense strikes me at entirely contrived (at least I hope it’s contrived since other possible explanations are even more unseemly).

Here’s how a Washington Post report described Carson’s supposedly controversial remarks.

Ben Carson said Thursday that Adolf Hitler’s mass murder of Jews “would have been greatly diminished” if German citizens had not been disarmed by the Nazi regime. The comment, which came during an interview with CNN’s Wolf Blitzer, was similar to arguments Carson made following last week’s mass shooting at Umpqua Community College in Roseburg, Ore., in which he defended the Second Amendment and suggested that the victims should have fought the gunman.

Carson’s campaign says some people are trying to make a mountain out of a molehill.

…some…have called his remarks insensitive… Armstrong Williams, an adviser to Carson, said…that the average voter does not scrutinize candidates for verbal missteps. “They care about intent. I think people understand what Dr. Carson is trying to say.”

A column in The Hill was much more aggressive in portraying Dr. Carson’s remarks as being flawed and self-destructive.

A series of controversial remarks by Ben Carson is raising new questions about whether he’s ready to take the Oval Office. Carson this week suggested the Holocaust would have been less likely if Jewish people had been armed, and appeared to criticize the victims of an Oregon shooting for not fighting back. …The retired neurosurgeon drew the ire of Democrats, liberal advocacy and Jewish groups…strategists believe the comments will dog Carson down the stretch and could dissuade those from backing him.

Maybe I’m just strange, but this supposed controversy is baffling. Why is self defense against evil suddenly a bad thing?

Didn’t the heroic actions of the three Americans in Europe demonstrate that charging a crazed gunman can be successful? And even if they hadn’t been successful, isn’t it better to die fighting than die cowering? I hope I’m never in that situation, and I don’t know how I would react, but I hope it would be in a similar fashion.

Regarding resistance to the Nazis, I accept that Dr. Carson shouldn’t have said such efforts would have “greatly diminished” Hitler’s monstrous actions, but surely he’s right about the principle.

Let’s look at some of the reality from World War II. Writing for the Washington Post, David Kopel explains that armed resistance against the Nazis was quite effective.

During World War II, 30,000 Jewish partisans fought in Eastern Europe, in their own combat units. In Western Europe, …in France, Jews amounted to less than one percent of French population, but comprised about 15 to 20 percent of the French Resistance. One of the most successful battles of the Jewish resistance was the Warsaw Ghetto Uprising. Nearly every Jew who participated was eventually killed — but they were going to be killed anyway. By choosing to stand and fight, the Warsaw Jews diverted a significant amount of Nazis resources from battlefields elsewhere, thus hastening the Nazi defeat.

He provides extensive analysis of the Warsaw uprising that began in early 1943.

…an uprising began. In the beginning, the Jewish Fighting Organization had about 600 volunteers; the Jewish Military Association had about 400, and there were thousands more in spontaneous small groups. The Jews had only 10 handguns… After four days of fighting, the Germans on January 21 pulled back from the ghetto… Not only the Germans were shocked by the unexpected resistance, but also the Jews were astonished. They could not imagine until then that the beaten, exhausted victims could rise against a mighty enemy who had conquered Europe. …In February 1943, the Polish Home Army transferred 50 revolvers (many of them defective), 50 hand grenades, and four pounds of explosives to the Jews in the Warsaw ghetto. The Warsaw Jews also manufactured their own explosives, including Molotov cocktails.

The Nazis paid a heavy price.

The Germans suffered over a thousand casualties in the first week of fighting alone. The Germans had to spend more time subduing the Warsaw Ghetto than they did conquering the entire nations of Poland or France.

But since the Jews were hampered by having very few weapons, that made it easier for Hitler’s thugs to eventually prevail.

 The Warsaw Jews knew they had almost no chance of survival. They decided that it was better to die fighting than to die in a gas chamber. …the key impediment to resistance was shortage of arms. According to Holocaust historian Abram L. Sachar: “The indispensable need, of course, was arms. As soon as some Jews, even in the camps themselves, obtained possession of a weapon, however pathetically inadequate—a rifle, an ax, a sewer cover, a homemade bomb—they used it and often took Nazis with them to death.” Thus, “the difference between resistance and submission depended very largely upon who was in possession of the arms that back up the will to do or die.”

And what’s the bottom line?

…“If someone comes to kill you, rise up and kill him first,” says the Talmud. [Babylonian Talmud, Tractate Sanhedrin, folio 72a.] That is the best response to mass murderers — in 1943, today and always.

If the manufactured outrage about Dr. Carson’s remarks are any indication, though, it appears that some people don’t believe in fighting back.

I’m not sure why, but I can’t help but suspect that statists want people to depend on government. Even if that means they are more vulnerable. And even though governments historically are the biggest threats to human existence!

Here’s another column worth sharing. It’s by Clayton Cramer for PJ Media and it’s a review of Stephen Halbrook’s new book about the Nazis and gun control.

The basic message is that gun control started out for ostensibly benign reasons under the Weimar Republic, but then was used for evil purposes by Hitler’s gang.

Stephen P. Halbrook’s…latest book, Gun Control in the Third Reich: Disarming the Jews and “Enemies of the State,” is an astonishing piece of scholarship: complete, careful, and thoughtful. …Halbrook traces the development of German gun control law… The problem…, as some pointed out when mandatory registration was under discussion in 1931, “in chaotic times, the lists of firearms owners would fall into the wrong hands, allowing unauthorized persons to seize arms and use them to commit unlawful acts” (p. 29). The lists did fall into the wrong hands — the Nazi government, after the 1933 elections. And they did use them to seize arms, especially from Jews and other “enemies of the state.” …when the time came that German Jews started to be loaded up on railroad cars and shipped to concentration camps, the writing was on the wall, and more than a few knew that they had little chance of getting out of this alive. But by that point, the Nazi government had used the registration lists dating from the Weimar Republic to disarm most German Jews.

