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Archive for March, 2017

Certain redistribution programs are called “entitlements” because anybody who meets various criteria is “entitled” to automatically get money or other benefits.

Economists worry that such programs (particularly the “means-tested” entitlements) create perverse incentives since some people will choose to work less and earn less in order to maximize the amount of handouts they receive. Such behavior is immoral, but understandable. People learn that if they make sacrifices and work more, the reward is taxation, whereas if they work less (or not at all), the reward is freebies from the government.

And the problem presumably is worse in places where there is a greater amount of redistribution (if you’re curious, here’s the data on which states and countries have the most profligate package of benefits).

But the problem goes beyond simply luring people into idleness with bad incentives. When politicians create programs that give away money, they also create opportunities for outright fraud. Which is a pervasive problem, as illustrated by these examples.

Let’s travel to Minnesota to get a sense of the magnitude of the problem.

Minnesota’s Pioneer Press reports on a government audit that found one-third of welfare recipients improperly received handouts.

A review by Minnesota’s legislative auditor has found that some of Minnesota’s welfare programs do a poor job of ensuring benefits don’t go to ineligible people… It found significant error rates in the Temporary Assistance For Needy Families program, which provides cash and other benefits to low-income families with children. …the audit found eight of 24 families it reviewed weren’t eligible for benefits they received.

That’s not a large sample size, so we don’t know if the actual overall error rate is higher or lower than 33 percent, but the audit certainly suggests that there is a major problem.

It’s also not clear how much of the problem is caused by accident and how much is caused by fraud. Presumably the latter, but it’s quite possible that some people aren’t knowingly bilking the system.

But in some cases, there’s no ambiguity. The Sun has a horror story about a stunning case of welfare fraud.

Fozia Dualeh, 39, was charged with felony theft in Anoka County District Court, as prosecutors say she received $118,000 in government aid over roughly an 18 month period. According to the complaint, Dualeh exploited three public benefit programs from January 2015 to August 2015 which included $24,176 in food support, $85,582 in child care assistance and $8,996 in medical assistance overpayments.

Wow, almost $120K over 1-1/2 years. That’s an impressive haul, though perhaps not too surprising given the dozens of handout programs that – when combined – make idleness relatively lucrative.

In any event, Ms. Dualeh claimed she was eligible for that huge package of handouts because her husband was no longer part of the family.

But that wasn’t true.

A search of the home by authorities in late October 2015 led to the discovery of Dualeh’s husband, who is also the children’s father, Abdikhadar Ismail, hiding under a blanket in the master bedroom, charges said. Several articles of mens clothing were found in a chest, as well as numerous documents and mail throughout the home belonging to Ismail. Ismail also listed the family’s address on two vehicles and with his employer, a residential health care business.

Given the large sums of money involved, the Center of the American Experiment probably deserves an award for most-understated headline on this issue.

Though at the risk of being a pedantic libertarian, I would prefer if the headline said “Lucrative” instead of “Profitable.” After all, as Walter Williams has explained that profit is a meritorious reward for serving others.

But we can all probably agree that Ms. Dualeh deserves membership in the Moocher Hall of Fame.

P.S. I wouldn’t be surprised if Ms. Dualeh was introduced to the welfare system thanks to America’s poorly designed refugee program.

P.P.S. On the broader issue of redistribution and economics, this Wizard-of-Id parody contains a lot of insight about labor supply and incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

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I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.

And it’s also worth noting that revenues are going up, even without any additional tax increases.

The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.

This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.

This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.

Here’s a chart that shows that our main problem is Medicare, Medicaid, and Obamacare.

Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.

I think that’s the wrong goal, and that instead the focus should be on reducing or stabilizing the burden of government spending, but I’m sharing this chart because it shows that spending would have to be lowered by 3.1 percent of GDP to put the nation on a good fiscal path.

Some folks think that might be impossible, but I’ll simply point out that the five-year de facto spending freeze that we achieved from 2009-2014 actually reduced the burden of government spending by a greater amount. In other words, the payoff from genuine spending restraint is enormous.

