Four (Past) Presidents Debunk the Case for Higher Taxes

I’m currently in Iceland for a conference organized by the European Students for Liberty. I spoke earlier today on the case for lower taxes and I made six basic points.

• Taxes undermine prosperity.
• Taxes reduce competitiveness.
• Taxes are self-destructive.
• Taxes are unfair and corrupt.
• Taxes are immoral.
• Taxes “feed the beast.”

Sadly, not everyone agrees with my views, either in Iceland or the United States.

Regarding the latter, Robert Samuelson expressed a contrary position last month when writing about the tax debate in the Washington Post.

…we need higher, not lower, taxes. …We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake.

After reading his column, I thought about putting together a detailed response. I was especially tempted to debunk the carbon tax, which is his preferred way of generating additional tax revenue.

But then it occurred to me that could make an “appeal to authority.” In my Iceland presentation today, I cited very wise words from four former presidents on tax policy. And their statements are all that we need to dismiss Samuelson’s column.

We’ll start with Thomas Jefferson, who argues for small government and against income taxation.

We then take a trip through history so we can see what Grover Cleveland said about the topic.

Simply stated, he viewed any taxes – above what was needed to finance a minimal state – as “ruthless extortion.”

The great Calvin Coolidge said the same thing about four decades later.

Highly underrated president from Libertarian

Last but not least, the Gipper addresses Samuelson’s point about the difference between taxes and spending.

Reagan is right, of course. The burden of federal spending is the problem whether looking at pre-World War II data or post-World War II data.

Four good points of view from four good Presidents.

The only missing component is that I need to find a President who correctly explains that higher taxes will lead to higher spending and more red ink.

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Good News for the United States in Updated Rankings for Economic Freedom

A new annual edition of Economic Freedom of the World has been released.

The first thing that everyone wants to know is how various nations are ranked.

Let’s start at the bottom. I can’t imagine that anybody will be surprised to learn that Venezuela is in last place, though we don’t know for sure the world’s most suffocatingly statist regime since the socialist hellholes of Cuba and North Korea weren’t included (because of a lack of acceptable data).

At the other end, Hong Kong is in first place, where it’s been ranked for decades, followed by Singapore, which also have been highly ranked for a long time. Interestingly, the gap between those two jurisdictions is shrinking, so it will be interesting to see if Singapore grabs the top spot next year.

New Zealand and Switzerland are #3 and #4, respectively, retaining their lofty rankings from last year.

The biggest news is that Canada plunged. It was #5 last year, but now is tied for #11. And I can’t help but worry what will happen in the future given the leftist orientation of the nation’s current Prime Minister.

Another notable development is that the United Kingdom jumped four spots, from #10 to #6. If that type of movement continues, the U.K. definitely will prosper in a post-Brexit world.

And if we venture outside the top 10, I can’t help but feel happy that the United States rose from #16 to #11. And America’s ranking didn’t jump merely because other nation’s adopted bad policy. The U.S. score increased from 7.75 in last year’s report to 7.94 in this year’s release.

A few other things that grabbed my attention are the relatively high scores for all the Baltic nations, the top-20 rankings for Denmark and Finland, and Chile‘s good (but declining) score.

Let’s take a look at four fascinating charts from the report.

We’ll start with a closer look at the United States. As you can see from this chart, the United States enjoyed a gradual increase in economic freedom during the 1980s and 1990s, followed by a gradual decline during most of the Bush-Obama years. But in the past couple of years (hopefully the beginning of a trend), the U.S. score has improved.

Now let’s shift to the post-communist world.

What’s remarkable about nations from the post-Soviet Bloc is that you have some big success stories and some big failures.

I already mentioned that the Baltic nations get good scores, but Georgia and Romania deserve attention as well.

But other nations – most notably Ukraine and Russia – remain economically oppressed.

Our next chart shows long-run developments in the scores of developed and developing nations.

Both sets of countries benefited from economic liberalization in the 19890s and 1990s. But the 21st century has – on average – been a period of policy stagnation.

Last but not least, let’s look at the nations that have enjoyed the biggest increases and suffered the biggest drops since 2000.

A bunch of post-communist nations are in the group that enjoyed the biggest increases in economic liberty. It’s also good to see that Rwanda’s score has jumped so much.

I’m unhappy, by contrast, so see the United States on the list of nations that experienced the largest reductions in economic liberty since the turn of the century.

Greece’s big fall, however, is not surprising. And neither are the astounding declines for Argentina and Venezuela (Argentina improved quite a bit in this year’s edition, so hopefully that’s a sign that the country is beginning to recover from the horrid statism of the Kirchner era).

Let’s close with a reminder that Economic Freedom of the World uses dozens of variables to create scores in five major categories (fiscal, regulatory, trade, monetary, and rule of law). These five scores are then combined to produce a score for each country, just as grades in five classes might get combined to produce a student’s grade point average.

This has important implications because getting a really good score in one category won’t produce strong economic results if there are bad scores in the other four categories. Likewise, a bad score in one category isn’t a death knell if a nation does really well in the other four categories.

As a fiscal policy wonk, I always try to remind myself not to have tunnel vision. There are nations that may get good scores on fiscal policy, but get a bad overall score because of poor performance in non-fiscal variables (Lebanon, for instance). Similarly, there are nations that get rotten scores on fiscal policy, yet are ranked highly because they are very market-oriented in the other four variables (Denmark and Finland, for example).

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The Problem Is Tax Hells, not Tax Havens

Not everybody appreciates my defense of tax havens.

• A Clinton Administration official accused me of disloyalty to America.
• The OECD threatened to throw me in a Mexican jail.
• A former U.S. Senator said I was guilty of “trading with the enemy.”

I don’t mind these threats and attacks. I figure the other side would ignore me if I wasn’t being at least somewhat effective in the battle to preserve tax competition, fiscal sovereignty, and financial privacy.

That being said, it’s definitely nice to have allies. I’ve cited Nobel laureates who support jurisdictional competition, and also shared great analysis in support of low-tax jurisdictions from top-flight financial writers such as Allister Heath and Pierre Bessard.

Now we have a new video from Sweden’s Johan Norberg. Johan’s latest contribution in his Dead Wrong series is a look at tax havens.

Johan packs an incredible amount of information in an 88-second video.

1. He points out that stolen data from low-tax jurisdictions mostly reveals that politicians are the ones engaging in misbehavior, a point I’ve made when writing about pilfered data from Panama and the British Virgin Islands.
2. He makes the critical point that tax competition “restrains the greed of government,” a point that the New York Times inadvertently confirmed.
3. He also makes the key point that tax havens actually are good for the economies of high-tax nations because they serve as platforms for investment and job creation that otherwise might not occur.
4. Moreover, he notes that the best way to boost tax compliance is by having honest government and low tax rates.

The bottom line is that tax competition and tax havens promote better policy since they discourage politicians from imposing high tax rates and double taxation.

But this isn’t merely an economic and tax issue. There’s also a very strong moral argument for tax havens since those jurisdictions historically have respected the human right of financial privacy.

For those who care about global prosperity, the real target should be tax hells rather than tax havens.

This is a message I will continue to deliver, whether to skeptics in the media or up on Capitol Hill.

P.S. If you prefer an eight-minute video over an 88-second video, here’s my two cents on the importance of tax competition.

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How the United Kingdom Can Prosper in a Post-Brexit World

Since I’m in London for a couple of speeches, I’ve taken advantage of this opportunity to make sure I’m up to speed on Brexit.

Regular readers may recall that I supported the U.K.’s decision to leave the European Union. Simply stated, the European Union is a slowly sinking ship. Getting in a lifeboat doesn’t guarantee a good outcome, I noted, but at least there’s hope.

The European Union’s governmental manifestations…are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline. A vote to leave, by contrast, would create uncertainty and anxiety in some quarters, but the United Kingdom would then have the ability to make decisions that will produce a more prosperous future. Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

Others reached the same conclusion.

“Black Swan” author Nassim Nicholas Taleb…told CNBC’s “Power Lunch” the EU has become a “metastatic and rather incompetent bureaucracy” that is too intrusive. “The way they’ve been building it top down from Brussels is doomed to fail. This is 2016. They are still thinking 1950 economics,” said Taleb, who is also the author of “Antifragile” and is an advisor to Universa Investments. Taleb has warned about an EU breakup for some time, calling it a horrible, stupid project back in 2012.

That being said, there is a lot of angst in the U.K. about what will happen during the divorce process, in part because of the less-than-stellar performance of the Tory leadership.

There are three things, however, that British politicians need to remember.

First, the EU bureaucrats are terrified at the prospect of losing $10 billion of annual payments from the U.K., which is why they are desperately trying to convince politicians in London to cough up a big pile of money as part of a “divorce” settlement.

And “desperately” is probably an understatement.

The UK…contributions to the EU do come to over €10 billion a year. That is a substantial fiscal hole for the European Commission to plug… The Commission would prefer not to reduce expenditure since the structural funds and agricultural subsidies it distributes help to justify the EU’s existence. …it is not surprising that the Brexit divorce bill has become a sticking point in the negotiations. If the amount is big enough, it could tide the EU over for a few years. In Brussels, a problem kicked down the road is treated as a problem solved. This gives the British some leverage because it is most unlikely that the Commission will have lined up any new sources of funding, or agreed what it can cut, before March 29, 2019, when negotiations have to be completed. With no deal, the EU might end up with nothing at all.

Second, European politicians are terrified that the U.K., which already has the world’s 10th-freest economy, will slash tax rates and become even more competitive in a post-Brexit world.

If you don’t believe me, maybe you’ll believe European officials who say the same thing.

European leaders will insist that the UK rules out tax dumping as part of any trade deal struck during Brexit negotiations… Matthias Machnig, the German deputy economy minister, called for a “reasonable framework” in tax and regulation, and warning “a race to the bottom in tax and regulation matters would make trade relations difficult”. Donald Tusk, the European Council president, also warned this morning that a deal must “…encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping”. The fear is that unless the trade deal which binds the UK into the European standards on tax, competition and state aid the UK will lead a regulatory “race to the bottom”.

Third, failure to reach a deal (also know as a “hard Brexit”) isn’t the end of the world. It’s not even a bad outcome. A hard Brexit simply means that the U.K. trades with Europe under the default rules of the World Trade Organization. That’s not complete, unfettered free trade, but it means only modest trade barriers. And since Britain trades quite successfully with the rest of the world under those rules, there’s no reason to fear a collapse of trade with Europe.

Moreover, don’t forget that many industries in Europe will pressure their politicians to continue free trade because they benefit from sales to U.K. consumers.

Around one in seven German cars is exported to the UK. Around 950,000 newly registered vehicles in the UK last year were made in Germany. As many as 60,000 automotive jobs in Germany are dependent on exports to the UK. Deloitte have explored the potential effect of a “tariff war” on the industry. …German politicians are realising this. The Bavarian Minister for Economic Affairs, Ilse Aigner, has said that “Great Britain is one of the most important trading partners in Bavaria. We must do everything we can to eliminate the uncertainties that have arisen.” …The Minister is correct. …A comprehensive free trade agreement is not only vital, but should be easy to achieve. In other words, spiteful protectionism from the Commission would accomplish nothing but impoverishing all sides.

The bottom line is that the U.K. has plenty of negotiating power to get a good outcome.

So what does this mean? How should British politicians handle negotiations, considering that they would like free trade with Europe?

Part of the answer is diplomatic skill. British officials should quietly inform their counterparts that they understand a hard Brexit isn’t a bad outcome. And they should gently remind EU officials that a hard Brexit almost certainly guarantees a more aggressive agenda of tax cuts and deregulation.

But remember that it’s in the interest of U.K. policymakers to adopt good policy regardless of what deal (if any) is made with the European bureaucrats.

The first thing that should happen is for British politicians to adopt a low-tax model based on Singapore. Some experts in the U.K. are explicitly advocating this approach.

I call this the Singapore effect. When Singapore separated from the Malaysian Federation in 1965, it apparently faced a grim future. But the realisation that no one was going to do it any favours acted as a spur to effective government – with spectacular results. We could do the same. We need a strategy that lays out the path to reductions in corporation tax, lower personal tax.

Marian Tupy of the Cato Institute explains why copying Singapore would be a very good idea.

Why Singapore? Let’s look at a couple of statistics. In 1950, GDP per capita adjusted for inflation and purchasing power parity was $5,689.91 in Singapore. It was $11,920.58 in the U.K. Average income in Singapore, in other words, amounted to 48 percent of that in the U.K. In 2016, income in Singapore was $82,168.33 and $42,287.17 in the U.K. Put differently, Singaporeans earned 94 percent more than the British. During the intervening years, Singaporean incomes rose by 1,344 percent, while British incomes rose by 256 percent. …the “threat” of Singaporean tax rates and regulatory framework ought not to be a mere negotiating strategy for the British government vis-a-vis the EU. It ought to be a goal of the British decision makers—regardless of what the EU decides!

Here’s a chart from Marian’s article.

Or the U.K. could copy Hong Kong, as a Telegraph columnist suggests.

Our political leaders still seem to lack a vision of what Britain can achieve outside the EU… Perhaps they are lacking in inspiration. If so, …Hong Kong…is now one of the richest places in the world, with income per capita 40 per cent higher than Britain’s.

And much of the credit belongs to John Cowperthwaite, who unleashed great prosperity in Hong Kong by limiting the role of government.

Faced with…the approach being taken in much of the West: deficit financing, industrial planning, state ownership of industry, universal welfare and higher taxation. How much of this did the British civil servant think worth transposing to Hong Kong? Virtually nothing. He had a simple alternative: government spending depended on government revenues, and this in turn was determined by the strength of the economy. Therefore, the vital task for government was to facilitate growth. …He believed in the freest possible flow of goods and capital. He kept taxes low in order that savings could be reinvested in businesses to boost growth. …Cowperthwaite’s view was that higher government spending today destroys the growth of tomorrow. Indeed, over the last 70 years Hong Kong has limited the size of the state to below 20 per cent of GDP (in Britain it is over 40 per cent) and growth has been substantially faster than in the UK. He made a moral case for limiting the size of government, too.

In other words, the United Kingdom should seek comprehensive reforms to reduce the burden of government.

That includes obvious choices like lower tax rates and less red tape. And it also means taking advantage of Brexit to implement other pro-market reforms.

One example is that the U.K. will now be able to assert control over territorial waters. That should be immediately followed by the enactment of a property rights-based system for fisheries. It appears that Scottish fishermen already are agitating for this outcome.

The Scottish Fishermen’s Federation says the UK’s exit from the European Union will boost jobs in the sector, reports The Guardian. It’s chief executive Bertie Armstrong said the exit will give them “the ability to recover proper, sustainable, rational stewardship through our own exclusive economic zone for fisheries”.

Let’s close with some Brexit-related humor.

I already shared some examples last year, and we can augment that collection with this video. It’s more about USexit, but there’s some Brexit material as well.

And here’s some more satire, albeit unintentional.

The President of the European Commission is so irked by Trump’s support for Brexit that he is threatening to campaign for secession in the United States.

In an extraordinary speech the EU Commission president said he would push for Ohio and Texas to split from the rest of America if the Republican president does not change his tune and become more supportive of the EU. …A spokesman for the bloc later said that the remarks were not meant to be taken literally, but also tellingly did not try to pass them off as humorous and insisted the EU chief was making a serious comparison.

I have no idea why Juncker picked Ohio and Texas, but I can state with full certainty that zero people in either state will care with a European bureaucrat thinks.

And speaking of accidental satire, this tweet captures the mindset of the critics who wanted to pretend that nativism was the only reason people were supporting Brexit.

"The EU is an economic catastrophe unfolding in slow motion at huge scale!" "The only reason anyone wants to leave the EU is racism!"

— Marc Andreessen (@pmarca) July 3, 2016

Last but not least, we have another example of unintentional humor. The pro-tax bureaucrats at the OECD are trying to convince U.K. lawmakers that tax cuts are a bad idea.

The head of tax at the Organization for Economic Co-operation and Development, which advises developed nations on policy, said the UK could use its freedom from EU rules to slash corporate tax but the political price would be high. …”A further step in that direction would really turn the UK into a tax haven type of economy,” he said, adding that there were practical and domestic political barriers to doing this. …The UK is already in the process of cutting its corporate tax rate to 17 percent.

Though maybe I shouldn’t list this as unintentional humor. Maybe some British politicians will be deterred simply because some tax-free bureaucrats in Paris expressed disapproval. If so, the joke will be on British workers who get lower wages as a result of foregone investment.

By the way, here’s a reminder, by Diana Furchtgott-Roth in the Washington Examiner, of why Brexit was the right choice.

As we celebrate Independence Day on July 4, we can send a cheer across the pond to the British, who declared independence from the European Union on June 23. For the British, that means no more tax and regulatory harmonization without representation. Laws passed by Parliament will no longer have to be EU-compatible. It even means they will be able to keep their high-efficiency kettles, toasters, hair dryers and vacuum cleaners. As just one example of the absurdity of EU regulation, vacuum cleaners with over 1600 watts were banned by Brussels in 2014, and those over 900 watts are scheduled to be phased out in 2017. Brussels bureaucrats say that these vacuum cleaners use too much energy. No matter that the additional energy cost of a 2300-watt vacuum cleaner compared with a 1600-watt model is less than $20 a year, that it takes more time to vacuum with a low-energy model, and, most important, people should be able to choose for themselves how they want to spend their time and money. I, for one, prefer less time housecleaning.

Amen. As much as I despise the busybodies in Washington for subjecting me to inferior light bulbs, substandard toilets, second-rate dishwashers, weak-flow showerheads, and inadequate washing machines, I would be far more upset if those nanny-state policies were being imposed by some unaccountable international bureaucracy.

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Michigan’s Pro-Market Revival

Perhaps because there’s no hope for genuine Obamacare repeal and limited hope for sweeping tax reform, I’m having to look outside of Washington for good news.

I wrote the other day about the very successful tax reforms in North Carolina. So now let’s travel to the Midwest.

The Wall Street Journal‘s editorial page has a very upbeat assessment of Michigan’s turnaround, though it starts by noting that many states teach us lessons on what shouldn’t happen.

…states can provide instructive policy lessons for better and sometimes worse—see the fiscal crack-ups in Connecticut and Illinois.

I definitely agree about the fiscal disasters of Connecticut and Illinois. And Michigan used to be in that group.