Cramer adds his two cents to the analysis, pointing out that more guns at least would have made life more difficult for the Nazis without making life more difficult for the Jews.

Perhaps rifles and pistols in the hands of Germany’s Jews would not have seriously delayed the Holocaust, but the example of the Warsaw Ghetto, where Polish Jews with ten rifles and a few dozen pistols delayed the German Army for six weeks, suggests otherwise. How could Germany’s Jews being armed for resistance have made anything worse?

And that’s basically the moral of the story for the modern fight over gun control.

Bad people will always have access to guns, regardless of their legality.

And in some cases, those bad people will be in control of the government. And the track record of dictators and tyrants is clear. They want a disarmed citizenry.

But if guns are legal for law-abiding people (or if the people can keep their weapons in spite of bad laws), then at least the good people have a way of protecting themselves if circumstances require strong action.

Some clever folks on the left may assert that it’s not an either-or situation because they’re simply talking about provisions to promote “common-sense gun safety.” But as discussed the other day, their real agenda is the banning and confiscation of privately owned weapons.

So it’s easy to understand why most supporters of the 2nd Amendment prefer Dr. Carson’s plain-spoken wisdom over President Obama’s smooth-talking statism.

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Alaska’s Oil-Fueled Spending Binge Violates Fiscal Policy’s Golden Rule, Leads to Budget Mess

If you look at oil-rich jurisdictions around the world, it’s easy to see why experts sometimes write about the “resource curse.” Simply stated, governments don’t have much incentive to be responsible when they can use oil as a seemingly endless source of tax revenue.

From the perspective of voters, this seems like a good deal. They can get lots of goodies from government without themselves paying much tax.

This is definitely a good description of how fiscal policy operates in Alaska, a state I just visited to give a speech to the Alaska Alliance.

But everything I said during my remarks will be familiar to regular readers, so instead I want to share some state-specific information from a presentation earlier this year by Professor Gunnar Knapp of the University of Alaska Anchorage. As you can see from one of his charts, the tax burden on households is very low.

But the fact that households don’t pay much tax doesn’t mean the Alaska government is starved of money.

That’s because the state, on average, collects 90 percent of its revenue from severance taxes on natural resources.

And since there’s a lot of oil, that adds up to a lot of revenue. A lot.

Here’s a map from the Tax Foundation, looking at per-capita state tax collections.

It turns out that Alaska is actually a very high-tax state, collecting more money than 48 other states. It’s just that one sector of the economy pays the overwhelming majority of that tax burden.

By the way, notice that oil-rich North Dakota has the highest tax burden and resource-rich Wyoming has the third-highest tax amount of tax revenue.

I suppose there’s some lesson to learn by comparing Alaska and Wyoming, which have lots of energy-related revenue and no state income taxes, with North Dakota, which has both.

But for purposes of today’s column, I want to emphasize a point about the boom-bust cycle and the value of spending caps.

Let’s return to Professor Knapp’s presentation and peruse a chart showing spending, revenue, and fiscal balance from 2005-present. Knapp’s slide puts the focus on surpluses and deficits, but I want to draw your attention to the fact that spending (the blue line) basically tripled from 2005 to 2013.

In other words, politicians in Alaska were not following Mitchell’s Golden Rule, which would have required them to limit spending so that it grew slower than the private sector.

Instead, they responded to the influx of oil revenue during the boom years the same way alcoholics respond to an open bar. They had a spending orgy.

It’s no surprise that more revenue enabled more spending.

That’s why it’s a mistake to “feed the beast.”

But let’s focus on the fact that Alaska is now in the midst of fiscal turmoil and make the very simple point that some sort of spending cap, starting back in 2005, would have prevented the current crisis.

If spending was limited so that it grew by 2 percent annually, outlays today would only be about $500 million higher than they were in 2005. Given the plunge in oil-related revenue, even that might not have been enough to balance the budget for 2015 or 2016, but the state would have had plenty of money in the state’s rainy day funds (technically known as the “statutory budget reserve fund” and the “constitutional budget reserve fund”) to fill in the fiscal gap.

And this is why spending caps are so important. Governments get in trouble because politicians have a hard time resisting the urge to spend money during growth years, when plenty of tax revenue is being generated.

I’ve made this point when looking at data from California. It also applies when looking at the fiscal mess in Puerto Rico. And Greece.

But perhaps most relevant for Alaska, it’s exactly when happened in oil-rich Alberta. Politicians from a supposedly conservative party in that Canadian province also went on a spending binge when energy prices were high. But then oil prices dropped, energy-related tax collections fell, the ruling party was defeated at the polls, and a new leftist government has used the over-spending mess as an excuse to impose additional taxes.

Yet none of that would have happened if Alberta had a spending cap.

Just as the crisis in Alaska wouldn’t exist if there had been some mechanism to stop politicians in Juneau from over-spending.

Needless to say, there’s also a lesson here for Washington (one that actually was heeded between 2009-2014, but the real key is permanent, structural spending restraint).

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In One Image, the Case for Ripping Up the Internal Revenue Code

I’m happy that many of the presidential candidates are proposing big tax cuts.

Bobby Jindal and Donald Trump have large tax cuts, and Jeb Bush, Rand Paul, and Marco Rubio are proposing smaller – but still significant – reductions in the federal tax burden.

All of these plans, to be credible, should be accompanied by proposals for a sustained reduction in the burden of government spending (with real enforcement mechanisms).

But there’s something else that needs to be part of the discussion. Yes, we need tax cuts and smaller government, but we also need radical tax simplification.

Consider this depressing chart showing the number of pages in the instruction manual for the IRS’s 1040 tax form.

Or the number of sections in the tax law, which has skyrocketed in the past four decades.

I think it’s fair to say that complexity is a proxy for corruption (and even the World Bank agrees with me). Our tax code is a Byzantine mess because interest groups and lobbyists conspire with politicians to swap loopholes for campaign cash.