The bottom line is very simple.

We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.

Or we can let America become Greece.

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There are many powerful arguments for junking the internal revenue code and replacing it with a simple and fair flat tax.

  1. It is good to have lower tax rates in order to encourage more productive behavior.
  2. It is good to get rid of double taxation in order to enable saving and investment.
  3. It is good the end distorting preferences in order to reduce economically irrational decisions.

Today, let’s review a feature of good tax reform that involves the second and third bullet points.

Under current law, there is double taxation of corporate income. This means that companies must pay a tax on income, but that the income is then taxed a second time when distributed to the owners of the company (i.e., shareholders).

This means that the effective tax rate is a combination of the corporate income tax rate and the tax rate imposed on dividends. And this higher tax rate is an example of why double taxation discourages capital formation and thus leads to lower wages.

But this double taxation of dividends also creates a distortion because there isn’t double taxation of corporate income that is distributed to bondholders. This means companies have a significant tax-driven incentive to rely on debt, which is risky for them and the overall economy.

Curtis Dubay has a very straightforward explanation of the problem.

In debt financing, a business raises money by issuing debt, usually by selling a bond. In equity financing, a business raises funds by selling a share in the business through the sale of stock. The tax system provides a relative advantage to financing capital expenditures through debt because under current tax law, businesses can deduct their interest payments on the debt instruments, but dividend payments to shareholders are not deductible. Thus, equity is disadvantaged because it is double taxed while debt correctly faces only a single layer of taxation.

By the way, when public finance people write that something is “not deductible” or non-deductible, that simply means it subject to the tax (much as the non-deductibility of imports under the BAT is simply another way of saying there will be a tax levied on all imports).

But I’m digressing. Let’s get back to the analysis. Curtis then explains why it doesn’t make sense to create an incentive for debt.

The double tax on equity makes debt a relatively more attractive way for businesses to finance themselves, all else equal. As a result, businesses will take on more debt than they otherwise might. …This is a serious problem because carrying significant amounts of debt can make businesses less stable during periods when profitability declines. Interest payments on debt are a fixed cost that businesses must pay regardless of their performance. This can be onerous and endanger a business’s solvency when profits fall.

He points out that the sensible way of putting debt and equity on a level playing field is by getting rid of the double tax on dividends, not by imposing a second layer of tax on interest.

…it does not make sense to equalize their tax treatment by eliminating interest deductibility for businesses. Doing so would further suppress economic growth, job creation, and wage increases. Instead, Congress should end the double taxation of income earned through equity financing in tax reform by eliminating taxes on saving and investment, including capital gains and dividends.

Incidentally, what Curtis wrote isn’t some sort of controversial right-wing theory. It’s well understood by every public finance economist.

The International Monetary Fund, for instance, is generally on the left on fiscal issues (and that’s an understatement). Yet in a study published by the IMF, Ruud A. de Mooij outlines the dangers of tax-induced debt.

Most tax systems today contain a “debt bias,” offering a tax advantage for corporations to finance their investments by debt. …One cannot compellingly argue for giving tax preferences to debt based on legal, administrative, or economic considerations. The evidence shows, rather, that debt bias creates significant inequities, complexities, and economic distortions. For instance, it has led to inefficiently high debt-to-equity ratios in corporations. It discriminates against innovative growth firms, impeding stronger economic growth. … recent developments suggest that its costs to public welfare are larger—possibly much larger—than previously thought. …The economic crisis has also made clear the harmful economic effects of excessive levels of debt… These insights make it more urgent to tackle debt bias by means of tax policy reform.

What’s the solution?

Well, just as Curtis Dubay explained, there are two options.

What can be done to mitigate debt bias in the tax code? In a nutshell, it will require either reducing the tax deductibility of interest or introducing similar deductions for equity returns.

And the author of the IMF study agree with Curtis that the way to create neutrality between equity and debt is by using the latter approach.