Former Michigan Democratic Gov. Jennifer Granholm was a progressive specialist in using the tax code to politically allocate capital, which depressed and distorted business investment. Between 2002 and 2007, Michigan was the only state to experience zero economic growth. …misguided policies were arguably bigger contributors to Michigan’s slump. Between 2002 and 2007, Michigan’s manufacturing grew at a third of the rate of the Great Lakes region. …In 2007 Democrats increased the state income tax to 4.35% from 3.9%. They also enacted a new business tax with a 4.95% tax on income, a 0.8% gross-receipts tax, plus a 21.99% surcharge on business tax liability. …Michigan’s economy plunged amid the national recession with unemployment hitting 14.9% in June 2009.

But Michigan has experienced a remarkable turnaround in recent years.

Michigan…offers a case study in the pro-growth potential of business tax reform. …Mr. Snyder’s first major undertaking with his Republican legislature was to replace the cumbersome state business tax with a 6% corporate tax and trim the individual rate to 4.25%. Michigan’s corporate-tax ranking jumped to seventh from 49th in the Tax Foundation’s business tax climate rankings. …They also reformed state-worker pensions. After the 2012 midterm elections, Republicans passed right-to-work legislation that lets workers choose whether to join unions. In 2014 state voters approved a ballot measure backed by the governor to repeal the personal-property tax for small businesses and manufacturers.

These reforms already are paying dividends.

In 2011 Michigan added jobs for the first time in six years, and it has since led the Great Lakes region in manufacturing growth. Unemployment has fallen below the national average to 3.9% even as the labor-force participation rate has ticked up. …Unemployment in the Detroit metro area has fallen to 3.2% from 11.4% six years ago. Businesses in Ann Arbor and Grand Rapids say they can’t find enough workers. Perhaps they should try recruiting in Chicago or New Haven.

As a fiscal wonk, I’m delighted by tax cuts and tax reform. That being said, I want to specifically focus on the reform of bureaucrat pensions in the Wolverine State.

It was mentioned as an aside in the WSJ editorial, but it may be even more important than tax changes in the long run. We’ll start with a short video the Mackinac Center produced to helped stimulate debate.

Here’s some of what Investor’s Business Daily wrote about the recent reforms.

We’ll start with a description of the problem that existed.

For years, Michigan had been racking up pension liabilities for public school teachers that it had no money to pay for. By 2016, the state’s unfunded liability had reached $29 billion — which meant state was funding only 60% of its pension obligations. …Michigan is hardly the only state to have made this mistake. Pressured by public sector unions, state lawmakers boosted retirement benefits, using wildly unrealistic forecasts for investment returns and wage growth to justify them.

And here are the admirable reforms that were enacted.

So what did Michigan do to avoid Illinois’ fate? It embraced bold pension reforms that will protect taxpayers and provide a solid retirement benefit to teachers. …it’s shifting its public school teachers toward defined contribution plans. All new hires will be automatically enrolled in a 401(k)-type plan with a default 10% contribution rate. Teachers will still be able to opt for a traditional defined benefit pension, but one that splits costs 50-50 between workers and the state, and includes safeguards that will prevent the funding ratio from dropping below 85%.

The experts at Reason also weighed in on the topic.

Pension analysts from the Reason Foundation (which publishes this blog and advocated for passage of SB 401) say no other state in the country has embraced reforms that go as far as Michigan’s. …new hires will be enrolled in a 401(k)-style pension plan, giving those workers the chance to control their own retirement planning while removing the threat of future unfunded liabilities. …What makes the Michigan proposal unique is it allows future hires to choose a so-called “hybrid” pension system retaining some elements of the old system with a provision requiring pension system to be shuttered if the gap between the fund’s liabilities and assets falls below 85 percent for two consecutive years. The mixed approach, allowing teachers to choose between a traditional pension and a 401(k)-style retirement plan, could be a model for other states to follow as they grapple with similar pension troubles.

Though the bill isn’t a panacea.

Paying down those obligations will take time—all current teachers and public school employees will remain enrolled in the current pension system and retirees will continue to collect benefits from it—but [it]…would make a big difference in the state’s long-term fiscal outlook.

Here’s a chart from the Mackinac Center showing how pensions became a growing problem. Unwinding this mess understandably won’t happen overnight.

But at least Michigan lawmakers took a real step in the right direction.

The same principle applies in Washington. Reforms to Medicare and Social Security wouldn’t change payments to existing retirees. And older workers generally would stick with the status quo.

But proposed entitlement reforms would lead to substantial long-run savings as younger workers are given the freedom to participate in new systems.

 

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Four Quirky Moments in Overseas Taxation

In my research and travels, I come across all sorts of strange stories about tax policy.

• Sometimes I learn about bizarrely foolish tax policies, such as the German tax on online coffee sales that loses money for government.
• Sometimes I learn about heartening protests against government greed, such as Irish taxpayers refusing to pay a housing levy.
• Sometimes I learn about inexplicable taxation rules, such as porn being taxed at lower rates than high culture in Spain.
• Sometimes I learn about strange forms of tax enforcement, such as transgender tax collectors in Pakistan.
• Sometimes I learn about how governments get very creative, such as a German plan to tax prostitutes with parking meters.
• Sometimes I learn about clever forms of tax avoidance, such as the Spanish theatre that gave free passes to patrons who bought lightly taxed carrots.
• Sometimes I learn about x-rated tax protests, such as the brothel owner in Austria who provided free “services” to lower his tax bill.

While I’m quite amused by these oddball examples, I actually prefer writing about overseas tax policies that provide teachable moments about big issues such as the Laffer Curve, taxes and growth, tax competition, and how higher tax burdens “feed the beast” by enabling more government spending.

Let’s look at some new examples and see what we can learn about politicians and fiscal policy.

We’ll start with a Bloomberg story from the Ukraine, where taxpayers go above and beyond to escape extortionary taxes on foreign vehicles.

Take a close look at the cars crawling through Kiev’s traffic-laden streets and you’ll notice something odd: a surprisingly large number of them aren’t registered in Ukraine. The explanation isn’t a sudden inflow of tourists, but rather a work-around by local drivers who crave foreign-made vehicles and refuse to pay restrictively high import duties to buy them. Instead, schemes have popped up where buyers effectively acquire cars from nearby nations and bring them across the border on temporary arrangements. They must then leave and re-enter Ukraine every year, or sometimes more frequently. “It’s amazing,” said Oleksandr Zadnipryaniy, a 30-year old entrepreneur who paid about $3,000 for a second-hand Opel Vectra from Lithuania. “Taxes are exorbitant. Why must poorer Ukrainians pay three times as much as richer Europeans?”

The answer to Mr. Zadnipryaniy’s question is that they don’t pay the tax. At least not if this chart is any indication.

Needless to say, I’m on the side of taxpayers and don’t have sympathy for the politicians, who are motivated by a desire to extract revenue and curry favor with domestic interest groups.

Such cars represent a headache for the government. Dodging import duties trims budget revenue… Cracking down is also tricky. …Drivers blame the government, accusing it of pandering to local car lobbies by setting high import duties.

Now let’s shift to another story about tax avoidance, though this one doesn’t have a happy ending.

The BBC reports that a big tax hike may put an end to “booze cruises” from Finland to Estonia

The Estonian government is set to impose a 70% rise in taxation on alcoholic drinks in July, Finnish broadcaster YLE reports. It’s a blow to drinkers from Finland who, since Estonian independence in 1991, have taken the short 54-mile (87km) ferry trip from Helsinki to Tallinn to enjoy prices which are less than half of those back home. …a 12-euro crate of beer will increase to 18 euros, making the concept of the money-saving “booze cruise” much less inviting.

But fortunately Finns still have an option.

Finnish tourist Erno Sjogren said that the tax rise might make him think again – but not on giving up the concept. Speaking to Helsingin Sanomat as he loaded his car outside an Estonian supermarket, he said he would consider taking his trade to Latvia instead – a 2.5-hour drive cross-country from the ferry port in the Estonian capital. The Latvian town of Ainazi is already benefitting, Helsingen Sanomat says, with the appropriately named SuperAlko store visible from the Estonian border and offering cheaper prices than its Baltic neighbours.

Let’s toast to tax competition!

Last but not least, I’m a giant fan of decentralization and a partial fan of secession (done properly and for good reasons), but you don’t automatically get results.

Consider what’s happening in Scotland, as reported by the U.K.-based Times.

Nicola Sturgeon has given her clearest indication to date that Scots will be in line for substantial income tax rises next year. In an interview due to be published today the first minister dismissed suggestions that a high-tax agenda would deter businesses, arguing instead that paying for good public services could be just as attractive to investors and people as low taxes. Ms Sturgeon’s comments came as the Scottish parliament backed a motion calling for higher taxes to pay for public services.

Ugh. I’m sympathetic to Scottish independence, but stories like this make me pessimistic about what will happen if politicians like Sturgeon are in charge of an independent nation.

Assuming, of course, she’s actually ignorant enough to believe that investors want higher taxes.

And I haven’t written about whether Catalonia should be independent of Spain, but this blurb from the EU Observer leaves a sour taste in my mouth.

Catalonia’s regional government said Monday that increases in staff at the tax office, from 321 to 800, have made the Spanish region ready to collect taxes for an independent Catalonia if citizens vote for independence on 1 October. A law to organise the referendum will be to a vote on Wednesday, but the national government in Madrid has dismissed the bill as a way to “cheat democracy”.

Technically, this won’t be bad news if the 479 new tax bureaucrats replace a similar number (or larger number) of officials that formerly harassed people on behalf of the national government in Madrid.

But I’m automatically suspicious that politicians and bureaucrats will maneuver to be the winners of any change. This isn’t an argument against secession, but it is a warning that independence won’t yield economic benefits if there’s no reduction in the burden of government.

Advocates of an independent Catalonia should first and foremost be making plans to unleash the private sector, to make themselves the Hong Kong or Singapore of Europe.

Assuming, of course, that they would want their new country to be highly ranked by Economic Freedom of the World.

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A Libertarian Paradise in…Nigeria?!?

Whenever someone accuses me of being too dogmatically opposed to government, I tell them that I only got 94 out of 160 possible points when I took Professor Bryan Caplan’s Libertarian Purity Quiz.

That’s barely 70 percent, which makes it seem like I’m some sort of squishy moderate even though I have a nice list of government departments and agencies I want to abolish.

And whenever someone accuses me of being insufficiently opposed to government, I point out that my score on Professor Caplan’s quiz is good enough – albeit just barely – for me to be categorized as a hard-core libertarian.

So does this mean I’m a principled moderate, if such a creature even exists?

Actually, it simply means that I’m not an “anarcho-capitalist,” which is the term for people who think all government can be abolished (sort of like the “more libertarian than thou” character in this amusing list of the 24 types of libertarians). If you want to get a perfect score on the Libertarian Purity Quiz, you have to favor abolishing the Department of Defense, the court system, and every other vestige of government.

That being said, I like that there are people pushing the envelope for more liberty. And I tell my anarcho-capitalist friends that we should all work together to get rid of 90 percent of government and then we can quibble over the rest.

Moreover, when I spoke earlier this year at the conference celebrating the 2nd-anniversary of Liberland, I pointed out that there are plenty of examples of how the private sector successfully carries out functions that most people think can only be handled by government.

Which leads me to the focus of today’s column. The U.K.-based Guardian has a fascinating story about a very successful Nigerian church.

The Redeemed Christian Church of God’s international headquarters in Ogun state has been transformed from a mere megachurch to an entire neighbourhood, with departments anticipating its members’ every practical as well as spiritual need. A 25-megawatt power plant with gas piped in from the Nigerian capital serves the 5,000 private homes on site, 500 of them built by the church’s construction company. New housing estates are springing up every few months where thick palm forests grew just a few years ago.

To most people, this story is probably interesting because of what it says about Nigeria and religion.

But since I’m a wonky libertarian, what grabbed my attention was the fact that the church – for all intents and purposes – was building an anarcho-capitalist society.

Education is provided, from creche to university level. The Redemption Camp health centre has an emergency unit and a maternity ward. …“If you wait for the government, it won’t get done,” says Olubiyi. So the camp relies on the government for very little – it builds its own roads, collects its own rubbish, and organises its own sewerage systems. And being well out of Lagos, like the other megachurches’ camps, means that it has little to do with municipal authorities. …according to the head of the power plant, the government sends the technicians running its own stations to learn from them. …the camp’s security is mostly provided by its small army of private guards in blue uniforms.

To be sure, it’s not a purely anarcho-capitalist society. The Nigerian government still has ultimate power to enforce laws.

But from a practical, day-to-day perspective, the church has set up a private city governed by private contract and voluntary cooperation. Sort of a Nigerian version of Galt’s Gulch.

And it’s definitely worth pointing out that it is far more successful than traditional Nigerian cities (and it sounds like it works better than many American cities!).

P.S. Anarcho-capitalism is susceptible to satire, as you can see from this clever video about Somalia and this ad for libertarian breakfast cereal.

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The German Study Estimates Negative Impact of the Corporate Income Tax on Wages

The most common arguments for reducing the 35 percent federal tax on corporate income usually revolve around the fact that having the developed world’s highest tax rate on business undermines competitiveness and reduces investment in America.

And all of that is true. But we should never lose sight of the fact that the corporate income tax is merely a collection device. Businesses may pay the tax, but the real burden is borne by people.

• Shareholders (investors) receive lower dividends.
• Consumers pay more for goods and services.
• Workers receive lower levels of compensation.

Politicians don’t really care about investors since some shareholders are rich, but they definitely pay lip service to the notion that they are on the side of consumers and workers.

So I think this new study from German scholars is worth sharing because it measures the effect of corporate taxation on wages. Here are some of the highlights.

In this paper, we revisit the question of the incidence of corporate taxes on wages both theoretically and empirically. …we exploit the specific institutional setting of the German local business tax (LBT) to identify the corporate tax incidence on wages. …we test the theoretical predictions using administrative panel data on German municipalities from 1993 to 2012. Germany is well suited to test our theoretical model for several reasons. First, we have substantial tax variation at the local level. From 1993 to 2012, on average 12.4% of municipalities adjusted their LBT rates per year. Eventually, we exploit 17,999 tax changes in 10,001 municipalities between 1993 to 2012 for identification. …Moreover, the municipal autonomy in setting tax rates allows us to treat municipalities as many small open economies within the highly integrated German national economy – with substantial mobility of capital, labor and goods across municipal borders.

And here are the key results. There’s a good bit of economic jargon, so the main takeaway is that 43 percent of the corporate tax is borne by workers.

For our baseline estimate, we focus on firms that are liable to the LBT. Figure 2 depicts the results. Pre-reform trends are flat and not statistically different from zero. After a change in the municipal business tax rate in period 0 (indicated by the vertical red line), real wages start to decline and are 0.047 log points below the pre-reform year five years after the reform. The coefficient corresponds to a wage elasticity with respect to the LBT rate of 0.14. …this central estimate implies that a 1-euro increase in the tax bill leads to a 0.56-euro decrease in the wage bill. …we have to rely on estimates from the literature to quantify the total incidence on labor. If we assume a marginal deadweight loss of corporate taxation of 29% as suggested by Devereux et al. (2014), 43% of the total tax burden is borne by workers. This finding is comparable to other studies analyzing the corporate tax incidence on wages (Arulampalam et al., 2012; Liu and Altshuler, 2013; Su´arez Serrato and Zidar, 2014). …We find that part of the tax burden is borne by low-skilled workers. …the view that the corporate income tax primarily falls on firm owners is rejected by our analysis.

For what it’s worth, I use a different approach when trying to explain the impact of the corporate income tax.

I state that shareholders pay 100 percent of the corporate income tax when looking at the direct (or first-order) effect.

However, since shareholders respond to this tax by investing less money in businesses, that means productivity won’t grow as fast, and this translates into lower wages for workers (compared to how fast they would have grown if the tax was lower or didn’t exist). This is the indirect (or second-order) effect of corporate taxation, and it’s akin to the “deadweight loss” discussed in the aforementioned study.

And this is also the approach that can be used to calculate the damage to consumers.

For today, though, the moral of the story is very simple. A high corporate tax rate is bad for growth and competitiveness, but one of the main effects is that workers wind up earning less income. So when the class-warfare crowd takes aim at “rich corporations,” there’s a lot of collateral damage on ordinary people.

P.S. For more information, here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. There’s lots of evidence – including some from leftist international bureaucracies – that a lower corporate tax rate won’t mean less tax revenue.

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Demographic Doom and the Welfare State

The world’s best welfare state arguably is Finland.

Yes, the burden of government spending is enormous and the tax system is stifling, but the nation gets extremely high scores for rule of law and human liberty. Moreover, it is one of the world’s most laissez-faire economies when looking at areas other than fiscal policy.

Indeed, depending on who is doing the measuring, Finland ranks either slightly above or slightly below the United States when grading overall policy.

Yet even the best welfare state faces a grim future because of demographic change. Simply stated, redistribution programs only work if there is a sufficiently large supply of new taxpayers to finance promised handouts.

And that supply is running dry in Finland. Bloomberg reports that policymakers in that nation are waking up to the fact that there won’t be enough future taxpayers to finance the country’s extravagant welfare state.

Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state, since they endanger its long-term survival. …the Aktia Bank chief economist said in a telephone interview in Helsinki. “We have a large public sector and the system needs taxpayers in the future.” …According to the OECD, Finland already has the lowest ratio of youths to the working-age population in the Nordics. …And it also has the highest rate of old-age dependency in the region. …The situation is only likely to get worse, according to OECD projections.

Here are a couple of charts showing dramatic demographic changes in Nordic nations. The first chart shows the ratio of children to working-age adults.

And the second charts shows the population of old people (i.e., those most likely to receive money from the government) compared to the number of working-age adults.

As you can see, the numbers are grim now (green bar) but will get far worse by the middle of the century (the red and black bars) because the small number of children today translates into a small number of working-age adults in the future.

To be blunt, these numbers suggest that it’s just a matter of time before the fiscal crisis in Southern Europe spreads to Scandinavia.

Heck, it’s going to spread everywhere: Western Europe, Eastern Europe, Asia, the developing world, Japan and the United States.

Though it’s important to understand that demographic changes don’t necessarily trigger fiscal and economic problems. Hong Kong and Singapore have extremely low fertility rates, yet they don’t face big problems since they are not burdened by western-style welfare states.