Some say that this problem could be solved by restricting the First Amendment and limiting people’s ability to participate in the political process. But that’s naive. So long as we have a convoluted tax code, insiders will figure out how to curry favor with the political elite and manipulate the system to their advantage.

Rather than trashing the Constitution, we should be trashing the internal revenue code.

I have lots of economic arguments for fundamental tax reform and I can wax poetic about the harm of high tax rates and double taxation of saving and investment.

But this new chart from the Tax Foundation, showing the ever-growing number of words in the tax code, is probably the single most compelling argument for a simple and fair flat tax.

Wow. It doesn’t seem to matter which party is in power. It doesn’t seem to matter who controls the White House or who controls Congress. Just as the number of pages in the tax code keeps expanding, so does the number of words.

And I think all of us know that this relentless growth in complexity is not good for ordinary taxpayers.

The only winners are the cronyists, politicians, and other insiders who get rich by using the coercive power of government.

And don’t forget that a complicated tax code means a very powerful IRS, and we’ve seen how that leads to venal corruption.

Now let’s circle back to where we started. I mentioned that many presidential candidates have proposed big tax plans that reduce the amount of money flowing to Washington. Many of those plans also include partial reforms of the tax code.

• Governor Jindal and Senator Paul get rid of the corporate income tax.
• All the candidates abolish the death tax.
• Senator Rubio gets rid of almost all double taxation of income that is saved and invested.
• Most of the plans replace depreciation with expensing.
• Most plans also replace worldwide taxation with territorial taxation.

All of these components are desirable in that they both reduce the tax burden and simplify the tax system. And I could list other attractive partial reforms that are in the various tax plans.

But I can’t help but wonder why no candidate has explicitly embraced the gold standard of tax reform.

By the way, I’m ecumenical on a replacement system. There are other plans that satisfy the goals of real reform.

My only caveat, for those who advocate a national sales tax or value-added tax, is that we first need to repeal the 16th Amendment and replace it with something so ironclad that politicians could never do a bait and switch and saddle the American people with both an income tax and a consumption tax.

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If the President Wants “Common Sense” Gun Laws, He Should Support Liberalization rather than Confiscation

I don’t necessarily blame President Obama for seeking to politicize tragic mass shootings. His actions may be a bit unseemly, but also understandable if he truly believes that disarming law-abiding people is the best way to reduce carnage.

That being said, this charitable interpretation only applies if the President sincerely pushes his preferred policies.

Yet Charles Krauthammer, writing for National Review, points out that there’s a remarkable disconnect. The President constantly talks about the need to enact “common-sense gun-safety laws,” but he never tells us what those laws would be.

Within hours, President Obama takes to the microphones to furiously denounce the NRA and its ilk for resisting “commonsense gun-safety laws.” His harangue is totally sincere, totally knee-jerk, and totally pointless. …Nor does Obama propose any legislation. He knows none would pass. But the deeper truth is that it would have made no difference. …notice, by the way, how “gun control” has been cleverly rechristened “commonsense gun-safety laws,” as if we’re talking about accident proofing.

I’m not someone can be simultaneously sincere and evasive, but let’s set that aside.

Dr. Krauthammer explains that Obama engages in empty rhetoric because his real goal is truly radical and impractical.

the only measure that might actually prevent mass killings has absolutely no chance of ever being enacted. …As for the only remotely plausible solution, Obama dare not speak its name. He made an oblique reference to Australia, never mentioning that its gun-control innovation was confiscation… Obama can very well say what he wants. If he believes in Australian-style confiscation — i.e., abolishing the Second Amendment — why not spell it out? Until he does, he should stop demonizing people for not doing what he won’t even propose.

So why doesn’t the President say what he believes?

Is it because he respects the Constitution? (it was hard to write that sentence without laughing)

Is it because he knows it is political poison? (a rather plausible answer)

Is it because he knows it will lead to massive civil disobedience? (if Obamacare is any indication, he doesn’t care whether laws actually work)

I’m not sure what motivates the President, but this very clever video from Reason TV shows what would be needed to confiscate guns.

As we’ve come to expect from the folks at Reason, an excellent job of combining humor and reality. Sort of a mix of this satirical video and this fact-based video.

By the way, since many statists think Australia is a role model for gun confiscation. let’s take a closer look at that issue.

Here are two charts from the guys at Powerline Blog. The first chart shows the big drop in murder rates in the United States during a period when gun ownership was increasing and citizens enjoyed greater freedoms such as concealed carry.

Now look at the data on the murder rate in Australia, with special attention to the change (actually lack of change) following the 1996 gun ban.

John Hinderaker helpfully explains what is shown in these charts.

Whatever Australia did, it was not as successful in reducing homicides as what we have done here in the U.S. This chart comes from the Australian government. Note that there was no apparent reduction in homicides after the gun confiscation/ban/buyback of 1996. Years later, the homicide rate declined slightly, as it did throughout the developed world… But nowhere near as sharply as the homicide rate has declined here in the United States since the mid-1990s. Whatever we have done in the U.S., whether or not you credit more liberal carry laws and more widespread ownership of handguns, it has worked far better than the approach to homicide that has been taken in Australia

There are lots of factors that determine gun violence, of course, so I’m not hopeful many statists will be convinced by John’s comparison.

But I do hope that this evidence, when combined with all the other research on gun ownership and crime, may lead more middle-of-the-road people to the right conclusions.

In the meantime, our leftist friends can rely on their version of social science research.

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Governor Jindal’s Bold Reform Plan Slashes Revenue to DC, Abolishes the Corporate Income Tax

Give him credit. Most elected officials are content to tinker at the edges, but Governor Jindal of Louisiana actually wants to solve problems.

Look what he’s done, for instance, on fiscal policy.

He sought to abolish his state’s personal income tax, a step that would have dramatically boosted the states competitiveness.