Abolishing interest deductibility would indeed eliminate debt bias, but it would also introduce new distortions into investment, and implementing it would be very difficult. …The second option, introducing a deduction for corporate equity, has better prospects. …such an allowance would bring other important economic benefits, such as increased investment, higher wages, and higher economic growth.

And Mooij even acknowledges that there’s a Laffer Curve argument for getting rid of the double tax on dividends.

The main obstacle is probably its cost to public revenues, estimated at around 0.5 percent of GDP for an average developed country. …In the long term, the budgetary cost is expected to be significantly smaller, since the favorable economic effects of the policy change would broaden the overall tax base. And in fact, a number of countries have successfully introduced variants of the allowance for corporate equity, suggesting that it is not only conceptually desirable but also practically feasible.

Another study from the International Monetary Fund, authored by Mooij and  Shafik Hebous, highlights the damage caused by luring companies into taking on excessive debt.

Excessive corporate debt levels are a serious macroeconomic stability concern. For instance, high debt can increase the probability of a firm’s bankruptcy in case of an adverse shock… Given this concern about excessive corporate debt, it is hard to understand why almost all tax systems around the world encourage the use of corporate debt over equity. Indeed, most corporate income tax (CIT) systems allow interest expenses, but not returns to equity, to be deducted in calculating corporate tax liability. This asymmetry stimulates corporations to use debt over equity to finance investment.

We get the same explanation of how to address the inequity in the tax treatment of debt and equity.

Effectively, there are two ways in which debt bias can be neutralized: either by treating equity more similar as debt by adding an allowance for corporate equity (ACE); or by treating debt more similar for taxation as equity by denying interest deductibility for corporations.

And we get the same solution. Stop double taxing dividends.

ACE systems have been quite widely advocated by economists and implemented in some countries, such as Belgium, Cyprus, Italy, Switzerland, and Turkey. Evaluations generally suggest that these systems have been effective in reducing debt bias… Yet, many countries are still reluctant to introduce an ACE due to the expected revenue loss.

By the way, the distortionary damage becomes greater when tax rates are onerous.

A recent academic study addresses the added damage of extra debt that occurs when tax rates are high.

For a country like the United States with a relatively high corporate income tax rate (a statutory federal rate of 35%), theory argues that firms in this country should have significant leverage. …The objective of our study is to estimate how much such variation in tax structure arising from global operations explains the variation in capital structure that we observe among US publicly traded multinational firms. …We employ the BEA’s multinational firm data and augment it with international tax data… Using our calculated weighted average tax rate, we include otherwise identified explanatory variables for capital structure and estimate in a multivariate regression setting how much our blended tax rate measure improves our understanding of why capital structure varies across firms and, to a lesser extent, across time. …Economically, this coefficient corresponds to a 7.1% higher book leverage ratio for a firm with a 35% average tax rate over the sample period compared to an otherwise identical firm with a 25% average tax rate. These results demonstrate that, contrary to some of the earlier literature finding that tax effects were negligible, firms that persistently confront high tax rates have significantly more debt, both economically and statistically, than otherwise equivalent firms who persistently face lower corporate income tax rates. …Irrespective of whether we examine leverage ratios based on book values or market values, whether we include cash or not, or if we alternatively examine interest coverage, we find that multinational firms confronting lower tax rates use less debt. The results are not only statistically significant, but the coefficient magnitudes suggest that these effects are first order

There’s some academic jargon in the above excerpt, so I’ll also include this summary of the paper from the Tax Foundation.

A new paper published in the Journal of Financial Economics finds that countries with high tax rates on corporate income also have higher corporate leverage ratios. …Using survey data of multinational corporations from the Bureau of Economic Analysis (BEA), the authors…find that businesses that report their income in high tax jurisdictions have corporate leverage ratios that are substantially higher than those in low tax jurisdictions. More precisely, they find that a business facing an average tax rate of 35% has a leverage ratio that is 7.1% higher than a similar firm facing an average tax rate of 25%.

By the way, here are the results from another IMF study by Mooij about how the debt bias is connected to high tax rates.