By the way, the article also reveals that Finland’s government isn’t very effective at boosting birthrates, something that we already knew based on the failure of pro-natalist government schemes in nations such as Italy, Spain, Denmark, and Japan.

Though I’m amused that the reporter apparently thinks government handouts are a pro-parent policy and believes that more of the same will somehow have a positive effect.

Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years. …the fertility rate should equal two per woman, Schauman says. It was projected at 1.57 in 2016, according to Statistics Finland. That’s a surprisingly low level, given the efforts made by the state to support parenthood. …Finland’s famous baby-boxes. Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot. …Offering generous parental leave…doesn’t seem to be working either. …The government has been working with employers and trade unions to boost gender equality by making parental leave more flexible and the benefits system simpler.

Sigh, a bit of research would have shown that welfare states actually have a negative impact on fertility.

The bottom line is that entitlement reform is the only plausible way for Finland to solve this major economic threat.

P.S. Since the nation’s central bank has published research on the negative impact of excessive government spending, there are some Finns who understand what should be done.

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Politicians in Washington Should Learn from Successful Tax Reform in North Carolina

Earlier this year, I pointed out that Trump and Republicans could learn a valuable lesson from Maine Governor Paul LePage on how to win a government shutdown.

Today, let’s look at a lesson from North Carolina on how to design and implement pro-growth tax policy.

In today’s Wall Street Journal, Senator Thom Tillis from the Tarheel State explains what happened when he helped enact a flat tax as Speaker of the State House.

In 2013, when I was speaker of the state House, North Carolina passed a serious tax-reform package. It was based on three simple principles: simplify the tax code, lower rates, and broaden the base. We replaced the progressive rate schedule for the personal income tax with a flat rate of 5.499%. That was a tax-rate cut for everyone, since the lowest bracket previously was 6%. We also increased the standard deduction for all tax filers and repealed the death tax. We lowered the 6.9% corporate income tax to 6% in 2014 and 5% in 2015. …North Carolina’s corporate tax fell to 3% in 2017 and is on track for 2.5% in 2019. We paid for this tax relief by expanding the tax base, closing loopholes, paring down spending, reducing the cost of entitlement programs, and eliminating “refundable” earned-income tax credits for people who pay no taxes.

Wow, good tax policy enabled by spending restraint. Exactly what I’ve been recommending for Washington.

Have these reforms generated good results?  The Senator says yes.

More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing.

What about tax revenue? Has the state government been starved of revenue?

Nope.

…a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses.

Senator Tillis didn’t have specific details on tax collections in his column. I got suspicious that he might be hiding some unflattering numbers, so I went to the Census Bureau’s database on state government finances. But it turns out the Senator is guilty of underselling his state’s reform. Tax revenue has actually grown faster in the Tarheel State, compared the average of all other states (many of which have imposed big tax hikes).

Another example of the Laffer Curve in action.

And here’s a chart from North Carolina’s Office of State Budget and Management. As you can see, revenues are rising rather than falling.

By the way, I’m guessing that the small drop in 2014 and the big increase in 2015 were caused by taxpayers delaying income to take advantage of the new, friendlier tax system. We saw the same thing in the early 1980s when some taxpayer deferred income because of the multi-year phase-in of the Reagan tax cuts.

But I’m digressing. Let’s get back to North Carolina.

Here’s what the Tax Foundation wrote earlier this year.

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

And in a column for Forbes, Patrick Gleason was even more effusive.

…the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. …This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. …It’s remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation).

Most importantly, state lawmakers put the brakes on spending, thus making the tax reforms more political and economically durable and successful.

Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.

Last but not least, I can’t resist sharing this 2016 editorial from the Charlotte Observer. If nothing else, the headline is an amusing reminder that journalists have a hard time understanding that higher tax rates don’t necessarily mean more revenue and that lower tax rates don’t automatically lead to less revenue.

A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money. We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. …Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year. …the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.

Though the opinion writers in Charlotte shouldn’t feel too bad. Their counterparts at the Washington Post and Wall Street Journal have made the same mistake. As did a Connecticut TV station.

P.S. My leftist friends doubtlessly will cite Kansas as a counter-example to North Carolina. According the narrative, tax cuts failed and were repealed by a Republican legislature. I did a thorough analysis of what happened in the Sunflower State earlier this year. I pointed out that tax cuts are hard to sustain without some degree of spending restraint, but also noted that the net effect of Brownback’s tenure is a permanent reduction in the tax burden. If that’s a win for the left, I hope for similar losses in Washington. It’s also worth comparing income growth in Kansas, California, and Texas if you want to figure out what tax policies are good for ordinary people.

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European-Sized Government Means Ever-Rising Tax Burdens for Lower-Income and Middle-Class Taxpayers

I argued last year that leftists should be nice to rich people because upper-income taxpayers finance the vast majority of the American welfare state according to government data.

Needless to say, my comment about being “nice” was somewhat sarcastic. But I was making a serious point about the United States having a very “progressive” fiscal system. The top-20 percent basically pay for government and those in the bottom half are net recipients of that involuntary largesse.

I also pointed out a huge difference between the United States and Europe. Governments on the other side of the Atlantic impose much higher burdens on lower-income and middle-class taxpayers.

Here’s some of what I wrote.

…the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue). The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers. Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly higher than in the United States.

So do this mean European politician don’t like ordinary people?

I could make a snarky comment about the attitudes of the political elite, but I’ll resist that temptation and instead point out that taxes in Europe are much higher for the simple reason that government is much bigger and that means some segment of the population has to surrender more of its income.

But here’s the $64,000 question that we want to investigate today: Why are European governments pillaging lower-income and middle-class taxpayers instead of going after the “evil rich” and “greedy corporations”?

Part of the answer is that there aren’t enough rich people to finance big government. But the most important factor is the Laffer Curve. Politicians can impose higher tax rates on upper-income taxpayers and companies, but that doesn’t necessarily translate into higher revenue. Simply stated, well-to-do taxpayers have considerable ability to earn less income and/or report less income when tax burdens increase, and they do the opposite when tax burdens decrease.

That’s true in the United States, and it’s true in European countries such as Sweden, France, Russia, Denmark, and the United Kingdom.

So even if politicians want to fleece upper-income taxpayers, that’s not a successful method of generating a lot of revenue.

Which is why a shift from a medium-sized welfare state (such as what exists in the United States) to a large-sized welfare state (common in Europe) means huge tax increases on ordinary taxpayers.

I’ve made this point before, but now I have some additional evidence thanks to a new report from the Organization for Economic Cooperation and Development. The Paris-based bureaucracy is probably my least-favorite international organization because of its advocacy for statism, but it collects and publishes lots of useful statistics about fiscal policy in the industrialized world.

And here are three charts from the new study that tell a very persuasive story (and a depressing story for ordinary taxpayers).

First, we can see how the average tax burden has increased substantially over the past 50 years.

And who is paying all that additional money to politicians?

As you can see from this second chart, income tax revenues have become a less-important source of revenue over time while social insurance taxes (mostly paid by lower-income and middle-class taxpayers) have become a more-important source of revenue.

The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time (and if we looked just at European governments that are part of the OECD, the numbers are even more depressing).

Now let’s put this data in context.

The United States now has a medium-sized welfare state financed mostly by upper-income taxpayers.

But because of dramatic demographic changes, we are doomed to have a large-sized welfare state. At least that’s what will happen if we don’t reform entitlement programs.

And if we leave policy on auto-pilot and there’s a substantial increase in the burden of government spending, it’s simply a matter of time before politicians figure out new ways of taking more money from lower-income and middle-class taxpayers.

Yes, they may also impose higher rates on “rich” taxpayers, but that will be mostly for symbolic purposes since those levies won’t generate substantial revenue.

Last but not least, don’t forget that European fiscal burdens will mean anemic European economic performance.

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Joe Biden, Basic Income, and Societal Capital

Most economic policy debates are predictable. Folks on the left urge higher taxes and bigger government while folks on the right advocate lower taxes and smaller government (thanks to “public choice” incentives, many supposedly pro-market politicians don’t follow through on those principles once they’re in office, but that’s a separate issue).

The normal dividing line between right and left disappears, however, when looking at whether the welfare state should be replaced by a “universal basic income” that would provide money to every legal resident of a nation.

There are some compelling arguments in favor of such an idea. Some leftists like the notion of income security for everybody. Some on the right like the fact that there would be no need for massive bureaucracies to oversee the dozens of income redistribution programs that currently exist. And since everyone automatically would get a check, regardless of income, lower-income people seeking a better life no longer would face very high implicit tax rates as they replaced handouts with income.

But there are plenty of libertarians and small-government conservatives who are skeptical. I’m in this group because of my concern that the net result would be bigger government and I don’t trust that the rest of the welfare state would be abolished. Moreover, I worry that universal handouts would erode the work ethic and exacerbate the dependency problem.

And I have an ally of the other side of the ideological spectrum.

Former Vice President Joe Biden…will push back against “Universal Basic Income,”… UBI is a check to every American adult, but Biden thinks that it’s the job that is important, not just the income. In a blog post…timed to the launch of the Joe Biden Institute at the University of Delaware, Biden will quote his father telling him how a job is “about your dignity. It’s about your self-respect. It’s about your place in your community.”

I often don’t agree with Biden, but he’s right on this issue.

Having a job, earning a paycheck, and being self-sufficient are valuable forms of societal or cultural capital.

By contrast, a nation that trades the work ethic for universal handouts is taking a very risky gamble.

Let’s look at what’s been written on this topic.

In an article for the Week, Damon Linker explores the importance of work and the downside of dependency.

…a UBI would not address (and would actually intensify) the worst consequences of joblessness, which are not economic but rather psychological or spiritual. …a person who falls out of the workforce permanently will be prone to depression and other forms of psychological and spiritual degradation. When we say that an employee “earns a living,” it’s not merely a synonym for “receives a regular lump sum of money.” The element of deserving (“earns”) is crucial. …a job can be and often is a significant (even the primary) source of a person’s sense of self-worth. …A job gives a person purpose, a reason to get up in the morning, to engage with the world and interact with fellow citizens in a common endeavor, however modest. And at the end of the week or the month, there’s the satisfaction of having earned, through one’s own efforts, the income that will enable oneself and one’s family to continue to survive and hopefully even thrive.

Dan Nidess, in a column for the Wall Street Journal, opines about the downsides of universal handouts.

At the heart of a functioning democratic society is a social contract built on the independence and equality of individuals. Casually accepting the mass unemployment of a large part of the country and viewing those people as burdens would undermine this social contract, as millions of Americans become dependent on the government and the taxpaying elite. It would also create a structural division of society that would destroy any pretense of equality. …UBI would also weaken American democracy. How long before the well-educated, technocratic elites come to believe the unemployed underclass should no longer have the right to vote? Will the “useless class” react with gratitude for the handout and admiration for the increasingly divergent culture and values of the “productive class”? If Donald Trump’s election, and the elites’ reactions, are any indication, the opposite is likelier. …In the same Harvard commencement speech in which Mr. Zuckerberg called for a basic income, he also spent significant time talking about the need for purpose. But purpose can’t be manufactured, nor can it be given out alongside a government subsidy. It comes from having deep-seated responsibility—to yourself, your family and society as a whole.

An article in the American Interest echoes this point.

…work, for most people, isn’t just a means of making money—it is a source of dignity and meaning and a central part of the social compact. Simply opting for accelerated creative destruction while deliberately warehousing the part of the population that cannot participate might work as a theoretical exercise, but it does not mesh with the wants and desires and aspirations of human beings. Communities subsisting on UBIs will not be happy or healthy; the spectacle of free public redistribution without any work requirement will breed resentment and distrust.

Writing for National Review, Oren Cass discusses some negative implications of a basic income.

…even if it could work, it should be rejected on principle. A UBI would redefine the relationship between individuals, families, communities, and the state by giving government the role of provider. It would make work optional and render self-reliance moot. An underclass dependent on government handouts would no longer be one of society’s greatest challenges but instead would be recast as one of its proudest achievements. Universal basic income is a logical successor to the worst public policies and social movements of the past 50 years. These have taken hold not just through massive government spending but through fundamental cultural changes that have absolved people of responsibility for themselves and one another, supported destructive conduct while discouraging work, and thereby eroded the foundational institutions of family and community that give shape to society. …Those who work to provide for themselves and their families know they are playing a critical and worthwhile role, which imbues the work with meaning no matter how unfulfilling the particular task may be. As the term “breadwinner” suggests, the abstractions of a market economy do not obscure the way essentials are earned. A UBI would undermine all this: Work by definition would become optional, and consumption would become an entitlement disconnected from production. Stripped of its essential role as the way to earn a living, work would instead be an activity one engaged in by choice, for enjoyment, or to afford nicer things. …Work gives not only meaning but also structure and stability to life. It provides both socialization and a source of social capital. It helps establish for the next generation virtues such as responsibility, perseverance, and industriousness. …there is simply no substitute for stepping onto the first rung. A UBI might provide the same income as such a job, but it can offer none of the experience, skills, or socialization.

Tyler Cowen expresses reservations in his Bloomberg column.

I used to think that it might be a good idea for the federal government to guarantee everyone a universal basic income, to combat income inequality, slow wage growth, advancing automation and fragmented welfare programs. Now I’m more skeptical. …I see merit in tying welfare to work as a symbolic commitment to certain American ideals. It’s as if we are putting up a big sign saying, “America is about coming here to work and get ahead!” Over time, that changes the mix of immigrants the U.S. attracts and shapes the culture for the better. I wonder whether this cultural and symbolic commitment to work might do greater humanitarian good than a transfer policy that is on the surface more generous. …It’s fair to ask whether a universal income guarantee would be affordable, but my doubts run deeper than that. If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

In a piece for the City Journal, Aaron Renn also comments on the impact of a basic income on national character. He starts by observing that guaranteed incomes haven’t produced good outcomes for Indian tribes.

…consider the poor results from annual per-capita payments of casino revenues to American Indian tribes (not discussed in the book). Some tribes enjoy a very high “basic income”—sometimes as high as $100,000 per year— in the form of these payments. But as the Economist reports, “as payment grows more Native Americans have stopped working and fallen into a drug and alcohol abuse lifestyle that has carried them back into poverty.”

And he fears the results would be equally bad for the overall population.

Another major problem with the basic-income thesis is that its intrinsic vision of society is morally problematic, even perverse: individuals are entitled to a share of social prosperity but have no obligation to contribute anything to it. In the authors’ vision, it is perfectly acceptable for able-bodied young men to collect a perpetual income while living in mom’s basement or a small apartment and doing nothing but play video games and watch Internet porn.

Jared Dillian also looks at the issue of idleness in a column for Bloomberg.

I do not like the idea of a universal basic income. Its advocates fundamentally misunderstand human nature. What they do not realize about human beings is that for the vast majority of them, a subsistence level of income is enough — and those advocates are blind to the corrosive effects that widespread idleness would have on society. If you give people money for doing nothing, they will probably do nothing. …A huge controlled experiment on basic income has already been run — in Saudi Arabia, where most of the population enjoys the dividends of the country’s oil wealth. Saudi Arabia has found that idleness leads to more political extremism, not less. We have a smaller version of that controlled experiment here in the U.S. — for example, the able-bodied workers who have obtained Social Security Disability Insurance payments and are willing to stay at home for a piddling amount of money. …the overarching principle is that people need work that is worthwhile, for practical and psychological reasons. If we hand out cash to anyone who can fog a mirror, I figure we are about two generations away from revolution.

By the way, it’s not just American Indians and Saudi Arabians that are getting bad results with universal handouts.

Finland has been conducting an experiment and the early results don’t look promising.

The bottom line is that our current welfare system is a dysfunctional mess. It’s bad for taxpayers and recipients.

Replacing it with a basic income probably would make the system simpler, but at a potentially very high cost in terms of cultural capital.

That’s why I view federalism as a much better approach. Get Washington out of the redistribution racket and allow states to compete and innovate as they find ways to help the less fortunate without trapping them in dependency.

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Keynesian Economics and the Fallacy of Boosting Growth by Destroying Wealth

Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics. Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

I’m always stunned when sentient adults make this kind of statement.

Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

Jeff Jacoby explains why this is poisonous economic analysis.

Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

By the way, I don’t think any Keynesians actually want disasters to happen.

They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

But let’s not get sidetracked.

For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

…Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

I’ll close by augmenting theory and academic analysis with some real-world observations. Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

Though they always have an excuse. The government should have spent more, they tell us.

P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Dark Humor from the Socialist Hellhole of Venezuela

Back in 2015, I mocked Venezuelan socialism because it led to shortages of just about every product. Including toilet paper.

But maybe that doesn’t matter. After all, if people don’t have anything to eat, they probably don’t have much need to visit the bathroom.

The Washington Post reports that farmers are producing less and less food because of government intervention, even though the nation is filled with hungry people.

Venezuela, whose economy operates on its own special plane of dysfunction. At a time of empty supermarkets and spreading hunger, the country’s farms are producing less and less, not more, making the caloric deficit even worse. Drive around the countryside outside the capital, Caracas, and there’s everything a farmer needs: fertile land, water, sunshine and gasoline at 4 cents a gallon, cheapest in the world. Yet somehow families here are just as scrawny-looking as the city-dwelling Venezuelans waiting in bread lines or picking through garbage for scraps. …“Last year I had 200,000 hens,” said Saulo Escobar, who runs a poultry and hog farm here in the state of Aragua, an hour outside Caracas. “Now I have 70,000.” Several of his cavernous henhouses sit empty because, Escobar said, he can’t afford to buy more chicks or feed. Government price controls have made his business unprofitable…the country is facing a dietary calamity. With medicines scarce and malnutrition cases soaring, more than 11,000 babies died last year, sending the infant mortality rate up 30 percent, according to Venezuela’s Health Ministry. …Child hunger in parts of Venezuela is a “humanitarian crisis,” according to a new report by the Catholic relief organization Caritas, which found 11.4 percent of children under age 5 suffering from moderate to severe malnutrition… In a recent survey of 6,500 Venezuelan families by the country’s leading universities, three-quarters of adults said they lost weight in 2016 — an average of 19 pounds. This collective emaciation is referred to dryly here as “the Maduro diet,” but it’s a level of hunger almost unheard-of… Venezuela’s disaster is man-made, economists point out — the result of farm nationalizations, currency distortions and a government takeover of food distribution. …The price controls have become a powerful disincentive in rural Venezuela. “There are no profits, so we produce at a loss,” said one dairy farmer.