That effort stalled, but he actually has been successful in curtailing state spending. He’s amassed one of the best records for frugality of all governors seeking the GOP presidential nomination.

And he’s now joined the list of presidential candidates seeking to rewrite the internal revenue code.

Since we’ve already reviewed the tax reform plans put forth by Rand Paul, Marco Rubio, Jeb Bush, and Donald Trump, let’s do the same for the Louisiana governor.

Regular readers hopefully will recall that there are three big problems with the current tax code.

1. High tax rates that undermine incentives for work and entrepreneurship.
2. Double taxation of income that is saved and invested, reducing capital formation and wages.
3. Loopholes that hinder economic efficiency by distorting the allocation of resources.

Let’s see whether Governor Jindal’s plan mitigates these problems.

On the issue of tax rates, the Louisiana Governor replaces the seven rates in the current system with three rates, starting at 2 percent. And instead of a top rate of 39.6 percent, the maximum penalty on work and entrepreneurship would be 25 percent.

He also abolishes the marriage penalty and gets rid of the alternative minimum tax (a perverse part of the code that forces people to calculate their taxes a second time, based on a different set of rules, with the IRS being the only beneficiary).

Regarding double taxation, one of the big problems in the current system is that corporate income is taxed at both the business level and the shareholder level. Most proposals seek to fix this problem by reducing or eliminating the tax burden on dividends on households. Governor Jindal, by contrast, would keep that tax and instead abolish America’s corporate income tax, which is probably the worst in the world.

In one fell swoop, that bold piece of reform also solves many other problems. You don’t have to worry about the tax bias of depreciation. You don’t have to worry about the anti-competitive policy of worldwide taxation. And you wipe out a bunch of corrupt tax preferences.

The plan also would create universal savings accounts that would be free of double taxation (a policy that has been very successful in Canada). Jindal’s plan also eliminates the death tax, though there would still be a capital gains tax.

Shifting to loopholes, the disappointing news is that the charitable deduction is untouched and the home mortgage interest deduction is merely trimmed. But the positive news is that the state and local tax deduction apparently goes away. And because the abolition of the corporate income tax automatically gets rid of the loophole for fringe benefits such as health insurance policies, the Governor also proposes to create an individual deduction for those costs.

The net effect of all these changes is that the tax code will be far less punitive.

The Tax Foundation is the go-to place for analysis on the economic and revenue impact of tax reform plans. Here’s what they predicted would happen to the economy if Jindal’s plan was adopted.

Now let’s end with two observations that may be more political than economic.

First, Jindal’s plan is a huge tax cut. About $10 trillion over 10 years according to the experts at the Tax Foundation. In this regard, Jindal is in the same league with Trump, who also proposed a very large tax cut. Paul, Rubio, and Bush, by contrast, have much more modest tax cuts.

This is a good thing, of course, assuming candidates have serious plans to restrain – and perhaps even cut – federal spending. I don’t lose sleep about whether there’s a balanced budget in year 5 or year 10, but a tax reform plan with a big tax cut isn’t serious unless there’s a concomitant proposal to shrink the burden of government spending.

Second, Jindal proposes to have all Americans pay some income tax. That’s the purpose of the 2-percent rate in his plan. His argument is quite explicit: “Every citizen needs to help row the boat, even if only a little.”

This is an appealing argument. While Mitt Romney was wrong in his assertion that 47 percent of the population was part of the dependent class, we don’t want too many people riding in the wagon and thinking government is “free.”

P.S. If you’re curious about Jindal’s position on other policy issues, he has a good track record on education. He implemented some good school choice reform, notwithstanding wretched and predictable opposition from the state’s teachers’ union.

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The Japanese Version of Another Great Moment in Government Incompetence

Remember the scene in Monty Python and the Search for the Holy Grail, when the Knights of the Round Table have to answer three questions before they can cross the Bridge of Death?

Sir Galahad is cast into the Gorge of Eternal Peril because he changes his mind when asked his favorite color.

I can sympathize because I would hate to be asked for a one-word description of government.

My first instinct would be say “stupid,” but that might not be the most mature response. So I’d probably say “wasteful.” But then I’d change my mind and say “corrupt.” As the bridge keeper was about to cast me to my death, I’d say “thuggish.” And my final choice as I fell into the gorge might be “incompetent.”

And I’d have lots of examples in mind for that final version, such as the time the Italian government appointed the wrong person to a job that shouldn’t even exist.

Or how about the British government being so incompetent that it created a new handout that was so poorly designed that nobody signed up.

I guess Japan’s government was inspired by the British counterparts, because Bloomberg reports that the Japanese government also is too incompetent to give away money.

Not a single Japanese company has applied for a government subsidy to encourage firms to promote women in the 17 months since the plan started. Under a labor ministry plan unveiled in April 2014, small and medium-sized companies that promote women are eligible to apply for a 300,000 yen ($2,500) payment per company, while larger firms can get 150,000 yen each. The ministry had budgeted 120 million yen to be distributed to about 400 companies.

So why didn’t companies want these handouts?

Probably because the government wanted them to waste a lot of time and energy and it simply wasn’t worthwhile.

The program requires companies to set their own numerical targets and achieve the goals within six months. Firms also need to offer at least 30 hours of training to educate their workforce about equal opportunity rights, according to the health ministry’s Megumi Kondo.

Needless to say, the right lesson to learn is that the government shouldn’t be trying to steer the market.

The profit motive and human preferences should determine how many women fill various positions in companies, not the arbitrary diktats of the political class.

Moreover, you would think Japan’s policy community would have more important things to worry about, such as the fact that  the IMF, BIS, and OECD all show the country on track for Greek-style fiscal chaos.

Or the fact that higher taxes are keeping Japan’s economy stagnant.

But I guess it doesn’t make sense to assume smart decisions by Japanese politicians. After all, they’re probably just as venal and short sighted as their American counterparts.