We find that, typically, a one percentage point higher tax rate increases the debt-asset ratio by between 0.17 and 0.28. Responses are increasing over time, which suggests that debt bias distortions have become more important.

The bottom line is that the U.S. corporate tax rate is far too high. And when you combine that punitive rate with a distortionary preference for debt over equity, the net result is that we have companies burdened by too much debt, which puts them (and the overall economy) in danger when there’s a downturn.

So the obvious solution (beyond simply lowering the corporate rate, which should be a given) is to get rid of the double tax on dividends.

The good news is that Republicans want to move in that direction.

The not-so-good news is that they are not using the ideal approach. As I noted last year, the “Better Way Plan” proposed by House Republicans is sub-optimal on this issue.

Under current law, companies can deduct the interest they pay and recipients of interest income must pay tax on those funds. This actually is correct treatment, particularly when compared to dividends, which are not deductible to companies (meaning they pay tax on those funds) while also being taxable for recipients. The House GOP plan gets rid of the deduction for interest paid. Combined with the 50 percent exclusion for individual capital income, that basically means the income is getting taxed 1-1/2 times. But that rule would apply equally for shareholders and bondholders, so that pro-debt bias in the tax code would be eliminated.

For what it’s worth, I suggest this approach was acceptable, not only because the debt bias was eliminated, but also because of the other reforms in the plan.

…the revenue generated by disallowing any deduction for interest would be used for pro-growth reforms such as a lower corporate tax rate.

Though I can’t say the same thing about the border-adjustability provision, which is a poison pill for tax reform.

P.S. While the preference for debt is quite harmful, I nonetheless still think the worst distortion in the tax code is the healthcare exclusion.

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For three decades, I’ve been trying to convince politicians to adopt good policy. I give them theoretical reasons why it’s a good idea to have limited government. I share with them empirical evidence demonstrating the superiority of free markets over statism. And I’m probably annoyingly relentless about disseminating examples of good and bad policy from around the world (my version of “teachable moments”).

But if you want to get a politician to do the right thing, you need more than theory, data, and real-world case studies. You need to convince them – notwithstanding my Second Theorem of Government – that good policy won’t threaten their reelection.

My usual approach is to remind them that Ronald Reagan adopted a bunch of supposedly unpopular policies, yet he got reelected in a landslide because reducing the burden of government allowed the private sector to grow much faster. George H.W. Bush, by contrast, became a one-term blunder because his tax increase and other statist policies undermined the economy’s performance.

I’m hoping this argument will resonate with some of my friends who are now working in the White House. And I don’t rely on vague hints. In this clip from a recent interview, I bluntly point out that good policy is good politics because a faster-growing economy presumably will have a big impact on the 2020 election.

Here’s another clip from that same interview, where I point out that the GOP’s repeal-and-replace legislation was good news in that it got rid of a lot of the misguided taxes and spending that were part of Obamacare.

But the Republican plan did not try to fix the government-imposed third-party-payer distortions that cause health care to be so expensive and inefficient. And I pointed out at the end of this clip that Republicans would have been held responsible as the system got even more costly and bureaucratic.

Now let’s shift to fiscal policy.

Here’s a clip from an interview about Trump’s budget. I’m happy about some of the specific reductions (see here, here, and here), but I grouse that there’s no attempt to fix entitlements and I’m also unhappy that the reductions in domestic discretionary spending are used to benefit the Pentagon rather than taxpayers.

The latter half of the above interview is about the corruption that defines the Washington swamp. Yes, it’s possible that Trump could use the “bully pulpit” to push Congress in the right direction, but I wish I had more time to emphasize that shrinking the overall size of government is the only way to really “drain the swamp.”

And since we’re talking about good policy and good politics, here’s a clip from another interview.

Back when the stock market was climbing, I suggested it was a rather risky move for Trump to say higher stock values were a referendum on the benefits of his policies. After all, what goes up can go down.

The hosts acknowledge that the stock market may decline in the short run, but they seem optimistic in the long run based on what happened during the Reagan years.