Here’s where we get to the economics lesson. When producers aren’t allowed to profit, they don’t produce.

And when we’re looking at the production of food, that means hungry people.

Even the left-wing Guardian in the U.K. has noticed.

Hunger is gnawing at Venezuela, where a government that claims to rule for the poorest has left most of its 31 million people short of food, many desperately so. …Adriana Velásquez gets ready for work, heading out into an uncertain darkness as she has done since hunger forced her into the only job she could find at 14. She was introduced to her brothel madam by a friend more than two years ago after her mother, a single parent, was fired and the two ran out of food. “It was really hard, but we were going to bed without eating,” said the teenager, whose name has been changed to protect her. …Venezuela’s crisis has deepened, the number of women working at the brothel has doubled, and their ages have dropped. “I was the youngest when I started. Now there are girls who are 12 or 13. Almost all of us are there because of the crisis, because of hunger.” She earns 400,000 bolivares a month, around four times the minimum wage, but at a time of hyperinflation that is now worth about $30, barely enough to feed herself, her mother and a new baby brother.

This is truly sad.

Our leftist friends like to concoct far-fetched theories of how prostitution is enabled by everything from low taxes to global warming.

In the real world, however, socialism drives teenage girls (or even younger) to work in brothels.

That’s such a depressing thought that let’s shift the topic back to hunger and toilet paper.

Especially since Venezuela’s dictator is bragging that the nation’s toilet paper shortage has been solved!

This is definitely a dark version of satire.

But Venezuela is such a mess that it’s hard to know where to draw the line between mockery and reality.

For instance, here’s another “benefit” of limited food. If you don’t eat, it’s not as necessary to brush your teeth.

And is the socialist paradise of Venezuela, that makes a virtue out of necessity since – surprise – there’s a shortage of toothpaste.

The Washington Post has the grim details.

Ana Margarita Rangel…spends everything she earns to fend off hunger. Her shoes are tattered and torn, but she cannot afford new ones. A tube of toothpaste costs half a week’s wages. “I’ve always loved brushing my teeth before going to sleep. I mean, that’s the rule, right?” said Rangel, …“Now I have to choose,” she said. “So I do it only in the mornings.” …The government sets price caps on some basic food items, such as pasta, rice and flour. …those items can usually be obtained only by standing in lines for hours or by signing up to receive a subsidized monthly grocery box from the government… Since 2014, the proportion of Venezuelan families in poverty has soared from 48 percent to 82 percent… Fifty-two percent of families live in extreme poverty, according to the survey, and about 31 percent survive on two meals per day at most.

Isn’t socialism wonderful! You have the luxury of choosing between two meals a day, or one meal a day plus toothpaste!

By the way, the central planners have a plan.

Though it won’t make Bugs Bunny happy.

Rabbit is now on the menu! Here are some excerpts from a CNN report.

Let them eat rabbits. That was basically the message from President Nicolas Maduro to Venezuelans starving and struggling through severe food shortages… The Venezuelan leaders…recommend that people raise rabbits at home as a source of food. …The agriculture minister argued that rabbits easily reproduce and are a source of protein. He also recommended citizens consider raising and growing other animals and vegetables at home. It’s just the latest attempt to try and solve the food shortage problem. The government forces citizens to pick up groceries on certain days of the week depending on social security numbers.

Gee, isn’t this wonderful. The government cripples markets so they can’t function and then advocates people live like medieval peasants.

Maybe there should be price controls on clothing, along with having the government in charge of distribution. That will wreck that market as well, so people can make their own clothes out of rabbit pelts.

I wonder whether a certain American lawmaker is rethinking his praise of Venezuelan economic policy?

Based on what he said as recently as last year, the answer is no.

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Civil Asset Forfeiture: A Slice of Venezuelan-Style Thuggery in America

I periodically list people who have suffered horrible abuse because of despicable actions by government. At some point, I’ll have to create a special page to memorialize these victims. Something like the Bureaucrat Hall of Fame or Moocher Hall of Fame, though I haven’t figured out a good name (“Victims of Government Thuggery Hall of Fame” is too wordy).

Anyhow, many of these unfortunate people (the Dehko family, Carole Hinders, Joseph Rivers, and Thomas Williams) have something in common. They are victims of theft. But they can’t call law enforcement because their money and property was stolen by the government.

Such theft is enabled by “civil asset forfeiture” and we can now add Gerardo Serrano to the list of victims. The Washington Post has the disgusting story of what happened.

On Sept. 21, 2015, Gerardo Serrano was driving from his home in Kentucky to Piedras Negras, Mexico, when his truck was searched by U.S. Customs and Border Protection agents at Texas’s Eagle Pass border crossing. After finding a small ammunition clip, the agents took Serrano’s truck from him. Two years later, Customs hasn’t charged Serrano with a crime, and they haven’t given his truck back either.

The bureaucrats could take his truck because Civil asset forfeiture basically gives bureaucrats a license to steal. I’m not joking, though I wish I was.

Customs seized the truck under the laws of civil asset forfeiture, which allow authorities to take cash and property from citizens upon suspicion of criminal wrongdoing. Because it happens under civil law, no criminal conviction — or even criminal charge — is necessary for authorities to take property they believe is connected to a crime.

That’s bad enough. But it gets even worse when you read about what happened to Serrano.

In September 2015, Serrano drove his new Ford F-250 pickup from his home in Kentucky to the Mexico border. He was going to visit a cousin he hadn’t seen in many years. He snapped a few photos with his phone as he drove through the checkpoint, planning to upload them to Facebook, just as he says he had been doing throughout his whole trip, to share the experience with friends and family back home. That’s when the trouble started. One of Serrano’s photos shows two Customs agents looking in his direction, hands held up. According to his lawsuit, the agents objected to his taking photos.

Are these bureaucrats members of some primitive jungle tribe that believes a photograph steals their souls?

That would at least be a semi-rational explanation.

But if you read the rest of the story, they’re apparently petulant jerks (I had other words in mind, but this is a family-friendly site).

Those agents waved him over to the side of the road, on the U.S. side of the border, and demanded he hand over his phone. Serrano said “no.” Customs declined to say whether there’s a prohibition on photography at border crossings. …one of the agents unlocked Serrano’s door, unbuckled his seat belt, and yanked him out of the car. “I know I didn’t do anything wrong,” Serrano told The Post. “So I say ‘listen, you can’t yank me out like that, I’m an American, you can’t do that to me.’”The agent took his phone, and demanded Serrano give him the passcode. Serrano recalls he told the agent to “go get a warrant.”By this time, other agents had started searching his truck. “I said, ‘Hey listen I have rights, you’re violating my rights, you’re not supposed to do that kind of stuff,’” Serrano recounted. …“I’m sick of hearing about your rights,” the agent said, according to Serrano’s lawsuit. “You have no rights here.”Eventually, one of the agents searching the truck found an ammunition clip containing five .380-caliber bullets and yelled “we got him!,” according to the lawsuit. …Serrano had planned to take his pistol on the trip, but he left it home at the strong urging of his cousin, who explained the potential consequences of bringing it to Mexico. But he didn’t realize the extra ammunition clip, containing five .380 caliber rounds, was still in the center console of his truck.

The bureaucrats must have been trained in Venezuela.

At the crossing, the CBP agents put Serrano in handcuffs and continued to ask him to give up the passcode. “You go get that warrant,” Serrano says he told them. “I’ll wait for you in jail.” Serrano didn’t believe that any judge would grant a warrant to search a phone for taking pictures at the border. …The agents eventually placed Serrano in a locked cell without food, water or a toilet, Serrano says. Periodically someone would come in and ask for the passcode to his phone, he says. He refused every time.

The good news is that Mr. Serrano won, sort of.

Serrano says that after three hours, the agents told him he was free to go, returned his phone and said he wasn’t being arrested or charged with any crime. Serrano says he was elated.

The bad news is that the bureaucrats stole his truck.

But then, the agents handed him a document informing him that Customs was taking his truck and the ammunition clip. Those items were “subject of legally becoming the property of the Federal Government (forfeiture),” according to the document, because Serrano had failed to disclose the presence of the clip, making the truck a “conveyance of illegal exportation.” …Several weeks later he received a formal forfeiture notice from Customs, informing him that the government believed his truck was being used to transport “arms or munitions of war.” The notice gave him a number of options to pursue if he wanted his truck back.

Here’s the part that only be described as adding insult to injury.

One of the options was to make an “offer in compromise” — send Customs a check, and if they deemed the amount to be high enough, they would return his truck to him. “That’s like a shakedown,” Serrano said.

Fortunately, the great folks at the Institute for Justice are helping him challenge this horrific example of theft by government.

By the way, you may be thinking Serrano is some sort of thug, maybe a gang member from MS-13? I’ve had some defenders of civil asset forfeiture claim that the program is justifiable because it gives law enforcement leeway to go after bad guys that they can identify with their “sixth sense.” Was Serrano a bad guy who was nailed, albeit using a bad law?

Um…, not exactly.

Serrano is originally from Chicago but he’s lived on a farm in Kentucky for 20 years. A lifelong Republican, he unsuccessfully ran for a seat in Kentucky’s House of Representatives in 2014 on an explicitly pro-Second Amendment platform. He describes himself as a civil libertarian, and has a concealed carry permit for a Sig Sauer .380 pistol he carries for self-defense. “I believe in freedom,” he said in an interview with The Washington Post. “That’s what made this country great, is our freedom, our liberty.”

Serrano sounds like a great American. If he’s an immigrant, I want more just like him.

He understands what’s really doing on.

“It’s like there’s a war going on and they want to make war with my Bill of Rights,” he said. “How do they get away with this? How could this happen?”

For what it’s worth, I hope Senator Rand Paul (who is willing to fight for liberty) place a “hold” on all nominations to the Justice Department and Department of Homeland Security until and unless the government returns Serrano’s truck and compensates him for mistreatment.

Let’s close with some additional excerpts from the column that explain the injustice of civil asset forfeiture.

Many Americans haven’t heard of civil asset forfeiture, the legal provision that grants police the authority to seize cash and property from people not charged with a crime. The practice doesn’t follow the traditional American concept of “innocent until proven guilty.” If police suspect that you acquired something as a result of illegal activity, or even if it is connected to illegal activity, they can take it from you. If you want to get it back, the onus is on you to prove you got it legally. Once property is seized and forfeited, in most states and at the federal level police can either keep it for themselves or sell it at auction to raise money for the department. Critics say this creates a perverse profit motive. …said Robert Johnson, Serrano’s attorney. “That’s an open invitation to abuse.” The practice is widespread. In 2014, for instance, federal law enforcement officers alone took more than $5 billion worth of cash and property from people — more than the total amount of reported burglary losses that year. After public outcry, the Obama administration put in place a number of restrictions on forfeiture that made it harder, in some cases, for authorities to take property without a criminal conviction. But Attorney General Jeff Sessions recently reversed those restrictions.

Every sentence of the above passage is spot on. Including the last two sentences. The Obama Administration actually took a small step in the right direction, but that was reversed in a terrible move by Trump’s Attorney General.

And here are some excerpts from a column published by CapX.

…asset forfeiture lets government agents seize Americans’ assets (cash, but also cars and even houses) on the mere suspicion that they were involved in a crime. Asset forfeiture is intended to deprive criminals of their ill-gotten gains, but frequently enables police to take the property of Americans who remain innocent in the eyes of the law. …Asset forfeiture primarily targets the poor. Most forfeitures are for small amounts: in 2012, the Institute for Justice, a libertarian law firm that has focused heavily on asset forfeiture, analyzed forfeiture in 10 states and found that the median value of assets seized ranged from $451 (Minnesota) to $2,048 (Utah). Given that law enforcement routinely takes everything they find in a forfeiture case, these small values suggest the relative poverty of the victims. The procedural hurdles for challenging asset forfeiture also mean that poor people are less able to get their money back. The average forfeiture challenge requires four weekdays in court; missing four days of work can be a prohibitive expense for Americans living paycheck to paycheck. …Asset forfeiture is especially dangerous for the unbanked, because police and federal agents consider high amounts of cash to be suspect. …Asset forfeiture functions as a regressive tax, which reduces low-income Americans’ economic mobility. A family that sees their savings wiped out has to start again from the bottom. A person whose cash rent payment is seized may turn to payday loans or the black market, or simply be evicted—none of which are conducive to upward mobility.

Civil asset forfeiture is reprehensible.

The fact that poor people are disproportionately harmed is awful (and pervasive in parts of the criminal justice system).

P.S. To their credit, the first two administrators of the federal government’s civil asset forfeiture program now recognize that it’s become an abusive monster and want it repealed.

P.P.S. It’s possible that the border bureaucrats were acting because of bias, of perhaps profiling Serrano because of his Latino heritage. But I never hurl that accusation without some real evidence. Unlike some people.

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Unsurprisingly, “Free” Healthcare from Government Is Very Expensive

In a strange way, I admire Bernie Sanders. He openly embraces big government. Back during the 2016 campaign, I frequently observed that the difference between the Vermont Senator and Hillary Clinton is that he wanted America to become Greece at a much faster rate.

Well, he just installed a turbo-charged engine and stepped on the accelerator. He’s proposed a single-payer healthcare scheme that is being called “Medicare for all.”

According to Sanders and other advocates, the government’s health system is a good role model: People pay a tax while working and they get health care when they’re old. But there’s a not-so-slight problem with that approach. For every dollar that Medicare recipients paid to the program, taxpayers are financing three dollars of spending.

That approach is workable (though only in the short run) for Medicare. But it won’t work if government is paying for everyone’s health care.

So even Bernie admits that a tax increase will be necessary. And not just any tax hike. He’s proposing the biggest tax hike in the history of the United States. Heck, it’s the biggest tax hike in world history. Here are some of the frightening details, as reported by the Washington Post.

The Medicare for All legislation backed by Sen. Bernie Sanders (I-Vt.) and 16 Senate Democrats does not include details on how it might be paid for. …Sanders’s Senate office released a white paper on possible ways to pay for the legislation.

He starts with a giant payroll tax of 11.5 percent (on top of the 15.3 percent payroll tax that already exists).

The taxes themselves would fall on both employers and employees. Sanders floats the idea of a 7.5 percent tax on employers… Another tax, of 4 percent, would hit individuals.

To understand what this means, just contemplate the disastrous impact of Obamacare on the job market.

Sanders also has a big class-warfare tax hike.

The next big slice of funding: higher tax rates on the very wealthy. Income…$250,000…higher…would be hit harder, on an upward sliding scale, ending at a 52 percent tax on income over $10 million.

By the way, imposing a tax is the easy part. Collecting revenue will be a much harder task, especially since Sanders wants to take the very successful experiment of the 1980s and run it in reverse. He also wants a big levy on banks (foreign financial institutions are probably praying for that outcome), an extra layer of tax on American companies competing in world markets (foreign corporations are cheering for that one), along with a huge boost in the death tax and the imposition of a wealth tax (lawyers and accountants doubtlessly are licking their chops).

Sanders imagines a tax on financial institutions worth more than $50 billion, a one-time tax on offshore profits (an idea that is continually floated then sunk in tax reform negotiations), a higher estate tax (topping out at 55 percent), and a 1 percent wealth tax on the richest 0.1 percent of households.

That’s all the tax hikes listed in the Washington Post story, but Sanders also has some additional material on his office website.

A huge increase in the double taxation of dividends and capital gains (particularly when you consider that personal tax rates will be much higher.

…end the special tax break for capital gains and dividends on household income above $250,000, treating this income the same as income earned from working.

A restriction on itemized deductions.

…itemized deductions would be capped at 28 percent for households making over $250,000. In other words, for every dollar in tax deduction a high-income household could save at most 28 cents.

For what it’s worth, I don’t like the state and local tax deduction and the charitable deduction, and I also don’t like preferences for housing.

But I want to eliminate such distortions only if the revenue is used to finance lower tax rates, not to finance bigger government.

That being said, let’s get back to our list. Sanders has a special tax targeting small business.

…ensure that all business income of high-income people would be subject to the existing 3.8 percent tax to fund Medicare, either through the net investment income tax or the additional Medicare tax on earned income.

Last but not least, he wants to skim $112 billion over 10 years from corporations by manipulating accounting rules.

…eliminate the “last-in, first-out” (LIFO) accounting method.

The bottom line is that Sanders, in one fell swoop, would saddle America with a European-sized government. And that would mean European-level taxes. The only thing that’s missing is he didn’t propose a value-added tax.

Though I’m sure that would get added to the mix since the huge increase in the government’s fiscal burden would retard growth. And since that would mean sluggish revenue, politicians would seek another way to extract more money from the economy’s productive sector.

P.S. I’m a policy wonk rather than a political tactician, but my guess is that Bernie is misreading the mood of the American people. Yes, “free” healthcare sounds nice, but people get understandably scared when they get a price tag. This is why single-payer was repealed in Bernie’s home state. And it’s why Colorado voters rejected a similar scheme by a landslide margin.

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Private Sector vs Government: The Humor Version

I’ve made very serious (and hopefully substantive) arguments about why small government and free markets are the recipe for prosperity.

Simply stated, profit and loss is a powerful feedback mechanism, and entrepreneurs and business owners who want to make money face constant pressure to attract consumers by offering better products at affordable prices.

These forces are so powerful that the private sector even does a good job in some areas that most people assume are reserved for government, such as criminal justice, roads, and airport security.

But let’s examine this issue today from a whimsical perspective. I found a couple of clever images on Reddit‘s libertarian page.

Here’s the first example, which will make instantaneous sense for anyone who’s ever walked into a McDonald’s and a DMV on the same day.

The second example is more elaborate, but makes a similar point. Those of us with gray hair have seen the amazing developments produced by the private sector in this collage.

But can anyone think of something that has improved in the public sector?

For what it’s worth, the two cars in the column for the private sector don’t look that different. But, once again, those with gray hair will probably remember how often they used to break down in the past. The computerized engines have greatly improved operations and maintenance. Not to mention map programs, built-in TVs for the kids in the back seat, and other positive changes.

Let’s close with a serious point. Yes, business owners are greedy. They’re looking out for their own self interest. They would love to charge us high prices.