P.S. If I had to pick the most inane regulation on the planet, I’d probably select the Greek rule on stool samples. But, depending on my mood, the Japanese reg on coffee enemas might win the prize.

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Recycling: The Triumph of Feel-Goodism over Common Sense

Since it’s basically a way of protecting property rights, environmental protection is a legitimate function of government.

That’s the easy part. It gets a lot harder when calculating costs and benefits.

Everyone surely agrees that a chemical company shouldn’t be able to dump toxic waste in a town’s reservoir because the costs would out-weigh the benefits. And presumably everyone also would concur that banning private automobiles would be crazy because this would be another example of costs being greater than benefits.

But there’s a lot of stuff in between those extreme examples where agreement is elusive.

And I’ll admit my bias. I don’t trust the modern environmental movement, particularly the climate alarmists. There are just too many cases where green advocates act like their real goal is statism.

Moreover, the hypocrisy of some environmental dilettantes is downright staggering.

And they also seem to be waging a regulatory war on modern life.

I’m giving all this background to create context for an article I want to discuss.

John Tierney, a columnist for the New York Times. has a piece that debunks recycling. He starts by looking back 20 years.

As you sort everything into the right bins, you probably assume that recycling is helping your community and protecting the environment. But is it? Are you in fact wasting your time? In 1996, …I presented plenty of evidence that recycling was costly and ineffectual, but its defenders said that…the modern recycling movement had really just begun just a few years earlier, they predicted it would flourish as the industry matured and the public learned how to recycle properly.

So what’s happened over the years? Has recycling become more feasible and rational?

Not exactly. From a cost-benefit perspective, it’s a scam. It simply doesn’t make sense.

…when it comes to the bottom line, both economically and environmentally, not much has changed at all. Despite decades of exhortations and mandates, it’s still typically more expensive for municipalities to recycle household waste than to send it to a landfill. …the national rate of recycling has stagnated in recent years. …The future for recycling looks even worse. As cities move beyond recycling paper and metals, and into glass, food scraps and assorted plastics, the costs rise sharply while the environmental benefits decline and sometimes vanish. …“Trying to turn garbage into gold costs a lot more than expected…”

Tierney specifically addresses the issue of greenhouse gasses.

…well-informed and educated people have no idea of the relative costs and benefits. …Here’s some perspective: To offset the greenhouse impact of one passenger’s round-trip flight between New York and London, you’d have to recycle roughly 40,000 plastic bottles, assuming you fly coach. …if you wash plastic in water that was heated by coal-derived electricity, then the net effect of your recycling could be more carbon in the atmosphere.

A traditional argument for mandated recycling is that landfill space is vanishing.

But that’s always been bunk.

One of the original goals of the recycling movement was to avert a supposed crisis because there was no room left in the nation’s landfills. But that media-inspired fear was never realistic in a country with so much open space. In reporting the 1996 article I found that all the trash generated by Americans for the next 1,000 years would fit on one-tenth of 1 percent of the land available for grazing. And that tiny amount of land wouldn’t be lost forever, because landfills are typically covered with grass and converted to parkland… Though most cities shun landfills, they have been welcomed in rural communities that reap large economic benefits (and have plenty of greenery to buffer residents from the sights and smells).

Moreover, incinerators are another practical option.

Modern incinerators, while politically unpopular in the United States, release so few pollutants that they’ve been widely accepted in the eco-conscious countries of Northern Europe and Japan for generating clean energy.

The bottom line is that recycling is an expensive feel-good gesture by guilt-ridden rich people.

In New York City, the net cost of recycling a ton of trash is now $300 more than it would cost to bury the trash instead. That adds up to millions of extra dollars per year — about half the budget of the parks department — that New Yorkers are spending for the privilege of recycling. That money could buy far more valuable benefits, including more significant reductions in greenhouse emissions. …why do so many public officials keep vowing to do more of it? Special-interest politics is one reason — pressure from green groups — but it’s also because recycling intuitively appeals to many voters: It makes people feel virtuous, especially affluent people who feel guilty about their enormous environmental footprint.

I don’t have a strong opinion on whether rich people should feel guilty about their resource consumption.

But I definitely get agitated when they try to atone for their guilt by foisting costly and ineffective policies on other people.

P.S. That’s why I consider myself to be pro-environment while also being a skeptic of environmentalists. Simply stated, too many of these people are nuts.

• Environmentalists assert that you’re racist if you oppose their agenda.
• Some environmentalists don’t believe in bathing,
• How about the environmentalists who sterilize themselves to avoid carbon-producing children,
• Or consider the environmentalists who produce/use hand-cranked vibrators to reduce their carbon footprint.
• There are also environmentalist who claim that climate change causes AIDS.
• And environmentalists put together a ranking implying that Cuba is better than the United States.
• The environmentalists who choose death to lower their carbon footprints.

P.P.S. Some environmental policies lead to disgusting examples of government thuggery (some of which, fortunately, are not successful).

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Chile’s Private Social Security System Should Be Globally Emulated, not Locally Emasculated

Chile is one of the world’s economic success stories.

Reforms in the 1980s and 1990s liberalized the nation’s economy and resulted in rapid increases in economic growth and big reductions in poverty.

Unfortunately, the current government is pushing policy in the wrong direction.

This drift toward statism has been unfortunate, featuring higher tax burdens, more spending, and increased intervention.

But I’ve always assumed that Chile’s private pension system would be safe from attack. After all, as noted in a new column for Investor’s Business Daily by Monica Showalter, it’s been a huge success.

Chile’s 35-year old private pension program…is working spectacularly well. …savings, ownership, control, responsibility and wealth building…are the pillars of the Chilean Model — and have as their ultimate reward a comfortable retirement, which Chileans now do.

But Monica warns that an ongoing education campaign is necessary to make sure that workers realize the benefits of the system.

And that’s been lacking.