But this brings me back to my original point. Yes, Reagan’s policies led to a strong stock market. His policies also produced rising levels of median household income. Moreover, the economy boomed and millions of jobs were created. These were among the reasons he was reelected in a landslide.

But these good things weren’t random. They happened because Reagan made big positive changes in policy. He tamed inflation. He slashed tax rates. He substantially reduced the burden of domestic spending. He curtailed red tape.

In other words, there was a direct connection between good policy, good economy, and good political results. Indeed, let’s enshrine this relationship in a “Fourth Theorem of Government.”

For what it’s worth, Reagan also demonstrated leadership, enacting all those pro-growth reforms over the vociferous opposition of various interest groups.

Will Trump’s reform be that bold and that brave? His proposed 15-percent corporate tax rate deserves praise, and he seems serious about restraining the regulatory state, but he will need to do a lot more if he wants to be the second coming of Ronald Reagan. Not only will he need more good policies, but he’ll also need to ditch some of the bad policies (childcare subsidies, infrastructure pork, carried-interest capital gains tax hike, etc) that would increase the burden of government.

The jury is still out, but I’m a bit pessimistic on the final verdict.

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I wrote yesterday about how the Organization for Economic Cooperation and Development (OECD) is pushing for bigger government in China. That’s a remarkable bit of economic malpractice by the Paris-based international bureaucracy, especially since China is only ranked #113 in the latest scorecard from Economic Freedom of the World. The country very much needs smaller government to become rich, yet the OECD is preaching more statism.

But nobody should be surprised. The OECD, perhaps because its membership is dominated by European welfare states, has a dismal track record of reflexive support for bigger government.

It supports higher taxes and bigger government in Asia, in Latin America, and…yes, you guessed correctly…the United States.

And here’s the latest example. In a new publication, OECD bureaucrats recommend policy changes that ostensibly will produce more growth for the United States. Basically, America should become more like France.

Income inequality has continued to widen… Public infrastructure is not keeping pace… Promote mass transit… Implement usage fees based on distance travelled…to help fund transportation… Expand federal programmes designed to improve access to fixed broadband. …Expand funding for reskilling… Require paid parental leave… Expand the Earned Income Tax Credit and raise the minimum wage.

To be fair, not every recommendation involves bigger government.

Adopt legislation that cuts the statutory marginal corporate income tax rate…

But even that single concession to good policy is matched by proposals to squeeze more money from the private sector.

…and broaden the tax base. …Continue with measures to prevent base erosion and profit shifting.

By the way, even though European nations dominate the OECD’s membership, American taxpayers provide the largest share of funding for the OECD.

In other words, we’re paying more taxes to have a bunch of international bureaucrats urge that we get hit with even higher taxes. And to add insult to injury, OECD bureaucrats are exempt from paying taxes!

Maybe that’s why they’re so blind to the harmful impact of bad tax policy.

It’s especially discouraging that the bureaucrats are even advocating greater levels of discriminatory taxation of saving and investment. Here are some blurbs from a report in the Wall Street Journal.

The Paris-based think tank has just junked the conventional economic wisdom on tax it had been promoting for years. …“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead…,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview. …Since the 1970s economists had argued capital income should be taxed relatively lightly because it was more mobile across countries and attracting investment would boost economic growth, ultimately benefiting everyone.

Actually, the argument on not over-taxing capital income is based on the merits of a neutral tax system that doesn’t undermine growth by punishing saving and investment.

The fact that capital is “mobile across countries” was something that constrained politicians from imposing bad tax policy. In other words, tax competition promoted better (or less worse) policy.

But now that tax havens and tax competition have been weakened, politicians are pushing tax rates higher. And the OECD is cheering this destructive development.

Here are some passages from the OECD report on this topic.

…there have been calls to move away from a narrow focus on economic growth towards a greater emphasis on inclusiveness. …Inclusive economic growth…implies that the benefits of increased prosperity and productivity are shared more evenly between people… More specifically with regard to tax policy, inclusive economic growth is related to managing tradeoffs between equity and efficiency. Growth-enhancing tax reforms might come at certain costs in terms of meeting equity goals so tax design for inclusive growth requires taking into account the distributional implications of tax policies.