But a system of free enterprise means that they can only earn money if they cater to our needs and wants. And so long as politicians aren’t showering them with bailouts, subsidies, protection, or handouts, that means they compete to provide us ever-better goods and services at ever-more-affordable prices.

In other words, Adam Smith was right.

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Government Run Amok at the Bureau of Alcohol, Tobacco, and Firearms

The Bureau of Alcohol, Tobacco, and Firearms (BATF) must be anxious to get on my list of government bureaucracies that shouldn’t exist.

The bureaucrats have engaged in some really silly and petty behavior (such as confiscating Airsoft toy guns because they might be machine guns), and they’ve engaged in some behavior that is criminally stupid and dangerous (running guns to Mexican drug gangs as part of the “Fast and Furious” fiasco).

Now we have another example. Though it’s so bizarre that I’m not sure how to classify it. Basically, the bureaucrats created an illegal slush fund, and then used the money illegally.

The New York Times has been on top of this story. Here are excerpts from the latest report.

For seven years, agents at the Bureau of Alcohol, Tobacco, Firearms and Explosives followed an unwritten policy: If you needed to buy something for one of your cases, do not bother asking Washington. Talk to agents in Bristol, Va., who controlled a multimillion-dollar account unrestricted by Congress or the bureaucracy. …thousands of pages of newly unsealed records reveal a widespread scheme — a highly unorthodox merger of an undercover law enforcement operation and a legitimate business. What began as a way to catch black-market cigarette dealers quickly transformed into a nearly untraceable A.T.F. slush fund that agents from around the country could tap. …One agent steered hundreds of thousands of dollars in real estate, electronics and money to his church and his children’s sports teams, records show. …At least tens of millions of dollars moved through the account before it was shut down in 2013, but no one can say for sure how much. The government never tracked it.

Oh, by the way, the BATF was breaking the law.

Federal law prohibits mixing government and private money. The A.T.F. now acknowledges it can point to no legal justification for the scheme.

But you won’t be surprised to learn that there have been no consequences.

…no one was ever prosecuted, Congress was only recently notified, and the Justice Department tried for years to keep the records secret.

And it’s also worth noting that this is also a tax issue. As I’ve noted before, high tax rates encourage illegality.

Though cigarettes are available at any corner store, they are extraordinarily profitable to smuggle. That’s because taxes are high and every state sets its own rates. Virginia charges $3 per carton. New York charges $43.50. The simplest scheme — buying cigarettes in Virginia and selling them tax-free in New York — can generate tens of thousands of dollars in illicit cash. By some estimates, more than half of New York’s cigarettes come from the black market.

By the way, I can help but wonder why the federal government is engaging in all sorts of dodgy behavior to help enforce bad state tax laws. Yes, I realize the cigarettes are crossing state lines, but so what? The illegal (but not immoral) behavior occurs when an untaxed cigarette is sold inside the borders of, say, New York. Why should Washington get involved?

In other words, I like the fact that borders limit the power of government. It’s why I don’t like global schemes to undermine tax competition (why should Swiss banks be required to enforce bad U.S. tax law?), and it’s why I don’t like the so-called Marketplace Fairness Act (why should merchants in one state be required to enforce the sales taxes of other states?).

But I’m digressing.

Let’s get back to the Bureau’s misbehavior. Here’s some additional reporting from the U.K.-based Times.

A US government crime-fighting agency ran a secret bank account that its employees used to buy luxury cars, property and trips to casinos. Officers for the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), charged with investigating smuggling and gun crimes, built up a slush fund worth tens of millions of dollars through illicit cigarette sales, ostensibly as part of an operation to catch traffickers. The scandal is the latest controversy to hit the agency, which has been criticised in recent years for lack of accountability and allowing the flow of guns and drugs to go unchecked. …Cash from the slush fund generated at an ATF field office in Bristol, Virginia, …funded activities such as a trip to Las Vegas, donations to agents’ children and the booking of a $21,000 suite at a Nascar race.

And what about the overall BATF bureaucracy? Well, it’s getting some unfavorable attention. Keep in mind that this scandal is on top of the “Fast and Furious” scandal of the Obama years.

The ATF has said that it has “implemented substantial enhancements to its policies, and has markedly improved leadership, training, communication, accountability and operational oversight”. Under the previous administration, it was widely derided for a botched weapons operation known as “Fast and Furious”. The agency allowed licensed firearms dealers to sell weapons to illegal buyers, hoping to track the guns to Mexican drug cartel kingpins. But out of the 2,000 firearms sold, only a fraction have been traced. The secret account scandal has renewed calls from across the political spectrum for the department of about 2,000 agents to be reformed or shut down.

Last but not least, I think we have a new member of the Bureaucrat Hall of Fame.

Thomas Lesnak, a senior ATF investigator, began the scheme. …Mr Lesnak retired with his pension and was not reprimanded.

Just like Lois Lerner and the IRS, engaging in corrupt and crooked behavior and then escaping any punishment.

Maybe the two of them should hook up? They’d make a great couple. I’m sure they could even figure out a way to make taxpayers finance their wedding and honeymoon.

P.S. The “Fast and Furious” scheme was just one of scandals that occurred during the Obama years, but it may have been the most foolish. Didn’t anybody at the BATF realize that it wasn’t a good idea to funnel weapons to Mexican drug gangs?!?

P.P.S. The silver lining to that dark cloud is that we got a couple of good one-liners about the Obama Administration’s gun-running scandal from Jay Leno and Jimmy Fallon.

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Income Trends, the Middle Class, and American Prosperity

Let’s consider some good news about America.

Some folks on the left like to claim that the middle class is shrinking and that therefore we need bigger government and more redistribution to protect these Americans from falling into poverty.

Well, the first half of that statement is true. The middle class is becoming smaller. But here’s the good news. As I noted in 2015 when sharing some data from Pew, the middle class is shrinking because more and more households are earning six-figure incomes.

Now we have more confirmation. Courtesy of Mark Perry of the American Enterprise Institute, here’s a nice chart based on data from the Census Bureau’s new report on income and poverty in the United States.

Want to feel even better?

In a column for CNBC, Professor Daniel Smith of Troy University explains that government data understates the improvements in living standards. He points out that total compensation has increased much faster than wages.

Complaints that the rich are getting richer while the majority have hit a brick wall in wage growth have led to calls to impose regulations and taxes aimed at creating a “fair” economy. This mantra, however, is wrought with holes and erroneous interpretation of the data… Over the last few decades, employees have been receiving an increasingly larger portion of their overall compensation in the form of benefits such as health care, paid vacation time, hour flexibility, improved work environments and even daycare. …Total compensation, which adds these benefits to wages and salaries, shows that earnings have actually increased more than 45 percent since 1964.

And he notes that income gains are understated if measured against the PCE index rather than the consumer price index.

Furthermore, “purchasing power,” the amount of stuff people can buy with each dollar, has changed dramatically… CPI is notorious for overstating inflation, and thus understating the growth of real wages received by workers. Adjusting the data with the more appropriate Personal Consumption Expenditure index brings the growth in average hourly wages from 5.58 percent to more than 35 percent and the growth in total compensation of employees from more than 45 percent to more than 87 percent.

The bottom line is we’re able to buy more and better for less work.

But even that index fails to grasp the drastic increase in what workers get for their wages. …100.5 hours of work was required to purchase a washing machine in 1959 compared to just 23.3 hours of work (for the average worker) in 2013. Purchasing a TV demanded an astounding 127.8 hours of work in 1959, whereas a worker in 2013 could purchase one with only 20.7 hours of work. Moreover, the improved quality of these goods over the past few decades is staggering. …Today’s iPhones and other smart-phone models seem like a different species from their predecessors… We’ve seen the same progress in knee-replacement surgeries, computers, the Internet, vacuum cleaners, and other technologies we’ve come to rely on.

Professor Smith wrote this piece back in 2014, but these arguments apply just as well today as they did back then.

Though I don’t want to be a Pollyanna. There are very worrisome trends in our economy, especially increased dependency and reduced labor force participation.

So if you prefer to look at the glass as being half empty, Nicholas Eberstadt of the American University authored an article that is very pessimistic assessment about recent trends.

It turns out that the year 2000 marks a grim historical milestone of sorts for our nation. For whatever reasons, the Great American Escalator, which had lifted successive generations of Americans to ever higher standards of living and levels of social well-being, broke down around then—and broke down very badly. …it should be painfully obvious that the U.S. economy has been in the grip of deep dysfunction since the dawn of the new century. …It took America six and a half years—until mid-2014—to get back to its late 2007 per capita production levels. And in late 2016, per capita output was just 4 percent higher than in late 2007—nine years earlier. By this reckoning, the American economy looks to have suffered something close to a lost decade. …Between 2000 and 2016, per capita growth in America has averaged less than 1 percent a year. To state it plainly: With postwar, pre-21st-century rates for the years 2000–2016, per capita GDP in America would be more than 20 percent higher than it is today. …If 21st-century America’s GDP trends have been disappointing, labor-force trends have been utterly dismal. Work rates have fallen off a cliff since the year 2000 and are at their lowest levels in decades.

I don’t disagree with any of this. Growth has been weak this century.

Which is hardly a surprise since we’ve seen an erosion of economic liberty (thanks Bush and Obama!).

But I also want to keep things in perspective. Weak growth is better than no growth. Our living standards are increasing, even if they could – and should – be rising at a faster clip.

So let me swing back to the Pollyanna side by sharing a chart which ostensibly is bad news because it shows rising inequality. But I view it as good news because it shows that all of us are at least 40 percent richer – in real terms – than we were back around 1980.

By the way, Thomas Sowell has pointed out that higher-income households tend to do better because they have more people working, while lower-income households feature lots of dependency. Moreover, if Professor Smith and others are right, the increase in living standards is far greater than what this chart shows anyhow. But even if you accept this data at face value, we are all getting richer over time.

Yes, growth rates should be faster and incomes should be climbing more rapidly. Especially at the bottom. Whether you look at global data or country-specific data, that’s an argument for free markets and small government.

As I wrote last year, we don’t need perfect policy to get more prosperity. Just give the private sector some breathing room.

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Good Tax Reform Requires Loophole Closing, not Just lower Tax Rates and Less Double Taxation

If tax policy was a religion, the Holy Trinity of reform would be very straightforward.

• Lower tax rates in order to encourage more productive behavior.
• Get rid of double taxation in order to enable saving and investment.
• End distorting preferences in order to reduce economically irrational decisions.

But if tax policy was a meal, the first two items would be the dessert and the last item would be the vegetable. Simply stated, politicians like lowering tax rates and reducing double taxation because that makes most people happy (at least the ones who actually pay tax).

But when you take away loopholes, the people who benefit from those preferences are unhappy. And they get very noisy. Interest groups hire lobbyists. Trade associations spring into action. Campaign contribution get dispensed.

If tax policy was a movie, it would be Revenge of the Swamp Creatures.

In this clip from a recent interview, I talk about some of the dessert, specifically a much-needed reduction in the corporate tax rate.

Bu today I want to focus more on the vegetables of itemized deductions.

Here’s some of what Reuters reported last month about the swamp gearing up to protect its privileges.

…industry groups and other sectors of society are gearing up to fight proposed changes to the personal income tax. …proposed changes to the personal tax code have already stirred opposition from realtors, home builders, mortgage lenders and charities.

And here’s a description of what might happen and the impact.

To simplify the tax code, Republicans have proposed eliminating nearly all tax write-offs including those for state and local taxes, then doubling the standard deduction. This would eliminate the incentive to itemize and should drastically reduce the number of taxpayers who do so. Currently, many taxpayers use itemized deductions, claiming write-offs for things like charitable contributions, interest paid on a mortgage and state and local taxes. If the standard deduction becomes larger, fewer taxpayers will need to itemize, reducing the incentive to hold a mortgage or contribute to charity. …Estimates suggest more than half of taxpayers would stop itemizing under the proposed plan.

Should we hope that these reforms occurs? If people lose or forego itemized deductions, would that be a good outcome?

As a long-time fan of the flat tax, I’m obviously not a fan of these preferences. Though I always stress that I only want to get rid of loopholes if the money is used to finance lower tax rates. At the risk of stating the obvious, I don’t want the money being used to finance bigger government.

Let’s see what others have said, starting with Justin Fox’s column for Bloomberg. He’s not happy that loopholes disproportionately benefits taxpayers with above-average incomes.

Let’s talk about upper-middle-class entitlements, the subsidies that flow almost entirely to those in the upper fifth or even tenth of the income distribution. …Why do these subsidies continue…? Mainly, it seems, because they’ve been granted to a sizable, influential population who, it is feared, will fight any effort to take them away. There are other interested parties, too — the real estate industry and mortgage lenders in the case of the mortgage interest deduction… But mainly it’s the millions of upper-middle-class Americans who, like me and my family, are beneficiaries of tax subsidies.

He’s right. I’m more upset about the economic distortions these preference create, but there’s no doubt that upper-income taxpayers reap most of the benefits.

Here’s his conclusion, which I think is spot on.

…if these tax breaks had never become law, no one would really miss them. Houses might cost a bit less. College might be slightly cheaper. Income tax rates might be a little lower. The economy might run a little bit more smoothly. So … how do we get to that place from here?

By the way, Fox includes a chart showing how richer taxpayers get more benefit from the mortgage interest deduction.

That’s certainly true, and I’ve previously shared data showing how the middle class gets almost nothing from itemized deductions compared to high-income taxpayers.

Let’s focus specifically on those goodies for the rich. This chart from the Tax Foundation reveals that the state and local tax break is especially lucrative.

For what it’s worth, the state and local deduction is my least favorite, so I’d like to see this chart change.

Though the healthcare exclusion may do even more economic damage (I assume it’s not included in the above chart since it’s an exclusion rather than a deduction).

But the bottom line of today’s column is that we’re not going to get the dessert of lower tax rates unless policy makers are willing to eat some vegetables – i.e., get rid of some tax preferences. Or, to be more exact, it will be impossible, given congressional budget rules, to have any sort of meaningful permanent reforms of the tax system unless there are revenue raisers to offset the tax cuts.

P.S. In any discussion of tax preferences, it’s important to properly define a loophole. Folks on the right generally think income should be taxed only one time (technically, they favor “consumption-base” taxation). So a loophole is a provision that results in zero tax on a particular activity.

Folks on the left generally think the tax code should impose double taxation (technically, they favor “Haig-Simons” taxation). So they have a much bigger list of loopholes, mostly focused on provisions that limit the extra layers of tax imposed on income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even see Republicans mistakenly use this benchmark.

By the way, Justin Fox presumably is in the Haig-Simons camp since his column treats the capital gains tax and 401(k)s as loopholes. But he cited one of my columns, so I can’t bring myself to criticize him.

P.P.S. It (almost) goes without saying that many folks on the left want to curtail tax breaks. They openly argue that it is good to divert a larger share of income into the hands of politicians and in order to facilitate bigger government. Some of them are even honest enough (crazy enough?) to openly assert that all income belongs to the government.

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The Humorous Version: It Ain’t Easy Being Libertarian

In my collection of libertarian humor, my favorite item is probably the video mocking us for reflexive anti-statism. It presumably was put together by a statist, but I’ll be the first to admit that it’s very clever satire.

Though if you prefer favorable humor, I very much enjoy Libertarian Jesus (featured here and here) because he makes a very serious point about the absurdity of equating government coercion with compassion (a lesson Pope Francis needs to understand).

Today, I have an updated version of the collage I shared back in 2012. Here’s how the world see libertarians.

Since I’ve taken my kids shooting (and raised them to have sound views), the top-left item has a good bit of truth. And there are some libertine libertarians, so conservative and parents aren’t being totally unfair in their stereotypes.

I very much approve the lower-left frame because it mocks (I think) the totalitarians who want more government – even if they think of themselves as anarchists. Libertarian wonks understand what true anarchism is.

Let’s close with a generic political joke.

You start with a cage containing four monkeys, and inside the cage you hang a banana on a string, and then you place a set of stairs under the banana.

Before long a monkey will go to the stairs and climb toward the banana.

You then spray ALL the monkeys with cold water. After a while, another monkey makes an attempt. As soon as he touches the stairs, you spray ALL the monkeys with cold water.

Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.

Now, put away the cold water. Remove one monkey from the cage and replace it with a new monkey. The new monkey sees the banana and attempts to climb the stairs. To his shock, ALL of the other monkeys beat the crap out of him. After another attempt and attack, he knows that if he tries to climb the stairs he will be assaulted.

Next, remove another of the original four monkeys, replacing it with a new monkey. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment – with enthusiasm – because he is now part of the “team.”

Then, replace a third original monkey with a new monkey, followed by the fourth. Every time the newest monkey takes to the stairs, he is attacked.

Now, the monkeys that are beating him up have no idea why they were not permitted to climb the stairs.

Neither do they know why they are participating in the beating of the newest monkey. Having replaced all of the original monkeys, none of the remaining monkeys will have ever been sprayed with cold water.

Nevertheless, not one of the monkeys will try to climb the stairway for the Banana.

Why, you ask? Because in their minds, that is the way it has always been!

This is how today’s House and Senate operates, and this Is why
from time to time, ALL of the monkeys need to be REPLACED AT THE SAME TIME!

DISCLAIMER: This is meant as no disrespect to monkeys.

P.S. If you enjoy generic political humor, I have several additional examples here.

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Overcoming FDA Bureaucracy and Saving Lives with Expanded “Right to Try”

I’m lucky. When I think of how government regulation impacts my life, my list contains minor nuisances such as inferior light bulbs, substandard toilets, second-rate dishwashers, weak-flow showerheads, and inadequate washing machines.

For my friend Matt Kibbe, by contrast, red tape could have been deadly. Literally.

Watch this powerful video and listen to him explain how he survived cancer. That’s the good part. The bad part is that he likely would have died if he got cancer during the 12 years it took before the Food and Drug Administration finally approved a life-saving drug.

Matt’s takeaway is that terminally ill patients should have the “right to try” drugs that aren’t approved by the FDA.

I wrote about this issue last year and shared two other videos on the topic. Today, I want to approach the issue from another direction by pointing out that “right to try” laws shouldn’t be controversial because tens of millions of patients already take drugs for purposes that aren’t approved by the FDA.

The only catch is that they can do this only with drugs that have been approved for some other purpose.