…successive socialist governments in Chile have pretty well limited their recognition of the Chilean Model to criticism of it, many of them still unhappy that it’s not a state model that’s providing such high returns. …All the issues that had been called problems were largely the result of widespread public ignorance of economics…the people who should know better aren’t educating the public.

Given that Chile has enjoyed such strong growth in recent decades, you would think ordinary people would be happy, even if they’re not aware of the relationship between pro-market reforms and rising living standards.

And since Chile has grown far faster than other nations in Latin America, you would think that the political elite actually would understand that there is a strong relationship between economic freedom and national prosperity.

But that’s not the case, and the current left-leaning government is an obvious example. It even created a commission to review Chile’s pension system, and that decision was perceived as an effort – at least in part – to undermine support for the private system.

Fortunately, it’s very difficult to look closely at the Chilean system and conclude that personal retirement accounts have been unsuccessful.

Professor Olivia Mitchell of the Wharton School at the University of Pennsylvania served on the Commission and wrote a column based on that experience for Forbes.

She starts by acknowledging Chile’s personal retirement accounts are a gold standard for reform and then asks why there’s a desire to change something that works.

Chile’s retirement system has been hailed as “best in class” by pension experts near and far. The country’s fabled individual and privately-managed accounts include around 10 million affiliates, hold $160 billion in investments, and pay retirement benefits to over a million retirees. So why did President Michelle Bachelet establish a Pension Reform Commission that just delivered to her 58 specific reforms and three comprehensive proposals to overhaul remodel Chile’s retirement system?

A benign explanation for the Commission is that it’s a helpful way of helping people learn about the system.

Ms. Mitchell (no relation, by the way) points out that workers in Chile suffer from genuine and widespread ignorance.

…only a handful (19% of men, 11% of women) know how much they contribute to the accounts: 10% of pay. This underscores my own research showing that most Chileans had no idea how much they paid in commissions, how their money was invested, or how their benefits would be determined at retirement. Only one-fifth of the participants had the faintest idea about how much money they held in their accounts (even within plus or minus 20%!).

But if those people paid close attention, they’d learn that the private system – particularly when combined with the government’s safety net – does a very good job of protecting the less fortunate.

Chile’s retirement system actually does a rather remarkable job of protecting against old age financial destitution. …Adding the means-tested to the self-financed pension generates replacement rates of about 64%, levels even above what retirees in the US get from social security.

Nonetheless, some of the Commissioners want to weaken the current system and give government a bigger role.

Prof. Mitchell is not impressed by their thinking.

…reforms offered by others on the panel have a major flaw: these would – slowly or rapidly – eat into the money so painstakingly built up in the private accounts over time. My view, along with the majority of the Commissioners, was that wrecking Chile’s funded pension system is not the answer. Instead, this would destroy decades of national saving and economic growth, not to mention the well-being of future generations. This is an especially critical concern in view of Chile’s rapid aging: this nation is set to become the oldest country in South America within 15 years. …Chile needs a resilient retirement system that encourages continued work, incentivizes saving, and offers credible pension promises that can actually be paid when the time comes. It would be unfortunate to see Chile dismantle the system that has done so well for so many, over the past 35 years.

The good news, as you can see from the column, is that most Commissioners don’t want radical changes to Chile’s private pension system.

This is a positive outcome. Assuming, of course, that the current left-wing government follows their recommendations.

What we don’t know, though, is whether other governments learn any lessons from all this analysis.

America’s Social Security system has gigantic unfunded liabilities, for instance, and many other nations also have big fiscal shortfalls in their tax-and-transfer systems operated by their governments.

The right answer is a transition to personal retirement accounts. That’s what will happen if policy makers from elsewhere in the world learn from Chile’s success.

P.S. This comparison of Chile and Cuba tells you all you need to know about markets vs statism.

P.P.S. Here’s a comparison of real savings in Australia’s system of private accounts compared to the growing debts of America’s pay-as-you-go government-run system.

P.P.P.S. If you want to see a strong case for personal retirement accounts, click here for an explanation from the man most responsible for Chile’s remarkable reforms.

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The Statism Spectrum and the Texas Grocery Store that Helped Push the Evil Empire on to the Ash Heap of History

Whenever I need to explain the difference between socialism and capitalism, I start by noting that socialism technically is different from Obama-style big-government redistributionism and cronyism.

Socialism involves something more pervasive, involving government ownership of the means of production (which, if you read this postscript, is why Jeremy Corbyn in the United Kingdom is far more radical than previous Labour Party leaders).

It also means eviscerating the competitive price system as a means of determining value and allocating resources, relying instead on politicians and bureaucrats to arbitrarily wield that power (some American politicians favor this latter approach in certain circumstances).

Needless to say, socialism has an unmatched track record of failure. It was such a disaster than only a few supposedly high-ranked academics (see this postscript) thought it worked.

But what about high-ranked communists who grew up under socialism. Did they think it worked?

The Houston Chronicle dug into its archives to produce a story about an incident that may have played a big role in history. It’s about a senior communist functionary who was exposed to a slice of capitalism.

Yeltsin visited mission control and a mock-up of a space station. According to Houston Chronicle reporter Stefanie Asin, it wasn’t all the screens, dials, and wonder at NASA that blew up his skirt, it was the unscheduled trip inside a nearby Randall’s location. Yeltsin, then 58, “roamed the aisles of Randall’s nodding his head in amazement,” wrote Asin. He told his fellow Russians in his entourage that if their people, who often must wait in line for most goods, saw the conditions of U.S. supermarkets, “there would be a revolution.” …In the Chronicle photos, you can see him marveling at the produce section, the fresh fish market, and the checkout counter. He looked especially excited about frozen pudding pops. “Even the Politburo doesn’t have this choice. Not even Mr. Gorbachev,” he said.

This random trip to a typical supermarket may have changed history.