In other words, the OECD wants to shift away from policies that lead to a growing economic pie and instead fixate on how to re-slice and redistribute a stagnant pie.

And here’s a flowchart from the OECD report. Keep in mind that “inclusive growth” actually means less growth. I’ve helpfully put red stars next to the items that involve more transfers of money from the productive sector of the economy to the government.

That flowchart shows what the OECD wants.

But if you want a real-world example, just look at Greece, France, and Italy.

Which brings me to my final point. To be blunt, it’s crazy that American taxpayers are subsidizing a left-wing overseas bureaucracy like the OECD.

If Republicans have any brains and integrity (I realize that’s asking a lot), they should immediately pull the plug on subsidies for the Paris-based bureaucracy. Sure, it’s only about $100 million per year, but – on a per-dollar spent basis – it’s probably the most destructive spending in the entire budget.

P.S. The OECD even wants a type of World Tax Organization.

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The Organization for Economic Cooperation and Development has published a 136-page “Economic Survey” of China.

My first reaction is to wonder why the Paris-based bureaucracy needs any publication, much less such a long document, when Economic Freedom of the World already publishes an annual ranking that precisely and concisely identifies the economic strengths and weaknesses of various nations.

A review of the EFW data would quickly show that China doesn’t do a good job in any area, but that the nation’s biggest problems are a bloated public sector and a suffocating regulatory burden.

Though it’s worth noting that China’s mediocre scores today are actually a big improvement. Back in 1980, before China began to liberalize, it received a dismal score of 3.64 (on a 1-10 scale). Today’s 6.45 score isn’t great, but there’s been a big step in the right direction.

One of the most impressive changes is that the score for the trade category has jumped from 2.72 to 6.78 (i.e., moving from protectionism toward open trade is good for growth).

I cite this EFW data because part of me wonders why the OECD couldn’t be more efficient and simply put out a 5-page document that urges reforms – such as a spending cap and deregulation – that would address China’s biggest weaknesses?

To be fair, though, the number of pages isn’t what matters. It’s the quality of the analysis and advice. So let’s dig into the OECD’s China Survey and see whether it provides a road map for greater Chinese prosperity.

But before looking at recommendations, let’s start with some good news. This chart shows a dramatic reduction in poverty and it is one of the most encouraging displays of data I’ve ever seen.

Keep in mind, by the way, that China’s economic statistics may not be fully trustworthy. And it’s also worth noting that China’s rural poverty measure of CNY2300 is less than $350 per year.

Notwithstanding these caveats, it certainly appears that there’s been a radical reduction in genuine material deprivation in China. That’s a huge triumph for the partial economic liberalization we see in the EFW numbers.

Now let’s see whether the OECD is suggesting policies that will generate more positive charts in future years.

The good news is that the bureaucrats are mostly sensible on regulatory matters and state-owned enterprises (SOEs). Here are a few excerpts from the document’s executive summary.

Business creation has been made easier through the removal and unification of licenses. …Gradually remove guarantees to SOEs and other public entities to reduce contingent liabilities. …Reduce state ownership in commercially oriented…sectors. Let unviable SOEs go bankrupt, notably in sectors suffering from over-capacity.

The bad news is that the OECD wants the government to increase China’s fiscal burden. I’m not joking.

Policy reforms can greatly enhance the redistributive impact of the tax-and-transfer system. …Increase central and provincial government social assistance transfers…increase tax progressivity. Implement a broad-based nationwide recurrent tax on immovable property and consider an inheritance tax.

This is bad advice for any nation at any point, but it’s especially misguided for China because of looming demographic change.

Here’s another chart from the report. It shows a staggering four-fold increase in the share of old people relative to working-age people in the country.

This chart should be setting off alarm bells. The Chinese government should be taking steps to lower the burden of government spending and implement personal retirement accounts so there will be real savings to finance this demographic shift.

But the OECD report actually encourages less savings and more redistribution.