This is not a recent revelation. Daniel Klein wrote about this issue 17 years ago for the Foundation for Economic Education.

Once a drug is approved for any use, it may be used in any way doctors and users see fit. Approved drugs are often found to have other benefits, and doctors learn to prescribe those drugs for such “off-label” uses. Although off-label uses have absolutely no standing with or approval by the FDA, they are perfectly legal. Do patients and doctors shrink in fear from uses not certified by the FDA? Absolutely not! Off-label prescribing is pervasive and vital to the health of millions of Americans. As economist Alexander Tabarrok says, “most hospital patients are given drugs which are not FDA-approved for the prescribed use.” Off-label prescriptions are especially common for AIDS, cancer, and pediatric patients, but are standard practice throughout medicine. Doctors learn of off-label uses from extensive medical research, testing, newsletters, conferences, seminars, Internet sources, and trusted colleagues. Scientists and doctors, working through professional associations and organizations, make official determinations of “best practice” and certify off-label uses in standard reference compendia such as AMA Drug Evaluations, American Hospital Formulary Service Drug Information, and US Pharmacopoeia Drug Information—all without FDA meddling or restriction.

Think about what this means. Countless Americans are taking medications and benefiting from those drugs, yet the FDA bureaucracy has never given its stamp of approval.

Which raises an interesting issue.

No one would be foolish enough to suggest that the FDA prohibit off-label prescribing. But…there is a logical inconsistency in allowing off-label prescribing and requiring proof of efficacy for the drug’s initial use. Logical consistency would require that one either oppose off-label uses and favor initial proof of efficacy, or favor off-label prescribing and oppose initial proof-of-efficacy.

By the way, just in case you think an old FEE article somehow isn’t enough proof, check out some of the research that is cited on the Wikipedia page for off-label use as of this morning.

Off-label use is very common. …Up to one-fifth of all drugs are prescribed off-label and amongst psychiatric drugs, off-label use rises to 31%. …A 2009 study found that 62% of U.S. pediatric office visits from 2001-2004 included off-label prescribing, with younger children having a higher chance of receiving off-label prescriptions. Specialist physicians also prescribed off-label more frequently than general pediatricians. …Some drugs are used more frequently off-label than for their original, approved indications. A 1991 study by the U.S. General Accounting Office found that one-third of all drug administrations to cancer patients were off-label, and more than half of cancer patients received at least one drug for an off-label indication. A 1997 survey of 200 cancer physicians by the American Enterprise Institute and the American Cancer Society found that 60% of them prescribed drugs off-label.

The bottom line is that we have rampant and pervasive drug use that is outside the FDA’s control. Yet that isn’t leading to horrible consequences. Or even bad consequences.

Instead, it’s teaching us that risk-averse bureaucrats are putting millions of lives at risk by delaying the approval of new drugs. Not just at risk. Don’t forget the research I cited last year estimating that deadly impact of FDA regulation.

I’ll close by noting that the FDA also does other bone-headed things. I’ve previously written about the bureaucracy’s war against unpasteurized milk (including military-style raids on dairies!). I suppose I also should mention that FDA red tape is responsible for the fact that Americans have a much more limited selection of condoms than Europeans.

P.S. While the regulatory burden in the United States is stifling and there are some really inane examples of silly rules such as the ones cited above, as well as the FDA’s war on vaping, I think Greece and Japan win the record if you want to identify the most absurd specific examples of red tape.

P.P.S. Here’s what would happen if Noah tried to comply with today’s level of red tape when building an ark. And here’s some clever anti-libertarian humor about deregulated breakfast cereal.

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Does Making Government Bigger Make It More Competent?

There are some core functions of government, even in a libertarian world. The most prominent examples are national defense by the central government and public safety at the state/local level.

So how do we make sure those functions are handled competently? I’ve argued that we’ll get the best results if the public sector is streamlined and elected officials have more ability to focus on genuine “public goods.”

Not everyone shares my perspective. Fareed Zakaria asserts in today’s Washington Post that hurricanes and wildfires show the need for bigger government. I’m not joking. Here’s how he starts.

…one cannot help but think about the crucial role that government plays in our lives. But while we accept, even celebrate, the role of government in the wake of…disasters, we are largely blind to the need for government to mitigate these kinds of crises in the first place.

I would argue that natural disasters sometimes show competence and courage by state and local first responders (along with private volunteers), but I’m much less sanguine about the role of the federal government, which comes in after the danger is over and starts spreading around money in ways that increase the likelihood of future problems.

But let’s set that aside and consider Zakaria’s broader argument about whether the United States is suffering from inadequate government. I’m not sure what world he’s living in, but he seems to think that America is some sort of libertarian dystopia, with an anemic public sector.

Ever since President Ronald Reagan, much of the United States has embraced an ideological framework claiming that government is the source of our problems. …Reagan argued for a retreat from the vision of an activist state and advocated instead a strictly limited role for government, one dedicated to core functions such as national defense. …Reagan’s worldview…has stayed in place for decades as a rigid ideology, even though we have entered a new age in which America has faced a very different set of challenges, often desperately requiring an activist government.

I wish this was true. I’d be delighted if “Reagan’s worldview” was “in place for decades.”

In reality, government spending is much higher today than it was in the 1980s. Even after adjusting for inflation, the federal budget is twice as big today as it was during the Reagan years (and it’s huge compared to its size for much of America’s history).

Call me crazy, but that’s not my definition of a “strictly limited…government.”

What’s especially amazing is one of the examples Zakaria used to justify more government.

We watched as financial institutions took on more and more risk, with other people’s money, effectively gambling in a heads-I-win, tails-you-lose system. Any talk of regulation was seen as socialist. Even after the system blew up, causing the worst economic crisis since the Great Depression, the calls soon came to deregulate the financial sector once again.

Does he really not know that the financial services sector has been heavily regulated for decades?

Even more amazing, does he not know that government policies such as Fannie Mae/Freddie Mac subsidies and TARP bailouts are what creates the heads-I-win, tails-you-lose environment?

Does he really think a bigger federal government is the way to solve these problem when it was federal intervention that caused the financial crisis?

To be fair, he does raise some issues that are a challenge, such as how to have free trade with countries that use government intervention to distort trade. But he doesn’t offer any suggestions of how to solve such problems while avoiding the risk of 1930s-style tit-for-tat protectionism.

His closing comment basically argues that we need more government because of what is sometimes called creative destruction.

We are living in an age of revolutions, natural and human, that are buffeting individuals and communities. We need government to be more than a passive observer of these trends and forces. It needs to actively shape and manage them. Otherwise, the ordinary individual will be powerless.

I’m tempted to respond that we’ve always had creative destruction. And, yes, it is very disruptive. But it’s also why we’re much richer today that we were in the past.

And it’s very likely that we wouldn’t be nearly as rich today if people like Zakaria had power “to actively shape and manage” the economy in the 1800s and 1900s. Heck, the reason why places such as Greece and Venezuela are such a mess is that politicians did a steroid-fueled version of shaping and managing.

Let’s close by circling back to the issue of how to increase government effectiveness. The European Central Bank produced a very rigorous study back in 2003 that measured public sector performance and public sector efficiency in OECD nations.

What the economists found, unsurprisingly, is that smaller governments did a better job than medium governments. And, needless to say, medium governments did a better job than big governments.

And the ECB came up with equally strong results in a 2006 study that looked at a larger list of countries.

It’s also worth mentioning, given current debates over whether certain activities are better handled in Washington or at the state level, that the International Monetary Fund (yes, even the IMF) found that decentralized systems do a measurably better job in delivering public services.

These studies echo what I wrote, using the Ebola virus as an example, about how smaller government is naturally more competent. And Mark Steyn made the same point, albeit in a more entertaining fashion.

P.S. My all-time favorite example of the disconnect between big government and competent government is Belgium, where the public sector consumes more than 50 percent of the economy’s output, yet a bureaucrat said it was hard to fight terrorism “due to the small size of the Belgian government.”

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The Obamacare-Repeal Fight Is Important, but Much More Is Needed if We Want a Pro-Consumer Health System

Right after Obamacare was enacted in 2010, I wrote a column suggesting four principles that should guide and motivate supporters of free markets and limited government.

As part of that article, I pointed out that Obamacare wasn’t a dramatic change. Instead, it was just another layer of government imposed on a health system that already was burdened by a huge amount of intervention.

The way to think of Obamacare is that we are shifting from a healthcare system 68 percent controlled/directed by government to one that…is 79 percent controlled/directed by government. Those numbers are just vague estimates, to be sure, but they underscore why Obamacare is just a continuation of a terrible trend, not a profound paradigm shift.

Later that year, the Center for Freedom and Prosperity released a video that elaborated, pointing out that Obamacare simply made a system dominated by government into a system even more controlled by government.

With predictable bad results.

That video included two charts based on my back-of-the envelope calculation, and I shared them in a 2013 column that further discussed the incremental damage of Obamacare.

Our healthcare system as a mess before Obamacare. Normal market forces were crippled by government programs such as Medicare and Medicaid and also undermined by government intervention in the tax code that resulted in pervasive over-insurance that exacerbated the third-party payer problem. These various forms of intervention led to all sorts of problems, such as rising prices and indecipherable complexity…Obamacare was enacted in 2010, and it was perceived to be a paradigm-shifting change in the healthcare system, even though it was just another layer of bad policy on top of lots of other bad policy. …Not surprisingly, all of the same problems still exist, but now they’re exacerbated by the mistakes in Obamacare.

In other words, we’re not going to fix the healthcare system by merely repealing Obamacare.

Yes, that’s a necessary step, but much more needs to happen.

Which is why I’m very happy that Prager University has a new video pointing out that health insurance doesn’t work nearly as well as car insurance and homeowners insurance. Why? Because it’s become an inefficient form of pre-paid health care rather than protection against large and unexpected expenses.

Amen. I’ve made a similar case on several occasions.

Though I wish the video went even further by explaining how the healthcare exclusion in the tax code encourages over-insurance.

And here’s a video from the Foundation for Economic Education that also explains how government intervention is distorting the health market.

Here’s the most important factoid from the video, which comes from the accompanying FEE article.

According to the Consumer Price Index and Medical-care price index from 1935 to 2009, the health care spending crisis didn’t start until the mid 1960s, around the same time when Medicare and Medicaid were signed into law, and at the same time that we began requiring doctors to go through all sorts of expensive licensing procedures beyond medical school. Since then, health care spending has doubled, even adjusted for inflation.

But let’s keep everything in perspective. Our system is needlessly expensive and inefficient because of government, but it still manages to deliver some decent outcomes.

Here is some very interesting analysis from the Adam Smith Institute in London.

US healthcare is famous for…poor outcomes. …their overall outcome on the most important variable—overall life expectancy—is fairly poor.

I get this factoid thrown in my face repeatedly when speaking overseas, so I was delighted to find out that it has nothing to do with the quality of our healthcare.

…consider the main two ingredients that go into health outcomes. One is health, and the other is treatment. If latent health is the same across the Western world, we can presume that any differences come from differences in treatment. But this is simply not the case. Obesity is far higher in the USA than in any other major developed country. Obviously it is a public health problem, but it’s unrealistic to blame it on the US system of paying for doctors, administrators, hospitals, equipment and drugs. In fact in the US case it’s not even obesity, or indeed their greater pre-existing disease burden, that is doing most of the work in dragging their life expectancy down; it’s accidental and violent deaths. It is tragic that the US is so dangerous, but it’s not the fault of the healthcare system; indeed, it’s an extra burden that US healthcare spending must bear.

Indeed, it turns out that the American system produces very good results on life expectancy once you adjust for these behavioral factors.

…simply normalising for violent and accidental death puts the USA right to the top of the life expectancy rankings.

And here’s the relevant chart from the article.

By the way, health spending in the United States would probably be high compared to other nations even if we removed all government intervention and changed our risky behaviors.

But only because richer nations can afford – even demand – new technology, cutting-edge research, and new treatments. In his Bloomberg column, Professor Tyler Cowen discusses some of these factors

…viewed through the lens of consumption behavior, American health-care spending is typical of this nation’s habits and mores. Relative to GDP, Americans consume a lot more than Europeans, and our health-care spending is another example of that tendency. …Consumption in the U.S., per capita, measures about 50 percent higher than in the European Union. American individuals command more resources than people in countries such as Norway or Luxembourg, which have higher per capita GDP. The same American consumption advantage is evident if you look at dwelling space per person or the number of appliances in a typical home. …To put it most simply, we Americans spend a lot on health care because we spend a lot period.

Tyler includes a graph mapping healthcare expenditures with overall consumption. The basic takeaway is that what makes America an outlier is our ability to consume, with healthcare being an example.

So what’s all this mean for policy?

Peter Suderman offers some very sage advice in a column for the New York Times.

…when it comes to health care, Republicans don’t know what they want, much less how to get it. …Democrats, on the other hand, share a distinct vision of robust universal coverage guaranteed by the government and paid for by a combination of delivery-system efficiencies and higher taxes. What Republicans need, then, is a set of guiding principles — a health care vision that should work from the ground up, that imagines a more affordable and more effective system.

Peter then suggests some principles.

…it would mean giving up on comprehensive universal coverage. Otherwise, Republicans will just end up bargaining on the terms set by Democrats, as they are now. …a second principle: unification, not fragmentation. …employer-provided coverage…is subsidized implicitly through the tax code, which does not tax health benefits provided by employers as income. This tax break is the original sin of the United States health care system. Worth more than $250 billion annually, it has enormously distorted the market, creating an incentive for employers to provide ever-more-generous insurance while insulating individuals from the true cost of care. …the third principle comes in: Health coverage is not the same as health care. Instead, it is a financial product, a backstop against financial ruin. Health care policy should treat it as one. …For noncatastrophic, nonemergency medical expenses, Republicans ought to promote affordability rather than subsidies. …encourage supply-side innovations in addition to demand-side reforms. The tangle of regulations governing health care can make it difficult for providers to respond to market signals and innovate. Doctor-owned hospitals are restricted by law, for example, and certificate-of-need requirements force medical providers to obtain licenses in a process that effectively requires them to ask permission from competitors to expand.

In other words, we wind up this column where we started.

Americans get good health care, but it’s needlessly expensive and inefficient as I explained in Part I and Part II of a recent series. If we can somehow unravel, or even bypass, all the bad government policy that currently exists, we could have a much better system.

How much better? Well, check out this Reason video on a free-market health center in Oklahoma, which recently was featured in a story in Time. Based on my personal experiences, that’s a big step in the right direction.

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India’s Disastrous War Against Cash, Encouraged by American Taxpayers

I wrote a four-part series about how governments are waging a war against cash, with the first two columns looking at why politicians are so interested in taking this radical step.

• In Part I, I looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
• In Part II, I reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.

Part III and Part IV are also worth reading, though I confess you’ll just get additional evidence to bolster what I wrote in the first two columns.

Today, let’s look at a real-world example of what happens when a government seeks to curtail cash. It happened in India last November, and I wrote about the disruption that was caused when the government banned certain notes.

But maybe the short-run costs were acceptable because there are long-run benefits. That’s certainly possible, but the evidence suggests that the Indian government is doing long-run damage.

Derek Scissors of the American Enterprise Institute has a new column on what’s happening with India’s economy. He is not impressed.

There is certainly a long-standing and extensive corruption problem. The discussion of “black money” has become so absurd, however, that it has little relation to corruption. …Taking currency notes out of circulation in a surprise move late last year was said to target black money inside the country. Seizure of cash was justified by a huge amount of hidden funds. …For political reasons, black money is being wildly exaggerated as an economic issue. …Directly related to hoping there is trillions in black money is wanting to tax those mythical trillions. All governments chase revenue but India’s pursuit seems especially misguided. …Good policy enhances competition and individual economic rights for the sake of greater productivity and personal income. Being obsessed with black money, tax revenue, and GDP growth does nothing to enhance competition or individual rights and leaves ordinary Indians worse off.

India’s central bank is even more critical, bluntly stating that the plan failed, as reported by the BBC.

Indians returned almost all of the high-currency notes banned in last year’s shock government crackdown on illegal cash, the central bank says. It said 15.28tn rupees ($242bn) – or 99% – of the money had made its way back into the banking system. Ministers had hoped the move would make it difficult for hoarders of undeclared wealth to exchange it for legal tender. The news that it did not will raise questions about the policy, which brought chaotic scenes across India. …Many low-income Indians, traders and ordinary savers who rely on the cash economy were badly hit. …As per the RBI data, it’s safe to say that demonetisation has been a failure of epic proportions. …Agriculture, the rural economy and property – which rely largely on cash transactions – were sectors hit by the ban. It also contributed to a slowdown in economic growth.

Indeed, the former head of the central bank warned the government ahead of time that the plan wouldn’t work. Here are some details from a Bloomberg story.

Raghuram Rajan was governor of the Reserve Bank of India in February 2016, when he was asked by the government for his views on demonetization… “Although there may be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals,” he wrote in the book. “I made these views known in no uncertain terms.” …speculation has raged over who thought up the policy, with the debate getting more divisive last week as a slew of data showed demonetization contributed to a growth slump without meeting its targets. …the cash ban devastated small businesses. More than 1.5 million jobs were said to be lost and newspapers reported deaths linked to the decision.

Rajan correctly observed that the best way to boost tax compliance is with low tax rates.

“It’s not that easy to flush out the black money,” Rajan had said, using the local term for cash stashed away illegally to avoid tax. He added that he’d rather focus on the incentives for black money, such as tax rates.

Amen. This is a point I’ve made over and over and over and over again.

Meanwhile, the Indian Express also has a column, written by a former Chief Economist at the World Bank, on how demonetization has been a failure.

…a wealth of analysis and data have become available. Demonetisation’s half-anniversary is a good time to take stock of this historic decision. The verdict is clear. It was a monetary policy blunder. It achieved next to nothing, and inflicted a large cost on the poor and the informal sector. …demonetisation took the wind out of India’s sails. My calculation is that around 1.5 percentage points of growth were lost to it.

A column in the Harvard Business Review pours cold water on the notion that demonetization is an effective way of reducing corruption.

The original reason given for the drastic demonetization action was to expose the so-called “black” market, fueled by money that is illegally gained and undeclared for tax purposes. …banks were estimated to have received 14.97 trillion rupees (around $220 billion) by the December 30 deadline, or 97% of the 15.4 trillion rupees’ worth of currency demonetized. …These rates of deposits defied expectations that vast troves of undeclared wealth would not find their way back to the banks and that black marketeers would lose this money since they would not be able to deposit their undeclared cash without being found out. This didn’t happen.