About a year after the Russian leader left office, a Yeltsin biographer later wrote that on the plane ride to Yeltsin’s next destination, Miami, he was despondent. He couldn’t stop thinking about the plentiful food at the grocery store and what his countrymen had to subsist on in Russia. In Yeltsin’s own autobiography, he wrote about the experience at Randall’s, which shattered his view of communism, according to pundits. Two years later, he left the Communist Party and began making reforms to turn the economic tide in Russia. …“When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people,” Yeltsin wrote. “That such a potentially super-rich country as ours has been brought to a state of such poverty! It is terrible to think of it.”

Since the Soviet Union was mired in poverty at the time, Yeltsin presumably was speculating about the potential wealth of his country.

And the good news is that the rigid communism of the Soviet Union is gone. Heck, the Soviet Union doesn’t even exist. Reagan was right when he predicted  the triumph of freedom, with Marxism being relegated to the “ash heap of history.”

But the bad news is that Russia (the most prominent of the 15 nations to emerge after the crackup of the Soviet Union) is a laggard on economic reform. There was a shift away from close-to-pure communism in the 1990s, to be sure, but the country still has a long way to go before it can be considered capitalist.

Here’s a back-of-the-envelope “statism spectrum” that I created. It’s designed to show that there are no pure libertarian paradises, not even Hong Kong. And there are no pure statist dystopias, not even North Korea (though that despotic regime is as close to pure evil as exists in the world).

Russia, I’m guessing, would be somewhere between China and Mexico.

And this gives me a chance to close with an important point.

Perfect economic policy almost surely is an impossible goal. But that’s fine. We can still enjoy good growth so long as we strive to at least move in the right direction. As I explained back in 2012, the private sector is capable of producing impressive results so long as it has sufficient breathing room to operate.

P.S. If you want a simpler and more amusing explanation of different economic systems, here’s the famous “two cows” approach.

P.P.S. The United States isn’t a socialist nation, but we’re not fully immune to that destructive virus. After all, we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all things that would function far more efficiently in the private sector.

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The Disgusting Corruption of America’s Political Class

Back in March, I asked why Republican presidential candidates were willing to openly violate federal anti-bribery law by supporting agriculture subsidies in exchange for campaign loot.

My question was merely rhetorical, of course, since politician supposedly aren’t violating the law because the money goes to their campaigns rather than their personal bank accounts.

But that doesn’t change the fact that there’s a sleazy quid pro quo.

If you think I’m exaggerating, you’ll change your mind after reading these excerpts from a column by the superb muckraking journalist Tim Carney.

The target of his piece in the Washington Examiner is Congressman Stephen Fincher of Tennessee.

Congressman Stephen Fincher…, once an opponent of the Export-Import Bank —a federal agency that subsidizes foreign buyers of U.S.-made goods — now is trying to undermine his party’s leadership by teaming up with Nancy Pelosi and her party in order to reauthorize Ex-Im Bank as President Obama and his big donors in the business lobby have demanded. …Fincher has pulled up his Tennessee roots and is now firmly planted in D.C. Instead of serving Western Tennessee, Fincher..now represents Wall Street and K Street.

Is this hyperbole?

Well, check out what Tim found out about his fundraising.

Fincher has raised a quarter-million for his re-election, according to his most recent campaign finance filing. Exactly two of his approximately 150 donations have come from Tennessee residents. Tennessee residents have given Fincher a combined $750, which rounds to 0 percent of his money raised.

And why are out-of-state donors lining up to give Fincher money?

Draw your own conclusions.

Fincher introduced his bill to reauthorize Ex-Im on Jan. 28. Two days later his campaign deposited a $2,000 check from General Electric, Ex-Im’s second-largest beneficiary and most ruthless defender. …Boeing (which benefits from 40 percent of Ex-Im subsidies) and United Technologies chipped in about a week and a half later. All of Ex-Im’s top beneficiaries, exporters and lenders (notably Ex-Im’s leading lender JPMorgan), have given to Fincher’s re-election.

The corrupt Ex-Im Bank is just one example of the for-sale sign in Fincher’s office.

Odious agriculture subsidies also can be purchased, even though none of the loot winds up in the pockets of Tennesseans.

Fincher has voted to protect the federal sugar program, whereby our government keeps out foreign sugar and issues taxpayer-backed loans to guarantee high prices for U.S. sugar growers. This hurts families, U.S.-based foodmakers and the economy, while benefitting a handful of privileged sugar companies. Tennessee produces no sugarcane or sugar beets… But Fincher’s donors do. Sugar Cane Growers of Florida PAC, American Crystal Sugar PAC, American Sugar Cane League PAC, Florida Sugar Cane League PAC, Southern Minnesota Beet Sugar Co-Op PAC and the U.S. Beet Sugar PAC are all Fincher donors and all beneficiaries of the corporate welfare Fincher supports.

By the way, I should hasten to add that this doesn’t mean that Fincher is especially corrupt by congressional standards.

Or that he’s completely bad. I’ve made the point before that most politicians are a combination of good and bad characteristics.

It’s like they have a devil on one shoulder whispering bad advice and an angel on the other shoulder trying to get them to do the right thing.

And when the devil has a lot of PAC checks and the angel is a wonky think tank economist like yours truly, the bad guys oftentimes triumph.

But not always. Fincher, for instance, has voted for budgets based on genuine entitlement reform. And in the grand scheme of things, reining in those programs is much more important to the nation’s long-run fiscal health than curtailing sleazy corporate welfare.

That’s still no excuse, though, for Fincher’s behavior. He’s using the coercive power of government to steal from one group of people in order to provide unearned and undeserved goodies for another group.

Democrats do the same thing, of course, and they’re quite promiscuous. They seemingly favor all forms of redistribution, ranging from traditional welfare to corporate welfare.

But you can make a strong argument that Republicans are being even more immoral since they generally redistribute from the poor and middle class to the rich.

P.S. Since I’m not feeling particularly charitable to the political class, let’s close with some biting humor against the crowd in Washington.

Regular readers know I’m not a big fan of Pope Francis, and I’ve shared some criticism based on the insights of Walter Williams and Thomas Sowell.