…rebalancing of the economy towards consumption is key. …Social infrastructure needs to be further developed…and the tax and transfer system made more progressive. …tax exemptions on interest from government bonds and savings accounts at Chinese banks could be abolished…introduction of inheritance tax.

What’s especially noteworthy is that the personal income tax in China (as is the case in almost all developing nations) only collects a trivial amount of revenue.

In 2016, PIT revenue amounted to 1.4 percent of GDP.

So why not do something bold and pro-growth, such as abolish that repugnant levy and make China a beacon for entrepreneurship and investment?

Needless to say, that’s not a recommendation you’ll find in a report from the pro-tax OECD.

And given the bureaucracy’s dismal track record, you won’t be surprised that there’s lots of rhetoric about the supposed problem of inequality, all of which is used to justify higher taxes and more redistribution.

The OECD instead should focus on growth and poverty mitigation, goals that naturally lend themselves to pro-market reforms.

Which brings me to the thing that’s always been baffling. Why doesn’t China simply copy the ultra-successful policies of Hong Kong, which has been a “special administrative region” of China for two decades?

Hong Kong has the policies – a spending cap, very little redistribution, open trade, private Social Security, etc – that China needs to become a rich nation.

If the leadership in Beijing has been wise enough to leave Hong Kong’s policies in place, why haven’t they been astute enough to apply them to the entire country?

Every so often, I think China is moving in that direction, only to then come across reasons to be pessimistic.

P.S. The OECD’s China report was predictably disappointing, but it wasn’t nearly as bad as the IMF’s report on China, which I characterized half-jokingly as a declaration of economic war.

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Some types of theft are legal in America.

But there’s a catch. You can only legally steal if you work for the government. It’s a process called “civil asset forfeiture” and it enables government officials to confiscate your property even if you have not been convicted of a crime. Or even charged with a crime.

I’m not joking. This isn’t a snarky reference to the tax system. Nor am I implying that bureaucrats can figuratively steal your property. We’re talking about literal theft by the state.

And it can happen if some government official decides – without any legal proceeding – that the property somehow may have been involved in criminal activity. Or maybe just because you have the wrong skin color.

A column in the Wall Street Journal explains this grotesque injustice.

…thousands of Americans have had their assets taken without ever being charged with a crime, let alone convicted. Russ Caswell almost lost his Massachusetts motel, which had been run by his family for more than 50 years, because of 15 “drug-related incidents” there from 1994-2008, a period through which he rented out nearly 200,000 rooms. Maryland dairy farmer Randy Sowers had his entire bank account—roughly $60,000—seized by the IRS, which accused him of running afoul of reporting requirements for cash deposits. …A manager of a Christian rock band had $53,000 in cash—profits from concerts and donations intended for an orphanage in Thailand—seized in Oklahoma after being stopped for a broken taillight. All of the property in these outrageous cases was eventually returned, but only after an arduous process.

These abuses happen in large part because cops are given bad incentives.

Any property they steal from citizens can be used to pad the budgets of police bureaucracies.

Today more than 40 states and the federal government permit law-enforcement agencies to retain anywhere from 45% to 100% of forfeiture proceeds. As a result, forfeiture has practically become an industry.

And real money is involved.

…data on asset forfeiture across 14 states, including California, Texas and New York. Between 2002 and 2013, the revenue from forfeiture more than doubled, from $107 million to $250 million. Federal confiscations have risen even faster. In 1986 the Justice Department’s Assets Forfeiture Fund collected $93.7 million. In 2014 the number was $4.5 billion.

In other words, there’s a huge incentive for cops to misbehave. It’s called “policing for profit.”

Fortunately, there is a move for reform at the state level.