It probably “didn’t happen” because the government was wildly wrong when it claimed that cash was the problem.

…when corrupt people need places to park their ill-gotten gains, cash normally is not at the top of their list. Only a tiny proportion of undeclared wealth is held in cash. In an analysis of income-tax probes, the highest level of illegal money detection in India was found to be in 2015–2016, and the cash component was only about 6%. The remaining was invested in business, stocks, real estate, jewelry, or “benami” assets, which are bought in someone else’s name.

Indeed, the Washington Post reports that the new notes already are being used for illegal purposes.

For the first few weeks of demonetization, it was common to meet Indians who felt that their collective suffering and inconvenience was justified because it would ultimately usher in a less corrupt, more equal India. But as the initiative enters its second month, more and more reports are emerging of seizures of vast quantities of hoarded cash in the new notes. Like water reaching the sea, the corrupt, it seems, have found ways to navigate around the government’s new obstacles. …A sense is building that while millions of Indians languish in ATM lines, the old black money system is simply restarting itself with the new notes.

The real story is that the corruption is caused by government, not cash.

The biggest question is how people are getting their hands on such huge stashes of the new currency. …one way: visiting your local politician.

What’s especially disappointing is that the United States government took money from American taxpayers and used those funds to encourage India’s failed policy.

Too bad USAID was whispering sweet things into Modi’s other ear… https://t.co/KPAOQXOZ8U

— Constantin Gurdgiev (@GTCost) September 4, 2017

And here are some excerpts from a report by the Hindu.

The United States on Wednesday described India’s demonetisation drive as an “important and necessary” step to curb illicit cash and actions. “…this was, we believe, an important and necessary step to crack down on illegal actions,” Mark Toner, State Department spokesperson, said in response to a question. …Acknowledging that the move inconvenienced people, Mr. Toner said it was “a necessary one to address the corruption.”

It’s worth pointing out that the U.S. government was encouraging India’s bad policy during the waning days of the Obama Administration, so it’s possible that taxpayers no longer will be funding bad policy now that Trump is in the White House.

I hope there’s a change, but I won’t hold my breath. The permanent bureaucracy has a statist orientation and it takes a lot of work for political appointees to shift policy in a different direction. I hope I’m wrong, but I don’t think that will happen

P.S. The Indian government also is hurting the nation – and poor people – with a value-added tax. Bloomberg has a report on some of the misery.

Before Prime Minister Narendra Modi introduced the country’s new goods and services tax on July 1, Ansari said he was earning 6,000 rupees ($93) a day selling leather jackets, wallets, bags and belts. But India’s new tax classified leather products as luxury items and raised the rate to 28 percent — more than double the 13.5 percent tax levied until June 30. Since then, his business has collapsed. “My business is down nearly 75 percent,” Ansari said… India’s vast informal economy — which accounts for more than 90 percent of the workforce — is struggling under India’s new tax rates…broader pain being felt by many small-and-medium-sized businesses in India’s informal sector, said K.E. Raghunathan, president of the All India Manufacturers Organisation.

The bottom line is that India needs more economic liberty, building on some good reforms in the 1990s. Unfortunately, politicians today are delivering bigger government.

P.P.S. If you want to read about some symptoms of India’s bloated government, the country has a member in the Bureaucrat Hall of Fame, it also produced the most horrifying example of how handouts create bad incentives, and it mistreats private schools to compensate for the wretched failure of government schools.

P.P.P.S. Here’s a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.

Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?

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My First Pro-VAT Column, but with a Huge Caveat

Whenever I see an otherwise sensible person express support for a value-added tax, it triggers a Pavlovian response. And it’s not a favorable reaction.

• I’ve criticized Tom Dolan, Greg Mankiw, and Paul Ryan, for pro-VAT comments.
• I’ve gone after Kevin Williamson, Josh Barro, and Andrew Stuttaford for the same reason.
• I wrote that Mitch Daniels, Herman Cain, and Mitt Romney deserved skepticism from voters for being sympathetic to a VAT.
  
• I also dinged Rand Paul and Ted Cruz for including value-added taxes in their campaign tax plans.
• I strongly disagreed with pro-VAT articles by Peter Morici, Jim Carter, Geoff Davis, and Alan Murray.

But I just read a pro-VAT column and I liked it.

So what happened? Have I surrendered to big government? Did I ingest some magic mushrooms?

Actually, I think you’ll agree that I’m still the same lovable guy. Yes, Professor John Cochrane of the University of Chicago (also a Cato adjunct scholar) has a column in the Wall Street Journal that embraces a VAT. But unlike all of the others I just cited, he includes a condition that is mandatory, necessary, vital, and non-negotiable. It’s so important that it deserves the opposite of fine-print treatment.

…eliminate entirely the personal and corporate income tax, estate tax and all other federal taxes. …it is essential that the VAT replace rather than add to the current tax system, as it does in Europe.

Amen. John hits the nail on the head.

The VAT isn’t theoretically bad. Like the flat tax, it would have one rate. There also would be no double taxation of saving and investment. And it also can be designed to have no loopholes.

In other words, the good news is that the VAT – when compared to the internal revenue code – is a less-destructive way of generating revenue.

The bad news, though, is that the VAT is capable of generating a lot of revenue. And as we’ve seen in Europe, that’s a recipe for enabling a larger burden of government spending.

Which is why the idea of a VAT should only be on the table if the plan would first abolish all other federal taxes. Which is what John is proposing.

Except I’d take it one step farther. Just like I’ve argued when contemplating a national sales tax, I’d only allow the VAT if we first repeal the 16th Amendment and replace it with something so ironclad that even John Roberts and Ruth Bader Ginsberg couldn’t rule in favor of an income tax at some point in the future.

By the way, John is right that the economy would grow faster if the income tax was totally abolished. The current system is filled with warts.

Much of the current tax mess results from taxing income. Once the government taxes income, it must tax corporate income or people would incorporate to avoid paying taxes. Yet the right corporate tax rate is zero. Every cent of corporate tax comes from people via higher prices, lower wages, or lower payments to shareholders. And a corporate tax produces an army of lawyers and lobbyists demanding exemptions. An income tax also leads to taxes on capital income. Capital income taxes discourage saving and investment. But the government is forced to tax capital income because otherwise people can hide wages… The estate tax can take close to half a marginal dollar of wealth. This creates a strong incentive to blow the family money on a round-the-world cruise, to spend lavishly on lawyers, or to invest inefficiently to avoid the tax. …A reformed tax code should involve no deductions—including the holy trinity of mortgage interest, employer-provided health insurance, and charitable deductions. The interest groups for each of these deductions are strong. But if the government doesn’t tax income in the first place, these deductions vanish without a fight.

By the way, I will quibble with a couple of things he wrote.

First, I don’t necessarily think the correct corporate tax rate is zero. What’s important is eliminating either the corporate tax or the tax on dividends. That way the income is only taxed once. And since it’s probably administratively easier to tax the income once at the business level rather than once at the shareholder level, I’m not fixated on abolishing the corporate tax.

Second, it’s very important to get rid of double taxation (what he calls “capital income”), but you don’t need a VAT to make that happen. There’s no double taxation with a flat tax.

Third, he should have explicitly included the state and local tax deduction in his list of loopholes to abolish (I’m guessing he assumed it would be the first deduction on the chopping block and therefore didn’t need to be mentioned).

There’s another part of John’s column that deserves attention. He points out that you need to have small government if you want a low tax burden.

…if the federal government is going to spend 20% of gross domestic product, the VAT will sooner or later have to be about 20%. Tax reform is stymied because politicians mix arguments over the rates with arguments over the structure of taxes. This is a mistake. They should first agree to fix the structure of the tax code, and later argue about rates—and the spending those rates must support.

At the risk of being pedantic, I think the VAT rate would have to be significantly above 20 percent, both because the tax base will be smaller than GDP and also because there will be loopholes or rebates. But the point he’s making is spot on. You can’t have a low tax rate and a big government. I’ve made the same point when writing about Belgium and Germany, nations where middle-class taxpayers are pillaged because the welfare state is too big.

My bottom line on this issue is that Professor Cochrane has produced a column showing that a VAT is theoretically worth considering, but only if all other federal taxes are permanently abolished.

But since that’s not going to happen any time soon, I don’t think there’s any reason to ease up on my dogmatic (and pragmatic) opposition to that levy.

P.S. My clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to know.

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By Making it Easier to Fire Workers, Macron’s Reforms Will Encourage French Employers to Hire More Workers

I like France, in part because it’s a nice place to visit, but also because I’ve been able to use the country as an example of bad public policy.

• It’s tax system is a nightmare, leading entrepreneurs to escape to other nations (hardly a surprise when tax rates can exceed 100 percent and politicians equate taxes with patriotism!). In some cases, tax rates are so punitive that revenues fall rather than rise.
• The French bureaucratic elite is pampered with costly perks and lavish compensation and the nation’s cossetted political class is famously self serving.
• And the regulatory system is a disaster, which not only hinders economic growth but also contributes to an erosion of social capital as people exploit the system and adopt an entitlement mentality.
• One reason for the bad tax system is that the French government consumes a huge share of economic output. The welfare state is enormous as privileged sectors of the population get expensive handouts.

It’s hard to pick which policy does the most damage. As a fiscal policy wonk, I’m tempted to blame France’s woes on high taxes and wasteful spending.

However, there’s a strong case that labor law is the worst feature of economic policy. France has all sorts of rules that “protect” employees, but the net effect is that workers suffer because these laws discourage entrepreneurs from creating jobs.

And even though I get a lot of mileage out of making France a bad example, I actually hope that the nation’s new government will move policy in the right direction. Indeed, this is why I wanted France’s current President, Emmanuel Macron, to get elected.

Yes, he used to be part of the previous socialist government that sought to make things worse rather than better. But I figured he was most likely to enact some pro-market reforms. And it appears my hopes may be realized, at least with regard to labor policy.

The BBC reports on why Macron wants reform, what he wants to do, and what likely will happen.

President Emmanuel Macron’s government has begun its drive to overhaul France’s rigid labour laws, vowing to “free up the energy of the workforce”. …France has an unemployment rate of 9.5%, double that of the other big European economies and Mr Macron has vowed to cut it to 7% by 2022.

Here’s what he is proposing.

The reforms aim to make it easier for bosses to hire and fire. …France’s labour code is some 3,000 pages long and is seen by many as a straitjacket for business. Among the biggest reforms, individual firms are to be offered more flexibility in negotiating wages and conditions. …If a business reached a deal with the majority of its workforce on working hours and pay that agreement would trump any agreement in the wider industry. …The government wants to facilitate deals at local level by encouraging companies with fewer than 50 employees to set up workers’ committees that can bypass unions. One of the thorniest problems for the government is how to make it easier for companies to dismiss staff. There is to be a cap on damages that can be awarded to workers for unfair dismissal. However, after months of consultations, ministers have agreed to increase the cap from their original proposal. The cap would be limited to three months’ pay for two years of work and 20 months’ pay for 30 years. Until now the minimum pay-out for two years’ employment was six months of salary.

And he’ll probably get what he wants, both because some of the bigger unions have decided to play ball and also because he’s been granted authority to unilaterally make changes.

Protests against the plan are expected next month, but two of the biggest unions say they will not take part. Jean-Claude Mailly, the leader of Force Ouvrière (FO), said that while the reforms were far from perfect, the government had carried out “real consultation” and FO would play no role in demonstrations on 12 September. The union with the biggest presence in the private sector, CFDT, said its members would not take to the streets either, although it was ultimately disappointed that its position was not reflected in the final text. …Mr Macron has already won parliamentary backing to push these reforms through by decree. An opinion poll on Wednesday showed that nine out of 10 French people agreed that their country’s labour code had to be reformed.

Dalibor Rohac of the American Enterprise Institute has some analysis of what’s been proposed.

…the National Assembly and Senate…authorized France’s government to amend the country’s byzantine labor code by executive orders… Prime Minister Édouard Philippe unveiled the details of the reform, divided into five decrees, on Thursday. So what exactly are they seeking to achieve? Perhaps most important is the introduction of caps on redundancy pay to those whose employment has been terminated without a just cause…stricter caps are introduced for small companies, for which large redundancy payments can be ruinous. It will also become easier for multinational companies to justify termination of employment on economic grounds. …it will be possible to downsize or close down French operations without having to subsidize them first from profits made overseas. …Companies with fewer than 20 employees will not have to rely on labor union representatives for their collective contracts. Subsidiaries of companies will have more freedom to offer temporary work contracts.

Dalibor is not overly impressed by this collection of changes.

…measured by the standards of what France needs, it is not much… The extent to which the reform elicits a strong reaction reflects purely the overregulated status quo, rather than the revolutionary nature of the proposed measures. …the government is doing something right, however timid.

The Wall Street Journal‘s editorial is a bit more optimistic.

French voters this spring gave themselves their best shot in a generation at reviving their moribund economy, and President Emmanuel Macron is now taking advantage of the opportunity. …the labor-market reforms he unveiled Thursday could remake the eurozone’s second-largest economy. …Mr. Macron will limit the severance payouts courts can mandate for fired workers. He will free small companies with nonunion workers from the straitjacket of national collective-bargaining agreements covering working hours, overtime pay, vacation benefits and the like. Companies will have more scope to negotiate labor deals at the firm level rather than being forced to abide by national agreements.

By reducing the potential cost of employing workers, the reforms will lead to more employment.

The severance overhaul will go a long way toward inducing businesses to hire more workers. Small- and medium-size French companies report pervasive fear of expanding their workforce lest they be stuck with problem employees or face ruinous expenses to lay off workers if economic conditions change.

And France desperately needs reform.

French unemployment is still 9.5% even at its five-year low. That’s double the rate in Germany, and French unemployment has become a social crisis, especially for young people frozen out of the job market. The jobless rate for French between age 15 and 24 is 25%—for those who haven’t moved to London or the U.S.

Though the WSJ does recognize that the reforms are merely a modest step in the right direction.

France isn’t becoming a laissez-faire paradise. Even if Mr. Macron’s labor overhaul takes effect, the French workplace will still be considerably more regulated than America’s.

Let’s close with some excerpts from a story in the New York Times.

…the government announced sweeping changes on Thursday with the potential to radically shift the balance of power from workers to employers. …an invigorated France is considered critical to the survival of a European Union that is finally showing signs of revival after a lost decade. …Economists in France and across Europe expressed optimism about the new law… France has stagnated for years under chronically elevated unemployment and slow growth. The country’s strong worker protections and expensive benefits have been blamed by some for being at least partly at the root of the problem.

Wow, it must be bad if even the NYT is acknowledging that government is causing the economy to stutter.

Amazingly, the story even admits that economic liberalization is the right way to get more job creation.

Germany crossed that Rubicon in the 1990s under Chancellor Gerhard Schröder. …Roughly 15 years ago, “France and Germany had economies that were more or less comparable, and that ceased to be the case because the Germans wisely did micro-reforms and the French did not,” said Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations. So the French ended up with “high unemployment, which fed populism, and getting out of that trap is vital

For what it’s worth, I think the reference to German reforms is key.

Under a left-leaning government, Germany liberalized labor markets. The so-called Hartz reforms were a huge success, slashing the jobless rate by more than 50 percent.

I don’t know whether Macron’s reforms are as bold as what happened in Germany, but any movement in the right direction will create more employment.

P.S. If Macron wants to save France, he better deal with the tax system as well. The problems are nicely captured by two videos, one about how young people are fleeing the nation and another showing a Hollywood celebrity reacting when told about the tax burden.

P.P.S. Whenever I give a speech in France, I ask the audience whether their government (which consumes for the half of economic output) gives them more and better services than the Swiss government (which consumes about one-third of economic output). The answer is always an overwhelmingly no.

P.P.P.S. I (sort of) agreed with Paul Krugman in 2013 that there is a plot against France.

P.P.P.P.S. Last but not least, the French people occasionally do support good policy (and they’re willing to escape to America if things don’t get better).

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Free Enterprise: The World’s only Successful Strategy for Poverty Reduction

In prior years, I’ve shared some videos with powerful messages with a common message. Grinding poverty used to be the normal human condition, but then rule of law and limited government enabled a dramatic increase in prosperity.

• A video from Marginal Revolution on the rapid growth of living standards
• A video from Learn Liberty with a similar lesson of global growth.
• A video from The Fund for American Studies specifically about U.S. growth.

All these videos are worth watching. They show that misery used to be pervasive but then we became rich starting a couple of hundred years ago.

But there’s one shortcoming in these videos. They basically tell a story of how the western world became rich. In other words, they describe how North American and Western Europe went from agricultural poverty to middle class prosperity.

What about the rest of the world?

Well, there’s a good story to tell there as well, albeit it’s happened more recently. Back in 2014, I shared some data from Economic Freedom of the world showing how there was a substantial increase in global economic liberty starting about 1980.

Yes, there were improvements in western nations during that period (thanks to Reagan, Thatcher, etc), but there were also improvements in economic freedom elsewhere (collapse of the Soviet Empire, reforms in what used to be known as the Third World, etc).

In this video from Prager University, Arthur Brooks of the American Enterprise Institute explains that this shift to free enterprise is what produced greater prosperity all across the world.

By the way, folks on the left (see this Salon article) don’t like the fact that the world shifted in the direction of economic liberty.

They grouse that the developing world was subjected to a “Washington consensus” that imposed a “neoliberal” agenda (with neoliberal meaning “classical liberal“).

But here’s a visual showing how a shift to capitalism was great news for the less fortunate. The number of people in extreme poverty has dropped dramatically since the early 1990s.

I wish the data went back to 1980, but even these partial numbers are a tremendous confirmation of the hypothesis that free markets are the best way of helping the poor.

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Taxpayers Are Getting Drowned by Government-Subsidized Flood Insurance

Government subsidies have an unfortunate habit of causing widespread economic damage and often result in huge burdens for taxpayers (though sometimes consumers are the ones getting pillaged).