But I definitely think this clever image is worth sharing.

Reminds me of this Star Wars-themed joke about Washington.

P.P.S. If you like mocking the political class, I have lots of other material for you to enjoy. You can read about how the men and women in DC spend their time screwing us and wasting our money. We also have some examples of what people in Montana, Louisiana, Nevada, and Wyoming think about big-spending politicians.

This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting.

Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry.

Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

P.P.P.S. One serious point. If we want to clean up corruption in Washington, more campaign finance laws won’t work. The only way to reduce corruption is to shrink the size of government.

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Looming Republican Surrender on Spending Caps?

What’s worse, Democrats who deliberately seek to make government bigger because of their ideological belief in statism, or Republicans who sort of realize that big government is bad yet make government bigger because of incompetence?

I’m not sure, though this is a perfect example of why I often joke that Washington is divided between the Evil Party and the Stupid Party.

And the fight over spending caps is a perfect example.

President Obama and the Democrats despise this small bit of fiscal discipline, which was created as part of the 2011 Budget Control Act (BCA). They’re aggressively seeking to eviscerate the law, particularly the sequester enforcement mechanism. And since they believe in bigger government, their actions make sense.

Republicans, by contrast, claim to believe in smaller government and fiscal responsibility. So they should be in the driver’s seat on this fight. After all, the BCA is the law of the land and the spending caps – assuming they are not changed – will automatically limit overspending in Washington. In other words, the BCA fight is like the fight over reauthorizing the corrupt Export-Import Bank. Republicans can win simply by doing nothing.

Seems like a slam dunk win for taxpayers, right?

Not exactly. With apologies for mixing my sports metaphors, the Republicans are poised to fumble the ball at the one-yard line.

Which would be a very depressing development. In this interview, I explain that preserving the spending caps should be the most important goal for advocates of limited government.

And you’ll see that I also explained that fighting for good policy today is necessary if we want to avoid huge fiscal problems in the future.

But that doesn’t seem to matter very much for a lot of Republicans.

Let’s look at what other fiscal policy experts are saying about this issue.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the key to good fiscal policy (including tax cuts) is to have effective and enforceable long-run spending restraint.

If lawmakers want big tax cuts, there will need to be commensurately greater levels of spending restraint. The difficulty, of course, is to persuade politicians to implement such spending constraints and actually stick to them in the long run.

Amen.

That’s basically the same message I shared yesterday.

President Obama, however, has threatened to veto the budget and shut down the government if Congress doesn’t agree to bust the current spending caps.

And plenty of Republicans, either because they also want to buy votes with other people’s money or because they’re scared of a shutdown fight, are willing to throw in the towel.

The battle isn’t lost, at least not yet, but it’s very discouraging that this fight even exists. Controlling discretionary spending should be the easy part.

After all, if politicians balk at the modest requirements of the BCA, what hope is there that they’ll properly address entitlements? As Veronique notes, those are the programs that are driving America’s long-run fiscal crisis.

…the only realistic way to limit spending growth to 2 or 3 percent per year is to reform the fastest-growing programs in our budget, or the so-called entitlements.

What makes this issue especially frustrating is that we know sustained spending restraint is possible.

Nations such have Switzerland have shown how spending caps produce very positive results.

But that requires some commitment for good policy by at least some people in Washington.

And that may be lacking. In a column for the Wall Street Journal, Steve Moore takes a closer look at how GOPers are poised to throw away their biggest fiscal victory of the Obama years.

Let’s start with an excerpt illustrating how the BCA and sequestration have worked.

…the Budget Control Act helped slam the brakes on Mr. Obama’s first-term spending spree. …In 2009 the federal government accounted for nearly a quarter of the American economy, 24.4%. That fell by 2014 to 20.3% of GDP.

He’s right. I’ve shared similar numbers showing how Obama’s spending binge was halted.

And that’s led to the biggest five-year reduction in the burden of government spending since the end of World War II.

But fiscal sobriety needs to be sustained. Deciding to have “just one drink” at the big spender’s bar is not a good way to stay on the wagon.

And Steve shares some bad news on this issue.

Congress and the White House are quietly negotiating a deal for the new fiscal year that would bust the spending caps that have brought down the deficit. Breaking the caps yet again—this would be the third violation in four years—is lousy policy. …the GOP is reportedly forging a compromise with Mr. Obama that would raise the caps by $70 billion to $100 billion. …What’s worse, the deal would likely raise the spending caps permanently, meaning…nearly $1 trillion…over the next decade.

By the way, there’s a reason why this sounds like déjà vu all over again. Republicans already agreed to bust the spending caps at the end of 2013.

That was an unambiguous victory for Obama.

And now it may happen again. Steven discusses the implications of this looming GOP surrender.

The mystery is why Republicans are so ready to throw away their best fiscal weapon… Liberals hate the sequester because it squeezes their favorite programs, from transit grants to Head Start. But it is the law of the land. President Obama can do nothing to circumvent the sequester—unless Republicans in Congress cave in. …Busting the spending caps will only reverse progress toward a balanced budget, fatten liberal social programs, and confirm what many tea-party voters have been shouting for years: that Republicans break their promises once elected.

For all intents and purposes, the battle over BCA spending caps is a huge test of GOP sincerity. Do they really believe in limited government, or is that just empty rhetoric they reserve for campaign speeches.

P.S. Some Republicans argue that they favor smaller government, but that the sequester is “unfair” and the spending caps are too “harsh” because the defense budget is disproportionately affected.

It’s true that the defense budget is being capped while most domestic spending (specifically entitlement programs) is left unconstrained. But that doesn’t mean the nation’s security is threatened.

Defense spending still grows under these laws and our military budget is still far bigger than the combined budgets of all possible adversaries.

For further information, read George Will’s sober analysis and also peruse some writings by Mark Steyn and Steve Chapman.

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