Since 2014 nearly 20 states and the District of Columbia have enacted laws limiting asset forfeiture or increasing transparency. Nearly 20 other states are considering similar legislation. …lawmakers in Alaska, Connecticut, North Dakota and Texas have sponsored legislation that would send confiscated proceeds directly to the general fund of the state or county. Similar measures in Arizona and Hawaii would restrict forfeiture proceeds to being used to compensate crime victims and their families. …Last fall California Gov. Jerry Brown signed a bill that, in most cases, requires a criminal conviction before any California agency can receive equitable-sharing proceeds. In January Ohio Gov. John Kasich approved legislation to ban his state’s police and prosecutors from transferring seized property to federal agencies unless its value is more than $100,000. Similar reforms have been introduced in Colorado, New Hampshire and a handful of other states.

Legislative reforms are good, though judicial action would be even better.

And, sooner or later, that may happen.

America’s best (but not quite perfect) Supreme Court Justice is justly outraged by these examples of legalized theft. First, some background.

…the U.S. Supreme Court declined to hear a case filed by a Texas woman who says that her due process rights were violated when the police seized over $200,000 in cash from her family despite the fact that no one has been convicted of any underlying crime associated with the money. Unfortunately, thanks to the state’s sweeping civil asset forfeiture laws, the authorities were permitted to take the money of this innocent woman. The Supreme Court offered no explanation today for its refusal to hear the case.

But Justice Thomas is not happy that government officials are allowed to randomly steal property.

Justice Clarence Thomas made it clear that he believes the current state of civil asset forfeiture law is fundamentally unconstitutional. “This system—where police can seize property with limited judicial oversight and retain it for their own use—has led to egregious and well-chronicled abuses,” Thomas declared. Furthermore, he wrote, the Supreme Court’s previous rulings on the matter are starkly at odds with the Constitution, which “presumably would require the Court to align its distinct doctrine governing civil forfeiture with its doctrines governing other forms of punitive state action and property deprivation.” Those other doctrines, Thomas noted, impose significant checks on the government, such as heightened standards of proof, various procedural protections, and the right to a trial by jury. Civil asset forfeiture proceedings, by contrast, offer no such constitutional safeguards for the rights of person or property.

The article continues to explain that Thomas could be signalling that the Supreme Court will address these issues in the future, even though it didn’t choose to address the case filed by the Texas woman.

Let’s hope so. It’s heartening that there’s been a bit of good news at the state level (I even wrote that reform of asset forfeiture was one of the best developments of 2015), but it would be nice if the Supreme Court ultimately decided to prohibit civil asset forfeiture altogether.

But that might be years in the future, so let’s close with a very fresh example of a good state-based reform.

The Wall Street Journal favorably opined yesterday about reforms that have been enacted in Mississippi.

…it’s worth highlighting a civil forfeiture reform backed by the ACLU that Mississippi GOP Governor Phil Bryant signed last week with bipartisan legislative support.

The editorial reminds us why asset forfeiture is wrong.

…civil forfeiture laws…allow law enforcement agencies to seize property they suspect to be related to a crime without actually having to obtain a conviction or even submit charges. Police and prosecutors can auction off the property and keep the proceeds to pad their budgets. …Perverse incentives…create a huge potential for abuse.

Here’s what Mississippi did.

Mississippi’s reforms, which were pushed by the Institute for Justice and had nearly unanimous support in the legislature, would curb the most egregious abuses. Law enforcers would have to obtain a seizure warrant within 72 hours and prosecute within 30 days, so they couldn’t take property while trying to formulate a case. Agencies would also be required to publish a description of the seized property along with its value and petitions contesting the forfeiture to an online public database. …the public will finally be able to police misconduct by law enforcement in criminal raids. That’s something even liberals can cheer.

It’s nice that there’s been reform at the state level, and the Mississippi example is quite encouraging. That’s the good news.

But the bad news is that there may not be much reason to expect progress from the White House since both President Trump and his Attorney General support these arbitrary and unfair confiscations of property.

Which is a shame since they both took oaths to protect Americans from the kind of horrible abuse that the Dehko family experienced. Or the mistreatment of Carole Hinders. Or the ransacking of Joseph Rivers. Or the brutalization of Thomas Williams.

However, if the first two directors of the Justice Department’s asset forfeiture office can change their minds and urge repeal of these unfair laws, maybe there’s hope for Trump and Sessions.

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