• Fannie Mae and Freddie Mac subsidies contributed to a massive housing bubble that destabilized the entire financial system.
• Means-tested subsidies have undermined progress on poverty by trapping people in long-run government dependency.
• Direct and indirect healthcare subsidies have created a huge third-party payer problem and led to high costs and inefficiency.
• Agriculture subsidies impose heavy costs on both consumers and taxpayers to reward large, politically connected agribusinesses.
• Federal subsidies for higher education have helped colleges fund more bureaucracy and saddled students with higher tuition.
• Unemployment subsidies increase and extend joblessness by giving people money so long as they don’t obtain a new position.

The common thread is that government intervention interferes with the normal operation of the price system and thus leads to distortions since markets are prevented from functioning properly.

Let’s add another example, and it’s very timely because of the flooding in Texas. The federal government subsidizes flood insurance. And it does so in a way that is bad for taxpayers and bad for the environment, while also giving a windfall to rich people and putting lives at risk.

That’s an impressive list, even by government standards.

In a must-read column for USA Today, my old friend Jim Bovard is very critical of the program.

Hurricane Harvey…offers the clearest lesson why Congress should not perpetuate the federal National Flood Insurance Program (NFIP)… The ravages in Houston and elsewhere would be far less if the federal government had not offered massively subsidized flood insurance in high risk, environmentally perilous locales. …NFIP embraced a “flood-rebuild-repeat” model that has spawned an almost $25 billion debt.

And when Jim says “flood-rebuild-repeat,” he’s not joking.

NFIP paid to rebuild one Houston home 16 times in 18 years, spending almost a million dollars to perpetually restore a house worth less than $120,000. Harris County, Texas (which includes Houston), has almost 10,000 properties which have filed repetitive flood insurance damage claims. The Washington Post recently reported that a house “outside Baton Rouge, valued at $55,921, has flooded 40 times over the years, amassing $428,379 in claims.

And he points out that the program is reverse class warfare.

Flood insurance subsidies benefit well-off households, and payouts disproportionately go to areas with much higher than average home values. Working stiffs in Idaho and Oklahoma are taxed to underwrite mansions for the elite. …NBC News revealed in 2014 that FEMA revised its flood maps to give 95%+ discounted insurance premiums to “hundreds of oceanfront condo buildings and million-dollar homes,” including properties on its “repetitive loss list.”

My colleague Chris Edwards has a comprehensive study of the federal government’s role in disaster relief. Here’s some of what he wrote about the history of subsidized flood insurance.

In 1968 the National Flood Insurance Act offered federal insurance to properties at risk for flooding. A key justification by supporters of federal flood insurance was that it would alleviate the need to pass special aid legislation after each flood disaster. As it has turned out, however, taxpayers are now both subsidizing flood insurance and paying for special relief bills passed after floods. …NFIP was supposed to save taxpayers money by alleviating the need for Congress to pass emergency aid packages after floods. Taxpayers were also not supposed to be burdened by the program itself because insurance premiums were to cover the system’s costs. Also, the NFIP included floodplain regulations that are imposed on communities adopting the program. These regulations were supposed to mitigate the harm from floods. None of the promises panned out. …Most importantly, rather than reducing the nation’s flooding problems, the NFIP has likely made flood damage worse by encouraging more development in hazardous areas. Since 1970, the estimated number of Americans living in coastal areas designated as Special Flood Hazard Areas (SFHAs) by FEMA has increased from 10 million to more than 16 million. Subsidized flood insurance has backfired by helping to draw more people and development into flood zones.

To add insult to injury, the program is poorly run.

The GAO has had the NFIP on its “high-risk” list of troubled programs for years. …In recent years, the program has accumulated more than $24 billion in debt because payouts have far exceeded premiums. Today, the program is in financial crisis and taxpayers will likely bear the burden of its large debt. The NFIP’s financial shortcomings are typical of government-run businesses. Unlike private insurance, the NFIP charges artificially low rates, does not build capital surpluses, and does not purchase reinsurance to cover catastrophic losses. …The GAO says that “by design, NFIP is not an actuarially sound program.” …A 2011 insurance industry study found that overall NFIP premiums are only half the level needed to cover the system’s full costs, and property owners in high-risk areas pay just one-third of full market rates.

But the biggest problem is that the program encourages imprudent – and even dangerous – behavior.

…artificially low rates subsidize people to live in high-risk flood areas. …NFIP is that it has encouraged development in hazardous areas. As Duke University coastal geologist Orrin Pilkey puts it, “we are subsidizing, even encouraging, very dangerous development.” Federal flood insurance has incentivized individuals and developers to build in hazardous areas…more lives and property are put in harm’s way.

And the program has plenty of repeat business.

…some property owners repeatedly rebuild in hazardous locations knowing that the government will bail them out after each flood. Repetitive loss properties account for only about 1 percent of all policies, but are responsible for about one-third of all NFIP claims. …One Mississippi home valued at $69,900 has flooded 34 times since 1978, and the owner has received $663,000 in NFIP payments over the years.

Here’s an image from Reddit’s libertarian page. Very appropriate given today’s topic.

An article for The Week looks specifically at how the program lured the people of Houston into taking excessive risk.

Why would the practical, fiscally conservative people of Texas anchor their financial security in houses that are now literally underwater? …a major culprit is the Federal Emergency Management Agency (FEMA), and specifically its subsidiary, the National Flood Insurance Program (NFIP). …Well-meaning but drenched in perverse incentives, they are complicit in the horrifying destruction now racking the Texas gulf coast. …a normal insurance company would jack up the premium price to cover the high risk of floodplain construction, thus discouraging vulnerable building plans among those who cannot afford to cover the cost of disaster, the NFIP will insure this construction at a discount. …an artificially low premium like the NFIP offers cruelly deludes homeowners into believing their flood-prone houses are far safer than they are. …NFIP has taxpayers subsidizing unrealistically low premiums that incentivize new construction on dangerous land, and its discounts are available even to wealthy homeowners with pricey properties. “About 80 percent of NFIP households are in counties that rank in the top income quintile,” notes a recent report at Politico, and “[w]ealthier households also tend to receive larger subsidies.”

How do we solve this government-created problem?

With the same answer that Chris gave.

Axing the NFIP and transitioning back to private flood insurance, with its accurate risk signaling, is much overdue.

Writing for Reason, Ronald Bailey explains the perverse incentives created by the program.

The main lesson that the public and policymakers ought to learn from Harvey is: Don’t build in flood plains, and especially don’t rebuild in flood plains. Unfortunately, the flood insurance program teaches the exact opposite lesson, selling subsidized insurance whose premiums do not come close to covering the risks home and business owners in flood prone areas face. As a result, the NFIP is currently $25 billion in debt. Federally subsidized flood insurance represents a moral hazard, Kevin Starbuck, Assistant City Manager and former Emergency Management Coordinator for the City of Amarillo, argues, because it encourages people to take on more risk because taxpayers bear the cost of those hazards.

And, in many cases, bear those costs over and over and over again.

Federal Emergency Management Agency data shows that from 1978 through 2015, 3.8 percent of flood insurance policyholders have filed repetitively for losses that account for a disproportionate 35.5 percent of flood loss claims and 30.5 percent of claim payments, Starbuck says.

The solution, once again, is obvious.

…taxpayers should not be required to subsidize people who choose to build and live on flood plains. When Congress reauthorizes the NFIP, it should initiate a phase-in of charging grandfathered properties premiums commensurate with their risks. This will likely lower the market values of affected homes and businesses and thus send a strong signal to others to avoid building and living in such risky areas.

A couple of months ago, before Harvey, the Wall Street Journal presciently opined about the downside of government-provided flood insurance.

A classic example of government dysfunction is a federal insurance program that helps pay to drain basements in millions of America’s second homes. …The 1968 program insures more than $1 trillion in property, with about five million policies in 2016 for those who live in areas prone to flooding. The program is more than $24 billion in debt. One reason for the hole is that about 20% of policies are directly subsidized. More than 75% of such policies are in counties in the top 30% for home values, according to a Government Accountability Office analysis, and many dot the affluent coasts of Florida, California and Texas. In other words, this is a wealth transfer from low and middle-income families to the folks who own real estate on Nantucket. …The best reform would be to convert the program into a private operation, though Members of both parties would pile together like sandbags to block it.

The editorial noted that Representative Jeb Hensarling, Chairman of the Financial Services Committee, has tried to limit the program. Since he’s a Texan, it will be interesting to see if his pro-market principles remain in the aftermath of Harvey (based on his record, I’m guessing yes).

In another Reason column, Katherine Mangu-Ward put together a list of things politicians shouldn’t do once the storm is over.

Here are a few things Trump and his pals absolutely shouldn’t do in the immediate aftermath of the hurricane, but probably will: …Increase funding for the federal flood insurance program. When it comes time to rebuild, everyone will studiously avoid discussing the fact that maybe we shouldn’t be using a massive federal insurance program to incentivize building in areas that are repeatedly hit by storms. There’s a reason private insurers don’t offer policies to many coastal dwellers, and it ain’t “market failure.”

Needless to say, I’m not optimistic that her advice will be heeded.

Though you would think some Democrats would be on the correct side, if for no other reason than the program is a big fat subsidy for rich people.

One of those fat cats even confessed that the program is a boondoggle that lines his pockets. Here are some excerpts from a 2004 column by John Stossel.

…the biggest welfare queens are the already wealthy. Their lobbyists fawn over politicians, giving them little bits of money — campaign contributions, plane trips, dinners, golf outings — in exchange for huge chunks of taxpayers’ money.

John then confesses that he put his snout if the taxpayer trough.

I got some of your money too. …In 1980 I built a wonderful beach house. Four bedrooms — every room with a view of the Atlantic Ocean. It was an absurd place to build, right on the edge of the ocean. All that stood between my house and ruin was a hundred feet of sand. My father told me: “Don’t do it; it’s too risky. No one should build so close to an ocean.” But I built anyway. Why? As my eager-for-the-business architect said, “Why not? If the ocean destroys your house, the government will pay for a new one.” What? Why would the government do that? Why would it encourage people to build in such risky places? That would be insane. But the architect was right. If the ocean took my house, Uncle Sam would pay to replace it under the National Flood Insurance Program. Since private insurers weren’t dumb enough to sell cheap insurance to people who built on the edges of oceans or rivers, Congress decided the government should step in and do it. …I did have to pay insurance premiums, but they were dirt cheap — mine never exceeded a few hundred dollars a year.

Lots of rich people like this subsidy.

The insurance, of course, has encouraged more people to build on the edges of rivers and oceans. …Subsidized insurance goes to movie stars in Malibu, to rich people in Kennebunkport (where the Bush family has its vacation compound), to rich people in Hyannis (where the Kennedy family has its), and to all sorts of people like me who ought to be paying our own way.

John was even an example of the “flood-rebuild-repeat” syndrome.

…just four years after I built my house, a two-day northeaster swept away my first floor. …After the water receded, the government bought me a new first floor. Federal flood insurance payments are like buying drunken drivers new cars after they wreck theirs. I never invited you taxpayers to my home. You shouldn’t have to pay for my ocean view.

More than once!

On New Year’s Day, 1995, …The ocean had knocked down my government-approved flood-resistant pilings and eaten my house. It was an upsetting loss for me, but financially I made out just fine. You paid for the house — and its contents.

Though now another rich person will get the subsidy.

I could have rebuilt the beach house and possibly ripped you taxpayers off again, but I’d had enough. I sold the land. Now someone’s built an even bigger house on my old property. Bet we’ll soon have to pay for that one, too.

Let’s close with some systematic data on the regressivity of the program.

Two of my other colleagues, Ike Brannon and Ari Blask, authored a study on the flood insurance program. They covered lots of material, but here’s what they wrote about poor-to-rich redistribution.

Wealthier households benefit disproportionately from the reduced average cost of flood insurance brought about by government intervention. Of course, not all NFIP-insured properties are high value, but insured homes are on average more valuable than noninsured homes. …In 2007, the Congressional Budget Office (CBO) published a report containing statistics on the average and median values of properties in the NFIP. …The median value of properties in the NFIP exceeded the median value of an American home across all four categories, as shown in Table 1. …40 percent of coastal properties receiving subsidies were worth more than $500,000 and 12 percent were worth more than $1 million. …Comparisons of NFIP premiums with potential private premiums show that NFIP policyholders with the most risk exposure tend to receive the largest subsidy, with 80 percent of explicit subsidy recipients living in counties in the top income quintile.

And here’s Table 1 from their study.

My guide to having an ethical bleeding heart is very straightforward.

If taking money from rich people to give to poor people is wrong, then taking money from poor people to line the pockets of rich people is utterly reprehensible.

I’ll write in the near future about why the federal government shouldn’t be involved in disaster relief. But I wanted to specifically highlight the wretched impact of subsidized flood insurance because it is such a perverse example of how government promotes unjust inequality.

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Can Republicans Learn from Reagan, Transcend Class Warfare, and Focus on Growth-Oriented Tax Policy?

Why were the Reagan tax cuts so successful? Why did the economy rebound so dramatically from the malaise of the 1970s?

The easy answer is that we got better tax policy, especially lower marginal tax rates on personal and business income. Those lower rates reduced the “price” of engaging in productive behavior, which led to more work, saving, investment, and entrepreneurship.

That’s right, but there’s a story behind the story. Reagan’s tax policy (especially the Economic Recovery Tax Act of 1981) was good because the President and his team ignored the class-warfare crowd. They didn’t care whether all income groups got the same degree of tax relief. They didn’t care about static distribution tables. They didn’t care about complaints that “the rich” benefited.

They simply wanted to reduce the onerous barriers that the tax system imposed on the economy. They understood – and this is critically important – that faster growth was the best way to help everyone in America, including the less fortunate.

Kimberley Strassel of the Wall Street Journal thinks that Donald Trump may be taking the same approach. Her column today basically argues that the President is making a supply-side case for growth. She starts by taking a shot at self-styled “reform conservatives.”

In May 2014, a broad collection of thinkers and politicians gathered in Washington to celebrate a new conservative “manifesto.” The document called for replacing stodgy old Reaganite economics with warmer, fuzzier handouts to the middle class.

She’s happy Trump isn’t following their advice (and I largely agree).

Donald Trump must have missed the memo. …Mr. Trump wants to make Reagan-style tax reform great again.

The class-warfare crowd is not happy about Trump’s pro-growth message, Kimberley writes.

The left saw this clearly, which explains its furious and frustrated reaction to the speech. …Democratic strategist Robert Shrum railed in a Politico piece that the “plutocrat” Mr. Trump was pitching a tax cut for “corporations and the top 1 percent” yet was getting away with a “perverted populism.” …Mr. Trump is selling pro-growth policies—something his party has forgotten how to do. …The left has defined the tax debate for decades in terms of pure class warfare. Republicans have so often been cast as stooges for the rich that the GOP is scared to make the full-throated case for a freer and fairer tax system. …Mr. Trump isn’t playing this game—and that’s why the left is unhappy. The president wants to reduce business tax rates significantly… He wants to simplify the tax code in a way that will eliminate many cherished carve-outs. …his address was largely a hymn to supply-side economics, stunning Democrats who believed they’d forever dispelled such voodoo. …Mr. Trump busted up the left’s class-warfare model. He didn’t make tax reform about blue-collar workers fighting corporate America. Instead it was a question of “our workers” and “our companies” and “our country” competing against China. He noted that America’s high tax rates force companies to move overseas. He directly and correctly tied corporate rate cuts to prosperity for workers, noting that tax reform would “keep jobs in America, create jobs in America,” and lead to higher wages.

Amen. That’s the point I made last week about investment being the key to prosperity for ordinary people.

Ms. Strassel concludes by putting pressure on Congress to do its job and get a bill to the President’s desk.

His opening salvo has given Republicans the cover to push ahead, as well as valuable pointers on selling growth economics. If they can’t get the job done—with the power they now have in Washington—they’d best admit the Democrats’ class-warfare “populism” has won.

I largely agree with Kimberley’s analysis. Trump’s message of jobs, growth, and competitiveness is spot on. His proposal for a 15 percent corporate rate would be very good for the economy. And I also agree with her that it’s up to congressional Republicans to move the ball over the goal line.

But I also think she’s giving Trump too much credit. As I point out in this interview, the Administration isn’t really playing a major role in the negotiations. The folks on Capitol Hill are doing the real work while the President is waiting around for a bill to sign.

Moreover, I’ve been repeatedly warning that there are some very difficult issues that Congress needs to decide.

Since big companies will benefit from a lower corporate rate, will there be similar tax relief for small businesses that file using “Schedule C” of the individual income tax? That’s a good idea, but there are big revenue implications.

Since Republicans (and this definitely includes Trump) are weak on spending, will they achieve deficit neutrality (necessary for permanent reform) by eliminating loopholes? That’s a good idea, but interest groups will resist.

Unfortunately, the White House isn’t offering much help on these issues. The President simply wants big tax cuts and is leaving these tough decisions to everyone else.

P.S. I should have been more specific in the interview. I said we would have a flat tax in my “fantasy world” but that I would settle for partial reform in my “ideal world.” I was grading on a curve, so I want to redeem myself. Here’s how things really rank.

• Fantasy World: A central government so small (like the Founders envisioned) that we don’t need any broad-based tax. In other words, we can get rid of the income tax and replace it with nothing.
• Ideal World: We replace the convoluted, punitive, and corrupt internal revenue code with a simple and fair flat tax.
• Sad Reality World: I’ll accept the scraps off the legislative table, but my fingers are crossed that we at least get some permanent, supply-side reforms.

P.P.S. I’m very hopeful that lawmakers will get rid of the deduction for state and local taxes. Not only would that provide some revenue that can be used for pro-growth changes, but it also would get rid of a very unfair distortion that enables higher taxes in states such as Illinois, California, New York, New Jersey, and Connecticut.

P.P.P.S. I have no objection to family-oriented tax relief and other policies that target middle-class taxpayers. Such provisions are politically useful since they expand the coalition of supporters. But I want policy makers to understand that economic growth is the best way of helping everyone – including the poor. That’s why supply-side provisions should be the primary focus of any tax package.

P.P.P.P.S. The class-warfare crowd doesn’t like lower tax rates on upper-income taxpayers. They argue that rich people won’t pay enough and that the government will be starved of revenue. Yet they have no answer when I show them this IRS data. Or this data from the United Kingdom. Or this data from France.

P.P.P.P.P.S. Notwithstanding the title of today’s column, I don’t think Trump is a principled supply-sider like Reagan. But it might be accurate to say he’s a practical supply sider like President John F. Kennedy.

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